Mumbai:Three financial sector regulators will retire in 2008. Yaga Venugopal Reddy, India’s chief money man who has been battling against the unending capital flow into the country, will retire in September. Ahead of him, two other regulators, Meleveetil Damodaran of the Securities and Exchange Board of India (Sebi) and Chellapilla Satyanarayana Rao of Insurance Regulatory Development Authority (Irda) will hang up their boots. There will be other new appointments in 2008—the government could decide to fill up the post of secretary, department of financial services, which has been open ever since Vinod Rai, the bureaucrat holding this post, became the comptroller and auditor general (CAG)—but none as significant as those to the top three regulatory posts in the financial sector.
Y.V. Reddy, a 1964 batch Indian Administrative Service (IAS) officer, is one of the few Reserve Bank of India (RBI) governors given a five-year term at one go. He succeeded Bimal Jalan, who had steered the central bank through the most eventful time of the Indian economy if one excludes the balance of payment crisis and economic reforms of the early 1990s. Jalan presided over the end of the South-East Asian crisis, the Pokhran nuclear blast and the US sanctions that followed, a stock market scam that involved few banks and the collapse of a string of cooperative banks.
Reddy, who was a deputy to Jalan as well as his predecessor Chakravarty Rangarajan, was involved in managing money and finance even before he came to Mumbai’s Mint Road, where the bank is based, in 1996. As joint secretary (economic affairs) in the finance ministry, he was the architect of changing India’s exchange rate system from a fixed rate one to the current regime.
As governor, Reddy made some fundamental changes. For instance, he has not allowed foreign banks to buy local banks. He has ring-fenced the domestic players from any possible assault from foreign banks till March 2009 and it is up to his successor (and the government) to open up the sector. Till such time, no foreign entity can buy more than 5% stake in a local bank. He has also made customers aware of their rights—the first governor to do so—and persuaded banks to reach out to unbanked pockets of the country to service people in the low income group.
Finally, Reddy makes no bones about his concern on the quality of foreign funds inflows. He wants a complete ban on investment in Indian market through participatory notes (PNs)—securities linked to equities used by investors who cannot trade directly in the Indian market—and the flow of foreign money into the booming real estate sector.
But neither Sebi nor the government seems to have empathy for him on these issues. In the last year of his tenure on Mint Road, Reddy has been left to fight a lonely battle against the never-ending capital flows into the world’s second fastest growing large economy, and that too, with too few monetary tools at his command. Managing capital flows will be the biggest challenge for his successor.
An IAS officer of 1969 batch and a former finance secretary, Kishore is now executive director, International Monetary Fund.
Could be the dark horse. The first deputy governor born after independence (January, 1948), Mohan came to Mint Road in September 2002 but before finishing his three-year term, moved back to North Block as secretary, department of economic affairs, only to come back to RBI after eight months.
Known as a turnaround artiste in financial circles, M. Damodaran came to Sebi after two other critical assignments in the financial sector. He had previously rescued Unit Trust of India, the nation’s oldest mutual fund that crumbled under the burden of assured returns schemes, and been instrumental in transforming development finance institution Industrial Development Bank of India into a bank.
As Sebi boss, Damodaran has put curbs on money inflows into the Indian stock market through PNs and taken a series of steps to widen market participation. For instance, he raised retail investors’ quota in initial public offerings (IPOs), did away with the discretionary powers of merchant bankers while allotting shares to institutional investors, and even introduced a reservation for domestic mutual funds in all IPOs. He has also made ratings mandatory for all new public floats. And by allowing local firms to issue Indian depository receipts, easing norms on follow-on offers and reintroducing short-selling of securities, Damodaran has deepened the market.
However, market surveillance continues to be an area of weakness for the regulator. Sebi takes time to complete its investigations and in several cases its appellate body, the Securities Appellate Tribunal (SAT), sets aside these orders. In April 2006, the capital market regulator unearthed a scam involving depositories, depository participants (DPs) and two dozen market operators, who allegedly played a role in using thousands of fictitious demat (or dematerialized) accounts and cornered share allotments in IPOs , but most of the players involved have got a reprieve from SAT. This has not shown Sebi’s investigation in the best of light. In one of its recent judgements, SAT even described Sebi’s action as a clear “violation of the principles of natural justice.” The biggest challenge before Sebi, experts say, is to curb its misplaced aggression and strengthen its surveillance.
Additional secretary, economic relations, ministry of external affairs.
Managing director, National Securities Depository Ltd.
A government appointed search panel is on the lookout for Damodaran’s successor. But nobody will be surprised if Damodaran gets an extension.
In his first interview with a local wire agency after he took over from N. Rangachary who guided the regulatory body since its inception in 1996, C.S. Rao said his job was to create a level-playing field and protect consumer interests. He has kept his word.
In 2007, he kicked off the detariffed regime in the general insurance business by freeing motor insurance. Now, Irda is removing all price controls, giving freedom to general insurers to set their premiums. Rao has ensured an orderly transition to this regime by keeping a hawk eye on solvency margins of insurance players that can be safeguarded only when their pricing is scientific. The solvency margin refers to the extent to which an insurance company’s assets can exceed its liabilities.
Wiser with the experience in health insurance where insurers increased rates after pricing freedom was given, Rao has threatened to intervene if the players indulge in unfair practices. He had, in fact, recently intervened to prevent public sector firms from charging hefty premiums on renewals of medical insurance or mediclaim policies by capping the premiums that these companies can charge on renewals. This has not gone down well with the industry.
The penetration of insurance in India has increased from about 2.3% in 2000 to 4.8% now and the density has improved from about $10 (Rs394) in 2000 to about $38. Growth is assured but the biggest challenge before the regulator is moving the industry from its existing solvency-based capital model into a risk-based one that ensures more efficient use of capital. Rao’s successor will also have to handhold the first set of insurance players that plan to enter the capital market with their IPOs. This means protection of investors through proper disclosures.
No name has cropped up as yet but if Rao has a say, C.R. Muralidharan, an Irda member, may get the nod.
Chairman, Competition Commission
In 2008, the government will also have to appoint the chairman and members of the Competition Commission of India, the apex body under the Competition Act that will promote and sustain competition, protect consumers’ interest and ensure free and fair trade. The birth of the commission will give a new dimension to policies in India’s economic and financial sector. For instance, the country’s central bank has all along been resisting the entry of corporations into the banking sector but the Competition Commission may feel Indian firms must play an active role in the banking sector to infuse the spirit of competition. Incidentally, in the mid 1990s, RBI itself had opened up the sector and allowed new private banks to set up shop to encourage the spirit of competition. But the banking regulator has, to date, not issued a single licence to an Indian firm.
In their own ways, the heads of RBI, Sebi and Irda have done well on their respective turfs but they are all cautious and conservative men. However, Indian financial markets continue to remain highly fragmented. The country does not have a well-developed bond market, a currency market and a market for currency, interest rate and credit derivatives. And turf conscious regulators are not making any effort to pull down the barriers.
The retirement of all three regulators is a great opportunity for the government to break away from the past and put the financial sector on a new path. A trillion-dollar economy needs regulators with a liberal approach to move forward and a clear mandate for change from the government.