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Home >Opinion >Online Views >Time for more subordinate legislation for the financial sector

One of the recent measures that has attracted little publicity is the proposal to remove the limits on commissions payable to agents of non-linked life policies, through an amendment to the Insurance Act, and let the regulator decide this (Clause 55, Insurance Laws Amendment Bill, 2008).

This is nothing short of momentous. What could be even more momentous is considered, organized debate on extending this to several other aspects of the financial sector. In fact, the Financial Sector Legislative Reforms Commission (FSLRC) should suggest comprehensively, in their final report due in March, the powers that should be transferred to subordinate legislation, as part of their remit to “make legislation dynamic to automatically bring them in tune with the changing financial landscape".

Subordinate legislation (also known as delegated legislation and executive order) is a delegation of authority from the legislature to the executive. The executive comprises the council of ministers, but also other organs of the state, notably regulators like the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi).

There have been examples of piecemeal transfer of authority to subordinate legislation in the past. In the last decade, RBI got the power to set statutory liquidity ratio (SLR) and cash reserve ratio (CRR) levels, unencumbered by limits set under laws earlier. Some regulations had moved from the Companies Act to Sebi and the Insurance Act to Insurance Regulatory and Development Authority (Irda). The prohibition on preference share issues by State Bank of India (SBI) was removed and thereafter it needs to follow RBI regulations on preference capital. There was an individual shareholding limit of 200 shares listed SBI associate banks, and that too only in paper certificates form—this was repealed and harmonized with Sebi rules.

But anachronisms abound. Private banks still cannot issue preference shares till the Banking Regulation Act is amended. RBI’s demand for power to supersede bank boards as a “precondition" to issue of more bank licences, through amendment to the Act, is well-known. There are investment restrictions for general insurers detailed in the Insurance Act, 1938. Chapter IIIB of the RBI Act mandates a number of minutiae on non-banking financial companies (NBFCs). There are legally-stipulated fines on banks and NBFCs at “3% above the bank rate", a benchmark that itself was dormant for seven-eight years. There is a 20% foreign holding limit for nationalised banks by law and for State Bank of India by executive order, and 74% in private banks as per department of industrial policy and promotion guidelines.

Subordinate legislation is a practical necessity, especially in a rapidly evolving sector. It deserves expediting because it is not feasible to engage Parliament or assemblies to ratify changes to clauses which were inserted into the primary law when the consensus-building for amendments was far smoother, but is no longer so. A rather uncontroversial amendment to the SBI Act took several years, not because members of Parliament went ballistic over undesirability of preference shares, but because it was simply not considered important enough to be taken up.

We are indeed moving in the right direction, as drafting of some recent legislations show. The Microfinance Bill, 2012, is an exemplary piece in this respect—it sets broad, “timeless" principles, and leaves the rest to RBI (e.g. Clause 25).

But old habits die hard: There are plenty of “revised" provisions that can create stumbling blocks. Clause 5 of the Banking Amendment Bill limits individual shareholding to 5%. Clause 12 proposes to increase penalties for sundry offences from 2,000 to 20 lakh from 100 to 50,000, among others. Clause 3 (v) (I) of the Insurance Amendment Bill stipulates a 100 crore capital for life/general insurers. Likewise, instead of leaving investment regulations to Irda, Clause 28 just alters the specific percentages for general insurers.

There has been significant debate about the obvious counter-point: possible abuse of executive power facilitated by increased subordinate legislation. Existing structures have mitigated this concern, and more have been suggested by the FSLRC. The council of ministers is regularly accountable to Parliament; delegation of powers is not unqualified. The regulatory agencies are quasi-sovereign bodies and have to table their reports periodically in Parliament; this laying on the table can be made more comprehensive, including subordinate legislation. There can be scrutiny or review committees of the House for the same. The Supreme Court has also unequivocally held that the primary law supersedes subordinate legislation.

At least, subordinate legislation is a far cleaner alternative to ordinance raj, the illegitimate product of cross-fertilization of the executive and the legislature, which smacks of rule by subterfuge.

Social scientist Yogendra Yadav pointed out recently that the despair over a raucous and dysfunctional Parliament is a result of our not sufficiently adapting the Westminster system for Indian conditions. We have to reduce the number of issues that can be held hostage to lawmaking caprices, at an enormous cost to the country. Increased subordinate legislation is a way out. It is far easier to check executive or regulatory abuse than parliamentary inaction.

Dipankar Choudhury has been a senior research analyst on financial services as well as other sectors at various investment banks, and is an independent consultant focusing on banks and financial services.

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