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A government appointed Commission today suggested that financial sector regulators such
as SEBI as well as IRDA be merged into a Unified Financial Agency (UFA) and the role of RBI
be restricted to regulating banks and managing monetary policy.
The two-volume report of the Finance Sector Legislative Reforms Commission (FSLRC),
which is marked by four dissent notes, has also suggested that SBI and LIC be brought
under the purview of the Companies Act.
Headed by former Justice B N Srikrishna, the 10-member FSLRC has said that the Reserve
Bank should govern only outward capital flows and be stripped of its power to control NonBanking Finance Companies (NBFCs). The task of monitoring inward flow be left to the
These proposals did not find favour with four members of the Commission who wanted RBI
to be the sole regulator of foreign capital flows and also of the NBFCs.
Under the proposed regulatory architecture, Securities and Exchange Board of India (Sebi),
Forward Markets Commission (FMC), Insurance Regulatory and Development Authority
(Irda) and Pension Fund Regulatory and Development Authority (PFRDA) would be merged
into a UFA.
The Commission proposed setting up of seven agencies -- RBI, UFA, Financial Sector
Appellate Tribunal (FSAT), FSDC, Resolution Corporation, Financial Redressal Agency and
Public Debt Management Agency --- for managing the financial sector.
In order to give effect to its recommendations, the Commission has come out with a draft
Indian Financial Code Bill, containing 450 clauses and six schedules.
"The Commission is mindful that over the coming 25 to 30 years, Indian GDP is likely to
become eight times larger than the present level, and is likely to be bigger than the
United States GDP as of today... The aspiration of the Commission is to draft a body of law
that will stand the test of time", the report said.
The report of the Financial Sector Legislative Reforms Commission (FSLRC) has generated
lots of comments and reactions. This article looks at the recommendations on the subject
of regulatory governance, in general, and, regulator-government interface, in particular.
If acted upon, these can significantly impact overall governance in India and not merely in
finance. The recommendations of the FSLRC are mainly contained in chapters 3, 4, 14 &16
of the report. The idea of an independent regulator is relatively new.
Modern regulators of this kind at a country level go back to the Inter-state Commerce
Commission (ICC) of the US created in 1887. In India, though a law created the RBI in
1934, it was not designed to be an independent regulator.

The original RBI Act of 1934 was amended many times to convert a private commercial
entity into a regulator. Post-independence, in 1953, the Forward Markets Commission
(FMC) was created by a parliamentary law but in the mould of a traditional government
Therefore, it perhaps cannot be characterised as an independent regulator, though it was
and is statutory.
The first really modern regulator in India is the SEBI, created by an executive order in
1988 and sanctified by a parliamentary law in 1992. Subsequently, India has created many
regulators in the financial and other sectors, which have come up in many states.
As a general proposition, it would be fair to say that the Indian experience with regulators
is rather mixed. A few have been reasonably successful, but most have been less than
optimal in their outcomes. One is of the opinion that much of this is on account of poor
legislative design. The major recommendation of FSLRC in this area is that there should be
a unified set of provisions on regulatory governance for all areas of finance.
The FSLRC has presented this unified set of provisions and made detailed
recommendations on the structure of the regulatory agency, composition of its board,
selection of board members, functioning of the board, resource allocation of the regulator,
including powers to levy fees, principles of levying fees, and performance assessment and
Another chapter describes in detail what ought to be the functions and powers of the
regulator. There is a good case for extending these principles to sectors beyond finance to
all statutory regulators. The practical importance of these recommendations will be
apparent if one looks at the actual practice in one just area of government-regulator
interface appointment of regulators.
As a rule, most present legal provisions in this regard are vague and do not follow any
standard principle. The many variations in the terms and processes of the appointments
clearly point to a systemic problem.
For example, in the last decade or so, there have been governors of the RBI who were
varyingly given a three-year term extended by three years, a single five-year term, and a
three-year term extended by two years. There have been Deputy Governors who were
given terms of over five years, exactly five years, three years, three+two years and two
years and 3 months, extended by nine months!
A major part of the problem is the RBI Act, which prescribes no age limit for Deputy
Governor or Governor, no process for appointment and no limits on terms.
Similar is the story with the Securities and Exchange Board of India (SEBI). One chairman
was appointed for five years, and extended for another two years, when the law then
provided for a three-year term. The term of another was not extended beyond three years
when the law provided for a five-year term.

While recently whole time members (WTM) have been given five-year terms, the chairman
was given only a three-year term. One WTM was appointed for three years, completed
this, demitted office and was then given a fresh term, while the terms of two identically
placed WTMs were not renewed.
If all this points to confusion and mindlessness, it also translates into the effective lack of
operational autonomy for the regulators, given the uncertainty of tenure and the ability of
the government to pick and choose individuals in the regulatory agency who are fit for
extension and who are not.
Contrast this with fixed terms prescribed in the Constitution for election commissioners
and the CAG of India and the obvious consequences in terms of institutional effectiveness.
Likewise, there are board members of some regulatory agencies who have been on these
boards for over a decade and some who have been given three years.
Boards of some regulatory agencies have no regulatory powers at all with regulatory
functions, including the drafting of regulations being done entirely by the staff of the
agency without any clearance of the board. In the case of some other agencies, boardlevel clearance is mandatory for issuing regulations.
Orders passed by some regulatory agencies have no appeal/recourse of any kind. In the
financial sector, all regulators are free from resource constraints, but some have been
accused of charging excess fees as the law confers powers to levy fees without any
guidance or principle.
The CAG of India mandatorily audits some financial sector regulatory agencies in
accordance with their statute whereas firms of chartered accountants audit some
regulators. Given the enormous powers of the regulators, it will be a brave chartered
accountant who actually does a tough audit of a regulator.
It is these and many similar aspects of regulatory governance and accountability that need
to be legislatively reformed in India.
The FSLRC recommendations directly address these and will go a long way in remedying
this governance deficit in regulatory structure and design.