Uphold regulatory autonomy

An Ordinance, promulgated on June 18, was triggered by a highly publicised jurisdictional dispute between the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority over regulation of the highly popular Unit-Linked Insurance Policies (ULIP). The dispute was resolved following the Finance Minister's intervention. However, the government has pounced on the opportunity to promulgate the Ordinance with the ostensible purpose of creating an institutional mechanism to resolve all future jurisdictional issues involving financial sector regulators. A new high-level body chaired by the Finance Minister and comprising the Finance Secretary and the four financial sector regulators will be asked to adjudicate on all future disputes within a specified time frame. Its decisions will be binding on all the regulators. The need to create a new mechanism has been questioned on a number of counts. Disputes such as the one between the SEBI and the IRDA have been rare. In any case, until the ULIP matter arose, the existing High Level Coordination Committee headed by the Reserve Bank of India and comprising representatives of all regulators and Finance Ministry officials was more than equal to the task of settling disputes. Besides, as in all well-functioning markets, informal channels of communication between the government and the regulators have ensured regulatory co-ordination. The more substantive objection to the Ordinance is that it will undermine regulatory autonomy, especially that of the RBI which has been charged with the task of maintaining financial stability. As the economist Dr. A. Vaidyanathan noted in these columns, “the RBI has earned a richly deserved and enviable reputation among central bankers and regulators the world over for its prescience in anticipating the burgeoning of high-risk bank lending in the domestic financial system...and for weathering two major crises by taking effective preventive measures.” Moreover, he adds, there is a near-global consensus on “the need for stronger, stricter and more transparent mechanisms that are independent of the government to regulate the financial sector and coordinate among regulators.” It appears that the United Progressive Alliance government has recklessly embarked on a retrograde path of undermining the autonomy of the central bank in particular and regulators in general under external pressure. The Ordinance in its present form gives scope for the executive arm of the government to take effective control of the financial sector. If this is not reversed but is allowed to become a statute, it will be a severe blow to transparency, professionalism, and the integrity of the regulatory process.