New regulatory plan for large financial houses

The government has proposed a new regulatory architecture for large financial institutions, by establishing "a college of supervisors" comprising representatives from various regulatory agencies.

Recognising that large financial conglomerates are going to play a crucial role in the coming years, the discussion paper on setting up the Financial Stability and Development Council has pointed out that these conglomerates have businesses spread across various segments of the financial sector and the overall picture is often not available.

Currently, large financial conglomerates such as State Bank of India, ICICI Bank and HDFC are regulated by the Reserve Bank of India, by virtue of the parent being a bank or a finance company. These entities have, in turn, promoted insurance companies, mutual fund arms, pension management companies, brokerages, investment banking subsidiaries and private equity funds.

"At present, each of these (institutions) have numerous subsidiaries operating in all the silos of Indian finance. Each regulator sees one or more subsidiaries operating in its silo. However, the overall picture is not fully known to any arm of government/regulatory agencies," the report says.

If the new structure finds favour with the regulators, a college of supervisors will look at all the entities together.

The government has used large complex financial institutions, financial stability and the absence of an agency to deal with international bodies such as the Financial Stability Board to make a case for the FSDC.

In his budget speech for 2010-11, Finance Minister Pranab Mukherjee had announced the setting up of the FSDC. As proposed by the discussion paper, prepared by the capital markets division of the economic affairs department of finance ministry, the FSDC will be headed by the finance minister and will have two committees, with heads of financial regulators, finance secretary, the chief economic adviser and the secretary of the department of financial services as members.

FSDC will also have two committees, the Financial Sector Regulatory Coordination Committee (FSRCC), which will be chaired by the RBI governor with heads of all other financial regulators as members, and the Financial Sector Stability Committee (FSSC), chaired by the finance secretary with all the regulatory heads and a deputy governor of RBI as members. 

The discussion paper has also allayed fears of regulators, by saying that the FSDC will not be a super regulator and there will be no change in the role of any regulator. "It (FSDC) will achieve its mandate without undermining the autonomy of the regulators," it said.

However, the paper pointed out the regulatory lacunaes, overlaps and inconsistencies as the country's finance governance features a large number of agencies, each operating in a specified area, often with a set of financial firms where all activities are supervised by one agency.

"Financial stability concerns are particularly important in such a setting, where the overall system of financial markets can malfunction despite the best efforts of each regulator working within its own silo," the report said.