Paper on Financial Sector Legislative Reforms Commission

The Financial Sector Legislative Reforms Commission (FSLRC) is a body set up by the Government of India through a notification dated 24th March 2011, to review and re-examine the legal-institutional architecture of the Indian financial sector. FSLRC has released its approach paper on the topic and based on further feedback on the proposals from stakeholders and deliberations thereon, the FSLRC proposes to complete its recommendations and report by March 2013. The approach paper, which was released for public comments in October 2012, provides for several initiatives to bring about drastic changes to ways in which the financial sector is regulated and operated.


It is a well understood fact that financial sector reforms are very crucial for economic growth and the concept of such a super-regulator which unifies regulatory bodies will go a long way in strengthening the financial sector and promoting financial inclusiveness. However, the paradigm shift in the regulatory and operational framework necessitates a more thorough review and critical analysis of such reforms.

Few of the key critical observations on the framework have been enumerated below:

  •  The approach paper does not address the ethical and corporate governance issues facing the financial sector or on ways of how the firms in the sector can be regulated on such issues and focuses more on protecting consumer interests, complaint redressal and systemic and financial risks affecting the sector. Until we have a clear code of ethics and governance framework, no amount of jurisprudence can introduce sectoral reforms at the fundamental level. FSLRC should constitute a mandatory code of ethics and governance framework for financial institutions and financial intermediaries in India, with punitive actions for non compliance.
  • It is also not very clear, if real estate sector, one of the biggest asset classes and a sector rife with poor governance and lack of consumer redressal mechanisms is included in the legislative framework. The current emphasis is only on the reforms in stock market, insurance, pension and commodities market. If consumer protection is the main ethos behind such a legislative framework, we need to include all asset classes which affect savings and investments of consumers. Further, the advent of newer financial products in the real estate classes will only necessitate appropriate regulatory and redressal mechanisms going forward.
  • The approach paper does not list out the operational issues of merging the regulatory bodies’ viz. SEBI, IRDA, PFRDA and FMC into a Unified Financial Agency (UFA). It is agreeable that a unified structure and an independent consumer redressal mechanism will be far better than the current vertical structure which allows for regulatory overlaps. But without a greater clarity on contentious issues such as those relating to regulatory functions and the subsequent risks relating to subsuming these bodies under one umbrella, the stakeholders will not have a clear idea on the effectiveness of such a framework and benefit associated with such a proposal.
  • Also there is huge difference in underlying regulatory beliefs of each of the regulatory bodies in India and bringing them under one umbrella might give rise to potential conflicts. For example, SEBI works towards increased equity participation and secondary market action, whereas IRDA and PFRDA are more measured in allowing companies they regulate in taking equity exposures. If these were to come under one regulatory agency, how these conflicts would be managed should be pondered over.
  • The framework also has to exactly enlist the type of financial products to be governed by each agency. For example, the current proposal suggests creation of an independent debt management office (DMO) to take over the responsibility of bonds and currency markets that are currently under the joint purview of SEBI and RBI and thus trimming down RBI’s functions in these products. So if companies were to issue convertible debt instruments with warrants or issue FCCBs, would they come under the purview of the UFA or the DMO is not very clear. This would again recreate the problems of regulatory overlaps. Another example, is where the banks cross sell financial products such as insurance and mutual funds. Would these come under the purview of RBI or the UFA? Until a very clear framework on regulatory responsibilities is established, the ethos of these proposals cannot be successfully implemented.
  • Also, the duration required for implementing the proposals will be a key concern. The proposals would work well, only if all the reforms mentioned in the paper are implemented simultaneously and not on a piece-meal basis. For example, if you were to merge all financial regulatory bodies, without creating a parallel financial appellate tribunal or financial redressal mechanism, the principles on which these structural changes were introduced will stand challenged. For a governance structure which took more than five years for amending simpler laws such as Companies Act, DTC, GST etc., and which are still under implementation; a proposal to revamp more than 60 laws along with institutional restructuring will be a challenge in itself.
  • Lastly, the paper does not specifically mention on how autonomy and independence of these regulatory bodies can be ensured. Although, FSLRS has stressed on the need for independence of regulators, how minimal government intervention can be achieved is still a grey area.


The article can be downloaded from here: Comments on FSLRC Approach Paper