First, there was the dispute between SEBI and Insurance Regulatory and Development Authority, a turf war that could have been avoided. It seems SEBI was rather keen to get the Finance Ministry involved, rather than sort it out bilaterally.
Second came the ordinance for the establishment of the Joint Committee/Mechanism (JC), to be chaired by the finance minister, for handling disputes, purportedly only in the case of hybrid products. This could, of course, be the proverbial foot in the door. It has, quite expectedly, raised fears of an erosion of financial sector regulatory autonomy, because the mechanism puts the RBI in a reporting relationship with the Ministry of Finance.
An informal high-level coordination committee, chaired by the RBI governor, already exists. It has been argued by some that even this should be disbanded, as it seems to put the RBI in a superior position over other regulators. But there is at least the possibility that, as an informal body with capable and non-supplicant heads of other regulatory bodies, this coordination committee could evolve over time into a peer review mechanism. This possibility, however, does not exist for the newly created JC.
The creation of the JC tampers with the careful balance that exists currently with the Reserve Bank of India Act, 1934, allowing a government nominee to sit on the RBI board but with no voting rights. Not that decisions are ever made in the RBI Board by a vote, and quite rightly so.
The signal to the market and players on RBI’s autonomy is critical. It has so far been clear that in matters of monetary policy, banking sector supervision and foreign exchange issues, the buck literally and metaphorically stops with the RBI at Mint Road, and not with the Ministry of Finance.
RBI Autonomy
One wonders if, by heading the Joint Committee, the finance minister will open the RBI and other regulators to parliamentary scrutiny, from which it has so far been free. The present scenario allows the RBI the necessary space to address policy from a technical perspective, without being affected by the prevailing political circumstances.
The RBI governor has made a telling observation that regulators not only need to be completely autonomous, but should also be perceived as such if their credibility, legitimacy and effectiveness are to be maintained. This is even more important in our fledgling democracy where there are constant attempts at short-circuiting established institutions and finding backdoor methods to cement vested interests.
We all know that the prime minister and finance minister, as seasoned administrators and astute policy makers, have no intention of compromising the functional autonomy of the RBI, or for that matter, of other regulators. They have declared as such on more than one occasion since the ordinance was passed.
Institutions, once established, remain in place and become open to misuse by those who follow. It is worth serious consideration whether the ordinance should be allowed to lapse and not converted into law.
Regulatory Capture
The third unexpected piece of news news has seen SEBI dragged to court by the MCX-SX for delaying its verdict on the exchange’s application to conduct business in equities and other SEBI-regulated instruments. MCX-SX asserts that it has fulfilled all the conditions laid down by SEBI, including the dilution of the holdings of its principal promoters to below the threshold required by SEBI. This requirement appears rather strange as promoters are usually given time to build and nurture their ‘start-up venture’ and are only then expected to try and attract new investors. Why should this practice be different in the case of stock exchanges?
One wishes that things would not have come to such a pass and that SEBI, which received the application three months earlier, had taken a decision either way, before the applicant approached the courts in search of justice.
SEBI should now act with alacrity and unambiguously ward off all aspersions of regulatory capture. The slightest public perception of regulatory capture by any market player can play havoc with the regulator’s credibility and legitimacy.
Predatory Pricing
MCX-SX has also petitioned the Competition Commission, now thankfully fully constituted under a dynamic chairman, that the National Stock Exchange (NSE), its competing exchange, practices predatory pricing by not charging any fee or commission for trading of foreign exchange futures. This has forced MCX-SX to withhold from charging a fee, apparently resulting in huge losses.
If true, this looks to be a rather obvious case of predatory pricing through cross subsidisation by the NSE from its other businesses. It should not take much time for the Competition Commission to decide this issue.
Finally, a related issue on regulators. Is it a mere coincidence that at present all regulatory bodies are headed by retired or deputed members of the Indian Administrative Service (IAS)? The Planning Commission apparently has on its website a draft framework legislation on regulation, which includes the criteria and modalities for the selection of regulators. Surely, it is not difficult to see why there has been no advance on this issue over the past three years.
Rajiv Kumar is the director and chief executive for the Indian Council for Research on International Economic Relations (ICRIER).
This article was first published here at The Hindu Business Line.