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Special Statutes for Certain Financial Intermediaries
Some key financial services intermediaries like SBI and its Associate Banks, Public Sector Banks, LIC and GIC are governed by their own statutes. These statutes give a special status to these institutions vis-á-vis the other institutions performing the same functions. Earlier, IFCI, UTI and IDBI also operated under special statutes, but now there special statutes have been repealed.
Few years back, an important addition was made to the regulatory architecture—the Financial Sector Development Council (FSDC) was set up which replaced the High Level Committee on Capital Markets. The council is convened by Ministry of Finance and does not have statutory authority—it is structured as a council of regulators—Finance Minister as chairman. It has a permanent secretariat.
The council resolves inter-agency disputes; look after the regulation of financial conglomerates that fall under various regulators’ purview; and performs wealth management functions dealing with multiple products.
The FSLRC (Financial Sector Legislative Reforms Commission), set up (headed by Justice B. N. Srikrishna) to examine the regulatory structure and the laws governing the financial sector, submitted its report by early 2013. In a broad sense, the commission has recommended for changeover from an ‘area-based’ division of regulators to a ‘task-based’ division. Major highlights of the recommendations are as follows:
(i) Developing a ‘horizontal structure’ whereby, the basic regulatory/monitoring functions to be done by a UIA (Unified Financial Agency)—in place of each agency (like SEBI, IRDA, etc.) looking after one financial type and area. It will eliminate regulatory overlap (due to which the ULIP controversy happened between the SEBI and IRDA).
(ii) Setting up a FRA (Financial Redressal Agency) to handle consumer complaints, regardless of area. It means, regulator not to oversee the consumer complaints.
(iii) FSAT (Financial Sector Appellate Tribunal) to be set up to hear the appeals of entire financial sector.
(iv) Advice to set up three other agencies which will oversee banking, besides the RBI.
The advices of the commission are under government’s consideration with some of them in the process of getting adopted, too.
1. Based on the discussion in P.A. Samuelson and W.D. Nordhaus, Economics (New Delhi: Tata McGrawHill, 2005), pp. 543–45.
2. Based on J.E. Stiglitz and C.E. Walsh, Economics (New York: W.W. Norton & Campany, 2006), pp. 612–14.
3. See Reserve Bank of India, Report on Currency and Finance (New Delhi: Government of India, multiple years).
4. In the capital market, money is traded on interest rate as well as on dividends. Long-term loans are raised on well-defined interest rates, while long-term capital is raised on dividends through the sale of shares.
5. Such financial assets are known as ‘close substitutes for money ’.
6. The only instrument of the money market was the Treasury Bills, which were sold by tender at weekly auctions upto 1965. But later these bills were made available throughout the week at discount rates by the Reserve Bank of India.
7. Sukhomoy Chakravarthy, Review of the Working of the Monetary System (New Delhi: Reserve Bank of India, 1985).
8. M. Vaghul, Working Group on Money Market (New Delhi: Reserve Bank of India, 1987). The committee was set up in 1986, and came to be known as the Vaghul Committee.
9. Based on the suggestions of experts belonging to the Indian financial market.
10. Ministry of Finance, Economic Survey 2001–02 (New Delhi: Government of India, 2002); Ministry of Finance, Economic Survey 2009–10 (New Delhi: Government of India, 2010).
11. The State Bank of India (operates in this market as lender as it is in a comfortable cash position) lends against government securities, while others lend against the ‘deposit receipts’ of the borrowing banks. The SBI functions as the ‘lender of intermediate resort’ (while the RBI functions as the ‘lender of last resort’).
12. Reserve Bank of India, Report on Currency and Finance (New Delhi: Government of India, 1999); Reserve Bank of India, Report on Currency and Finance (New Delhi: Government of India, 2000).
13. It was in 1979 that the Chore Committee for the first time recommended for a discount house to level the liquidity imbalances in the banking system. The government became active after the recommendations of the Working Group on the Money Market (i.e., the Vaghul Committee, 1987) and finally established DFHI in 1988. The Vaghul Committee suggested to set up a discount finance institution which could deal in short-term money market instruments so that liquidity could be provided to these instruments. The committee also recommended the house to operate on ‘commercial basis’, which was accepted by the government while setting up DFHI.
14. Industrial Finance Corporation of India Act, 1948, Government of India, New Delhi.
15. Ministry of Finance, Economic Survey 2000-01, (New Delhi: Government of India, 2010).
16. Ministry of Finance, Economic Survey 2006-07, (New Delhi: Government of India, 2007).
17. Narasimhan Committee on the Financial System (CFS), 1991 suggested for the conversion of the AIFIs into Development Banks.
18. It was the S. H. Khan Committee on Development Financial Institutions (DFIs), 1998 which forwarded the concept/idea of Universal Banking in India.
19. Ministry of Finance, Economic Survey 2011–12 (New Delhi: Government of India, 2011), pp. 115–16.
20. The write-up is based on information available from SEBI, RBI and different announcements/published reports of the Ministry of Finance, since 1996 onwards.
21. Publications Division, India 2014, (New Delhi: Government of India, 2015), p. 326.
22. Ibid, p. 329.
23. Ministry of Finance, Economic Survey 2012–13 (New Delhi: Government of India, 2013), p. 116.
24. Financial Sector Legislative Reforms Commission report, March 2013, N. Delhi.