Perspectives from ISB

The Financial Sector Legislative Reforms Commission[i] (“FSLRC”) submitted its report to the Ministry of Finance at the end of March.[ii] The report is significant both for its composition and mandate.  The FSLRC was chaired by renowned Supreme Court Justice, B.N. Srikrishna,[iii] and had a broad mandate to review the institutional arrangements of Indian financial sector regulation writ large.  The panel and its recommendations will likely be read in the light of the pro-market impulses of a weak central government facing elections in a year.  This is perhaps too narrow a frame.

The FSLRC’s report, complete with draft authorizing legislation, and in line with the high standards set for the body, proposes a sweeping reorganization of the country’s financial architecture.  The Commission was conceived of over 4 years ago[iv] and has been in operation for 2 years.[v] FSLRC draws on the work of over 100 people and extensive consultations with regulators, market participants and stakeholders across the Indian financial world, not to mention jurisdictions ranging from Australia and Singapore to the US and the City of London.  Indeed, the Act draws from some of the notable features of the US Dodd-Frank Act, the UK’s Financial Services and Markets Act of 2000, financial liberalisation in South Korea and recent Indian government committee reports.[vi] In particular, FSLRC proposes:

  • a consolidation of regulation of securities, pensions and insurance into a single, UK Financial Services Authority-style regulator.  The current work of the Securities and Exchange Board of India (SEBI), the Pension Fund Regulatory and Development Authority (PFRDA) and the Forward Markets Commission (FMC) would be rolled into a new Unified Financial Authority (UFA);
  • institutional arrangements to deal with systemic risk by giving the existing Financial Stability and Development Council statutory authority as well as financial and operational autonomy;
  • the creation of a resolution corporation to deal with— important given the significance of large family conglomerates to the Indian economy—“too big to fail” problems;
  • legal guidelines to norm policy initiatives promoting financial inclusion and redistribution;
  • an independent public debt management agency combined with;
  • a narrowing of the central bank’s (the Reserve Bank of India or “RBI”) mandate to focus largely, though not exclusively, on monetary policy, as defined by the Central Government;
  • a streamlining of the country’s system of capital controls in line with new IMF thinking that would allow restrictions of capital flows in narrowly defined instances (primarily natural disasters and balance of payment crises). In particular, the Central Government would promulgate ‘rules’ governing inbound capital flows while the RBI would promulgate ‘regulations’ governing outbound flows;
  • the creation of a financial consumer protection agency;
  • a clean-up of certain matters related to financial contracts and market infrastructure; and,
  • the formalization of procedures of administrative governance, including requirements of cost-benefit analysis, familiar to any student of US administrative law.

A number of the Commission’s recommendations are particularly notable.  First, FSLRC, in its work on systemic risk, calls for institutional arrangements to deal with future financial crises.  Dodd-Frank creates a Financial Stability Oversight Council within the US Treasury Department.  FSLRC would codify in statute the longer standing Financial Stability and Development Council composed of the Finance Minister, the chairs of the Reserve Bank of India, the newly created UFA and Resolution Corporation as well as an administrative law member, and provide the Council with operational and financial autonomy.

The US saw fairly significant battles over the creation of the Consumer Financial Protection Bureau in 2011.  In a country where 40 percent of the population lack access to the most basic of financial services,[vii] the creation of a body promoting financial awareness can help deepen understanding of, and trust in the financial system.

Financial regulation in India has often been criticized for piecemeal regulation by sectors and unnecessary complexity that prevents entities other than large firms from breaking through the home bias of foreign investors;[viii] for example, investment limits vary by industry sector and conditions have been attached to individual licenses for reasons which many find inconsistent.[ix] FSLRC’s arrangements would promote unified treatment of financial firms for prudential reasons rather than sectoral, and general ownership neutrality in regulation.  The FSLRC’s recommendations would also formalize and make administrative governance more transparent by requiring statements of objectives and principles, cost-benefit analysis and allow for notice and comment procedures.  Not least, the Commission’s recommendations would create specialized administrative courts to review violations of financial regulations that, while not unfamiliar in an Indian context,[x] have been a basic part of the American regulatory landscape, on a broad scale, across various levels of government, since the New Deal.[xi]

Economic policy debates in India have also been characterized by tensions between pressures to reduce budget deficits and promote social welfare.  Perhaps interestingly, the Commission does not require or prohibit any particular policy measure, but recommends that cost-benefit-analysis be required for any initiative promoting financial inclusion and redistribution.[xii]

Still, the Commission’s report will not be without controversy.  Perhaps the most significant effect of the FSLRC’s recommendations, if implemented in toto, would be to limit the role of the central bank.  The RBI has been both lauded and pilloried for taking a cautious approach to financial liberalization.[xiii] The FSLRC would create a separate agency responsible for managing public debt, removing these functions from the RBI.[xiv] The FSLRC would also hand control over critical policy matters such as the objectives of monetary policy[xv] and the administration of at least inbound capital flows[xvi] to the political branch of Government, the Central Government.  Indian economic policy has been characterized by a high-pitched, if largely internal to the system, turf warfare between the Central Government, specifically the Ministry of Finance, and the RBI, over the pace of financial liberalization.  While not taking an explicit position on financial liberalization,[xvii] and notwithstanding the many merits of these recommendations on their own terms, the Commission’s prescripts would rewrite the rules of engagement in economic policy in favor of the political branch of government and place a long term bet on broad-scale financial development—a contested proposition given the experience of OECD nations with financial deregulation in recent decades—as a means to realizing broader economic and social development.

[i] Bikku Kuruvila is a US trained lawyer who worked as a consultant for the National Institute of Public Finance and Policy in New Delhi from 2009 to 2013.  The views expressed here are personal.

[ii] See, Ministry of Finance, Financial Sector Legislative Reforms Commission, (Viewed on April 4, 2013).

[iii] Justice Srikrishna is, of course, first famous for leading a 5 year inquiry into the Mumbai riots and bomb blasts of 1992 and 1993.

[iv] The idea of a Commission undertaking a broad review of Indian financial sector regulation was first mentioned by then Finance Minister Pranab Mukherjee in his budget speech to Parliament in 2009.

[v] The Commission was notified on March 24, 2011.

[vi] See generally, Report of the Committee on Fuller Capital Account Convertibility, 126 (2006) (Commonly known as the Tarapore Committee); Committee on Financial Sector Reforms, A Hundred Small Steps 35 (2009); The High Powered Expert Committee on Making Mumbai an International Financial Centre (2007) (Also known as the Percy Mistry Committee); Report of the Working Group on Foreign Investment (2010) (Also known as the UK Sinha report).

[vii] See, Dr. K.C. Chakrabarty (2011): “Financial Inclusion: A Road India Needs to Travel.” Livemint (12 Oct). Viewed on February 18, 2013 ( (This is an article of Deputy Governor Chakrabarty’s that originally appeared in, Livemint, and that is reproduced on the RBIs website.  Financial inclusion, to begin with, would include measures such as access to checking accounts or basic banking facilities, particularly in rural areas).

[viii] See, the UK Sinha report, 70-75. “Home bias” would be understood as the tendency of foreign investors to overweight their portfolios with investments in their home countries as well as to minimize investment in foreign firms operating in less familiar regulatory climates.

[ix] Id. at 56-59.

[x] For all the common critiques of the Indian legal system, particularly overwhelming case loads and delays in resolution of disputes, Indian courts have created vigorous bodies of law and institutions, such as the Securities Appellate Tribunal that should inspire some confidence in Indian rule of law.  Processes of consultation of stakeholders, too, appear to be an accepted, if informal practice of regulators, which FSLRC would institutionalize.

[xi] The US Administrative Procedure Act specifying the procedures that administrative agencies of the federal government must follow in creating regulations was enacted in 1946. Formal requirements such as notice and comment, administrative adjudication, cost-benefit type considerations have long been a part of the discourse and practice of US administrative governance.

[xii] Specifically, Chapter 60, Section 322 of the draft Indian Financial Code would only authorize the political branch of government to initiate measures of financial inclusion, and would require a review of these measures through a lens of ensuring “effective and affordable access” while reimbursing financial service providers for their efforts. In particular, the draft Code would require explicit and formal review of the efficacy, impact and cost of a given measure and seek, expressly, to identify best practices in a given area of endeavor.  These are not hard norms banning given initiatives of financial inclusion, but would norm the efforts of any regulator seeking to promote greater and deeper access to the financial system.

[xiii] See generally, Bajaj, Vikas (2009):  “In India, Central Banker Played It Safe.” The New York Times (25 Jun). Viewed on February 18, 2013 (  Some economists have argued that the RBI, particularly under former Governor Y.V. Reddy blocked important measures such as opening domestic bond markets to foreign investors, restricted trade in currency markets and kept Indian institutions from investing freely abroad.  Others, mindful of the causes of the financial crisis in the U.S., have praised the central bank for measures such as restrictions on bank lending to real estate developers, increases in the amount of reserves that banks must set aside and prevention from using certain derivatives.

[xiv] See, Draft Indian Financial Code, Part II (Establishment of Financial Regulatory Agencies), Chapter 9 (Establishment of the Public Debt Management Agency) and Part XII (Public Debt Management Agency), Chapter 73 (Objectives and Functioning of the Public Debt Management Agency).  See also, Report of the Financial Sector Legislative Reforms Commission, 111-114 (2013).   Currently, the RBI manages the market borrowing program of Central and State Governments while external debt is managed directly by the Central Government.  The Commission argues that some functions critical to managing public debt, such as cash and investment management, or the consolidation of information regarding contingent and other liabilities, are not currently carried out.  The Commission notes the RBI’s position that “to achieve public policy objectives of ensuring growth, price stability and financial stability, co-ordination between monetary policy, fiscal policy and sovereign debt management is critical” but argues that the governance arrangements recommended by the Commission—with RBI and Central Government voice in the debt management agencies deliberations—addresses these concerns.

[xv] See, Draft Indian Financial Code, Chapter 61, Section 326.  The objectives of the RBI, for example growth versus employment or price stability, are not specified.  However, vesting authority to define the mandate of the central bank in the political branch of government (the Central Government) works against the classic respect for central bank autonomy in economic policy-making worldwide.  See also, Report of the Financial Sector Legislative Reforms Commission, 103 (2013)(Chapter 11, Monetary Policy).  The Commission also states that “[w]hereas the Commission recognizes that there is a broad consensus at an international scale on the need for a central bank to have a clear focus on price stability, after much discussions it has decided not to specify such a requirement in the draft Code.  Instead, the objective that the central bank must pursue would be defined by a Central Government and could potentially change over the years.”

[xvi] See, Draft Indian Financial Code, Chapter 68 (Inward capital flows) and Chapter 69 (Outward flows).

[xvii] Report of the Financial Sector Legislative Reforms Commission, 81 (2013).  The report notes that “[t]he Commission has no view on either the timing or the sequence of capital account liberalisation.”