Talks about financial super-regulator, which started with this year’s budget, and became louder when the Securities and Exchange Board of India (SEBI) attempted to regulate unit-linked insurance plans (ULIPs), have now reached their logical conclusion. The government is in the process of creating a structure that ensures the financial regulators are formally subservient to the Ministry of Finance. Notably, the Reserve Bank of India (RBI) governor has spoken out publicly against the finance ministry appointing itself as the supervisor of the Insurance Regulatory and Development Board (IRDA), RBI and SEBI.
The supervisory body has been brought in with an excuse of financial stability, something that can easily be presented as a desirable function in the aftermath of the global financial crisis. Predictably, by the time the idea has reached close to implementation, it has degenerated into what sounds like a straightforward supervisor of the RBI, SEBI, IRDA etc.
The only defensible functions of this body would have been financial stability, and settling inter-regulatory disputes. The moment it moves beyond the two, it moves into territory where it serves no purpose except controlling and manipulating the regulators. Even for the earlier mentioned functions, there’s no obvious need for them because the ultimate purpose was getting achieved anyway. For example, during the October 2008 financial crisis, when debt mutual funds had a liquidity crisis, SEBI and RBI together arranged for banks to create a temporary credit line for funds.
Similarly, during the IRDA-SEBI dispute over ULIPs, the finance ministry eventually stepped in with an ordinance instead of letting the courts decide the case. In order to get an outcome of its liking, it went as far as getting the law changed rather than risk a judicial review.
These two events show that when serious crisis hits things are managed even under the current arrangement. The question is whether this body will become a routine supervisor or whether it will step only when needed. As it is, given that regulators in India are generally headed by bureaucrats or ex-bureaucrats, even the amount of autonomy depends on individuals’ drive to be independent.
However, having said that, what is actually needed is a direction to financial regulations. For the regulated, it doesn’t actually matter which part of government is doing what. The ULIP crisis came to a head because no one ever sat down and objectively thought through things when these products were first launched years ago. It will be interesting to see whether the new arrangement actually functions for the people’s good or whether it just becomes a channel for routing lobbying pressures to the regulators.
This article was originally published on July 23, 2010.
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