At a time when central banks around the world are getting empowered to deal with a range of market- and growth-related challenges, it is disturbing to see the government of India use the subterfuge of a weekend ordinance to diminish the status of the Reserve Bank of India (RBI). Much of the media comment, including in this newspaper, on the ordinance issued by the president of India on June 18, 2010 on jurisdictional issues pertaining to unit-linked insurance policies (Ulips) focused, quite understandably, on the implications of that ordinance for the turf war between the Insurance Regulatory and Development Authority (Irda) and the Securities and Exchange Board of India (Sebi). It has been widely commented, and correctly, that Irda has won what was essentially a turf war. Some have questioned the advisability of the amendment to the Sebi Act (1992) which states that “a collective investment scheme or mutual fund shall not include any unit-linked insurance policy or scrip or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer.” These are issues on which there can be different viewpoints and these will no doubt get articulated in the public debate. But an aspect of the amendment that has generally not been commented upon is the decision to create a “joint committee” under the chairmanship of the Union finance minister and including, as its members, the Union finance secretary, the secretary, department of financial services in the finance ministry, the governor of RBI, and chairmen of Irda, Sebi and the Pension Fund Regulatory and Development Authority (PFRDA), charged with the responsibility of sorting out all issues of jurisdiction regarding hybrid products or composite instruments “having a component of money market investment or securities market instrument or a component of insurance or any other instrument presently handled by RBI, Irda, Sebi or PFRDA.”
Is this the thin end of the wedge that will enable North Block to secure greater control over the central bank? In his Budget Speech this year, the Union finance minister had proposed the idea of setting up a high-level financial stability and development council (FSDC) presided over by himself. The so-called joint committee of the June 18 ordinance sounds exactly like an FSDC. Doubts about the government’s intentions have been raised precisely because the government chose the ordinance route, issued over the weekend, at a time when the matter was subjudice, and it was so on the advice of the finance ministry! There is something odd about the manner in which this entire episode has been handled that does not augur well for transparent economic governance in the country. It almost appears as if the finance ministry is intent on securing a grip over the central bank, especially after the tumultuous Venugopal Reddy era, and has used the Irda-Sebi tussle to increase its own powers in dealing with the central bank. The sooner the government comes clean the better for central bank authority. For its part, RBI must stand up and be counted.