Fin sector reforms panel has its task cut out in '11
A new year is upon us. The financial sector is reported to be all set for a material development this year. The Financial Sector Legislative Reforms Commission (FSLRC) is expected to be finally set up this year.
Media reports suggest that a potential chairman has been identified. While it is conventional in India for personalities and icons to sideline issues, the FSLRC has its agenda cut out. The year 2011 indeed presents a major opportunity for the FSLRC to make a serious impact.
A lot needs to be done with financial sector regulation. By definition, the sector is a highly regulated one worldwide, and thanks to the global financial crises in recent years, it will remain so. The Indian financial sector has achieved much since 1991, when India opened up, and a lot of attributable to courageous policy and improved regulation. However, if the Indian financial sector has to enter the next bigger orbit of maturity, what we now have is woefully inadequate.
For a jurisdiction that is laying claim to being among the top twenty economies of the world, the legal framework in the financial sector can be regarded as being in a mess. Long-standing interpretations of foreign investment policy get easily disturbed with a change in the officers who administer the policy. For example, pure stock broking operations are treated as "fund-based" activity rather than a fee-based service, even if the broker does not undertake proprietary trading on its own account. Yet, brokers who want to undertake proprietary trading are told that whether they can have foreign equity holding without special permission, is a matter not free from doubt.
So also, simple transactions such as transfer of shares on a cross-border basis have remained beset with problems of interpretation, particularly in relation to pricing norms that govern such transactions under Indian exchange controls. Regulations on pricing for conversion of convertible instruments, remain in flux.
Another example is the ambiguity over what constitutes a non-banking financial company (NBFC) — varying definitions abound. The foreign direct investment policy has a definition different from the definition adopted by the Reserve Bank of India (RBI). The RBI is clueless about what to do with applications for registration as NBFC — its regulatory desire is to hand out as little registrations as possible. Some types of entities registered with other regulators are exempt from being registered as NBFC while other types of entities so registered are not specifically exempted from NBFC registration requirements.
The concept of "collective investment schemes", which are regulated by the Securities and Exchange Board of India (SEBI) is expansive and has been interpreted in a broad manner. While the coverage of unit-linked insurance plans led to the controversial spat between regulators, leading to the Financial Stability and Development Council (FSDC) being set up, other areas of controversy not involving other regulators, abound. For instance, in a knee-jerk public warning, art funds were declared by SEBI to be collective investment schemes, but neither has any specific action been taken to have them registered, nor has any clarification been issued to state that the earlier view adopted was wrong.
As exchange controls get more liberal, and resident Indians have the means to invest abroad, regulation of marketing and offering of foreign securities and investment products in India remain inadequate. Entities that want a predictable framework to operate in, are left clueless.
Even where predictable regulations are available, unpredictable positions are adopted by administrators of the law. For example, the pricing for an open offer triggered by conversion of a convertible instrument has been treated varying by SEBI, depending on whether the market price for the stock is high or low, at the time of conversion.
Simple means of effective co-ordination among regulators too, are not adopted — a classic case in point is the massive exposure investors are now taking to commodities, with a completely different regulatory coverage for such activity. Worse, decisions of all financial sector regulators are not clearly appealable, leaving no check and balance over every regulator — here, the law governing SEBI, which is subject to appellate review by the Securities Appellate Tribunal, is a rare exception. Efforts to initiate a common Financial Sector Regulatory Tribunal have not borne fruit.
Clearly, 2011 can be a turning point for the Indian financial sector, if the FSLRC plays the role expected of it. One can only hope it does not become another instance of a lost opportunity.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
Email: somasekhar@jsalaw.com