FM heat on unregulated financial sector

P Chidambram says financial consumer comfortable to participate in regulated market

The Centre was striving to get rid of unregulated players in the financial sector through reforms, Finance Minister P Chidambaram said here on Monday.

He was addressing a national seminar on the Indian Financial Code, mooted by Financial Sector Legislative Reforms Commission and organised by the Institute of Company Secretaries of India. “Our endeavour is to eliminate unregulated space,” he said.

According to Chidambaram, a financial consumer is comfortable to participate in a regulated market and there should be an assurance that she will be protected.

However, exploiting the limitations of the regulatory architecture, ingenious financial engineers come up with innovative products outside the regulatory jurisdiction and deprive the consumers with such products from regulatory protection, he noted.

“We believe that we must move quickly to move all unregulated space,” he said.

Adding that a recent attempt in this direction was the Securities Laws (Amendment) Ordinance, 2013, which considers any raising of resources, whatever means, if not regulated otherwise, as a collective investment scheme.

Given the speed and dynamism in which the financial sector operates, it generates new space — sometimes undefined areas — which provide opportunities for unregulated players in the market, Chidambaram noted.

“The existence of such players who operate in the twilight zone endanger the discipline of the markets, leading to systemic instability. Invariably, such activities adversely impact a large number of consumers. This reduces their confidence in the system. A large number of investors, particularly small investors, stay away from the system. It reduces the supply of blood to the body economic,” the finance minister said.

He added that while the country has been travelling at reasonable speed in financial sector reforms since the early 1990s, the pace is not good enough as the financial world is also moving very fast. Chidambaram said that India has been responding to events after they happen rather than anticipating them and being ready to face them. So, financial economic policy has to catch up with the needs of future India if the country needs to reach its goals, he noted.

There have been five institutional milestones in Indian corporate financial institutions in the last six months — FSLRC report, new Companies Act, the passage of Pension Fund Regulatory and Development Authority (PFRDA) Bill, placing commodity futures market regulation under the finance ministry and the re-promulgation of the Security Laws Amendment Ordinance. However, many of these have been pending for 10-20 years, he pointed out.

According to Chidambaram, the next wave of reforms will be through straightening of the institutional foundation, improving processes and by taking well-designed policy decisions to enhance clarity, consistency and transparency.

The FSLRC recommendations and the draft law the Commission has prepared will go a long way to achieve many of these objectives, particularly in the area of institutions and processes. “It is my intention that we adopt the basic spirit of the framework provided by FSLRC in building a strong institutional foundation for our financial sector,” said Chidambaram. The government would consider the powerful dissents that have been appended while making the law, he added.