Frame law to regulate financial conglomerates

The Committee on Financial Sector Assessment (CSFA) today said the government should frame a new Act to strengthen the regulation and supervision of the financial conglomerates (FCs) and favoured a lead regulator status for the Reserve Bank of India (RBI).

The CSFA report said that the supervision of such groups was in the nascent stage and there were legal impediments that stop sharing of proper information and joint inspections by the regulators.

“There is no legislation specifically permitting regulation of FCs and holding companies in India. The Reserve Bank could, in the interests of financial stability, be armed with sufficient supervisory powers and monitoring functions in respect of financial conglomerates,” the report said.

At present, a monitoring and oversight framework is in place for FCs that balances the regular supervision of individual entities by the respective regulators – RBI, Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda).

The report suggested that the central bank will be the regulator and supervisor in cases where: in case of an FC the apex institution is a bank holding company; where the apex institution is a non-bank holding company and have a bank within its structure; and when FC has a non-banking finance company as its a holding firm.

Even if an FC does not have a bank or a financial holding company, the conglomerate would be within the regulatory reach of RBI. In case of entities within the FCs without any regulator, it would be brought under the reach of the lead regulator.

In a bid to enhance regulatory framework for the self-regulatory organisations (SROs), the committee said these bodies should fulfill certain preconditions such as transparent policies by the regulators for defining, identifying and approving SRO status.

The committee was of the view that SROs could potentially enhance regulatory efficiency and optimise regulatory costs.