Regulators to decide on more effective coordination

The government will hold discussions on a proposal to make the high level committee on financial and capital markets (HLCC) — an informal body comprising representatives of all financial regulators — more effective next month. “The decision to make HLCC more effective would be deliberated on in the second half of November. The discussion is on whether formalisation of HLCC would be more effective or more bureaucratic?” an official source said.

There is a consensus that HLCC needs to be more effective to tackle any problem speedily and with ease as there are many issues in the financial market that require close coordination and acting together by various regulators, the source said. As of now, the industry has to deal with many regulators. For instance, he said, if mutual funds face liquidity crisis as happened last year following Lehman Brothers’ collapse, the step to infuse liquidity would be taken by the RBI, but the information on cash crunch with MFs will be known to Sebi first.

“As such, financial sector issues require close coordination among regulators,” he said. However, there is no guarantee that a formal structure for HLCC would make it more effective as it may make it more procedural and bureaucratic.

The liquidity crisis faced by the mutual fund industry last year was addressed in just over six hours over mobile phones and SMSs between different financial sector regulators.

The RBI had opened a special repo window — liquidity injection by the RBI against government securities — for mutual funds to tide over the liquidity crunch. The crisis was solved in about two months.

As such, the current informal structure of HLCC proved quite effective in handling the MF crisis, he said. The November meeting will deliberate on whether providing formal structure to HLCC would lend promptness and swiftness to coordination among regulators in salvaging any crisis.

HLCC, an informal panel of various financial sector regulators like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), was formed in 1992 after a Department Order (DO) issued by the then Department of Economic Affairs Secretary Montek Singh Ahluwalia.

Now, insurance regulator Irda and interim pension regulator PFRDA, are also part of the coordination committee. The informal body meets regularly to review the situation in the financial sector, but there is no fixed schedule for these meetings.

Over a period of time, the source said, there have been recommendations by various panel and committees for strengthening the HLCC. A panel headed by Raghuram Rajan, former Chief Economist of International Monetary Fund, had recommended some kind of formal structure to be given to HLCC to plug regulatory gaps and assign it a responsibility.