An elephant in a hurry

Regulatory turfs are set to get reworked as financial sector reforms gather pace

India's financial sector is about to witness a sea-change. Regulatory turfs are being reworked, Acts are getting amended, and laws are being strengthened, as the government appears keen to walk the talk in driving financial sector reforms.

Conspiracy theories are also beginning to emerge as many suggest that some of the proposed steps indicate a growing rift between the North Block and Mint Road. This is despite the government and the Reserve Bank of India (RBI) repeatedly dismissing any suggestion of a conflict.

The government, for instance, wants to create a committee that will decide on monetary policy actions and set interest rates. The panel will include non-RBI staff, and decisions will be taken by way of a voting process among the members. So far, such decisions were at the sole discretion of the RBI governor. Finance Minister Arun Jaitley, during his Budget speech for 2015-16, said the government will move to amend the RBI Act this year to provide for the new monetary policy committee. While RBI appears to support the idea of such a committee, media reports suggest that there are differences with the government over issues like size and composition of such a panel.

"It appears that the overall framework was agreed upon by both the government and the RBI. I believe the issue is not with the design, but probably with the details. One needs to know what is acceptable by RBI and the system before making further guesses," Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, said.

Another move that appears to have left bond traders confused is the decision to take away RBI's regulatory powers over the money market and transfer it to the stock market regulator, the Securities and Exchange Board of India (Sebi). While the proposal was not mentioned in Jaitley's Budget speech, the Finance Bill has proposed to amend the sections 45U and 45W of the RBI Act - effectively taking away the central bank's powers to regulate government securities and other money market instruments.

However, many of the proposed steps have also found favour with industry experts and analysts.

RBI, which currently oversees public debt management, is backing the government's proposal of establishing a public debt management agency. Similarly, the move to merge commodity market regulator, Forward Markets Commission (FMC), with Sebi seems to be well received by the market. Both the proposals were part of the recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC).

CHANGING DYNAMICS

• A new committee will be created to decide on monetary policy actions and set interest rates. The RBI Act will be amended to provide for it
• A public debt management agency will be established with the objective of minimising the cost of raising and servicing long-term public debt
• The sections 45U and 45W of the RBI Act will be amended. This effectively ends the central bank's powers to regulate government securities and other money market instruments
• Commodity market regulator FMC will be merged with stock market regulator Sebi
• A comprehensive bankruptcy code will be introduced. It will replace the Sick Industrial Companies Act as well as the BIFR Act, which have failed to reform bankruptcy law
• NBFCs with capital of Rs 500 crore or more will be covered under the SARFAESI Act. This will help them not only in loan recovery but will also allow them to sell bad loans to asset reconstruction companies

"Creation of a public debt management agency is part of the FSLRC implementation. We welcome the move to deepen the bond market," Ashishkumar Chauhan, managing director and chief executive officer of BSE, said. The exchange will work with the government to implement corporate debt market reforms for primary as well as secondary market, he added.

Jayant Manglik, president, retail distribution, Religare Securities, said while the merger may take several months as it may have to be referred to a standing committee of the finance ministry, it will benefit the commodities industry. "It will help in faster integration of the commodities futures industry into the financial trading landscape. I am sure Sebi will also be well-equipped to handle the new challenges, which come with the introduction of a new product line under its regulatory oversight."

The proposed introduction of a comprehensive bankruptcy law is expected to strengthen banks' loan recovery initiatives. The new bankruptcy code will replace the Sick Industrial Companies Act (SICA) and the Board for Industrial and Finance Reconstruction Act, which have failed to stop the endless wrangling over collateral when corporate borrowers' default. "As such the orientation of the bankruptcy code in India appears to be towards creditor protection," V Balaji, partner, Deloitte Haskins & Sells, said.

Non-banking financial companies also have a reason to celebrate. Large NBFCs will now be covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act that will aid their loan recovery. "This will not only enable them to recover their loans like banks, but would enable the ARCs (asset reconstruction companies) to procure the NPAs (non-performing assets) from this segment, thereby broadening the industry's horizon," P Rudran, managing director and chief executive officer of Asset Reconstruction Company of India, said.

Jaitley said that people who urge the government to implement "Big Bang Reforms" also describe the Indian economy as an elephant. "An elephant, madam speaker, moves slowly, but surely," he said in his Budget speech. As far as financial sector reforms are concerned, the elephant seems to be in a hurry.