'Indian Financial Code could be in place by 2014-end'

Mr Sinha mentioned the circumstances under which the restructuring of UTI took place. I think it was one of the boldest decisions taken by the government in 2003. While the first tentative steps were taken by Shri Yashwant Sinha, then finance minister, the restructuring was mid-wifed by Shri Jaswant Singh, finance minister, and then when I joined the finance ministry in May 2004, we took it forward and completed the restructuring of UTI. It is a good example of governments, even when governments change and the main actors change; it is a good example that despite bitter political rivalry, there is also a deeper bipartisan consensus when it comes to taking crucial decisions affecting the economy. It is my sincere hope that, as we enter the field of bitter political rivalry, we will remember that there must be a bipartisan approach to the challenges that India's economy faces and to the steps that have to be taken to stabilise India's economy.

I asked myself how would the UTI crisis had been faced if we had all the instruments and all the institutions that have now been recommended by the Financial Sector Legislative Reforms Commission (FSLRC), the commission to rewrite our financial sector laws. When an institution like UTI gets into distress the first port of call should be the Resolution Corporation. It is largely recommended that we must put in place a Resolution Corporation that will identify financial firms that are in trouble but not yet bankrupt and will force them out of business through sale or liquidation. When there is a systemic crisis involving an organisation like UTI, the first responder must be a place where all regulators can gather and function like a virtual war room. If I had gone through the recommendations of FSLRC as Indian Financial Code that they have recommended, the war room in such a crisis would be the Technical Secretariat of the Financial Stability and Development Council, which will have a sound information base in the form of Financial Data Management Centre. In the absence of Financial Data Management Centre and absence of Financial Stability and Development Council, the war room, I am afraid, usually turns out to be the office of the finance minister.

But all this will have meaning only when we acknowledge the need for micro-prudential regulation. While our regulation is focussed on macro-prudential regulation - we are good regulators of the macro economy - we do not have micro-prudential regulations. It is worth remembering that neither the old UTI Act nor the Sebi Act has defined micro-prudential regulation. Micro-prudential regulations are about verifying promises made to consumers by players in the capital market. If the mutual fund says that the unit is worth Rs 8, we need someone to verify that the underlying portfolio is worth Rs 8. If a mutual fund promises assured returns of 10 per cent, we need someone to verify that there is a locked-in position on the market that you will deliver 10 per cent returns. These are the things that flow from micro-prudential regulation that were not understood in 1964 when UTI was created, and I am afraid, we are only now beginning to understand the need for micro-prudential regulation. I say this because I think we cannot lose time in implementing the recommendations of the FSLRC.

We have divided the recommendations into legislative actions and non-legislative actions. And I am deemed to report that FSLRC, when I addressed my first seminar, I said I realise that it's not possible to initiate and complete legislative actions as required within the term of this Cabinet. But we will begin work and then we hope that legislative actions can be completed in 2014. But we can take all the steps that have been recommended under the non-legislative actions and I am happy to inform you that a lot of measures on non-legislative actions have been initiated in the ministry of finance, and I hope that they will be unveiled and rolled out in the weeks and months ahead. But it is my sincere appeal to all the political parties, to all the members of Parliament, now and those who will be elected to the next Parliament, that we must complete legislative actions based on FSLRC recommendations in 2014. And we must have the major part of the Indian Financial Code in place in 2014. On behalf of my party, I can assure the financial community that if we find a place in the government, we will complete major legislative actions to put in place an Indian Financial Code by the end of 2014.

I am happy that UTI, despite the fact that it has slipped from the top rank to a few notches below, continues to enjoy the confidence of a large number of investors. Assets under management of UTI are little over Rs 75,000 crore, about nine per cent of the total assets under management of the mutual fund industry. UTI AMC has also created a niche for itself in the alternate asset management space with companies such as UTI Capital Ltd and UTI Ventures Ltd. Recently, Sebi has made a number of changes to promote the mutual fund industry. I know there is a debate and I am engaged in discussions with the Sebi chairman. Some players in the market have attributed the stress faced by the mutual fund industry, to the ban on the entry load that was imposed by Sebi. Following the ban, there was a sharp decline in the gross mobilisation of funds. It dropped by nearly 22 per cent from 88.59 lakh-crore in 2010-11 to 68.19 lakh-crore in 2011-12.

After a series of consultations and deliberations, Sebi took certain steps to re-energise the mutual fund industry. Among the steps were - increase in penetration of mutual fund products and energising the distribution network by increasing the limits of expenses that is charged by AMCs to the fund, improving the reach of mutual fund products in smaller cities and towns beyond the top 15 cities, alignment of interest of investors, distributors and AMCs and investor protection by addressing issues of mis-selling and churning. I am happy to note that these actions have had a positive impact on the mutual fund industry. I am told that 946 new branches have been opened in cities beyond the top 15 cities upto December 2013. And the Assets under Management from such cities has increased to around nearly 12 per cent at the end of December 2013.

Edited excerpts from Finance Minister P Chidambaram's speech at UTI's Golden Jubilee Celebrations on February 2, 2014, in Mumbai