Who is the real boss of India's financial markets?

The appointment of Injeti Sri­nivas as the chairman of the In­ternational Financial Ser­vi­ces Centres Authority (IFSCA) this July, just months before market regulator Securities and Exchange Board of India (Sebi) gets a new chairman sets the stage for the most interesting tussle. It will be the one to determine who is the real boss of the financial markets in India, for the foreseeable future.  

For financial sector companies sett­ing up shop in India, as of now the go-to regulators are obviously the Sebi and the Reserve Bank of India (RBI)with carve-outs for IRDAI or possibly PFRDA. But this could change soon.

The International Financial Services Centres Authority Act, 2019, under whi­ch Srinivas was appointed, makes the scale of difference starkly clear. There shall be no role for any of the financial sector regulators in the International Financial Services Centres (IFSCs). To ma­ke it abundantly clear, the Act has listed out all the acts, under which Sebi, RBI, IRDAI and others draw their powers to club them under a First Schedule. Section 13 of the Act then puts it bluntly to say none of those laws under the First Schedule will apply to curb its powers.  

“Notwithstanding anything contain­ed in any other law for the time being in force, all powers exercisable by an ap­p­ropriate regulator, specified under column (2) of the First Schedule, under the respective Acts… in the International Financial Services Centres will be exercised by the Authority in so far as it relates to the regulation of the financial products, financial services or financial institutions, as the case may be”. The only entity to which the Act shall be subordinate to is the central government. One cannot think of any Act written for the economic sector in India that gives such blanket overriding power to one agency, without offering any counterva­iling power to any other body to balance the two.

So the new chairman and the mem­bers will have all the powers to draw up the rules under which the IFSC entities will operate. Since the Act also offers equally broad powers to the Authority to decide any sort of financial products that can be offered by the Centre, this is like starting from a clean slate to establish a new financial republic in India at the IFSCs.

Any company that wishes to mark its presence here will consequently be free from any worry of having to satisfy the competing regulatory requirements of the horde of regulators in the financial sector. For instance, from this powerhouse of a financial centre, a company can offer brokerage, fund business, in­surance, banking or any boutique product it can devise. The only restriction is the business has to be transacted in a foreign currency. This may not be a big restriction though since the Act does not put any monetary ceiling or restriction for anyone to do business with entities, which will be registered under it. This means not just domestic companies, but also any Indian citizen who has a legitimate foreign exchange earnings should consider the allure of an IFSC. With such a pervasive backing, it is quite certain that businesses here will have a far better range of banking, brokerage, pension or insurance products to offer than the ti­ghtly regulated domestic markets can match.

It is no surprise that both the Sebi and the RBI had put in strong objections with the Finance Ministry when the Bill was passed by Parliament in December last year. They see it as having clipped their authority considerably and have continued to make their concerns kno­wn even now. The only nod to their concern is that their officers shall be ex-officio members of the board of IFSCA. With such stupendous level of attraction, isn’t it fairly obvious that the glamour of leading the financial sector in India shall pass on to the chairman of the IFSCA?

Of course there are caveats. The first is one of scale. An IFSC is still more of a promise even though it has begun to make its presence felt. Taking all of its business verticals together, the total turnover is about $60 billion as on March 31, 2020. For a $3-trillion economy, this is really a small change. It, however, is not the size, but the scale of the ambition. It makes no bones about the fact that Prime Minister Narendra Modi is their biggest supporter to make the market “emerge as a hub for international financial services activities”.

Srinivas has a reputation to protect. The Odisha-cadre IAS officer steered the bankruptcy legislation in India against stern opposition and insulated its board from the pressures of the industry. As the first chairman of the IFSCA, he will want to position it similarly, as the go-to place for connecting India’s domestic financial markets with international flows. The law provides him abundant backing. One suspects the financial sector has already begun to believe in it too.