Idea behind SROs is not to make them more regulatory: Anish Mashruwala

The idea of SRO is not to make it more regulatory but it's more decentralisation from the regulator to allow a larger sense of how a particular product in the industry should develop, he says

In March, the Reserve Bank of India came out with a framework on self-regulatory organisations (SROs). Since then, industry bodies in finance have shown interest in setting up SROs. It is early days even as there are concerns over dual membership and SROs’ scope. Anish Mashruwala, partner, JSA Advocates and Solicitors (and co-chair of the finance practice and head of its banking & finance group), spoke with Raghu Mohan on these issues in a telephonic interview. Edited excerpts:

What is your view on dual membership in SROs?

Let’s say I am a member of the Indian Merchants’ Chamber and also of the Bombay Chamber of Commerce. I might have different parts of my organisation active in both. Now, it might be that one of the chambers in some situations adopted different positions from the other. And it’s always an exchange of ideas where if this is done, you bring it to the notice of the other relevant organisation. In the case of SROs for non-banking financial companies (NBFCs), this is probably a practice that should be followed, and committees and leaderships would take note of that. So, I think allowing a dual membership is beneficial because we have seen that in other industries and professions.

There may also be general competition between the two SROs, to say that if the practices of one are better at good governance, and it has a more effective voice with the regulator, it is likely to attract better membership in terms of quality than the other. I think having dual membership is good.

Should SROs get to have penal powers over their members?

No, I don’t think so. All an SRO can do if they find members not following the code of conduct or good practices will be to remove them; or put them in some sort of suspension mode, etc, depending on each body. Now, if that’s going to be effectively a means of saying that we will not, therefore, hear your voice if you are not part of the membership, it may get people to fall in line. Because a lot of this has indirect powers, right? If you are part of a generally accepted membership body, you are more likely to see members coordinating with each other. And if you are the black sheep, the whole membership, and therefore, by definition, the industry will sort of be against you.

I think that’s the sort of penalty – whether you call it indirect penal consequence, or whether you call it some sort of a punishment. I think this will only mean that in times to come when SROs become representative of the industry, they will build that kind of power.

Where are SROs to get quality independent directors when highly regulated entities like banks and NBFCs are finding it tough?

When the National Company Law Tribunal came about, there was a dearth in finding a technical member on it for a long period of time. But over time, in six months, there was more awareness and there were courses offered. The people who were the drafters of the Insolvency and Bankruptcy Code went around creating awareness, foreign players came in and people got the opportunity to also participate in a new career in that sense. At some places, we still feel that more and more members should come in. But that’s happening. Let’s give it time. You will find, there will be people who will fill these spots, but that’s for time to tell.

Is there a danger of lobby groups morphing into SROs?

Look, you cannot hide the fact that SROs will be lobbying. Part of their key objectives is that they represent the industry and hence, will lobby. We’ve seen that across the board, across industry. So, whether it’s a danger depends on the side you are looking at. Some will say this is necessary; some will say this is a problem. I won’t use a strong word like danger but lobbying is going to happen. One of the aspects for transparency and fair governance is to give the industry being represented the chance of lobbying with the regulator. The regulator can then revert that if this is genuine lobbying by the organisation which is coming through a recognised SRO, then we will take a look at it when we frame further policy. Better it comes from people who are most concerned with it rather than people who, in today’s social media world, say things because you can. Lobbying goes with the territory.

If other financial sector regulators were also to latch on to the SRO idea, how is coordination to happen between them?

A conglomerate is anyway exposed to five different regulators. You will want to ensure that you take the best out of that by saying that if one regulator has told me something, the industry towards that is moving there. So my entity within the conglomerate will have to follow those aspects. The idea of the SRO is not to make it more regulatory. In fact, I think it's more decentralisation from the regulator to allow a larger sense of how a particular product in the industry should develop. I think SROs will play a part in that. So, if you are a conglomerate with different businesses, let’s say, you have an insurance arm, and you have an NBFC, which is a housing finance company, and you also have a factoring platform, you are going to have those independent businesses anyway subject to different regulators. And your particular entity in that conglomerate, which is overseen by a particular regulator, will effectively take best practices, which the industry as a whole, in the SRO, will lobby for.