FSAT idea returns as debate grows over RBI penalties, regulatory overlap

RBI Governor Sanjay Malhotra has reopened the debate over an appellate mechanism for central bank penalties, even as experts remain divided over whether another layer of oversight is needed

The Financial Sector Legislative Reforms Commission (FSLRC) under Justice B N Srikrishna in March 2013 recommended a unified Financial Sector Appellate Tribunal (FSAT) among other things: The idea was that it would hear all appeals in the financial sector.

 

Thirteen years on, it may be time to revisit the idea.

 

There have been data leaks at Reserve Bank of India (RBI)-regulated entities (REs), misselling, and customers falling prey to mule accounts.

 

On the regulatory front, there is the RBI’s draft Guidance on Regulatory Expectations for Data Governance; the Digital Personal Data Protection (DPDP) Act, 2023; and the DPDP Rules, 2025. Finally, there are financial conglomerates with multiple business lines cutting across regulators, which can leave the consumer not knowing whom to turn to.

 

Now, penalties imposed by the RBI on its REs are low when compared with what is slapped by banking regulators in advanced markets. In FY26, India had 241 instances of penalties amounting to ₹26.33 crore on REs. This compares with 353 instances and ₹54.78 crore in FY25, 281 and ₹86.11 crore in FY24, and 211 and ₹40.4 crore in FY23.

 

Globally, penalties run into hundreds of millions of dollars; the highest imposed by the RBI to date is ₹58.9 crore in March 2018 on ICICI Bank for failure to adhere to directives on the sale of securities from its held-to-maturity portfolio.

 

Cross-cutting risks

 

In January this year, RBI governor Sanjay Malhotra said, “Enforcement, restrictions and penalties are measures of last resort. Our endeavour is to have a robust financial ecosystem where supervision encourages self-correction and enforcement acts only as backstop.”

 

But the fact remains that these penalties are not deterrent enough. The RBI imposes non-monetary penalties too, occasionally (like barring an RE from a certain line of business for non-compliance). Currently, when the RBI imposes penalties — monetary or non-monetary — REs can appeal only to it. Theoretically, they can go to the courts but few take this route. To this add the DPDP Rules, 2025, with penalties on institutions ranging from ₹50 crore to ₹250 crore, and matters get even more swampy.

 

In January this year, deputy governor S C Murmu pointed to digitalisation blurring traditional regulatory boundaries. “Many of the financial activities are now being unbundled and delivered through non-financial platforms and arrangements involving both regulated and unregulated entities that do not fit neatly within the existing regulatory scope of RBI. Oversight of such activities is often fragmented among multiple financial and non-financial regulators with no single authority having a comprehensive, end-to-end view of the entire activity chain and risk transmission pathways,” he said.

 

“Hence, regulatory actions taken within individual mandates may be sound in isolation, yet collectively may not fully address such cross-cutting risks”.

 

Establishing the FSAT would have seen the Securities Appellate Tribunal — the forum for appeal in cases involving the Securities Exchange Board of India (Sebi), Insurance Regulatory and Development Authority of India (Irdai), Pension Fund Regulatory and Development Authority (PRFDA), and the Forward Markets Commission (FMC) — subsumed into it.

 

As for the RBI, former deputy governor K J Udeshi — a member of FSLRC — dissented. But it was on recommendations relating to capital controls.

 

In the words of the FSLRC, “The regulations governing capital controls on inward flows should be framed by the government, in consultation with the RBI. The regulations governing capital controls on outward flows should be framed by the RBI, in consultation with the government.” Udeshi said, “When the rule-making vests with the government, the RBI may be consulted, but if there is a disagreement, the RBI would willy-nilly have to deal with a fait accompli and be accountable for the actions it would be required to take in the light of the government’s decisions.”

 

Tried and tested

 

“We can do with just a couple of regulators as suggested by the FSLRC. This model has been tried in many countries successfully. It will reduce overlaps in regulations and compliance complexities in REs,” said R Gurumurthy, who serves on the boards of Axis Capital, Religare Finvest, Care Health Insurance, and Simplex (he was also former head of governance at RBL Bank).

 

“Even the dissent submitted by the RBI member (Udeshi) was only in the area of capital controls. Much water has since flown down the river and some changes have also happened with the passage of time. It is well worth constituting a fresh committee to take this to closure.”

 

He, however, added, “Reducing the FSLRC discussions to just FSAT and penalties would be grossly inappropriate as the ambit is far wider than that.”

 

There is a counterview. “I do not find much substance in this argument since the whole process of enforcement is well-structured, rule-based and gives an opportunity at every stage for REs to make their defence,” said Ravi Duvvuru, a member of the RBI’s advisory group on regulation and founder and designated director, Duvvuru & Reddy LLP.

 

“The discussions before the Panel of Executive Directors which is the final court of appeal within the banking regulator, are transparent and due consideration is given to submissions.”

 

His stance is that while some may believe that this is a mere formality, it is not so. “Bankers have mentioned that there have been several instances where the panel concluded that the charges were not substantiated, or lowered the penalty substantially after the submissions made by the RE in the hearing. Unfortunately, such information is not available in the public domain,” he said.

 

But, unlike Sebi or Irdai, the RBI does not put out a “speaking order” — legalise for a ruling that clearly states the reasons for the decision.

 

There is also the issue of jurisdictional ambiguity.

 

“It can create uncertainty for the industry and consumers,” noted Rishi Agrawal, co-founder and chief executive officer of Teamlease Regtech. One example is Sebi’s move to ban 14 private insurance companies from selling unit linked insurance plan (ULIP)s in 2010. It had then argued that the ULIP pool was public money akin to mutual funds and came under its watch. But Irdai held that they were akin to life insurance policies and fell in its domain. Finally, a presidential ordinance settled the matter: ULIPs are insurance products and come under Irdai.

 

Whither consumers?

 

In 2010, the creation of the Financial Stability and Development Council (FSDC) — the coordinating agency for regulators chaired by the finance minister – reflected an acknowledgement that coordination mechanisms are essential in a growing and increasingly interconnected financial sector.

 

That complexity has only grown with digital finance. The RBI regulates lending institutions; the Ministry of Electronics and Information Technology may intervene where illegal digital platforms violate IT laws; and the Enforcement Directorate investigates money laundering offences.

 

Similarly, embedded finance, bancassurance, tokenised assets and integrated financial apps span multiple regulatory areas.

 

“When responsibilities overlap, businesses face duplicate and overlapping compliance obligations and regulatory recordkeeping. At the same time, consumers struggle to identify the appropriate authority for grievance redressal,” said Agarwal.

 

The problem gets even more complicated when it comes to financial conglomerates. They may have multiple business lines — other than retail banking there is insurance, mutual funds and investment banking — within their fold. And the regulators are different.

 

As financial conglomerates add more business units, it means the list of regulators responsible for oversight keeps on increasing.

 

“The RBI opposed an appellate body (on its turf) and that recommendation was never enacted, though other parts of the FSLRC’s work — on consumer protection, for instance — were taken up. What we got instead was coordination without merger: The FSDC, chaired by the finance minister since 2010, and its working arm, the FSDC sub-committee, chaired by the RBI Governor,” said Karhik Sharma, partner at Saxena, Singhal & Vaid.

 

To be sure, there is a ‘lead-supervisor model’ for financial conglomerates.

 

Since the 2004 Working Group on Monitoring of Financial Conglomerates, each identified conglomerate has a designated entity that files consolidated group data to a principal regulator, meaning the regulator of that designated entity.

 

The RBI, Sebi, Irdai and PFRDA signed an MoU on this in March 2013; an inter-regulatory forum under the FSDC sub-Committee monitors these groups. As Sharma sees it, “Nobody’s failing to look at a group as a whole — that part already exists. The problem is what the principal regulator can actually do once it's looked into an issue. Its authority comes from an inter-regulatory MoU and an information return, not from any statutory power over entities another regulator licenses.”

 

Budget proposal

 

There is a view that the proposal in the Union Budget FY27 to set up a high-level committee to review and recommend reforms for the banking sector (in line with the vision of Viksit Bharat 2047) is expected to be far-reaching in its scope.

 

It follows a key RBI initiative taken last year: A regulatory review cell housed in its Department of Regulation (effective October 1, 2025).

 

Its mandate is to subject regulations to a comprehensive and systematic internal review every 5-7 years.

 

Nishith Mehta, lead-risk and compliance at Trilegal, said banks will continue to remain the foundation of financial stability and credit delivery.

 

“At the same time, the structure of financial intermediation has evolved, with credit now flowing through a wider ecosystem that includes non-banking financial companies, capital markets and technology-enabled platforms.” His point: It would be useful for the proposed high-level committee to take a forward-looking and system-wide view, even as it maintains a strong focus on strengthening the banking sector.

 

Such an approach would help ensure that reforms improve resilience, enhance the efficiency of credit transmission, and enable the financial system as a whole to support the next phase of economic expansion. 

Tribunal that wasn’t  

• The FSLRC under Justice B N Srikrishna in March 2013 recommended a unified FSAT, which would hear all appeals in the financial sector
• The Securities Appellate Tribunal would have been subsumed into FSAT
• Former RBI deputy governor K J Udeshi — a member of FSLRC — dissented but only on the recommendations relating to capital controls
• The FSAT was never set up, which means each industry has its separate regulator