Government of India ___________________________________________ Report of the Financial Sector Legislative Reforms Commission Volume I: Analysis and Recommendations March 2013 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION New Delhi 22 March, 2013 Shri P. Chidambaram Finance Minister Government of India New Delhi 110001 Dear Finance Minister, The FSLRC presents its Report to the Government of India. The Report is in two parts: Volume I – text of the findings and recommendations and Volume II – basic framework of a dra law. The Commission did not release the Report in public domain since the mandate was to submit it to the Government. However, given the high level of stake-holder interest on the subject and the need for transparency, the Government may release the Report at the earliest. Yours sincerely B N Srikrishna Chairman Dhirendra Swarup M Govinda Rao* Member Convener Member Jayanth Varma Member P J Nayak Member K J Udeshi Yezdi H Malegam Member Member C K G Nair Secretary *Appointed Member of the 14th Finance Commission with eect from 04 February, 2013. Three Members of the FSLRC could not sign the Report. Shri C. Achuthan passed away on 19th September, 2011; Justice Debi Prasad Pal is seriously ill and Joint Secretary, Capital Markets (Nominee Member) could not attend the meetings due to other commit- ments. Contents Acronyms.....................................v Acknowledgement................................ ix Executive Summary................................ xiii 1 Introduction1 1.1 FSLRC and its Mandate...........................1 1.2 Deliberations in the Commission......................2 1.3 Interaction with experts and stake-holders................2 1.4 Working Group Process...........................4 1.5 Analysis and assessment..........................5 2 The tasks of financial law 11 2.1 Shiing away from a sectoral perspective................. 12 2.2 Adopting a principles-based approach................... 13 2.3 Approach to draing............................ 14 2.4 Financial regulatory governance...................... 15 2.5 Ownership neutrality and competition................... 17 3 Structure of the regulator 21 3.1 Selection of the regulator’s board..................... 21 3.2 Composition of the board of the regulator................. 22 3.3 Functioning of the board.......................... 23 3.4 Advisory councils of the regulator..................... 24 3.5 Resource allocation of the regulator.................... 25 3.6 Performance assessment and reporting.................. 27 4 Functions and powers of the regulator 29 4.1 Issuing regulations and guidelines..................... 29 4.2 Executive functions............................. 32 4.3 Administrative law and role of tribunals.................. 37 4.4 Conclusion................................. 40 5 Consumer protection 43 5.1 Strategic picture.............................. 43 5.2 Scope of the law.............................. 45 5.3 Objectives and principles.......................... 45 5.4 Protections for all consumers....................... 46 5.5 Additional protections for retail consumers................ 48 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION i CONTENTS 5.6 Functions and powers of the regulator................... 49 5.7 Advisory council on consumer protection................. 50 5.8 Financial redress agency.......................... 50 5.9 Competition law and policy........................ 53 6 Micro-prudential regulation 55 6.1 Rationale for micro-prudential regulation................. 55 6.2 A non-sector-specific micro-prudential framework............ 57 6.3 Scope of micro-prudential regulation................... 58 6.4 Powers of micro-prudential regulation................... 59 6.5 Principles to guide the use of powers................... 62 7 Resolution 69 7.1 The problem................................ 69 7.2 An eective resolution framework..................... 70 7.3 Objectives of the resolution corporation.................. 71 7.4 Interaction between agencies....................... 72 7.5 Powers of the resolution corporation................... 73 7.6 Resolution tools............................... 74 7.7 Fund for compensation and resolution.................. 78 7.8 Consequences of resolution........................ 79 8 Capital controls 81 8.1 Objectives of capital controls........................ 81 8.2 Current framework............................. 82 8.3 Proposed framework............................ 83 9 Systemic risk 89 9.1 The problem of systemic risk........................ 89 9.2 Objectives and principles.......................... 90 9.3 Institutional arrangement......................... 90 9.4 The five elements of the systemic risk regulation process......... 92 9.5 Constructing and analysing a system-wide database........... 93 9.6 Identification of systemically important firms............... 95 9.7 System-wide measures........................... 96 9.8 Inter-regulatory agency co-ordination................... 97 9.9 Crisis management............................. 97 10 Financial inclusion and market development 99 10.1 Objectives.................................. 99 10.2 Institutional architecture.......................... 100 10.3 Principles that guide the use of measures................. 101 11 Monetary policy 103 11.1 Objective of monetary policy........................ 104 11.2 Powers of the central bank......................... 104 11.3 The monetary policy process........................ 105 11.4 The monetary policy committee...................... 106 11.5 Accountability................................ 107 11.6 Institutional structure............................ 107 11.7 Temporary Liquidity Assistance...................... 108 ii FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION CONTENTS 12 Public debt management 111 12.1 An independent public debt management agency............ 111 12.2 Structure of the public debt management agency............. 112 12.3 Objectives and functions of the public debt management agency.... 114 12.4 Scope.................................... 118 13 Foundations of contracts and property 119 13.1 The interaction of financial laws with other laws............. 119 13.2 Principles relating to certain contracts................... 120 13.3 Infrastructure Institutions.......................... 122 13.4 Regulatory issues of Infrastructure Institutions.............. 123 13.5 Special provisions for Infrastructure Institutions.............. 125 13.6 Public issue and trade of securities..................... 126 13.7 Market abuse................................ 128 14 Financial regulatory architecture 131 14.1 Financial regulatory architecture as a distinct feature of financial law.. 131 14.2 Problems of the present arrangements.................. 132 14.3 Considerations that guide alternative architecture choices........ 132 14.4 A financial regulatory architecture suited for Indian conditions...... 133 15 Transition issues 137 16 Summary of recommendations not embedded in the dra Code 141 16.1 Ownership neutrality and competition................... 141 16.2 Parliamentary review of subordinate legislation.............. 142 16.3 Recommendations of Working Groups................... 142 16.4 Cross-border resolution.......................... 142 16.5 Systemic risk................................ 143 16.6 Transition issues.............................. 143 17 Conclusion 145 18 Notes of dissent 147 18.1 Note of dissent by J.R. Varma........................ 147 18.2 Note of dissent by K.J. Udeshi....................... 148 18.3 Note of dissent by P.J. Nayak........................ 150 18.4 Note of dissent by Y.H. Malegam...................... 153 19 Annexes 157 19.1 Formation of the FSLRC.......................... 157 19.2 List of consultants, researchers and other oicials who assisted the Com- mission................................... 159 19.3 List of invitees for interaction with FSLRC................. 160 19.4 Issues for discussion with experts and stake-holders........... 162 19.5 Interactions with authorities overseas................... 163 19.6 Working Group on insurance, retirement financing, and small savings.. 164 19.7 Working Group on payments........................ 174 19.8 Working Group on securities ....................................... 176 19.9 Debt Management Oice.......................... 180 19.10 Working Group on banking ....................................... 182 19.11 Interactions by the Working Groups.................... 193 19.12 External Reviewers and Experts who worked with the Research Team.. 194 19.13 Submissions to FSLRC........................... 195 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION iii Acronyms aaa Aid, Accounts and Audits Division arc Asset Reconstruction Company asic Australian Securities and Investment Commission bod Board of Directors bom Board of Management bsm Bank Subsidiary Model cag Comptroller and Auditor General of India cci Competition Commission of India ccp Central Counter Party cea Chief Economic Advisor ceo Chief Executive Oicer cerc Central Electricity Regulatory Commission cersai Central Registry of Securitisation Asset Reconstruction and Security Interest of India cfsa Committee on Financial Sector Assessment cftc Commodities Futures Trading Commission cft Combating the Financing of Terrorism cpc Code for Civil Procedure, 1908 crr Cash Reserve Ratio dea Department of Economic Aairs dicgc Deposit Insurance and Credit Guarantee Corporation of India dop Department of Post drat Debt Recovery Appellate Tribunal drt Debt Recovery Tribunal