Friday, March 29, 2013

FSLRC's Recommendations

The Financial Sector Legislative Reforms Commission headed by Justice B.N.Srikrishna has submitted its report after working on it for about two years.

The Commission has made a far-reaching recommendation to clip the powers of RBI and to further empower Finance Ministry. "The rules on capital account transactions for all inward flows will be made by the central government in consultation with the regulator. The rules on capital account transactions for all outward flows will be made by RBI in consultation with the central government."

This nefarious recommendation has attracted notes of dissent by three eminent members who perhaps are the only ones in the Commission who understand its implications! Y.H.Malegam, K.J.Udeshi and Dr.P.J.Nayak have disassociated themselves from this recommendation; it is unfortunate that in a Commission of this importance, knowledgeable members are unable to prevail upon others. This perhaps indicates the existence of some external influence.

Y.H.Malegam argues forcefully that Finance Ministry must take decisions only on FDI-related inward flows and that other inflows be they portfolio ones or ECBs or NRI investments should be subject to RBI's control.

Malegam also dissents from the Commission's proposal that NBFCs and Housing Finance Companies should be regulated by the proposed Unified Financial Agency and not by RBI. The proposal is very retrogressive.

The Commission has proposed dismantling of SEBI, IRDA and PFRDA. P.J.Nayak reminisces correctly that when the Finance Ministry was administering through Controller of Capital Issues or the Stock Exchange Division of the Finance Ministry, new capital issues were continually grossly mis-priced and malpractices in the functioning of brokerage firms were commonplace. Therefore SEBI etc. were formed. As Nayak wisely asserts, "The Commission now arrests and partly reverses the directional movement and it is with this apprehension that one must view the very substantial statutory powers recommended to be moved from the regulator (primarily RBI) to the Finance Ministry."

It is a pity that members who are in the know of things can only whistle in the dark while the Commission carries out its assigned job of enfeebling the regulators and empowering the Finance Ministry.