The Financial Sector Legislative Reforms Commission or the FSLRC has called for merging the Securities & Exchange Board of India (SEBI), Insurance regulatory and Development Authority (IRDA) and the pension regulator into one super regulator. M Damodaran, Former Chairman of SEBI believes there is no final solution to what could be the best structure for a regulatory authority.
Damodaran points out that every regulatory organization has over the years developed its own identity and has its own philosophy to regulate that part of the financial world. Therefore, anything that has to be fixed must do with the body of regulations that they use, he advises.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Let me first start with the FSLRC's plans for a future SEBI, it wants SEBI, IRDA and PFRDA rolled into one and RBI ofcourse to be the banking regulator and the monetary authority, what do you think of this architecture?
A: On the architecture, there is no final solution as to what is the best structure that you can have. You have the unified regulator in UK, you have diversified regulators in several other jurisdictions. We ourselves have quite a few regulators set up from time-to-time and each of them has gained a momentum of its own.
Even assuming for argument that this is the ideal solution, I think it is a little late in the day to attempt the kind of merger that is suggested because how do you do away with the institutions that exist? If the recommendation is that all three exists and then there should be a coordinating body that might be a good, happy house.
Q: What is your worry, will things fall between stools so that no one takes responsibility, is that the worry?
A: I do not think it is a question of something falling between stools, it is a question of each regulatory organization over the years have developed an identity of its own, having a philosophy of its own and attempting to regulate the portion of that financial universe in a manner that is considered best according to that regulator. I think what you need to fix is the body of regulations that they use. That is the bigger problem to my mind.
Q: The FSLRC wants laws to be written not sectorally but, across sectors. That is one rule on capital adequacy or one common redressal system across all instruments and agencies, is that a good way to think about financial sector rules?
A: I think what will happen then is there will be a discontinuity and a consequent uncertainty in the regulated universe and what you cannot do with regulation is to shock and surprise the regulated universe on a continued basis. If you do too much of that, too soon it could be disruptive and then you could have a phase where people do not understand the new regulations and therefore, the best intentions are on the wrong side of the regulation.
What you need to do instead is to rewrite the entire body of regulations after factoring in all the knowledge that you have and write it in a manner that is simple, does not leave scope for too much interpretation and makes the conduct of business easier. That is I think the primary requirement at this point in time.
Q: In the FSLRC's approach paper, there is a lot of emphasis on rule of law, the FSLRC’s approach paper says before writing a rule, the regulator has to justify why he is writing the rule, why he is taking away a market freedom, do you think this is a workable and a good idea?
A: I think it is and it is an excellent initiative, it is long overdue. You need to look at two things, when a new regulation is written, someone needs to ask himself or herself, is this necessary? Can we not administer this particular problem on the basis of existing regulations? It is only when existing regulations are inadequate that you must think of new regulations.
The second is to look at the cost of compliance. Compliance is not cost free and the bill is picked up by that entity in whose interest you write out the regulations, whether it is an investor or a shareholder or a depositor. That is where the cost will be transferred and therefore you have to ask yourself, is this new regulation in the interest of that body whose interest I seek to protect and on whom I am imposing a cost? That is the real issue to my mind.
Q: What are your thoughts on this common redressal agency and structure almost parallel to the courts right down to the district level starting from the centre? Is that a good way to help the consumer, the financial sector consumer?
A: No. Not if you are going to spread it to the district level. We have a large number of districts in this county. You are not going to get the kind of competence that you need to deal with complex problems and their resolutions. What you need to look at is, in-house redressal mechanisms and a sturdy appellate process with appellate bodies outside, as you have in the case of Securities Appellate Tribunal.
Q: The Financial Sector Legislative Reforms Commission (FSLRC) speaks of a recovery corporation to be set up to takeover weakening financial firms before their net worth turns negative. Is that a good idea or do you like some people fear that it may end up like the BIFR into which promoters have wantonly dumped their companies once they start on a weakening trend?
A: The recovery corporations are required and they should be set up, sufficiently strengthened, very well managed and should be empowered. They should be asked to act promptly not when it is too late and when you have to pick up the pieces that are scattered all over the place. You need to re-invent an existing organization as the recovery corporation because there are stakeholders’ interest that you need to address proactively.
Q: The FSLRC talks of giving clear goals to each regulator, specifically it wants to give inflation targets to the Reserve Bank, the monetary policy authority. Given the global experience of the last decade, do you think this is a good idea?
A: I heard former governors of the RBI saying that if you are managing growth and inflation, you are riding two horses facing opposite directions. Therefore, are you going to move in the direction of a single objective of who will then take care of the other object which the RBI is presently handling? You need to ensure that the RBI wears a lesser number of hats than it does at this point of time. But, that does not mean that you so radically change the scene that you reduce RBI to a unidimensional entity.
As for goal setting, I think my approach to regulation and regulators has always been that you set up a regulator, give that organization functional autonomy, give it budgetary support needed and then allow it to discharge their duties for which you have set it up. If an external agency starts goal setting, monitoring and anything of that kind you are clearly not going to get anywhere.