'Super regulator not ideal solution for financial sector'

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.