Aiming to reform financial sector regulations for the longer term in keeping with systemic risks involved in financial management, the government-appointed Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice B. N. Srikrishna has proposed an Indian Financial Code Bill to enable creation of a unified financial regulator while limiting the role of the Reserve Bank of India (RBI) to monetary management.

As per the proposed regulatory architecture recommended by the Commission, whose report was put in public domain on Thursday, the unified financial agency (UFA) — and not a unified financial regulator, the commission has asserted — will comprise four existing agencies which will be merged into one. These are the Securities and Exchange Board of India (SEBI), the Forward Markets Commission (FMC), the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA).

Envisioning a full transition into a set of small and implementable measures, the FSLRC said the “existing RBI will continue to exist, though with modified functions.” In all, the Commission suggested seven agencies and each of them will have distinct functions.

Apart from the RBI along with the UFA, the Commission has suggested Financial Sector Appellate Tribunal (FSAT), Resolution Corporation, Financial Redressal Agency, Public Debt Management Agency and FSDC (Financial Stability and Development Council). The existing Securities Appellate Tribunal (SAT), it said, will be subsumed into FSAT and the existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) will be subsumed into the Resolution Corporation.

While the existing FSDC will continue to exist though with modified functions and a statutory framework, the Commission has recommended two new creations – a Financial Redressal Agency (FRA) and a new Debt Management Office. The draft Indian Financial Code Bill containing 450 clauses and six schedules is to give effect to its recommendations.

Explaining why the vast changes in the system of financial regulation and management is necessary, the report said: “The Commission is mindful that over the coming 25 to 30 years, Indian GDP is likely to become eight times larger than the present level, and is likely to be bigger than the United States GDP as of today...The aspiration of the Commission is to draft a body of law that will stand the test of time.”

The Commission, which submitted its report to Finance Minister P. Chidambaram last week, had 10 members, apart from its Chairman Mr. Justice Srikrishna. It may be recalled that with a view to strengthening the mechanism for maintaining financial stability, financial sector development and inter-regulatory coordination, the government, in consultation with the financial sector regulators, had set up the FSDC in December, 2010.

Implementation of the report, however, is not expected to be smooth. For, apart from the legislative changes required through Parliamentary approval, the fact that the Commission’s recommendations are marked by dissenting notes by four members — P. J. Nayak, K. J. Udeshi, Y. H. Malegam and Jayanth R. Varma on a host of specific issues is an indications of the hurdles in the way. This is despite the fact that the report said: “The Commission believes that this proposed financial regulatory architecture is a modest step away from present practice, embeds important improvements, and will serve India well in coming years.”

Arguing the need for the changes recommended, the report said the actual functioning of the regulator lies in three areas —- regulation-making, executive functions and administrative law functions.

As for capital control, it said the Finance Ministry should make rules for inbound capital flows, while the onus of making rules for outbound capital flows should rest with the RBI. However, one of the dissent notes pertains to this provision.

The FSLRC went on to say: “At present, in India, there is a confusing situation with regulators utilising many instruments such as regulations, guidelines, circulars, letters, notices and press releases. The draft Code requires all regulators to operate through a small number of well defined instruments only”.