THE first initiative in India’s bid to bring all financial sector regulators under a super-regulator is expected to kick-start in the union budget to be presented by Finance Minister Arun Jaitley later this month.

The minister is widely expected to announce the merger of the Forward Markets Commission (FMC), the commodity watchdog, with the Securities and Exchange Board of India (Sebi), the capital market regulator.

India expects to ultimately travel down the road taken by several developed economies including the UK by bringing all financial sector regulators under a super-watchdog. However, the proposed path is strewn with political hurdles and with the BJP-led government not enjoying a majority in the upper house of parliament it will be difficult to bring about this merger soon.

Both regulators have had an uneasy relationship in recent years, with their respective heads fiercely defending their turfs, and both have resisted the merger moves. Though FMC was established much earlier, it lacked teeth and has not been effective. Sebi, however, has been a high-profile regulator, which has taken on large corporates and introduced several changes in the capital markets.

Several high-level committees have over the past decade recommended the merger of the two regulators. One such report was by the Raghuram Rajan committee (Rajan is now the governor of the Reserve Bank of India) in 2009, which had suggested that Sebi should oversee all exchange trading of financial securities.

The Financial Sector Legislative Reforms Commission (FSLRC), which has suggested the merger of all financial sector regulators, had also called for the merger of the two watchdogs.

The FMC was virtually sidelined last year after a scam involving the National Spot Exchange — which operated in a regulatory vacuum — and it was brought under the control of the finance ministry. The FMC operates under the Forward Contract Regulation Act (FCRA) and the government has been toying with the idea of pushing ahead with an amendment to the bill. However, the move to liberalise commodities trading is fiercely opposed by many political (including some from within the BJP).

The finance ministry, it is learnt, is now planning to amend the Securities Contracts (Regulation) Act, allowing for the merger of the FMC with Sebi. Last year, the ministry was planning to introduce the bill amending the Sebi act in the winter session, which however, proved to be a washout with differences between the government and the opposition resulting in a paralysis in the functioning of parliament.

The government recently granted a three-month extension to Ramesh Abhishek, the head of the FMC and did not name his successor. It is also wary about criticism from the Supreme Court, which has been forthright in its condemnation of toothless regulators.

Last week the apex court directed the Central Bureau of Investigation to investigate how regulators such as Sebi and the RBI were turning a blind eye to the proliferation of numerous Ponzi schemes, which have resulted in millions of small-time investors losing their savings. The apex court, while hearing a public interest litigation that sought a CBI probe into other Ponzi schemes, directed the premier agency to even investigate the role of Sebi and RBI officials. The CBI is already probing the multi-billion-rupee Saradha chit fund scam in West Bengal, which has resulted in the arrest of several leaders of the ruling Trinamool Congress.

THE FSLRC, which was set up a few years ago by the finance ministry under the chairmanship of a retired judge, had suggested the merger of Sebi, FMC, Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA) into a Unified Financial Authority (UFA).

The commission also suggested that the RBI’s role should be restricted to only regulate and supervise banks and the payment system and monetary policy regulation. Non-banking finance companies and housing finance companies would come under the jurisdiction of the UFA.

However, the RBI has been critical of the commission report, with Rajan opposing the move to take away some of the central bank’s powers.

The FSLRC wants other agencies to be set up including a Financial Sector Appellate Tribunal (FSAT) to replace the Securities Appellate Tribunal; a Resolution Corporation; a Financial Redress Agency; a Public Debt Management Agency (which will be the investment banker for the government); and a Financial Stability and Development Council.

The government has formed a task force for setting up the Resolution Corporation, which would provide the code for insolvency and bankruptcy in financial companies.

Jaitley’s budget, to be presented to parliament on February 28, is also likely to see the announcement about the setting up of finance special economic zones (FSEZs) as suggested by the FSLRC. The first such SEZ, on the lines of the proposed International Financial Services Centres (IFSCs) is expected to come up at the Gujarat International Finance Tec-City (GIFT) being promoted near Ahmedabad.

The National Institute of Public Finance and Policy, in a concept note that was put up on the finance ministry’s website last week for public debate, has suggested that finance SEZs be exempt from securities transaction tax, commodities transaction tax and service tax. Importantly, it has also suggested complete capital account convertibility in these zones.

The NIPFP report also emphasises on the importance of dispute resolution mechanisms by setting up a separate arbitration system. Laws for companies operating in the zones would be different from elsewhere in the country. The special economic zones would help international and domestic companies to raise funds.

Authorities in India have been trying to promote cities such as Mumbai as global financial hubs. However, in terms of rankings, Mumbai trails at 48 behind other finance centres around the globe, according to the Global Financial Centres Index (GFCI) rankings brought out by the Z/Yen group. The top five centres include New York, London, Hong Kong, Singapore and Tokyo.

The government recently held a meeting to discuss the setting up of these centres. It was chaired by the RBI governor, and the heads of other regulators including Sebi, IRDA, PFRDA and the FMC, along with finance ministry officials, were present.

Published in Dawn, Economic & Business, February 23rd, 2015

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