2 008 is not just a year when the
country may be forced into an
early poll. It will also mark the end of terms for three men who matter the most in financial services. They are RBI governor YV Reddy, Sebi chief M Damodaran and IRDA chairman CS Rao.
This unusual turn of events is as rare as, or possibly more than, the Ganapati festival and Ramzan coinciding, which actually happened last week after 33 years. While the overlapping of two lunar calendars made news, the possible changes of guard, no matter how ceremonial, in the financial world would understandably be less eventful.
But the government should not miss out on the opportunity this can throw up. There can’t be a better time to change the very regulatory structure in the financial sector and create a ’super-regulator’ armed with supervisory powers across stock market intermediaries, banks and financial institutions and insurance companies. It could be an arduous exercise: a new law has to be enacted to create the super-regulator; once this is achieved, the regulatory powers currently bestowed with RBI, Sebi and IRDA will have to be transferred to the apex watchdog. Such changes are difficult to push through. But it could be a lot easier when there are no incumbents.
Chances are, no one would take the plunge. The government and political parties have already gone into an election mode. An early poll would leave lawmakers with little or no time to consider a complex legislation that is difficult to explain to the mass. Why tread into a new territory, open a new front? It could spark endless debates, internal resistance and who knows, even a possible opposition from the Left. Why create a new animal when a high-profile panel like the High Level Committee on Capital Markets - comprising the heads of all regulators and senior finance ministry officials - already exists?
These factors can hold back a coalition government from doing anything about it. But the need for a super-regulator will be felt more in the days to come. It is bound to resurface amid a raging debate over the kind of holding company that banks should
have. In a discussion paper circulated to banks, RBI has proposed an overarching holding company for different businesses like banking, insurance, brokerage, asset management and bond trading of a diversified financial services group. The point is, who regulates the holding company?
Reporting to multiple regulators is a choice, but certainly not the best one. Besides dealing with multiple bureaucracies, such a holding firm could find itself caught in a crossfire of conflicting views aired by different regulatory authorities. This is where a super-regulator can step in to make life easier for the industry. (As they have in the UK, where FSA does the job, while Bank of England functions as the central bank).
Make no mistake: holding companies cannot be wished away. In which ever form it takes shape - whether an overarching firm or an intermediate entity (like the one ICICI Bank has proposed and has been scoffed at by RBI) - a holding company structure will help meet the huge fund needs for businesses like insurance. The ICICI plan was to bring in financial investors in the intermediate holding company. In an overarching type, the parent holding firm would do that or even get listed. Of course, one has to take care of tricky ownership issues: foreign
holding in an insurance JV can be 26%, in a bank 74%, while in a mortgage house (like HDFC) it can be as high as 100%; so what’s the maximum that foreigners can own in a holding company?
However, the idea of a super-regulator has cropped up occasionally in the past, long before holding company turned into a contentious issue, though it was out of default, rather than design. For instance, some years ago, when a plantation company called Golden Forest ran away with investors’ money, the authorities realised that the firm was operating in a regulatory twilight zone. Neither Sebi nor RBI regulated such an entity, which was not a non-banking finance company. Later, the loophole was plugged when Sebi framed the guidelines for plantation companies. As plantation firms shut shop, the discussion for a super-regulator died a natural death. The ICICI proposal may bring it back to spotlight.
Multiple regulators and the turf war that followed have often held back new products in the financial market. For years, RBI and Sebi waged a quiet tussle over who controls the debt market. More recently, the central bank has expressed its discomfort over products like stock lending and listing of interest rate futures - a product that allows shortpositions in bonds.
Even the listing of corporate bonds is yet to take place. Fears are that the introduction of currency futures, which would allow listing of derivative instruments, could meet with a similar fate. RBI would possibly like to retain its control on the product and allow trading only through a separate platform like the negotiated dealing system, which serves as an order-matching system for government bonds.
Even if RBI hands over its regulatory functions and confines itself to the role of a monetary authority, introduction of new products which influence financial markets has to take place only through a consultative process. But in all likelihood, decision-making will be quicker, the financial services industry can have an unequivocal regulatory voice and the institutions will be spared of dealing with multiple authorities.