Jaitley to chair FSDC meeting today even as RBI, govt lock horns in public

Finance Minister Arun Jaitley will chair the 20th meeting of the Financial Stability and Development Council on Tuesday. 

The FSDC is an apex body which also consists of chiefs and senior officials of all the financial sector regulators in India.

The meeting, to be held in the Finance Ministry in New Delhi, is coming in the backdrop of an unprecedented churn in financial markets and sectoral regulations in India.

There have been a number of flashpoints between the Centre and the Reserve Bank of India in the past one year, including on Rs 10 trillion worth of stressed assets in the books of banks, the Financial Resolution and Deposit Insurance Bill, the Punjab National Bank scam, the liquidity crisis in non-banking financial companies, the differences over prompt corrective action framework, the crisis in IL&FS and regulation of state-owned banks.

These are some of the issues, affecting companies, investors and financial markets cutting across sectors, that the FSDC was set up to deal with in 2010. Apart from these, there is also the recent selloff in Indian equity and currency markets.

The FSDC brings all financial sector regulators on one table to handle matters related to financial stability, inter-regulatory coordination, and financial sector development, as its own terms of reference notes. 

However, the latest meeting comes amid concerns about the role of the 'super-regulator'. This assumes a greater importance at a time when it seems there's a complete communication breakdown between the government and the central bank.

Take the example of RBI’s February 12 circular that junked alternative avenues to deal with stressed assets outside the scope of the insolvency and bankruptcy code. A big decision such as that is something that should have been brought to the FSDC. However, its last meeting before the circular was in December 2017, and the next was in June 2018.

The February 12 circular did not figure in the agenda of the FSDC's December meeting. One does not know if it has figured in the only meeting since as the press releases from Finance Ministry on FSDC have stopped coming after the December meet. In fact, the government, the Insolvency and Bankruptcy Board of India (which was not even a part of FSDC at the time), all other regulators and stakeholders were blindsided by the circular.

Another example is the acquisition of a 51 per cent stake in the troubled state-owned lender IDBI Bank by insurance behemoth LIC, a deal which has possible repercussions across sectors and regulatory frameworks. Just a few weeks before the deal was approved by the Insurance Regulatory and Development Authority, the FSDC met on June 14. However, the LIC-IDBI deal was not a part of its agenda.

The FSDC was reconstituted in May partly because of the exigency created by Jaitley’s illness that necessitated the inclusion of Piyush Goyal, who had the taken temporary charge of the finance ministry. It had also brought in the chairman of the bankruptcy board, Secretary-DST (department of information technology) and the revenue secretary on the high table. While no reasons were given for the expansion, their inclusion meant to suggest that the body would keep a tab on the financial sector.

So far though, the FSDC has only been about trivial details, forming sub-committee after sub-committee, without exercising the kind of authority its mandate allows it to. Long-standing disputes or contentions remain unresolved. While there are informal and formal channels of communication that the government and the regulators have with each other, a body like FSDC could have been utilised better.

FSDC was created in the aftermath of the global financial meltdown in the spirt of similar institutions created in USA to handle regulatory uncertainty. The kerfuffle created between the Securities and Exchange Board of India and IRDAI around the same time about who gets to control the market for ULIPS was the proximate reason for its creation.

FSDC took over the role of the high level committee on capital markets created after the Harshad Mehta scam of early nineties. Every time a disturbance hit the financial sector, it was progressively given more room to create a larger noise. Not surprisingly the formation of FSDC was immediately termed as that of a super regulator.

Those likely to attend the meeting on Tuesday are RBI governor Urjit Patel, SEBI chairman Ajay Tyagi, IRDAI chairman Subhash Khuntia, Pension Fund Regulatory and Development Authority chairman Hemant Contractor, IBBI chairman MS Sahoo, and senior Finance Ministry and regulatory officers.