 "It need not take a crisis to initiate structural reforms")
It is that time of the year when one takes stock of hits and misses in the year gone by, and takes a look at what lies ahead in the new year. For the financial sector regulatory system, the year began with serious promise of rapid structural reform but, as the year draws to a close, there is realisation that structural reform in India can only trundle along at a slow pace, unless a crisis visited upon us. Just two examples would make this good.
First, take the attempt at fundamental structural legislative reform. As the year began, the Indian Financial Code, which was part of the Financial Sector Regulatory Reform Commission, was being refined and re-written to be brought into a form that could be tabled in Parliament. This was purely a drafting exercise based on instructions from the government. Frenetic activity got underway and the second version of the draft law was brought out. The entire exercise was derailed when the media went to town about the Reserve Bank of India's powers having been undermined with the structure of the monetary policy committee of the central bank.
The controversy over the increased scope for interference by the government in monetary policy led to uninformed disowning of the changes by some senior folks in government, not realising that these changes had been those instructed in writing by the government. The RBI Governor stated he was not unhappy with the construct of the monetary policy committee, but the damage had already been done. The draft law simply did not get tabled this year, and with this, the controversy scuttled all other reform and changes that had been painstakingly worked on. There had even been compromising meeting of minds on various other points of contention between the regulators and necessary reform of their working, but this one controversy was enough to stymie the progress of the reform.
Second, the P J Nayak Committee's proposed structural reform of how governments should handle public sector banks and their governance was up for implementation. The proposal was to effect a fundamental change in how the government acts in relation to public sector banks by preparing a road-map to giving up majority ownership over these banks and in the interim, scrapping some of the really antiquated laws that seriously hinder and hamper governance of public sector banks. Expectations had been built up by how open everyone seemed to acknowledging the seriousness of the problem with public sector banks and the urgent need for the solution.
However, all that has been achieved, as the year draws to a close, is to appoint a small handful of private-sector folks in a few banks, without addressing the structural problems with how these banks' boards are manned and appointed. Indian company law has marched light years ahead in governance of companies and responsibilities of directors on the board. However, the governance framework for nationalised banks, conceptualised in the 1970s, is now completely out of step, imposing serious costs on how the banks are managed with no commensurate benefit for their peculiar governance structure.
Perhaps, the only real impetus for structural reform can be a crisis and a breakdown like the one we had in 1991. Many of the measures that were taken then have in fact been undone over the past 20 years. Examples abound. The removal of bureaucratic judgment of merit of a securities offering and movement to a disclosure-based regime has been reversed and we have an informal merit-based regime, supported by a formal policy that the capital market regulator may prevent an issuer from accessing the market on grounds, among others, that the business plan of the company is "complex". Exchange controls were substantially liberalised in the 1990s and eventually the dreaded Foreign Exchange Regulation Act was decriminalised by replacement with the Foreign Exchange Management Act. This year, the new law has been criminalised again. The anti-trust law to prevent monopolies had become an instrument of impeding capital formation and was abolished in 1991. The new competition law and its regulator have completed their honeymoon period and old problems are reportedly resurfacing.
The coming year surely needs to be a year of structural regulatory reform. There is so much that can be cleaned up in the area of regulatory accountability and objectivity without having to go to Parliament. Not having the numbers in Parliament was not an excuse when drastic changes were needed during the crisis of 1991. Without even going to Parliament, the mini-states in the form of financial sector regulators (they have powers to legislate, to execute and to adjudicate, all in one organisation) can be reformed. For example, not a single regulatory agency in the financial sector entails performance appraisal for senior office bearers although each of them has been pushing for performance appraisal of the boards of entities they regulate. One hopes there is realisation that waiting for another economic crisis cannot be afforded this time around with a much larger economy, with far greater value at stake.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.
somasekhar@jsalaw.com
First, take the attempt at fundamental structural legislative reform. As the year began, the Indian Financial Code, which was part of the Financial Sector Regulatory Reform Commission, was being refined and re-written to be brought into a form that could be tabled in Parliament. This was purely a drafting exercise based on instructions from the government. Frenetic activity got underway and the second version of the draft law was brought out. The entire exercise was derailed when the media went to town about the Reserve Bank of India's powers having been undermined with the structure of the monetary policy committee of the central bank.
The controversy over the increased scope for interference by the government in monetary policy led to uninformed disowning of the changes by some senior folks in government, not realising that these changes had been those instructed in writing by the government. The RBI Governor stated he was not unhappy with the construct of the monetary policy committee, but the damage had already been done. The draft law simply did not get tabled this year, and with this, the controversy scuttled all other reform and changes that had been painstakingly worked on. There had even been compromising meeting of minds on various other points of contention between the regulators and necessary reform of their working, but this one controversy was enough to stymie the progress of the reform.
Second, the P J Nayak Committee's proposed structural reform of how governments should handle public sector banks and their governance was up for implementation. The proposal was to effect a fundamental change in how the government acts in relation to public sector banks by preparing a road-map to giving up majority ownership over these banks and in the interim, scrapping some of the really antiquated laws that seriously hinder and hamper governance of public sector banks. Expectations had been built up by how open everyone seemed to acknowledging the seriousness of the problem with public sector banks and the urgent need for the solution.
However, all that has been achieved, as the year draws to a close, is to appoint a small handful of private-sector folks in a few banks, without addressing the structural problems with how these banks' boards are manned and appointed. Indian company law has marched light years ahead in governance of companies and responsibilities of directors on the board. However, the governance framework for nationalised banks, conceptualised in the 1970s, is now completely out of step, imposing serious costs on how the banks are managed with no commensurate benefit for their peculiar governance structure.
Perhaps, the only real impetus for structural reform can be a crisis and a breakdown like the one we had in 1991. Many of the measures that were taken then have in fact been undone over the past 20 years. Examples abound. The removal of bureaucratic judgment of merit of a securities offering and movement to a disclosure-based regime has been reversed and we have an informal merit-based regime, supported by a formal policy that the capital market regulator may prevent an issuer from accessing the market on grounds, among others, that the business plan of the company is "complex". Exchange controls were substantially liberalised in the 1990s and eventually the dreaded Foreign Exchange Regulation Act was decriminalised by replacement with the Foreign Exchange Management Act. This year, the new law has been criminalised again. The anti-trust law to prevent monopolies had become an instrument of impeding capital formation and was abolished in 1991. The new competition law and its regulator have completed their honeymoon period and old problems are reportedly resurfacing.
The coming year surely needs to be a year of structural regulatory reform. There is so much that can be cleaned up in the area of regulatory accountability and objectivity without having to go to Parliament. Not having the numbers in Parliament was not an excuse when drastic changes were needed during the crisis of 1991. Without even going to Parliament, the mini-states in the form of financial sector regulators (they have powers to legislate, to execute and to adjudicate, all in one organisation) can be reformed. For example, not a single regulatory agency in the financial sector entails performance appraisal for senior office bearers although each of them has been pushing for performance appraisal of the boards of entities they regulate. One hopes there is realisation that waiting for another economic crisis cannot be afforded this time around with a much larger economy, with far greater value at stake.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.
somasekhar@jsalaw.com