Observations and Next Steps

Vinod Rai, Additional Secretary, Financial Services,

Ministry of Finance, Government of India

It a pleasure and privilege to be here this evening. We in the Government are particularly thankful to this august gathering of distinguished experts who have been discussing various issues connected with regulation because the Government of India is now at that very crossroad where some very critical decisions need to be taken on the regulatory architecture. Having myself been a regulator of the Pensions Regulatory and Development Authority,( the youngest regulator) for about 8 months, I realize that the time has come when the Government of India will have introspect on this issue, particularly in terms of how the financial regulator or the banking regulator is going to be contra distinct from the market regulator and how best to ensure that there is perfect coordination and consistency in the decision making between these regulators. We in the Government of India are aware that for historical reasons multiple regulators have been created and are in existence today. I am aware that there are studies that recommend a unified regulatory structure and that this has been a prescription even for countries such as India. That may be long-term target for us and we may also look at a situation in which over a period of time we could have a unified structure as an objective. However, for the time-being when markets and structures are developing, when maturity of each of these markets has not been established as yet, we feel that regulators that are in existence today would be necessary to at the least put in position a regulatory structure and a framework of enforcement. Thereafter the issue of unification of the structure could be taken further from that stage onwards.

What would be the significant areas of interest of the Government in the entire gamut of issues of financial regulatory architecture? Firstly, I guess we have to realize that nobody loves the regulator. They detest the architecture that is put in position, they hate the implementation or the enforcement of this architecture and they despise the very punishments or the conduct regulations that are meted out to them. Now, if that be so a regulator finds that he is the only one who is loyal to himself! What the regulator seeks is a fair and competitive market structure which ensures fair play in the market it regulates . I am also aware that in discussions that were held earlier today, views have come forward saying that regulators should not be involved in the development of the markets and it should be separated from their role of regulation. For instance, it would probably be acceptable to have the Insurance Regulatory Authority or the Pension Fund Regulatory Authority without the’ development’ role attached to it. When I mentioned that nobody loves a regulator, it is best reflected in the following limerick:

“As a beauty I am not a star

there are more handsome to me by far

my face ,I don’t mind it

because I’m behind it,

it is the people in front that I jar”.

The view thus far has been that we accept a new regulator though we may not agree with its existence and see how best we can put up with him.

In the case of India we have reached the crossroad where we have to manage a stage of transition. We have on the one hand the Reserve Bank of India, which regulates the money and the financial markets .We do not propose to alter any of those activities that the Reserve Bank (central bank) is vested with. On the other hand there is the pension funds regulator, the securities market regulator, the insurance regulator etc where we will have to ensure that there is a certain consistency of decision-making and the existence of a high level body which oversees them and ensures that they do not pull in different directions. To that extent, I am aware that the Conference has suggested a menu of options. There is no single ideal, no single model that can be replicated and juxtaposed in the Indian context. Most of the regulatory structures evolve and they evolve out of the challenges that the markets are facing. They also evolve out of the loopholes that they seek to plug and that is where most of the regulators become very complex in the architecture because the attempt is to try and plug every loophole. Alexa Lam, who spoke in the earlier session mentioned that we cannot expect to be smarter than what the market is. Well, we cannot and it is a fact. The market is always smarter. If one attempts to be the tough cop, the market would have already innovated a method which will circumvent the regulation that has been brought about. So the best is to try and bring about a situation in which you can take the market along. You can take the client base along with you. You can ensure that the institutions that are sought to be regulated have a healthy relationship with the regulator. I understand that this is a very tough call but the regulatory agency, to the extent that it is possible, has to try and establish a relationship with the sector it is proposing to regulate with the least amount of stratification, the least amount of complexity and the least amount of complexities of the regulations. It has to ensure that autonomy is granted, but that autonomy has an element of accountability attached to it. Recently we have had queries from Indonesia, from Singapore etc. on trans-border financial transactions which will involve regulators from these countries comparing notes with regulators in India. In attempting to plug the loopholes which exist in the two systems, the objective is to ensure that fair play is ensured and loopholes or innovations in one market are not such as to cause a detriment to the other market. There have been a large number of instances, that I will not go into at this stage, where setting up of companies in one country is with the objective to ensure that the regulation in the other country is circumvented and benefit is accrued to the company without accountability in either of the countries where the company is in existence or where the company is doing business.

We have carefully considered unified models, but as I mentioned earlier, for historical reasons certain regulators have come into existence, and the road ahead seems to be a road in which we at present do not have an option except to ensure that there is a certain element of coordination between the different regulators. Now, the issue that arises is how much of regulation should be introduced and how much should be self-disciplinary. As far as the Government of India and the Central Bank are concerned, there have been detailed exercises in trying to put together a system, and we are seeing one such example in the Pension Regulatory Authority, where the systems are being put into position with the onus of accountability, performance, fair practices, and competition are put onto the client, or put onto the company that is being regulated or the “regulatee”, if I can call it. It is expected that this would induce a certain element of maturity into this structure right at the very beginning, in the inception stage itself. It is being hoped that this regulatory structure which has been created now will be far less complex than those that have been created in the past. It is being hoped that the “regulatee-regulator” relationship will be one where disclosures and other details will be far more healthy and the interaction will be far more regular, and the need for day-to-day regulation, of day-to-day policing will be done away with.

The apex body that is under contemplation, to ensure consistency among regulators will be a body which will have the key elements or the key players of each of the regulators that are in existence today whether it is the National Housing Board, the SEBI, the Insurance Regulators, the NABARD, the Central Bank, the Pension Regulator , to ensure that to the extent possible multiplicity of roles being performed by a single company do not come into conflict with each other. There are at present institutions which may be players in each of these markets and they certainly do not want to be regulated by different regulators. They find it very difficult to create these Chinese walls between different departments or different divisions in a manner that one division is reporting to one regulator and the other division is reporting to a different regulator. The Governor of the Reserve Bank has been credited with the thought, that we need to put into position an apex body which would be like a holding company overseeing the functioning of the regulators to ensure that at least in the macro-picture there are no aberrations. As far as we are concerned in the Government of India, we would be very anxiously looking forward and awaiting the recommendations that emerge from this conference because as I mentioned earlier we are at that crossroad where we need to take some very important and critical decisions to lay out the road ahead and I am hoping that these recommendations would lighten our burden, give us guidance for strategizing on these issues.

I would like to thank the World bank and the organizers for having put together this very informative and constructive session over two days which has deliberated at length and has brought experts from all round the world and I am sure that we have benefited greatly from this experience. We will be anxiously awaiting the recommendations of the conference.

Thank you so much.