Financial Regulation in India: A Short Analysis


The Indian financial system is going through a process of massive change. Long divided into watertight compartments, various segments of the system are merging into one another, and financial conglomerates have made their appearance on the scene. However, the blurring distinction among financial intermediaries under the impact of domestic and global integration, innovations in instruments and processes, advances in technology and the increasing volumes of capital intermediated by the financial system have necessitated strengthening of the regulatory and supervisory framework. Enter financial regulation.


Financial regulations are laws that govern banks, investment firms, and insurance companies. They protect you from financial risk and fraud. But they must be balanced with the free flow of capital.


The health of the financial sector of a country is a matter of public concern in view of its contribution to economic performance. Financial regulation and supervision assume importance in ensuring that the financial system operates along sound lines. Effective government oversight prevents companies, organizations and individuals from taking excessive risks. Some have concluded, for example, that stricter regulations could have stopped Lehman Brothers from engaging in risky behaviour, a change that could have prevented or at least reduced the impact of the 2008 financial crisis.


The functioning of financial markets is regulated by several legislations that include Acts, Rules, Regulations, Guidelines, Circulars, etc. The regulators of the financial market lay down specific rules of behaviour for participants in the financial system and provide for the monitoring of the observance of the rules and regulation.


The regulation and supervision of the financial system in India are carried out by different regulatory authorities, some of which will now be analysed in depth.


Reserve Bank of India (RBI)


The RBI is the primary regulator of banks. The Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over the entire banking system. In exercise of the powers under these Acts, the RBI regulates the entry into banking business by licensing, exercise controls over shareholding and voting powers of shareholders, exercises control over managerial persons and regulates the business of the bank by permitting and prohibiting certain business through Priority sector lending. RBI also supervises the functioning of the banks by inspecting and issuing directions from time to time in the public interest and in the interest of the banking system as a whole, the banks are also subject to adhere to the norms laid down by it with respect to Exposure limits, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and Provisioning.


Securities and Exchange Board of India (SEBI)


The Securities and Exchange Board of India was established in 1988 as an interim administrative body to promote orderly and healthy growth of the securities market and for investor protection. SEBI prescribes the conditions for issuer companies to raise capital from the public so as to protect the interest of the suppliers of capital (investors). To ensure fair and high standards of service to investors, SEBI allows only fit and proper entities to operate in the capital markets as intermediaries, it has also prescribed norms for fair market practices including prohibiting fraudulent and unfair trade practices and even regulates the operation of collective investment schemes, including Mutual Funds.


Insurance Regulatory and Development Authority (IRDA)


The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India established by an act of IRDA Act 1999, which acts as a regulator of all private sector and public sector insurance companies in India. The regulatory framework mainly aims to focus on the protection of the interest of the consumers, ensuring financial soundness of the insurance industry and facilitating healthy growth of the insurance market where both the government and the private players play simultaneously.


Pension Fund Regulatory and Development Authority (PFRDA)

Pension Fund Regulatory and Development Authority (PFRDA) was established by the Government of India in 2003 to promote old age income security and to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto. PFRDA is responsible for regulating and administering the National Pension System (NPS) along with administering the Atal Pension Yojana (APY) which is a defined benefits pension scheme for the unorganized sector, guaranteed by the Government of India.


Forward Markets Commission


Forward Markets Commission main objective is to advise the Central government on matters of the Forwards Contract Act, 1952. It is the chief regulator of the commodity (MCX, UCX, NMCE, etc) of the Indian future market.


However, with multiple regulators in India, there are varying regulatory requirements which often leads to regulatory arbitrage. An example of this is the similarity between mutual funds and ULIPs, the first which is regulated by the SEBI and the second which were regulated by the IRDA. SEBI imposes very different levels of disclosure and ongoing transparency on the outcomes of mutual funds compared to the standards of disclosure required by the IRDA. I

The present arrangement has gaps for which no regulator is in charge – such as the diverse kinds of Ponzi schemes that periodically surface in India, which are not regulated by any of the existing agencies until very recently when Unregulated Deposit Scheme Ordinance 2019 was passed. The existing framework also contains overlaps between laws and agencies leading to incidents in which conflicts between regulators have consumed the energy of economic policymakers and held back market development. Securities and Exchange Board of India (SEBI) extended litigation against the Sahara group, and the recent investigations on alleged money laundering by some banks using insurance products are good examples of both regulatory gaps as well as opportunities for arbitrage. Reflecting these difficulties, the present Indian financial regulatory architecture has, over the years, been criticized from time to time.


References


https://www.investopedia.com/articles/investing/112714/regulations-govern-banking-india.asp

https://www.bankersadda.com/financial-regulators-in-india

https://www.thebalance.com/financial-regulations-3306234