There is currently a sort of ?low level equilibrium? in the relations between the Centre and some key regulators in the country. The term ?low level equilibrium? was recently used by the government to describe the choppy relationship between India and China, marked as it is by frequent disruptions. Relations between finance minister and some important financial markets regulators are also similarly strained and possibly at the lowest equilibrium seen in recent years. This even prompted finance minister Pranab Mukherjee to remark recently that regulators did not come from heaven. The sub-text of this statement, of course, is that regulators must subordinate themselves to North Block?s wisdom. After all it is the finance ministry that is ?finally answerable to Parliament.?
The problem began with the totally avoidable battle between Sebi and Irda over who should regulate Unit Linked Insurance Plans (Ulips), which left a bad taste in everyone?s mouth. It was this episode which gave Pranab Mukherjee enough reason to assert himself in a manner that is now hurting every regulator, including RBI, which had nothing much to do with the Ulip fracas.
The real low point for Sebi and Irda came when the finance minister told Parliament that he had no option but to resort to an Ordinance when key regulators fought like petulant children, thereby disrupting the markets. Both Sebi and Irda were squarely responsible for giving the finance minister the handle to intervene, and how! It created a chain of events that strained relations between the finance ministry and RBI also. RBI spoke against the need for an Ordinance and a special Committee to resolve inter-regulatory disputes. Earlier, RBI also criticised the budget proposal for setting up a Financial Stability Development Council (FSDC) to oversee stability in the financial markets. Both RBI and Sebi saw this as impinging on their autonomy. Pranab Mukherjee is an old school politician, and much like a benevolent patriarch he doesn?t like to be questioned by regulators. Of course, he chose to address some of RBI?s concerns by amending the Ordinance in Parliament that gave the central bank the status of vice-Chair on the Committee. This was only a minor victory for RBI.
The ministers? antipathy towards the key regulators is now seen in the way North Block not giving extensions to deputy governors at RBI who are close to retirement. In the past, at least one extension would be given if only to recognise their lasting contribution to RBI. Thankfully, on other critical issues of monetary policy management, the RBI governor is on the same page as the finance minister. In fact, Pranab Mukherjee and Subbarao have coordinated well on macro-economic management of the economy.
Sebi chairman Bhave is also due to retire by February and the search for a new candidate has already begun.
The finance minister is not happy with Sebi?s conduct on many issues, starting with the way Bhave passed the Ulip ban order, setting a chain reaction. Bhave?s move to reduce the agent?s commission to near zero on the sale of mutual funds was also seen as a move that was tantamount to throwing the baby out with the bathwater. And now he wants to control the pricing of public issues by merchant bankers so that enough is left on the table for the small investor! Suddenly, Bhave seems to be seized by a desire to play the white knight for the small investor. Is he trying to blaze a trail of glory as he exits?
Pranab Mukherjee does not appear to have taken kindly to the latest public spat between Sebi and MCX, which is seeking a licence to set up a stock exchange in competition with the NSE. Sebi has rejected MCX?s application, and MCX will appeal against Sebi?s order.
Overall, there is a strong perception, even at the finance minister?s office, that the stock market regulator is biased against MCX and its actions are willy-nilly perpetuating the monopoly of the NSE, a private entity. In fact, MCX has directly accused Sebi of ?conflict of interest? as some of its members have worked with the NSE in the past.
Unfortunately, the financial markets regulatory environment may have got further vitiated by a recent discovery that the capital markets division of the finance ministry had mooted a formal proposal towards the end of UPA-1?s tenure to ?help NSE recover its dramatic loss of market share in commodities trading against MCX?. Recently, the agriculture minister Sharad Pawar wrote to Pranab Mukherjee questioning the capital market division?s desire to help one private entity, i.e. NSE, against another, which is MCX! This, indeed, is unprecedented. Pranab Mukherjee himself is a bit puzzled by this episode.
In a way, Sharad Pawar was also protesting against the attempt by the Capital Markets division of finance ministry to interfere in the affairs of the Forward Markets Commission (FMC), which regulates commodities trading. The FMC is generally very suspicious of Sebi as there had been talk in the past of bringing the regulation of derivative trading in commodities under Sebi. In principle, this makes sense but, given Sebi?s perceived bias towards NSE, any such move now will be seen with even greater suspicion. The chairman of FMC, PC Khatua, has also publicly spoken against the idea of merging FMC with Sebi. Incidentally, he is the only regulator to have got a one year extension recently!
Overall, the lack of harmony among regulators gets compounded when the relationship between the government and some regulators is marked by acrimony. There is a need to bring back the goodwill and the subtle balance of power exercised by the government and regulators in the larger interests of governance.
mk.venu@expressindia.com