The problem was not of Sebi encroaching on Irdas domain. I do not think that Sebi has imperialistic designs. Sebis intrusion into Irdas domain was the result of its efforts to reduce transaction costs to the users while investing. It was also about bringing in greater transparency. Sebi has made progress on these fronts in case of mutual funds that fall under its ambit. Ulips compete with mutual funds but have not been similarly reformed. Sebis intrusion was to plug this gap.
Irda does not see it this way. This led to the spat, which led first to an Ordinance and then a Bill. The Ordinance ruffled the feathers of RBI, which saw its role being diluted by being a mere member along with other regulators. The Bill corrected this by making RBI governor the vice-chairman of the Joint Committee.
The Bill establishes the superiority of the ministry in its understanding of the problem as that of a turf war. Thus, what began by Sebi as an effort to reform the financial markets to bring in lower transaction costs and greater transparency has been converted into a turf war between now not two, but four agenciesSebi, Irda, RBI and MoF. The seven-member Joint Committee is chaired by the finance minister and has two more representatives from the ministry. This is getting uncomfortably close to nationalisation of regulatory bodies.
This style of functioning of the government is reminiscent of the old Congress. It is a style that is out of sync with a Congress of today that prefers professionalism over interventions. Bhaves appointment as Sebi chief reflected the faith that the Congress of today reposed in professionals. The induction of Nandan Nilekani into the government machinery is another example of its faith in professionals. The MoFs limited view of the problem as that of a turf war between regulators and its willingness to intervene with a strong hand does not bode well for the creation of a modern financial market that is governed by strong and independent regulators, which in turn are run by professionals of integrity and courage.
While the turf-war has been settled by the government, public debate, regulatory and policy actions to bring in greater transparency and lower transaction costs should continue. If Irda is to continue to govern Ulips, it should not mean that the high transaction costs of Ulips are justified.
Ulips have been successful because they have been sold aggressively by intermediaries who earn enormous margins. No consumer would buy a product that involved a huge margin to the intermediary unless s/he was made to believe that the returns would be correspondingly high. The aggressive selling involved in doing this, which is based on the creation of expectations of excessive returns works against the development of a healthy financial market in the long run. It reinforces the traditional belief that the stock market is a casino to get rich quickly.
Sebis tirade is perhaps against this poor design of a market that is dominated by intermediaries and against the misconception of the financial markets described above. Its efforts are towards creating efficient financial markets and not about turf encroachments. Irda saw it differentlyas an encroachment over its turf. Its dispute was apparently never about market design, it was about turf. Having won its turf against Sebi, Irda should now set about reforming the Ulips business. This will be a reasonably good outcome of an episode that otherwise seems to have gone on a tangent.
The UPA needs to repair the damage inflicted upon the independence of the regulators. The minister has caused harm by referring to the differences between the regulators as quarrels of petulant children. This reflects a narrow and partial understanding of the problem. Differences are an integral part of a democratic setup. They should be addressed, not chided.
Disputes will arise but, the courts are a better recourse to settle them, than the government. Note that the audit firm PwC petitioned against Sebis show cause notice (for allegedly acting recklessly and negligently as auditors for Satyam Computers) because it was governed by ICAI and not by Sebi. PwC had maintained that unless the question of jurisdiction is decided, Sebi should not proceed against them on the allegations. The court has ruled in favour of Sebi.
Financial markets are full of powerful entities that often treat regulators with contempt. Regulators who are perceived to be weak and easily controlled by the political system will not be able to withstand pressures from ambitious entrepreneurs, if they are made subservient to the political system. The government needs to rebuild the confidence and respect that regulators must command from the markets.
The author heads the Centre for Monitoring Indian Economy. These are his personal views