In a span of four days, the rules for the Indian financial sector have been challenged so radically that there are no comparable episodes to benchmark them against. The one thing it has made clear is why it is necessary to have principle-based regulations to drive efficiency in the financial sector, instead of the archaic rule-based ones.
On the face of it, there is absolutely no doubt that the Sebi order of April 9 has not questioned Irda?s right to police the insurance sector. It has simply said if any insurance company wants to run an equity-based product, it has to get a certificate of approval from the market regulator. But since 80% of the premium for the life insurance sector is based on these products, the market regulator will call the shots for the most sizeable part of the insurance sector. If the order is upheld by the Securities Appellate Tribunal, the Irda domain could be clipped substantially. Interestingly, none of the affected insurance companies had approached the tribunal until Monday evening; may be because they were sure the Sebi position will hold. This is, therefore, a principle-based position. Equity markets are the domain of Sebi.
What Irda has battled for is a rule-based position that says insurance companies must be regulated by it, regardless of the type of activity they perform. Taken to its logical end, even banking activities of these companies must, therefore, fall within Irda?s domain. Obviously that does not happen, which demonstrates how flexible a principle-based governance structure is. Thus, the government has taken the correct step of asking the two organisations to approach the court. Without pre-judging the issue, it can be safely said the moot point will be that of principles versus rules.
Given the scale of the tussle and the stakes involved in this regulatory turf battle, it shows why rules written in to protect turf have to be junked in favour of those that allow for development of the sector; this needs the sharing of inter-regulatory space.
In other words, if an almost venerable product like Ulip can run foul of water tight regulatory compartments, what are the chances for newer products to flourish. The problems are not restricted to the middle class. A very down market product, which is a brand new innovation for financial inclusion?the banking correspondent model based on the telecom space?can also fall in the same trap. Already there are murmurs whether it is something that RBI should monitor or the telecom regulator.
It is not surprising that the manifestation of the same trouble has invaded the real economy, too, in India. There are two battles going on among the regulators in this sphere. The Central Electricity Regulatory Commission and the Forwards Market Commission, the regulator for commodity markets, are fighting in court about who will run the business of electricity trading in India. The electricity regulator says all electricity related affairs are its domain, whereas the FMC has argued that commodity trade of any sort has to run as per its rules. The Competition Commission is fighting an equally messy battle with more than one regulator. This is about which of them will have the right to decide whether a merger or an acquisition is anti-competitive.
At one level, as the government frees itself from the responsibility to run a sector and hands over the role to regulators, turf issues will spring up. Since a regulator is a referee, it must be clear on the rules before running the game. A government ministry, on the other hand, often works out the preparatory work before the game and can live with the contradictions.
Yet, despite this caveat, there are too many regulatory hurdles creeping up for the good of the different sectors. The problem is not that they have emerged, but they have persisted for too long. Companies, investors and others are often not bothered why they have arisen. But they are sure concerned about how long the differences have persisted.
The Sebi-Irda spat, too, has not grown overnight. The first time the issue reached the high level committee on coordination of capital markets was in 2005. Since no subject reaches the committee chaired by the RBI governor unless it is already a first class dispute, the Ulip spat, too, must have simmered for a long time. Five years later we are still working out a resolution.
For the financial sector this means trouble with a capital T. Financial sector entities must innovate to beat the competition. The Ulips developed as fine investment vehicles that merged the efficiency of the equity market with the benefit of the insurance cover. The investors liked it, which is why there are so many of them and also why no insurance company or mutual fund will do without them. But if the financial sector regulators take so much time to decide on new products, it is troubling news. As the financial sector develops, one can bet that companies will come out with new products that will merge the efficiencies of different markets. We can either put in a blanket rule that says entities regulated by one regulator will not be allowed to peek into the neighbourhood or allow development of principle-based regulations.
This is not a pessimistic scenario. Already we have examples where this has begun to happen. The coordination shown by the Sebi and RBI to roll out the exchange traded derivatives or the currency futures market, where the FMC also has got in the act, shows this is eminently possible.
?subhomoy.bhattacharjee@expressindia.com