The proposed Financial Sector Legislative Reforms Commission (FSLRC) will review three crucial legislations that are quite old and need to be streamlined. The commission would be a ?medium term body? tasked to review the Reserve Bank of India Act, 1934, the Insurance Act, 1938 and the Securities Contract Regulation Act, 1956.
?The critical financial sector legislations are not only old, they have also been drafted at very different points in time. For instance, the Securities Contract Regulation Act, 1956, or the slightly older Forward Contracts (Regulations) Act, 1952, were written with the purpose of actually banning derivatives. But we used these Acts to write ?double negatives? to permit derivatives. So each time we made an amendment it created a lot of problems,? a senior government official said.
The FSLRC would further study the ?system of appeals? and governance norms for regulatory institutions. It would look into the issue of same products being regulated by different agencies.
?For instance, the Insurance Act permits an insurance firm to sell a pension product without an insurance cover, to be regulated by Irda. Post the pension regulator?s creation, the identical product can be provided to customers but not by an insurance company. So the same insurance company (LIC) sets up a wholly-owned subsidiary called the LIC Pension Fund Ltd, which provides pension products. But the two products are completely unlike each other because there is tremendous regulatory arbitrage,? the official explained.
These are consequences which were completely unanticipated, he said, adding the FSLRC will take into account all these legislative gaps and completely rewrite legislations. Finance minister Pranab Mukherjee proposed setting up of this commission in the Union Budget 2010-11.
Another key concern to the market participants is the definition of the financial products such as securities and derivatives, which are defined variedly in separate legislations.
?For instance, the Harshad Mehta scam led to the finding that for the banking regulator in India, the law does not permit it (RBI) to actually be a counter party in derivatives transactions. So what is the solution? We came out with a retrospective amendment, which is that the Reserve Bank shall and shall always be deemed to have had the power to deal with derivatives,? the official said.
?But while doing this amendment we also put in place a regulatory structure which completely violates the definition of securities in the SCRA. And now we spent the next four years trying to juggle these two amendments, both passed by the Parliament, by the same ministry of finance, which actually said the exact opposite of each other. I don?t think this was intended. But these are consequences of the way we progressed in writing, amending and modifying these legislations,? he said.
The commission would study these critical inconsistencies in the existing laws.