This Commission is chaired by a former Judge of the Supreme Court of India, Justice B. N. Srikrishna and has an eclectic mix of expert members drawn from the fields of finance, economics, public administration, law etc.
[1] Based on substantive research, extensive deliberations in the Commission and in its Working Groups, interaction with policy makers, regulators, experts and stakeholders; the Commission has evolved a tentative framework on the legal–institutional structure required for the Indian financial sector in the medium to the long run.
The Financial Sector Legislative Reforms Commission (FSLRC) was constituted by the Government of India, Ministry of Finance, vide a resolution dated 24 March 2011.
These piecemeal changes have induced complex and cumbersome legislation, and raised difficulties in harmonising contradictory provisions.
The fragmented regulatory architecture has led to a loss of scale and scope that could be available from a seamless financial market with all its attendant benefits of minimising the intermediation cost.
A number of expert committees have pointed out these discrepancies, and recommended the need for revisiting the financial sector legislations to rectify them.
[3] The Terms of Reference of the Commission include the following: [5] Due to the scope and depth of research required for the completion of this project, certain sectors were singled out and dedicated working groups (WGs) were created for in-depth analysis.
The Commission strongly believes in the approach of writing 'principle based' legislation that would articulate broad principles which do not vary with financial or technological innovation.
Under rules-based regulation, there is the risk that financial firms set up complex harmful structures that comply with the letter of the rules.
In order to minimise conflicts of interest across these three fields, and to develop specialised skills, the Commission will recommend that the three functions be performed by distinct boards which oversee the three areas of work of monetary policy, payments regulation and supervision, and banking regulation and supervision.
As argued above, regulatory independence is desirable so as to support the functioning of the regulator as an expert body, and to ensure that rule-making and enforcement of rules does not fluctuate with changes in political executives.
FSLRC will pursue all four pathways to accountability: This will help ensure that adequate analysis has preceded rule-making, and show the full regulatory intent to citizens and judges.
The main objective would be to reduce the probability of failure of financial firms, but this will be balanced with a principle that requires the regulator to consider the consequences for efficiency.
It will concern itself with all financial firms which make highly intense promises to consumers, such as banks, insurance companies, defined benefit pension funds, and payment systems.
The international experience has shown that delays in resolution almost always lead to a situation where the net worth is negative, which would generally impose costs upon the taxpayer.
Hence, a sophisticated legal apparatus is being designed, for a resolution corporation that will act swiftly to stop weak financial firms while they are still solvent.
As Indian policy makers have repeatedly stated, in the long run, India will move towards capital account openness.
One possible approach in justifying capital controls lies in the argument that conditions in the global economy are sometimes turbulent.
In addition, there are tight connections between the liberalisation of outward flows and a fiscal question: the extent of domestic financial repression (the forced lending by households through banks to the government).
This raises questions about whether the rule-making function (i.e. the drafting of subordinated legislation under the capital controls law) should be placed with the Ministry of Finance or the RBI.
Similarly, supervisory functions (i.e. the enforcement of the subordinated legislation) could potentially be placed at RBI or at the Financial Intelligence Unit (FIU), which watches India's cross-border flows from the viewpoint of restraining the financing of terrorism.
An integrated statistical picture of the entire financial system would be used to identify SIFIs, and help coordinate joint work between multiple regulatory agencies in their micro-prudential regulation.
Decisions may also be required about drawing on emergency lines of credit from the central bank, in its capacity as the lender of last resort.
The first, or the development of missing markets, requires information gathering and analysis on the scale of the full financial system, rather than within one sector at a time.
It involves (a) creating the Indian rupee, (b) setting the short-term interest rate, and (c) operating a 'lender of last resort' facility whereby liquidity is temporarily extended to solvent but illiquid financial firms.
The FSLRC has looked into the necessity of keeping these sector specific rules and will retain them only under special circumstances.
Clarity in rules of enforcement of contracts involving the market infrastructure institutions such as, exchanges, clearing corporations and depositories, is indispensable for organised financial trading.
The FSLRC has also looked into issues of market integrity which may have implications on creation and transfer of contracts in the financial sector.
While plenty responses were positive and encouraged the Commission's work, strong oppositions on some fundamental issues have also come up.
Being amongst the oldest regulators in India, the RBI has enjoyed a special status, not only in terms of its powers, but also in the public image.