Indian Financial Code (IFC ) of FSLRC Revised


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The Financial Sector Legislative Reforms Commission(FSLRC) was constituted by the GoI on March 11, 2011 headed by Justice (Retd.) B. N. Srikrishna to rewrite and harmonise financial sector legislations, rules and regulations. This had become necessary as the institutional framework governing India’s financial sector was built over a century. 
There are over 60 Acts and multiple Rules/Regulations in the sector and many of them date back decades when the financial landscape was very different from what is obtaining today. Large number of amendments made in in these Acts over time has increased the ambiguity and complexity of the system.
The Commission would simplify and rewrite financial sector legislations, including subordinate legislations, to achieve harmony and synergy among them. This will remove ambiguity, regulatory gaps and overlaps among the various legislations making them more coherent and dynamic and help cater to the requirements of a large and fast growing economy in tune with the changing financial landscape in an inter-connected financial world. In the long-term, it would help usher in the next generation of reforms, contribute to efficient financial intermediation enhancing the growth potential of the nation.
The Financial Sector Legislative Reforms Commission (FSLRC) gave its recommendations on  22th March 2013. The Report is in two parts: Volume I – titled “Analysis and Recommendations” and Volume II – titled the “Draft Law” consisting of the Draft Indian Financial Code (IFC).  The recommendations included revamping the legislative framework governing the financial sector by a non-sectoral, principle-based approach and restructuring existing regulatory agencies and creating new agencies wherever needed. The FSLRC has given a draft legislation namely Indian Financial Code as Volume-II of its report. The basic approach of the FSLRC is to provide clear mandate and powers and mechanism for accountability to financial agencies. The tasks/mandate are consumer protection, prudential regulation, resolution mechanism, capital controls, systematic risk, financial inclusion and market development, and monetary policy which need to be addressed in a non-sectoral manner.
 The FSLRC recommended a seven agency structure for the financial sector which are the Reserve Bank of India (RBI), Unified Financial Agency (UFA), Financial Sector Appellate Tribunal (FSAT), Resolution Corporation (RC), Financial Redressal Agency (FRA), Financial Stability and Development Council (FSDC) and Public Debt Management Agency (PDMA). 
The FSLRC Report has been examined by the Government. Broadly, recommendations of the FSLRC can be divided into two parts, legislative aspects and non-legislative aspects. The non-legislative aspects of the recommendations are relating to governance enhancing measures on consumer protection and greater transparency in the functioning of financial sector regulators; and the same has been accepted and is being implemented by all regulators on a voluntary basis. The legislative recommendations relate to re-writing the laws using a principle based approach, restructuring existing regulatory agencies and creating new agencies. Implementation of these recommendations would require wider consultations with stakeholders. 
As per the proposed regulatory architecture recommended by the Commission the unified financial agency (UFA) — and not a unified financial regulator, the commission has asserted — will comprise four existing agencies which will be merged into one. These are the Securities and Exchange Board of India (SEBI), the Forward Markets Commission (FMC), the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA).
Revised Financial code
In a move that may dilute powers of RBI chief, the government today proposed taking away his authority to veto the interest rate decision of the central bank's monetary policy committee. The revised draft of Indian Financial Code (IFC), released on July 23, 2015,  by the Finance Ministry, has also proposed that the all-powerful committee would have four representatives of the government and only three from the central bank, including the 'RBI Chairperson'.
The draft talks of 'RBI Chairperson' and not 'RBI Governor'. RBI is headed by a Governor, at present. The IFC, which is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the government in consultation with RBI. "Inflation target for each financial year will be determined in terms of the Consumer Price Index (CPI) by the Central Government in consultation with the Reserve Bank every three years," said the draft.
 Further, it said the RBI "must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target". At present, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance. The first draft, submitted in March 2013, too had talked about the committee and majority vote, but gave powers to RBI chairperson to supersede the decision of the panel. 




Sunday, 26th Jul 2015, 10:11:42 AM

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