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Mumbai, April 7 The Committee on Financial Sector Reforms has recommended consolidation of all market regulation and supervision under SEBI and consolidation of all deposit-taking entities under the banking supervisor.

At present, regulation of organised financial trading is handled by three agencies, the RBI (government bonds and currencies), SEBI (equities and corporate bonds) and FMC (commodities, futures).

The committee, appointed by the Planning Commission and headed by Dr Raghuram Rajan, former chief economist of IMF, has observed that this separation of regulatory responsibility among three agencies is a key defect of the Indian financial markets.

The committee has recommended the merger of regulatory and supervisory functions for all organised financial trading into SEBI.

In its report released today, the committee said that fragmentation of market supervision between multiple regulatory authorities increases transaction costs, creates frictions and reduces liquidity in all markets.

Consolidation of regulators will make it easier to deal with problems arising out of blurring of boundaries between different types of products.

It will also make it easier to get specialised professionals who can detect insider trading, manipulation and other abuses.

“Merger of all market regulation into SEBI will reduce transaction costs and improve liquidity in financial markets,” the report said.

The report listed some examples of regulatory overlaps, such as overlap between SEBI and the Ministry of Corporate Affairs in the regulation of issuer companies, between SEBI and the RBI in the regulation of foreign institutional investors and exchange traded currency and interest rate products and between the RBI and State Governments in regulation of co-operative banks.

The overlapping regulatory structure also becomes a barrier to innovation as any new product might need approval from more than one regulator.

The report said that eventually all co-operative banks that are under the State Registrar of Co-operative Societies should be treated like commercial banks and brought under the banking supervisor.

There is also need to streamline Tier 2 regulators, such as Nabard, SIDBI and NHB.

The committee also said that there is a need for a Financial Sector Oversight Agency, which will monitor the functioning of large, systemically important, financial conglomerates as well as large systemically important financial institutions that would otherwise be unregulated.

The committee has also called for an Office of the Financial Ombudsman which will monitor selling of different products, the degree of transparency about their pricing, risks and deal with consumer grievances.

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