In the years to come, if an investor wants to invest in an array of assets, including stocks, commodities, mutual funds, insurance and pension products, all he would need to do is to approach a broker offering these products, do a singe KYC compliance and get going. Similarly, a broker wishing to set up shop dealing in the above products would need to register with just one regulator and comply with only one set of disclosure rules.
Sounds utopian? This is the environment that the Financial Sector Legislative Reform Commission envisages for India’s regulatory landscape.
The Commission has recommended that the Securities and Exchange Board of India, Forward Markets Commission, Insurance Regulatory Development Authority and the Pension Fund Regulatory and Development Authority be merged to form a new entity — the Unified Financial regulatory Agency (UFA). The Commission has also recommended shifting regulation of bond and currency trading from the RBI to the UFA.
However, the regulation of banks and bank payment system is to be left with the Reserve Bank of India.
The regulations governing various investment segments in India have evolved in a piecemeal manner over time as a response to unfolding events. This has led to gaps that are open to misuse.
Unconventional collective investment schemes such as investment in emu farms, teak farms and orchards have thrived on such regulatory loopholes. The recent skirmish between the SEBI and the Sahara India group also underlines the fact that the current set of rules is far from comprehensive.
Eliminating grey areas
The Commission has recommended that the Finance Ministry issue a list of securities that would fall under the purview of the unified regulator.
This list is to be revised periodically. Since the corporate governance and continuous disclosure requirements for fund-raising entities are included only in the Companies Act, 1956, entities other than companies have not been adhering to these regulations.
The report tries to plug this loop-hole by suggesting that securities issued by entities other than companies also be brought under the UFA. All schemes above a certain size are also recommended for inclusion thus reducing ambiguities.
Easier for intermediaries
The International Organisation of Securities Commissions (IOSCO), in its report on the behaviour of institutional investors in emerging markets, points out that dealing with multiple regulators is one of the deterrents for foreign investors. India, along with South Africa, has the most number of regulators at five.
It is obvious that the ease of doing business improves with fewer regulators.
Not just foreign, but domestic financial intermediaries, also are supportive of the recommendation to merge the regulators.
Setting up a new business as an intermediary will be easier as will be the possibility of expanding into other assets. The consumers will also not have to go through the rigmarole of doing KYC compliance many times over.
Another plus is the unified data-base mooted by the Commission. This will improve surveillance since the record of the customer transactions across assets can be captured at one place.
Similarly, identification of systemically important institutions would become easier. A single statutory body to redress complaints of retail investors that is independent of the regulator also sounds like a good idea.
Uniformity
There is currently great disparity in the regulations of SEBI, IRDA, FMC and PFRDA. The disclosure standards that the regulators require from those they govern also vary greatly, often at the cost of consumer interest. Centralising it may raise the bar on regulatory aspects across assets, thus serving consumer interest better.
Some of these regulators also appear to be under-staffed if the list of employees put out on their Web sites is anything to go by.
The equity market regulator, SEBI, sports a comfortable number of employees. But Forward Markets Commission that controls commodity exchanges whose transaction value is almost two-third of the value of equity trades has staff strength that is less than a tenth of SEBI’s.
In terms of branch offices too, SEBI seems to be more enthusiastic about fanning out across the country while the other regulators are lagging in this count. A unified regulator formed by the merger of these entities can leverage on the current staff and branches of the group of regulators, while providing an easy access point to investors.
What can go wrong?
There is however a niggling doubt on whether the mandate of the single regulator is too large and unwieldy. The success of UFA will depend upon putting up an organisation structure that has departments dealing with each unique asset class manned by experts in the field. Employing adequate qualified personnel would be imperative to address a wide range of issues from a diverse customer set. There is also the possibility that some of the less important segments could be given less attention by the UFA.
While bringing assets with retail focus such as equity, mutual funds, insurance, commodities and exchange traded derivatives under the UFA appears a good idea, the suggestion to bring currency and bond trading too under the UFA is not. The RBI has rightly pointed out that it needs to retain control over bond and forex market to manage interest and exchange rates.
Again, since the participants in the forex market and the bond market are mainly banks, the RBI would be better placed to oversee these sectors. Exchange traded currency derivatives can be shifted to the proposed UFA to enable smaller entities to hedge their forex exposure.