NEED FOR AN INDIAN FINANCIAL CODE

SUBJECT- LEGAL RESEARCH AND METHODOLOGY

SUBMITTED TO: MR. VIJAYANT SINHA

SUBMITTED BY: Ms. NIDHI

ROLL NUMBER: 1632

FIRST YEAR, I SEMESTER

CHANAKYA NATIONAL LAW UNIVERSITY

TABLE OF CONTENTS
 ACKNOWLEDGEMENT

First and above all, I thank God, the almighty for providing me this opportunity and granting me
the capability to proceed successfully. This project appears in its current form due to the
assistance and guidance of several people.

Immeasurable appreciation and deepest gratitude is extended to Mr. Vijayant Sinha, the professor
of legal research and methodology for his valuable suggestions towards this project work.

I am highly indebted to my parents for their constant support, guidance and supervision.

I would like to thank my friends, Aditi, Jaya and Rakshita who provided me expertise that greatly
assisted the research, and food, while I was making the project.

RESEARCH METHODOLOGY
This project involves both doctrinal and non-doctrinal forms of research. As far as the doctrinal
OR the secondary sources are concerned, they primarily include

1. Articles.
2. Books
3. Journals
4. Websites

Finance Ministry Reports on FSLRC, various reputed newspapers such as The Hindu and the
views of their editors, books, and other websites, form a part of the secondary sources, which
will be dealt with in detail in the bibliography section.

The non-doctrinal aspect of the project involves opinion of law students with regard to FSLRC
and the strengths and weakness of the present and proposed financial systems.

Method of Writing:
The method of writing followed in the course of this research project is primarily analytical.
Although the first section contains a description of the financial systems, the author felt that
imparting the basic understanding of what exactly is a financial system was essential to
understand the laws governing it and analyze the impact of the proposed law on implementation.

Mode of Citation:
The author has stuck to the OSCOLA METHOD of citation and has followed it uniformly,
throughout the project.

INTRODUCTION

India today stands on the cusp of a fundamental renovation of its financial systems. The
Financial Sector Legislative Reforms Commission (FSLRC) drafted a little known but radical
Indian Financial Code, which intends to replace most of the existing financial regulation laws
with one central, uniform law, by redrawing the regulatory architecture and their working.
This project seeks to analyze the need of this code. For this, the researcher seeks to foray into the
various aspects of the topic. Before moving on to the IFC, the researcher aims to understand
what a financial system is and take a peek into the existing financial structure of India. After that,
a deep enquiry into the FSLRC and its proposed architecture will be undertaken. The project will
then deal with the advantages and criticisms for and against the Indian Financial Code, and it
concludes with the impact of IFC on the Indian economy if implemented. The conclusion shall
mark the ending of the project.

A) AIMS AND OBJECTIVES

The principal aim of this project is to analyze the need for the Indian Financial Code and its
future impact if implemented.

B) HYPOTHESIS

The hypothesis is that Indian Financial Code will have a negative impact if it is implemented.

C) SCOPE AND LIMITATION

The scope of this project extends to identifying the flaws in the present IFC and a detailed
analysis of the possibility of its failure and reasons for the same. A comparative study between
the present and proposed financial structures will also be within its ambit.

Due to paucity of time, human resource and adequate funding, the scope of the project is limited
and therefore restricted to the ambit defined already.

THE FINANCIAL SYSTEM

A country's financial system includes its banks, securities markets, pension and mutual funds,
insurers, market infrastructures, central bank, as well as regulatory and supervisory authorities.
These institutions and markets provide a framework for carrying out economic transactions and
monetary policy, and help to efficiently channel savings into investment, thereby supporting
economic growth.1

Broadly speaking a financial system is that intermediary which facilitates the flow of funds from
the areas of surplus to areas of deficit. It broadly includes financial institutions, markets,
instruments and services

A financial system is covers the exchange of money between investors, lender and borrowers.

Role of the Financial System

Financial markets are associated with the accelerated growth of an economy. A financial market

helps to achieve the following non-comprehensive list of goals:2

 Saving mobilization: Obtaining funds from the savers or surplus units such as household

individuals, business firms, public sector units, central government, state governments,

etc. is an important role played by financial markets. Borrowers (e.g. bond issuers) are

connected with lenders (e.g. bond buyers) in financial markets.

 Investment: Financial markets play a crucial role in arranging to invest funds. Both firms

and individuals can invest in companies through financial markets (e.g. by buying stock).

 National Growth: An important role played by financial market is that, they contribute to

a nation's growth by ensuring unfettered flow of surplus funds to deficit units. In other

words, financial markets help shift money from industry to industry or firm to firm based

on the supply and demand for their products.

1 http://www.imf.org/en/About/Factsheets/Financial-System-Soundness
2https://www.boundless.com/economics/textbooks/boundless-economics-textbook/introduction-to-macroeconomics-
18/key-topics-in-macroeconomics-91/the-role-of-the-financial-system-341-12438/
  Entrepreneurship growth: Financial markets allow entrepreneurs (and established firms)

to access the funds needed to invest in projects or companies.

COMPONENTS OF A FINANCIAL SYSTEM

A financial system comprises of financial institutions, financial markets, financial services

and financial instruments. The definitions and meaning of the same are given in detail below:

1) Financial Institutions- They facilitate the meeting of investors and borrowers. They
mobilize savings from the surplus community and allocate them amongst the deficit
community. A financial institution (FI) is a company engaged in the business of dealing
with monetary transactions, such as deposits, loans, investments and currency exchange.
Financial institutions encompass a broad range of business operations within the financial
services sector, including banks, trust companies, insurance companies, and brokerage
firms or investment dealers.3
They can further be classified as banking and non-banking institutions.

2) Financial Markets- the place where financial assets are either created or transferred is a
financial market. The market provides a platform for the interplay of demand and supply
of financial instruments and consequently set a price for the same.
Financial markets are where traders buy and sell stocks, bonds, derivatives, foreign
exchange and commodities. These markets are where businesses go to raise cash to grow,
companies reduce risks, and investors make money.4

Financial markets are classified as Money Market, Capital market, Derivatives, Foerign
exchange and insurance market-

• Capital Market -Capital Market consists of primary market and secondary market. In
primary market newly issued bonds and stocks are exchanged and in secondary market
buying and selling of already existing bonds and stocks take place. So, the Capital Market
can be divided into Bond Market and Stock Market.5 Usually securities and financial

3 http://www.investopedia.com/terms/f/financialinstitution.asp
4 https://www.thebalance.com/an-introduction-to-the-financial-markets-3306233
5 http://www.economywatch.com/market/market-types/financial-market-types.html
 assets having maturity of more than one year are traded here. SEBI regulates capital
market.

• Money Market- It is a place where short term securities with a maturity period of one
year are traded. Money Market facilitates short term debt financing and capital. RBI
regulates money market.

• Derivatives market-Derivatives Market provides instruments which help in controlling

financial risk.

• Foreign Exchange market- Foreign Exchange Market facilitates the foreign exchange
trading.

• Insurance Market -Insurance Market helps in relocation of various risks.

3) Financial Instruments- They represent a claim against the future income and wealth of
others. These are instruments which are traded in financial markets. It is a claim for
payment of money on a future specified date. They are highly liquid and transferable.
They can be used to raise loans. Financial instruments are assets that can be traded. They
can also be seen as packages of capital that may be traded. Most types of financial
instruments provide an efficient flow and transfer of capital all throughout the world's
investors. These assets can be cash, a contractual right to deliver or receive cash or
another type of financial instrument, or evidence of one's ownership of an entity.6 They
can be primary and secondary- primary instruments are those which are issued by
ultimate investors to the ultimate consumers while in secondary markets, investors buy
instruments from investors.

4) Financial Services- they provide key financial services such as merchant banking,
leasing, hire purchase, credit-rating etc. financial services rendered by financial
intermediaries bridge the gap between lack of knowledge on part of investors and
increasing sophistication of financial instruments and markets. These services are vital
for creation of firms, industrial expansion, and economic growth.
6 http://www.investopedia.com/terms/f/financialinstrument.asp#ixzz4NVuMbHHS
 Services and products provided to consumers and businesses by financial institutions
such as banks, insurance companies, brokerage firms, consumer finance companies, and
investment companies, comprise the financial services industry.7

The flow chart explains the components in a crisp manner. The four components
form an essential part of any financial system.

7 http://www.investorwords.com/19080/financial_services.html#ixzz4NVzLPyaG
EXISTING REGULATIONS IN THE FINANCIAL SECTOR-
The financial system in India is regulated by independent regulators in the field of banking,
insurance, capital market, commodities market and pension fund. However the Government of
India plays a significant role in controlling the financial system in India and influences the roles
of such regulators to some extent.
The following are five major financial regulatory bodies in India-

1) Reserve Bank Of India8

The Reserve Bank of India was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank
was initially established in Calcutta but was permanently moved to Mumbai in 1937. The
Central Office is where the Governor sits and where policies are formulated. Though
originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by
the Government of India.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank
as:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage."

The RBI performs a variety of functions-

Monetary Authority:

 Formulates, implements and monitors the monetary policy.

 Objective: maintaining price stability and ensuring adequate flow of credit to productive
sectors.

Regulator and supervisor of the financial system:

 Prescribes broad parameters of banking operations within which the country's banking
and financial system functions.

 Objective: maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.

Manager of Foreign Exchange

 Manages the Foreign Exchange Management Act, 1999.

 Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

8 https://www.rbi.org.in/Scripts/AboutusDisplay.aspx
Issuer of currency:

 Issues and exchanges or destroys currency and coins not fit for circulation.

 Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.

Developmental role

 Performs a wide range of promotional functions to support national objectives.

Related Functions

 Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.

 Banker to banks: maintains banking accounts of all scheduled banks.

2) Securities and Exchange Board of India-9

The Securities and Exchange Board of India was established on April 12, 1992 in
accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
The Preamble of the Securities and Exchange Board of India describes the basic
functions of the Securities and Exchange Board of India as-
"...to protect the interests of investors in securities and to promote the development of,
and to regulate the securities market and for matters connected therewith or incidental
thereto"

SEBI has to be responsive to the needs of three groups, which constitute the market:

• the issuers of securities - For issuers it provides a market place in which they can raise
finance fairly and easily.

9 http://www.sebi.gov.in/sebiweb/stpages/about_sebi.jsp
 • the investors - For investors it provides protection and supply of accurate and correct
information.

• the market intermediaries - For intermediaries it provides a competitive professional

market.

Reasons for Establishment of SEBI: 10

With the growth in the dealings of stock markets, lot of malpractices also started in stock
markets such as price rigging, ‘unofficial premium on new issue, and delay in delivery of
shares, violation of rules and regulations of stock exchange and listing requirements. Due to
these malpractices the customers started losing confidence and faith in the stock exchange.
So government of India decided to set up an agency or regulatory body known as Securities
Exchange Board of India (SEBI).

Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives of
SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation of business
and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,
etc.

Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:

i. Protective functions

ii. Developmental functions

iii. Regulatory functions.

10 http://www.yourarticlelibrary.com/education/sebi-the-purpose-objective-and-functions-of-sebi/8762/
1. Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.

As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud
and cheat the investors.

(ii) It Prohibits Insider trading:

Insider is any person connected with the company such as directors, promoters etc. These
insiders have sensitive information which affects the prices of the securities. This information is
not available to people at large but the insiders get this privileged information by working inside
the company and if they use this information to make profit, then it is known as insider trading,
e.g., the directors of a company may know that company will issue Bonus shares to its
shareholders at the end of year and they purchase shares from market to make profit with bonus
issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying
securities of the company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements which are likely to induce the
sale or purchase of securities by any other person.

(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following
steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.

2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange
and increase the business in stock exchange. Under developmental categories following
functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:

(a) SEBI has permitted internet trading through registered stock brokers.

(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate
the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.

(ii) These intermediaries have been brought under the regulatory purview and private placement
has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange in any
manner.

(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.

The Organizational Structure of SEBI:

1. SEBI is working as a corporate sector.

2. Its activities are divided into five departments. Each department is headed by an executive
director.

3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.
 3) Insurance Regulatory and Development Authority of India11
The IRDA is a national agency of the government of India, and is based in Hyderabad. It
was formed by an act of the Indian parliament, known as the IRDA Act, 1999, amended
in 2002, and 2015 to incorporate some emerging requirements.

MISSION STATEMENT OF IRDA

 To protect the interest of and secure fair treatment to policyholders;

 To bring about speedy and orderly growth of the insurance industry (including
annuity and superannuation payments), for the benefit of the common man,
and to provide long term funds for accelerating growth of the economy;
 To set, promote, monitor and enforce high standards of integrity, financial
soundness, fair dealing and competence of those it regulates;
 To ensure speedy settlement of genuine claims, to prevent insurance frauds
and other malpractices and put in place effective grievance redressal
machinery;
 To promote fairness, transparency and orderly conduct in financial markets
dealing with insurance and build a reliable management information system
to enforce high standards of financial soundness amongst market players;
 To take action where such standards are inadequate or ineffectively enforced;
 To bring about optimum amount of self-regulation in day-to-day working of the
industry consistent with the requirements of prudential regulation.

The IRDA governs and supervises the Insurance Industry of India. The mission is

"To Protect the interests of the policyholders, to regulate, promote and ensure orderly growth
of the insurance industry and for matters connected therewith or incidental thereto."

4) Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory

authority for commodity futures market in India. It is a statutory body set up
under Forward Contracts (Regulation) Act 1952

11 https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo1332&mid=1.9
 The functions of the Forward Markets Commission are as follows:12

(a) To advise the Central Government in respect of the recognition or the withdrawal
of recognition from any association or in respect of any other matter arising out of
the administration of the Forward Contracts (Regulation) Act 1952.

(b) To keep forward markets under observation and to take such action in relation to
them, as it may consider necessary, in exercise of the powers assigned to it by or
under the Act.

(c) To collect and whenever the Commission thinks it necessary, to publish

information regarding the trading conditions in respect of goods to which any of
the provisions of the Act is made applicable, including information regarding
supply, demand and prices, and to submit to the Central Government, periodical
reports on the working of forward markets relating to such goods;

(d) To make recommendations generally with a view to improving the organization

and working of forward markets;

(e) To undertake the inspection of the accounts and other documents of any
recognized association or registered association or any member of such
association whenever it considers it necessary.

The Commission functions under the administrative control of the Ministry of Finance,
Department of Economic Affairs, Government of India.

On 28 September 2015, the FMC was merged with the SEBI.13

12 http://www.fmc.gov.in/index3.aspx?langid=2&subsublinkid=13&sslid=27
13 http://www.thehindu.com/business/sebi-may-allow-fpis-in-commodities-derivatives-market/article7698212.ece
 5) Pension Fund Regulatory and Development Authority (PFRDA)

The PFRDA was established by the GOI, on 23 August, 2003. The mandate of PFRDA is
development and regulation of pension sector in India. PFRDA promotes old age income
security by establishing, developing and regulating pension funds. It protects the interests
of subscribers to schemes of pension funds and related matters. PFRDA is responsible for
the appointment of various intermediate agencies such as Central Record Keeping
agency, pension funds manager custodian etc. The mandate is

“To be a model Regulator for promotion and development of an organized pension system to
serve the old age income needs of people on a sustainable basis.”

THE FINANCIAL SECTOR LEGISLATIVE REFORMS

COMMISSION

The Financial Sector Legislative Reforms Commission (FSLRC) is a body set up by the
Government of India, Ministry of Finance, on 24 March 2011, to review and rewrite the legal-
institutional architecture of the Indian financial sector. This Commission is chaired by a former
Judge of the Supreme Court of India, Justice B. N. Srikrishna. 14The setting up of the FSLRC
was the result of a felt need that the legal and institutional structures of the financial sector in
India need to be reviewed and recast in tune with the contemporary requirements of the sector.

The institutional framework governing the financial sector has been built up over a century.
There are over 60 Acts and multiple rules and regulations that govern the financial sector. Many
of the financial sector laws date back several decades, when the financial landscape was very
different from that seen today. For example, the RBI Act and the Insurance Act are of 1934 and
1938 vintage respectively. The Securities Contract Regulation Act was enacted in 1956, when
derivatives and statutory regulators were unknown. The superstructure of the financial sector
governance regime has been modified in a piecemeal fashion from time to time, without
substantial changes to the underlying foundations. These piecemeal changes have induced
complex and cumbersome legislation, and raised difficulties in harmonizing contradictory
provisions. Such harmonization is imperative for effectively regulating a dynamic market in the
era of financial globalization.

The piecemeal amendments have generated unintended outcomes including regulatory gaps,
overlaps, inconsistencies and regulatory arbitrage. 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 minimizing the intermediation cost. For instance, complex financial
intermediation by financial conglomerates of today falls under the purview of multiple regulators
with gaps and overlaps. A number of expert committees have pointed out these discrepancies,
and recommended the need for revisiting the financial sector legislations to rectify them. The
need for complete review of the existing financial sector laws has been underlined to make the
Indian financial sector more vibrant and dynamic in an increasingly interconnected world.

The present arrangement has gaps where no regulator is in charge – such as the diverse kinds of
ponzi schemes which periodically surface in India, which are regulated by none of the existing
agencies. It also contains overlaps where conflicts between laws has consumed the energy of top
economic policy makers. When there are overlaps, financial firms will undertake forum-
shopping, where the most lenient regulator is chosen, and portray their activities as belonging to
14http://www.thehindu.com/business/Economy/govt-constitutes-financial-sector-legislative-reforms-
commission/article1568477.ece
that favoured jurisdiction. Hence a need was felt for a financial regulatory architecture that
should be conducive to greater economies of scale and scope in the financial system.15

The FSLRC presented its report to the Government of India on 22 March 2013. The report is in
two parts: Volume I- titled “Analysis and Recommendations” and Volume II titled the “Draft
Law” consists of Draft IFC

The draft IFC consists of the following fifteen parts-

I. Preliminary

II. Establishment of financial regulatory agencies

III. Regulatory governance

IV. Financial consumer protection

V. Prudential regulation

VI. Contracts, trading and market abuse

VII. Resolution of financial service providers

VIII. Financial Stability and Development Council

IX. Development

X. Reserve Bank of India

XI. Capital control

15 https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjImvvr4ebPAhVN-
GMKHdb8ATsQFggdMAA&url=http%3A%2F%2Fwww.iibf.org.in%2Fdocuments%2FFSLC-need-
approach_revised.docx&usg=AFQjCNG1meDCgebWPyCxUO4WHDG6P-
pkrw&sig2=olrSlu0QCXKnfLglBSC91w
 XII. Public Debt Management Agency

XIII. Investigations, enforcement actions and offences

XIV. Functions, powers and duties of the Tribunal

XV. Miscellaneous

The commission identified nine components of focus, consumer protection, micro-prudential

regulation, resolution, capital controls, systemic risk, development, monetary policy, public debt
management and market abuse.16

1. Consumer protection – The Commission found that a mere ‘buyer beware’ approach is not
adequate in finance; regulators must place the burden upon financial firms of doing more in the
pursuit of consumer protection. This perspective shapes interventions aimed at prevention (of
inducing financial firms towards fair play) and cure (redress of grievances).

2. Micro-prudential regulation – When financial firms make promises to consumers, e.g. the
repayment of a bank deposit, regulators are required to monitor the failure probability of the
financial firm, and undertake interventions that reduce this failure probability.
3. Resolution – Micro-prudential regulation will diminish, but not eliminate, the failure of
financial firms. A specialised resolution capability is required, which swiftly and efficiently
winds down stressed financial firms, and protects the interests of small customers.
4. Capital controls – These are restrictions on cross-border activity on the capital account.
The Commission has no view on the sequencing and timing of capital account liberalisation. The
work of the Commission in this field was focused on placing the formulation and implementation
of capital controls on a sound footing in terms of public administration and law.

16 https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjImvvr4ebPAhVN-
GMKHdb8ATsQFggdMAA&url=http%3A%2F%2Fwww.iibf.org.in%2Fdocuments%2FFSLC-need-
approach_revised.docx&usg=AFQjCNG1meDCgebWPyCxUO4WHDG6P-
pkrw&sig2=olrSlu0QCXKnfLglBSC91w
5. Systemic risk – Micro-prudential regulation thinks about the collapse of one financial firm at a
time. A very different point of view is required when thinking of the collapse of the entire
financial system. Micro-prudential regulation is about the trees, and systemic risk regulation is
about the forest. It calls for measurement of systemic risk, and undertaking interventions at the
scale of the entire financial system (and not just one sector) that diminish systemic risk.
6. Development and redistribution – Financial economic governance in India is charged with the
development of market infrastructure and processes, and with redistribution. These objectives
have to be achieved through sound principles of public administration and law.
7. Monetary policy – Objectives, powers and accountability mechanisms have to be setup for
monetary policy.
8. Public debt management – A specialised framework on public debt management has to be
setup that takes a comprehensive view of the liabilities of Government, and establishes the
strategy for low-cost financing in the long run.
9. Contracts, trading and market abuse – Certain adaptations to the foundations of commercial
law, surrounding contracts and property, are required to enable the financial system. Alongside
this, the legal foundations law for the securities markets are established.

The overall task of constructing financial comprised the above nine elements, and of establishing
sound foundations of regulatory governance
PROPOSED ARCHITECTURE UNDER THE FSLRC REPORT
The commission has proposed a financial regulatory architecture featuring seven agencies-

The proposal features seven agencies and is hence not a ‘unified financial regulator’ proposal. It
features a modest set of changes, which renders it implementable:
1. The existing RBI will continue to exist, though with modified functions.
2. The existing SEBI, FMC, IRDA and PFRDA will be merged into a new unified agency.
3. The existing Securities Appellate Tribunal (SAT) will be subsumed into the FSAT.
4. The existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) will be
subsumed into the Resolution Corporation.
5. A new Financial Redressal Agency (FRA) will be created.
6. A new Debt Management Office will be created.
7. The existing FSDC will continue to exist, though with modified functions and a statutory

The commission has recommended the repeal or large scale amendment of all special legislations
that:

• Establish statutory financial institutions.

• Lay down definite provisions to govern any aspect of the operation or functioning of
Public sector financial institutions.

The undertaking of all statutory institutions would be transferred to ordinary companies

incorporated under companies act.

THE FINANCIAL REGULATORY AGENCIES

The functions of each of these seven proposed agencies are as follows:

Reserve Bank of India- The RBI will continue as if it were established under the code. It is
proposed that RBI will perform three functions: monetary policy, regulation and supervision of
banking in enforcing the proposed consumer protection law and the proposed micro-prudential
law, and regulation and supervision of payment systems in enforcing these two laws.
The Reserve Bank Board will consist of executive, non-executive and nominee members, to be
appointed by the Central Government, where at all times —
a) the total number of members must not he more than twelve:
b) the total number of executive members [mist not be greater than half of the total number of
members:
c) up to two members will he nominee members.
The members of the Reserve Bank Board must be fit and proper persons having expertise in
dealing with matters relating to banking. payments and monetary policy. A person cannot be
appointed as a member on the Reserve Bank Board if such person –
a) Is an employee of the Central Government, except in case of the nominee
members
b) Is member of Parliament or a state legislature
c) Is a director, employee or officer of any banking service provider
d) Member of advisory council of the Reserve ank
e) Member of Monetary Policy Committee

Unified Financial Agency The unified financial regulatory agency would implement the
consumer protection law and micro-prudential law for all financial firms other than banking and
payments. This would yield benefits in terms of economies of scope and scale in the financial
system; it would reduce the identification of the regulatory agency with one sector; it would help
address the difficulties of finding the appropriate talent in Government agencies.

This proposed unified financial regulatory agency would also take over the work on organised
financial trading from RBI in the areas connected with the Bond-Currency-Derivatives Nexus,
and from FMC for commodity futures, thus giving a unification of all organised financial trading
including equities, government bonds, currencies, commodity futures and corporate bonds.

The unification of regulation and supervision of financial firms such as mutual funds, insurance
companies, and a diverse array of firms which are not banks or payment providers, would yield
consistent treatment in consumer protection and micro-prudential regulation across all of them.
This would take over the work on organized financial trading from RBI in the areas with the
bond-currency-derivative nexus and from FMC for commodity figures, thus giving a unification
of all organized financial trade. It will lead to consistent treatment in consumer protection and
micro- prudential regulation.

Financial Sector Appellate Tribunal The present SAT will be subsumed in FSAT, which will hear
appeals against RBI for its regulatory functions, the unified financial agency, decisions of the
FRA and some elements of the work of the resolution corporation.
A tribunal by the name of the Financial Sector Appellate Tribunal is established under this Act to
exercise the jurisdiction, powers and authority conferred upon the Tribunal under this Act.
The Tribunal will have its main bench at Mumbai and may establish benches at any other place
in India. The Tribunal will consist of the Presiding Officer and at least two other members. The
Central Government may notify a higher number of members of the Tribunal in consultation with
the Presiding Officer. The Presiding Officer and all members of the Tribunal will be appointed by
the Central Government in accordance with the provisions of Chapter 83.
In the event of a temporary vacancy in the office of the Presiding Officer, the Central
Government may nominate

Resolution Corporation The present DICGC will be subsumed into the Resolution Corporation
which will work across the financial system as a specialized organization that will handle distress
in special kinds of financial firms. It will detect financial trouble at an early level and will
promptly close the defaulting financial service provider.

Financial Redressal Agency The FRA is a new agency which will have to be created in
implementing this financial regulatory architecture. It will setup a nationwide machinery to
become a one stop shop where consumers can carry complaints against all financial firms.
The consumers wouldn’t have to navigate between IRDA, SEBI, RBI Etc. the status quo means
propulsion of costs and increased confusion in eyes of consumers. The FRA is proposed to be a
light weight mediation system, where neither of the parties has lawyers.

Public Debt Management Agency An independent debt management office is envisioned.

Financial Stability and Development Council Finally, the existing FSDC will become a statutory
agency, and have modified functions in the fields of systemic risk and development. This idea
was mooted by Raghuram Rajan Committee in 2008. In 2010, Pranab Mukherjee decided to set
up an independent body to deal with macro prudential and financial irregularities in the entire
financial domain of India this council is seen as an Indian effort to prevent recession and
economic meltdown.

The Commission believes that this proposed financial regulatory architecture is a modest step
away from present practice, embeds important improvements, and will serve India well in
coming years.

Over a horizon of five to ten years after the proposed laws come into effect, it would advocate a
fresh look at these questions, with two possible solutions. One possibility is the construction of a
single unified financial regulatory agency, which would combine all the activities of the
proposed Unified Financial Authority and also the work on payments and banking. Another
possibility is to shift to a two-agency structure, with one Consumer Protection Agency which
enforces the proposed consumer protection law across the entire financial system and a second
Prudential Regulation Agency which enforces the micro-prudential regulation law across the
entire financial system. In either of these paths, RBI would then concentrate on monetary policy.

Table: Regulatory Architecture

Present regulator Proposed Regulator Functions

RBI RBI Monetary Policy, Regulation
and Supervision of Banks
and payment systems.
SEBI Unified Financial Agency Regulation of all non-bank
FMC related markets.
IRDA
PFRDA
SAT FSAT Hear appeals against RBI,
UFA AND FRA
DICGC Resolution corporation Resolution work across
entire financial systems
FSDC FSDC Statutory agency for
systemic risk and
development.

Proposed new entities

Debt management agency An independent agency for debt
management
FRA Consumer complaints
IMPACT OF INDIAN FINANCIAL CODE ON INDIAN ECONOMY AND
POLITY

India requires a sound regulatory apparatus to power high growth. This can be achieved by
granting each regulator limited powers with ample accountability mechanisms.
The objectives of each of these regulators should also be clear to avoid,
of
overlapping jurisdictions.

Regulators are also given the power of law-making and the executive function of
enforcing the same. Regulators, further, perform the quasi-judicial function of writing
orders. In order to ensure better functioning of the law, a need was felt for rewriting the
laws governing the financial system. Certain improvements suggested by the Indian
Financial Code, that pave way for a more sound financial system can be listed as under-

1) The MPC will be constituted by seven members. It is, argued that a bench of
seven judges can arrive at a better judgment as compared to single member. The
likelihood of influence and pressure on the entire community is
also. Further. a seven member committee would lead to diversity of
perspective and independence of thought, leading to an improved outcome,
leading to better monetary policies.

2) Under the proposed law, the RBI will have lesser autonomy and functions.
The authority to set interest rates will vest with the MPC and not with the
Governor, which will lead to greater institutional stability and predictability
for the RBI, but a general misguided economic policy for the nation.

3) The main essence of the IFC is to provide consumer protection from

abusive and unscrupulous activities. The code prescribes certain basic rights
 for all consumers and creates a single unified Financial Redressal Agency
(FRA) to serve any aggrieved consumer across sectors. In addition, the
FSLRC considers competition as an important aspect of consumer
protection and envisages a detailed mechanism for cooperation between
regulators and the Competition Commission.

4. It considerably reduces systemic risk for entire Financial System through the
Financial Stability and Development Council.

5. So far as the regulators are concerned, the FSLRC stresses the need for
independence and accountability. It seeks to replace the sector-wise regulation
system with a system where the RBI will regulate the banking and payments
system and a Unified FinancialAgency will subsume existing regulators like
SERI, IRDA, PFRDA and FMC, to regulate the rest of the financial markets.

NEGATIVE IMPACTS

The IFC which is yet to be implemented has stirred debates which question its need in the
current financial system. The governor of RBI, Raghuram Rajan himself called this
code schizophrenic.

1. The MPC which will determine interest rates is likely to dilute the powers
of RBI governor, in determining monetary policy, and strip him of his
veto.

2. Since the proposed MPC will have 4 members from government, it will imply
politically driven decisions which might have adverse impacts on the economy.

3. Neither the FSLRC report nor the Code, which is the outcome of the report,
cogently argues what was wrong with or lacking in the existing system that
warranted a complete overhaul of the regulatory framework.
4. The proposed MPC will be constituted by seven members and it is feared that
this might dilute the accountability mechanism.

5. The RBI has been a better watchdog than its counterparts in the west, which was
one of the reasons why the Indian financial system was more insulated during the
2008 Global Economic Meltdown. That is to be preserved and not sacrificed in the
name of making RBI accountable.

CONCLUSION

After gaining a basic understanding of the four components of the Financial services, the
researcher understood the background of the FSLRC and examined the problems in the existing
legal framework for controlling and regulating the financial sector. The most concrete problem
that came forward, was the problem when due to overlapping jurisdiction, the disputing parties
either exploited it in their favor, or one of the parties was confused about which forum to
approach in case of a fault.

After that the researcher analyzed the various provisions of the proposed code. The principal
problem with the amended draft of the code was the extra power given to the executive
government. The RBI aims for financial stability whereas the government aims for high growth
rate. If the power rests solely with the government, then it will surely follow a very aggressive,
growth-oriented monetary policy. This might be helpful in the short term but will have adverse
economic impact in the long term. Whatever procedures have been in place, especially for the
RBI governor, such as the tie breaking power, are actually just placating gimmicks, because in a
7 member committee, a tie is only possible in case of absenteeism, which is very rare in these
type of committee. Also out of the 7, 4 are to be appointed by government, which would lead to
more governmental control. The appointments could also be politicized and people with little or
no merit may end up on the Monetary Policy committee, deciding the economic future of the
country as large as India. Historically RBI has functioned as a very efficient watch-dog,
doggedly guarding the Indian economy. RBI is one of the very few institutions that actually
worked right for the country. In that case, reducing the powers of the institution in the garb of
bringing in accountability is not justified, in my opinion.

I also felt that in the controversy in which this code has been shrouded, the other aspects of the
code, which will have tremendous impact on the economy have been blindly ignored. The
debates have essentially boiled down to RBI v. Government, which is a fallacious thing to do.
The RBI issue being the most important and controversial topic, the other aspects such as
Unified Financial Authority, Resolution Corporation and their potential benefits and harms have
been ignored. The draft 1.0 was still acceptable, however the Draft 2.0 has some discrepancies,
which indeed make it have a negative impact on the Indian Economy, therefore proving the
hypothesis.