FSLRC: What to Expect?
Published on Wed, Apr 27,2011 | 19:31, Updated at Wed, Apr 27 at 20:31Source : Moneycontrol.com
By: Tejesh Chitlangi – Senior Associate, Finsec Law Advisors
Financial Sector Legislative Reforms Commission (FSLRC) was notified by the Government on March 24, 2011 pursuant to an announcement made by the Finance Minister in the 2010-11 Budget. FSLRC has been mandated to rewrite and clean up the financial sector laws, including subordinate legislations so as to bring them in harmony with the requirements of India’s fast growing financial sector.
A need to formulate such a body was long felt as most of the laws were created in an era wherein the financial markets, players and their needs were completely different. Multiplicity of Acts/Rules/Regulations and large number of amendments made from time to time have increased the ambiguity and complexity of the system. Many of the laws/provisions have become redundant or their application conflicts with other laws, fight economics and lack practicality. As the legal framework currently stands, many of the provisions lead to absurd and perplexing interpretations which ultimately lead to greater non-compliances and more litigations. Hence the FSLRC has been mooted to remove ambiguity, regulatory gaps and overlaps between various legislations, make them dynamic and co-exist.
This Article analyses some of the key terms of reference of FSLRC (stated below) as notified vide March 24, 2011 Ministry of Finance notification and few important areas requiring relook and corrective actions:
1) Examine the need for re-statement of the law and immediate repeal of any out-dated legislation on the basis of judicial decisions and policy shifts in the last two decades of the financial sector post-liberalisation.
For instance, FSLRC should take a relook and recommend changes in certain key provisions like Section 13 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) which enables the Government and SEBI to prohibit certain contracts in securities by notifying them as illegal. The Government had decades back banned forward transactions and options in securities (other than spot delivery transactions and exchange traded and settled derivatives) considering them to be speculative in nature by way of a circular in 1969 (replaced by a 2000 circular continuing the prohibition).This reflects a law which was introduced in a completely different era and its application in present context is a blatant example of bad application of an archaic law. If speculation was such a bad word then the stock exchanges should have been the first on agenda to be closed down. On the other hand, the pre-emptive rights in form of call/put options/ROFRs which are genuine and internationally accepted clauses in commercial agreements are being targeted in guise of section 13 of SCRA. The recent Cairn-Vedanta arrangement being one of such victims.
Another contentious area for FSLRC to examine is the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulation, 2006 (“MIMPS”). The same has been criticized as being the live example of an exercise of power in excess of the one delegated to the regulator under SCRA. In addition, it creates undue hardships on new players to enter the exchange field and thereby encourages monopoly. This is unacceptable in today’s liberalized Indian economy aspiring to shift from the “developing” status to being termed as “developed”.SCRA authorizes SEBI to prescribe the ‘manner’ in which 51% shares in a stock exchange are to be held by non-brokers. SEBI under MIMPS in addition to providing for this manner has also restricted ownership in exchanges to 5% (15% in specified cases) for a person along with those acting in concert. Above all, MIMPS is not even applicable to exchanges which have undergone corporatisation and demutualisation. Such delegated legislation which is in violation of the parent law i.e. SCRA needs to be re-examined.
2) Examine prescription of parameters for invocation of emergency powers where regulatory action may be taken on ex parte basis.
Ex-parte orders have to be passed only in such rare circumstances wherein there is an immediate need to discontinue the continuing harm caused to the investors. Such actions should not be taken on the whims and fancies of the Regulators. One of the regulators has recently faced criticism for passing ex-parte orders without complying with the principles of natural justice. Furthermore, allegations are always made that post decisional hearings tend to be biased and ineffective. Practical criteria and guidelines need to be stated in black and white so that there is no misuse of regulatory powers.
3) Examine the interplay of exchange controls under FEMA and FDI Policy with other regulatory regimes within the financial sector.
For instance, investments in sectors other than those stated in section 10(23FB) of the Income Tax Act, 1961 are not permitted for FVCIs (such sectors specified in their registration certificate). SEBI (Foreign Venture Capital Investors) Regulations, 2000 don’t prescribe such prohibitions. Real estate was removed from the negative list of investments by FVCIs but RBI still insists for a prohibition in the certificate of registration. In fact exchange control regulations permit automatic investments by FVCI in domestic venture capital fund (DVCF) in India. But again there is an interpretation that FIPB approval is required for FVCIs to invest in DVCF investing outside section 10(23FB) sectors. This heavily regulated and ambiguous route makes it un-attractive apart from the select benefits which are available to FVCIs (lock-in exemption under SEBI ICDR Regulations subject to conditions, exemption under Takeover Regulations with respect to transfer of shares, exemption from pricing guidelines etc.). But if there are no investment avenues, any talk of benefits arising from the investments become irrelevant.
4) Examine the most appropriate means of oversight over regulators and their autonomy from government.
One industry should not grow/develop at the cost of the other industry and the Regulators should not be seen as safeguarding the interests of the sectors lying within their domain at the cost of others. RBI by not encouraging the corporate bond markets (safeguarding the loan books of the banks) and IRDA by fighting to bring products under its domain and hurting the products under other regulator’s jurisdiction have weakened the markets and investors. Financial Stability and Development Council (FSDC) seems to be a sound mechanism to achieve success in this regard though not being a super-regulator.
5) Examination of all recommendations already made by various expert committees set up by the government and by regulators and to implement measures that can be easily accepted.
Committee Reports of the likes of “Takeover Regulations Advisory Committee” on SEBI Takeover Regulations and Dr. Bimal Jalan Committee on “Review of ownership and governance of Market Infrastructure Institutions” need to be practically viewed. The modern day recommendations should be implemented and those taking the markets and economy back to pre 1991 era need to be rejected in entirety.
6) Examining the architecture of the legislative and regulatory system governing the Financial sector in India.
This is a very broad term of reference for FSLRC and would require examining each and every Act/Rule/Regulation/Guideline, streamline the same, avoid duplications and ideally bring greater certainty amongst market participants so that they may precisely know the set of laws governing them. For instance, wealth management industry needs some practical set of regulations. Under portfolio management/advisory space, any advisor, portfolio/wealth manager managing money/securities above Rs. 5 lakhs technically comes under the purview of SEBI (Portfolio Managers) Regulations, 1993 but markets don’t often follow the norms and not surprisingly because there are thousands of advisors rending advice which SEBI does not have the bandwidth to regulate and may not be required as well. The draft SEBI Investment Advisers Regulations issued in 2007 met a roadblock and has not seen the light of day. Similarly, there is no clarity if in order to carry on venture capital activity, whether an entity has to necessarily seek registration with SEBI or is it optional under SEBI VCF Regulations. SEBI CIS Regulations is yet another piece of regulatory framework which was intended to be made applicable on agro/plantation bond issuances but the same appears to be applicable on every pooling vehicle apart from mutual funds which is specifically excluded. SEBI Act, 1992 is widely worded and anything to do with investments in securities (whether listed-unlisted) where any investors are involved comes within SEBIs regulatory ambit. This leads to unintended application of SEBI provisions and leaves SEBI with an option to either exercise/not exercise its powers at its own will.
The first meeting of FSLRC was held on April 5, 2011 whereinthe committee headed by Justice BN Srikrishna has decided to form 8 sub-committees looking into areas like banking, pension, insurance, capital markets, debt management office, forward markets and legal processes. FSDC has already been formulated and is running and should be an intermediate arrangement till the time FSLRC is able to submit its recommendations which can then be examined and implemented.
The proposed FSLRC aims to achieve the good, though how far the same can be effectively achieved is there for all of us to see. This would not be an overnight process as is evident from the 24 months long period already awarded to FSLRC to come out and submit its Report to the Finance Minister pursuant to which the Department of Economic Affairs will process the Report for implementation. FSLRC has a humongous task ahead and if effectively done could greatly benefit the financial sector in India and economy at large. Great attempt but a long way to go!!