INDIAN FINANCIAL CODE An Overview

Presented By:

S.DhanapalSenior Partner

S DHANAPAL & ASSOCIATESPractising Company

Secretaries

INTRODUCTION

• The Finance Minister announced the formation of the Financial Sector Legislative Reforms Commission (FSLRC) during his Budget speech of 2011-2012 to rewrite and harmonize financial sector legislations, rules and regulations.

• This Commission is chaired by a former Judge of the Supreme Court of India, Justice B. N. Srikrishna and has an eclectic mix of expert members drawn from the fields of finance, economics, public administration, law etc.

• The FSLRC was required to submit its findings within a period of 24 months.

INTRODUCTIONFSLRC submitted its report to finance minister P Chidambaram on 22nd March 2013.

INTRODUCTION

• The report proposes a complete overhaul of the existing financial sector laws.

• It suggests a new omnibus law THE INDIAN FINANCIAL CODE to oversee the entire gamut of financial sector issues

INTRODUCTION

• The FSLRC went through as many as 62 laws and did an exhaustive study of them with regards to coming up with this new regulatory architecture.

• It proposes to subsume, repeal and basically incorporate every existing law that deals with the financial sector.

• Around 15 existing acts will get repealed and subsumed in the code once it is approved.

WHY WAS FSLRC SET UP?

• 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.

• 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.

WHY WAS FSLRC SET UP?

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 harmonising contradictory provisions.

For instance, complex financial intermediation by financial conglomerates of today falls under the purview of multiple regulators with gaps and overlaps

• Current laws have been enacted on piecemeal basis which has left gaps between the regulators, legal system and conflict in policies.

• Current legislative framework addresses only temporary pressures and not critical key issues

• Multiplicity of laws, institutions and regulators creating ambiguity

• Lack of transparency and more of bureaucracy

PRESENT SYSTEM

TERMS OF REFERENCE & OBJECTIVES OF FCLRC

• Examining the architecture of the legislative and regulatory system governing the Financial sector in India

• Examine if legislation should mandate statement of principles of legislative intent behind every piece of subordinate legislation in order to make the purposive intent of the legislation clear and transparent to users of the law and to the Courts.

• Examine if public feedback for draft subordinate legislation should be made mandatory, with exception for emergency measures.

• Examine prescription of parameters for invocation of emergency powers where regulatory action may be taken on ex parte basis.

• Examine the interplay of exchange controls under FEMA and FDI Policy with other regulatory regimes within the financial sector.

• Examine the most appropriate means of oversight over regulators and their autonomy from government.

TERMS OF REFERENCE & OBJECTIVES OF FCLRC• 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.

• Examination of issues of data privacy and protection of consumer of financial services in the Indian market.

• Examination of legislation relating to the role of information technology in the delivery of financial services in India, and their effectiveness.

• 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.

• Examine the role of state governments and legislatures in ensuring a smooth interstate financial services infrastructure in India.

• Examination of any other related issues

DECODING

THE DRAFT INDIAN FINANCIAL CODE 2013

Objective of Indian Financial Code

• To consolidate and amend the law regulating the Indian financial sector and

• to set out principles for financial regulation, and• to provide for the establishment, objectives,

powers of, and framework for interaction among, financial regulatory agencies, and

• for matters connected therewith or incidental thereto,

• with a view to bring coherence and efficacy in the financial regulatory framework.

Composition of the Bill

• The bill forms part of the Report of the Financial Sector Legislative Reforms Commission, Volume II.

• It has been introduced as a Draft Law in March 2013, “Indian Financial Code”, “Bill No. abc of 2013”

• It comprises of 450 sections and 6 schedules

KEY COMPONENTS OF THE LEGAL FRAMEWORK RECOMMENDED IN INDIAN FINANCIAL CODE

Consumer Protection

Micro Prudential Regulation

Resolution

Systematic Risk

Capital Controls Development

Monetary Policy

Public Debt Management

Foundations of Contract &

Property

KEY HIGHLIGHTS

Unified Financial Authority

Regulator for all financial services other than

banking and payment systems

Reserve Bank of India

Regulator for banking and payment systems

Proposed Regulatory Structure

KEY HIGHLIGHTS

Other Regulatory Agencies

FINANCIAL REDRESS AGENCY

RESOLUTION CORPORATION

FINANCIAL STABILITY

& DEVELOPMENT

COUNCIL

PUBLIC DEBT MANAGEMENT

AGENCY

FINANCIAL SECTOR

APPELLATE TRIBUNAL

• 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) proposed to be subsumed into unified financial agency.

• Deposit Insurance and Credit Guarantee Corporation of India (DICGC) to be subsumed into resolution corporation.

• Existing Securities Appellate Tribunal (SAT) to be subsumed Into Financial Sector Appellate Tribunal (FSAT)

KEY HIGHLIGHTS

• Manner of appointment, selection criteria and removal of members of each financial agency has been clear defined making it more objective and transparent.

• Further regulations can be made by an financial agency only by means of Notifications and the process of issuing regulations have also been clearly defined.

• Except for emergency regulations, all regulations made by a Financial Agency must apply from an identified prospective date that is set out in such regulations, with due regard to the time necessary for persons impacted to arrange to comply with such regulations.

KEY HIGHLIGHTS

• All regulations made under this Act must be reviewed by the Financial Agency within three years of such regulations being issued.

• Consumer protection has been placed at the heart of financial system.

• A large part of the burden of consumer protection is put on the firms.

KEY HIGHLIGHTS

• Financial Sector Appellate Tribunal will hear appeals against all financial sector regulators and into which the existing Securities Appellate Tribunal will be subsumed.

• Resolution Corporation will replace the Deposit Insurance and Credit Guarantee Corporation of India, which assists in closure of distressed financial sector institutions.

• RBI will be divested of its powers over management of public debt, which is currently one of its subsidiary functions. Bill proposes a separate public debt management agency.

KEY HIGHLIGHTS

• The bill recommends empowering the existing Financial Stability and Development Council, by making it a statutory body responsible for managing risk and crises in the financial system.

• The report also recommends setting up of a financial data cell, which will look out for systemic risk in the financial sector, especially the ones arising out of the financial conglomerates.

KEY HIGHLIGHTS

List of Acts Which will be repealed• The Securities Contracts (Regulation) Act, 1956• The Securities and Exchange Board of India Act, 1992 • The Depositories Act, 1996• The Public Debt Act, 1944• The Government Securities Act, 2006• The Reserve Bank of India Act, 1934• The Insurance Act, 1938• The Banking Regulation Act, 1949• The Forward Contracts (Regulation) Act, 1952• The Banking Companies (Acquisition and Transfer of

Undertakings) Act, 1970………….CONTD…….

List of Acts Which will be repealed• The Deposit Insurance and Credit Guarantee

Corporation Act, 1961• The Foreign Exchange Management Act, 1999• The Insurance Regulatory and Development

Authority Act, 1999• The Payment and Settlement Systems Act, 2007• The Acts establishing bodies corporate involved in

the financial sector (for example, The State Bank of India Act, 1955 (23 of 1955) and The Life Insurance Corporation Act, 1956 (31 of 1956))

Code in Nutshell• Seven pillars of the new Law are:

Reserve Bank of India: Regulator of Banking & Payments monetary policy.

Unified Financial Agency: Regulator of financial firms and activities other than banking and payments.

Resolution Corporation: Deals with closure of distress in firms.

Financial Redressal Agency: Single window complaint mechanism against financial institutions and intermediaries.

Financial Stability & Development Council: Recast as statutory body. Will mange systematic risks and development.

Public Debt Management Agency: Government’s debt manager.

Financial Sector Appellate Tribunal: Will hear complaints against all financial regulators.

WRAP UP

• Indian Financial Code has been proposed after much deliberation by experts which aims to reform financial sector regulations for the longer term in keeping with systemic risks involved in financial management.

• The bill envisages a full transition by way of a set of small and implementable measures.

• Implementation of the report, however, is not expected to be smooth. For, apart from the legislative changes required through Parliamentary approval, the fact that the Commission’s recommendations are marked by dissenting notes by four members — P. J. Nayak, K. J. Udeshi, Y. H. Malegam and Jayanth R. Varma on a host of specific issues is an indications of the hurdles in the way.

S DHANAPAL(B.COM, B.A.B.L., F.C.S)

Senior Partner

S  D h a n a p a l & A s s o c i a t e s

(a  Firm  of  Practising  Company  Secretaries)

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S DHANAPAL(B.COM, B.A.B.L., F.C.S)

Senior Partner

S  D h a n a p a l & A s s o c i a t e s

(a  Firm  of  Practising  Company  Secretaries)

Suite No.103, First Floor, Kaveri Complex,

96/104, Nungambakkam High Road,

(Next to Ganpat Hotel & ICICI Bank),

Nungambakkam, Chennai - 600 034.

Land-line 044 - 4553 0256 / 0257Dir-044-42652127 Cell-

9677022712PROFESSIONAL LIFE - ENDLESS

POSSIBILITIES WITH BORDERLESS SUCCESSES

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