The government and financial sector regulators buried their differences on the proposed Financial Stability & Development Council (FSDC) after Finance Minister Pranab Mukherjee offered the Reserve Bank of India governor a sweetener.
While the finance minister will head the proposed body, the governor will head the only sub-committee under the settlement formula. Earlier, the government had proposed two sub-committees with the one on regulatory coordination chaired by the RBI governor and the other, on financial stability, headed by the finance secretary.
The modification in the structure follows opposition from Mint Road. The RBI governor even went public with his concerns. In its response to a consultation paper floated by the finance ministry, RBI had said that the proposed FSDC would "impinge on regulatory autonomy and flexibility" and had made a case for functioning as the systemic regulator.
"The FSDC should normally operate through an empowered committee, to be chaired by the governor, RBI, and having as its other members the finance secretary and heads of other regulatory bodies, while the responsibility for financial stability and macro-prudential regulation of the financial sector should be explicitly vested with the Reserve Bank of India," it had said.
Though the regulators refused to speak on the issue, a finance ministry statement said: "It was agreed that with a view to strengthen and institutionalise the mechanism for maintaining financial stability and development, the central government would set up the apex council. Without prejudice to the autonomy of regulators, this council would engage in macro-prudential supervision of the economy, including the functioning of large financial conglomerates and address inter-regulatory coordination issues."
The FSDC secretariat will be housed in the department of economic affairs, the release stated.
This is the second time in recent months that RBI, after crying foul over a government proposal, has agreed to toe the line after being offered a better deal. Earlier, it had opposed the proposal to set up a joint committee headed by the finance minister to decide on inter-regulatory disputes over hybrid products. The finance ministry had agreed to appoint the RBI governor as vice-chairman with other regulators and the finance secretary as members.
The settlement on FSDC, which was reached this afternoon following Mukherjee's meeting with the regulators, looked like a rerun of the earlier settlement. The only difference was that this time, RBI governor D Subbarao, Securities & Exchange Board of India Chairman C B Bhave, Insurance Regulatory & Development Authority Chairman J Hari Narayan and Pension Fund Regulatory & Development Authority Chairman Yogesh Agarwal were called to North Block. The last time, Mukherjee preferred a one-on-one meeting with Subbarao.
After the meeting, which lasted around 30 minutes, the two dissenters the RBI governor and Sebi chairman held a brief meeting with Finance Secretary Ashok Chawla. Last time, too, Subbarao had met Chawala after his meeting with the finance minister.
Now that the regulators have agreed to the finance ministry proposal, the Cabinet would have to approve it. Officials said that a Cabinet note was readied yesterday and that a decision on the issue would be taken over the next 15-20 days.