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Does India need a single financial regulator?

By S Subramanian and Nupur Hetamsaria
February 13, 2006 13:14 IST
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Recently, at a seminar, Union Agriculture and Food Minister Sharad Pawar announced that he would take up the issue of banks, mutual funds and foreign institutional investors entering into the commodities derivative market with the Reserve Bank of India and the finance ministry. On the same platform he went on to rule out the possibility of merging Forward Markets Commission with the market regulator Securities Exchange board of India.

It looked a bit contradictory as it once again raised the question whether it is required to have different regulators for various markets when it is clear that the participants of the markets are the same entities.

The origin of this debate dates back to eighties when the abolition of Glass-Stegall Act in the United States resulted in the blurring of differences between various financial service providers like commercial banks, investment banks, insurance companies and securities brokerage firms. The regulatory environment for these converged functional entities however remained different. This resulted in overlap of functions between the regulators.

A need was felt for a single unified regulator who can oversee the entire financial services markets. The initiative for such a unified financial regulator came from the Scandinavian countries.

Norway was the first country to establish an integrated regulatory agency in 1986 followed by Denmark in 1988 and Sweden in 1991. East Asian countries like Japan and South Korea followed suit in the nineties. The most famous move towards a single regulatory authority was that of United Kingdom where a single regulator called Financial Services Authority was formed by merging nine regulators. It was a gradual process that spread over a period of five years.

In India also there are many regulators -- namely the Reserve Bank of India, SEBI, FMC, Insurance Regulatory and Development Authority -- who supervise various financial markets. Another regulator for pension funds Pension Fund Regulatory and Development Authority is waiting in the wings. These regulators, as in other countries, have an obvious overlap between their functions.

Hence one section of experts is in favour of moving towards a unified regulatory regime with strong supportive arguments. But, we need to look into the suitability and benefits over costs of such a move in the Indian context.

Single regulator mirrors market environment

The main argument is that a single financial regulator is superior as it mirrors the nature of modern financial markets where old distinctions between different sectors and different products have broken down. But the applicability of this concept in India may not hold good.

Though some financial firms have spread their wings across the spectrum of products, most others are still focused on their core area. Besides, the market is also dominated by firms which are specialising in the particular business. For example, the life insurance business is dominated by the Life Insurance Corporation of India whose main focus is insurance.

In securities brokerage business, the market share of the brokerage firms which are subsidiaries of banks is still in single digit.

In such an environment the concentration of regulatory responsibility will result in loss of regulatory diversity and valuable sector-specific knowledge and expertise. The benefits of a single regulator may not compensate for these losses.

Single regulator is efficient

Another argument in favour of a single regulator is that it will be more efficient in allocating resources. A single regulator's position allows it to look across the entire financial industry and devote regulatory resources (both human as well as financial resources) to where they are most needed.

However, the main challenge lies in the formation of the single regulator. Typically, single regulators are formed by simply merging the regulatory functions of many regulators and they continued to be plagued by bureaucratic and government interventions.

The UK's FSA is an exception as traditionally the financial market there were operating without much of government intervention. Secondly, though FSA was formed by merging regulators, later it got synchronised with a unification act.

The experiences of various nations (except the UK) show that even after the merger the regulatory authorities for various divisions continued to work as separate divisions and there were Chinese walls separating them.

The same fate can be foreseen for India as the regulatory environment here is not mature enough to be liberated from government interventions. Hence merger may not result in automatic synchronization and efficiency among the various regulatory functions.

Commonality of knowledge

The commonality of knowledge required in regulating markets gives the single regulator the benefit of economies of scale.

For example, for both commodities market and securities market, the basic issues of trading, clearing and settlement are very similar. Hence when a regulator develops the expertise in preventing fraud and protecting systemic integrity, it will be more effective and ideally placed to select the optimal regulatory responses to any situation.

But, in a developing economy like India, unlike the matured markets, the objectives and focus of various markets are different.

For example, the primary focus of futures commodity market is price discovery and hedging for price risk, while that of the securities market is capital formation. Further, as the regulatory environment is not mature, it is better to have a healthy competition among regulators which will automatically push them towards efficient and effective regulatory practices.

Clarity of accountability

The supporters of 'single market regulator' system further argue that in the case of single market regulator, the responsibility and accountability is clear. The single regulator cannot transfer the blame of any failure to another regulatory body.

In India itself we have seen in some instances the regulators passing the buck to another regulator. During the banking scam of 2001, which was a part of the Ketan Parekh scam, the then chief of Sebi D R Metha, in an interview commented that Sebi cannot be held responsible for what happened in the banking system. The business press observed that he actually passing on the buck to the RBI.

But in countries like India the regulators have the responsibility of developing the market along with regulation. For instance, IRDA has the responsibility to develop a healthy insurance market by educating the public about the need for insurance.

Similarly, the FMC has the responsibility to bring in more farmers directly to the futures market to benefit from price discovery. A single regulator may have well defined accountability in terms of regulations but not in terms of development.

Hence India needs multiple regulators who can develop the market as well.

Information sharing

Yet another argument in favour of a single regulator is Information sharing. Single regulators will have advantage in sharing information among various regulating division, which will help a lot in preventing fraud as well as in handling crisis. Multiple regulators have problem in sharing information on time.

The previous market crises in India like the CRB scam have shown that the Information flow between RBI and Sebi is not very smooth.

This problem can be overcome by strengthening the High Level Committee on Capital Markets (HLC) which was formed as per the suggestion of the Joint Parliament Committee that enquired the 1992 stock market scam.

HLC is chaired by RBI Governor and has Union Finance secretary and chairmen of Sebi and IRDA as members. It may also have a representation from FMC and the Pensions Authority as and when it is formed.

HLC can play a very important role in facilitating information sharing between the multiple regulators.


A single market regulator clearly has its own advantages over multiple regulators. But it is more suitable for well-developed and mature markets which are smaller in size, like the UK. Even the United States, which is supposed to have the most mature financial markets in the world, has multiple regulators.

Indian markets are not mature yet and still have a long way to go. Different sectors are in different stages of development. In this environment it is better to have multiple regulators which are flexible and sensitive to the needs of the market or the sector they are regulating.

S Subramanian is Faculty, ICFAI Business School, Hyderabad; and Nupur Hetamsaria is Member, ACCA; Faculty, ICFAI Business School, Hyderabad.

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