Financial sector legislative reforms commission

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

India has an extensive array of legislation regulating the various sectors of the Indian banking system. Private sector banks are governed by the Banking Regulation (BR) Act, 1949, as also the Indian Companies Act, 1956.

Shardul Thacker,Partner,Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Mulla & Mulla & Craigie Blunt & Caroe

Foreign banks that have established their presence in India and been registered under the Companies Act are also included within the ambit of banking companies under the BR Act.

Further, nationalized banks come within the purview and operation of the Banking Companies (Acquisition and Transfer of Undertaking) Acts of 1970 and 1980. The State Bank of India (SBI) and its subsidiaries are governed by the State Bank of India Act, 1955. Certain provisions of the Reserve Bank of India (RBI) Act, 1934, are also applicable to nationalized banks, SBI and its subsidiaries, private and foreign banks.

Inspite of the plethora of banking legislation, the Indian banking industry has been developing in a systematic manner.

The BR Act has stood the test of time and has also assisted the RBI in the maintenance of financial stability and averting crises.

It has done so by mandating a minimum paid up capital and reserve, transferring a percentage of profits to reserves, restricting payment of dividend, maintaining a statutory liquidity ratio (SLR), imposing restraints on connected lending, maintaining a percentage of domestic liabilities as assets in India, etc.

Harmonized legislation

In recent times, a need has emerged to eradicate the inherent discrepancies prevalent in the various laws governing the banking sector, which have resulted in an uneven playing field.

This in turn has discouraged competitiveness in the banking sector. Such a scenario calls for a single comprehensive legislation, which would govern all players in the banking industry and promote transparency and clarity.

All these factors coupled with the recent global financial crisis have necessitated a review of the existing banking legislation, which must be adapted according to the needs of the time.

In the wake of the global crisis, many aspects requiring major reform have come to light either because legislation was lacking or because the prevailing legislation proved insufficient. Domestic and cross-border regulatory cooperation in sharing of information, integration of Indian accounting standards with international financial reporting standards, empowering the RBI for consolidated supervision, supervision of financial conglomerates, etc., are areas requiring such reform.

A possible re-write

In such circumstances, the government of India has recognized the importance of establishing a financial sector legislative reforms commission (FSLRC), which would comprise a committee of experts from outside the government.

The FSLRC would be mandated with the task of rewriting the laws governing the financial sector in order to align them with the contemporary requirements of the financial sector.

It is proposed that the FSLRC will streamline the numerous banking regulations, thus doing away with the ambiguities and inconsistencies in such banking legislation due to the amendments and changes made over time.

The task of rewriting the financial sector legislation would be primarily aimed at:

• Harmonization of the enormous plethora of statutes governing the various aspects of the banking sector and different aspects of banking business, which would bring about clarity and transparency.

Embedding provisions into the legislative framework of the banking industry which acknowledge the dynamics and complexity of a globalized financial system, which have a futuristic perspective and assist in the maintenance of financial stability.

• Recognition that the banking sector has been and remains a critical instrument for accelerating India’s growth.

It is envisaged that the proposed financial sector reforms should be primarily driven by the RBI in lieu of a legislative panel. The government has however recognized that the scope of the FSLRC would be limited in so far as policy changes or regulatory reforms would be excluded from their mandate.

Such policy changes and regulatory reforms would have to be decided prior to the FSLRC undertaking its activities.

This would ensure that the FSLRC has a clear mandate on the policy directions to be adopted i.e. policy direction should govern the work of the proposed commission.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.


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