No, Mr FM

The Reserve Bank of India (RBI) has rightly objected to a finance ministry proposal to set up a joint statutory panel to resolve disputes between regulators. The proposal, slipped in through an ordinance issued last month to resolve the scrap over unit-linked insurance plans (Ulips) between Sebi and Irda, the insurance regulator, will damage the independence of all regulators by making the finance ministry the final arbiter.

On the face of it, there is nothing wrong in this.  Since court battles can take years to resolve, perhaps the finance ministry — as the nodal agency to which all regulators report administratively — can theoretically be the final judge. But, as the Reserve Bank governor, Duvvuri Subbarao, points out in a note of protest to the ministry, “the establishment of a statutory joint committee is itself problematic and raises issues about potential misuse in ways that impair the autonomy of the regulators.”

It is not difficult to see why.  In theory the finance ministry will step in only if two regulators are having a dispute. But what if some finance minister at some future date decides that he can give policy directions to one regulator or another by using a dispute as excuse for intervention? Also, what is to stop corporate groups close to the powers-that-be to invent regulatory disputes to enable the political authorities to step in?

Institutional arrangements like these should not be left to the goodwill and credibility of the finance minister at the helm. The decision in the Ulips case illustrates how the ministry can go wrong. Sebi entered the picture when it said that Ulips are basically mutual funds masquerading as insurance schemes, and hence it has the right to regulate them. But the finance ministry weighed in on behalf of Irda and said that Ulips were the sole domain of the insurance regulator. Neither Sebi nor the RBI was consulted before the ordinance was issued. Given the high stakes the insurance industry has in Ulips, it is not difficult to imagine a scenario where they lobby the ministry to rule in their favour.

Now, with major corporate houses set to enter banking under the new liberalised norms for entry, banking regulation itself could become a bone of contention between contending parties. The Reserve Bank needs to have clear autonomy both in the conduct of monetary policy and in the regulation of banks. Otherwise, vested interests will have a field day.