FSLRC members like KJ Udeshi, PJ Nayak, JR Varma and YH Malegam have pointed out several issues with the recommendations of the Commission, especially about regulatory overreach and controls. The transfer of powers from RBI may even make the Finance Ministry a dominant regulator feared the members
Some members of the Financial Sector Legislative Reforms Commission (FSLRC) have recorded notes of dissent about several issues in the FSLRC report submitted to the government. These members have raised concerns over regulatory overreach, controls and also shifting of powers from the Reserve Bank of India (RBI) to the Finance Ministry.
One of the members, Kishori J Udeshi who is former deputy governor of RBI, said she had reservations on the recommendations (of the FSLRC) related with capital control. The Commission has recommended: “The regulations governing capital controls on inward flows should be framed by the Government, in consultation with the RBI. The regulations governing capital controls on outward flows should be framed by the RBI, in consultation with the Government.”
However, consultation does not imply a consensus and when the RBI is in disagreement with the Government, the Government has the unquestionable powers to issue directions to the RBI, said Udeshi.
She said, "When the rule-making vests with the Government, the RBI may be consulted, but if there is a disagreement, the RBI would willy-nilly have to deal with a fait accompli and be accountable for the actions it would be required to take in the light of the Government’s decisions."
PJ Nayak, country head of Morgan Stanley and former chairman and managing director of Axis Bank, has also raised concerns over the shifting of power from RBI to the Finance Ministry. "One must view with apprehension the very substantial statutory powers recommended to be moved from the regulators (primarily RBI) to the Finance Ministry and to a statutory Financial Stability and Development Council (FSDC), the latter being chaired by the Finance Minister. The Finance Ministry thereby becomes a new dominant regulator," he said.
"There is no convincing evidence which confirms that regulatory agencies have underperformed on account of their very distance from the Government. Indeed, many would argue that this distance is desirable and has helped to bring skills and a fluctuating level of independence into financial regulation. What is worrisome is that the chairmanship of FSDC is with the Finance Ministry, as this could lead to a government creep into the micro-prudential powers of other regulators," he added.
According to JR Verma, professor at Indian Institute of Management (IIM), Ahmedabad, the authorization requirement (Section 142) for providing any financial service, defined very broadly in Section 2(75) creates the risk of regulatory overreach.
"Many activities carried out by accountants, lawyers, actuaries, academics and other professionals as part of their normal profession could attract the registration requirement because these activities could be construed as provision of a financial service. Similarly, investors who rebalance their own portfolios regularly and day traders who routinely place limit orders on a stock exchange could also be deemed to require authorization. An expansive reading of Section 2(75) (k) could require even a messenger boy who delivers a mutual fund application form to obtain authorization. All this creates scope for needless harassment of innocent people without providing any worthwhile benefits," he said.
The draft Indian Financial Code (Section 150(3)) does allow regulators to exclude any activities from the definition of financial service. However, this does not solve the problem of regulatory overreach because it relies entirely on regulatory self restraint, which is often a scarce commodity, he added.
Prof Varma said, "In my view, the authorization requirement under Section 142 should be restricted to a narrower subset of financial service providers."
YH Malegam, the longest-serving directors of RBI, has expressed reservations about financial regulatory architecture, especially shifting regulatory controls over non-banking financial companies (NBFCs) and housing finance companies (HFCs) to unified financial authority (UFA).
He said, "NBFCs are currently regulated and supervised by RBI. HFCs are currently regulated and supervised by National Housing Bank (NHB) which is a 100% subsidiary of RBI. Difficulties are created in addressing finance regulation on a holistic basis, when there is the rise of a rapidly growing shadow banking sector."
“NBFCs and HFCs are engaged in activities which can be termed shadow banking. They are of a size, individually and collectively, which can pose a serious challenge to the efficient regulation of banks. All the considerations mentioned in the (FSLRC) report to support the need for a single unified regulation support a single unified regulation of banks, NBFCs and HFCs. Consequently, it is imperative that NBFCs and HFCs be regulated and supervised by RBI,” Malegam said.
The FSLRC, set up by the ministry of finance to review and rewrite the financial sector legislations to bring them in tune with the current / emerging requirements under the chairmanship of Justice BN Srikrishna, submitted its report to Finance Minister P Chidambaram on 22nd March.
Troubles continued for the debt-ridden Deccan Chronicle Holdings as the DRT ordered attachment of promoter’s properties, while a court in Chandigarh has issued non-bailable warrant against the company directors
The regional office of Debt Recovery Tribunal (DRT) from Hyderabad has ordered attaching scheduled properties of promoters of Deccan Chronicle Holdings Ltd (DCHL), the publishers of Deccan Chronicle. Separately, a court in Chandigarh is issued a non-bailable warrant against directors of the company in a cheque bounce case.
Axis Bank, which is seeking to recover around Rs427 crore from DCHL had filed the petition before the DRT. The Tribunal issued attachment notices covering properties of T Venkatram Reddy (chairman) and his brother T Vinayak Ravi Reddy (vice-chairman and now MD).
The DRT said, "It is represented by the counsel for the petitioner that the respondents Deccan Chronicle Holdings, T Vinayak Ravi Reddy and T Venkattram Reddy, against whom the show-cause notices were issued in the interlocutory applications, including the present application, have neither furnished security nor given explanation. Further, the respondents have also not filed their counters. Therefore, this tribunal is of the considered opinion that it is a fit case to pass attachment before judgment in respect of the schedule properties".
In another case, a court in Chadigarh has issued non-bailable warrant against directors of DCHL in a cheque bounce case filed by Religare Enterprises. According to media reports, the cheque for repayment of loans to Religare Finvest was signed by MS Reddy, who quit DCHL in December 2012.
Meanwhile, the annual general meeting (AGM) of the company, held in Hyderabad was wound up within half an hour, says media reports. The 10th AGM of the debt-laden DCHL was over in 10-20 minutes on Thursday, sparking outrage among irate shareholders and triggering moves for legal action by aggrieved key investors like financial institutions (FIs), one of the reports said.
According to the report, the Reddy brothers altogether skipped the AGM. PK Iyer, one of the three promoters, chaired the AGM and managed to get some resolutions passed, only to wind up the meeting soon after. The AGM only legitimised the debt levels by approving the borrowing limit at R5,000 crore besides the reappointment of directors on the board.
Few resolutions passed in the AGM including re-designation of T Vinayak Reddy, vice-chairman, appointment of CB Mouli & Associates as auditors and authorising the board on reserves and paid-up capital. All the three additional directors, V Lakshmana Charya, Venkateswarlu Malapaka and S Suresh, were appointed as independent directors of the company.
IRDA health insurance guidelines issued last month will ensure that your cumulative bonus does not go down to zero after you file a claim. Claim in overlapping policy periods will get benefit of available sum insured in the two policy periods. Will the insured misuse it for planned hospitalisation?
Insurance Regulatory and Development Authority (IRDA) health insurance guidelines addresses several issues like lifelong renewals, special provisions for senior citizens, transparency in premium and claims based loading as well as restricting role of TPA to claims processing and not settlement. Other important change includes ensuring that your no-claims-bonus (NCB) does not go down to zero if you lodge a claim. Claim in overlapping policy period will benefit from having sum insured in the two policy periods being available to pay your hospital bill.
NCB change – IRDA health insurance guidelines states that insurers may offer cumulative bonuses on indemnity based health insurance policies (mediclaim), which shall be stated explicitly in the prospectus and the policy document. If a claim is made in any particular year, the cumulative bonus accrued may be reduced at the same rate at which it is accrued. Cumulative bonus shall not be allowed on benefit based policies.
The new change will surely help mediclaim policyholders. But, will insurance companies be keen to offer NCB at all? Some insurance companies have dropped the NCB feature and possibly more will follow as the policyholder will not fear filing low value claim as NCB will not be completely lost. Earlier, the insured thought twice before filing low value claims due to NCB going down to zero.
For e.g. Many mediclaim policies offer 5% NCB every claims free year with a maximum of 50% NCB. If your base sum insured (SI) is Rs2 lakh then after 10 claims free year, the NCB will give benefit of additional 50% of base SI which is Rs1 lakh. If there was claim in 11th year, the policyholder used to lose all the NCB. It would go back to zero NCB. With the new rules given in health insurance guidelines, having a claim in 11th year will only reduce the NCB from 50% to 45%.
The second important change is claim overlapping policy period. There have been real examples of policyholder hospitalised for a duration which falls across two policy periods. The insurance companies would consider the sum insured available on the day of hospital admission and ignore the sum insured of the subsequent policy period. Under the new guidelines, the insurance companies will have to consider the leftover sum insured of the existing policy and new sum insured as the claim is overlapping in the two policy periods. While this will certainly benefit policyholders, it is possible to misuse this feature for planned hospitalization. It can be done by manipulating the dates to overlap the two policy periods for specific procedures planned in advance.
IRDA health insurance guidelines states – If the claim event falls within two periods, the claims shall be paid taking into consideration the available sum insured in the two policy periods, including the deductibles for each policy period. Such eligible claim amount to be payable to the insured shall be reduced to the extent of premium to be received for the renewal/due date of premium of health insurance policy, if not received earlier.
For e.g. Policyholders may have mediclaim of Rs1.5 lakh SI of which only Rs1 lakh SI is available due to prior claim of Rs50,000. If the insured if hospitalised for a period that overlaps two policy periods, then the insured can benefit from leftover SI of existing period (Rs1 lakh) and SI of the new policy period (Rs1.5 lakh). If there is a claim up to Rs2.5 lakh, the policyholder can expect full recovery of claim amount from the insurance company subject to other sub-limits imposed by the contract. If the insured has not paid the premium for the new policy period, then it will be deducted from the claim amount.