Money & Banking
FSLRC recommendations on RBI: Stop, look and proceed!

The finance ministry and FSLRC, in a hurry to resolve minor issues, perhaps ignored the evolution of the role of RBI and the care with which RBI has nurtured the financial sector. Time is not right for dismantling or truncating the RBI which is doing creditably well as is being admitted in several international forums

The Financial Sector Legislative Reforms Commission(FSLRC)—comprising justice BN Srikrishna, chairman, D Swarup, member convenor, M Govinda Rao, member, JR Varma, member, PJ Nayak, member, KJ Udeshi, member, YH Malegam, member, CKG Nair, secretary—submitted its report to the finance minister in last month.


Since the release of an approach paper by the Commission in October 2012, there has been some healthy discussion in the media on the likely “destabilisation effect” on the existing architecture responsible for the regulation, supervision and resource management in the financial sector. From the tenor of the final report and the way in which FSLRC chairman is defending the recommendations, one gets a feeling that the Commission had a brief and had little manoeuvrability in drafting the final report. If proof is needed, one can have a look at the dissenting notes recorded by four out of the seven members who signed the final report. Those who process the recommendations will have to take into account the difference of views expressed especially by KJ Udeshi, PJ Nayak and YH Malegam.   


Last week, the FSLRC chairman, while defending the recommendations meant to clip the wings of Reserve Bank of India (RBI), spoke about more transparency in the working of the central bank, RBI’s strength now being dependent on the incumbent who becomes governor and so on. It is little discomforting to comment on the personal views of an eminent judge on an issue which he had opportunity to examine threadbare. But here, one is compelled to clarify certain misconceptions which are being conveyed to the media. One, RBI all along has been functioning within the mandated contours of responsibility and whenever the central bank’s autonomy has surfaced as a contentious issue, it has happened when North Block has attempted to manipulate RBI’s perceptions by pre-emptive tactics through media or otherwise. It is public knowledge that GOI-RBI consultations are an ongoing process and these have never been dependent on the incumbent holding the position of RBI governor.


FSLRC recommends holding company structure for banks


Recent years have seen RBI working with maximum transparency in policy formulation and implementation. Discussion papers on policy issues, draft guidelines on regulatory measures are notified to invite comments of stakeholders. Just as the judiciary cannot function the same way as legislatures function, financial sector regulators may not be able to go by “majority vote” on each issue. 


 It would appear that the Commission did not get opportunity to understand the present relationship between the RBI and GOI. The regulatory apparatus plus legislations in financial sector in India are in working condition. The FSLRC’s effort to re-invent them has already pushed the present regulators and supervisors to a confused state.


P J Nayak, inter alia observed in his dissenting note asunder:

“The Commission now arrests and partly reverses this directional movement, and it is with apprehension that one must view the very substantial statutory powers recommended to be moved from the regulators (primarily RBI) to the finance ministry and to a statutory FSDC, the latter being chaired by the finance minister. The Commission has recommended that direct statutory powers be vested in the government in matters of (i) Capital Controls and (ii) Development. The statutory empowerment of the FSDC encompasses (iii) Inter-Regulatory Co-Ordination; (iv) Identification and Monitoring of SIFIs; and (v) Crisis Management. This transfer of powers collectively constitutes a profound shift in the exercise of regulatory powers away from (primarily) RBI to the finance ministry. The finance ministry thereby becomes a new dominant regulator.


“To rearrange the regulatory architecture in this manner, requiring new institution-building while emasculating the existing tradition of regulators working independently of the government, appears unwise. There is no convincing evidence which confirms that regulatory agencies have under performed 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.”


No point in doing an MRI of FSLRC report or the dissenting notes. Application of “collective wisdom” is conspicuous by the absence in the whole affair. Some vested interests are itching for a truncated central bank with diminished role with no say in the non-bank financial sector, the government securities market and the foreign exchange market. This implies that the RBI would have no say in the management of the exchange rate and thereby in the forex reserves. Add to this the Commission’s view on government debt management. The Commission opts for a separate Debt Management Office (DMO), totally separated from the RBI, which is the dispensation North Block has been trying to push and RBI has been resisting for valid reasons for a long time now.


FSLRC's Approach Paper is impractical to implement


The idea of creating a Unified Financial Agency for all financial regulators except RBI, truncating RBI by separating Public debt Management and keeping the agency doing that work (presumably with the same work force) in RBI premises, later UFA subsuming even RBI all give a feeling that the FSLRC was not allowed to “apply its intelligent mind” and in the eagerness to satisfy all, and so fast, it has forgotten its own brief. Perhaps, the purpose would be served better, if the RBI is allowed to function with its present mandates, a coordination committee sorts out issues among the remaining regulators and if the government’s aim is to reduce the number of regulators, merge with RBI, and the agencies outside RBI one by one, as work stabilizes. The twin goals of one Unified Financial Agency and managing the man-power-related issued mentioned here would be better achieved this way.


Our finance ministry and FSLRC, in a hurry to resolve minor issues like occasional friction between or among officials holding top positions in different work areas in the financial sector, perhaps ignored the evolution of the role of RBI and the care with which RBI has nurtured the financial sector concurrently successfully safeguarding the government’s interests even in several areas which do not come under traditional central banking functions. When found necessary, at the appropriate time, new institutions were built by the RBI in association with the government to transfer responsibilities which either conflicted with its core functions or became unwieldy or unmanageably heavy.


Time is not opportune for dismantling or truncating the RBI which is doing creditably well as is being admitted in several international forums. Any regulatory changes should be to consolidate and restate the roles so far evolved and should not be a tool for the finance ministry or any government department to usurp powers or responsibilities now with statutory regulators.


It would be worthwhile to revisit the preamble of the Reserve Bank of India Act, 1934 which reads as under:

“An Act to constitute a Reserve Bank of India. Whereas it is expedient to constitute a Reserve Bank of India to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; And whereas in the present disorganization of the monetary systems of the world it is not possible to determine what will be suitable as a permanent basis for the Indian monetary system; But whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures; It is hereby enacted as follows”


 Beyond some cut and paste, because of changes in the institutional structure in the financial sector or external policy compulsions, the RBI Act has not yet been subjected to the comprehensive review, envisaged in its preamble. The FSLRC has also missed a “god-sent” opportunity to do this long-pending exercise by succumbing to ‘compulsions’ imposed on it by a “Terms of Reference” covering the entire financial sector. As legislative procedure and government action in the present scenario would be slow, it would be desirable for the RBI itself to make an internal assessment of its responsibilities in regard to monetary policy vis-a-vis various other additional responsibilities such as developmental role, institution-building and management of public debt thrust on it by history and come out with a discussion paper.


Other stories by Warrier


(MG Warrier is a former general manager of Reserve Bank of India, Mumbai)




4 years ago

don't tell me we are heading in a direction where Private banks can decide the interest rest ,liquid flow and to the extreme mint it !

RTI Judgement Series: PIO's exemption upheld by CIC since matter was under investigation

The CIC upheld the PIO's claim for exemption since the ESIC department was investigating the total liability of the appellant's unit. This is the 71st in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application

The Central Information Commission (CIC), while disposing an appeal upheld the denial of the information by the Public Information Officer (PIO) of Employees Provident Fund Organization’s (ESIC) sub-regional office at Rohtak, under Section 8(1)(h) of the RTI Act.


While giving this important judgement on 3 January 2011, Shailesh Gandhi, the then Central Information Commissioner said, “... it appears that the PIO's contention that disclosing the records may lead to altering/modification of certain records which would impede the process of investigation.”


Hisar (Haryana) resident Anita Gupta, on 12 August 2010, sought information under the Right to Information (RTI) Act from the PIO of the ESIC’s sub-regional office at Rohtak. She sought information regarding records about a raid on her firm for applicability of provident fund. Here is the information she sought...


1. Complete copy of 7(a) proceeding in respect of M/S Ridhhi Sidhhi Industries, in which the 7(a) order dated 10 June 2010 has been passed by HC Malhotra, APFC, including the complete squad’s report dated 24 June 2009.

2. Order sheets of proceedings held on dates as mentioned in the RTI application.

3. Notices of proceedings, if any, sent to employer.

4. Statement of PD Sinhman, EO submitted on 16 October 2009.

5. All other related documents relied upon by the authority for passing the 7(a) orders.


In his reply, the PIO stated that the information cannot be provided under Section 8(1)(j) of RTI Act. “The records asked by the applicant are still into enquiry under 7(a) proceedings, and thus, can be seen by applicant once they are all received by EPFO of sub-regional office in Subhash Road, Rohtak,” he said.


Citing unjustified and specious information provided by the PIO, Gupta filed her first appeal. The First Appellate Authority (FAA) while rejecting the appeal said the reply given by the PIO was sufficient.


Gupta then approached the CIC with her second appeal.


During the hearing, Mr Gandhi, the then CIC noted that the appellant (Gupta) runs a firm which was raided for applicability of provident fund to the establishment. The Department’s team stated that it found 49 employees working in the unit and has therefore started an investigation to determine the liability and also the past liability of the unit.


The Department passed an order under Section 7(a) and was in the process of determining the liability of the unit.


The appellant (Gupta) wanted records which are available to the Department and the Department is claiming exemption under Section 8(1)(h) of the RTI Act, the Commission noted.


The PIO also claimed that the cash book, balance-sheet and ledger of the establishment have not been presented before the department while Gupta said she was not aware about this.


Mr Gandhi, based on the available evidence and statements produced before the Commission, said, “It appears that the PIO’s contention that disclosing the records may lead to altering/modification of certain records which would impede the process of investigation. The Department claimed that the investigation into the issue of total liability of the appellant’s unit was still in the process of determination.”


While disposing the appeal, the Commission upheld the denial of information by the PIO under Section 8(1)(h) of the RTI Act.




Decision No. CIC/SG/A/2010/003234/10749

Appeal No. CIC/SG/A/2010/003234



Appellant                                            : Anita Gupta,

                                                            Hisar - 125005, Haryana


Respondent                                        : MS Arya

                                                            Public Information Officer/ RPFC-II,

                                                            Employees Provident Fund Organization,                                                                         Sub-regional Office, 1st and 2nd floor,

                                                            Ganga Palace complex, Subash Road,

                                                            Rohtak - 124001




4 years ago

Do Private Devaswoms come under RTI Act?

(Devaswom - administration of Property of God)

In Kerala Hindu temples are administered either by government Devaswom Boards or by private Devaswoms.

(Devaswom Board (Kerala Government) have supervisory power over private Devaswoms)

Nomura positive on Diageo-United Spirits deal

According to Nomura, one of the key triggers for Diageo in India will be a reduction in the import duty on imported scotch. One of the most immediate benefits for United Spirits’ shareholders is the potential capital infusion helping to reduce the debt and improve both the profit & loss and the balance sheet

United Spirits has received all regulatory approvals with respect to the stake sale to Diageo.  As previously announced, there are three phases of the deal. Importantly, there is no change to either the phased manner of the deal or the open offer for minority shareholders against what was previously announced. The stock has held up well despite news flow which has been sometimes concerning, according to Nomura Equity Research.
Nomura believes that although the deal closure has been delayed, it has been due to the more time that Diageo and United Spirits have had to wait for regulatory approvals. These approvals have had to come in from the relevant authorities such as the Securities and Exchange Board of India (SEBI), Competition Commission of India (CCI) and Reserve Bank of India (RBI).
Long-term structural story of premiumisation in an attractive underpenetrated category remains intact. Valuations at 25x FY15F P/E versus the sector average of around 24x is reasonable, in our view, given the strong earnings growth expected over the next couple of years. Nomura recommends buying in United Spirits at current levels, ahead of several catalysts that are coming up in FY14F.
With approvals from all the three authorities now in place, the company has finally received the go-ahead to launch its open offer to acquire further shares from minority shareholders. The open offer is scheduled to start from 10th April and shall close on 26 April 2013. The price for the open offer is Rs1,440 per share, in line with the previously announced price and, at the same level that Diageo is acquiring shares from the current promoters of the company. 
The foreign company made it clear that there was no case to increase the open offer price and that all the shares would be acquired at the same level as they pay to the existing promoters of the company. However, with the current share price at Rs1,797 (as of 8 April 2013), the brokerage believes Diageo is unlikely to get any shares tendered in the open offer.
According to the contours of the deal, UB Holdings and other promoters of United Sprits will offload 12.8% of their total holding. This stake would works out to 16.7 million shares at Rs1,440 per share and the total value of that would be Rs24.1 billion.
United Spirits has treasury shares totalling 6.5% which will be sold to Diageo. This money will flow through into United Spirits. This will essentially work out to aroundRs12 billion. Post this stake sale, the shareholding structure for United Spirits will be UB Holdings (+group/ other promoters) having around 14.9% stake and Diageo having 19.3%. Diageo would then be issued additional 10% (post-equity) stake in United Spirits. The total value to that would amount to Rs21 billion. This money will also flow into United Spirits.
The next step is for Diageo to make an open offer to minority shareholders and that would entail an investment of Rs54.4 billion (assuming 100% subscription at Rs1,440 per share). Post completion of this offer, Diageo will hold 53.4% of the enlarged share capital of United Spirits.
Nomura’s analyst spoke to the management of Diageo. The CEO of Diageo also stated that the company is always confident of making bolt-on deals work in emerging markets. However, it will not be pressured into paying up over the odds for any acquisition. This is also evident in the recent potential deal with the Jose Cuervo tequila brand, where Diageo walked away as valuations were not right.
The management added that over the longer-term, Diageo does not intend to own 100% of United Spirits.  It wants to have a local face for its business; however, the key thing is they do want to have a controlling interest in the longer-term. This is one of the primary criteria when they look at acquisitions.
The management stated that Diageo’s experience in other emerging markets where it has made acquisitions like Turkey will help it and lends confidence that the United Spirits acquisition will be positive over the medium-term. The CEO specifically cited as an example of Mey Icki in Turkey, where the company is a market leader in local spirit, Reki, but had a strong route to the market. Diageo was able to leverage this strength and drive its share of scotch higher over a year. Having a good route to market is a significant source of competitive advantage in emerging markets and Diageo will look to use United Spirits’ distribution to push through sales of its global brands.
According to Nomura, one of the key triggers for Diageo for its India business will be a reduction in the import duty on imported scotch. In the case of such an event, the company expects it to happen in a phased manner over 5-8 years. However, Diageo will want to have complete clarity on any such move before it invests or plans on getting its global brands into India at a faster clip.
Investor concerns on the Diageo-United Spirits deal
The short-term concern that the deal will not go through as United Spirits’ current promoters have pledged their shareholding to banks who, in turn, have been selling off the shares in the open market; and the longer-term concern is that Diageo being a majority stakeholder does not result in any significant improvement in profitability as is being built into the stock price currently.
However, Nomura has assessed both these concerns and believes that while the pace of operational improvement may be slower, there is enough room for Diageo to deliver a cleaner, leaner and more profitable company to shareholders over the next 3-5 years.
United Spirits’ shares which are held by the current promoters of the company have been pledged to banks as collateral for loans given to both Kingfisher Airlines and United Breweries Holdings. Nomura’s Banks Research team has worked extensively on understanding the nature of these pledges, and also who are the lenders who own most of these shares as collaterals. Nomura’s banks team expects smaller PSU banks to take a big haircut on their Kingfisher exposure (likely to be spread over the next two-three years through incremental provisions) in the absence of solid collaterals and difficulty in invoking corporate guarantees going by recent history.
According to Nomura Equity Research, one of the most immediate benefits for United Spirits’ shareholders is the potential capital infusion helping to reduce the debt and improve both the profit & loss and the balance sheet. As at the end of FY12, United Spirits had a debt of Rs75 billion on which the interest payments were Rs8.7 billion. The debt/equity stood at 1.6. The deal is expected to go through in 1QCY13, so benefits of this transaction will only flow through in FY14F.
Once the preferential allotment goes through, and new equity is infused into the company, we expect United Spirits will benefit to the tune of Rs33 billion, which Diageo has confirmed will go towards debt repayment. As a result of this change alone, interest repayment in FY14F will go down to Rs4.7 billion. The balance sheet will improve substantially with debt/equity improving from 1.6 in FY12 to 0.5 in FY14F, according to Nomura.
Nomura reiterates a ‘Buy’ rating on the stock and believes that United Spirits will be one of the best consumer stories over the next two years. It notes there are several catalysts which should keep the share price buoyant. Profitability improvement will be one of the key things to watch and Diageo should be able to deliver consistent improvement, post a year of investment in FY14F. “Our numbers already build-in a V-shaped recovery into FY15F. United Spirits currently trades at 25x FY15F P/E against the sector average of around 24x. We reiterate our long-term structural Buy case on United Spirits at these levels,” says Nomura. 


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