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.