Watching the financial watchdogs

In India, we are plagued with a multiplicity of authorities and shadow boxing of regulators in the financial arena. There is an urgent need to place consumer protection at the heart of financial regulation with a stronger Financial Redressal Agency or mechanism

Now that our financial regulatory, legislative and administrative frameworks have failed the common Indian, it calls for immediate fundamental system overhaul. The multiple regulatory authorities have in no way curbed the menaces of money laundering, black money, insider trading, mis-selling of insurance, mutual fund products and chit funds that have turned cheat funds.

 

The numerous financial swindles have mostly harmed the lower income segment of society who is lured by promises of extremely unimaginable returns by agents whose commissions run as high as 40%. West Bengal-based Saradha and its associate chit funds has galloped people’s savings from other states like Assam, north-eastern states, Odisha, Bihar and Jharkhand. The ramifications of Sahara with much wider footprints are yet to turn up as so far it had simply ignored directions from the Supreme Court and Securities and Exchange Board of India (SEBI).

 

The sheer lack of regulatory oversight by any one or more of the high-level authorities has proven them toothless paper tigers. The regulators have failed as watchdogs, which can neither bark nor bite. This has necessitated the need for a more effective watch on the watchdogs.

 

That scams of such great magnitude running into thousands of crores of rupees are perpetrated under their very noses cannot go unnoticed. This occurs primarily because unscrupulous market players taking unfair advantage of the multiple orders from the Supreme Court and SEBI. Yet they cannot be touched as they know the regulators are operating in grey areas. This is exactly the situation the Saharas and Saradhas who have been very conveniently been exploiting with their schemes that were neither here nor there, regulated neither by Reserve Bank of India (RBI) nor SEBI nor Insurance Regulatory and Development Authority(IRDA) nor the State Governments. Sahara has been dragging its feet, buying time with impunity.

 

In India we are plagued with a multiplicity of authorities and regulators shadow boxing in the financial arena, with vast scope for regulatory arbitrage and not acting effectively in their mandate of protecting consumer interests. At the top of the pyramid in New Delhi are the Prime Minister’s Office (PMO), followed by the Ministries of Finance and Corporate Affairs. The Central Bureau of Investigation (CBI) reports to the PMO, the Central Board of Direct Taxes (CBDT) and Enforcement Directorate (ED) to the Ministry of Finance while the Special Frauds Investigation Office (SFIO) reports to the Ministry for Corporate Affairs. Next come the three Financial Regulators - RBI for the banking sector, SEBI for the capital markets both are Mumbai-based and the Hyderabad-based IRDA for the insurance sector. Each of them have their own file pushing babus duplicating investigations by stepping on each other’s toes, resulting in harming genuine consumer interests. Each of them jealously guards their turfs. Typically, it happened during investigations into the Satyam investigation where the local police station despite not knowing the ABC of the fraud wanted a piece of the action!

  

The Government of India, pursuant to the 2011 Budget announcement setup an Expert Group designated the Financial Sector Legislative Reforms Commission (FSLRC) with an extremely lofty mandate ostensibly,  “to re-study the regulatory requirements of banking, payments, public debt management, securities, insurance, pension funds and small savings and rewrite and harmonize the century old financial sector legislation by creating an umbrella Unified Financial Regulatory (UFRA) to oversee all the regulators – SEBI, RBI and IRDA as well as Forward Markets Commission (FMC) and Pension Fund Regulatory and Development Authority (PFRDA) to move from narrow sectoral regulation to a broader framework of rules and principles. To deal with all financial transactions, help regularizing economies of scale and scope, provide a common platform for organized financial trading in all kinds of financial instruments spanning equities, bonds, currencies and commodities.”

 

Presently, there are no effective regulations to effectively supervise financial entities masquerading as chit funds, mutual funds, insurance under undefined grey areas in the unorganised sector that commence operations merely by producing a registration certificate issued by either the Registrar of Firms or Companies. The confusions of jurisdiction of different agencies over products and services are galore.

 

At present efforts are on to keep RBI out of the purview of the UFRA.  The inter-regulator turf war spat in 2010 over the jurisdictional issues like unit linked insurance plan (ULIP) among RBI, SEB and IRDA makes it all the more imperative to mandate that the RBI is also brought in the loop. There are no convincing reasons to keep RBI out. Like its other counterparts, the RBI too has to share the blame for allowing matters to deteriorate.

 

The many transgressions and misdemeanours that are the fall out of unbridled growth of unorganized entities masquerading as non-banking financial companies (NBFCs) which are  cheating citizens of their hard earned savings. This is the result of throwing up of hands by the banking, markets and insurance regulator by trying to palm off the blame to the state governments who are expected to have their own laws.

 

West Bengal has a special Assembly session to get a new one. None of the state governments are equipped with the wherewithal and manpower qualified to audit or inspect the massive financial frauds. None of the Regulators have been able to prevent these unorganized entities from constantly hawking all kinds of finance, money and insurance products with fancy names, fabulous returns, incentives and commissions.

 

This is all the more reason when all the three of them viz. SEBI, IRDA and RBI have abjectly failed in discharging their sovereign duties of protecting the aam insaan calling for setting up a super watchdog like the UFRA to oversee their functions as proposed by the FSLRC.

 

The interests of millions of consumer deserve special attention as problems of moral hazard and incidence of white-collar economic offences are hitting the common citizens and there are no credible institutions that can be approached to address the consumers’ legitimate grievances concerns and award appropriate compensations.

 

Read SEBI vs Investors by Sucheta Dalal

 

Under the present dispensation, the FSLRC points out that action are initiated far too late when the entities whether commercial or co-operative banks or the NBFCs get into trouble. It recommends the setting up of a ‘Resolution Corporation’ a hybrid covering Deposit Insurance and Credit Guarantee Corporation (DICGC), which is an out dated slow active passive body.

 

This is a cash rich wholly owned subsidiary of the RBI sitting over premiums collected from all banks, disbursing hardly any sums and showing massive profits. The maximum cover of Rs1 lakh per capita of deposit it provides to depositors is grossly inadequate when compared with the scams and non-performing assets (NPA).

 

In its recommendations the FSLRC seems to disregarded some of the path breaking recommendations made by the Jagdish Kapoor Working Group on Deposit Insurance (2000). The working group had advocated differential deposit premium for banks in keeping with their respective risk profiles and providing teeth granting regulatory and supervisory powers to the DICGC in line with the US Federal Deposit Insurance Corp (FDIC) to trigger faster and prompt corrective action. There are disagreements on replicating the US Resolution Trust that was set up following the sub-prime crisis. There are two opinions whether the NBFCs should also be brought into the net.

 

In India today the NBFCs and co-operatives operating as banks function in opaque no-mans-land of dual-but-no control of state and central government legislations, this has been put an end to. There is an urgent need to place consumer protection at the heart of financial regulation with a stronger Financial Redressal Agency or mechanism that the FSLRC also recognizes.

 

(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)

Comments
ML MAHAJAN
9 years ago
Quoting from the report of FSLRC, Mr. Nagesh Kini has very assiduously made out a case for " watch on the watchdogs" and bring RBI within the purview of proposed UFRA, thus take away whatever little independence and autonomy RBI has today. Those who have such a view are well advised to read the volumes of "History of RBI and evolution" and I am sure, if they do so they would change their views having regard to the stupendous role played by RBI in and developing and strengthening the financial sector in our country. Unlike many other central banks, RBI is mandated to play a different role in our financial system and not only oversee the banking system alone. Its advice to the Government of day whether it may be management of public debt, foreign exchange, currency and any other issue germane to financial sector, has been fair and independent. Central Banks are supposed to be autonomous and independent and those who seek to clip their wings, may have to knock at the door of courts to free the RBI from the clutches of the Government as Supreme Court is doing today to free the CBI from the political masters.

Manohar Mahajan
nagesh kini
Replied to ML MAHAJAN comment 9 years ago
While appreciating all that has been done by the RBI, some of its recent actions like proposing to do away totally with cheques, laundering of black money, KYC gaffes makes one wonder whether there is anyone there really applying the mind! I don't need to go into the history or geography.
My only wish is that the watch dog has not only to bark but also bite when the time comes. This is where our Regulators have sadly failed.
Vinay Joshi
Replied to nagesh kini comment 9 years ago
Dear Mr.Nagesh Anna,

Do you know Russell's paradox?

In a village there is a barber who shaves only those who does not shave themselves. Who will shave the barber?! [this was used by him to solve a complex maths problem.]

You know M.P Chitale & Co; Chartered Accountants, you have audited banks, you appreciate RBI.

You never commented on my FSLRC post[s] earlier.

I've pointed it out to you that regulation is now a concern 'key focus' around the world due to globalization. I've also pointed out to you that Greg Medcraft has concerns as he is heading the Int'l organization.

WHY can't you state that coz of RBI, India was 'INSULATED' from the 2008 crisis.

You have not even commented on my post of RBI annual rate policy.

What do you intent to say?

- cheques proposed. So?

- which laundering of money are you talking? RBI is acting, taken stern steps [which you may not know to inspect the lockers.]

- If you can't understand the history & geography of RBI, coming out from a respected professional like you, what should commoners do?

Why don't you put up RBI's failures in perspective, CRYPTIC COMMENTS, of no use desired from a professional like you.

Instead of RBI, why can't you talk on ICAI?

What are they doing? They do not bark/bite JUST go to sleep putting their thumb impression. HMV!

Answer if you have answers to substantiate.

Regards,



Vinay Joshi
9 years ago
Hello Mr.Nagesh Anna,

As of now I’ve extensively written on FSLRC, you never commented.

Your post, please answer what ICAI MEMBERS DO & ARE SUPPOSED TO DO?

Why common man, persons have to suffer ?

No financial regulatory, legislative & or administrative aspects fail, they are made to fail & non implementation.

Why ICAI members failed to highlight Satyam saga, Global Trust etc & many more & all.

Why Vinod Rai, can take on & expose not being an ICAI member?

You use wrong noun or verb if intended as in ‘galloped’ – to state savings galloped.

In respect of Sahara, not a scam FYI, find it out for yourself what it is.

All things are perpetrated by the rich & powerful, supported by the watchdog.

During Harshad Mehta what audit firms did? Primarily RBI audit.

Well we Indians only have a mindset that regulators should be looking over every individual shoulder!

In the aftermath of the biggest financial crisis since the Great Depression, regulation of the financial markets has been the key focus for policymakers around the world.

I’m sure you’ve not heard Bill Gates & Bill Clinton on Peterson summit on fiscal defecit.

Neither would you know the concern of Greg Medcraft, Chairman, International Organization of Securities Commissions, [also CM Australian Sec.Invst.Commn, former investment banker],

How regulation is shaping up to deal with rise of innovation in financial products.

In India ‘buyer beware’ to ‘seller beware’, is eventually evolving. Product structure is being examined, appropriate aspects are framed.

In Australia there was a complex product – a leveraged derivative called ‘contract for difference’. Many investors lost their money. Nothing could be done.

Now operators don’t allow investors to open an account unless they have completed the learning module. So transparency in understating the risk.

Luckily in 2008 crisis India was insulated coz of ONLY RBI! Dr. D Subbarao furthered the measures to delink, else a crisis could crash the monetary system as in Cyprus [miniscule tho’] majorly US but they had the wherewithal to bail it out.]

The central bank can’t be out of the regulatory ambit rather it ensures structural change & market based financing.

In emerging market economies the regulator has also to keep pace with advance technologies just like now SEBI wants lo-co for retail investors. Globalization has to be seen in perspective.

Creative people & conmen always find ways of making money.

The key to good regulation is always to stay ahead of innovation & keep pace with the same.

It is critical to have right people & politicians integrity.

FSLRC is the stepping stone. Chit & cheat funds only manifest coz of corrupt politicians & those certifying the accounts.

Regards,




Dayananda Kamath k
Replied to Vinay Joshi comment 9 years ago
since 2005 i was raising questions in agm of a listed nationalised bank about authenticity and fairness of the balance sheet as well as changing of the previous years balance sheet figure in this years balance sheet. the banks system did not have provision for calculating simple interest where for staff housing loans, education loans and crop loans and they were overcharging interest and refunding to only those who claim back the branches are under various audits then is it not the duty of auditors to calculate the exact excess charged or at least give a foot note about the same. further the previous years figures changed without any explanation which will give a better comparative figure in this balance sheet, is a miss reporting from the point of public ,investors,and share holders. in 2008 i complained to the icai against the statutory auditors of the bank. but they did not initiate any action for long every year i used to show them how the figures are being changed. in 2010 i received a letter that for initiating disciplinary proceedings as per the amendments i have to pay rs. 2500/- per auditor. i informed them that my complaint is against all the auditors who are auditing the banks. what is the amount to be paid then they started disciplinary proceedings for my complaint dated before the amendment to rules. this i came to know because they asked me to provide copies of both the years balance sheets. which are actually available in public domain. but i did not heard any thing about that. this is how they protect themselves.
Vinay Joshi
Replied to Dayananda Kamath k comment 9 years ago
Dear Mr. Dayananda Kamath K,

As a matter of fact Mr. Nagesh Kini, FCA, should have addressed you as he has professed [earlier, year back may be] to be an expert on bank audits. Instead he chose to answer Mr.ML Mahajan neither my post to him .

His original write up a summary or extracts of certain info available in public domain.

Mr. Dayananda, you have the option of filing RTI, as well approach FinMin & with filling the application in RS as per format. [no MP needs to endorse it], thereafter legal option.

Anyway i'm putting up a glaring example, expect ML, [Debashis Basu, ICAI member] to answer it.

Pawan Kumar Bansal's CA, Mr.Sunil Kumar Gupta, of S.Kumar Associates, Chartered Accountants, has blatantly violated the 'ethics', 'the morals', the solemn pledge.

Is ICAI not a watch dog? first & foremost apart from other regulators.

ICAI had the tenacity to struck off the member on rolls - SIMPLE reason 'moral turpitude', - The case pertains to bigamy!?

Anyway coming to S.K Gupta, as an ICAI member [w/o banking experience] was non exe. Dir & thereafter independent director [shareholders rep.] on the Board of Canara Bank.

A practicing CA has not informed ICAI about his position, ultra vires. Be it so.

He further sanctions loans worth crores to the group co's, not eligible, w/o collateral that too at a meagre 3% interest p.a.

He further continues to audit the group co's.

ICAI should answer 'moral turpitude', bigamy v. rampant corruption.This is not isolated case.

When ICAI Prez was mired in land corruption THAT TOO swindling ICAI money what can be expected of a 'watchdog'?

Regards,

Vinay Joshi
Replied to Vinay Joshi comment 9 years ago
Further, a motion will be there in ICAI council re this episode.

Rgds,
NSriramamurty
Replied to Vinay Joshi comment 9 years ago
In Addition to Satyam,GTB-we may add Mr.Vijay SAI Reddy ,CA of Mr.Jagan Mohan Reddy,whom CBI id investigating a Lakh Crore Quid Pro Quo case.SC rejected CA's Bail alredy granted by HC as CBI told that CA is changing Witnesses Minds and ensuring non-receipt of information Required by CBI from Abroad.Allmost all CAs help Companies How to Misutilise existig Contradiction/Loopholes in Various Acts and Rules ,but ICAI encourages their Professionals and Never take Disciplinary Actions finding out Erring CAs.As Politicians also get Benefitted by CAs,they do not allow any Competetion in AUDITs by Other Professionals in whole India.Requires Immence Change.
Vinay Joshi
Replied to NSriramamurty comment 9 years ago
Mr.N Sriramamurthy,

Neither Mr.Nagesh Kini [so called associated ACTIVIST with ML]& Mr.Debashis Basu [ML founder] both ICAI members have not commented.

Soma Bagaria, legal attorney - tax had commented on March 1, @ 16:00 hrs, write up in ML, re sec 5 IT [TRC], absolutely unaware about Feb 28th press conference of FM & overnight ntfn. by CBDT. Having pointed it out no answer from her.

In the same write up i had pointed out Vodafone case [March 1] reconciliation.

Tax advise gone wrong, tax experts failed to fix the situation, Vodafone had spent 100's of crores in int'l & domestic professional advice.

Vodafone had spent knowingly that if not, they will have to pay.
[unknown amounts paid to politicians.]

WILL THEY RECOVER THE AMOUNTS FROM THEIR SO CALLED TAXATION/LEGAL/PROFESSIONAL ADVISERS?

ICAI can take action against a member for 'BIGAMY', strike him off the rolls, 'NOT A PROFESSIONAL MISCONDUCT' interfering in 'personal life' of a member. [Madras HC has upheld the decision].

As far as ICAI 'moral turpitude', does not breach 'CORRUPTION', or ethics, so the ICAI President goes scott free in 100CR Nagpur land deal. Whose BLESSINGS HE HAD?

As of now supposedly 'CBI', was doing its job.

There's a SMS doing round in Delhi - 'CPAPVP' - ruling Delhi.[Cong.Prez, Ahmed Patel, Cong VP].

Regards,


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