2

SPECIAL FEATURE:
An Interview with
Mr. Gajendra Kothari,
MD and CEO,
Etica Wealth Management
Infrastructure
Financing
By Mr. Vishal Bhambhani,
Alumni SIMSREE
Banking Licenses
for the NBFCs: A
Necessary Evil?
By Hitesh Rohira,
SIMSREE
Financial Sector
Legislative Reforms
Commission
By SIMSREE FINANCE
FORUM
With the passing of Banking Laws (Amendment) Bill, the
RBI has got the power to issue new banking licenses in
order to encourage financial inclusion as well as allow for
more penetration of banking services to the public. This
move is seen as a game changer in the banking sector
with Indias largest business houses as well as NBFCs set
to apply for new licenses. But, along with this
development comes a greater responsibility for RBI to
check the credibility and usage of funds by license
nominees in order to regulate the function of new banks
so that they do not deploy funds to risky assets or for
personal business interests.
Another important topic covered in this issue is
Infrastructure Financing. Infrastructure creation is seen
as one of the main growth drivers in times of slump in
growth and financing is the way with the help of which
we can create better infrastructure and hence contribute
better for the prosperity of our developing economy.
In this issue, we have an article on Infrastructure
Financing by Mr. Vishal Bhambhani, who is an Associate
at Infrastructure Solutions Group at Centrum Capital Ltd.
and our illustrious alumni. Also, as part of our forum
activity we have an article on Banking Licenses for
NBFCs: A necessary evil? written by Hitesh Rohira from
SIMSREE. Finally we have an article from our team on
Financial Sector Legislative Reforms Commission(FSLRC).
Happy Reading!

EDITORIAL

3





1. What are the general roles of wealth
management industry and what is your
take on the current wealth management
industry?
Ans. Wealth management industry is a tiny
industry currently in India. It has not
expanded to the scale to which it has grown
in the developed markets. People generally
have small savings with them and they like
to invest in gold. People also invest in real
estate properties but that is limited to a
very small percentage of people .Wealth
management awareness exists amongst
such small percentage of people. People
also use LIC schemes for tax savings but
people think that they are a kind of forced
savings as they view LIC policies as a source
to save their tax. Gradually after
liberalization, foreign banks have entered
India bringing in their best practices. Public
Sector Banks (PSB) initially used to have
only a single point of contact like the
manager for any queries regarding the
investments that people have to make. But
now with the advent of technology and
rapid growth in the economy and with the
increase in the income levels of the people
,banks now have multiple desks in their
branches for the different types of savings
account they need to have. Agents are also
responsible for the spreading awareness
amongst the people regarding their savings
and investments. Industry in recent times
has become a lot more complex and
dynamic. Previously one was able to
guarantee a fixed percentage of return on
the investments made but no more is the
same scenario. One cannot guarantee a
fixed percentage of return .Indian industry
is a sunrise industry with a tremendous
potential for growth to tap large untapped
markets.

Interview: Mr. Gajendra
Kothari,
CEO and MD, Etica Wealth
Management

4

2. What is your take on the Financial
awareness amongst the people in the tier2
and lower tier cities and how do you think
financial awareness could be spread?
Ans. Only around 10 % people are
financially literate in the tier2 and lower tier
cities and around 30-35 % people are
financially literate in metros like Mumbai,
so a lot more needs to be done in order to
increase awareness amongst the people.
Even in a metro like Mumbai which is the
financial hub of India, a lot more potential is
there for the growth of wealth
management industry because of the lack
of financial literacy amongst the people.
The other difference between the people in
the metros and the smaller cities is that the
people in the metro dont have time which
they can spend to make themselves learn
the basics of financial investment while the
people in the smaller towns and cities do
get time to learn these basics more thing
that can be done is to teach normal
economic terms in an engaging manner in
the schools to spread awareness amongst


people regarding their savings and
investments.
3. Can agents be used to spread awareness
about financial planning?
Ans. The agents can be thought to be a full
fledged advisors rather than just Life
insurance agents as it will help to spread
the financial awareness more quickly and
easily and also broaden their thinking .RBI is
also using retired bankers and teachers to
spread financial awareness which is a very
good initiative.
4. What is the time horizon for investing in
mutual funds?
Ans. First of all a mutual fund should not be
bought randomly just for the sake of
making quick money. Some basic things
which they need to keep in mind before
investing is that they need to know for what
they are investing, how much money they
are investing, what is their financial goal for
which they are investing, what is the time
period over which they would like to get the
desired return. They need to keep in mind
the financial goal they have and the not

5

kind of returns that they will get in short
term.
5. How to woo investors to save money in
Mutual Funds?
Ans. One can show them a comparative
analysis about the performance of various
mutual fund providers and the rate of
return that they get over a period. They
need be taught that if one puts money in
saving schemes and if inflation is more than
savings rate then there is no point in
putting money in savings scheme.
6. Why dont people invest in real estate?
Ans. The main reason is the huge sum of
money required to but a property which
majority of the people cant afford.
7. How to bring money into the equity
market rather than gold?
Ans. To create a separate vehicle for
equities because if money flows into equity
then it is the main source of financing for
many industries which plays a part in the
development of an economy .People can be
wooed by providing tax benefits on the
money they put into equities .Gold is an

illiquid asset which doesnt pump in the
money into the economy.
8. What is your take on the Rajiv Gandhi
mutual Fund scheme?
Ans. It is a good initiative but gain too many
complexities will hamper the scheme. It is a
separate scheme where one can save
additional 50000 rupees apart from 1 lakh
rupees under 80C.But again the major
drawback is that only new investors are
allowed who havent yet opened any demat
account so the scope of existing investors
investing is closed down.
9. Why are the ETF schemes not working?
Ans. They are very specialized schemes.
People in general arent aware of the plain
vanilla products being offered so the scope
of development of ETF schemes
automatically reduces .Majority of the
people do not have demat accounts which
is pre-requisite for ETFs.Unlike ETfs gold
and FDs are very easy to understand
products which even a layman can
understand and invest in.


6

10. What is your take on budget w.r.t.
investments?
Ans. No changes as such have been made in
this budget to make the investments
lucrative.
































One more important thing
that people need to remember
is that Insurance and savings
should be considered two
separate things because
Insurance should be taken
solely by perspective of
insuring ones life so that the
family also gets financially
covered

FIN-QUIZ
1. A US denominated bond that
is publicly issued in US
2. Foreign exchange contracts
which provide for settlement
on the 1st working day after
the contract day
3. In what denominations can a
commercial paper be issued
in India
4. Which sister organization of
the World Bank helps private
activity in developing
countries by financing
projects with long-term
capital in the form of equity
and loans?
5. New industries that are
coming up and which are
going to play an important
role in the countrys economy
December Issue Answers:
1. Luca Pacioli
2. "Big Board" or "The Exchange"
3. zero
4. Economy
5. Tarini Vaidya of KBC Bank
India & South Asia



7



- By Mr. Vishal Bhambhani, Alumni
Infrastructure an asset class comprises of:
Power generation, transmission &
distribution
Development of Roads, bridges,
runways
Airport and seaport development
Railway tracks, signaling system,
stations
Telephone lines, telecommunications
network
Pipelines for water, crude oil, slurry,
waterways
Canal networks for irrigation, sanitation
or sewerage
Out of the above, power, roads, seaports &
airports form a major chunk of required
/envisaged investment (public and private)
w.r.t physical infrastructure development.





As an investment asset class,
infrastructure has the following:
Basic Characteristics:
Building infrastructure is a capital-
intensive process, with large initial costs
and low operating costs.
It requires long term finance as the
gestation period is often much longer than
say a manufacturing plant
These projects are characterized by
non-recourse or limited-recourse financing;
i.e. lenders can only be repaid from the
revenues generated from the project
Market and commercial risks related to
uncertainty of demand (traffic) forecasts
are of greater importance
Have unique risks of public interest
nature of most projects and interface with
regulators and Govt. agencies

Infrastructure Financing
- India

8

In some cases, projects have significant
externalities wherein the social returns
exceed the private returns which in
turn calls for some form of subsidization like
Viability Gap Funding, Govt. guarantees,
grants, etc
Funding of an infrastructure project takes
place with an objective of:
Financing a single purpose capital asset
within a Legally independent project
company (SPV) usually with a limited life
Structure of Infra financing:(Diagram on
next page)
Project Financing is an option granted by
the financier- exercisable when an entity
demonstrates that it can generate cash
flows in accordance with long term
forecasts. The assets, rights and interests of
the development are usually structured into
a special purpose vehicle (SPV) and are
legally secured to the financiers as
collateral. A typical example of
arrangements made by a SPV of an
infrastructure project is shown below:

Developer/Promoters perspective
(Shareholders): To maximize ROE and
minimize the payback period of the equity
investment.
Lenders perspective: Financial viable
project with scheduled repayment(s) of
loan and visibility of future cash flows with
maximum certainty
Authoritys perspective: Timely
implementation of the project with
maximum utility to the users of the
infrastructure at minimum cost to the ex-
chequer.
Purchaser/Customers perspective:
Availability of better quality infrastructure
at affordable cost.
The satisfactory combination of the above 4
stakeholders leads to a somewhat
practically unattainable solution but has to
be dealt with in a non-orthodox way by
safeguarding each stakeholders interests
which calls for usage of innovative financial
products or in simple terms Financial
Engineering

9

Infrastructure Finance Indian scenario:
India is among the top 3 fastest growing
economies in the world; however, the GDP
growth is constrained by lack of
infrastructure development in the country
which is evident from the fact that:
(Source: World Economic Forums Global Competitiveness Index)
India ranks 91
st
in the world in availability of
overall quality of infrastructure.
India's logistic cost as a percentage of
the GDP is unusually high - double that of
developed countries and substantially
higher than BRIC countries


India's over dependence on road freight
means that logistic cost as a percentage of
GDP is as high as 13%-14% compared to
7%-8% in developed countries and 9%-10%
in other BRIC countries
Indias industries suffer from chronic power

cuts; exports are delayed because of poor
roads and congested ports. Office-goers
spend hours stuck in traffic; villagers get
electricity for only 6 to 8 hours a day.
Economists estimate that ~ 2 % of GDP is
lost owing to poor infrastructure.


10

Considering all of the above:
Indias growing economy is placing huge
demands on development of critical
infrastructure power, roads, railways,
ports, transportation systems, and water
supply and sanitation
If steps are taken in right direction, it
will put the ball rolling for even higher GDP
growth and a more prosperous economy in
the near future (5-7 years)
This subsequently would lead to higher
demand of capital to fund these projects
While the government has raised its
investments in infrastructure, the
investment gap remains daunting with an
estimated $1 trillion required to meet the
countrys resource needs over the next five
years. Investment in infrastructure has
made significant strides, from 5 % of GDP a
decade ago to a projected 10 % of GDP
during the Twelfth Plan (2012-2017) As
seen above, financing of this type of
investment in infrastructure would require
large outlay from the private sector


Private investment avenues: Funding
avenues for projects comprise of
commercial banks, NBFCs, Insurance Cos,
ECBs, Equity (including FDI), Debt Funds,
private equity, ECBs, etc.
However, structural and regulatory barriers
that impede the flow of domestic capital
into infrastructure are:
Asset Liability mismatch and exposure
limits of banks
High pre-emption of funds from the
banking system
Investment restrictions on long-term
savings mobilizers namely Insurance cos,
pension & provident funds
The shallowness of Indias corporate
bond market
Constrained supply of ECBs
Takeout financing offers a window to
the banks to free their balance sheet from
exposure to infrastructure loans, lend to
new projects and also enable better


11

management of the asset liability position.
However the mechanism has not really
emerged as a game-changer as it does not
envisage equitable distribution of risks and
benefits.
Financiers will now need to take on this
new challenge of how to structure their
business model(s) to build a high-return
business in financing infrastructure
projects. Infrastructure projects need many
financial products and services beyond debt
and equity capital
What can be done to boost availability of
capital?
The bank-dominated financial system has
been able to step up and meet the needs of
the first wave of private investment in
infrastructure. Going forward, the
magnitude of required infrastructure
funding is huge and shall require the
following:
Making the Infrastructure Project(s)
Commercially Viable



This is the first and foremost thing to be
done for financing infrastructure in a
sustainable manner. This will lead to
sustainable development of infrastructure
without jeopardizing the soundness of the
financial sector. Project appraisal and
follow-up capabilities of many banks,
particularly public sector banks, also need
focused attention and upgradation so that
project viability can be properly evaluated
and risk mitigants are provided where
needed.
Greater Participation of State
Governments
In a federal country like India, participation
and support of the State governments is
essential for developing high quality
infrastructure. Thus greater participation
from states is the call now. This would lead
to progress of states along with the country.
Improving efficiency of the Corporate
Bond Market
The bond market is not that vibrant now.



12

A vibrant corporate bond market will
reduce the dependence on the banking
sector for funds. It is important to broad
base the investor base by bringing in new
classes of institutional investors (like
insurance companies, pension funds,
provident funds, etc.) apart from banks into
this market. As of now, the insurance and
pension funds are legally required to invest
a substantial proportion of their funds in
Government Securities. These investment
requirements limit their ability to invest in
infrastructure bonds. Further, they can only
invest in a blue chip stock, which is also
acting as a limiting factor since most of the
SPVs created for infrastructure funding are
unlisted entities.

Credit Enhancement
One of the major obstacles in attracting
foreign debt capital for infrastructure is the
sovereign credit rating ceiling. Domestic
investors are also inhibited due to high level
of credit risk perception, particularly in the
absence of sound bankruptcy framework. A
credit enhancement mechanism can
possibly bridge the rating cap between the
investment norms, risk perceptions and
actual ratings.
Simplification of Procedures Enabling
Single Window Clearance
It is well recognized that while funding is
the major problem for infrastructure
financing, there are other issues which
aggravate the problems of raising funds.
These include legal disputes regarding land
acquisition, delay in getting other
clearances (leading to time and cost
overruns) and linkages (e.g. coal, power,
water, etc.) among others. It is felt that in
respect of mega-projects, beyond certain
cut-off point, single window clearance
approach could cut down the
implementation period. Moreover, we also

13

need to develop new financial markets for
municipal bonds to enable infrastructure
financing at the grass root levels. We need
to create depth, liquidity and vibrancy in
the G-Sec and corporate bond market so as
to enable rising of finance and reduce
dependence on the banking system. At the
same time, there is a need to widen our
investor base and offer adequate risk
mitigating financial products, such as, Credit
Default Swaps (CDS). A vibrant G-Sec
market would facilitate growth of the
corporate debt market thereby enabling
fund flow through alternate means apart
from banks
Way Forward:
Once we solve the peripheral but critical
issues with regards to financing, it will
greatly facilitate flow of funds to the
projects and help in maintaining asset
quality to the comfort of the lenders and
other stakeholders. Accelerated
infrastructure investments will not only de-
bottleneck the system, it will also create its
own demand. There cant be a better


example than China, which has built
infrastructure at a spectacular pace. As a
resultsince the Eightiesit has seen
double digit growth and defied the boom
bust theory of economic cycles.















Solving the critical issues with
regards to financing will
greatly facilitate flow of funds
to the projects and help in
maintaining asset quality to
the comfort of the lenders and
other stakeholders.
Accelerated infrastructure
investments will not only de-
bottleneck the system, it will
also create its own demand.


14


- By Hitesh Rohira SIMSREE
Introduction
Banking industry is the backbone of any
economy and hence has always attracted
the attention of policy makers, industrialists
as well as of academicians. It acts a catalyst
to build the economy. Historically, banking
industry in India has been dominated by a
handful of industrialist, who exploited it for
their personal benefits. Post independence
Government has tried to increase the reach
of banks through measures like
nationalization initially and later on through
liberalization but unfortunately banking
industry has remained concentrated only in
urban areas leaving poor people outside the
system. More than 40% of Indian
population does not have access to the
banking system. So there was a need to
consider issuing new banking licenses for
NBFCs and corporate houses. Will it be
really beneficial without any side-effects or
its a necessary evil which is being
implemented even after knowing the side
effects? This question has delayed the final



decision and implementation up till 2013
after the idea was conceived in 2010.
Need and Initial Steps
A large part of the sector is government-
owned since most major banks were
nationalized in 1969. But a significant jump
in coverage means large investments and
the government doesn't have the money.
Already the investments in infrastructure
planned for 12th 5yr plan would be a big
task as it would call for raising the spending
on infrastructure to 7-8 per cent of GDP
from the present level of 2-3 per cent. But
financial inclusion and competitive banking
are also important. Hence they considered
opening up the banking system for
industrial houses and NBFCs and go for new
banking licenses after last issued license of
Yes Bank (2004).
UPA government in its election manifesto
has promised to increase the pace of
financial inclusion and since then has taken
measures like Unique Identification Number
Banking Licenses for the
NBFCs: A Necessary Evil?

15

(UID) initiative, which would do away with
the hassles of KYC (Know Your Customers)
norms. The RBI's major objection was that it
didn't have enough powers to regulate the
new banks. The agency could remove an
errant director, but if an entire bank board
connived in a fraud, it was helpless. But, the
Banking Laws (Amendment) Bill, which gives
the RBI more power, has been cleared by
the Lok Sabha in December 2012, as a part
of the government's new reforms package
which has arrived with 2014 elections in
mind. RBI has also taken a crucial step to
achieve this objective. It intends to provide
an opportunity to not only the NBFCs but
also, for very first time to the industrial
houses to participate in financial inclusion
by expanding banking net to the lower
strata of our society.
RBI has been extremely cautious, taking
more than 2 years in carving out the
guidelines and making corrections,
clarifications which would provide
directions for selection or rejection of a
particular private player for assigning
banking license.

Major considerations for Allowing/
Disallowing Industry houses to run banking
services are:
Advantages:
Faster-Processing: As per a research
loans sanctioned to the existing customers,
vendors, dealers-distributors of the
industrial unit are processed 40-45% times
faster than those done by the banks due to
quicker due-diligence of the clients through
already available data.
Knowledge-Transfer: The existing
industrial houses can also extend the
management expertise and strategic
direction of their existing NBFC experience
to the affiliated banks.
Financial Inclusion: The compulsion of
having certain percent of branches in
unbanked rural areas would serve for
betterment of Rural India and help in
Financial Inclusion and thus contribute to
the economy more effectively.
Competitive Financial Services Sector:
This would improve the quality of financial
services as there would be more

16

competition among the new and old
players. Also this would increase
employment and reduce costs of service to
some extent.
Disadvantages:
Self Dealing: Self-dealing means that
the parent industrial company that set up
the bank can route funds to its own
purposes not considering the depositors
interests. There exists a possibility that a
bank affiliated to a commercial firm may
deny loans to its competitors.
Connected Lending: Also, the risk of
connected lending to companies or
suppliers within the group cannot be ruled
out. Such rotation of funds among related
parties can make it difficult for the
regulator to trace the sources and
utilization of funds.
Conflict of Interest: The industrial houses
might take undue advantage to maximize
their profits while selling various
instruments, especially when they are
catering to uneducated people from rural
areas.

Cautious implementation amidst mixed
reaction:
According to the joint IMF-World Bank
Financial Stability Assessment Program
(FSAP) for India, the risks in the current
context for new bank licenses may
outweigh the benefits. On the other hand,
Boston Consulting Group expects Indian
Banking Sector to be third largest i.e. only
next to US and Japan by 2025 with such
reforms. Also market sentiments show
positive response.
RBI policy on banks acknowledges these
risks and aims to address them through
several prudent means with NOHC being an
important one of them. It has already
opened application for licenses which has
to be done before 1
st
July 2013 and the
applicants would be listed on RBIs website
for transparency. Applications will be
screened by RBI and referred to a high level
advisory committee. Tata, Birla, Reliance
and Mahindra Groups might be the big
conglomerates who would want a piece of
action. Others include L&T, SKS
Microfinance, LIC and IDFC.

17

The following are the major guidelines
issued by RBI (as quoted since August 2011
to March 2013) for new banking licenses
followed by the rationale for each:
It is proposed that the initial minimum
paid-up capital for a new bank shall be Rs
500 crore and that a wholly-owned non-
operative holding company (NOHC) will
hold the existing businesses and the newly
created bank within itself. Only the non-
financial companies can have a
shareholding in the NOHC. The NOFHC and
the bank shall not have any exposure to the
Promoter Group. The bank shall not invest
in the equity / debt capital instruments of
any financial entities held by the NOFHC.
The minimum capital requirement of 500
crore is laid down such that the capital
requirement is not significantly high or not
meager. A very low minimum capital
requirement (of 200 crore) could attract
non-serious entities without inadequate
financial resources to seek for licenses. In
such small scale entities, operational
inefficiencies may exist as they cannot take
advantage of economies of scale. Further,

there is always a risk of an early wiping off
of the initial capital. Such small scale banks
would also not be able to invest in
technology. While a low minimum capital
requirement has these disadvantages, a
very high minimum cap requirement (say
1000 crore) would evince only those with
high funds. Such entities would be profit
oriented and could divert funds to big-ticket
corporate thereby diluting the purpose of
financial inclusion. Thus the requirement of
high enough entry capital can be fulfilled
only by entities with large surplus of funds
that are readily available with the industrial
houses. It could also act as contingent
capital for banks in case of financial shocks.
The creation of an NOHC would enable in
separating the activities of each of the
subsidiary companies from another and
help in greater regulation by separate
regulators in each of the segmented
spheres. The NOHC will only act as a vehicle
to hold the investments on behalf of the
promoter/promoter group and will not be
allowed to accept deposits. NOFHC should
hold a minimum of 40 per cent of the equity
capital of the bank with a lock-in period

18

of five years. Later, it has to be brought
down to 15 percent within 12 year from
that onwards. Further, 50 per cent of
directors (increased to a majority in some
cases) must be independent of the
promoter; and the bank, group entities,
non-operating holding company, and the
promoter would be subject to RBIs
consolidated supervision.
Excepting promoters/promoter groups
that generate more than 10% of revenues or
have 10% of assets in real estate or broking
services, all private sector players are
eligible to promote banks. The exposure of
the bank to any entity in the promoter
group shall not exceed 10 per cent and the
aggregate exposure to all the entities in the
group shall not exceed 20 per cent of the
paid-up capital and reserves of the bank.
A clear NO to the businesses in broking
services which comes as lessons from
international experience was also suggested
by RBI in 2011 owing to the recent financial
crises. However, after consultation with the
finance ministry, RBI removed this
condition in 2013 in the final guidelines

released recently. It also allowed public
sector entities to apply for the license. But
winning a license may be tougher for
broking and real estate companies as the
central bank has stipulated that bank
promoters business culture should not be
misaligned with the banking model.
Groups with diversified ownership,
sound credentials and integrity that have a
successful track record for at least 10 years
shall be eligible to promote banks and RBI
may seek feedback on applicants from
other regulators and agencies like Income
Tax, CBI, Enforcement Directorate, etc.
This rule out the first-generation
entrepreneurs setting up a new bank. Also
this would ensure that only financially
strong companies or groups go for new
banks.
The newly formed banks must have 25 %
of their branches in unbanked rural areas.
The banking regulator put a stricter
condition of having 25% of its branches in
unbanked rural areas with population up to
9,999. Many believe, for a new banking

19

entity, it will be stumbling block as the brick
and mortar model especially in rural areas
take time to turn profitable. In line with
existing domestic norms, the new bank
should also achieve priority sector lending
target of 40%. Interestingly, most of the
existing banks are failing to meet the target.
But, this is to ensure financial inclusion
which is the most important criteria for
evaluating the applicants for licenses
according to Governor of RBI.
Other important guidelines:
- New banks to get listed within 3 years of
business.
- FDI is capped at 49% for the first five years
after which it can extend as per policy
norms.
Conclusion
With the advantages and disadvantages
known, acknowledging them RBI is taking
cautious steps in issuing new bank licenses
with prudent guidelines. So the net effect
will mostly be positive. It will infuse greater
competition and thus efficiency in the
sector and perhaps a little volatility. But it

would help in achieving financial inclusion
in the long term.
References:
1. www.rbi.org.in/
2. www.moneycontrol.com
3. www.bseindia.com
4. www.economictimes.indiatimes.co
m/
5. www.financialexpress.com
6. http://knowledge.wharton.upenn.e
du/india/
7. http://www.business-
standard.com/article/finance/nod-
to-realtors-and-brokerages-if-fit-
and-proper-chakrabarty-
113022600275_1.html
8. http://www.thehindubusinessline.c
om/industry-and-
economy/banking/new-bank-
licences-risks-outweigh-benefits-in-
current-context/article4313334.ece
9. http://www.livemint.com



20



- By SIMSREE Finance Forum
The Financial Sector Legislative Reforms
Commission was setup post the
announcement by Hon. Pranab Mukharjee
during the 2011-12 budget. It was setup to
help rewriting and harmonizing of the
financial sector legislation, rules and
regulations so as to address the immediate
and future requirements of the sector. The
Commission was chaired by Supreme Court
Justice (Retired) B. N. Srikrishna, and had
ten members with expertise in the fields of
finance, economics, law and other relevant
fields.
It published its report and has
recommended a series of changes in the
entire financial; regulatory and legislative;
setup. According to the report: The setting
up of the Commission was the result of a
felt need that the legal and institutional
structures of the financial sector in India
need to be reviewed and recast in tune with





the contemporary requirements of the
sector. Over the years, as the economy and
the financial system have grown in size and
sophistication, an increasing gap has come
about between the requirements of the
country and the present legal and
regulatory arrangements. Unintended
consequences include regulatory gaps,
overlaps, inconsistencies and regulatory
arbitrage. The fragmented regulatory
architecture has led to a loss of scale and
scope that could be available from a
seamless financial market with all its
attendant benefits of minimizing the
intermediation cost. The remit of the
Commission is to comprehensively review
and redraft the legislations governing
Indias financial system, in order to evolve a
common set of principles for governance of
financial sector regulatory institutions.


Financial Sector Legislative
Reforms Commission


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At present the financial market is regulated
by RBI, SEBI, IRDA, PFRDA and FMC which
have evolved over the years. The present
arrangement has gaps for which no
regulator is in charge such as the diverse
kinds of ponzi schemes that periodically
surface in India, which are not regulated by
any of the existing agencies. It also contains
overlaps where conflicts between
regulators have consumed the energy of
top economic policy makers and held back
market development. This causes a great
deal of difficulty in getting issues resolved
and the solutions to problem get prolonged.
Various examples are present for instance,
ULIP scheme, the aggrieved consumer was
being subjected under the jurisdiction turfs
between SEBI and IRDA. This kind of egoistic
tendency would be eliminated if a common
grievance redressal system is erected.


When a regulator focuses on one sector,
certain unique problems of public
administration tend to arise. Assisted by
lobbying of financial firms, the regulator
tends to share the aspirations of the
regulated financial firms, such as low
competition, preventing financial
innovation in other sectors, high
profitability, and high growth. These
objectives often conflict with the core
economic goals of financial regulation such
as consumer protection and swift
resolution. Reflecting these difficulties, the
present Indian financial regulatory
architecture has, over the years, been
universally criticized by all expert
committee reports. The Commission has
analyzed the recommendations for reform
of financial regulatory architecture of all
these expert committee reports and
weighed the arguments presented by each
of them.
Architecture of the Regulator
As per FSLRCs recommendations, the
current list of regulators would be replaced
by a horizontal structure whereby the basic

22

regulatory and monitoring functions of all
areas would be done by a Unified Financial
Agency (UFA) while RBI takes care of
banking and monetary policies. All
consumer complaints will be handled by a
Financial Redressal Agency (FRA) and there
will be a single tribunal, the Financial Sector
Appellate Tribunal (FSAT) which will hear
appeals regarding the entire sector. This
new horizontal structure serves the
interests of the consumers of financial
services much better. Apart from this a
separate agency would be formed for the
purpose of deciding on bank interest rates.
The commission feels that this structure will
reduce the complexities both for consumers
and investors thus avoiding all the
complications like conflicts between two
regulators and others which make it difficult
for foreign investors to carry out their
businesses in India.



The following table gives an idea about the
present and proposed structure of the
regulator.
PRESENT PROPOSED
1. RBI 1. RBI
2. SEBI

2. UFA (Unified
Financial
Authority)
3. FMC (Forward
Markets Commission)
4. IRDA (Insurance
Regulatory and
Development Authority)
5. PFRDA (Pension Fund
Regulatory and
Development Authority)
6. SAT (Securities
Appellate Tribunal)
3. FSAT (Financial
Sector Appellate
Tribunal

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7. DICGC (Deposit
Insurance and Credit
Guarantee Corporation)
4. Resolution
Corporation
5. FRA (Financial
Redressal Agency)
6. PDMA (Public
Debt Management
Agency)
8. FSDC (Financial Stability and Dvlpmt Council)

Advantages of having a unified regulator
Accountability and Consumer
friendliness: There can be cases where the
consumer is being subjected to the
jurisdiction of more than two regulators. In
such cases there is always an ego problem
between the regulators and hence it is the
consumer who suffers because of delayed
redressal of complaints.
Creating checks on the regulators: The
commission also provides for a written legal
framework i.e. rule of law in decisions of
RBI and other regulators. At present there is
little scope to challenge the policy decisions


of RBI and SEBI. They are not accountable
to government or court and neither to
public. No one could question them even if
their targets are not achieved. However
when the recommendation of FSLRC are
implemented there would be certain
objectives which the RBI is bound to
achieve and certain rules by which it can
take decisions. The decision could be
challenged in tribunals if found to be faulty.
This is creates a mechanism of
accountability by creating proper checks
and balances. So a written framework
which bridges the accountability and
Independence is welcome.
Separating complaints and regulators:
In the new proposal consumer complaints
will be separated from the regulator. This is
important because certain classes of
consumer complaints are full of mistakes or
oversights by the regulator at their root.
Recognizing this root cause means
admitting to its own flaw, something that is
hard for any organization. If there is a
separate complaints redressal authority


24

then such mistakes can be easily identified
and corrected.
Splitting NBFCs from the RBIs ambit:
At present we have a clumsy system for
governing NBFCs where often regulatory
differences arise among RBI, SEBI and NHB.
There are some NBFCs which take deposits
while others dont. The committee has
proposed a concrete split i.e. banking and
payments with RBI while rest of the areas
lies with UFA. So the NBFCs taking deposits
comes under the purview of RBI and rest of
them goes with UFA.
Distributing the power to make decisions
for monetary policy: Monetary policy
commission will be consisting 7 members
where 5 members would be nominated by
the government, out of five nominated
members 2 members will be appointed in
consultation with RBI and 3 members at
governments discretion. The advantage is
that a committee of experts would be in a
better position to take such decisions than a
single official. After all, collective decision-
making is generally viewed as reducing the
probability of error.

Disadvantages of a unified regulator
Practical implementation: Just merging
existing setups under a single banner may
look good on paper but may not actually
eliminate the regulatory complexities. Its
practical execution will be quite difficult.
SEBI, IRDA, FMC and PFRDA etc could easily
continue operating as isolated departments
of a nominally unified financial regulator.
Cross-selling menace of the banks to
remain: Banks sometimes take advantage
of the customers trust to sell a variety of
other products which the customer might
not require or afford. Mostly rural
housewives and old aged pensioners fall
prey to this as they are not so financially
literate. RBI should see that in the name of
increasing business and profit the private
banks are creating barriers for common
people by asking high minimum balance
and charging exorbitant amount in case of
fall in minimum balance leading to closure
of many accounts. The proposal by the
commission is silent on this topic. Thus
before going forward it should be made
sure that people are not at loss.

25

Increased government control over the
regulators: At present the RBI and other
regulators are independent of the
government and their decisions are not
influenced by the government. However the
new proposal will increase the government
control over the decision making. Especially
in case of the monetary policy decisions,
the seven member team will have 5
members nominated by the government
who might be influenced by government
officials to alter or even change the
decisions.
Impact on the powers of RBI:
Presently the finance ministry makes
rules regarding FDI but the rules regarding
FIIs, External Commercial Borrowings
(ECBs), forex loans and fund inflows from
NRIs are made by the RBI. However once
the recommendations are accepted these
powers will no more be with the RBI. This
can create a problem especially in a
situation when the current account deficit
(CAD) is burgeoning.


The RBI will be given specific targets which
it has to attain within a specified frame of
time. These objectives and targets will be
failure standards by which the central bank
will be measured. Such a thing can put RBI
under a lot of pressure and can affect its
working. However until and unless it is
known what are these targets? Is there a
possibility of assigning weights to these
targets at different circumstances? All these
are important part.
The possibility of RBI meeting inflation and
growth targets in India where much power
is held by the government is very less. The
FSLRC suggests around 5 odd reforms and it
has to be decided whether all of them have
to be implemented at the same time or in a
particular sequence. These are analytical
questions which need to be answered
before the recommendations can be
implemented.
Thus on the whole the reforms are a step in
the right direction but its implementation
and effectiveness still remain a challenge.


26




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