July 25th, 2015
in Op Ed
by Ajay Shah, ajayshahblog
When the Financial Sector Legislative Reforms Commission (FSLRC) produced the draft Indian Financial Code (IFC) in March 2013, the Ministry of Finance put it out for public review and comments. This version is informally termed IFC v1.0. Hundreds of comments were received on this first draft. Justice Srikrishna and his team worked on these comments and have come out with a revised draft Indian Financial Code. This is informally called IFC v1.1.
Today, the Ministry of Finance has put this revised draft out for public review and comments.
IFC v1.0 was the result of a thorough and careful process. Even though enormous time and effort was put into it, with the benefit of hindsight, it had numerous blemishes. With the benefit of hindsight, I feel that within IFC v1.0 there were many projects running in parallel, and their inconsistencies of approach were visible in the final product.
IFC v1.1 is a polished product. With the benefit of 853 days of elapsed time, many blemishes have been found. The code is much more orthogonalised: general concepts are consistently applied. It now reads as simple and precise English. I can't think of many laws in India which match the quality of thinking and drafting of IFC v1.1.
India's financial reforms are working on three tracks:
- The first element is the legislative process that should, at some point in the future, lead to Parliament enacting the Indian Financial Code. The February 2015 Budget Speech by Arun Jaitley said he will table this in Parliament 'sooner rather than later'. The release of IFC v1.1 today is an important milestone in this legislative track.
- The second element is building institutional capacity to enforce the new law. In India, building high performance institutions is difficult. As with SEBI or PFRDA or NSDL, it makes sense to build the institutional capacity ahead of time so that when Parliament passes the law, it can immediately be enforced. When the law is enacted without adequate planning for the institutional capacity, this can lead to difficulties as was seen with the Companies Act, 2013.
- The third element is to treat FSLRC as the strategy and chip away at incremental changes within the existing legal framework to move towards this goal. This also builds institutional capacity, and reduces the complexities after the law is passed. It front-loads the gains: why not reap the fruits of improved financial sector policy sooner rather than later? Elements of this include: (1) The FSLRC Handbook, (2) the SEBI-FMC merger (backdrop and then Budget 2015), (3) shifting regulation-making power on non-debt capital controls from RBI to MOF (Budget 2015), (4) inflation targeting as the objective for RBI, (5) Finance SEZs, (6) Appeals against all financial agencies other than RBI at a tribunal named SAT.
State capacity is about well drafted laws and sound institutions that enforce these well drafted laws. The Indian malaise with chronically malfunctioning institutions is as much about badly drafted laws as about badly designed organisations. A quantum leap in the law -- the IFC -- will not solve the problem by itself. A similar quantum leap in the working of financial agencies is also required. In order to do this in a systematic way, MOF has invented a new framework involving 'task forces' which lay the foundations for a financial agency before the management team is recruited.
At present, five task forces are in motion -- to build the Financial Sector Appellate Tribunal (FSAT) that will hear appeals against all financial agencies, the Public Debt Management Agency (PDMA), the Resolution Corporation (RC), the Financial Data Management Centre (FDMC) and the Financial Redress Agency (FRA).
Each of these five projects would take over three years from start to finish. One one hand, this is frustratingly slow. We need the FRA or the FSAT or the PDMA or the FDMC or the RC yesterday. But it's not possible to do these things in reduced time. The time horizons for these projects are consistent with the time horizons for IFC to go through the parliamentary process.