INDIAN FINANCIAL CODE
S DHANAPAL & ASSOCIATES
Practising Company Secretaries
• The Finance Minister announced the formation of the
Financial Sector Legislative Reforms Commission (FSLRC)
during his Budget speech of 2011-2012 to rewrite and
harmonize financial sector legislations, rules and
• This Commission is chaired by a former Judge of the
Supreme Court of India, Justice B. N. Srikrishna and has an
eclectic mix of expert members drawn from the fields of
finance, economics, public administration, law etc.
• The FSLRC was required to submit its findings within a
period of 24 months.
FSLRC submitted its report to finance minister
P Chidambaram on 22nd March 2013.
• The report proposes a complete overhaul of
the existing financial sector laws.
• It suggests a new omnibus law THE INDIAN
FINANCIAL CODE to oversee the entire gamut
of financial sector issues
• The FSLRC went through as many as 62 laws and
did an exhaustive study of them with regards to
coming up with this new regulatory architecture.
• It proposes to subsume, repeal and basically
incorporate every existing law that deals with the
• Around 15 existing acts will get repealed and
subsumed in the code once it is approved.
WHY WAS FSLRC SET UP?
• 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.
• Many of the financial sector laws date back
several decades, when the financial landscape
was very different from that seen today.
• For example, the RBI Act and the Insurance
Act are of 1934 and 1938 vintage respectively.
The Securities Contract Regulation Act was
enacted in 1956, when derivatives and
statutory regulators were unknown.
WHY WAS FSLRC SET UP?
The superstructure of the financial sector
governance regime has been modified in a
piecemeal fashion from time to
time, without substantial changes to the
These piecemeal changes have induced
complex and cumbersome legislation, and
raised difficulties in harmonising
For instance, complex financial
intermediation by financial conglomerates
of today falls under the purview of
multiple regulators with gaps and overlaps
• Current laws have been enacted on piecemeal basis
which has left gaps between the regulators, legal
system and conflict in policies.
• Current legislative framework addresses only
temporary pressures and not critical key issues
• Multiplicity of laws, institutions and regulators
• Lack of transparency and more of bureaucracy
TERMS OF REFERENCE & OBJECTIVES OF FCLRC
• Examining the architecture of the legislative and regulatory
system governing the Financial sector in India
• Examine if legislation should mandate statement of principles
of legislative intent behind every piece of subordinate
legislation in order to make the purposive intent of the
legislation clear and transparent to users of the law and to the
• Examine if public feedback for draft subordinate legislation
should be made mandatory, with exception for emergency
• Examine prescription of parameters for invocation of
emergency powers where regulatory action may be taken on ex
• Examine the interplay of exchange controls under FEMA and
FDI Policy with other regulatory regimes within the financial
• Examine the most appropriate means of oversight over
regulators and their autonomy from government.
TERMS OF REFERENCE & OBJECTIVES OF FCLRC
• Examine the need for re-statement of the law and immediate
repeal of any out-dated legislation on the basis of judicial
decisions and policy shifts in the last two decades of the
financial sector post-liberalisation.
• Examination of issues of data privacy and protection of
consumer of financial services in the Indian market.
• Examination of legislation relating to the role of information
technology in the delivery of financial services in India, and
• Examination of all recommendations already made by various
expert committees set up by the government and by regulators
and to implement measures that can be easily accepted.
• Examine the role of state governments and legislatures in
ensuring a smooth interstate financial services infrastructure in
• Examination of any other related issues
Objective of Indian Financial Code
• To consolidate and amend the law regulating the
Indian financial sector and
• to set out principles for financial regulation, and
• to provide for the
establishment, objectives, powers of, and
framework for interaction among, financial
regulatory agencies, and
• for matters connected therewith or incidental
• with a view to bring coherence and efficacy in the
financial regulatory framework.
Composition of the Bill
• The bill forms part of the Report of the
Financial Sector Legislative Reforms
Commission, Volume II.
• It has been introduced as a Draft Law in March
2013, “Indian Financial Code”, “Bill No. abc of
• It comprises of 450 sections and 6 schedules
of Contract &
Regulator for all financial
services other than
banking and payment
Reserve Bank of India
Regulator for banking and
Proposed Regulatory Structure
Other Regulatory Agencies
• Securities and Exchange Board of India (SEBI), the Forward
Markets Commission (FMC), the Insurance Regulatory and
Development Authority (IRDA) and the Pension Fund
Regulatory and Development Authority (PFRDA) proposed
to be subsumed into unified financial agency.
• Deposit Insurance and Credit Guarantee Corporation of
India (DICGC) to be subsumed into resolution corporation.
• Existing Securities Appellate Tribunal (SAT) to be
subsumed Into Financial Sector Appellate Tribunal (FSAT)
• Manner of appointment, selection criteria and removal
of members of each financial agency has been clear
defined making it more objective and transparent.
• Further regulations can be made by an financial agency
only by means of Notifications and the process of
issuing regulations have also been clearly defined.
• Except for emergency regulations, all regulations made
by a Financial Agency must apply from an identified
prospective date that is set out in such
regulations, with due regard to the time necessary for
persons impacted to arrange to comply with such
• All regulations made under this Act must
be reviewed by the Financial Agency
within three years of such regulations
• Consumer protection has been placed at
the heart of financial system.
• A large part of the burden of consumer
protection is put on the firms.
• Financial Sector Appellate Tribunal will hear appeals
against all financial sector regulators and into which
the existing Securities Appellate Tribunal will be
• Resolution Corporation will replace the Deposit
Insurance and Credit Guarantee Corporation of
India, which assists in closure of distressed financial
• RBI will be divested of its powers over management of
public debt, which is currently one of its subsidiary
functions. Bill proposes a separate public debt
• The bill recommends empowering the
existing Financial Stability and Development
Council, by making it a statutory body
responsible for managing risk and crises in
the financial system.
• The report also recommends setting up of a
financial data cell, which will look out for
systemic risk in the financial
sector, especially the ones arising out of the
• The Securities Contracts (Regulation) Act, 1956
• The Securities and Exchange Board of India Act, 1992
• The Depositories Act, 1996
• The Public Debt Act, 1944
• The Government Securities Act, 2006
• The Reserve Bank of India Act, 1934
• The Insurance Act, 1938
• The Banking Regulation Act, 1949
• The Forward Contracts (Regulation) Act, 1952
• The Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970………….CONTD…….
• The Deposit Insurance and Credit Guarantee
Corporation Act, 1961
• The Foreign Exchange Management Act, 1999
• The Insurance Regulatory and Development
Authority Act, 1999
• The Payment and Settlement Systems Act, 2007
• The Acts establishing bodies corporate involved in
the financial sector (for example, The State Bank of
India Act, 1955 (23 of 1955) and The Life Insurance
Corporation Act, 1956 (31 of 1956))
• Seven pillars of the new Law are:
Reserve Bank of India: Regulator of Banking & Payments, monetary policy.
Unified Financial Agency: Regulator of financial firms and activities other than banking and
Resolution Corporation: Deals with closure of distressed financial firms.
Financial Redressal Agency: Single window complaint mechanism against financial
institutions and intermediaries.
Financial Stability & Development Council: Recast as statutory body. Will mange systematic
risks and development.
Public Debt Management Agency: Government’s debt manager.
Financial Sector Appellate Tribunal: Will hear complaints against all financial regulators.
• Indian Financial Code has been proposed after much
deliberation by experts which aims to reform financial sector
regulations for the longer term in keeping with systemic risks
involved in financial management.
• The bill envisages a full transition by way of a set of small and
• Implementation of the report, however, is not expected to be
smooth. For, apart from the legislative changes required
through Parliamentary approval, the fact that the
Commission’s recommendations are marked by dissenting
notes by four members — P. J. Nayak, K. J. Udeshi, Y. H.
Malegam and Jayanth R. Varma on a host of specific issues is
an indications of the hurdles in the way.
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