This article is written by Rimjhim Vaishnavi, a student of NUSRL, Ranchi.
There have been many criticisms relating to the existing legislation for regulating the financial sector and the monetary policy. The RBI has also been criticised for its inefficiency in managing the monetary policy. There are many loopholes in the present legislation has been enacted on unsystematic way and being changed from time to time which is creating ambiguity in management of the sector. Apart from it, it does not deal with critical key issues, there is lack of transparency. These loopholes have brought the urgency of new legislation for the financial sector. Hence, many economists favoured Indian Financial Code as they thought it would remove those difficulties which are being face in the present legislation. The article deals with what Indian Financial Code is? And what changes it can bring in management of the present financial sector.
What is Indian Financial Code?
The Indian Financial Code is a set of new rules and laws which could regulate the financial sector of India.
The main reason why Indian Financial Code was brought into existence was firstly to ensure the development of market infrastructure and its functioning, which would the regulators as well as the government some power to control the market.
Formation of the Financial Sector Legislative Reforms Commission
For setting up Indian Financial Code, a commission was set up on March 24, 2011 which was named ‘Financial Sector Legislative Reforms Commission’ (FSLRC)., chairman of which was Justice B.N.Srikrishna. This committee was formed to rewrite the Code so that it could regulate and formulate the financial sector more efficiently. The committee put more emphasis on consumer protection and as how to facilitate the journey from $ 2 trillion to $15 trillion by 2016, which has been denoted in its report.
This act aims at establishing new financial regulation principles which would regulate the financial sector, interaction of Financial Agencies and to bring efficacy and coherence in the financial regulatory framework. It also focuses on incorporation of the existing Reserve Bank of India (RBI) according to the Act.
What is its benefit?
The Indian Finance Code mainly focuses at gaining the confidence of the investors at the same time providing them protection in the investment market.
- IFC also tried to maintain the stability in the market and reduce speculation. IFC also focuses at reducing systematic risk which is prevalent in the market.
- According to the new financial code, RBI Governor can no longer enjoy his veto power relating to the policy rates. As per the Act four members have to appointed from the central government and three from the RBI. It limits the role of RBI in the field of monetary management.
- It also focuses on a process through which the financial regulators will include and perform the legislative, executive and judicial function.
- It also provides financial regulation where government intervention is required.
As mentioned above, the main essence of the Indian Finance Code is to provide consumer protection; hence it provides some benefits to the consumer which includes:
- Protection against unfair terms,
- Protection against unfair conducts, inclusive of protection against the unsophisticated investors
- Protection also includes the right to get suitable advice when required by the consumer and protection against different conflicting advices regarding different schemes
How does it work?
The Act stated that different departments would manage the different financial agencies and on aiming which it formulated different boards like, the Reserve Bank Board for the handling the working of Reserve Bank, the Corporation Board for the managing the Corporation, Financial Authority Board for the Financial Authority, the Redress Agency Board for the Redress Agency and the Debt Agency Board for the Debt Agency. Along with allocation and establishment of different department, it also deals with the functions of financial agencies which include the functions relating to decision-making, advisory councils, composition of the boards and its strength, accountability mechanisms and funding for financial agencies.
Indian Financial Code also tends to clarify financial consumer protection, trading and market abuse, financial stability, risk management and reduction, agency managing public debt along with it its power, functions and its duty.
Need for Indian Financial Code
IFC is needed for reviewing the legal and institutional structure of the financial sectors whether it complies with the requirement of the financial sectors.
Another reason why it is required is because many of the legislation managing and regulating the financial sectors are not efficient enough to work in accordance with present scenario.
Due to time to time changes brought in the legislation of financial sector, it has made the legislation more complex and difficult to function
The INC mainly focuses on the aspects like consumer protection, micro-prudential regulation, capital controls, public debt management and foundation of contract and property. The main reason behind INC is to cover the loopholes which exist in the present legislation. To make INC more effective all the regulation which have been made under this Act are being reviewed by the Financial Agency within three years after the regulation has been brought into action. But the main point of its criticism is that RBI powers relating to monetary policy will be subsumed.