How selective application of rules by RBI, IRDA & SEBI is creating mistrust
It is fairly common knowledge in the country that someone on a moped has a higher probability of getting penalised for traffic violation than someone driving a Mercedes Benz, or one with a beacon flashing.
It is fairly common knowledge in the country that someone on a moped has a higher probability of getting penalised for traffic violation than someone driving a Mercedes Benz, or one with a beacon flashing. The traffic sergeant's power does not depend on the uniform he wears as a law enforcer, but from the status of the subject he monitors. What is true in civilian life may be becoming a norm in financial markets as well.Financial regulations in India have come a long way, but not their enforcement. A fair and just financial market regulator is vital to economic prosperity, especially, when international investors, domestic businessmen and the government compete for the same businesses across a variety of industries. Be it the insurance, banking, or a markets regulator - there have been multiple standards in enforcing rules and flip-flops have unsettled many. So, is there a level-playing field?
The simmering debate comes to the fore with the all-pervading government imposing its will on the companies it controls and the regulators who report to it. Laws governing life insurance companies don't apply to state-run Life Insurance Corporation. Promoter holding covenant in banks is not uniform across the industry, though all are monitored by the Reserve Bank of India. The market regulator is caught between the government's need for funds and its commitment for a transparent, tainted money-free market.
"It's different strokes for different folks," said Rana Kapoor, founder and chief executive at YES Bank, the youngest of lenders. Kapoor's remark sums up the feeling among some businessmen that regulators have a jaundiced eye and that discretion in enforcing law has been eroding confidence.
As a prudent measure to avoid building up risks, the insurance regulator prescribed a 10% limit on equity holding for all life insurance companies, but there's one exception now, LIC. It has breached the limits, and that's fine with the regulator since it is performing a national duty - bailing out the government, which is struggling for resources to fund banks owned by it.
Many justifications are given for letting LIC breach the limit, saying legislation that applies to it shields it from the insurance regulator. So, what's the sanctity of the regulations when state-run companies and private enterprises compete for the same business, but are governed by different rules.
"Irda has no control over LIC," said Ravi Trivedy, an independent consultant. "The regulator has been lax in its approach."
It is not just with the state-run giant. Rules get amended, changed, whenever there's demand from the lobby group citing stress. But what about the moral hazard.
The Insurance Act did not allow companies to divest stake before completing 10 years of operations. But the finance ministry changed rules suddenly, allowing companies to sell up to 26% any time after registration. Subsequently, Reliance Life sold a 26% stake to Nippon Life.
When it comes to the Reserve Bank of India, the accolades that it gets for managing the financial system does not extend to micro issues concerning individual banks. Its implementation of shareholding pattern is not uniform and the way it arranges some shotgun marriages may save depositors, but do the guilty get punished? There are instances, such as Nedungadi Bank, or Global Trust Bank, where transparency took a back seat.
The promoter holding cap in a bank is a point of contention. The declared policy is that no promoter should hold more than 10%, but the goal post has been changing, especially, this millennium when it kept everyone on their toes on new bank licences. The promoters of the so-called 'old generation private banks' and the new generation banks are not treated on par. YES Bank, Development Credit and Kotak Mahindra Bank have seen their promoters pare stakes, but there's a lot left to be done to meet the rules.
The ever-changing rules are partly blamed. When Kotak Mahindra was granted licence in 2003, the regulator mandated that promoters own 49% at least till 2008. Promoter Uday Kotak has cut the stake to 45%, from 63% at the time of issuing the licence, but it is still substantial.
"We would like to confirm that the long-term objective of the bank is to broad-base the shareholding in a non-disruptive manner, keeping in mind the interests of all stakeholders," a spokesman at Kotak Mahindra Bank said. "The bank continues to be in dialogue with RBI for a feasible road map for further dilution. The bank is committed to follow the statutory directions of RBI."
YES Bank, which started with a 75% promoter stake, has now brought it down to 26%. The stake of Aga Khan Fund for Economic Development - promoter of Development Credit Bank - is down to 18.18% from 29.80%. HSBC, which owned as high as 15% in Axis Bank, formerly UTI Bank, has lowered it to less than 5%. While at one level, the regulator insists on commitment from the promoter, it does not want significant holding of a promoter, fearing that functioning could be manipulated.
RBI's best-known stand is that no more than 10% for a promoter. But the ownership and governance guidelines along with the guidelines of 2004 provide for ownership higher than 10%, and even up to 30% and above 30%, subject to the subjective criteria.
Inconsistency is probably sandwiching the old private sector banks which are neither able to raise funds from public investors, nor are their promoters allowed to buy more shares. "RBI should allow promoters to hold atleast 26% in banks, subject to fit and proper criteria," said one of the promoters at a private sector bank, who did not want to be identified. "It's always good for the banks to have strong promoters as they can bring in capital during crisis. At 10%, commitment of promoters reduces."
Market regulator Securities & Exchange Board of India is not far behind in flip-flops. After vilifying the Bank of Rajasthan promoters Tayals, the regulator woke-up after two years to say that the acts committed by Tayals were not 'grave'. During the period, the family lost control of the bank. Will the regulator pay the damages? Sebi's lack of willingness to enforce its own decisions on participatory notes makes one wonder whether it wants a rising stock market, or put an end to money laundering.
"FIIs and their sub-accounts shall not issue/ renew ODIs with underlying as derivatives with immediate effect,"' Sebi said on October 25, 2007. "They are required to wind up the current position over 18 months, during which period Sebi will review the position from time to time." It is 43 months since, and the so-called participatory notes are very much the instrument of choice for many global investors.
"The most urgent and most debated area of regulation has to do with that which affects the operation of the economic machine itself. Adverse conduct here can be deeply damaging, but even when it is visibly destructive, action to correct it can be strongly resisted," wrote John Kenneth Galbraith.
(With inputs from Reena Zachariah)