Washington: The IMF has asked Indian regulators such as Sebi and RBI to put in place a strong coordination framework to deal with possible failure of the country's financial conglomerates, an issue that has been a key concern in the US and other large economies.
In its financial sector assessment report on the Indian securities market, the International Monetary Fund (IMF) said that "regulators should seek to develop a basic framework for coordination to deal with the failure of entities" belonging to large financial conglomerates.
At least two such committees have been set up by the Indian government and regulators. They are represented by the government, capital markets regulator Sebi, central bank RBI and insurance watchdog IRDA, among others.
The IMF observed that the committees usually meet on a quarterly basis, but there is no "formal" arrangement for the frequency of such meetings.
It also found that "it is not the practice to share inspection reports" among the regulators and whole "joint inspections are not conducted either."
"However, whenever in the course of investigation, it is found that the entities would have probably violated the provisions of any statute falling under the jurisdiction of or regulations framed by, some other regulator, orders of Sebi has been forwarded to the concerned regulatory authorities.
"Sebi has provided examples to that effect...Nevertheless a standardised template to gather information on financial groups has been developed," IMF said.
It further noted that the regulators' high-level committee meets on a semi-annual basis to discuss with CEOs of financial groups any regulatory concerns they might have.
On potential risks from financial conglomerates, the IMF said that the current regulatory approach is based on the identification of a lead supervisor, to whom the conglomerate is required to send periodic information.
"There are currently 12 financial conglomerates. In eight of them, the RBI is the lead regulator, given the existence of the bank in the group, in one, Sebi is the lead regulator and in three, IRDA is the lead regulator," it said.
In cases of default, Sebi, RBI, the stock exchanges and clearing banks generally touch base with each other to address any market disruption.
"In the context of financial conglomerates, the regulators have constituted two committees where issues of common concern can be discussed. Conglomerates are required to submit a standard set of data to their lead supervisor.
"In addition, Sebi can also coordinate with regulators through the FSDC. Sebi has MoUs for cooperation with foreign intermediaries," it added.
However, the last case of a major default by a broker occurred in the late 90s, IMF was told by Sebi.
Besides, Indian authorities gave IMF concrete examples of coordination in 'crisis' situations such as the failure of Lehman Brothers subsidiaries in India and redemption pressures for money market funds.
Still, the IMF called for better coordination among the regulators on information sharing and policy making.
"Several channels have been created to foster coordination. Many of them are recent developments, and therefore are still evolving," it said.
The Financial Stability Development Council (FSDC) was created in 2010, with representation from the Finance Ministry and regulators to foster coordination on financial stability issues as well as developmental issues.
A sub-committee on inter-regulatory coordination was also set up within the umbrella of the FSDC.
The IMF said the FSDC is still at an early stage and only high-level issues are discussed there, while more operational issues are dealt with at the level of the sub-committee.
"As in the case of the FSDC, there are no formal arrangements regarding the frequency of the meetings of the sub-committee. The authorities informed that it meets also when and as necessary," IMF said.
A joint panel was created in 2010 to resolve differences over the nature of hybrid or composite instruments.
Comprising of the Finance Minister, RBI chief, Finance Secretary, Financial Services Secretary, IRDA Chairman, Sebi Chairman and PFRDA Chairman, this committee was created after differences between Sebi and IRDA over the nature of certain products sold by insurers.
"The overall quality of the oversight and supervision on payment and securities clearing and settlement systems would be enhanced if the RBI and Sebi met regularly on a technical and higher level, and had formal arrangements for information sharing and policy coordination," IMF said.
The IMF suggested that RBI and Sebi can be encouraged to include commodities regulator FMC in their regular meetings.
The assessment results also indicate that crisis management procedures can be improved, although the operational reliability of systems is high and Business Continuity Planning and Disaster Recovery sites are in place.
First Published: Tuesday, September 03, 2013, 15:33