Reforming Financial Regulators of India

India’s financial regulators are under intense scrutiny, with the Securities and Exchange Board of India (SEBI) facing criticism for its handling of the Adani case and the Reserve Bank of India (RBI) under fire for its differing approaches to fintech firms and traditional banks. As India’s financial markets evolve, the need for a careful balance between regulatory autonomy and accountability is more pressing than ever. History has shown that effective regulation hinges on both independence and robust oversight. Strengthening India’s regulatory accountability mechanisms is now essential.

Key Financial Regulatory Bodies in India

• Reserve Bank of India (RBI): Established in 1934, the RBI functions as India’s central bank and primary banking authority, wielding extensive regulatory control. It oversees scheduled commercial banks, Non-Banking Financial Companies (NBFCs), and foreign exchange markets.
• Securities and Exchange Board of India (SEBI): Formed in 1992 to oversee securities markets and safeguard investor interests, SEBI regulates stock exchanges, mutual funds, and other market intermediaries, including the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
• Insurance Regulatory and Development Authority of India (IRDAI): Created in 1999 to regulate and develop the insurance sector, IRDAI supervises life and general insurance companies as well as specialized insurers. As of 2022, India’s insurance premium volume is USD 131 billion, with life insurance accounting for 77% and non-life for 23%.
• Pension Fund Regulatory and Development Authority (PFRDA): Founded in 2003 to promote old-age income security, the PFRDA regulates pension products and administers the National Pension System (NPS), serving over 6.62 crore subscribers.

Role of RBI and SEBI in Ensuring Regulatory Oversight and Market Stability in India

• Preventing Systemic Risk: The foundation of India’s financial regulatory structure is built upon the coordinated efforts of the RBI and SEBI to maintain market stability and mitigate systemic risks. Both regulators employ advanced surveillance systems within their respective spheres—RBI ensures banking sector stability via stress tests and capital adequacy norms, while SEBI upholds market integrity through circuit breakers and real-time monitoring. A recent example of SEBI’s proactive regulation is the updated F&O policy, requiring option buyers to pay premiums upfront instead of at day’s end, reducing default risks and reinforcing market integrity. Additionally, RBI’s stringent oversight has contributed to banking sector resilience, with Gross Non-Performing Assets (GNPAs) projected to fall to a decade low of 2.5% in FY25, preserving stability amidst global volatility.
• Consumer Protection and Transparency: Protecting consumers is a core mandate for both RBI and SEBI, with strong frameworks in place to shield retail investors and banking clients. For instance, SEBI has barred online bond platforms from offering unlisted debt securities and unauthorized products through subsidiaries, as outlined under Rule 51A, to limit investor exposure to potentially high-risk investments. Similarly, RBI issued comprehensive guidelines in September 2022 to regulate the burgeoning digital lending sector. Both regulators’ commitment to consumer-centric measures has been evident in high-profile cases, such as RBI’s enforcement actions against Paytm Payments Bank for regulatory non-compliance and SEBI’s efforts to streamline mutual fund categories for improved investor clarity.
• Technology Adoption and Innovation: The modernization of India’s financial sector has been fueled by RBI’s and SEBI’s forward-looking approach toward adopting technology while upholding stringent security standards. RBI’s pilot program for a central bank digital currency, which has achieved 1 million daily transactions, exemplifies this commitment. Similarly, SEBI’s transition toward a T+0 settlement cycle places India ahead of many developed markets in terms of operational efficiency.
• Corporat1e Governance and Compliance: Both regulators have established robust frameworks for governance and compliance across regulated entities. SEBI’s Listing Obligations and Disclosure Requirements (LODR) work in tandem with RBI’s Prompt Corrective Action (PCA) framework, which is vital for monitoring banks’ financial health. Moreover, the introduction of enhanced ESG (Environmental, Social, and Governance) reporting requirements for major listed companies has positioned India as a leader in sustainable finance practices.
  
  

Current Accountability Concerns Raised at India’s Financial Regulators

• Transparency in Decision-making: Insufficient public disclosure in regulatory consultations and decision-making raises accountability concerns. For instance, while the RBI has issued repeated warnings about cryptocurrency investments as a potential threat to financial stability, there is limited clarity on its long-term regulatory stance. Similarly, SEBI has been criticized for inadequate stakeholder engagement, especially in high-profile cases like the recent Adani-Hindenburg investigation.
• Conflict of Interest Management: The current framework to manage conflicts of interest within regulatory bodies reveals notable weaknesses. Recent allegations of a conflict of interest involving the SEBI chairperson underscore systemic gaps. Furthermore, the absence of a mandatory cooling-off period for senior regulatory officials moving to private sector roles could lead to compromised regulatory integrity.
• Parliamentary Oversight Deficits: Limited parliamentary oversight has created a significant accountability gap within regulatory bodies. Although the Second Administrative Reforms Commission recommended in 2009 that regulatory bodies undergo regular parliamentary committee reviews, these reviews have remained inconsistent. While the Public Accounts Committee recently began evaluating the performance of regulators established by parliamentary acts, continuous and comprehensive oversight remains insufficient.
• Staff Accountability and Internal Governance: Internal accountability within regulatory bodies shows considerable weaknesses, particularly in evaluating staff performance and decision-making processes. Recent events, such as staff protests at SEBI headquarters in September 2024 and reported dissent within the RBI’s Monetary Policy Committee in October 2024, highlight ongoing governance challenges.
• Delay in Enforcement Actions: Prolonged delays between violation detection and enforcement compromise regulatory effectiveness. For instance, the RBI’s delayed rollout of digital lending regulations allowed a regulatory gap that unregulated loan apps exploited. Similarly, SEBI faced criticism for its slow response in implementing algorithmic trading regulations, contributing to market volatility concerns.
• Political Interference: In some cases, regulatory bodies encounter pressure from the government to make decisions influenced by political goals rather than purely regulatory principles. Such interference can undermine regulatory independence. For example, the RBI has faced pressure in recent years to increase dividend payouts to help the government meet budget targets. In FY 2023-24, the RBI announced a record dividend of ₹2.11 lakh crore to the Government of India, raising concerns about its autonomy in fiscal matters.

What measureas can be adopted?

• Enhanced Parliamentary Oversight Framework: Introduce mandatory quarterly appearances of regulatory heads before dedicated parliamentary committees to review performance. Establish specialized sub-committees within existing parliamentary panels focused exclusively on financial regulation oversight, ensuring more targeted accountability. Require public disclosure of committee recommendations and the corresponding regulatory responses.
• Standardized Public Consultation Process: Enforce a minimum public consultation period for all significant regulatory changes with structured feedback systems. Create online portals for tracking consultation statuses and stakeholder contributions in real time. Require regulators to publish detailed rationales for accepting or rejecting stakeholder feedback, as seen in Singapore’s approach, which has led to greater public participation in regulatory decisions.
• Independent Regulatory Review Board: Establish an autonomous board composed of financial experts, academics, and industry veterans to review regulatory performance. Conduct quarterly performance audits using predefined metrics that evaluate efficiency, transparency, and effectiveness. Require impact assessments for all major regulatory decisions to ensure their broader implications are considered.
• Strengthened Internal Governance Structure: Introduce a mandatory rotation of key roles within regulatory bodies every three years to prevent conflicts of interest. Set up internal ombudsman offices that report directly to parliamentary committees and implement whistleblower protection for regulatory staff. Mandate public disclosure of senior appointments along with their qualifications.
• Technology-Enabled Transparency Platform: Develop an integrated digital platform for real-time disclosure of regulatory actions, decisions, and enforcement measures. Implement blockchain technology to create immutable audit trails for all regulatory decisions. Public dashboards displaying updated regulatory performance metrics on a monthly basis can further enhance transparency.
• Professional Development and Accountability Framework: Institute mandatory professional certification requirements for all regulatory staff and provide specialized training in emerging areas such as fintech, cybersecurity, and AI regulation. Establish clear performance metrics linked to regulatory effectiveness and offer competitive compensation to attract top talent.
• Coordinated Enforcement Mechanism: Form joint enforcement teams across regulatory bodies to streamline operations in areas of overlapping jurisdiction. Develop a centralized, accessible database for enforcement actions across regulators and standardize penalties and enforcement procedures to create a more cohesive regulatory approach.

India’s financial regulators are essential to maintaining market stability and safeguarding investor interests. Strengthening their accountability mechanisms is crucial to ensure their continued effectiveness. By improving transparency, managing conflicts of interest, enhancing parliamentary oversight, refining internal governance, and bolstering enforcement, India can significantly enhance the credibility and resilience of its financial regulatory framework.

The End of the Blog: Reforming Financial Regulators of India