Indian Financial Code, 2015 – what is this new buzz !!!

a) Vide a press release dated 23-July-2015[1], the Ministry of Finance has put the revised (so when did the original came, can’t remember ? even I did not) draft of the bill i.e. proposed the Indian Financial Code, 2015 into public domain for comments / suggestions.

Before we understand the basics, let’s put in context thereof-:

Example 1

b) I am sure you would remember the catch words, “the great Sahara case”, “Supreme Court”,” Rupees 20,000 crores”. The brief of the case is that, those two Sahara companies issued a Statement in lieu of prospectus because they stated that, they do not want to get listed on any stock exchange and want to raise money from members of Sahara family.

c) SEBI issued a notice to Sahara for furnishing the details etc. Sahara denied and took a stand that, SEBI has a jurisdiction only in case of those companies whose securities are listed or are willing to get listed.

d) Sahara did not have either and prima facie, Sahara did have a legal point in what they were saying.

e) SEBI directly filed a Special Leave Petition [SLP] before Supreme Court which SC accepted and proceeded with the case. When the SLP was filed, there was no order that was passed against Sahara by SEBI or Registrar of Companies [ROC] for any offence.

f) Sahara had filed all requisite papers with ROC. Later, SC ruled that, on facts, and going by substance of the transaction, having regard to the volume of transaction, nature of issue, and keeping in mind the basic purpose for which the SEBI has been constituted, SEBI does has a jurisdiction.

g) Consider another example, today even in Maharashtra, there are co-operative credit societies which conduct the banking business WITHOUT taking the banking license from Reserve Bank of India.

Example – 2

h) Rajasthan High Court had ruled that, Cooperative societies can not conduct banking business without obtaining banking license. Per contra Co-operative societies argue they are neither involved in banking activities nor intend to do so. They claim accepting deposits only from members, and any financial aid is also confined to their members and, therefore, the Banking Regulation 1949 cannot be applied against them.

i) They argued deposits and lending were not banking activities for them as deposits were not accepted from people at large.

j) The facility of deposits and loans were only for members in accordance with the provisions of the bye-laws.


Example – 3

k) Today the FEMA is regulated by RBI whereas the FDI policy is governed by Ministry of Finance. Though they make an effort to work in tandum with each other, it nevertheless creates problems being consistent ad harmonised with each other.

Context in nutshell-:

l) The financial sector in India has evolved over a period of time and the legislations were made in bits and pieces. They were mainly to tackle the current problem at respective point in time rather than a stable long term principle based policy.

m) One of the reasons being there is dramatic change in the way business is done in view of liberalization of economy post 1990 and with growth of IT at speed of geometric progression.

Proposed Consolidation

n) Thus there are too many regulators like,

§ Reserve Bank of India,

§ Central Government,

§ Respective State Governments agencies like Registrars of Co-operative societies,


§ Respective Stock Exchanges some recognised, some un-recognised,

§ Registrar of Companies etc.

o) This Act will repeal the following Act i.e. in substance will consolidate the whole financial sector into well-structured, unified code.

§ The Securities Contracts (Regulation) Act, 1956 (42 of 1956)

§ The Securities and Exchange Board of India Act, 1992 (15 of 1992)

§ The Depositories Act, 1996 (22 of 1996)

§ The Public Debt Act, 1944 (18 of 1944)

§ The Government Securities Act, 2006 (38 of 2006)

§ The Reserve Bank of India Act, 1934 (2 of 1934)

§ The Insurance Act, 1938 (4 of 1938)

§ The Banking Regulation Act, 1949 (10 of 1949)

§ The Forward Contracts (Regulation) Act, 1952 (74 of 1952)

§ The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970)

§ The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980)

§ The Deposit Insurance and Credit Guarantee Corporation Act, 1961 (47 of 1961)

§ The Foreign Exchange Management Act, 1999 (42 of 1999)

§ The Insurance Regulatory and Development Authority Act, 1999 (41 of 1999)

§ The Payment and Settlement Systems Act, 2007 (51 of 2007)

§ The Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013)

§ The National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981)

§ The National Housing Bank Act, 1987 (53 of 1987)

§ The Small Industries Development Bank of India Act, 1989 (39 of 1989)

Development of financial sector-:

p) The institutional framework governing the financial sector has been built up over a century. There are over 60 Acts and multiple rules and regulations that govern the financial sector.

q) 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.

r) The superstructure of the financial sector governance regime has been modified in a piecemeal fashion from time to time, without substantial changes to the underlying foundations. These piecemeal changes have induced complex and cumbersome legislation, and raised difficulties in harmonising contradictory provisions. Such harmonisation is imperative for effectively regulating a dynamic market in the era of financial globalisation.

s) The piecemeal amendments have generated unintended outcomes including regulatory gaps, overlaps, inconsistencies and regulatory arbitrage. The fragmented regulatory architecture has led to a loss of scale and scope that could be available from a seamless financial market with all its attendant benefits of minimising the intermediation cost.

t) For instance, complex financial intermediation by financial conglomerates of today falls under the purview of multiple regulators with gaps and overlaps. A number of expert committees have pointed out these discrepancies, and recommended the need for revisiting the financial sector legislations to rectify them. The need for complete review of the existing financial sector laws has been underlined to make the Indian financial sector more vibrant and dynamic in an increasingly interconnected world.

u) In the wake of above situation, The Financial Sector Legislative Reforms Commission (FSLRC) was set up on 24th March 2011 with following terms of reference and objectives.

Terms of Reference

  • Review, simplify and rewrite the legislations affecting the financial markets in India, focusing on broad principles.
  • Evolve a common set of principles for governance of financial sector regulatory institutions.
  • Remove inconsistencies and uncertainties in legislations/Rules and Regulations.
  • Make legislations consistent with each other.
  • Make legislations dynamic to automatically bring them in tune with the changing financial landscape.
  • Streamline the regulatory architecture of financial markets.
  • 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 Courts.
  • Examine if public feedback for draft subordinate legislation should be made mandatory, with exception for emergency measures.
  • Examine prescription of parameters for invocation of emergency powers where regulatory action may be taken on ex parte basis.
  • Examine the interplay of exchange controls under FEMA and FDI Policy with other regulatory regimes within the financial sector.
  • Examine the most appropriate means of oversight over regulators and their autonomy from government.
  • 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 their effectiveness.
  • 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 India.
  • Examination of any other related issues.

v) The FSLRC published an Approach paper outlining methodology and approach for addressing the above issues / situation.

The Approach Paper emphasizes the following:

  • A uniform legal process for the financial sector regulators emphasizing rule of law.
  • A well-articulated principles-based approach to primary legislation emphasising a sound body of subordinate legislation based on these laws.
  • Statutorily empowered, independent regulators with clear goals, powers and accountability.
  • Removing twilight zones in the financial sector: every entity operating in the financial space needs to be on the radar of a financial regulator.
  • Focusing on consumer protection- This is the ultimate objective of financial sector regulation as regulation per se is not an objective. Consumer protection has two components; prevention and cure. While financial regulators will address the former, the proposed financial redressal agency (FRA) spanning across the financial sector will deal with the latter addressing financial consumer grievances. A feed-back loop from the FRA to the regulators will help the latter in systemically addressing consumer grievances by appropriate regulations.
  • A resolution mechanism to address failure of financial firms and to protect consumers, including management of the deposit insurance scheme.
  • Ownership neutrality and competition.
  • Moving away from the sectoral approach to regulation
  • A framework for addressing systemic risk, financial sector development, coordination.

w) At this stage, it will be sufficient to re-produce the long title of the Act. The para phrasing is done by me.

1. An Act to regulate the financial sector and to introduce principles for financial regulation and the constitution, objectives, powers and interaction of Financial Agencies and to bring coherence and efficacy in the financial regulatory framework.

2. WHEREAS this Act lays down mechanisms of independence and accountability, and creates precise objectives, powers and processes for Financial Agencies.

3. WHEREAS this Act is a principles-based law, neutral in its application to any specific financial sector and seeks to focus on ownership-neutrality and fostering competition.

4. WHEREAS this Act reorganizes the existing Indian financial regulatory architecture in light of the dynamic growth experienced by the country.

5. WHEREAS this Act

§ formalises regulatory governance in financial regulation, introduces specific protections for consumers of financial products and financial services,

§ the principles of prudential regulation, lays down the position of law in certain specific contracts, trading and market abuse,

§ provides a mechanism for the resolution of certain types of financial service providers, introduces systemic risk oversight in the financial system,

§ focuses on the responsibility of financial inclusion and market development, sets out the outlook on capital controls, and formalises the process of public debt management in the country.

6. WHEREAS this Act deems the existing Reserve Bank of India to be incorporated under this Act entrusting it with the role of monetary policy-making, the central bank and the regulation of banking and payment systems.

7. WHEREAS this Act establishes a Financial Authority to regulate all financial services other than banking and payment systems.

8. WHEREAS this Act establishes a Resolution Corporation to carry out the resolution of certain types of financial service providers in distress.

9. WHEREAS this Act establishes a Financial Redress Agency to redress the complaints of retail consumers.

10. WHEREAS this Act establishes a Financial Sector Appellate Tribunal to adjudicate on matters provided for in this Act.

11. WHEREAS this Act establishes the Public Debt Management Agency for the management of public debt, cash, and contingent liabilities of the Central Government.

12. WHEREAS this Act makes the existing Financial Stability and Development Council a statutory agency for fostering the stability and resilience of the financial system.

[1] Press Release F.No.4/1/2014-FSLRC New Delhi, Dated: 23 July 2015 on

Inviting Comments on the Revised Draft Indian Financial Code

Government of India, Ministry of Finance, Department of Economic Affairs

This legislation will become one of the largest pieces of legislation with 414 sections divided into 94 chapters and XIX parts.

PART I Preliminary And Definitions
CHAPTER 1 Preliminary
CHAPTER 2 Definitions
PART II Financial Agencies And The Tribunal
CHAPTER 3 Establishment Of Financial Agencies
CHAPTER 4 Establishment And Structure Of The Tribunal
CHAPTER 5 Allocation Of Regulation Of Financial Services
PART III Functioning Of Financial Agencies
CHAPTER 6 Boards Of Financial Agencies
CHAPTER 7 Strength And Composition Of Boards
CHAPTER 8 Eligibility And Selection Of Members
CHAPTER 9 Resignation, Removal And Suspension Of Members
CHAPTER 10 Decision Making By The Board
CHAPTER 11 General Functioning Of The Board
CHAPTER 12 Advisory Councils
CHAPTER 13 Funding Of Financial Agencies
CHAPTER 14 Accountability Mechanisms For Financial Agencies
CHAPTER 15 Other Obligations
CHAPTER 16 Interaction Between The Competition Commission And The Regulator
PART IV Delegated Legislation By Financial Agencies
CHAPTER 17 Regulations And Guidance
CHAPTER 18 Bye-Laws Of Financial Agencies
CHAPTER 19 Miscellaneous
PART V Executive Functions Of Financial Agencies
CHAPTER 20 Disposal Of Applications
CHAPTER 21 Information And Inspections
CHAPTER 22 Investigations
CHAPTER 23 Offences Under This Part
PART VI Quasi-Judicial Functions Of Financial Agencies
CHAPTER 24 Administrative Law Wing
CHAPTER 25 Show Cause Notices And Orders
CHAPTER 26 Enforcement Actions
CHAPTER 27 Procedure For Enforcement Actions
CHAPTER 28 Penalties
PART VII Financial Consumer Protection
CHAPTER 29 Objectives And Principles
CHAPTER 30 Protection Of Consumers
CHAPTER 31 Requirement Of Disclosure
CHAPTER 32 Protection Of Personal Information
CHAPTER 33 Redress Of Complaints
CHAPTER 34 Suitability Of Advice For Retail Consumers
CHAPTER 35 Other Powers And Functions Of The Regulator
CHAPTER 36 Redress Agency
CHAPTER 37 Proceedings Before The Redress Agency
CHAPTER 38 Redress Agency’S Procedures
CHAPTER 39 Other Provisions Governing The Redress Agency
CHAPTER 40 Financial Awareness
CHAPTER 41 Advisory Council On Consumer Protection
CHAPTER 42 Offences Under This Part
PART VIII Prudential Regulation
CHAPTER 43 Objectives And Principles
CHAPTER 44 Authorisation To Carry On The Business Of Providing Financial Services
CHAPTER 45 Prudential Requirements
CHAPTER 46 Auditors And Actuaries
CHAPTER 47 Provisions Governing Particular Transactions
CHAPTER 48 Functions And Powers Of The Regulator
CHAPTER 49 Offences Under This Part
PART IX Contracts, Trading And Market Abuse
CHAPTER 50 Principles Relating To Contracts Of Insurance
CHAPTER 51 Rights Relating To Financial Products And Financial Services
CHAPTER 52 Infrastructure Institutions
CHAPTER 53 Contractual Issues Pertaining To Infrastructure Institutions
CHAPTER 54 Dematerialisation Of Financial Products
CHAPTER 55 Issue And Listing Of Securities
CHAPTER 56 Market Abuse
CHAPTER 57 Offences Under This Part
PART X Capital Controls
CHAPTER 58 Objectives And Principles
CHAPTER 59 Current Account Transactions
CHAPTER 60 Capital Account Transactions
CHAPTER 61 Administration Of Capital Controls
CHAPTER 62 Authorised Dealers
CHAPTER 63 Annual Reports
PART XI Reserve Bank Of India
CHAPTER 64 Objectives And Functioning Of The Reserve Bank
CHAPTER 65 Monetary Policy Function
CHAPTER 66 Other Central Bank Powers
CHAPTER 67 Currency
CHAPTER 68 Accounts Of The Reserve Bank
PART XII Resolution Of Financial Service Providers
CHAPTER 69 Objectives And Scope
CHAPTER 70 Consumer Insurance
CHAPTER 71 Resolution
CHAPTER 72 Restoration And Resolution Plans
CHAPTER 73 Resolution Of A Covered Service Provider
CHAPTER 74 Liquidation Of The Covered Service Provider
CHAPTER 75 Offences Under This Part
PART XIII Financial Stability And Development Council
CHAPTER 76 Objective And Functioning Of The Financial Stability And Development Of Council
CHAPTER 77 Functions Of The Council
CHAPTER 78 Financial Data Management Centre
CHAPTER 79 Other Provisions Governing The Council
CHAPTER 80 Offences Under This Part
PART XIV Development
CHAPTER 81 Objective And Functions
CHAPTER 82 Provisions For Review
PART XV Public Debt Management Agency
CHAPTER 83 Objective And Functions Of The Debt Agency
CHAPTER 84 Management Of Public Debt And Contingent Liabilities
CHAPTER 85 Government Securities
CHAPTER 86 Cash Management
CHAPTER 87 Other Functions
CHAPTER 88 Powers Of The Central Government
PART XVI Offences
CHAPTER 89 Offences Under This Act
PART XVII Functions, Powers And Duties Of The Tribunal
CHAPTER 90 Tribunal Members
CHAPTER 91 Jurisdiction And Appeals
CHAPTER 92 Powers And Procedure
CHAPTER 93 Administration
PART XVIII Miscellaneous
CHAPTER 94 Transition Provisions
PART XIX Schedules

( Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)

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