Financial standards - Indian perspective II

This is the second and concluding part of the extracts from the paper presented by Dr. Y. V. Reddy, Deputy Governor of the Reserve Bank of India, at a recently held conference on International Standards and Codes organised by the International Monetary Fund-World Bank in Washington DC. The paper describes the Indian perspective and approach in regard to the implementation of international financial standards and codes advocated by the Financial Stability Forum (FSF). The first part appeared in this column on March 22.

THE ADVISORY groups constituted by the Standing Committee on International Financial Standards and Codes in ten core subject areas pertaining to the financial system are entrusted with the task of studying, in detail, the present status of applicability and relevance and compliance of relevant standards and codes, reviewing the feasibility of compliance and the timeframe over which this could be achieved given the prevailing legal and institutional practices, comparing the levels of adherence in India, vis-a-vis in industrialised and also emerging economies particularly to understand India's position and prioritise actions on some of the more important codes and standards, and to chalk out a course of action for achieving the best practices.

Out of the set of 12 subjects (actually eleven as accounting and auditing are taken together) areas for which standards and codes that have been prescribed by international financial institutions and other standard setting bodies pertaining to the financial system, the Standing Committee has so far identified ten core subjects for immediate attention and assessment by the advisory groups. These are, transparency in monetary and financial policies, data dissemination, payments and settlement system, banking supervision, securities market regulation, accounting and auditing, fiscal transparency, insurance regulation, bankruptcy laws and corporate governance. The twelfth area namely 'Market integrity' associated with the 20 recommendations of the Financial Action TaskForce (FATF) on money laundering is not being presently looked into by the Standing Committee.

It may need to be mentioned that all the advisory groups are chaired by eminent experts not generally holding official positions in Government or other regulatory bodies. While the chairmen of these advisory groups were identified and nominated by the Standing Committee, taking into account the experience and expertise, the choice of members of these advisory groups, was completely left to the chairmen of advisory groups. The members are generally non-official experts in relevant subject areas. The groups have, however, the option of including officials from the Government, the Reserve Bank of India and the Securities and Exchange Board of India as special invitees. Such officials help in providing inputs on the understanding of extant position relating to the relevant standards and codes and also the steps under way towards improvements.

This arrangement keeps the advisory groups outside the sphere of official influence and allows them to make critical assessment of relevance and state of compliance with standards and codes and give unbiased recommendations with regard to the feasibility of compliance and the necessity of achieving best practices in the areas covered by them.

In order to facilitate exchange of information and expertise on matters of mutual interest, the advisory groups have the option of having interactions/consultations among themselves and many did exercise the option.

The advisory groups may also jointly deliberate on overlapping issues in certain subject areas to evolve a consistent approach. In finalising its report, the Standing Committee would, however, attempt to consolidate these overlapping areas. The reports of the advisory groups are made public, as soon as they are submitted to the Standing Committee.

The Standing Committee also periodically reviews the progress of the advisory group and is required to review its own status after the completion of one year and report to the Government/RBI.

The secretariat support to the Standing Committee is provided by the RBI.

Work processes

In view of the varied nature of the subject areas, each advisory group decided to design its own methods and processes of work. Thus, some groups mounted special studies or technical papers, some divided the work of preparing basic technical papers among each of the members and most depended heavily on the background material collected and analysed by professionals in the RBI. While an advisory group gave an interim report, the general preference turned out to be in favour of final reports, sometimes in parts submitted sequentially.

In some of the subject areas, the government concerned or regulatory bodies had already constituted some study groups and hence it was argued on occasions that the advisory groups are duplicating such efforts. In such cases, it became necessary to clarify that the work of the advisory groups is without prejudice to any other official and non-official initiatives, and that the work is not meant to be intrusive. It also became necessary to encourage the advisory groups to take account in their deliberations such parallel, though partial, efforts and provide appropriate inputs to such efforts whenever sought. The process was made easier in several cases as one or more members of relevant The Advisory Group happened to be so eminent as to be involved in several of the initiatives.

Some advisory groups had to reckon with the fact that their perception of compliance with international standards differed from the official stance of authorities concerned, that is, the regulator or the government body. The non-official status of the advisory groups has enabled them to consider the official stance but make its own independent assessment of degree of compliance.

In some of the advisory groups there has been a view in favour of making recommendations on substantive policy-issues, while the mandate was, say on, transparency. There have also been occasions when the group tended to comment on functioning of official bodies in the context of standards.

In the preparation of their respective reports, most advisory groups have also been studying and reviewing international experience in various subject areas. In particular, the report of the Advisory Group on monetary and financial policies took comprehensive account of extant institutional arrangements and practices in five countries namely, the U.K., the U.S., Australia, New Zealand and South Africa. The Advisory Group on Bankruptcy Laws has examined the existing Acts on insolvency and bankruptcy in the U.S. and select countries in Europe and Asia. The Advisory Group on Accounting and Auditing has conducted in depth studies of the International Accounting Standards (IAS), the U.S. Generally Accepted Accounting Principles (U.S. GAAP) and the comparative structure of Accounting Standards in India and standards issued by the Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI).

In the course of their work, the advisory groups have also been having the benefit of discussions with market participants, members from professional bodies as well as academics. The Advisory Group on Insurance Regulation met the officials of the Life Insurance Corporation of India and the Advisory Group on Fiscal Transparency had extensive discussions with all State finance secretaries and the Office of the Comptroller and Auditor General of India. The advisory groups have, in most cases, co- opted market participants and members from professional bodies as special invitees. For example, the Advisory Group on Payments and Settlement System has special invitees from the National Stock Exchange (NSE) and a member from academia. The Advisory Group on Accounting and Auditing has a member from the Institute of Chartered Accountants of India (ICAI) and other well known market participants and practising professionals. Similarly, the Advisory Group on Securities Market Regulation and the Advisory Group on Banking Supervision have eminent experts from Housing Development Finance Corporation (HDFC) and ICICI Bank. The Advisory Group on Bankruptcy Laws also includes practising professionals and eminent academics, including the former Director of National Law School as the Chairman of the Group.

The advisory groups were encouraged to prepare in tabular form the given international standard/code, current status in India and the corresponding recommendation of the group as a supplement to the narrative to facilitate easy reference.

As and when the reports are received by the Standing Committee, they are placed on the RBI's website for immediate wider public dissemination.

Current status

As of now, the reports/part of reports in respect of the following subjects have already been received by the Standing Committee: Transparency of Monetary and Financial Policies (Final), Payment and Settlement System (Parts I and II ), Insurance Regulation (Final - Parts I and II), Banking Supervision (Part I), Accounting and Auditing (Final), Bankruptcy Laws (Interim). All reports have been placed on the RBI website and are in the process of being published for wider dissemination and discussion.

Plans for follow up

The Standing Committee would consolidate the reports of all advisory groups and prepare its own report containing executive summaries/highlights of all the reports, action points requiring attention by regulatory authorities/agencies concerned with the follow up. The Standing Committee report also would be widely disseminated to the public as the advisory group reports.

The advisory group would be requested to help organise a seminar/workshop for a day in an appropriate institution/centre for creating awareness and this would help the Standing Committee to concretise the views on recommendations.

For each report, a mailing list covering both public sector and private sector organisations, international institutions and experts, both local and international, would be also be identified and finalised in consultation with the chairman of each advisory group. The Standing Committee would request specific comments/feedback on the recommendations of the advisory group from these addressees.

The Standing Committee would prepare an annual review of status and progress regarding compliance with, and implementation of standards and codes and submit it to the Ministry of Finance.

Highlights

The Indian position which recognises the significance, scope, limits and contextual degree of relevance of international financial standard and codes has been considered by a broad spectrum of experts, intellectuals and market participants as reasonable.

Second, the need to assess Indian standards and codes with international benchmarks has also elicited broad support.

Third, the impact of the process could often be indirect and not necessarily direct and instant. For example, the Secretary Department of Company Affairs in a recent address to the accountants and auditors referred to the work of the Standing Committee and related it to the ongoing amendments to the Company Law.

Fourth, the participative processes also have a multiplier effect in terms of several means by which the codes and standards are disseminated. For example, the widely read Economic Survey 2000- 01 of the Central Government released as part of set of Budget Documents makes a detailed reference to the subject (vide Box 6.4 on International Financial Standards and Codes). There have also been extensive references to this in several publications of the RBI.

Fifth, several prominent intellectuals, professionals, and market participants contributed to the process of benchmarking, and identifying gaps and they participated in the exercise in a purely honorary capacity, as a national endeavour

Sixth, such a process brought out the possible differing views between official bodies or authorities and domestic independent opinion as regards the extent of compliance with such codes and standards. It is considered necessary to recognise this and try to arrive at a consensus.

Seventh, some concern on the part of official authorities to such an independent assessment is understandable but could be significantly overcome through their participation as special invitees and the efforts of advisory group which have members of national standing.

Eighth, many areas of overlap among the areas covered by different advisory groups were observed. Also, each advisory group had to interact with several regulatory and standard setting bodies. The process thus becomes quite complex, especially when the jurisdictional issues come up.

Ninth, several standard setting bodies including professional associations and self-regulatory bodies of market participants involved with current practices have, on occasions had concerns about the advisory groups findings but special efforts by the advisory groups helped assuage these concerns.

Tenth, the work of the advisory groups required substantial technical and professional inputs located in several agencies, public and private. These had to be pooled and collated.

Eleventh, the advisory groups have found it difficult to focus entirely on compliance issues since there is a preoccupation with immediate issues of operational significance to the market participants and such issues may be policy or procedural or may even be of short term relevance. The main focus has not been, however, lost sight of.

Twelfth, the enthusiasm for disclosure and transparency in public agencies is not matched by eagerness to be transparent on the part of private sector. The private sector's participation in the process helped a better appreciation of the importance of disclosures.

Finally, four lessons from the exercise appear to be relevant. The process of implementation demands significant resources and is time-consuming. Moreover, most of the follow-up activities require some legislative changes.

In the ultimate analysis, adoption of the standards has to be driven by self-interest of the country and attempts should be toward harmony and ultimate convergence rather than mechanical compliance.

(Concluded)

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