The Financial Sector Legislative Reforms Commission report submitted recently, among others, contained which of the following proposals? 1. All regulators will have an empowered board, the role of each of the members has been defined. 2. The Commission envisages an important process of judicial review of the regulations. 3. The draft code does not mention about executive powers. Select the correct answer using the code given below.

1. Financial Regulatory Landscape in India (basic)

To understand the reforms in banking regulation, we must first look at the Financial Regulatory Landscape in India. Think of this landscape as a garden where different authorities ensure that every 'plant' (financial institution) grows healthily without harming others. Traditionally, this garden has been partitioned: the Reserve Bank of India (RBI) looks after the 'trees' (Banks and NBFCs), while the Securities and Exchange Board of India (SEBI) monitors the 'flowers' (Capital Markets).

The RBI, established in 1935 following the Hilton Young Commission, operates under the RBI Act, 1934 and the Banking Regulation Act, 1949 Nitin Singhania, Money and Banking, p.161. Its reach is vast, covering not just commercial banks, but also Non-Banking Financial Companies (NBFCs), Primary Dealers, and the four All India Financial Institutions (AIFIs) like NABARD and SIDBI Vivek Singh, Money and Banking- Part I, p.67. On the other side, SEBI was granted statutory powers in 1992 to protect investors and regulate the securities market, eventually absorbing the Forward Markets Commission (FMC) in 2015 to streamline oversight Nitin Singhania, Agriculture, p.274.

However, as the financial world became more complex, the government realized that having separate 'silos' for regulation could lead to gaps or overlaps. This led to the Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B.N. Srikrishna, which submitted its report in 2013. The Commission proposed a modern Indian Financial Code to move away from fragmented laws. Key recommendations included:

• Unified Governance: Regulators should have empowered boards with clear roles for executive and non-executive members.
• Accountability: Regulatory decisions shouldn't be final; they should be subject to judicial review through a new Financial Sector Appellate Tribunal (FSAT).
• Defined Powers: Regulators must have clear executive functions for micro-prudential regulation and market conduct, ensuring they are neither toothless nor arbitrary.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.66-67; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.161; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Agriculture, p.274

2. Evolution of Banking and Financial Reforms (basic)

To understand the evolution of banking reforms in India, we must look at two major turning points: the 1991 Balance of Payments crisis and the subsequent move towards systemic overhaul in the 2010s. Before 1991, the Indian banking system was characterized by "financial repression," where the government heavily dictated where banks should lend. The 1991 crisis acted as a catalyst for change, leading to the appointment of the Narasimhan Committee (Committee on Financial System). As noted in Indian Economy, Vivek Singh (7th ed.), Money and Banking - Part II, p.127, this committee argued that instruments like the Statutory Liquidity Ratio (SLR) should be used for prudential safety (ensuring banks have liquid assets) rather than being treated as a tool for the government to fund its own budget deficits.

As the economy matured following the LPG (Liberalization, Privatization, and Globalization) reforms, the focus shifted from just fixing bank balance sheets to fixing the legal and regulatory architecture of the entire financial sector. This led to the 2013 report of the Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B.N. Srikrishna. The Commission proposed a massive cleanup of the "jungle of laws" by introducing a single Indian Financial Code (IFC). The goal was to move away from sectoral silos (where different regulators acted in isolation) towards a more unified governance structure.

Two critical pillars of the FSLRC recommendations were Governance and Accountability:

• Unified Board Structure: The Commission recommended that all financial regulators should have an empowered board with clearly defined roles for executive and non-executive members to prevent the concentration of power in a single individual.
• Judicial Review: To ensure that regulators don't become "judge, jury, and executioner," the FSLRC proposed a Financial Sector Appellate Tribunal (FSAT). This body would hear appeals against regulatory decisions, ensuring that the rule of law and transparency are upheld in the financial markets.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.127

3. FSDC: The Macro-Prudential Coordinator (intermediate)

In the complex world of finance, different regulators oversee different sectors: the RBI looks after banks, SEBI manages the stock markets, and IRDAI handles insurance. However, modern financial products often overlap these boundaries. Imagine a bank selling an insurance policy tied to a mutual fund — which regulator should take the lead? To solve this "silo" problem and monitor risks that could sink the entire economy (systemic risks), the Government of India established the Financial Stability and Development Council (FSDC) in December 2010.

The FSDC acts as the apex-level forum for macro-prudential supervision. Unlike the Reserve Bank of India, which is a statutory body created by an Act of Parliament, the FSDC is non-statutory. It was created through an executive order (gazette notification), giving it the flexibility to act as a coordinating platform rather than a rigid legal entity Vivek Singh, Money and Banking - Part II, p.133. It essentially serves as a bridge between the autonomy of financial regulators and the policy objectives of the government.

Composition and Leadership

The Council is chaired by the Union Finance Minister. This is a crucial distinction to remember for your exams, as many students mistakenly assume the RBI Governor chairs all high-level financial committees. Its membership is a "who's who" of Indian finance, including the heads of all major regulators (RBI, SEBI, PFRDA, IRDAI) and the Insolvency and Bankruptcy Board of India (IBBI). It also includes top bureaucrats like the Finance Secretary, the Chief Economic Advisor, and secretaries from the Ministry of IT and Corporate Affairs Vivek Singh, Money and Banking - Part II, p.133.

Feature	Financial Stability and Development Council (FSDC)
Status	Non-statutory (Executive Body)
Chairperson	Union Finance Minister
Primary Goal	Inter-regulatory coordination & Macro-prudential stability

The FSDC focuses on Macro-prudential regulation — which means looking at the health of the "entire forest" (the financial system) rather than just "individual trees" (individual banks). Its mandate extends to financial literacy, financial inclusion, and coordinating India's stance at international forums like the G20 or the Financial Stability Board (FSB).

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.133

4. Principles of Regulatory Governance and Accountability (intermediate)

To understand Regulatory Governance, we must first recognize that modern financial regulators are unique entities. Unlike traditional government departments, they possess 'tripartite' powers: they make rules (quasi-legislative), enforce them (executive), and punish violations (quasi-judicial). To prevent these powers from becoming absolute, the Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B.N. Srikrishna, proposed a framework centered on two pillars: structured governance and rigorous accountability.

1. Governance through Empowered Boards: The FSLRC recommended a unified governance structure for all 'Financial Agencies' (regulators). Instead of a single powerful chief, the Commission proposed an empowered board. This board must have a clear separation of roles between executive members (who run daily operations), non-executive members (who provide oversight), and nominee members. This ensures that no single individual has unchecked authority, fostering a culture of collective decision-making and professional management.

2. Accountability and Judicial Review: In a democracy, no exercise of power is beyond the law. As noted in Indian Polity, M. Laxmikanth, Judicial Review, p.297, the Constitution is supreme, and any regulatory action must conform to constitutional requirements. To make this practical in finance, the FSLRC proposed the establishment of a Financial Sector Appellate Tribunal (FSAT). This specialized body would hear appeals against regulatory decisions, ensuring that regulators are accountable to a judicial process. This is similar to how administrative control is exercised in other sectors to ensure performance and legality Laxmikanth, M. Indian Polity, Consumer Commissions, p.371.

3. Transparency and Defined Functions: For accountability to be real, the law must explicitly detail the executive powers of regulators—ranging from micro-prudential regulation (ensuring individual bank safety) to resolution and market conduct. This prevents 'regulatory creep,' where an agency might try to expand its power beyond its legal mandate. By shifting from a 'Police State' mentality to a 'Welfare State' framework, regulation aims to establish the economic democracy pledged in our Preamble Introduction to the Constitution of India, D. D. Basu, Directive Principles of State Policy, p.177.

Sources: Indian Polity, M. Laxmikanth, Judicial Review, p.297-298; Laxmikanth, M. Indian Polity, Consumer Commissions, p.371; Introduction to the Constitution of India, D. D. Basu, Directive Principles of State Policy, p.177

5. Institutional Shift: The Monetary Policy Committee (MPC) (exam-level)

The creation of the Monetary Policy Committee (MPC) in 2016 represents one of the most significant institutional shifts in India's economic history. Before this reform, the RBI Governor had the ultimate authority (and responsibility) for setting interest rates, guided only by an advisory committee. This was replaced by a statutory and institutionalized framework through an amendment to the RBI Act, 1934 Indian Economy, Nitin Singhania, Money and Banking, p.172. The primary goal of this shift was to move away from individual discretion toward a rule-based, committee-driven approach that targets inflation while supporting economic growth.

A critical component of this reform was the Monetary Policy Framework Agreement (2015) between the Government of India and the RBI. Under this agreement, the RBI is mandated to maintain Consumer Price Index (CPI-Combined) inflation at 4% with a band of +/- 2% Indian Economy, Vivek Singh, Money and Banking- Part I, p.60. The decision to use CPI over the Wholesale Price Index (WPI) was a deliberate shift because CPI includes the service sector (which contributes nearly 60% to India's GDP) and better reflects the retail prices paid by the common man Indian Economy, Nitin Singhania, Inflation, p.73.

The MPC consists of six members: three from the RBI (including the Governor) and three external members appointed by the Government. This structure ensures a diversity of perspectives and balances the independence of the central bank with democratic accountability. To ensure transparency, the RBI is held accountable to the Government; if inflation remains outside the target band for three consecutive quarters, the RBI must issue a public report explaining the failure and the proposed remedial path Indian Economy, Nitin Singhania, Money and Banking, p.172.

Feature	Pre-2016 System	Post-2016 (MPC) System
Decision Maker	RBI Governor (Discretionary)	6-Member Committee (Majority Vote)
Primary Target	Multiple Indicators	Inflation Targeting (4% ± 2%)
Price Index	Wholesale Price Index (WPI)	Consumer Price Index (CPI-C)
Legal Basis	Administrative decision	Statutory (RBI Act Amendment)

Sources: Indian Economy, Nitin Singhania, Money and Banking, p.172; Indian Economy, Vivek Singh, Money and Banking- Part I, p.60; Indian Economy, Nitin Singhania, Inflation, p.73

6. FSLRC and the Indian Financial Code (IFC) (exam-level)

The financial landscape in India has historically been governed by a patchwork of over 60 different laws, many of which date back to the British era. To harmonize this fragmented system, the Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B.N. Srikrishna, submitted its report in 2013. The Commission proposed the Indian Financial Code (IFC) — a single, comprehensive law intended to replace the majority of existing financial statutes. A core pillar of the FSLRC's philosophy was the shift from a 'rule-based' to a 'principle-based' regulatory regime, ensuring that laws could evolve with the markets. It is crucial to distinguish this Indian Financial Code (the proposed law) from the Indian Financial System Code (IFSC), which is merely an 11-digit alphanumeric code used for bank branch identification during fund transfers Indian Economy, Nitin Singhania, Money and Banking, p.196.

The FSLRC proposed a radical overhaul of governance and accountability within financial regulators. It recommended a unified governance structure where every financial agency (like RBI or SEBI) would have an empowered board with clearly defined roles for executive and non-executive members. To ensure regulators didn't become 'all-powerful,' the FSLRC emphasized judicial review. It proposed the creation of a Financial Sector Appellate Tribunal (FSAT), which would hear appeals against the decisions of all financial regulators, thereby providing a check against arbitrary regulatory actions. This aligns with modern governance standards where the powers of the state and its regulators are balanced by a robust appeals mechanism.

Furthermore, the draft IFC explicitly detailed the executive powers and functions of regulators. Contrary to the idea of narrowing their scope, the Commission wanted regulators to have clear mandates over micro-prudential regulation (the health of individual firms), consumer protection, and market conduct. It also proposed a specialized Resolution Corporation to handle the orderly failure of financial firms, a concept later echoed in reforms like the Insolvency and Bankruptcy Code (IBC) Indian Economy, Vivek Singh, Money and Banking - Part II, p.141. By codifying these roles, the FSLRC aimed to eliminate jurisdictional overlaps and provide a predictable environment for investors.

Sources: Indian Economy, Nitin Singhania, Money and Banking, p.196; Indian Economy, Vivek Singh, Money and Banking - Part II, p.141

7. Solving the Original PYQ (exam-level)

This question tests your understanding of the institutional architecture of India's financial sector. Having studied the evolution of regulatory bodies like SEBI and RBI, you can see that the FSLRC (Justice B.N. Srikrishna Commission) was designed to move away from sector-specific silos toward a holistic legislative framework. The first building block here is governance: Statement 1 correctly identifies the shift toward empowered boards with clear role definitions to ensure professional management. Think of this as the transition from discretionary power to structured institutional governance, which is a core theme in Indian administrative reforms.

Moving to Statement 2, the commission focused heavily on accountability. In a rule-of-law framework, regulatory actions must be contestable; hence, the proposal for judicial review and a dedicated Financial Sector Appellate Tribunal (FSAT) is a logical extension of your lessons on constitutional checks and balances. However, Statement 3 represents a classic UPSC trap. It is logically inconsistent to propose a comprehensive "Indian Financial Code" while omitting executive powers. A "code" by definition seeks to clarify the powers—executive, legislative, and semi-judicial—of the regulators to ensure they can function effectively. When you see a negative qualifier like "does not mention," evaluate if that aligns with the objective of a reform commission; usually, these bodies aim for more clarity, not less.

The correct answer is (A) 1 and 2 only. In the exam, use elimination: once you recognize that Statement 3 is factually incorrect because the code explicitly details micro-prudential and market conduct powers, options (C) and (D) are immediately discarded. By applying the principle of regulatory balance—empowerment (Statement 1) balanced by oversight (Statement 2)—you can confidently arrive at the right conclusion. Sources: FSLRC Report Summary (2013) and Wikipedia: Financial Sector Legislative Reforms Commission.