Government refuses to yield on section 7 in faceoff with RBI
TOUGH STANCE Govt says contentious issues should be resolved at RBI board meeting on Nov 19
NEW DELHI: The Union government will not yield ground on its right to issue a directive to the Reserve Bank of India (RBI), even as it claimed that contentious issues between the two should be resolved at the board meeting of the central bank on November 19.
“There is complete clarity in the government that it has the right to issue a directive. This clause exists for all Acts defining the role of the regulator,” a person familiar with the development said, asking not to be identified.
Specifically, section 7 (1) of the RBI Act of 1934 says the Union government can “from time to time give such directions to the (central) bank as it may, after consultation with the governor of the bank, considered necessary in the public interest”. Further, section 7 (2) gives the government powers to entrust the business of RBI to its central board of directors.
The person cited above also said dialogue between the finance ministry and RBI was ongoing even though the two sides continued to disagree publicly. “The finance minister is the entrusted point person,” the person added.
On Friday, economic affairs secretary Subhash Chandra Garg said the government and RBI were in talks to finalize the economic capital framework of the central bank, which would lead to a transfer of surplus reserves with the central bank to the government.
Referring to speculation that RBI governor Urjit Patel had threatened to resign, the person said it was inexplicable as noththe ing so inclement had transpired. “Differences exist. India today is a very complex economy and at times, there tend to be an overlap in the oversight purview between a regulator and the government. There is then a need to engage and clarify,” the person said.
If indeed this is the case, then it may well be that both sides are clearly dialling down tensions and are exploring a middle ground. An email sent to RBI remained unanswered.
Tensions escalated between RBI and the government after the latter wrote three letters to the central bank threatening to invoke section 7 (1) of the RBI Act for addressing its concerns about a liquidity squeeze in the market.
The first letter was written after the Allahabad high court’s suggestion that the government consider giving directions to RBI under section 7 of the RBI Act, 1934, in a case involving independent power producers, who, by virtue of their accumulated debts, fell foul of the insolvency and bankruptcy code. Thereafter, it despatched another letter on October 10 seeking Patel’s views on deploying the central bank’s capital reserves to infuse liquidity into the markets.
The final letter was on regulatory issues including the suggestion to relax the prompt corrective action framework for some state-run banks. The person cited earlier said there was nothing exceptional about section 7 and that the Union government was empowered similarly in dealing with other regulators.
Under section 18 of the Insurance Regulatory and Development Authority of India (Irdai) Act, the central government has power to issue directions to the insurance regulator, wherein the centre’s decision is deemed to be final.
Section 19 of the Irdai Act empowers the central government to supersede Irdai for a period of six months.
“The provision is there but it is rarely used. As far as I know, it has never been used in the history of Irdai,” said a former chairman of Irdai.
To be sure, section 7 of the RBI Act too has never been invoked, though previous governments have threatened its use.
Similarly, sections 16 and 17 of the Securities and Exchange Board of India Act and sections 43 and 44 of the Pension Fund Regulatory and Development Authority have provisions empowering the government to issue directions to the regulators and supersede their boards. Section 25 of the Telecom Regulatory Authority of India Act also has similar provisions.
“Such clauses always exist in the acts governing the regulators. This is because of the division of work between the government and the regulators, where the former makes policy and the latter implements it,” said Pronab Sen, programme director for the India programme of the International Growth Centre.
“The issues for which the government has started discussions under section 7 of the RBI are more operational issues rather than that of policy and ideally, this section should not have been used. Because this section carries an implicit threat that if you don’t agree, we will issue a directive,” said Sen, who was also India’s former chief statistician.