Dynamics and regulatory system of Indian financial markets. A dialectic view
| Pages | 275-302 |
| DOI | https://doi.org/10.1108/13581980710762282 |
| Published date | 31 July 2007 |
| Date | 31 July 2007 |
| Author | A.K. Sharma,Ashutosh Vashishtha |
| Subject Matter | Accounting & finance |
Dynamics and regulatory system
of Indian financial markets
A dialectic view
A.K. Sharma and Ashutosh Vashishtha
Department of Management Studies,
Indian Institute of Technology Roorkee, Roorkee, India
Abstract
Purpose – This paper aims to trace the evolution of Indian financial market structure and regulation,
in the broad dialectic sense and to suggest a consolidated, holistic regulatory model.
Design/methodology/approach – The paper sketches the evolution of Indian financial market
structure and its regulation in terms of dialectic cycles. The first cycle extending practically over four
decades, from the 1950s to the 1980s, was a period of foundation, expansion, and policy introspection.
The decade of the 1990s marked the commencement of the second cycle – a period of liberalization and
emergence of financial conglomerates. The Indian financial system has since completed one full circle
in the dialectic process and is now passing through the last phase (synthesis) of the second cycle.
Based on this dialectic approach, a consolidated and holistic regulatory model has been developed and
suggested.
Findings – The paper concludes that, from a regulatory perspective, the recent developments in the
financial sector have led to an appreciation of the limitations of the present segmental approach to
financial regulation and favors adopting a consolidated supervisory approach to financial regulation
and supervision, irrespective of its structural design.
Originality/value – This paper will be of value to financial regulators, financial intermediaries and
investors across all the countries, developed as well as developing. It will facilitate and guide in the
process of regulatory restructuring and strengthening the overall health of the financial markets.
Keywords Financial markets,Regulation, Financial reporting,India
Paper type Research paper
1. Introduction
The financial system and its critical driving force, that is, financial infrastructure[1]
that are in existence at anytime may be seen as the outcome of a continuous process of
interactive exchange and chain sequence of actions and reactions between regulators,
regulated institutions, financial markets, and the consumers (of financial services and
products). Innovative changes in financial institutions, regulatory structures and
practices, and financial instruments occur, from time to time, over a long period. These
changes affect the generation, mobilis ation and distribution of savings, and
are important for shaping the direction and pace of growth of an economy. The
circumstances and imperatives faced by an economy, both internally and externally,
play an important role in appreciating the need for, and initiating the change process.
The Indian financial system consists of banks, insurance companies, mutual funds
and other institutions such as, non-bank financial institutions, which promote and
mobilise savings and make the same available to actual investors – individual
investors, industrial and trading companies and the government. It also inclu des other
institutions, which actually act as alternative channels for investment of saving s rather
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
Dynamics and
regulatory
system
275
Journal of Financial Regulation and
Compliance
Vol. 15 No. 3, 2007
pp. 275-302
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980710762282
than promoters of savings. For instance, the new issue market and the stock exchanges
which facilitate the buying and selling of shares and debentures of various companies.
Finally, the various regulatory agencies[2] are also an important part of the financial
system. They are indispensable from the point of view of promoting financial stability
and protecting interests of consumers of financial services. Above all, they play a
crucial role in giving a direction to the financial sector to align it with the mood and
needs of the macroeconomic system.
The evolution of Indian financial markets and the regulatory system, conside ring
the vast network of banking institutions, insurance companies and stock exchanges
and their regulatory agencies, can be said to have occurred mainly over the later half of
the last century. This is, in fact, also the period when the country’s financial regulatory
system was founded, nurtured, and given a direction and purpose and the necessary
strength in a gradual way as warranted by the circumstances and contingencies, from
time to time. During this period, the system played varied roles – an instrument of
planned development in the initial stage; a precursor of social change a little later; and
a custodian of modern complex and robust financial sector, presently.
The beginning of the process may be seen in the coming into existence of the
Reserve Bank of India (RBI). The growth of financial system that has since occurred
may be conceptualised, to a large extent, in dialectic terms[3]. An understanding of the
dynamics of the financial system is useful in many respects. In particular, it facilitates
a correct perception of its present state for identifying the areas where policy initiatives
need to be undertaken to plug the loopholes. Viewing the growth process of the system
in simple historical stages is not of much use. It is more important to see how it has
been affected as a result of actions and reactions of different interest groups in course
of various corrective measures initiated in the past. This approach to investigating into
a problem and seeking solutions contains the essence of what is known as dialectic
process.
2. Rationale of study
India’s financial sector has seen major changes over the past decade. Banks have
begun to move towards universal banking structure as frontiers between banking,
securities and insurance sectors have become thin and blurred. Competitive pressures
have resulted in a growing number of mergers, the emergence of financial
conglomerates, growing instances of regulatory arbitrage and overlapping and
duplicacy of regulations. These changes have important implications for both financial
intermediaries and financial regulators. The present study highlights the limitations
and irrelevance of the present segmental approach to regulation of Indian financial
markets. Although study focuses on Indian financial system and its regulatory
architecture but it is quite relevant for other developing and developed economies also
as there is a global trend towards reviewing the financial regulatory architecture. The
dialect approach to regulate the financial markets as suggested in this study may offer
a useful insight in this regard.
The paper has been divided into four sections. Section 3 briefly describes the
analytical frame of dialectic dynamics. Section 4 sketches the dialectic dynamics of
Indian financial system, Section 5 proposes a comprehensive and holistic integrated
regulatory model for Indian financial sector and Section 6 concludes the paper.
JFRC
15,3
276
To continue reading
Request your trial