Financial Sector Legislative Reforms Commission (FSLRC)

The Financial Sector Legislative Reforms Commission (FSLRC) was established by the Government of India in March 2011 to review, simplify, and modernise the existing legal and institutional framework governing the Indian financial system. The commission’s primary objective was to create a harmonised, principle-based, and coherent legal architecture suitable for India’s rapidly evolving financial sector.
Headed by Justice B. N. Srikrishna, the FSLRC was a landmark initiative aimed at aligning India’s financial regulatory structure with global best practices while ensuring efficiency, consumer protection, and financial stability.

Background and Rationale

India’s financial laws evolved over several decades, beginning with the colonial era and extending through the post-Independence phase of economic planning. By the early 21st century, the Indian financial system had become increasingly complex and integrated, but its legislative framework remained fragmented, outdated, and inconsistent.
Key reasons for establishing the FSLRC included:

• Multiplicity of Laws and Regulators: Financial sector governance was dispersed across numerous legislations such as the RBI Act, 1934; SEBI Act, 1992; Insurance Act, 1938; and others, leading to overlaps and regulatory arbitrage.
• Sectoral Approach: Different financial sectors—banking, insurance, capital markets, and pensions—had separate regulators with differing powers and philosophies.
• Technological and Market Developments: Innovations like derivatives, algorithmic trading, and digital finance required new legal approaches.
• Consumer Protection Concerns: Existing laws offered limited mechanisms for redressal of grievances or compensation for financial consumers.
• Need for Global Alignment: The post-2008 financial crisis underlined the need for integrated supervision and risk-based regulation.

The Union Finance Ministry, recognising these challenges, constituted the FSLRC to undertake a comprehensive review and recommend legislative and institutional reforms to strengthen the financial regulatory system.

Composition of the Commission

The FSLRC was chaired by Justice B. N. Srikrishna, a former judge of the Supreme Court of India. Its members included distinguished experts from law, economics, and finance:

• Dr. D. Subbarao – Former Governor, Reserve Bank of India (initially, later replaced).
• Dr. K. J. Udeshi – Former Deputy Governor, RBI.
• Dr. Ashok Chawla – Former Finance Secretary.
• Prof. Ajay Shah – Economist and financial policy expert.
• Prof. N. Balasubramanian – Corporate governance expert.
• Justice Yezdi S. Bharucha – Legal scholar and former judge.
• Dr. P. J. Nayak – Former Chairman, Axis Bank.
• Mr. C. B. Bhave – Former SEBI Chairman (Special Invitee).

The Commission also drew on inputs from working groups, consultants, and public consultations to formulate its recommendations.

Mandate and Objectives

The FSLRC was tasked with re-examining, simplifying, and rewriting the laws governing India’s financial system. Its mandate included:

1. Reviewing existing financial sector laws and identifying gaps, inconsistencies, and redundancies.
2. Evolving a principle-based, unified legislative framework to replace the fragmented structure.
3. Defining the roles of regulators, government, and market participants.
4. Proposing institutional reforms for better coordination and regulatory accountability.
5. Enhancing consumer protection and transparency mechanisms.
6. Strengthening the framework for systemic risk management and crisis resolution.

Submission of the Report

The FSLRC submitted its comprehensive Final Report on 22 March 2013 to the Ministry of Finance. The report was accompanied by a draft Indian Financial Code (IFC) — a proposed consolidated legislation intended to replace and harmonise numerous existing financial laws.
The report contained around 300 recommendations covering regulatory structure, institutional reforms, and legislative consolidation.

Major Recommendations of FSLRC

1. Unified Legislative Framework – Indian Financial Code (IFC)

The Commission proposed the enactment of an Indian Financial Code (IFC) to serve as an umbrella legislation covering all major aspects of financial regulation. The IFC aimed to replace multiple sector-specific laws and introduce a common, principle-based regulatory architecture.

2. Shift to a Unified Regulatory Structure

FSLRC recommended a seven-agency framework, replacing the existing fragmented system:

1. RBI (Monetary Authority): Retain control over monetary policy and systemic stability.
2. Unified Financial Agency (UFA): Consolidate regulatory functions for all financial firms (except banks and payments systems) – including capital markets, insurance, and pensions.
3. Financial Redressal Agency (FRA): Provide unified grievance redressal and consumer protection services.
4. Resolution Corporation: Handle failure management of financial institutions, similar to global “Resolution Authorities.”
5. Debt Management Office (DMO): Transfer public debt management functions from RBI to a specialised agency under the Ministry of Finance.
6. Financial Sector Appellate Tribunal (FSAT): Replace existing appellate bodies like SAT and provide a unified appellate mechanism.
7. Financial Stability and Development Council (FSDC): Serve as the apex coordinating body for macroprudential oversight.

3. Consumer Protection and Market Conduct

FSLRC proposed a comprehensive consumer protection framework, focusing on:

• Disclosure-based regulation instead of merit-based approvals.
• Obligations on financial service providers to ensure fair treatment and suitability of products.
• Establishment of the Financial Redressal Agency for speedy resolution of consumer complaints.

4. Principle-Based Regulation

The IFC proposed moving away from prescriptive, rule-based regulation towards principle-based, outcomes-focused regulation. This approach was intended to increase regulatory flexibility, accountability, and adaptability to innovation.

5. Regulatory Governance and Accountability

The FSLRC recommended introducing formal checks and balances for financial regulators:

• Clearly defined statutory objectives.
• Transparent rule-making processes with public consultation.
• Periodic independent performance evaluations.
• Clear accountability to Parliament and the public.

6. Systemic Risk and Financial Stability

The Commission proposed the creation of a Financial Stability and Development Council (FSDC) with statutory backing to monitor and coordinate systemic risk management across regulators. The FSDC was to be chaired by the Finance Minister, supported by a technical secretariat.

7. Resolution and Crisis Management

The proposed Resolution Corporation was designed to prevent disorderly failures of financial institutions. It would monitor early signs of distress, take corrective action, and manage resolution through mergers, recapitalisation, or liquidation.

8. Independence and Accountability of the RBI

While affirming the RBI’s autonomy in monetary policy, the FSLRC recommended:

• A Monetary Policy Committee (MPC) with external and government nominees for balanced decision-making.
• Separation of debt management and regulatory functions to avoid conflict of interest.

Implementation and Follow-Up

The FSLRC’s recommendations have had a significant influence on subsequent policy developments, even though the Indian Financial Code has not been enacted in its entirety. Key elements adopted in later reforms include:

• Formation of the Monetary Policy Committee (MPC) under the RBI Act (amended in 2016), aligning with FSLRC’s recommendations.
• Creation of the Insolvency and Bankruptcy Code (IBC), 2016, reflecting the resolution framework principles of the proposed Resolution Corporation.
• Establishment of the Financial Stability and Development Council (FSDC) as a coordination mechanism for regulators.
• Draft Indian Financial Code (IFC) released for public consultation in 2015, though not legislated due to extensive debate.

Some proposals, such as transferring public debt management from the RBI to a DMO, faced opposition and were deferred.

Criticisms and Debates

While widely acknowledged for its vision, the FSLRC also attracted criticism on several grounds:

• Centralisation of Power: The proposed Unified Financial Agency was viewed as excessively centralised, risking bureaucratic overreach.
• RBI Autonomy Concerns: Recommendations to limit RBI’s regulatory functions and create a separate DMO were seen as undermining the central bank’s independence.
• Implementation Complexity: The transition from multiple laws to a unified code was seen as legally and administratively challenging.
• Limited Stakeholder Consensus: Regulators such as the RBI and SEBI expressed reservations regarding certain proposals.

Despite these concerns, the FSLRC succeeded in initiating a critical debate on modernising India’s financial legal framework.

Contemporary Relevance and Legacy

The FSLRC remains a milestone in India’s financial regulatory reform journey. Its principles of transparency, accountability, consumer protection, and risk-based supervision continue to shape policymaking. The emphasis on coordinated regulation and systemic stability has become increasingly relevant with the growth of fintech, digital finance, and integrated markets.