Regulation, Competition & Government Ownership: A case study of Financial Sector in India

The case for appropriate regulation of financial sector to ensure stability and investor protection is fairly obvious. The need of government ownership in designing such regulation is not, however, so obvious. These days competition is seen to be a facilitator of effective regulation (Whittaker, 2001). Changes in communication and computation technology are changing the face of industry affecting, inter alia, structure and competition. (Wharton Financial Institution Centre, 2001) This is also affecting the trends in regulation of financial sector making it more elaborate and internationally convergent.

Government of India has significant ownership stakes in major segments of financial system viz. banking, insurance, and pension & fund management. Creation of a single regulatory agency to oversee all segments of financial sector is a major issue in ensuring regulation through competition. The other issue is to ensure government ownership does not impede competition and regulation in financial sector. From the perspective of regulation and competition, it is not the percentage of government holding per say is very important; but the manner in which government ownership affects the internal working these entities is the most relevant aspect.

This paper seeks to identify the balance between competition and of regulation in financial services sector so as to ensure stability of the system and investor protection. It also enquires whether government ownership is essential for proper regulation of financial sector. The theme of the paper is developed in the context of financial sector in India, which is characterized by dominant government ownership.