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Bok Visiting Professor KP Krishnan on Market Regulation, India vs. the U.S.

April 21, 2011

Bridging Theory and Practice

Dr. KP Krishnan, the Secretary of the Economic Advisory Council of the Prime Minister of India and Bok Visiting International Professor
Bok Visiting International Professor KP Krishnan

Dr. KP Krishnan, the Secretary of the Economic Advisory Council of the Prime Minister of India, this semester came to Penn Law to serve as a Bok Visiting International Professor, where he taught a seminar on capital market regulation in India.

Each year through its International Program Penn Law invites several recognized experts in international and comparative law from around the world to Philadelphia, providing students access to senior experts, jurists, and professionals who offer new perspectives on cutting edge issues.

Penn Law’s Office of Communications interviewed Dr. Krishnan on his experience at the Law School and how globalization is impacting the exchange of ideas between India and the U.S.

Penn Law: What brought you to Penn Law through the Bok International Visiting Professors program?

KP Krishan (KK):  Really, it was a chance conversation with folks at the Center for the Advanced Study of India (CASI), which is a center here at Penn,  which led to a meeting with the Penn Law  people.  I was visiting New York and Washington for work last year, and one thing led to another: while I was in Philadelphia I met with Professors Eric Feldman, Anita Allen and Jill Fisch and Associate Dean Amy Gadsden at the White Dog Cafe, and I had this formal offer to be a Bok professor.

I’ve been teaching in India on financial sector regulation – not as a regular full course, but co-teaching with other professors. So, when this offer came, in a sense it was a natural extension of what I’ve been doing off-and-on. 

PL:  Please tell us about your current work in the Indian government. 

KK:  I belong to the Indian Civil Service, and in the Indian Civil Service  the way it normally works is, we spend a lifetime in the government.  Since July 1 last year my present job is to be the secretary of the prime minister’s Economic Advisory Council.  The nearest equivalent of this is the White House’s Council of Economic Advisers.

Immediately prior to that, for five years I ran the financial markets division in the Indian Ministry of Finance, which deals with financial sector regulation, as well as international cooperation in the financial sector.  My present job is much more macro - it includes the financial sector also.  It is much more advisory and economy wide. 

PL:  Are you able to bring that experience to bear in your Law School class?

KK:  Yes. Regulation, particularly financial sector regulation, by its very nature, has an enormous amount of policy content. And in a context like India, where a lot of the regulation is done through the mechanism of law, the political process – that is, the parliamentary process - clears the regulation. This by definition involves all the major political parties, their ideologies and their view on markets and the state – should there be greater role of the state, a lesser role of the state, etc.  The final outcome is necessarily an amalgam of all the expert views, thinking, and knowledge of finance and law, and finally, what is acceptable politically.

Therefore, I think, a person who has had the advantage of a ringside view of all of this brings to the classroom a sense, or a reality check, about what happens and how the best should not become the enemy of the good.  And that’s what I’ve tried to bring to the seminar at Penn Law. 

An interesting aspect is the parallels with the U.S. system.  At one level, we are very different. But at another level, the processes in a democracy are ultimately the same.  It is the politically accountable politicians who make the last call.  Do they always make the call in the public interest?  Do they make it on the basis of some other lobbying group, or on account of international pressure?  These are the kind of things that we discussed in the class.

PL:  What was it like in the classroom? Who participated?

KK:  I had nine students from the Law School, and interestingly, two Wharton professors – one who teaches accounting, another who teaches economics and business policy – as well as an Indian infrastructure lawyer, and Professor Shyam Balganesh from Penn Law. An average class was about 12 or 13 folks.  A very interesting mix of people.

PL:  What are the key similarities or differences in the regulatory frameworks in India and the U.S.?

KK:  Regulation in both countries has been, in a sense, path-dependent.  That is, it’s not something which somebody sat up one day and designed –it’s the result of history, not exactly what, ideally, a professor would recommend.  In India we have a multiplicity of regulators, exactly like the U.S. does, but for very different reasons.  The U.S. has it for reasons of the federal distribution of powers – the distribution between the states and the federal government.  In India, the entire financial sector rests with the government of India, namely the federal government, but nevertheless, we still have a multiplicity of regulators.  And bringing about coordination between regulators has been a major theme in both countries. 

The pre- and the post- [2008 financial] crisis issues in India and the U.S. actually led to identical conclusions – we need greater coordination amongst regulators.  But at the same time, we need to keep politics out of this because the fundamental issue is consumer protection.

PL:  What is the value of comparative law in this context?

KK:  Let me just give you one example. One of the major problems that came out post the Lehman crisis in the U.S. was the unregulated, or the over-the-counter markets - the OTC markets - a bilateral market between a buyer and a seller, not intermediated by a stock exchange or any other kind of exchange.  Through its history, India has had an explicit preference for exchange-traded markets over OTC markets, where a lot of the information doesn’t come out in the public domain - so when a crisis of the kind that happened in 2007 or 2008 occurs, you do not actually know how badly off is a particular financial firm, because a lot of their trades are known only to them and their counterparties.

So, when the crisis blew up, the government could not even estimate what is the kind of damage that was going to hit the system, and therefore, what it was that the government needed to do.  So instead we have encouraged the much more open, transparent, publicly traded exchange markets.  And so post-2008, the Financial Stability Board, the G20, have actually begun to mandate exchange-like regulations for the OTC markets. 

In this sense, the flow of best practices now seems to be two-way, and I think the Financial Stability Board and the G20 have encouraged this two-way flow of ideas.  It is still dominated by a flow coming from the OECD to the emerging markets economies, but I believe there are also the beginnings of what I would think is an encouraging trickle of a flow in the developing world’s direction, which is hugely important.

One of the major consequences of globalization is a much more interconnected world. So, I also want to note what the Law School and Penn in general are doing to organize a structured flow of ideas between scholars and practitioners in India with their counterparts in the U.S. is going to be increasingly relevant and important for globalization to become a meaningful, productive and mutually beneficial process.

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