Former revenue secretary C S Rao takes over as chairman of the Insurance Regulatory and Development Authority on Tuesday.

He will be closely observed, not for his views on whether the foreign direct investment limit in the insurance sector should be raised from the present 26 per cent to 49 per cent, but for his decision on depositing IRDA funds in the government's public account.

N Rangachary, who completed his seven-year tenure as interim Insurance Regulatory Authority (between 1997 and 2000) and subsequently as IRDA chairman on June 9, was steadfast in opposing the finance ministry's diktat on parking the latter issues.

Taking time out of a felicitation function organised by an industry chamber in New Delhi, Rangachary did not bat an eyelid when he told Business Standard, "Till I retire, the funds will remain with the regulator."

Rao is also a seasoned bureaucrat, having served in North Block both as an expenditure as well as a revenue secretary. Unlike Rangachary, Rao is known more for his mild manners and consensus approach towards resolving issues.

But control of IRDA funds is one of its kind issue, that Rangachary projected as being central to the financial independence of the regulator. When the topic was broached to Rao before he demited office, he chose not to discuss it.

In fact, the decision to ask IRDA to deposit its funds in the public account was taken by none other than C M Vasudev (currently executive director, World Bank) during his tenure as economic affairs secretary.

And Vasudev, North Block insiders say, is credited with bringing Rao as expenditure secretary despite initial reluctance by Yashwant Sinha who was the finance minister then.

The larger question in this tussle between the finance ministry and the IRDA is whether the financial independence of the insurance regulator has been compromised.

It's a larger question that applies to all the other regulators including the Central Electricity Regulatory Commission, Telecom Regulatory Authority of India, the Reserve Bank of India and the Securities and Exchange Board of India.

As far as Trai and CERC are considered, their funds are parked with the government in its public account. And in the recent amendment to the Sebi Act, the finance ministry has ensured that the capital market regulator also deposits its excess funds into the public account of India.

Sebi has, however, been allowed to retain the amount it realises as penalties from market offenders. The RBI is a unique case: the huge dividends it pays to the government -- it paid over Rs 10,000 crore (Rs 100 billion) in 2001-02 -- ensures that the excess funds land in the government coffers.

The finance ministry believes that IRDA's fund corpus, which is under Rs 100 crore (Rs 1 billion) now, will swell to over a Rs 1,000 crore (Rs 10 billion) in a few years. And so it is better to ensure rightaway that the funds make their way to the exchequer.

Officials in North Block argue that the requirement does not come in the way of the regulator's independence. "The law ministry has to obtain Parliament sanction for paying the salaries of Supreme Court judges.

"Does it mean that their judgement is clouded?" said a senior official. The ministry had fought and won a similar battle with the erstwhile law, justice and company affairs ministry for housing the Investor Education and Protection Fund in the public account.

"Rangachary was seeing a ghost where none existed," quipped another senior finance ministry official. He said that North Block even said that IRDA need not seek the ministry's approval for its annual expenditure budget. "It has to just give us its expenditure plan and draw the funds from the RBI," he added.

But Rangachary probably felt that the finance ministry was trying to control the IRDA funds and further believed that it came in the way of the regulator's financial independence. And the IRDA Act, 1999 did not say in as many words that the funds should be deposited with the exchequer.

Rangachary argued that the Act allows the regulator to retain the funds. Many in the industry also shared Rangachary's concerns. But given his demi-god status in the sector, insurance company honchos would not say anything else.