Damodaran Committee: Panel slams selection process of regulators

Stresses on functional autonomy of regulators

A committee headed by former Securities and Exchange Board of India (Sebi) Chairman M Damodaran has lashed out at the orientation of debates to the backgrounds and personalities of regulators. It also slammed the practice of conducting interview-based selections of regulators by a panel.

In a report on regulatory reforms for businesses, the committee said, “Unfortunately, much of the debate and discussion on regulatory organisations tends to focus on the backgrounds and personalities of the head of the regulatory organisation.” Such sterile debates didn’t help in understanding the organisation’s regulatory philosophy, which significantly influenced the content and scope of regulations, it said.

The Damodaran committee was constituted by the Ministry of Corporate Affairs after a World Bank report ranked India 132nd on the ease of doing business, well below most countries in the South Asian Association for Regional Cooperation and other countries in the BRICS (Brazil, Russia, India, China and South Africa) bloc.

An analyst said of late, there was much hype over the appointment of Raghuram Rajan as Reserve Bank of India governor, with some observations focusing merely on his looks. The euphoria in the markets had resulted from the announcement of various measures by the new governor, as well as the perception that the differences between the central bank and the finance ministry over monetary stance would now end.

The committee recommended a transparent mechanism to appoint a watchdog. “The appointment of persons to head regulatory organisations should be attempted in a far more transparent manner,” it said. It recommended a system in which the head of a regulatory organisation and his board-level colleagues appeared before an appropriate parliamentary committee once every six months to report on various developments and discuss the broad plan of action for the next six months.

From time to time, the government adopts different mechanisms for various watchdogs. For instance, Rajan’s name was forwarded by Finance Minister P Chidambaram to Prime Minister Manmohan Singh, who gave his approval to the appointment, those in the know said. However, after Damodaran’s exit from Sebi in 2008, an interview was conducted and C B Bhave was selected chairman.

The committee said the practice of inviting applications from interested candidates and asking them to appear for interviews by a panel comprising persons unfamiliar with the regulatory organisation led to loss of public confidence, not only in the process but also in the organisation.

It added the genuine functional autonomy of regulators would have to be reinforced with financial autonomy by putting in place a system in which regulatory organisations weren’t dependent on government departments for financial support.

The panel also suggested each regulatory organisation undertake self-evaluation once in three years and put the conclusions in the public domain. It recommended each government organisation or department responsible for framing regulations undertake a two-stage process of consultation, through which a revised draft was put up after the first round of stakeholder consultations. Typically, just one draft is put in the public domain for inviting suggestions.

A ministry official said the recommendations and the time frame for their implementation were being considered.

Besides Damodaran, the committee comprised ITC Group’s Y C Deveshwar, ICICI Bank Non-Executive Chairman K V Kamath, Aditya Birla Group Chairman Kumar Mangalam Birla and Mahindra Group Chairman Anand Mahindra.

BUSINESS SENSE
What the Damodaran panel recommended

* Transparent mechanism to appoint a watchdog

* Regulators to be made independent of government departments for financial support

* Regulators to undertake self-evaluation once in three years and put report in public domain

* Draft regulations to go through a two-stage consultation process: by going back to stakeholder with revised draft