Frustrations boil over

Disputes shouldn't be allowed to weaken regulatory architecture

Regulatory issues kept on the boil for a long time usually turn into frustrations which then tend to boil over and overwhelmingly influence the regulatory architecture, and may even pull it down. The Sebi-Irda dispute on the Ulip matter resulting in the issuance of an ordinance by the government is a classic example. The recent court case between the MCX and Sebi is another. The third one, which is still on the boil, is the contradictory and contumacious stand taken by Sebi and the mutual funds on the load structure.

In the jurisdictional dispute between Sebi and Irda, it was not clear if the Union finance ministry, which is represented on the boards of the regulatory bodies, gave any advice to the regulators or discussed the matter in the board meetings. It was not quite apparent if the High Level Committee on Financial Markets discussed this matter; even if it did, the impact was not visible either on Sebi or Irda. The government allowed the regulators to go to the court, bought time, issued an ordinance and threw the regulators into a tizzy. The resultant effect was that the regulators, including RBI, became apprehensive about the government’s intentions and implications for statutory powers and regulatory freedoms. The government has been needlessly made to appear apologetic about its decision. A little prescience could have avoided the mess. Lesson — resolve early such jurisdictional disputes before they are on the boil.

When an entity seeks permission or regulatory approval from a regulator, the least it expects is a definitive response in accordance with the norms laid down in the regulations, provided it has satisfied the regulator with all required information and data. Establishing a stock exchange and running it efficiently is not an ordinary business. Surely there must exist transparent and rational eligibility criteria to determine this. Does the stock exchange add value to investors, issuers and the economy in terms of efficiency, transaction costs and new products? Is it sustainable in the long term? Would it provide fair and meaningful competition and does it offer investors a choice, or would it fragment the existing liquidity of the market? Do the board and the management of the stock exchange have the desired standards of competence and governance? These are some of the economic considerations which should underpin the decision of the regulator. No regulator can be faulted so long as its decisions are cogent on facts and sound on principles of law. But unexplained delays and absence of rational response could aggrieve an applicant and the result could be an extreme action like a court case against the regulator. Respect is a trait which a regulator must possess, and fear a useful emotional response which a regulator should evoke. Less of either erodes confidence in the regulator. The confrontation between mutual funds and the regulator cannot also be taken lightly by the regulator. Regulatory expertise lies in striking a judicious balance between protecting investors and developing the market while ensuring transparent regulations. Better to avoid confrontation than resolve conflict.