Somasekhar Sundaresan: Trai has to be more than intuitive

In its effort to penalise telecom service providers for call drops but capping the compensation, Trai resorted to guesswork. A regulator that seeks transparency in the voluntary conduct of those it regulates should lead by example

In our over-regulated society, if there is one contemporary judgement every regulator must read with keen self-interest, if not with bated breath, it is the Supreme Court ruling on the challenge to the telecom regulator's intervention on call drops. The court ruled that the Telecom Regulatory Authority of India's (Trai) intervention to penalise telecom service providers for call drops was arbitrary, fraught with factual contradictions and, in fact, only seemingly transparent.

The court was obviously only interpreting telecom law. Yet, virtually every regulator, particularly those in the financial sector, not only operates under similarly-drafted law but also adopts practices similar to those adopted by the Trai. In fact, the Trai's conduct appears far more reasonable than those in the financial sector.

The Trai had sought to provide that consumers of mobile phone services should be paid a rupee for every call drop but capped such "compensated" dropped calls to three per day. The Trai's intervention was admittedly intuitive. The regulator had evidently acknowledged that the cause of call drops extended beyond the fault of service providers. Nearly 40 per cent of the drops are attributable to consumers, according to the regulator. However, it wanted to punish service providers on the premise of testing a "no-fault liability", who was actually at fault being irrelevant.

This is quite the usual Indian regulatory story. The telecom regulator's defence in court was what all regulators adopt: "guesswork is inherent in framing a regulation of this sort". Intuitively push for a measure that you hope would prove to be a remedy. Couple it with kicking the can down the road, with a promise to review the measure after a few months. Brand those challenging the intuition as anti-social (if not anti-national) since they are not aligned with the need to be obedient to the regulator, who must be respected in all circumstances. Anecdotal evidence of the symptoms would usually suffice to prescribe anything that can be seemingly bandied about as a medicine. No diagnosis of the real ailment is necessary. If the intended medicine were to fail, one could always tweak the dosage and prescribe another medicine on intuition. The ailment can coexist for a lifetime.

There are many examples of "no-fault liabilities" imposed by financial sector regulations. There are even examples of being given compensation without having suffered losses. For example, if after a takeover offer is made, public shareholders and the acquirer are both surprised by the discovery of a management fraud, the latter is forced to continue with the offer on the same terms, without permission to withdraw the offer or to even adjust the offer price. Likewise, shareholders, who were not even shareholders when a takeover offer was due, are asked to be compensated with interest for the delay. So long as the regulator seems to be addressing the problem, it does not matter whether she is actually solving it.

In this case, the Trai had actually held widespread consultations on the proposal, heard the service providers and the consumers and not only for their own inputs but also for critique of the other stakeholders' inputs. Such effort at transparency, the Trai argued, showed how it had not been arbitrary. The Delhi High Court had agreed with the Trai but the Supreme Court did not. Consumers had argued before the Trai that the compensation was too low. Service providers had argued that the compensation was arbitrary and high. The Trai came up with a middle ground: inflicting pain on service providers and yet restricting it to three rupees per consumer per day. Indeed, there was the added promise of palliative - everything would be reviewed after six months.

With public consultations, the Trai seems to have done far better than other Indian regulators. Inviting cross-objections to conflicting inputs is hardly part of the conduct of financial sector regulators. These regulators are known to seek inputs on one form of regulatory intervention, only to impose a completely new form of intervention after public comments, not caring to explain what happened in between. The Trai, after going through with the consultative motions, simply did what it would want to do in any case - impose a penalty masquerading as compensation, resorting to intuitive guesswork. No reasons were given for why it chose the measure it finally adopted, how it dealt with arguments made by each side to the debate, and how it believed its measures would meet its intended objectives. Therefore, the Supreme Court ruled that the regulatory intervention was manifestly arbitrary and unreasonable.

More than two years ago, the Financial Sector Legislative Reforms Commission had drafted a law that would lay down the process by which regulators in the sector may make regulations. Nothing has come of it so far. Regulators have resisted such measures tooth and nail, overtly and covertly. Now, the Supreme Court, consciously acknowledging that the law in India does not yet require regulation-making to necessarily entail transparent public consultations, has quoted the United States Administrative Procedure Act to "exhort Parliament to take up this issue and frame legislation… by which all subordinate legislation is subject to a transparent process by which due consultations with all stakeholders are held, and the rule or regulation-making power is exercised after due consideration of all… submissions… taking into account what they have said and the reasons for agreeing or disagreeing with them". Regulators, who seek transparency in the voluntary conduct of those they regulate, should lead by example and not wait for a law to force them to adopt good conduct.

The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own