Guarding the guardians: How to manage regulator appointments and removal

Parliament needs to institute oversight mechanisms for regulators, who oversee markets, without compromising their autonomy

The state is broken up into three co-equal branches — the legislature, the executive and the judiciary. When this “separation of powers” is maintained, where the three roles are not blurred, it becomes easier to build a capable and accountable state. But life is not so simple. There are situations where sophisticated political thinkers have advocated some blurring of the strict separation of powers. This is seen with Statutory Regulatory Authorities (SRAs), which typically fuse two branches of the state (in advanced economies) and three branches of the state (in India).

One of the reasons for the creation of an SRA is to ensure independence from “politics” and to distance regulatory decisions from political considerations. When the SRA engages in investigations and prosecution, it must be at arm’s length from politics, just as the police or the Central Bureau of Investigation (CBI) ought to be. When the Reserve Bank of India (RBI) sets the short-term interest rate, it should not be influenced by the electoral objectives of the incumbent political party.

This takes us to the lively and topical issue of the governance and management of the senior people who constitute the SRA. The processes for their appointment, discipline, and removal must be correctly done to get to the required autonomy. In India, the top layer of SRA personnel is appointed by the executive government and the levels below are typically appointed by the SRA, with different degrees of government involvement.

The problems of appointment, discipline and removal are well understood for main line civil servants under the Constitution of India. Looking beyond government departments, the Constitution of India establishes various bodies like the Supreme Court (SC), the Union Public Service Commission (UPSC), the Election Commission of India (ECI) and the Comptroller and Auditor General (CAG). A variety of mechanisms are in place to establish their political independence while simultaneously solving the problems of appointment, discipline, and removal. Judges of the SC, as well as the CAG and the Chief Election Commissioner, cannot be removed without parliamentary approval, requiring an overall majority and a two-thirds majority of those present and voting. In the case of UPSC members, an inquiry is required to be conducted by the SC before a decision on removal is made.

The laws that establish SRAs do not fall into either of the two buckets (either main line civil servants of a department or a constitutional body like the CAG). For example, the Reserve Bank of India Act simply says that the governor of the RBI can be removed by the government. Whole-time members (WTMs) and chairman of the Securities and Exchange Board of India (Sebi) can be removed by the government, if there is anything that renders their continuation detrimental to the public interest. The only safeguard in the Sebi Act is that this cannot be done without giving the person an opportunity of being heard. For reasons of history and the fact that the Competition Commission of India (CCI) evolved as a quasi-judicial body, the CCI law is the only SRA legislation that requires an inquiry by a SC judge (like for UPSC members) before removal.

In the long-term journey towards enhancing state capability, appointments to many more senior positions in SRAs should come via the “revolving door” of industry practitioners. This will make matters more complex in terms of discipline and removal. Unlike civil servants, these appointees will join SRAs with a prior life of wealth and close connections with the regulated entities. We need people of this background and expertise, but they will require frameworks for discipline and integrity very different from civil service rules, though based on the same underlying principles. Given the responsibilities entrusted to SRAs, it is inevitable that a variety of disgruntled people will campaign through the press and through brown paper envelopes, carrying scurrilous tales about present and past SRA personnel. These problems will get worse before they get better.

Civil servants come under the jurisdiction of the CBI and the Central Vigilance Commission (CVC). According to the current laws, CBI and CVC have authority not only over civil servants, but also public servants. Various court judgments have ruled that the functionaries of SRAs are public servants. A large number of complaints against SRA personnel have found their way to CBI and CVC, where they are often treated similarly to complaints about the working of public sector undertaking employees. As the CBI and the CVC closely coordinate strategies with the Union government, these powers can readily translate into a loss of power for the leadership of SRAs.

The present ways are not up to the task. Beyond removal, which is a nuclear option, there is a lack of process definition in these laws inter-alia, to deal with disciplinary matters and alleged misdemeanours of SRA functionaries.

This is part of the bigger picture of SRA governance. SRAs are a complex and new moment in the evolution of the Indian state. Much effort needs to be put into designing the laws that will get these important organisations up to high levels of state capability. The best take on these questions so far, lies in the draft Indian Financial Code (IFC), drafted by Justice Srikrishna’s Financial Sector Legislative Reforms Commission (FSLRC 2011-2015).

Of essence in the solution is the governing board of the SRA. As with an ordinary private firm, a well-structured board with a majority of independent persons as board members should be the centre of accountability for the managers of the SRA (e.g, the RBI governor and deputy governors). This requires the FSLRC machinery of composition, role and appointment process for the board members.

The law needs to have well-thought-out and carefully drafted mechanisms for all aspects of the human resource (HR) process of SRAs, including the appointment, removal, conflicts of interest, and ombudsman. Here also, the best attempt to date lies in the IFC of the FSLRC. The time has come to take the IFC out of the closet, update and enact it.

The writer is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant