Reforming corporate regulatory agencies under MCA to boost governance

Regulators under the Ministry of Corporate Affairs need reform to match the empowerment and autonomy of financial sector regulators

One of the announcements in the latest Budget was on regulatory reforms outside of finance. Though the finance minister (FM) did not elaborate on the logic of excluding financial regulation from this exercise, the obvious inference is that our policymakers think non-financial regulation is more in need of reform than financial regulation.

 

Financial sector regulations, and the functioning of financial regulators, undoubtedly need considerable reform. However, compared to regulation in other sectors in India — and the conditions that prevailed before them — the statutory regulatory authorities (SRAs) in finance remain among the best visible in the country.

 

These regulators grew out of a three-step process. The first was foundational thinking about market failure and the need for state intervention. The second was identifying a clear set of functions that could be carved out of a government department and assigned to an arm’s-length agency, where accountability mechanisms could be established (e.g, inflation targeting for the Reserve Bank of India). Finally, there was the creation of the checks and balances through which these organisations could add value, rather than merely exercising regulatory power.

 

In the financial sector, this is the journey that took place with the establishment of the Securities and Exchange Board of India (Sebi), the Insurance Regulatory and Development Authority of India (Irdai), and the Pension Funds Regulatory and Development Authority (PFRDA). These SRAs fare well on statutory empowerment and autonomy. The laws creating these bodies have conferred on them the power to make regulations, as well as the authority and financial resources required to recruit personnel without any reference to the executive government. Only the board-level functionaries of these bodies are appointed by the government.

 

A great deal of experience was built up through the working of these SRAs, which led up to the draft Indian Financial Code prepared by the Financial Sector Legislative Reforms Commission (FSLRC). This document is the state-of-the-art in Indian regulatory theory today  — the normative ideal for how Indian regulators should function. Elements of that normative ideal are steadily feeding into numerous incremental reforms through the years, influencing the working of all regulators in India.

 

When compared with the financial sector SRAs, most regulators in other sectors in India are more basic. There are over a dozen regulators spanning food and medicines, education, and the professions. Most recently created regulators do not have regulatory legislative autonomy and require government approval for making regulations.

 

In this setting, it is fascinating to note that the ministry with the largest number of SRAs under its wing is not the Ministry of Finance (MoF), but the Ministry of Corporate Affairs (MCA). The regulators in this ministry include the Registrar of Companies, or RoC (and their head, the Director General of Corporate Affairs, or DGCA), the Competition Commission of India (CCI), the Insolvency and Bankruptcy Board of India (IBBI), the National Financial Reporting Authority (NFRA), and the three regulators of the professions of chartered accountants, company secretaries, and cost & works accountants, besides more than  a dozen frontline regulators for the insolvency and valuation professions.

 

At the practitioner level, there is much dissatisfaction about how the entire regulatory structure for companies works: It imposes substantial overheads, whereby only large firms can afford the team of lawyers and accountants required to comply with the law. Middle India — the heart of entrepreneurship and employment — is not treated well by the government apparatus.

 

Finance is the brain of the economy, and the real sector is the body of the economy, this is where gross domestic product (GDP) is made. The two elements — finance and the non-financial firms — occupy centre stage in India’s quest for high GDP growth. It is a good situation when the same minister looks at both in an integrated way. However, the three-step path described above has largely not been applied in the field of MCA.

 

Important regulatory tasks within the MCA (including those by RoC and DGCA) in a way is reminiscent of what was happening at the MoF in the 1990s. There are better ways to approach this, which need to be evaluated — for example, an Australian-style combination of India’s Sebi, RoC, and DGCA.

 

The CCI, NFRA and IBBI are sector-agnostic regulators that deal with competition across the entire economy, auditing of important companies, and the orderly regulation of failed enterprises — all very important parts of modern economic regulation. All these agencies depend on substantial budgetary support from the government and do not have powers to raise their own resources. For instance, the CCI’s human resource functions are governed by rules made by the government, in a manner similar to that of an attached or subordinate office. In the case of IBBI and NFRA, qualifications for positions, creation of posts in these bodies, and the manner of filling them up are decided by the government through the government’s General Financial Rules.

 

There are some desirable practices and design elements in some of the MCA bodies. The CCI Act is the only SRA legislation in India that requires an inquiry by a Supreme Court judge before a board-level functionary can be removed. The IBBI is the first SRA in India to write a regulation on how it will make regulations. Likewise, the IBBI regulations prescribe that the disciplinary committee shall not include the Whole-Time Member involved in the fact-finding inquiry related to a case, respecting the principle of separation of powers. It is also the first (and the only) SRA to commission an external agency to evaluate its record of work. All these elements reflect the same yearning — to uphold constitutional values, and build good organisations under Indian conditions.

 

In this context, a sensible idea for the MCA would be to build an FSLRC-style project that applies the three-step path. This should bring together modern public economics knowledge — of market failure and the need for state intervention — and modern public administration thinking on how to build high-performance agencies grounded in the Indian Constitutional principles of the rule of law.

 

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