Strengthening regulatory bodies: Key reforms for efficiency, accountability

This column is not focused on analysing the performance of regulators, but rather on examining certain broad core issues that need to be addressed

Microeconomics 101 explains the causes and effects of market failures in a free-market economy, as well as the need and justification for regulators. Over time, even developing economies have realised that having credible and well-reputed regulatory institutions is a prerequisite for sustainable growth.

 

The enactment setting up a regulator should have a clear purpose, explicitly stating the objective, role, appointment procedure, powers and functions, guiding principles for regulation, appellate mechanism, and how the regulator will be held accountable. The regulator must have operational and financial independence, and the law should unambiguously prescribe that.

 

A number of regulatory bodies have been established in India since the country embarked on its journey of economic liberalisation in 1991. This column is not focused on analysing the performance of these regulators, but rather on examining certain broad core issues that need to be addressed.

 

Let’s begin with the question of whether we need so many regulators. This question often arises from concerns about the financial burden on the public exchequer when setting up new institutions. However, a far more serious and important issue is the need to analyse the impact of multiple regulatory institutions with poorly defined or even conflicting roles on the regulated entities and other stakeholders. Among other consequences, the objective of improving the ease of doing business certainly gets thrown out of the window!

 

It’s not that this aspect hasn’t been examined in the past. For instance, the Financial Sector Legislative Reforms Commission (FSLRC) report of 2013 on the financial sector clearly explains the need for rationalising the regulatory architecture and recommends having only two regulators in the sector. However, vested interests and turf issues have ensured that this idea remains on the back burner.

 

The government’s mindset in setting up these institutions and dealing with them needs to change. First and foremost, it should accept that statutory regulatory bodies aren’t government departments. In many sectors, some of the regulated entities are government-owned. These entities often, citing sovereign ownership, seek and expect different regulatory treatment, including forbearance, compared to private-sector players. How about a cost-benefit analysis of such a proposition? The costs are obvious. Among other perversions, it distorts the level playing field. As for the benefits, if one digs deeply, there are hardly any in the medium to long term. Most of the time, it only implies throwing the can down the road, and bringing in complacency in the working of these entities.

 

Regulators’ arm’s-length functioning, both in letter and spirit, is an essential prerequisite. If the government finds this impractical or unfeasible in a particular case, it is better not to set up that regulator.

 

Coming to administrative matters, including the appointment of regulators and ensuring their accountability.

 

The arm’s-length working principle dictates that the appointment procedure, including tenure, should be embedded in the law and not left to rule-making. Extending this principle, the appointment process shouldn’t be handled by the ministry dealing with that sector. Let the department of personnel in the government handle the appointment of all statutory regulators.

 

Getting the right people to fill the regulatory jobs can prove to be a challenging task. Recent events have sparked a media debate on whether such appointees should come from the government or the private sector. This subject requires a separate discussion, and this column is not on that. That said, a word of advice regarding the selection of candidates from the government may be in order. The common public perception that these jobs are sinecures for the retired officials has to be strongly negated. The government should identify and offer appointments to suitable candidates well ahead of their superannuation, say, three or more years before retirement. Autonomous regulatory bodies with substantial and well-defined roles would definitely attract the right people ready to leave their government jobs to take up these roles.

 

A lot has been written in the media about the accountability of regulators. It is a serious issue. Regulators cannot be given a free pass in the name of regulatory independence.

 

Let us first examine the legal provisions in some existing statutes that may be relevant for ensuring oversight of regulators’ working. These include — the powers of the central government to make rules, issue directions to regulator and even supersede them in certain situations; the requirement for regulators to submit an annual report to the government, which is subsequently laid before Parliament; the provision for laying regulations before Parliament; and the establishment of an appellate body to hear appeals against the quasi-judicial orders passed by regulators. Some enactments also prescribe government nominees on the board of the regulator.

 

These provisions only serve a limited purpose. The government’s rule-making is restricted to administrative issues; issuing directions could be perceived as a violation of the arm’s length working principle. Instances of a regulatory board being superseded are virtually unheard of. Annual reports attract more attention from the media — there are no instances of regulations laid before Parliament being modified.  The functioning of appellate bodies is often marred by vacant positions and a lack of expertise.

 

While some improvements could be brought in to make such provisions efficacious, the desirable approach would be to have a direct parliamentary oversight through parliamentary committees over regulators’ functioning. Though we have parliamentary standing committees reviewing different ministries’ working, few would disagree that this mechanism has a long way to go before reaching the level of maturity observed in developed democracies of the West. These committees should be strengthened by providing well-qualified supporting staff, and streamlining the processes. A committee could call a regulator twice a year to review its functioning and also hear from stakeholders and experts. Regulators should be obligated to file an action-taken report on the committee’s observations, within a defined timeframe. The committee may then finalise its report, which should be placed before the parliament, and later in the public domain.

 

In fact, as the system matures, the concerned parliamentary committee may also be entrusted with the authority to confirm the appointment of regulators.

 

Regulatory bodies are important institutions in a market economy, and need to be nurtured and developed with care to support economic growth, ensuring that all stakeholders continue to repose faith in the ecosystem.

 

The author is distinguished fellow at the Observer Research Foundation, and former chairman of Sebi.He also previously served as secretary of the Petroleum & Natural Gas Regulatory Board, and as chairman of the Central Pollution Control Board