'Institutionalise formal regulatory independence'

Any clamour for regulatory independence must begin with a review of existing formal structures. The formal architecture in India affords little or no independence to her financial regulators. Independence that the legal and institutional structures confer upon regulators is formal independence. The composition and incentives of the regulator's board are indicative of its formal independence. For example, the board members' tenure and its renewability, whether they are appointed by a single minister or an expert body, whether the government can dismiss them at will, whether the regulator depends on government funding, etc, are indicative of its formal independence.

Regulators also do not function in isolation of society. Their philosophies are shaped by their interaction with regulated entities, political personalities, experiences of board members, etc. This is informal independence. Indian financial regulators score fairly low on formal independence. The law allows the government to appoint members of regulatory boards, which is fine. The selection process is, however, neither institutionalised nor entirely merit-based. Appointments go through several files. Sometimes, as was done recently for the appointment of a new chief of the Securities and Exchange Board of India, the government issues a public advertisement inviting applications.

The law also empowers the government to issue directions to regulators in somewhat loosely defined circumstances, such as public interest or on policy matters. Pertinently, the government's decision on what constitutes policy is final. This is in addition to its power to supersede regulatory boards during emergency.

Experience suggests our financial regulators are fairly informally independent. For instance, the government has never substituted regulatory boards or issued directions to regulators. The draft Indian Financial Code reveals the weaknesses of our present formal architecture. The Code, replete with independence-conferring provisions, institutionalises formal regulatory independence. For instance, it codifies an independent and merit-based selection committee process for the appointment of regulatory boards. It sets out specific grounds and a committee-driven process for removal. Finally, it does not allow the government to issue directions to regulators on policy or in public interest! For genuine seekers of regulatory independence, the Code is a good place to begin.

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