<b>Pratik Datta & Rajeswari Sengupta:</b> A better bankruptcy regulator


Pratik DattaRajeswari Sengupta
The Insolvency and Bankruptcy Code (IBC) introduced in the winter session of Parliament recommends setting up a regulator, the Insolvency and Bankruptcy Board of India (IBBI). A regulator is a 'mini-state' with legislative, executive and quasi-judicial powers. Fusing all three aspects of the state into one agency is problematic, and requires particular care for achieving good outcomes. The current draft of the IBC requires many improvements on this score.

The IBBI will regulate insolvency professionals (IPs), IP agencies, information utilities (IUs) and resolution procedures. The entry of players needs to be monitored, and their behaviour needs to comply with standards specified through regulations. Violations of these standards must attract sanctions. In order to achieve malleability, many details of the insolvency process have been delegated to regulations to be specified by the IBBI.

While there is merit in proposing a new regulator, there is considerable scepticism about the performance of existing regulators in India, be it for regulation of professions (e.g. Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Medical Council of India, Bar Council of India, etc) or regulation of industries (e.g. Reserve Bank of India, Securities and Exchange Board of India). If existing regulators have problems, why should we expect better from the IBBI?

Where have we gone wrong? The governance of existing regulators, including the composition of the board and its relationship with the management, is faulty. The procedures for writing subordinate legislation are neither well-defined nor transparent. The mechanisms for exercise of executive powers for conducting inspections and investigations are idiosyncratic and give arbitrary power to officials. Basic principles of rule of law are violated in the quasi-judicial function. Finally, feedback loops of accountability are feeble and fail to set off a continuous process of self-improvement.

Most existing regulators do not exercise a clear separation between their executive, legislative and quasi-judicial powers. The regulatory staff often controls the legislative functions supposed to be performed by the board of the regulator. The power to write law must vest with Parliament, or must be delegated to unelected officials under the control of the board, with requirements about due process.

Executive and quasi-judicial powers often get muddied. The wide-ranging executive powers given to regulators are not balanced with proper systems governing the application of administrative law. The concept of an administrative law wing like in the US Securities and Exchange Commission (SEC) is wholly absent in the Indian regulatory context. Quasi-judicial powers must be exercised by regulatory staff, who are at arms-length from the executive wing. The prosecution in a criminal case can never be the judge of its own cause.

There is no accountability of performance of existing regulators. The annual report should be a tool through which the public is able to judge the performance of the regulator. Lack of clarity in the laws also results in the regulator getting away with releasing minimal information on its performance. Recently, the Supreme Court came down heavily on the RBI for non-disclosure of information, emphasising that under the rule of law, punishments cannot be given in secret.

So how do we ensure that the IBBI performs better than existing Indian regulators? Sound regulatory governance requires considerable detail encoded into the primary law, which specifies all five aspects: board and governance, legislative function, executive function, quasi-judicial function and accountability. Conventional laws in India are skimpy on specifying these details, which is what has led to pervasive underperformance.

For a market to function properly, regulators must treat market participants as equal stakeholders. While framing regulations, the IBBI must consult relevant market participants. It must do detailed cost-benefit analysis to assess if a particular regulation solves a case of market failure. It must issue regulations in a transparent manner after deliberations at the board level. Surprises should not come about, where a regulation which is released today takes effect from tomorrow, without any warning.

The quasi-judicial function in the IBBI is special. Persons who write orders must not be involved either in writing law or in enforcing it. Hearings must take place, where the accused have an opportunity to present their point of view, and reasoned orders must come out in writing on the regulator's website. Efficacious methods for appeal must be available to those found guilty.

The establishment of sound processes for the legislative, executive and quasi-judicial functions will create an environment of rule of law. This generates accountability in and of itself. In addition, the IBBI must be required by law to publish an annual performance report documenting its performance according to well-defined parameters.

The current draft of the IBC does not specify these basic requirements in adequate detail. It does not provide sufficient clarity on the regulation making process of the IBBI, nor does it provision for a well-defined accountability mechanism for the regulator. The independence of the quasi-judicial function from the legislative and executive powers of the regulator is also not clearly spelled out. Now that the draft bill has been introduced, these are some of the issues that should be high on our minds when we think of bankruptcy reform and the associated enabling infrastructure.
Pratik Datta is at NIPFP and Rajeswari Sengupta is at IGIDR
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

Also Read

Fixing bankruptcy, insolvency laws

<b>Aparna Ravi:</b> Towards a unified insolvency and bankruptcy code

Bankruptcy Code sent to the joint parliamentary panel

<b>Letters:</b> The end justifies the means

Bankruptcy proposals must address existing shortages: experts

<b>Michael Schuman:</b> Contradictions between state and market intensify

<b>Noah Smith:</b> Forget Shanghai stocks, the real problem is debt

<b>T N Ninan:</b> Double bubble trouble

<b>Shekhar Gupta:</b> The Doval detail

<b>Sunanda K Datta-Ray:</b> Why China can be casual about English

First Published: Jan 09 2016 | 9:48 PM IST

Explore News