It would be interesting to view the independence of financial regulators by trying to view it through the prism of how directors are considered independent. Under the new Companies Act, a director is independent, if she is a person of integrity, possesses relevant expertise, and one who is not a promoter besides other requirements. There is also a term limit for each independent director. Most importantly, there are also several accountability standards applicable to independent directors.
A more blunt definition of independence for financial regulators would be that it is independent of the government and independent of the politics and politicians who might seek to influence its behaviour. From the perspective of the second definition, the financial regulators are highly independent.
Based on the first definition, the answer is more nuanced. Broadly, all financial regulators possess high integrity, relevant expertise and experience and are relatively uninfluenced by the government. The Reserve Bank of India (RBI)'s hawkish stance on the monetary policy, for instance, is evidence of that. Top leadership of the regulator has terms, usually three to five years and that keeps limits on their power.
However, the integrity of the regulators has a missing twin. And that is accountability. Not only is accountability weak with some financial regulators but this lack of accountability often flows from the over-confidence of its integrity and expertise. The classic example of this weak accountability is the way payment bank licences were handed out as if alms were distributed.
In a rule of law country, if eligibility of standards is set, it cannot be open to give a licence only to some people who meet the standards. It must be given to all who qualify. The only reason RBI can get away with it is because hardly anyone suspects foul play. The award is wrong but it is also objective and uninfluenced by politics or money.
Similarly, Sebi's investigations are carried out with a gun on the head of witnesses asked to furnish information in a day or even half a day. These excesses are tolerated, but we do need independence coupled with accountability for true independence of regulators.
Founder, Finsec Law Advisors
The author is former executive director of Sebi. The views expressed are personal