India's regulators need more independent voices, less insider control

Complex markets require independent voices and diverse expertise. India's regulatory architecture is missing both

Economic policy strategy after 1991 tried to reshape the relationship between the state and the market. From a position of central planning, state control, and often state ownership, we have moved towards greater participation by the private sector in production and a regulatory role for the state. This transition necessitated the creation of a new institutional architecture, the Statutory Regulatory Authorities (SRAs). 

SRAs have proliferated across the Indian landscape. There are over 20 SRAs at the Union level, and even more at the state level, dealing with things like electricity distribution, real estate development, and water tariffs. SRAs now impinge upon a large chunk of the Indian economy. From pricing telecom spectrum and overseeing the solvency of insurance firms to safeguarding retail investor wealth and determining tariffs on renewable energy, their actions dictate the daily operations and viability of myriad economic agents. A great deal of state power is now exercised through SRAs. Therefore, good internal governance within SRAs is foundational to India’s economic success. 

In traditional democratic structures, the powers of the state are separated into three branches (the legislative, the judicial, and the executive) to prevent overreach. SRAs, however, exercise extraordinary, concentrated powers within a single institutional boundary. They wield executive powers to monitor and supervise markets, they generally have expansive powers to write law, and in some cases, quasi-judicial powers to adjudicate disputes and impose penalties. This departure from fundamental concepts of the Constitution demands a commensurate establishment of good internal governance. 

Quasi-legislative power here means the authority to write binding rules of conduct that control and regulate the activities of economic agents. When an elected legislature enacts a law, it is subjected to political debate, multi-party scrutiny, standing committee reviews, and public accountability. When an SRA drafts regulations, it is exercising legislative power, but without those inherent political checks and balances. When officials write law, without these processes, there is a “democratic deficit”. A special effort is required to establish checks and balances and to bring people back to the table to restore democratic legitimacy. 

The board of an SRA can be a crucial oversight mechanism that can rein in the concentration of power in the legislative and executive actions of an SRA. It requires technical expertise to cope with the fast-changing complexities of each sector. It also requires private individuals drawn from society at large to achieve better democratic legitimacy. All Indian SRAs have members drawn from inside the SRA and part-time members from outside. 

How do we fare on these issues today? Let’s consider the financial sector SRAs. All of them are headed by former civil servants. All have had persistent vacancies in their boards. The Reserve Bank of India (RBI) has 11 members on its Central Board. Of these, 2/11 are academic researchers and 1/11 is an external expert. The remaining eight are former or serving civil servants, RBI insiders, or public-sector bankers. With the Securities and Exchange Board of India (Sebi), six of its nine members are former or serving civil servants, two are RBI/Sebi insiders and one is a market expert. The Insurance Regulatory and Development Authority of India is a bit better. Of its five board members, two are former or serving civil servants, one is a former PSU banker, and two are private-sector experts. With the Pension Fund Regulatory and Development Authority, six of its seven board members are serving or former civil servants, while the one remaining member is a former regulator. Adjacent SRAs like the Insolvency and Bankruptcy Board of India  and the National Financial Reporting Authority  have similar scores on this index. 

The newest kid on the block, the International Financial Services Centres Authority, is supposed to achieve global competitiveness for a financial system within Gift City. While Indian finance is an Ambassador car, finance in Gift City is supposed to be a Ferrari. But when we look at the board composition, all seven of its members are either serving or former civil servants and or drawn from other SRAs. 

The terminology used for this situation worldwide is “the administrative state”, an environment where power is concentrated in the executive branch, and the judiciary and the legislature shrivel away. We have public servants manning SRAs internally and dominating the boards. The insider capture of financial sector SRAs is complete. This contains three problems: 

The knowledge problem: The original vision for economic reform was that the state would retreat from central planning, enable a dynamic and competitive private sector, and bring a new level of economic thinking and domain expertise into regulatory institutions. While civil servants and career regulators possess invaluable experience, an insular board devoid of contemporary domain expertise creates a regulatory echo chamber that misses the practical implications of its own rulemaking on economic growth and innovation. The primal objective in India is to achieve high economic growth. This requires regulatory boards that have domain knowledge and regulatory knowledge from India and from the advanced economies that we aspire to become like in the coming decades. 

The political problem: SRAs were intended to create greater policy certainty for private firms. Political power should regularly rotate around different party configurations, but the decisions of regulators should be at an arm’s length from the government. When regulatory boards are overwhelmingly populated by former and present government officials, the institutional distance meant to provide objective oversight collapses, rendering the regulator susceptible to government pressure. 

The governance problem: If an organisation is controlled by its top management, this creates poor checks and balances. There is a lack of accountability for the leadership, which then makes more mistakes. The job of the board is to exert checks and balances. The board must hold the management accountable. This cannot happen if the board is the management (or, is composed of persons who are unable to demand performance from the management). In the private sector, we have adopted the doctrine that a majority of board members should be “independent directors”. These independent voices help ensure that management remains accountable and benefits from external expertise. 

It is time to think of a similar statutory mandate for our SRAs. The laws governing SRAs must be amended to prescribe a strong contingent of independent, non-executive members drawn from academia, private-sector industry, law, and consumer advocacy. 

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