TOPIC : SHOULD INDIAN REGULATORY AGENCIES BE GIVEN CONSTITUTIONAL STATUS TO SAVE THEIR INDEPENDENCE?

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THE CONTEXT: The financial sector in India has been hit by many scams like the recent NSE scam, PNB scam etc. Despite the presence of Independent Regulatory Bodies (IRBs)like RBI, SEBI etc., the occurrence of such scams has raised questions about the functioning and performance of these bodies. The working of other such IRBs more or less reflects these concerns. One view is that giving Constitutional status to these bodies will address the issues while others disagree. This article examines this debate in detail.

WHAT ARE INDEPENDENT REGULATORY BODIES?

DEFINITION

• Independent Regularity Bodies (IRBs) are agencies of modern democratic governments, parts of the executive wing with a certain degree of statutory or constitutional autonomy, reporting directly to the legislature.
• Like the general executive, they are accountable to the legislature and subject to judicial review.
• With the increasing expansion of the scope and activities of governmental operations, IRBs came to be accepted as a needed instrument.

SEPARATE FROM THE EXECUTIVE

• Government regulation has always existed through its own departments directly under its control.
• Over the last century, a new type of regulatory system known as Independent Statutory Regulating Agencies has emerged.
• These agencies differ from the traditional regulatory system in that they are separate from the executive branch of government and have some autonomy.

TYPOLOGY OF IRBs

• Regulation in India can be mapped under three broad categories: economic regulation, regulation in the public interest and environmental regulation.
• Hence, the IRBs in India majorly work under these broad areas.

NEED FOR IRBs

• Need to prevent market failure,
• Need to check anti-competitive practices,
• Need to promote the public interest. (Read Ahead)

           EVOLUTION OF IRBs: AN OVERVIEW

LAISSEZ FAIRE ERA

• The system of independent regulation started in 1887 in the USA where the independent regulatory commission was first established as a regulator.
• It was aimed to keep government interference at arm’s length so that economy can work efficiently without the interference of government.

WELFARE ERA (PRE LPG)

• Regulators were created to ensure that government should have proper control on the economy.
• It was to ensure the economy work for public welfare.
• The aim was to ensure control not facilitate.
• In the pre-globalization era, the regulation was bureaucratic and more focused on control.
• The regulation was premised on license permits and quotas, which suppress the innovation and expansion of business and other sectors.

LPG ERA

• In the globalization/LPG era, there is revolutionary change and the focus of the regulatory environment was shifted from strict regulation to deregulation.
• Its aim was to facilitate and create a business-friendly environment.
• There was the emergence of sectoral regulation as the economy becomes more diversified and specialized.
• The regulator was given more power with the concept of managerialism, arm’s length organization, and hands-off management.
• The IRBs were empowered to take decisions, make rules and implement them.

SOME IMPORTANT IRBs WORKING IN ECONOMIC REGULATION 

RBI

• The RBI Act of 1934 established it. It serves as a banker to the government, a lender of last resort, and performs various supervisory functions related to licensing and establishments, branch expansion, management, and liquidation.

SEBI

• It performs protective (protecting investors’ interests, providing investment security, checking price rigging, and prohibiting insider trading), developmental (increasing business on the stock exchange), and regulatory functions (establishing rules, regulations, and a code of conduct for intermediaries such as merchant bankers etc.

IRDA

• IRDA’s mission is to protect the interests of insurance policyholders and ensure fair treatment. It issues a registration certificate, renews, modifies, withdraws, suspends, or cancels such registration. It establishes a code of ethics for surveyors and loss assessors.

TRAI

• It ensures technical compatibility and efficient interconnection of various service providers.
• It establishes quality service standards in order to protect the interests of consumers.
• It ensures effective fulfilment of the universal service obligation.

CCI

• It ensures healthy and fair competition in the market economy and protects the interests of consumers:
• It aims to prohibit anti-competitive business practices, and abuse of dominance by an enterprise as well as regulate various business combinations such as mergers and acquisitions.

 THE MAIN FUNCTIONS OF THE IRBs

The actual functions of individual regulatory authorities in a country would depend on the overall structure of the regulatory regime, empowerment of authorities as provided in the relevant legal instruments and rules, administrative arrangements and autonomy, and technical capacity. However, some of the essential functions of regulators include:

• Protection of public interest.
• Imposing penalties for non-compliance.
• Administering tariff adjustments and periodic reviews.
• Facilitating dispute resolution between parties.
• Monitoring compliance with contractual obligations to the government and users, and other legal and regulatory requirements.
• Establishing technical, safety and quality standards and monitoring their compliance.
• Providing advice and counsel to government on policy matters and other related matters to private sector involvement in the sector.

THE RATIONALE BEHIND THE SETTING UP OF IRBs

LEVEL PLAYING FIELD

• To provide a level playing field for all while also protecting the larger public and national interest.

COMPLEXITIES OF GOVERNANCE

• Increasing complexities and technological advancement necessitated the use of experts to handle issues.

EFFECTIVE DECISION MAKING

• Protecting decision-making from political interference serves the public interest best.

LPG-POST 1991

• Following the 1991 reforms, the entry of the corporate sector necessitated certain measures to boost investor confidence and protect the public interest.

FUNCTIONAL SPECIALISATION

• The traditional departmental structure of government was not well suited to the dual role of policymaking and regulation of the sector in question.

 INDEPENDENCE OF THE IRBs

According to the World Bank handbook, an IRB model of regulation requires setting up an independent regulator which has organizational, financial and management independence from ministries. This is necessary in order to depoliticize the decision-making and ensure sectoral regulation occurs on techno-commercial principles. In this regard, the IRBs have been established under various statutes which delineate the various aspects of personal management, functional domains, accountability areas etc. As the IRBs are set up by the legislatures, it is believed that government will have less ability to control their working which will enable them to work with efficiency, objectivity and fairness. In other words, independence is given to IRBs for performance excellence.

POOR PERFORMANCE OF THE IRBs: SOME ILLUSTRATIONS

RBI

• The recurrence of scams in the banking sector (public, private, cooperatives), the problem of NPAs, persistent inflation etc. have raised questions on whether RBI is responsible for its mandate.

SEBI

• The NSE co-location scam and the very unprofessional manner in which SEBI has handled the issue invited criticisms from various quarters.
• The delay in concluding investigations, reactive rather than proactive actions and delay in addressing grievances of retail investors etc., are other instances.

TRAI

• TRAI has been criticised for its favourable stance towards Reliance Jio in the context of predatory pricing.
• The AGR dues didn’t pile up overnight but stem from a 15-year-old dispute over sharing of revenues between telcos and the government.
• A well-regulated industry would not be subject to such a large fiscal shock.

 THREE MAJOR CHALLENGES IN THE WORKING OF IRBs

INDEPENDENCE

• Financial independence is one aspect of independence.
• Financial independence is frequently restricted by regulators’ reliance on concerned line ministries for budgetary allocations, approval of staff hires, and the requirement that the former report to the latter.
• Independence also refers to a fixed term of employment and protection from dismissal, barring cases of incompetence and moral turpitude.
• However, the government interferes repeatedly with the tenure of employees in regulatory agencies.
• Functional independence is a requirement for regulatory effectiveness, which necessitates that the regulator maintains an impartial relationship with interest groups (Problem of Regulatory Capture)

ACCOUNTABILITY

• During various Parliamentary debates, regulators do not respond to questions about them. The minister of the associated ministry is held accountable.
• Regulators are frequently overlooked from scrutiny. Only two questions were posed to regulators in the 16th Lok Sabha. Only when there is an impending crisis or a serious debate in the country are the actions of the regulator called into question.
• Annual reports from regulators are not submitted to parliamentary standing committees.

TRANSPARENCY

• A transparent regulatory process is essential. Stakeholders, for example, must be made aware of the regulatory process and given opportunities to freely express their opinions.
• Liberal use of interim orders, without hearing the affected party, is criticised.
• It turns out that in many such cases, the regulator takes its time to issue the final order. Also, the rules are often harsh and are made without meaningful consultation and many a time the rules are changed as fast as they are made.

 WHETHER THE IRBs ARE TRULY INDEPENDENT?

In actual practice, the government can influence the personal management practices of the regulatory bodies. The significant role of government in appointment, promotion and removal, an extension of tenure etc. undermines the independence of regulated bodies. For instance, an Ordinance was brought to change the TRAI Act in order to change the eligibility criteria for the appointment of Chairman of TRAI, and the controversy between the RBI and Central Government and the resignation of the RBI Governor and Deputy Governor.  Similarly, the financial dependency of the regulatory body on the administrative ministry is also a cause of concern. Thus, it is argued that IRBs should be given constitutional status like the ECI, CAG, etc. The idea is that Constitutional status will eliminate political pressure and government influence from the functioning of regulatory bodies which will enhance their efficiency.

WHETHER CONSTITUTIONALIZING OF IRBs IS THE BEST WAY TO ENSURE INDEPENDENCE AND THUS PERFORMANCE?

ARGUMENTS IN FAVOUR

• It will substantially reduce executive control over the IRBs thereby securing meaningful independence.
• Constitutionalisation will completely remove the dependency of the IRBs on the ministries for funds and functionaries.
• It will enhance the stature, prestige and authority of the IRBs which will help it to resist political pressure.
• Regulation has become the fourth branch of the state and hence is a quite significant function of the state. So Constitutionalisation can enable them to carry out their function efficiently.
• There are many countries that provide Constitutional status to IRBs. For instance, in a 2009 report, the Bank for International Settlements (BIS) found that the Constitutions of eight countries specifically provided for the independence of their central banks Switzerland, Chile, Mexico, Russia, South Africa etc.

ARGUMENTS AGAINST

• The purpose of regulation is not to check the government and hence they can’t be equated with bodies like ECI, Supreme Court, CAG etc.
• Constitutionalisation will lead to a further lack of accountability of the IRBs which is detrimental.
• There is no guarantee that Constitutionalisation will automatically ensure independence and performance.
• As IRBs are the creations of the legislature, which represents the sovereign authority of the people, it should have the freedom to decide the various aspects of the IRBs.
• Neither the Damodaran Committee, the FSLRC, the Second ARC etc. have recommended Constitutionalisation.
• Central banks perceived to have the “gold standard” of independence, such as the Reserve Bank of New Zealand, Federal Reserve, and Bank of Canada do not have Constitutional status. In fact, some of the best-governed banks, such as the Bank of Japan and the Federal Reserve have private shareholders, such as banks and financial institutions.

THE WAY FORWARD: 

ADHERE TO SECOND ARC RECOMMENDATIONS

• Before establishing a regulator, its need should be carefully examined. Only where necessary should there be regulation, according to the rules.
• A Management Statement outlining the goals and responsibilities of each regulator should be developed by each Ministry in addition to the statutory framework.
• The appointment, tenure, and removal of different regulatory authorities must be done in a transparent and equitable manner.
• There must be enough protection against arbitrary removal.
• The relevant Departmentally Related Standing Parliamentary committees should be used to ensure parliamentary oversight of regulators (DRSC).
• The independent regulators ought to undergo regular evaluation.
• A report on the performance of the regulators in light of these principles ought to be included in their annual reports.

FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION RECOMMENDATIONS

• The FSLRC advises achieving financial independence by independently obtaining funds from sources like fees.
• FSLRC suggests specific regulatory goals, informing Parliament regarding their success in enforcing their regulatory targets, etc.
• It also urges the consolidation of regulators, such as The PFRDA and IRDA.
• It also suggests creating an extensive and enforceable code of conduct.

OECD: BEST PRACTICE PRINCIPLES FOR THE GOVERNANCE OF REGULATORS

Following the OECD best practices can improve the IRB’s functioning. These principles are:

• Role clarity
• Preventing undue influence and maintaining trust
• Decision-making and governing body structure for independent regulators
• Accountability and transparency
• Engagement
• Funding
• Performance evaluation

ENSURE TRANSPARENCY

• It may appear that an agency’s independence is being compromised when it is forced to defend its decisions in front of members of the public or other representatives.
• Contrarily, one of the best ways to encourage the agency to act in the public interest is through transparency.
• The provisions included in the Reserve Bank of India Act in 2015, which mandate the regular publication of the minutes of its meetings, the individual votes of each member, and the obligation to inform the government of any failures in upholding the inflation target, serve as a classic illustration.
• As it would be difficult to justify decisions and votes that do not align with the public interest, this is a potent provision that simultaneously secures independence and accountability.

CONTINUOUS PARLIAMENTARY OVERSIGHT

• Parliamentary oversight appears to be the best form of political accountability because accountability to the line ministry is frequently associated with pressure being applied to the regulator to favour utilities operated by the ministry.
• Legislators need to devise such mechanisms to bring regulatory oversight but must be careful not to interfere in their functioning.

THE CONCLUSION: Regulation is an important activity and hence the IRBs need to have real independence. Constitutional status is not the right approach but there are many other ways by which this can be ensured. A via media need to be found that will balance the need for independence and democratic control.

QUESTIONS TO PONDER

1. What do you understand by Independent Regulatory Bodies? Explain the reasons behind their establishment.
2. “Independence of the IRBs require their Constitutionalisation”. Examine.