Human resources & regulatory autonomy

Synopsis: Statutory regulatory authorities need autonomy in staffing their organisations with specialists who have integrity and knowledge.

Introduction

Recently, the chairman of the National Financial Reporting Authority (NFRA) called for a “standalone legislation”. He stated that, in the interest of functional, financial and administrative autonomy of the NFRA, there is a compelling need for a standalone legislation on NFRA.

Why NFRA was established?

The need for establishing the NFRA had arisen on account of the requirement across jurisdictions in the world, in the wake of accounting scams.

Hence, government wants to establish independent regulators, for enforcement of auditing standards and ensuring the quality of audits, and thereby, enhance investor and public confidence in financial disclosures of companies.

Why a standalone legislation?

NFRA was constituted in 2018 under section 132 of the Companies Act, 2013.

The chairman said that this section does not provide comprehensive coverage of all the functions and powers that are required to constitute the NFRA as a corporate financial reporting regulator.

How regulators like NFRA  are created in India?

Regulation is defined more broadly as the intentional and direct interventions by public agencies in the economic activities of a target population usually in the private sector.

Regulators are created as a statutory regulatory authority (SRA) and vested with the powers of two or all three organs of the state, namely the legislative, executive and judiciary.

Why SRAs like NFRA need the flexibility to recruit?

SRA’s are required to develop the capabilities required to discharge functions in domains that require specialised and continuously updated knowledge. Example: the Reserve Bank of India (RBI) in its role as the banking regulator requires people with specialised knowledge of banking.

If there are adjudicatory activities associated with these then another arm of the regulator will also need to have the capacity to judge the violations of these measures and take remedial and penal actions.

Further, the normal governmental system of personnel does not deal with such specialised areas. Hence, SRAs need the flexibility to recruit, retain and substitute talent as dictated by developments in the markets they regulate.

What is hampering the recruitment of talented human resources  in regulator sector?

The government remuneration systems turn out to be inadequate to attract the right talent. This is mainly due to conditions specified in The General Financial Rules (GFR).

The General Financial Rules (GFR) of the government are applied to organisations that receive more than 50 per cent of their recurring expenditure in the form of grants-in-aid. According to GFR rules, such organisations need to formulate terms and conditions of service of their employees in a way that they are not higher than those applicable to similar categories of employees in government.

Another rule of the GFR requires that all proposals for creation of positions in such bodies shall be submitted to the sanctioning authority.

What is the way forward?

Given that India will need organisations which may not have a natural and direct source of income (like the NFRA and IBBI) the longer-term solution will lie in the direction of differential treatment of SRAs in the GFR.

The mandate and nature of the functions of the organisation, should be the basis of classification of organisations.

In this context, The Financial Sector Regulatory Reforms Commission recommendations to fully empowering the board of the SRA, along with appropriate changes in the GFR is the way forward. This will ensure SRA autonomy with accountability.

Source: This post is based on the article “Human resources & regulatory autonomy” published in Business Standard on 24th September 2021.