The complex world of regulators

News: Recently, there has been an important change in the working of the government. Nowadays, the statutory regulatory authorities (SRAs) have become important institutions of the government.

What are the issues in SRAs?

They face questions of accountability and excessive concentration of power.

They seem to depart from the principles of the separation of power between legislature, executive, and judicatory.

These are unusual organisation which are set into motion in the body politic and body economic

It is important to assess the working of SRAs. however, it is difficult to do so.

In normal times, regulators are often criticised for over-regulation. In difficult times, they are criticized for under-regulation.

They have not laid the foundation for economic growth or avoiding crises so far. For example, in 2001, a Joint Parliamentary Committee (JPC) on the stock market crisis of March/April 2001said that “regulators have been found wanting and they do not instil confidence in the investor”.

Regulators generally do not have much direct output. Their services are inputs to outputs of the regulated entities and markets.

Their performance is affected by several external factors, many of which are beyond their control. Further, their efforts take years to have visible outcomes.

The data required to make the evaluation of SRAs may not be easily available.

Some good examples of SRAs success

The SEBI was created in 992. It laid the foundations of a modern financial market system.

How can the working of SRAs be improved?

In 2013, the Financial Sector Legislative Reforms Commission (FSLRC) recommended a formal mechanism to evaluate regulators based upon which a review committee should be established. The review committee should comprise only non-executive members of the regulator’s governing board.

The Committee on Reforming the Regulatory Environment for Doing Business in India (2013) recommended that each regulator should undertake self-evaluation once in three years. Its conclusions should be placed in the public domain for informed discussion and debate.

Measures Taken So far

The International Financial Services Centres Authority Act, 2019 mandates that the authority should constitute a Performance Review Committee to review its performance annually.

The Insolvency and Bankruptcy Board of India (IBBI) is also required to do assessment of its effectiveness and efficiency in terms of its objectives and mandate, as per the provisions, mentioned in the Insolvency and Bankruptcy Code 2016.

Way Forward

A systematic strategy for evaluation can be organised. It should be done around three groups of parameters: Governance, process, and outcomes. However, the principle of Nemo judex in causa sua, or nobody should judge their own cause, should be kept into consideration while doing so.

The legislature can authorize the Comptroller and Auditor General of India (CAG) to do performance audits of SRAs, as both have a principal-agent relationship.

The terms of reference of the evaluation should be discussed with the relevant parliamentary standing committee. The task can be delegated to a non-partisan external research organisation which should submit report back to the parliamentary standing committee. This report should be the basis of the amendments to the law.

The regulatory evaluation can consist of two aspects: First examining the actions of the regulator over a stated time period, and second, doing anonymous perception assessment among regulated persons through a private organisation.

Lesson to learn

The IBBI has become the first Indian SRA to have commissioned an independent evaluation of its regulatory role. This constitutes an important milestone in the emergence of state capacity in regulation in India. Other SRAs should learn from it.

Source: The post is based on an article “The complex world of regulators” published in the Business Standard on 21^st June 2022.