The heads of key regulatory bodies meeting Arun Jaitley at an FSDC meet in 2017. (Photograph: PIB)

How Responsive Are India’s Regulators?

BloombergQuintOpinion

India’s transition to private markets is predicated on how well it regulates private activities across a range of economic sectors such as finance, telecom, and infrastructure. Since 1991, the government has signaled its willingness to regulate private markets technocratically and neutrally by creating independent regulators such as the Securities and Exchange Board of India, Telecom Regulatory Authority of India, Insolvency and Bankruptcy Board of India, and others.

However, their ability to regulate markets effectively, in turn, depends on how responsive they are to inputs from their stakeholders. In a recent paper, we create a framework to measure how responsive regulators are to stakeholders. Our analysis highlights disturbingly low levels of responsiveness to stakeholders, and the lack of suitable institutional processes within regulators that would enable a genuine two-way conversation between regulators and stakeholders in a structured and productive manner.

In an economy so heavily dominated by regulatory bodies that are relied upon for their expertise and efficiency, the responsiveness of such bodies to the stakeholders is necessary for three reasons.

First, regulators are not democratically elected, and thus are accountable to the public in a limited, indirect sense. They are required to submit regulations before Parliament, but since parliamentary time is scarce, this is rarely an effective oversight mechanism. An analysis by PRS Legislative Research shows that only a tiny fraction of such regulations are reviewed in Parliament.

A responsive regulation-making process, therefore, increases the democratic legitimacy of regulation among stakeholders.

Second, regulations are binding on stakeholders and impose economic costs on them. This affects their business decisions, and greater certainty and predictability in regulation enables them to plan their business activities better. Conversely, regulations and diktats that come as a surprise send stakeholders into a tizzy and affect the ease of doing business. Some good examples are the RBI circular on data localisation, or the overnight diktat to banks against providing services to individuals or firms dealing with virtual currency, both of which were issued without any prior notice or public consultation.

Third, a structured process for considering stakeholder inputs often helps regulators make better decisions, since market participants are able to present often unknown information and different perspectives to regulators in a manner that does not invite charges of favoritism and rent-seeking.

For these reasons, it is important to measure how well regulators do when it comes to being responsive.

In order to measure how well Indian regulators follow these processes, we created a system of measurable benchmarks of regulatory responsiveness based on international benchmarks and academic literature on this subject. The system looks at a set of 10 processes or metrics and assigns scores for each process based on the degree to which regulators adhere to such processes. Every benchmark has a high score of 1, so the highest attainable aggregate score is 10.

How Responsive Are India’s Regulators?

Using this measurable system of responsiveness, we studied the process preceding the regulations passed by four Indian regulators, the RBI, SEBI, TRAI, and AERA during the period between January 2014 and April 2016. These are ‘quasi-legislative’ instruments, that is, unlike quasi-judicial orders that are targeted to specific entities identified therein, they are intended to bind all regulated entities or a class of them.

Our findings reveal a fairly low level of responsiveness in general, even though there is significant variation among the regulators. 

The scores reveal that regulators publish explanatory documents prior to issuing a regulation in very few cases.

  • While TRAI and AERA do so for about half of their regulations, SEBI and RBI fare extremely poorly.
  • Only TRAI and AERA published comments received by them received during this period, while SEBI and RBI rarely do so.
  • And only TRAI publishes its own responses to comments received by it.

The findings with the total scores are given in the table below.

How Responsive Are India’s Regulators?

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This generally low level of responsiveness is disturbing, because it highlights the fact that stakeholders that are subject to the regulations of these regulators often do not have complete information or predictability about how the regulation is going to affect them.

The low level of responsiveness highlights a high degree of regulatory uncertainty.

Interestingly, we found that the enabling laws for the regulators that are more responsive (TRAI and AERA), explicitly require them to be transparent in their activities. The degree of responsiveness of regulators in a country has a direct correlation to how well the rule of law is observed. This underscores the need for legislative reform to improve the responsiveness of regulators to the markets they oversee.

Anirudh Burman is a senior research analyst at Carnegie India. Bhargavi Zaveri is a researcher at the Indira Gandhi Institute for Development Research.

This article is based on a paper by the authors titled ‘Regulatory Responsiveness in India: A framework for empirical assessment’ published in the William and Mary Policy Review.

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.