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REGULATORY AUTHORITIES IN INDIA

Content:
1 Introduction Revised Value Addition Material

Background
Need
2 Regulation in India
Evolution of Regulation in India
Types of Regulation in India
Categories of Regulators in India
Statutory Independent Regulatory Agencies
Self Regulatory Authorities
Issues Related to Regulation in India
Independence
Accountability
Transparency
Important Regulatory Bodies
Securities and Exchange Board of India
Insurance Regulatory and Development Authority
Competition Commission of India
Telecom Regulatory Authority of India (TRAI)
Interaction between Policy Makers and Regulators and its Current Status
Participation of Stakeholders in the Regulatory Process
Competition Authority vs. Sector Regulators
Consumer Redress
Regulatory Coherence
Future Course of Action
3 Fiscal Sector Legislative Reforms Commission (FSLRC)
Comments Relating to Independence of Regulatory Bodies
Recommendation with Regards to Accountability
4 Recommendations of 2nd ARC
5 Single Super-Regulator vs. Multiple Regulators
Arguments in favor of Unified Supervision
Arguments against Unified Regulation
6 Enforcement Directorate
Origin and Evolution
Functions

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1] Introduction
Regulation may be broadly understood as an effort by the state to address social risk, market
failure or equity concerns through rule-based direction of social and individual action.
Regulation is an attempt to control or influence private behaviour in the desired direction by
imposing costs on or proscribing undesirable behaviour. Since regulation can have important
consequences for economic efficiency and private incentives, it is usually justified only under
special conditions like prevention of market failures, restriction or removal of anti-competitive
practices, and promotion of public interest.
Background
The role of the state in economic and social life has dramatically changed from being the main
provider of social and economic services to being a rule-maker and regulator. The new mode of
the state with its structures and relationships is characterised by an increase in the regulatory
functions and responsibilities. These changes have paved the way to the emergence of a state
increasingly defined by the volume, diversity and complexity of its regulatory institutions. This
state is known as the regulatory state.
Contrary to what was expected, liberalisation and privatisation during the 1980s and 1990s
have led to a vast growth in the states regulatory obligations. In India, the regulatory role of
government stems from the provisions of the Constitution, which empower the Union and
State Legislatures to make laws on various subjects. The Constitution empowers the State to
impose reasonable restrictions on the exercise of various rights conferred by Article 19 in the

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interest of public order, sovereignty and integrity of India, protecting the interest of the general

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public, or in the interest of decency, morality etc. Consequently, there is a plethora of laws and
rules, which seek to regulate the activities of individuals and groups of individuals. The gm
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Constitution as well as the laws enacted by Parliament have established the institutions and
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mechanisms to enforce the laws and rules. Article 53(1) of the Constitution regulates the
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exercise of the executive powers of the Union. Further, Article 53(3) authorizes the Parliament
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to confer by law such functions to authorities.

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Need
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There are three sets of justifications for regulatory interventions:

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(i) Prevention of Market Failure

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Market failure is a condition in which the market mechanism fails to allocate resources
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efficiently to maximize social welfare. Market failures occur in the provision of public goods, in
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case of natural monopolies or asymmetric information, and in the presence of externalities.

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A natural monopoly occurs when an entire market is more efficiently served by one
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firm than by two or more firms due to increasing returns to scale. Natural monopolies
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enjoy scale benefits that protect them from competition; entry by other firms tend to
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lead to inefficient production i.e. the average cost of output is much higher with entry
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by multiple firms than with the existence of just one firm. In such cases, regulation may
be necessary to protect consumer interests. In doing so, regulation might bar the entry
of new firms into the sector and protect the monopoly status of the incumbent
operator. In India, the transmission and distribution of electricity is still natural
monopolies.
Asymmetric information is a situation where one party to a transaction knows more
about the product than another. This prevents the market mechanism from achieving

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an efficient allocation of resources. This creates a role for regulation of market

transactions or provision of information by a third party to remove or minimize
information asymmetries. In India, considerable information asymmetries exist in the
health and education sector.
Externalities constitute another source of market failure and are defined as the effects
of production or consumption activity, positive or negative, on actors not involved in
the relevant product market. For example, an industrial plant discharging waste into a
river imposes a negative externality (costs) on users downstream. These costs are not
factored into production decisions at the plant, but are instead borne by society.
Regulation, in such circumstances, may be considered appropriate to restore economic
efficiency. Unregulated production and consumption externalities are common in India,
as in other developing economies.
Therefore, prevention of market failures, restriction or removal of anti-competitive practices,
and promotion of public interest required judicial safeguards.
(ii) To check anti-competitive practices
Firms may resort to anti-competitive practices such as price fixing, market sharing or abuse of
dominant or monopoly power. Laws that empower officials to take action can help deter such
practices. Regulation through a set of transparent, consistent, and non-discriminatory rules can
create a competitive and dynamic environment in which market players can thrive. In its
absence, anti-competitive practices and regulatory failures may not allow the market process to
yield socially optimal outcomes.

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(iii) To promote the public interest

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A third set of justification arises from concerns about the promotion of public interest, which isgm
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an important policy objective for governments. Ensuring fair access, non-discrimination,

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affirmative action, or any other matter of public importance can provide an important reason
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for regulation. Some major regulations in this regard in India are:

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Support Pricing: Government offering to buy wheat or rice from farmers at a price
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which is higher than the market price

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Public Distribution System: Supply of food grains at a price which is lower than the
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market price
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Free Distribution: Distribution of piped water and free power to agriculture, which is a
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regulatory decision to levy zero tariffs, stemming from policy stances

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2] Regulation in India
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Evolution of Regulation in India

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Post-independence, India experimented with a socialist mixed economy model" with the state
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retaining control over the commanding heights of the economy heavy industries and utilities.
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While private sector activity was allowed, the government tried to control it through a web of
controls such as licensing and quotas in regard to intermediate goods, imports and outputs.
Such controls were complemented by high tariff walls. Thus, the government was not only a
producer and regulator of strategic and important goods and services; it also exerted direct
control over the output, and sometimes even associated prices, of private sector activity. Given
that electoral pressures exerted by various interest groups did affect regulatory actions by the

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government, such regulation can hardly be labeled as independent. After 1985, the Indian
economy embarked on a process of domestic reform, which involved the following elements
delicensing of industries and abolition of output quotas or bounds on outputs of firms,
permission for private entry into sectors, which were hitherto the monopoly of the
government, and liberalisation of quotas and tariffs on capital good imports.
From 1991 onwards, liberalisation of the external sector meant that tariff reductions were
extended to almost the entire spectrum of merchandise trade and conditions for foreign
investment were simplified and liberalised. The process of domestic reform and external
liberalisation is still ongoing. However, the producer profile in various sectors has undergone a
significant change with private firms co-existing with government firms in many sectors, which
were previously government monopolies (e.g. electricity, telecommunications). The consensus
among decision makers has been that independent regulation is required in such sectors to
guarantee a level playing field. As a result, independent regulators have been constituted in
various sectors, starting with electricity and telecommunications, and the number is still on the
rise. Regulation in India can be mapped under three broad categories: economic regulation,
regulation in the public interest and environmental regulation.
Types of Regulation in India
Regulation in India can be mapped under three broad categories: economic regulation,
regulation in the public interest and environmental regulation.
(i) Economic Regulation

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Economic regulation aims at preventing or tackling market failure. This is achieved with rules

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that proscribe and punish market distorting behaviour. In the Indian context include The
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Electricity Act of 2003, which allows State regulators to fix tariffs for power consumption, thus
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preventing suppliers from taking advantage of natural monopolies.

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(ii) Regulation in the Public Interest

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This covers areas where industries are failing to meet a standard or uphold something of public
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importance. This is different from market failure. A classic case is of health and safety, where
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firms can fall short in protecting employees or the general public from harm. The Bureau of
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Indian Standards (BIS) created by the Bureau of Indian Standards Act, 1986 has been setting
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quality and safety standards for various products, some of which are mandatory. Such
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regulations are necessary due to low level of consumer awareness, skewed income
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distribution and lack of capacity of majority of the population to pay for essential services,
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essential needs such as food security. This calls for support pricing of food grains and
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encourages farmers to maintain a higher acreage under food grain cultivation, thereby
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enhancing food security.

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(iii) Environmental Regulation

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Environmental regulation covers actions to protect the environment from harm. A healthy
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environment is desirable not just on aesthetic grounds, but because environmental degradation
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imposes costs on land, labour and resources that have important consequences for economic
development. In India, environment protection has been given constitutional status. The
Directive Principles of State Policy state that protecting and improving the environment is the
duty of the State as well as citizens of the country. The Government of India has enacted
various laws to protect the environment through the Environment (Protection) Act, 1986 as
the umbrella legislation. Ministry of Environment and Forests is the nodal agency for

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environmental legislation. However, several states have also enacted their own legislation
besides the major ones enacted by the Central Ministry. The State Pollution Control Board
(SPCB) established in each state, is responsible for implementing these legislations as well as
issuing rules and regulations prescribing the standards for a clean environment. The activities of
SPCBs are coordinated by the Central Pollution Control Board (CPCB).
Categories of Regulators in India
There are primarily two types of regulatory agencies:
Statutory Independent Regulatory Agencies
Regulation by government through its own Departments or Agencies directly under its control
has always existed. The last century has seen the emergence of a special category of regulatory
systems the Independent Statutory Regulating Agencies. These agencies differ from the
conventional regulating system as they are separated from the executive wing of the
government and enjoy a certain degree of autonomy. The concept of independent regulations
took birth in USA. The basic premise of the establishment of these agencies being that a market
based economy needs to be regulated in order to ensure a level playing field to all and also to
safeguard the larger public and national interest. Other factors, which favoured the creation of
independent regulators were:
i. Increasing complexities and the advancement of technologies required for handling
of issues by experts;
ii. Public interest is best served by insulating decision-making in certain issues, from

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political interference.

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In India, with the initiation of the process of economic liberalization in the early 90s, @
government withdrew from many activities, which hitherto were monopolized by it. The entry
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of corporate sector necessitated certain measures to boost the investor competence and to
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safeguard public interest. One such measure was setting up of independent regulators. In
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addition, the traditional departmental structure of government was not best suited to play the
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dual role of a policy making as well as regulating the sector concerned.

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Self Regulatory Authorities

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These Authorities are created under different laws but they are self-regulatory in nature. The
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functions of Self-Regulatory Bodies may include: (i) issues of professional education (ii) matters
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connected with licensing, and ethical conduct of the practitioners.

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Issues Related to Regulation in India

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Independence
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Regulatory efficacy demands functional independence, which calls for the regulator maintaining
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an arms length relationship from interest groups. One aspect of such autonomy is the ability of
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the regulator to access funds, the magnitude of which does not depend on the whim of the line
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ministry i.e. financial independence. However, independence requires satisfaction of other pre-
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conditions- regulators once appointed should have fixed tenure and immunity from removal
except in the case of incompetence and moral turpitude. In India, sector regulators have been
mandated with independence though such autonomy is limited in various aspects. Moreover,
there is a difference between mandated and delegated independence, with the latter much
lower than the former due to control exercised by the executive. Functional independence is
often curbed by the dependence of regulators on concerned line ministries for budgetary

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allocations and sanctioning of staff appointments as well as the need for the former to report to
the latter. Again on the lines of what has been mentioned above, there is no uniformity in the
independence and funding of different regulators. While the Finance Ministry has been
proactive in providing secure funding and resultant independence to the regulators reporting to
it, this principle has been largely ignored by many other ministries.
Accountability
Independence must go hand in hand with accountability. Along with independence, all
regulators need to be accountable. Appropriate mechanisms are required to make independent
regulatory agencies accountable. Accountability is of two types: political and legal. In India,
regulatory bodies in general have the following features that are relevant to their
accountability:
i. They have been constituted on the basis of statute, which also lays down terms of
appointment and removal of Board Members.
ii. Their decisions can be appealed against before a specified appellant authority in most
cases. Naturally, they are also subject to the writ jurisdictions of High Courts and the
Supreme Court.
iii. The accounts of regulator are audited by the Comptroller and Auditor General.
iv. They are legally bound to prepare an annual report and submit to the Government,
which in turn lays it before each House of Parliament.
v. The respective statutes have mandated that regulators shall ensure transparency while
exercising their powers and discharging their functions.

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vi. The Chairman, Members and officers of regulators are deemed to be public servants

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within the meaning of Section 21 of the Indian Penal Code (IPC).
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Parliamentary supervision seems to be the ideal form of political accountability as
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accountability to the line ministry can often be associated with pressure being exerted on the
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regulator to favour utilities being operated by the ministry. Similarly, vested interest groups
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often find it easier to effectively pressurise the regulator through the line ministry rather than
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through the Parliament. Therefore, replacing the line ministrys control by Parliamentary
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supervision across the board is necessary. This provision was also put forward by 2nd ARC, as
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discussed in a subsequent section.

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The regulators actions are questioned only when there is an impending crisis or a serious
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debate in the country. In fact, in most such cases it is the line ministry that is questioned, and
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not the regulator. Such misperception enables the line ministry to interfere in the functioning of
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the regulatory body.

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As mentioned earlier, legal accountability allows review of a regulators specific decisions. It is

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important to ensure that the review process does not create a second layer of regulation, as
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experienced in the telecom sector. In the telecom sector, the role of the appellate tribunal,
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Telecom Disputes Settlement and Appellate Tribunal (TDSAT), is quite wide. The TDSAT and not
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the TRAI has been empowered to settle disputes. This division of labour has adversely affected
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the performance of the telecom regulator as any issue can be presented as a dispute.
Nevertheless, there are some benefits- judicial review is considered important in guarding
against decisions by a regulatory agency, which falls outside its statutory mandate or fail to
follow established administrative procedures. TDSAT has taken decisions in certain cases where
TRAI has seemingly not followed due process. Appellate powers are also not uniform across
sectors. Unlike TDSAT, the Securities Appellate Tribunal (SAT) can only entertain appeals against
the decisions of the capital market regulator, Securities & Exchange Board of India (SEBI).

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Transparency
It is important to have a transparent regulatory process. The regulatory process must
incorporate some crucial steps to ensure transparency. For example, stakeholders must be
made aware of the regulatory process and should be given opportunities to present their views
freely. In certain cases, regulatory legislation in India has made provisions to guarantee a
transparent regulatory process. For example, in the electricity and telecom sectors, it has been
mandated that regulators should ensure transparency while exercising their powers and
discharging functions. In the case of Tariff Authority for Major ports (TAMP), no specific
provisions regarding transparency exist in the legislation. However, TAMP has attempted to
introduce transparency through guidelines. No provision in regard to transparency exists in the
Competition Act, but a provision does exist in the general governance principles expounded by
the government. Furthermore, the Right to Information (RTI) Act empowers citizens to seek
information on any matter from any government department or undertaking.

Important Regulatory Bodies

Some important regulatory bodies and their powers and functions are listed below. This is not
an exhaustive list and only important bodies have been listed.
Securities and Exchange Board of India
The Securities and Exchange Board of India (SEBI) is the regulator for securities market in India.

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It was established on 12th April 1992 through the SEBI Act, 1992. SEBI has to be responsive to

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the needs of three groups, which constitute the market: the issuers of securities; the investors;

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(a) Powers
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For the discharge of its functions efficiently, SEBI has been vested with the following powers:
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To approve by-laws of stock exchanges

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To require the stock exchanges to amend their by-laws.

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Inspect the books of accounts and call for periodical returns from recognized stock
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exchanges.
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Inspect the books of accounts of financial intermediaries.

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Compel certain companies to list their shares in one or more stock exchanges.
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Levy fees and other charges on the intermediaries for performing its functions.
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Grant license to any person for the purpose of dealing in certain areas.
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Delegate powers exercisable by it.

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Prosecute and judge directly the violation of certain provisions of the companies
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Act.
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Power to impose monetary penalties.

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(b) An Appraisal
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Successful cases of grievance redressal by SEBI have been rising rapidly. However, a survey
shows that most of the investors find the redresser ineffective. Moreover, SEBI is not able to do
much about fly by night or sign-board companies who vanish after collecting huge money.
SEBI has been too busy in framing rules and regulation giving rise to complex and cumbersome
framework, which leaves scope for discretionary interpretation. It failed to punish those who
caused abnormal fluctuations in the market. Due to this, small investors are losing confidence in

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investing. The autonomy of SEBI has been compromised as it, more or less, functions as a
branch of the Union Finance Ministry.
Insurance Regulatory and Development Authority
Insurance Regulatory and Development Authority (IRDA) is an autonomous apex statutory
body, which regulates and develops the insurance industry in India. It was constituted by
Insurance Regulatory and Development Authority Act, 1999.
(a) Powers and functions
Issue to the applicant a certificate of registration and suspend or cancel such
registration;
Protection of the interests of the policy holders in matters concerning assigning of
policy, nomination by policy holders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance;
Specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;
Promoting efficiency in the conduct of insurance business;
Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organizations connected with the insurance business;
Control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and

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regulated by the Tariff Advisory Committee;

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Regulating investment of funds by insurance companies;
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intermediaries.
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Competition Commission of India

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Competition Commission of India is a body of the Government of India responsible for

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enforcing the Competition Act, 2002 throughout India and to prevent activities that have an
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adverse effect on competition in India. The Competition Act, 2002, as amended by the
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Competition (Amendment) Act, 2007, follows the philosophy of modern competition laws. The
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Act prohibits anti-competitive agreements, abuse of dominant position by enterprises and

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regulates combinations (acquisition, acquiring of control and Merger and acquisition), which
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causes or are likely to cause an appreciable adverse effect on competition within India.
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(a) Function and Responsibilities

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Make the markets work for the benefit and welfare of consumers.
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Ensure fair and healthy competition in economic activities in the country for faster and
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inclusive growth and development of economy.

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Implement competition policies with an aim to effectuate the most efficient utilization
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of economic resources.
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Develop and nurture effective relations and interactions with sectoral regulators to
ensure smooth alignment of sectoral regulatory laws in tandem with the competition
law.
Effectively carry out competition advocacy and spread the information on benefits of
competition among all stakeholders to establish and nurture competition culture in
Indian economy.

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Telecom Regulatory Authority of India (TRAI)

The Telecom Regulatory Authority of India (TRAI) is the independent regulator of
the telecommunications business in India.
(a) Powers and Functions
Recommend the need and timing for introduction of new service provider;
Recommend the terms and conditions of licence to a service provider;
Ensure technical compatibility and effective inter-connection between different service
providers;
Ensure compliance of terms and conditions of licence;
Facilitate competition and promote efficiency in the operation of telecommunication
services so as to facilitate growth in such services;
Protect the interest of the consumers of telecommunication service;
Inspect the equipment used in the network and recommend the type of equipment to
be used by the service providers;
Settle disputes between service providers.
Interaction between Policy Makers and Regulators and its Current Status
The role of regulator is to achieve predetermined policy objectives and maintain competitive
conditions in the market by ensuring that everyone follows the basic rules of the game. On the
other hand, the role of policy makers is to provide long-term objectives and vision to the

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development of a country. Policy makers issue policy guidelines, which set out national

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priorities for sustainable development of sectors and measures for servicing disadvantaged

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areas of the country or sections of consumers. However, while in theory policy makers and @
regulators have distinctly different roles, in reality the regulator and policy makers share
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common responsibilities ensuring orderly and sustained growth of the sector, attracting
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private investment, enhancing consumer protection and so on. Given that regulatory bodies
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are often created to achieve predetermined policy objectives, an absolute divorce between the
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two is not desirable and proper interaction between them becomes very important.
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At the same time, it is equally important to ensure that the regulators domain is not
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encroached upon by the government in the name of achieving policy objectives. This calls for
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creating a clear distinction between policy and regulation, which is often missing in India. The
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government has not made a policy decision to clearly specify the role of sector regulatory
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bodies, the degree of independence these should have, their accountability and so on. As a
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result, when the need arises, the concerned ministry drafts a Bill as per its convenience to
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change regulatory mandates. The resulting insecurity implies that regulators often work as an
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extension to the office of the ministry. Lack of interaction of the regulator with the policy maker
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resulting in confusion regarding respective domains coupled with inadequate empowerment

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has made regulators ineffective. To cite a case, the Department of Telecommunications (DoT)
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announced certain proposals (on Access Deficit Charges, one India call rate and inter-
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connection usage charges) to restructure the tariff regime in telecommunications, considering

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these to be policy issues. However, the sector regulator, TRAI, objected to these proposals. The
manner of consultations between the RBI and the Ministry of Finance is a good model: the RBI
holds consultations with the latter on a regular basis, at formal and informal levels, without
compromising its autonomy.

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Participation of Stakeholders in the Regulatory Process

Sector growth should be the common objective of the government as well as the regulator.
However, this is often forgotten. For the orderly growth of a sector, a regular consultation
among the industry, the government, the regulators and other stakeholders such as consumers
is essential. A mechanism for periodic meetings involving these can help the regulator
understand stakeholder problems and concerns. Such forums also enable the regulator to
explain the rationale of various regulatory decisions. However, not much thought has been
given by most regulators to ensuring a representative consultative process. There is another
very important reason for having a representative regulatory process. In India, regulatory
reforms, which have accompanied economic reforms, have been marked by lack of consumer
participation. Consumers, being largely unorganised, have been largely bypassed by the reform
process (except in a few cases where consumer concerns have been highlighted by the media),
which has been influenced by a strong business lobby.
In India, a few sector regulators such as Central Electricity Regulatory Commission (CERC) and
TRAI have created participation mechanisms by constituting Advisory Committees with
representation from consumers and other stakeholders. The participation of stakeholders,
particularly consumers, can be made very effective through well designed and implemented
public meetings along with distribution of accessible literature. In addition to lack of proper
consultation, there is lack of coordination between regulators and government departments,
responsible for formulating and implementing investment related policies. Clear information
may empower stakeholders and can inform the decision-making process. However, such

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information should be taken into account by the regulator while making decisions. This can be

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ensured through accurate documentation of consultations and recourse to effective legal action

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Competition Authority vs. Sector Regulators

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To strengthen the forces of competition in the market, both competition law and policy (to be
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enforced by Competition Commission) and market regulatory laws (to be enforced by the
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regulator) are required. These complement each other. The difference between the two forms
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of intervention in the market process lies in their nature. A regulator tells the firms what these
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have to do. A regulator examines issues of technology, cost and process in the industry
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regulated by it. Competition Authority, on the contrary, tells the firms what they should not do
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i.e. price fixing, predatory pricing, cartels, discriminatory treatment etc. The role of the
ed

Competition Authority is that of an adjudicator, which acts against anti-competitive practices.

is
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The separation between the ex-ante functions (the regulators domain) and adjudicatory
on
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functions is not perfect and therefore characterized by confusion and disputes in regard to turf.
pe
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Further, a sector regulator has a narrow focus, whereas the competition authority has an
ti
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economy wide remit. The differences in domain also result in differences in views and create
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tensions between the competition authority and the sector regulator. Not only is there a need
do

to encourage cooperation between the competition authority and sector regulators, there is a
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need to review the formally legislated working arrangements between the sector regulators
and the competition authority to ensure coordination and avoid conflicts of jurisdiction and
needless turf battles.
Consumer Redress
A redressal mechanism is an essential component of the competition legislation of any country.
In India too, the MRTPA (Monopolies and Restrictive Trade Practices Act) has inbuilt grievance

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Student Notes:

redressal provisions. However, over the years, because of factors like inadequate budgetary
allocation and lack of autonomy the MRTPC (the predecessor of CCI governed by MRTPA) has
not been very effective in providing redress and consequently pending cases have kept piling
up. The CCI is expected to serve consumers better in terms of redress. In addition to the
above, some sector regulators such as telecom, electricity and insurance also have redressal
mechanisms: generic complaint redress by TRAI, telephone adalats (courts), grievance redressal
mechanisms of State Electricity Commissions, the consumer grievance redress cell of the
Insurance Regulatory Development Authority (IRDA), insurance ombudsman, banking
ombudsman etc.
Regulatory Coherence
A robust overarching regulatory philosophy/framework is needed for coordinated development
of the economy and its constituent sectors. However, the evolution of regulatory institutions in
India is not guided by a common philosophy. Political constraints and government preferences
seem to have dominated the reform agenda.
More than twenty years of independent regulation in India have been characterized by the
governments inability to create and follow a cogent and coherent approach to independent
regulation. At the state level, Bureau of Industrial Promotion (BIP) works as a nodal agency to
provide regulatory coherence, i.e. it is the nodal agency for expediting clearance of private
sector projects. Being a nodal agency, it interacts with all the regulatory bodies at the state level
and tries to ensure coherence among them. But in practice it has not been very effective.

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Overall regulatory coherence may be improved by making the following institutional

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arrangements:

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Sector specific apex bodies need to be established at the Centre. These bodies should gm
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be complemented by a well-endowed economy wide regulatory and competition

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authority in each state.

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An appellate tribunal for all appeals against sector regulators needs to be established. If
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the workload increases in any one sector, these can be hived off.
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Interface between regulators and the Competition Commission needs to be formalized

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in legal terms so that there is no conflict between them and impugned parties do not
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take advantage of the same.

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Multi-stakeholder participation should be the way forward, which can effectively take
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care of several concerns with regard to regulatory efficacy and accountability.

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Consumer organizations need to be strengthened with resources so that they can be

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effective advocates.
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Future Course of Action

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The government is planning to bring following reforms in the institutional framework of

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regulatory commissions, their role, functions and relationship with the executive and
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legislature, their interface with markets and people, and processes and methods of regulation
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Th

including rule making and dispute resolution:

Empowering all regulators to make and enforce regulations, issue licenses and impose
punitive measures including suspension or cancellation of licenses; and set
performance standards and determine tariffs.
Ensuring independence of regulatory bodies: the government is planning to make the
selection process transparent and shorn of interference.

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Student Notes:

Fixing the tenure of members: The government is considering stipulation of a uniform

tenure of four years for members of all regulatory bodies. Further, to attract quality
personnel and enrich the functioning of the regulatory body, remuneration would be
enhanced and a provision for having a non-governmental representative, such as an
academician or a lawyer, as a member would be included.
Reducing the overlap of jurisdiction between the CCI and regulators; the government is
planning to define a workable division of labour and increase the interface between the
two, which at present is minimal.
Introducing multi-sector regulators: The government is contemplating the
establishment of multi-sector regulators for (i) communications; (ii) transport; and (iii)
electricity, fuels and gas. This would eliminate proliferation of regulatory commissions,
help build capacity and expertise, promote consistency of approach and save on costs.
At the State level, a single regulatory commission for all infrastructure sectors may be
more productive and cost effective. States should be encouraged to consider this
approach and the scope of their existing electricity regulators could be extended to
other sectors.
Constituting appellate tribunals on the lines of telecom and electricity appellate
tribunals. Another approach under consideration is the constitution of a single
appellate tribunal with regional benches for all regulatory commissions.

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3] Fiscal Sector Legislative Reforms Commission (FSLRC)

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The Financial Sector Legislative Reforms Commission (FSLRC), constituted by the Ministry of gm
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Finance in March 2011, was asked to comprehensively review and redraw the legislations
00
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governing Indias financial system. A former judge of the Supreme Court, Shri B.N. Srikrishna,
hl
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chaired the Commission. According to FSLRC, the current regulatory architecture is fragmented
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and is fraught with regulatory gaps, overlaps, inconsistencies and arbitrage. To address this, the
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FSLRC submitted its report to the Ministry of Finance on March 22, 2013, containing an analysis
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of the current regulatory architecture and a draft Indian Financial Code to replace bulk of the
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existing financial laws.

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With respect to regulators, FSLRC stresses the need for both independence and accountability.
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The draft Indian Financial Code adopts ownership neutrality, whereby the regulatory and
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supervisory treatment of a financial firm is the same, whether it is a private or public company.
on

The draft Code seeks to move away from the current sector-wise regulation to a system, where
rs
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the RBI regulates the banking and payments system and a Unified Financial Agency subsumes
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existing regulators like SEBI, IRDA, PFRDA and FMC, to regulate the rest of the financial markets.
en
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Regulators will have an empowered board with a precise selection-cum-search process for
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appointment of members. The members of a regulatory board can be divided into four
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categories: the chairperson, executive members, non-executive members and Government

Th

nominees. In addition, there is a general framework for establishing advisory councils to

support the board. All regulatory agencies will be funded completely by fees charged to the
financial system. Finally, the FSLRC envisages a unified Financial Sector Appellate Tribunal
(FSAT), subsuming the existing Securities Appellate Tribunal (SAT), to hear all appeals in finance.
The table below provides an outline of the FSLRCs proposed regulatory architecture.

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Student Notes:

Present Proposed Functions

RBI RBI Monetary policy; regulation and
supervision of banks; regulation and
supervision of payments system.
SEBI Unified Financial Agency Regulation and supervision of all non-
(UFA) bank and payments related markets.
FMC
IRDA
PFRDA
Securities Appellate Financial Sector Hear appeals against RBI, the UFA and
Tribunal (SAT) Appellate Tribunal FRA.
(FSAT)
Deposit Insurance Resolution Corporation Resolution work across the entire
and Credit financial system.
Guarantee
Corporation (DICGC)
Financial Stability FSDC Statutory agency for systemic risk and
Development development.
Council (FSDC)

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New entities Debt Management An independent debt management

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Agency agency. 7@
Financial Redressal Consumer Complaints
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Agency (FRA)
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Comments Relating to Independence of Regulatory Bodies

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There are four arguments in favour of independence:

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The regulator is able to set up a specialized workforce that has superior technical
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knowledge.
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This is assisted by modified human resource and other processes, when compared with the
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functioning of mainstream government departments.

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With such knowledge, and close observation of the industry, an independent regulator is
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able to move rapidly in modifying regulations, thus giving malleability to laws.

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The presence of independent regulators improves legal certainty.

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Recommendation with Regards to Accountability

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Avoid conflicting objectives: This problem is heightened when there are conflicts of
interest. It is, hence, desirable to structure regulatory bodies with clarity of purpose and
the absence of conflicting objectives.
A well structured rule-making process: To ensure that the benefits of the regulations out
weigh the costs, for every proposed regulation there should be:
o A compact statement of the objects and reasons of the subordinate legislation;

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Student Notes:

A description of the market outcome, which is an inefficient one (a market failure in

o
Economics parlance);
o Demonstration that solving this market failure is within the objectives of the
regulator;
o Clear and precise exposition of the proposed intervention;
o Demonstration that the proposed intervention is within the powers of the regulator;
o Demonstration that the proposed intervention would address the identified market
failure;
o Demonstration that the costs to society through complying with the intervention are
outweighed by the gains to society from addressing the market failure.
The Rule of Law: A crucial element of accountability and independence of regulators is
three core principles of the rule of law:
o Laws should be known before an action takes place.
o Laws should be applied uniformly across similar situations.
o Every application of law should provide the private party with the information for
application of the law, the reasoning by which the conclusion was arrived at, and a
mechanism for appeal.
Reporting: Once the objectives of an agency have been defined, it is meaningful to ask the
agency to report e.g. in the Annual Report the extent to which it has achieved these
objectives. Each agency should report on how it has fared on pursuing its desired
outcomes, and at what cost.

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4] Recommendations of 2nd ARC
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In the 12th report titled, Citizen Centric Administration, the 2nd ARC noted:
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i. Regulation only where necessary: It has been argued that India is an over-
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regulated country, but many of the regulations are not implemented in right
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earnest. The reasons include (a) the sheer number of such regulations; (b)
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outdated regulations that continue to remain on the statute book; (c) the tendency
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to over-legislate, as a result the legislation becomes an end in itself; and (d) the
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complex procedural formalities stipulated in these regulations. It is, therefore,

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necessary to have a detailed scrutiny of all laws and regulations Union, State and
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Local followed by repeal of unnecessary regulations, updation of outdated ones

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and simplification of the procedures so that compliance becomes easy.

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ii. Regulation to be effective: One of the consequences of a large number of

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regulations has been the poor standards of their enforcement. Social legislations
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are a classic example of this. Slack enforcement leads to corrupt and unethical
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practices and the objectives of the legislations are also not met. Another reason for
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the poor enforcement of some regulations is the lack of attention to building

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capacity in the agencies entrusted with enforcement of such regulations. For

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example, the capacity and expertise of the Motor Vehicles Department has not kept
Th

pace with the explosive growth of vehicles on the road. The Commission
recommended that in order to ensure that the regulatory measures do not
degenerate into corrupt practices it is necessary to have an effective supervision of
the agencies, which carry out these regulatory functions. This supervision should
primarily be carried out internally by the supervisory officers and should be
supplemented by a periodic assessment by an independent agency.

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Student Notes:

iii. Self-regulation is the best form of regulation: In the field of taxation, there has
been a shift from departmental assessment to greater reliance on self-assessment.
This holds good for Union taxes such as Income tax, State taxes like the VAT and
local taxes like the property taxes. This principle of voluntary compliance can be
extended to other fields like building bye-laws, public health regulations etc. To
start with, this principle can straightaway be applied to cases where
permission/license is required to be renewed periodically.
iv. Regulatory procedures to be simple, transparent and citizen friendly: There
should be systemic reforms so as to minimize the scope for corruption. These
include simplifying transactions, using IT, promoting transparency, reducing
discretion, effective supervision etc.
v. Involving citizens groups, professional organizations in the regulation activities.
The burden of the enforcement machinery can be shared by associating citizens
groups as well as professional organizations to certify compliance and report
violations of the regulations to the concerned authorities. Recently, in Delhi the
procedure for grant of building permissions has been simplified and registered
architects have been authorized to certify the building plans of houses. This has
helped in reducing the work of the civic agencies and reduced corruption as well.
This principle could be also extended to other spheres of activities.
In the 13th report of 2nd ARC, following steps have been proposed to improve the working of
independent regulators:

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a. Setting up of a Regulator should be preceded by a detailed review to decide whether

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the policy regime in the concerned sector is such that the Regulator would be better
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placed to deliver the policy objectives of the department concerned.
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b. In addition to the statutory framework, which underpins the interface between the
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government and the regulator, each Ministry/Department should evolve a

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Management Statement outlining the objectives and roles of each regulator and the
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guidelines governing their interaction with the government. This would guide both the
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government department and the Regulator.

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c. There is need for greater uniformity in the terms of appointment, tenure and removal
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of various regulatory authorities considering these have been set up with broadly
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similar objectives and functions and should enjoy the same degree of autonomy. The
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initial process of appointment of Chairman and Board Members should be transparent,

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credible and fair.

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d. The appointment of the Chairman and Board Members for all such regulatory
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authorities should be done by the Union/State Governments after an initial screening

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and recommendation of a panel of names by a Selection Committee. The composition

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of the Selection Committee should be defined in the respective Acts and may broadly
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follow the pattern laid down in the Electricity Regulatory Commission Act.
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e. The tenure of the Chairman and Board Members could also be made uniform,
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preferably three years or 65 years of age, whichever is earlier.

f. Legal provisions regarding removal of Board Members should be made uniform, while
at the same time ensuring sufficient safeguards against arbitrary removal. This could be
achieved by allowing removal by the Union Government only on fulfillment of certain
conditions as laid down in Section 6 of the IRDA Act with the additional safeguard that a
removal for abuse of power shall be preceded by an enquiry and consultation with
UPSC.

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Student Notes:

g. Parliamentary oversight of regulators should be ensured through the respective

Departmentally Related Standing Parliamentary Committees.
h. A body of reputed outside experts should propose guidelines for periodic evaluation of
the independent Regulators. Based on these guidelines, government in consultation
with respective Departmentally related Standing Committee of the Parliament should
fix the principles on which the Regulators should be evaluated. The annual reports of
the regulators should include a report on their performance in the context of these
principles. This report should be referred to the respective Parliamentary Committee
for discussion.
i. Each statute creating a Regulator should include a provision for an impact assessment
periodically by an external agency. Once the objective of creating a level playing field is
achieved, the intervention of the Regulators could be reduced in a phased manner
ultimately leading either to their abolition or to convergence with other Regulators.
j. There is need to achieve greater uniformity in the structure of Regulators.
k. The existing coordination mechanisms such as the Committee of Secretaries/Cabinet
Committees, assisted by Secretary (Coordination) could easily ensure that the
institutional framework for all Regulators follow, by and large, a uniform pattern.

5] Single Super-Regulator vs. Multiple Regulators

Arguments in favor of Unified Supervision

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Fragmented supervision may raise concerns about the ability of the financial sector

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supervisors to form an overall risk assessment of the institution, operating domestically
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and often internationally, on a consolidated basis, as well as their ability to ensure that
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supervision is seamless and free of gaps. There are also group-wide risks that may not
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be adequately addressed by specialist regulators.

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As the lines of demarcation between products and institutions have blurred, different
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regulators could set different regulations for the same activity for different players.
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Unified supervision could thus help achieve competitive neutrality. (IRDA and SEBI
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collision on ULIPs)
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The unified approach allows for the development of regulatory arrangements that are
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more flexible. Whereas the effectiveness of a system of separate agencies can be

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impeded by turf wars or a desire to pass the buck or where respective enabling
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statutes leave doubts about their jurisdiction, these problems can be more easily
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limited and controlled in a unified organization. (example NSEL crisis)

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Unified supervision could generate economies of scale as a larger organization permits

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finer specialization of labor and a more intensive utilization of inputs and unification
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may permit cost savings on the basis of shared infrastructure, administration, and
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support systems. Unification may also permit the acquisition of information

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technologies, which become cost-effective only beyond a certain scale of operations

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and can avoid wasteful duplication of research and information-gathering efforts.

A final argument in favor of unification is that it improves the accountability of
regulation. Under a system of multiple regulatory agencies, it may be more difficult to
hold regulators to account for their performance against their statutory objectives, for
the costs of regulation, for their disciplinary policies, and for regulatory failures.

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Student Notes:

Arguments against Unified Regulation

A number of important countries continue to persist with multiple regulators, though
regulatory co-ordination has been increasing everywhere. The US, for example, has adopted a
model, which blends functional regulation with umbrella supervision. For over 60 years,
regulation of financial institutions in the US was divided among several different agencies. The
Gramm-Leach-Bliley Act, enacted in November 1999, adheres to the principle of functional
regulation whereby the primary regulators of insurance companies, investment companies and
banks continue to be specialist regulators as earlier. However, the Federal Reserve Board is now
entrusted with the role of the umbrella supervisor to regulate the financial holding companies
subject to some limitations, which are collectively referred to as Fed-Lite provisions.
The persistence of separate regulators in most economies reflects the fact that there are
equally compelling arguments against unified supervision. This includes:
Given the diversity of objectives ranging from guarding against systemic risk to
protecting the individual consumer from fraud it is possible that a single regulator
might not have a clear focus on the objectives and rationale of regulation and might not
be able to adequately differentiate between different types of institutions.
A single unified regulator may also suffer from some diseconomies of scale. One source
of inefficiency could arise because a unified agency is effectively a regulatory monopoly,
which may give rise to the type of inefficiencies usually associated with monopolies. A
particular concern about a monopoly regulator is that its functions could be more rigid

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and bureaucratic than these separate specialized agencies. It is argued that another

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source of diseconomies of scale is the tendency for unified agencies to be assigned an

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ever-increasing range of functions; sometimes called Christmas-tree effect.
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Some critics argue that the synergy gains from unification will not be very large, i.e.
7
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economies of scope are likely to be much less significant than economies of scale. The
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cultures, focus, and skills of the various supervisors vary markedly. For example, it has
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been argued that the sources of risks at banks are on the asset side, while most of the
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risks at insurance companies are on the liability side.

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The public could tend to assume that all creditors of institutions supervised by a given
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supervisor will receive equal protection, generating moral hazard. Hence depositors
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and perhaps other creditors of all other financial institutions supervised by the same
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regulatory authority may expect to be treated in an equivalent manner.

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Another serious disadvantage of a decision to create a unified supervisory agency can

is

be the unpredictability of the change process itself. The first risk is that opening the
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issue for discussion will set in place a chain of events that will lead to the creation of a
rs
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unified agency, whether or not it is appropriate to create. The second risk is legislation
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in that the creation of a unified agency will generally require new legislation, but this
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creates the possibility that the process will be exploited by special interests. The third
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risk is a possible reduction in regulating capacity through the loss of key personnel.
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Another risk is that the management process itself will go off track.
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6] Enforcement Directorate
Directorate of Enforcement is a multi-disciplinary organization mandated with the task of
enforcing the provisions of two special fiscal laws Foreign Exchange Management Act, 1999
(FEMA) and Prevention of Money Laundering Act, 2002 (PMLA). The Directorate of

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Student Notes:

Enforcement, with its Headquarters at New Delhi is headed by the Director of Enforcement.
There are five Regional offices at Mumbai, Chennai, Chandigarh, Kolkata and Delhi headed by
Special Directors of Enforcement. There are zonal offices headed by the Joint Directors and sub-
zonal offices headed by Deputy Directors.
Besides directly recruiting personnel, the Directorate also draws officers from different
Investigating Agencies, viz., Customs & Central Excise, Income Tax, Police, etc. on deputation.
Origin and Evolution
The origin of this Directorate goes back to 1st May, 1956, when an Enforcement Unit was
formed, in Department of Economic Affairs, for handling Exchange Control Laws violations
under Foreign Exchange Regulation Act, 1947 (FERA 47). This Unit was headed by a Legal
Service Officer, as Director of Enforcement with Headquarter at New Delhi and two branches at
Bombay and Calcutta.
In the year 1957, this Unit was renamed as Enforcement Directorate, and another branch was
opened at Madras. The administrative control of the Directorate was transferred from
Department of Economic Affairs to Department of Revenue in 1960. With the passage of time,
FERA47 was repealed and replaced by FERA, 1973. For a short period of 04 years (1973
1977), the Directorate remained under the administrative jurisdiction of Department of
Personnel & Administrative Reforms.
With the onset of the process of economic liberalization, FERA, 1973, which was a regulatory
law was repealed and in its place, effective 1st June, 2000, a new law Foreign Exchange

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Management Act, 1999 (FEMA) came into operation. Further, in tune with the International

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Anti Money Laundering regime, Prevention of Money Laundering Act, 2002 (PMLA) was
enacted, and entrusted for its enforcement to the Directorate. gm
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Carved in the role of a multi-dimensional organization, the Directorate enforces two laws:
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i. FEMA, a Civil Law having quasi-judicial powers, for investigating suspected

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contraventions of the Exchange Control Laws and Regulations with the powers to
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impose penalties on those adjudged guilty; and

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ii. PMLA, a Criminal Law, whereby the Officers are empowered to conduct enquiries to
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locate, provisionally attach/confiscate assets derived from acts of Schedules Offences,

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besides arresting and prosecuting the Money Launderers.

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Functions
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The main functions of the Directorate are as under:

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1. Investigate contraventions of the provisions of Foreign Exchange Management Act,

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1999(FEMA). Contraventions of FEMA are dealt with by way of adjudication by

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designated authorities of ED and penalties up to three times the sum involved can be
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imposed.
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2. Investigate offences of money laundering under the provisions of Prevention of Money

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Laundering Act, 2002(PMLA) and to take actions of attachment and confiscation of

property if the same is determined to be proceeds of crime derived from a Scheduled
Offence under PMLA, and to prosecute the persons involved in the offence of money
laundering. There are 156 offences under 28 statutes, which are Scheduled Offences
under PMLA.

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Student Notes:

3. Sponsor cases of preventive detention under Conservation of Foreign Exchange and

Prevention of Smuggling Activities Act, 1974(COFEPOSA) in regard to contraventions of
FEMA.
4. Render cooperation to foreign countries in matters relating to money laundering and
restitution of assets under the provisions of PMLA and to seek cooperation in such
matters.

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Copyright by Vision IAS

All rights are reserved. No part of this document may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise, without prior permission of Vision IAS

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09650617807, 09968029039, 09717162595
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