1

Statutory Regulatory Authorities in India

A Constitutional perspective

KP Krishnan, Additional Secretary (LR), MoRD GOI

(Views are personal and not attributable to GOI)

2

Structure of presentation

• Rationale for SRAs

• Rise of SRAs- globally & India

• Constitution of India and SRAs• Separation of powers• Rule of law

• Financial sector laws in India

• Issues & problems

• Way forward

3

Rationale for SRAs I

• Specialization• Privatization, increase in competition and liberalization of markets necessitated

complex laws• Regulation no longer a matter for generalists• As complexity increases, important to keep rules malleable• Detailed multi-stakeholders scrutiny and resourcefulness of industry necessitated

that the rule maker is as resourceful

• Conflict of interest• Classic example is that of the central bank as a monetary policy-making body,

independent of the government• Crucial in sectors where the private sector is competing with public sector

enterprises• Enforcement powers must be or at least perceived to be independent of political

ideologies

4

Rationale for SRAs II

• Credible commitment theory• Insulate policy decisions from political pressures• Continuity in approach, despite change at political levels• Insulate policy making from unpredictable intervention by elected politicians

5

Global developments on SRAs

• Apart from central banks first federal regulatory agency in the US was a regulator for inter-state railroad freight rates in 1887

• Europe did not have separate regulatory agencies, until the late 1980s and 1990s

• Until very recently, England had a few one-person regulators

• Today UK has nearly 50 regulatory agencies

• Some regulators in Europe have nominees of the legislature on their boards e.g. Boards of telecom regulators in Italy and Germany

6

Agencies or NDPB• Sir Leo Pliatsky coined the term Non-departmental public bodies (NDPB) to

describe these in his 1980 report to the UK Government

• A body which has a role in the processes of (national) Government, but is not a Government Department, or part of one, and which accordingly operates to a greater or lesser extent at arm’s length from Ministers

• If the function needs to be carried out at arm’s length from ministers e.g. regulatory functions, decisions on funding

• When expert advice is required by ministers on technical/specialized issues

• If a body needs to be set up to deal with appeals

• When a body is required to carry out a range of commercial activities where board members need a degree of independence

7

Rise of the regulatory state in India

• Earliest known regulator in India is the Reserve Bank of India

• Pre-liberalisation departments of government directly regulated activities

• Post-liberalisation period saw a wave of independent regulatory agencies, in the social and economic space e.g. SEBI (1992), TRAI (1997), IRDA (1999) and CCI (2002)

• NHRC and NCBC (1993)

8

Taxonomy of agencies in India?

• Not all the statutory agencies are “regulators”

• We don’t have an NDPB type classification and categorization of bodies

• Not all have all-encompassing governance powers

• Some agencies are largely executive in nature, e.g. NCBC’s main function is to examine requests for inclusion as a backward class

• Some regulators’ powers are largely quasi-judicial, e.g. CCI’s function of approving combinations involves the exercise of mainly quasi-judicial powers

• Some regulators have executive, legislative and quasi-judicial powers, e.g. most financial sector regulators such as SEBI, RBI, IRDA and PFRDA

9

SRAs and the Constitution of India I

• Article 53 (1) of the Constitution regulates the exercise of the executive powers of the Union by officers of the Union

• Article 53 (3) enables the Parliament to confer by law “functions” to “authorities”

• Constitution does not define “functions” or “authority” in this context. Presumably, Article 53 (3) refers to executive functions

• Executive powers not explicitly defined in the Constitution

10

SRAs and the Constitution of India II

• Jurisprudence however indicates that executive powers include• Residue of governmental functions that remain after the legislative and

judicial functions are taken away• Power to make subordinate legislation, when such powers are delegated by

law and • Limited judicial functions, when such functions are delegated by law

• Authorities are not defined in the Constitution but RBI, SEBI & IRDA in the financial sector & TRAI, etc. are clearly “authorities” under Article 53 (3)

• Outcome of all this is “state” power being exercised by new type of agency with powers & limits on powers laid down by law

11

Separation of powers

• Same persons cannot be part of more than one of the three organs of government, e.g. Ministers should not sit in Parliament• One organ of government cannot interfere in the functioning of another, e.g.

Legislature can only question but not interfere with executive actions• One organ of government cannot exercise functions of another, e.g. Judiciary can

only interpret or set aside the law, not write it• No Constitution in the world has adopted the doctrine in its rigid form• Parliamentary privileges, power of judiciary to make rules of procedure, power

of executive to issue ordinances, power of legislature to impeach members of the judiciary, etc. technically violate the the pure form of the doctrine• Most Constitutions have adopted an adapted form of the doctrine• Focus of the doctrine has shifted from a strict demarcation of functions and

powers to checks and balances

12

Separation of powers & SRAs

• Functions of regulators can be classified into three buckets • Legislative i.e. making regulations and internal bye-laws• Executive i.e. licensing, exempting, investigating and prosecuting• Judicial i.e. adjudicating and penalizing

• Doctrine of separation of powers requires that the buckets be separated within the body of the delegate

• At the least, the doctrine must be applied to separate the judicial functions from the other two buckets

13

Elements of rule of law

• Means different things to different people and in different contexts

• Following elements are beyond debate

• Predictability and transparency of executive action

• Effective opportunity to be heard

• Opportunity to appeal to an impartial forum

• Judicial review of legislation

• Clarity and certainty of binding norms in discretion-based regulation

14

Judicial pronouncements on regulatory authorities I

• Generally regulatory authorities are constitutionally permissible & valid

• Courts have emphasized the need for independent regulators such as TRAI (Delhi Science Forum and Ors. v. Union of India 1996 SCC (2) 405)

• Courts have upheld powers conferred upon regulators such as SEBI’s powers to issue directions under section 11 of SEBI Act and CCI’s powers to make inquiries under section 26 of the CCI Act

• Outcome is that regulatory authorities can exercise powers that are:• Quasi-judicial• Quasi-legislative &• Administrative

• Regulatory authorities can impose monetary penalties

• Regulatory authorities can licence, regulate & supervise

15

Judicial pronouncements on regulatory authorities II

• Supreme Court has recognized the importance of the internal separation of powers within a regulator

• In Clariant International Ltd. And anr. v. SEBI, a three-member bench observed:

“The SEBI Act confers a wide jurisdiction upon the Board. Its duties and functions thereunder run counter to the doctrine of separation of powers. Integration of powers by vesting legislative, executive and judicial powers in the same body, in future, may raise several public law concerns as the principle of control of one body over the other was the central theme underlying the doctrine of separation of powers”

16

Financial sector legal issues

• Most financial sector legislations very old• RBI Act 1934 • Insurance Act 1938• Securities Contract Regulation Act 1956

• And based on the knowledge of those times

• Stand alone amendments leading to confusion & complexity

• Regulatory arbitrage, gaps, overlaps & inconsistency

• Regulatory governance

17

RBI

• RBI grants licences to banks based on number of criteria including vague criteria like public interest

• RBI may cancel a bank licence on several grounds including public interest

• No requirement for appointment of an adjudicating officer for investigation before cancellation of licence

• Any person aggrieved by the cancellation of a bank license may appeal to Central Government & decision of Central Government is final

• Fusion of executive and quasi-judicial powers

• This, coupled with the judicial tendency of deference, leaves an aggrieved party virtually without a remedy

18

SEBI

• An adjudicating officer is in charge of enquiring into suspected violations

• Adjudicating officer is also in charge of• giving the investigated person an opportunity of being heard; and • imposing penalties

• SEBI Board may examine any case disposed of by AO and only make orders enhancing the quantum of penalty

• The executive function of conducting an enquiry is fused into the quasi-judicial function of imposing penalties

19

S. 11B of SEBI Act

... “if after making or causing to be made an enquiry, the Board is satisfied that it is necessary, - (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; ... it may issue such directions, - (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market”

20

The problems with this

• SEBI has been given powers to pursue a vague objective (“the interest of investors”)

• Public choice theory predicts this will be used!

• And guess what?

• SEBI has vigorously used 11B for writing regulations and orders

• In fact it is the source of the largest number of SEBI orders

21

Another example of vague powers

• Objective of the Payments and Settlement Systems Act is “to regulate the payment system”

• Power to issue directions under the Payments and Settlement Systems Act: “to perform such acts as may be necessary, in the opinion of the Reserve Bank, to remedy the situation”

• This can become unlimited power

• In the limit, vague objectives + vague powers

22

Clarity of purpose

• When the agent has multiple objectives, this muddies the waters

• The agent will claim that Objective 1 was somehow the priority of the day so we failed on Objective 2

• Things are worse when Objective 1 directly clashes with Objective 2

• Let’s achieve clarity of purpose

23

Egregious examples

• Egregious examples: • Issuance of informal instruments: Informal guidance issued by SEBI, Press

Releases issued by DIPP. Advice given by RBI to banks under section 36 of Banking Regulation Act. None of these are legally binding, but informal pressure to abide by it• Powers of exemption or approval without guidance for exercise of those

powers: Approval route under ECB regulations. No guidelines on whether your proposal for foreign currency borrowing will be approved. Ad-hoc exemptions under FEMA (eg. Tata-Docomo case). No requirement to give reasons for rejection of licenses to banks. (eg. no reason for approving payment bank licenses for 11 banks and reasons for rejecting the others)• Imposing vastly different penalties for the same class of violations in similar

circumstances; failure to publish compounding or settlement orders. Show cause notice does not reveal the material relied upon; regulator refuses to provide inspection of incriminatory or exculpatory evidence

24

Regulatory authorities interface with GoI

• Prescription of rules on eligibility, terms & conditions

• Process of appointment/removal

• Source and application of funds & audit

• Integrity enforcement in SRAs

• Facilitation of parliamentary interface

• Interaction with foreign governments

• Regulation of entities owned by government

• Miscellaneous• VIP correspondence/public grievance redressal• Administrative matters like foreign visits

25

The Contract

• The law or the executive order is the contract between principal and agent

• The critical components: • Objectives • Powers given to the agent and • Accountability mechanisms and governance arrangements

• Too many existing laws and executive orders lack these three components

26

FSLRC Model

• Recognising expansive powers of regulators, the Financial Sector Legislative Reforms Commission led by Justice B.N. Srikrishna recommended a model for separating the quasi-judicial powers of the regulator from its executive and quasi-legislative powers

“Once an investigation has taken place, and the supervisory team within a regulator believes there have been violations, the principles of public administration suggest

that the actual order should be written by disinterested party.

… A systematic process would operate within the regulator, where administrative law officers and the administrative law member would be presented with evidence

and write orders”

27

FSLRC Model

• Financial Regulators will have a separate wing which will perform only quasi-judicial functions

• Administrative law wing will be headed by a member of the board and will be accountable only to that member

• Members of administrative law wing will not perform any function other than the quasi-judicial functions such as levying penalties, granting and rejecting applications for licenses, etc.

• Investigation is conducted by other officers who present the information to the administrative law officers to make an impartial decision on the basis of the information collected

28

FSLRC Model

• Standard of show-cause notices:• Must contain the action proposed to be taken by the regulator and the effect of such

action• Must contain the information on the basis of which the allegation is made • Must give an opportunity to make representations before the administrative law wing

• Must give to the person investigated access to any exonerating material which can be used in her own defense

• Standard of orders passed by regulators:

• Must take only that action which was proposed in the show-cause notice

• Must inform the person against whom it is passed of the right to appeal against it and the time-limit for making such appeal

• Must state the material relied upon in making the order

29

International examples

• Processes in the UK:• Appointment of investigator – notice of appointment will be given to the firm under

investigation• Investigator investigates – investigation report will be reviewed by an internal

lawyer who was not part of the investigation• If any action is proposed, then matter referred to a Regulatory Decisions Committee

(RDC). Persons who participated in the investigation cannot be members of RDC• Firm under investigation may make representations to the RDC• If further action is proposed, then a decision notice is issued which can be

challenged before the Tribunal• If no appeal is made or if the Tribunal confirms the notice, Regulator can take the

proposed action

30

International examples

• Processes in the US:• An enforcement process begins with a Wells Notice identifying the specific

charges and offering an opportunity of representation• After investigation is complete, the Administrative Law Judge within a

regulator to identify whether the allegations are true and issuing a decision• Administrative Law Judges are independent judicial officers who in most

cases conduct hearings and rule on allegations of violations initiated by the Commission’s Division of Enforcement

31

Thank you