Human resources & regulatory autonomy

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

Newspapers reported recently the call of the chairman of the National Financial Reporting Authority (NFRA) for a “standalone legislation”. NFRA is a relatively new regulator—largely invisible to the general public—constituted in October 2018 under Section 132 of the Companies Act, 2013. The chairman reportedly said that this section does not provide comprehensive coverage of all the functions and powers that are required to constitute the NFRA as a corporate financial reporting regulator. As the way forward, he said “… in the interest of functional, financial and administrative autonomy of the NFRA, there is a compelling need for a standalone legislation”. This, according to him, will be the key to build the regulatory capacity of the NFRA.

The need for establishing the NFRA had arisen on account of the requirement across jurisdictions in the world, in the wake of accounting scams, to establish independent regulators, for enforcement of auditing standards and ensuring the quality of audits, and thereby, enhance investor and public confidence in financial disclosures of companies. The design and structure of the NFRA and the distribution of responsibilities between the NFRA and the government calls for a more detailed discussion. The focus of this piece will be on the general issue of autonomy of regulators in the area of human resources of their organisation.

Regulation is defined more broadly as the intentional and direct interventions by public agencies in the economic activities of a target population usually in the private sector. The way this has evolved in India is creation of a statutory regulatory authority (SRA) and fusing the powers of two or all three organs of the state, namely the legislative, executive and judiciary, in that authority for that specific domain. This not only renders the SRA very powerful, but also requires it to develop the capabilities required to discharge these onerous functions in domains that require specialised and continuously updated knowledge.

Illustration: Binay Sinha

As an example, the Reserve Bank of India (RBI) in its role as the banking regulator requires people with specialised knowledge of banking. The Securities and Exchange Board of India (Sebi) as the regulator for capital markets requires specialists in financial markets and corporate and securities markets legislation. A few years ago, the RBI would not have needed large numbers of specialists in the area of fintech, payment systems or digital currency. Likewise, Sebi would not have needed specialists in algorithmic trading or high frequency trading some years ago. But now both these regulators require specialists in these areas who not only understand the domain but also understand the use and potential abuse of these new opportunities and the consumer protection measures that are necessary to be put in (by writing regulations on the subject) and enforcing these measures. If there are adjudicatory activities associated with these then another arm of the regulator will also need to have the capacity to judge the violations of these measures and take remedial and penal actions. 

In this sense, regulatory capacity building is more complex than capacity building in government departments. Even conceding that the knowledge of economics and finance required in the parent Ministry of Finance needs updating, the scale and depth of the knowledge required are hugely different. Hence, SRAs need the flexibility to recruit, retain and substitute talent as dictated by developments in the markets they regulate. The normal governmental system of personnel does not deal with such specialised areas or with such requirements in terms of speed etc. In addition, given the opportunity cost of these specialists, the government remuneration systems turn out to be inadequate to attract the right talent. This is the primary argument for SRAs in the area of human resources.

However, the solution may not come only with a special legislation. For example, Sebi, the Insolvency and Bankruptcy Board of India and many other SRAs have been created by Parliamentary legislation. These explicitly empower the SRAs to appoint personnel as considered necessary by the SRA for the efficient discharge of its functions and on terms it decides. In practice, however, the situation is very different across SRAs. 

The problem, therefore, is elsewhere. The General Financial Rules (GFR) of the government mandate that organisations that receive more than 50 per cent of their recurring expenditure in the form of grants-in-aid should formulate terms and conditions of service of their employees in a way that they are not higher than those applicable to similar categories of employees in government. In exceptional cases relaxation may be made in consultation with the Ministry of Finance. Another rule of the GFR requires that all proposals for creation of positions in such bodies shall be submitted to the sanctioning authority. 

Given the weight of history and the general risk aversion of civil servants, notwithstanding explicit provisions in a parliamentary legislation, in practice the executive instructions contained in GFR triumph over the provisions of statute. Sebi escapes this tyranny today as it is not a grant-in-aid institution and generates its own resources in accordance with the law establishing it. It is interesting to note that even in its initial years when the GoI had given Sebi an interest free loan, the GoI acted in accordance with the Sebi Act, departing from the provisions of GFR. Given that India will need organisations which may not have a natural and direct source of income (like the NFRA and IBBI) the longer-term solution will lie in the direction of differential treatment of SRAs in the GFR.

Modern governance is challenging and requires multiple forms of state organisations. The mandate and nature of the functions of the organisation, rather than only the ability to generate its own resources, should be the basis of classification of organisations. SRAs are a category that need autonomy in the area of human resources for ensuring both capability and integrity required to avoid capture. The Financial Sector Regulatory Reforms Commission recommendations in this context, fully empowering the board of the SRA on these matters, along with appropriate changes in the GFR is the way forward. This will ensure SRA autonomy with accountability.

The writer is professor NCAER, member of a few for-profit and not-for- profit boards and former civil servant