Checks and balances challenge: How to strengthen regulators' accountability

Parliament's oversight of statutory regulatory authorities is weak, and strengthening it is both necessary and desirable

Parliamentary oversight of the workings of statutory regulatory authorities (SRAs) is an established norm in many democracies. It is an essential feature of the checks and balances required for SRAs, which work at an arm’s length from the executive.

Indian SRAs like the Securities and Exchange Board of India (Sebi) fuse all three branches of the state. They have the power to make binding regulations (the legislative function), the ability to enforce these regulations (the executive function), and the authority to adjudicate and sanction violations of regulations by the regulated entities (the judicial function). This departure from the separation of powers makes Indian SRAs unique, both in comparison with SRAs abroad, and other Indian government organisations.

Given this unique design of SRAs in India, a sui generis and comprehensive set of accountability mechanisms is required. The Sebi Act, 1992, and subsequent amendments to it have attempted to provide for such an accountability mechanism. Over the years, we now know that these mechanisms have not been very effective.

Let’s start by summarising the existing checks and balances. By its very nature, Sebi’s judicial function cannot be supervised by Parliament. Parliament, therefore, provided (in Chapter VI B of the Sebi Act) for a multi-member Securities Appellate Tribunal (SAT) to hear appeals against the quasi-judicial orders of Sebi (and some other financial sector SRAs). Though this multi-member SAT mechanism took time to evolve, over the years, SAT has been a powerful source of checks and balances against Sebi, demanding that punishments be backed by proof, and striking down Sebi’s excesses.

For Sebi’s legislative functions, the Act has the standard Indian mechanism of post-facto parliamentary scrutiny of administrative law. All regulations made by Sebi are placed before Parliament, which has the power to review, modify, or strike them down. This important role is assigned to the parliamentary committees on subordinate legislation. The reality of parliamentary scrutiny over regulations made by SRAs, however, has been disappointing.

Over a 23-year period, between 1999 and 2022, the Lok Sabha parliamentary committee reviewed 13 regulations issued by all SRAs, and the Rajya Sabha parliamentary committee reviewed four such regulations. Sebi alone has issued more than 650 regulations since it came into being. There are more than 20 SRAs at the level of the Union of India, and most of their legislative activity is not being subject to parliamentary scrutiny. In addition, SRAs have also been pushing a lot of legislative activity into legal instruments that go by other names, further diluting an already weak parliamentary scrutiny.

A critical part of regulatory design is the composition and role of the governing board. The board is required to oversee the executive functions, and also the overall working of the agency. A well-structured board should have a majority of private citizens as members, and should approve each regulation issued by the regulator. All these features are lacking. The composition and functioning of the governing boards of all SRAs in India leave much to be desired. They are almost entirely composed of internal persons and serving government functionaries. In practice, the board delegates most of the powers to the chairperson and provides very little oversight. There is a striking gap between the governance standards that Sebi demands of listed companies or the Reserve Bank of India (RBI) demands of banks and  how Sebi and  the RBI themselves are governed.

The Sebi Act prescribes an annual audit of Sebi to be conducted by the Comptroller and Auditor General (CAG). This needs to be read with the Indian Constitution and the provisions of the CAG Act, 1971. The CAG is required to conduct both financial proprietary as well as performance audits of SRAs in exactly the same manner as it does for the executive government. The Sebi Act mandates submission of an annual report to Parliament. Sebi’s annual report must be read by Parliament alongside the CAG’s report on Sebi.

In practice, the CAG has seldom gone beyond auditing Sebi’s expenditure and its staff. Its reports bring out very little on the performance of Sebi in the discharge of its executive functions. Sebi’s annual reports lack the information required for a critical assessment of its performance. Over the past 32 years, Parliament has not discussed the annual report of Sebi (or any other SRA) even once.

According to newspaper reports, the Public Accounts Committee (PAC) plans to discuss the performance of SRAs. This decision needs to be seen in the above context. Regulators like Sebi are unique by world standards in that they breach the separation of powers, and they are simultaneously afflicted with weak checks and balances when compared with global insights into regulatory theory. Enhancing these checks and balances is a part of strategic thinking in reform (i.e. modifications to the law as envisaged by the Financial Sector Legislative Reforms Commission) and also tactical moves (e.g.  PAC oversight).

The finance committees of Parliament — namely, PAC, the Committee on Public Undertakings, and the Estimates Committee — are tasked with scrutinising various aspects of government finances and expenditures. Their focus is on funds sanctioned by Parliament and their utilisation by the executive government. SRAs typically do not receive government budgetary support and are thus outside the purview of these committees. Another parliament committee relevant to this discussion is the Departmentally Related Standing Committee (DRSC), which also primarily examines utilisation of funds allocated to a ministry. It will hence be interesting to see the pathway taken by PAC to obtain the much needed improvements upon the checks and balances over SRAs.

Nearly 15 years ago, former finance minister Yashwant Sinha proposed the creation of a new parliamentary committee to review the performance of SRAs. SRAs could be grouped into two or three categories and the committee secretariat could build up internal capacity and source external expertise and enable Parliament to exercise its oversight on SRAs. This work could ideally involve parliamentarians and their teams jumping off from (a) better CAG reports (b) better SRA annual reports and (c) studies obtained from independent research organisations.

The writer is an honorary senior fellow at the Isaac Centre for Public Policy, and a former civil servant