Finally, an Indian regulator, and the most articulate one at that, has provoked a much-needed public debate about the Financial Sector Legislative Reform Commission's (FSLRC) recommendations on regulatory reform. Reserve Bank of India Governor Raghuram Rajan recently spoke about two "fundamental areas of tension" in the report's recommendations.
The governor's talk comprises carefully chosen words. Opening with copious praise for the FSLRC, quickly reminding that provoking debate is more important than singing paeans, highlighting that he has had a personal change of heart on one of the areas of tension, hurrying to clarify that he is not indulging in "unthinking defence of regulatory turf", Rajan has concluded that something that ain't broke shouldn't be fixed.
All that the media picked up was the adjective "schizophrenic" coming as it did from none less than the central bank chief. The two "areas of tension" are appellate oversight of regulatory decisions, and the re-engineering of the financial sector's regulatory architecture by consolidating most regulatory agencies into a combined organisation. Most debate on the FSLRC report has been on the latter. The attention of both incumbents and retired regulators has been riveted on it at the expense of a wide range of other recommendations.
The strength of competing views on this area is underlined by the governor himself saying: "I too shared such a view (in support of consolidating regulatory agencies - extensively articulated in "A Hundred Small Steps" alias the Rajan Committee Report on Financial Sector Reforms, 2009) but I now (after spending time inside the RBI) believe it is too extreme." Therefore, this column will not join that aspect of the debate. On the other hand, the views on the merits of judicial oversight warrant joining issue. (Disclosure: The author was a consultant to the FSLRC. Views expressed here may therefore be taken with a dose of salt larger than what is used when reading the regulator's opposition to this reform.) First, the RBI's belief that access to justice against regulatory excesses and blunders in the form writ petitions in a high court is an effective check and balance on regulators (the don't-fix-what-ain't-broken argument) is fundamentally erroneous. Not only because regulators, in large measure, get away with inspiring uninformed awe about how important and sensitive their erroneous decisions are, but also because every now and then when a judge decides to take deep interest in a dispute, the regulator may actually get a medicine more painful than the ailment.
For example, see the cancellation of all 2G spectrum licences years after they were granted, banked and financed, by a writ court that also ruled that every allocation of state property should be made only by auction. It took a Presidential Reference to the Supreme Court under the Constitution to set right the damage with a fine tightrope walk from the then Chief Justice taking care to ensure that the majesty of the court's earlier view was not undermined. On the other hand, a specialised tribunal that focuses on a specific area of law all year is an able foil to meeting the objectives of an effective regulatory system. Give the regulatory very strong powers, give a special tribunal clear powers to check excesses committed by the use of such powers, and you achieve a system that works. In fact, a focused special-purpose tribunal is known to be able to clearly look through multiple litigation strategies and pick on the mischief played by both the regulated entities and by the regulator - all in one forum. Most final decisions are handed down within months, with proceedings handled by simple people ranging from officers of companies to chartered accountants and company secretaries.
On the other hand, it truly takes "high priced lawyers" (the governor's words) to even start getting heard within months in the writ courts. This comfort zone of the RBI is truly an area that is indeed broken, and therefore needs urgent fixing.
The next issue is the scope of appellate review. The argument that there could arise "too much of checks and balances" and second-guessing of regulatory wisdom merely by providing for appellate review is entirely intuitive, and without empirical support. Indian regulatory appellate history in fact points in the opposite direction. In the nearly two decades of the Securities Appellate Tribunal's (SAT) existence, the quality of orders from the Securities and Exchange Board of India (Sebi) has only gone up. On the other hand, regulators that do not have an appellate tribunal overseeing them write one-para orders without reasons when they take disciplinary actions - they have no concern of having to explain themselves to an appellate tribunal. The check and balance then gets skewed because all they need to do is coerce the regulated entity by equating an appeal for reasons, with second-guessing and disrespecting the regulator.
The entity in question may fall in line but the rest of the market would be none the wiser about what actually went wrong and what it should do not to attract the regulator's displeasure. It is the resultant legal and policy uncertainty that effectively impedes the ease of doing business in India and our consistently pathetic rankings in the World Bank's annual survey on the subject. Of course, the messy backlog in the court system places India second from the bottom on legal enforcement in this survey - which is what makes the RBI's offering of the writ courts as an effective alternative, highly suspect.
Even today, challenges to regulatory decisions on the ground that they are without jurisdiction are led in the writ courts and the SAT.
Such questions have been answered - successfully most times, without success at times. Sebi's annual reports take pride in its appellate success ratio year after year.
All of this points to a healthy working of a check and balance. All that the draft law from FSLRC does is make the principles and objectives to be met by regulators in their decision-making even clearer so that similar challenges can be dealt with more objectively by courts. Acknowledging that a problem exists is the biggest part of solving the problem. The financial sector sorely needs it.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own. somasekhar@jsalaw.com
