1. Regulatory process in India fails to perform its biggest function; here’s why

Regulatory process in India fails to perform its biggest function; here’s why

The regulatory process has failed to perform its main function of creating transparency and clarity in licensing and tariff setting

By: | Published: October 27, 2016 6:23 AM
The intention behind creating independent regulatory commissions was to introduce transparency in government decisions. The intention behind creating independent regulatory commissions was to introduce transparency in government decisions.

Despite protests about India being a federation with powers allocated between the Union, states and local authorities, the reality is much different. Every attempt to delegate decision-making to lower levels, has been overcome by politicians and the bureaucracy. The Constitution was amended to give powers to panchayats, but financial decisions remain mostly with the state governments. Municipal authorities fare even worse as there are many agencies, no single coordinating authority, and usually a minister for the biggest metropolitan city. Decisions are with him and the chief minister and these neither reflect coordination nor a careful consideration.

The intention behind creating independent regulatory commissions was to introduce transparency in government decisions. As economy grew, many resources under government ownership became extremely valuable. Land was one; others included coal, electricity, telecommunications spectrum, petroleum and natural gas, stock markets, pensions funds and their governance, airport facilities, etc.

The economic reforms of 1991 were expected to increase private domestic and foreign investment. Decisions related to terms for investment, tariffs, licensing, etc, were to be made transparent. Consultation and full disclosure was to be the rule. Legislation creating statutory regulatory commissions were passed during this time.

There are over 60 regulatory bodies at central and state level, including bodies created by the Constitution like CAG. Moreover, governments have transferred some of their regulatory powers like licensing, tariff setting, ensuring competitive markets, to these regulatory agencies created by statute with an intention to recognise the technical nature of the subject under regulation, and provide clarity and transparency since large sums of money are involved. For regulatory bodies; jurisdiction, extent of their powers, the manner of exercising them, penal powers, etc, are laid down by the statutes that created them. But they are quite dissimilar in functioning due to the jurisdiction they operate in.

None of the agencies is a model for others, as each is created by the concerned ministry. For instance, Trai is a recommendatory body, whereas the electricity commissions are still trying to get authority over their forward markets. Besides, penal powers for non-compliance are weak in most cases except Sebi and the Competition Commission. Some of the commissions have appellate tribunals over them, while appeals from others go directly to the High Courts.

There is little information on comparative powers and performance. Nor is there any attempt to study whether different commissions follow a common approach on similar issues.

In addition to statutory bodies, legislatures have given charters to self-regulatory bodies in select areas like sports. There are over 24 sports bodies like IOA, AILTA, BCCI, etc. There are also some professions that have self-regulatory powers over their members in relation to their profession. For instance, MCI (medical education); ICAI (accounting), ICWA (costing), Institute of Architects, Bar Council of India, etc.

It is a generally accepted notion, that self-regulated regulators do not perform all their functions satisfactorily. There are allegations of malfeasance against almost all of them. The professional ones (like ICAI or MCI) are not known for stringent actions against members flouting the norms. The sports organisations, on the other hand, tend to have people running them for their entire life and there are doubts about their financial integrity.

The statutory regulators appointed by the government also do not enjoy an infallible position. In the case of electricity, telecommunications, competition, securities, the appeals against the orders of the concerned commissions are to Appellate Tribunals, and not directly to the High Courts. This has often led to delays and the dilution of the original intent of the Commission. This is especially the case with competition where the Commission had received far stronger penal powers than other regulatory bodies. Its severe punishments on erring enterprises in violation of the law were diluted by the Competition Appellate Tribunal. The Securities Appellate Tribunal (SAT) has been similar in its functioning, though not to the same extent. Trai, on the contrary, can be overruled by the ministry since it is a recommendatory body. Government departments in the regulated sectors have not diminished and they continue to influence most regulatory bodies.

In many instances, the government departments especially in state governments, get the regulatory commission to act at the behest of the government, and not independently. One reason for this is the selection process of Chairman and members of the regulatory bodies. The selection committees specified in the legislation are invariably composed of administrators, many from the concerned ministry, invariably after retirement, and in some cases out of the same ministry whose sector they are to regulate. These are obnoxious practices that are against the original intent of statutory independent regulation. Such appointees mostly bring to the regulatory assignments, the baggage of their administrative mindsets, the procedures and rules that go with them, and an ingrained culture of subservience to the government. They have little commercial or management attitudes and knowledge.

Thus, no state electricity regulatory commission has ever objected to the free power given to agriculture and other select consumers. These loss making supplies have been met by cross-subsidies, i.e., higher tariffs to other consumers which has led to wrong cropping patterns, depletion of ground water and growing salinity of land. Another instance: The Electricity Act mandates open access in order to optimise the use of available electricity in the country. State governments prefer to make supply from local electricity generators. No regulatory commission has protested or denied the prevention of such open access of electricity between states.

With most regulatory bodies, the staff is on deputation from other departments of the government. They do not regard themselves as having a career in regulation. Few if any, rise to become members or chairmen of these bodies.

There are regulatory bodies, like RBI and Sebi, that have had much impact on the economy, but most are content with submission to the government’s desires.

So, has the statutory regulatory process been successful? It has not done what was expected from it, namely create transparency and clarity in licensing, tariff setting, etc. This is mainly due to the key positions in these bodies becoming post-retirement perquisites for retiring bureaucrats and government servants resulting in little independence, courage or knowledge in regulating the concerned sectors. They largely operate as just another government layer.

Special benches in the High Courts, can certainly replace the appellate tribunals as they would focus on law and leave ascertaining facts to the Commissions.

It would be better if all the commissions have a uniform structure and if they can follow each others’ orders to ensure that there is a body of regulatory law and precedents that can enrich the whole business of regulation.

The author is former director general, NCAER, and was the first chairman of the CERC. Views are personal

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