Government of India Volume I: Analysis and Recommendations

THE TASKS OF FINANCIAL LAW
In the normal functioning of Government, the three functions of regulation-making,
enforcement and adjudication are kept separate under the ‘separation of powers’ doctrine.
When the Parliament delegates these functions to the regulators, it places them in
the unique position of being ‘mini-states’ with powers similar to the legislature, executive
and judiciary all under a single entity. The Commission has strived to achieve greater
separation of powers in the functioning of the regulator, particularly by separating out
adjudication from other activities.
A well-structured, independent regulator needs to avoid two extremes. At one extreme
is excessive delegation. As an example, if legislation sets up an independent regulator
with the mandate of ‘serving the public interest’ or ‘improving the welfare of the
people of India’, and arms it with sweeping powers, this would raise concerns about what
such an agency could do. At the other extreme is the issue of micro-management in the
legislation. If laws embed institutional details of markets, technology and financial sector
activities, the key purpose of establishing independent regulators would be lost. To
avoid both these extremes, the Commission recommends that independent regulators
should be given precise objectives, and a specific toolkit of powers through which those
objectives are to be pursued, with the independence to decide the manner in which the
powers are to be used. Any action of the regulator will however remain subject to extensive
mechanisms of accountability.
2.4.2. Accountability of regulators
As argued above, regulatory independence is essential to support the functioning of the
regulator as an expert body, and to ensure that regulation-making and enforcement do
not fluctuate with changes in political executives. But independence is not an unmixed
blessing: when unelected officials are given strong powers, this needs to be accompanied
by appropriate accountability mechanisms.
The Commission recommends that the substance of financial regulation is too minute
and dynamic to be legislated upon by Parliament, however, the process through which
financial regulation is to be effected should be clearly detailed in the law. Parliamentary
legislation should therefore incorporate high standards of procedure that the regulator
will be required to adhere to. Drawing on practical Indian experiences of the last twenty
years and global best practices, the draft Code embeds an array of mechanisms through
which independence of the regulator can be actually operationalised, and accountability
achieved.
The Commission has adopted the following pathways to accountability:
1. Setting out of clear objective standards of governance that the regulator must adhere to;
2. A well-structured regulation-making process with appropriate checks and balances to ensure
that all regulations are backed by thorough analysis of costs and benefits and are made through
an open consultative process;
3. A formal and transparent system of regulation and supervision, rooted in the rule of law, which
will include:
◮ Duty of the regulator to explain its actions to regulated entities and the public at large; and
◮ Requirements that regulatory actions and changes should be imposed with adequate prior
information to persons likely to be affected (unless inappropriate for a particular situation)
and should rarely be carried out without hearing the concerned parties;
4. Reporting requirements that mandate the regulator to disclose how it fared on pursuing its desired
outcomes and at what cost; and
5. Placing the judicial oversight of the regulator in FSAT which will ensure greater scrutiny over the
actions of the regulator and with greater efficiency. Principles of efficiency and measurement of
performance will also be applied to the FSAT.
16 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION