Government of India Volume I: Analysis and Recommendations

CHAPTER 4
Functions and powers of the
regulator
The regulator acts like a mini-state in that it exercises legislative powers in the form of
drafting regulations that are binding on regulated entities; it acts as the executive in its
supervision and enforcement actions; and it performs a quasi-judicial function while assessing
compliance with the law by regulated entities and compliance of processes by
the regulator while imposing penalties on them.
While giving these wide ranging powers to the regulators, the draft Code on regulatory
governance needs to put in place appropriate checks and balances to ensure that
the powers are not misused and proper regulatory governance processes are followed in
every action taken by the regulator.
The Commission has identified the following areas for which regulatory governance
processes need to be clearly detailed in the draft Code:
1. Process for issuing regulations and guidelines;
2. Executive functions - granting permission to carry on financial activities, information gathering,
investigation, imposition of penalties and compounding of offences; and
3. Administrative law functions.
4.1. Issuing regulations and guidelines
The primary function of a financial sector regulator is to set down standards of behaviour
expected from regulated entities. This encompasses making regulations governing how
the regulated entities should interact with the regulator, consumers, financial markets
and other regulated entities. Regulations also guide the internal functions and actions of
regulated entities in the conduct of financial activities.
In a system governed by the rule of law, no action should be judged against unknown
standards. Therefore, before the regulator can carry out any supervision or adjudication
functions it has the responsibility to lay down in clear and unambiguous terms, the behaviour
that it expects from regulated entities. While doing so, the regulator needs to
follow a structured process that allows all stake-holders to be fully informed of and participate
in the regulation-making process.
Some existing regulators have already adopted the good practice of carrying out
public consultations in the course of making regulations. However, the Commission
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 29