Statutory Regulatory Authorities in India
A Constitutional perspective
KP Krishnan, Additional Secretary (LR), MoRD GOI
(Views are personal and not attributable to GOI)
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Structure of presentation
• Rationale for SRAs
• Rise of SRAs- globally & India
• Constitution of India and SRAs
• Separation of powers
• Rule of law
• Financial sector laws in India
• Issues & problems
• Way forward
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Rationale for SRAs I
• Specialization
• Privatization, increase in competition and liberalization of markets necessitated
complex laws
• Regulation no longer a matter for generalists
• As complexity increases, important to keep rules malleable
• Detailed multi-stakeholders scrutiny and resourcefulness of industry necessitated
that the rule maker is as resourceful
• Conflict of interest
• Classic example is that of the central bank as a monetary policy-making body,
independent of the government
• Crucial in sectors where the private sector is competing with public sector
enterprises
• Enforcement powers must be or at least perceived to be independent of political
ideologies
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Rationale for SRAs II
• Credible commitment theory
• Insulate policy decisions from political pressures
• Continuity in approach, despite change at political levels
• Insulate policy making from unpredictable intervention by elected politicians
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Global developments on SRAs
• Apart from central banks first federal regulatory agency in the US was a
regulator for inter-state railroad freight rates in 1887
• Europe did not have separate regulatory agencies, until the late 1980s and 1990s
• Until very recently, England had a few one-person regulators
• Today UK has nearly 50 regulatory agencies
• Some regulators in Europe have nominees of the legislature on their boards e.g.
Boards of telecom regulators in Italy and Germany
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Agencies or NDPB
• Sir Leo Pliatsky coined the term Non-departmental public bodies (NDPB) to
describe these in his 1980 report to the UK Government
• A body which has a role in the processes of (national) Government, but is not a
Government Department, or part of one, and which accordingly operates to a
greater or lesser extent at arm’s length from Ministers
• If the function needs to be carried out at arm’s length from ministers e.g.
regulatory functions, decisions on funding
• When expert advice is required by ministers on technical/specialized issues
• If a body needs to be set up to deal with appeals
• When a body is required to carry out a range of commercial activities where board
members need a degree of independence
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Rise of the regulatory state in India
• Earliest known regulator in India is the Reserve Bank of India
• Pre-liberalisation departments of government directly regulated activities
• Post-liberalisation period saw a wave of independent regulatory agencies, in the
social and economic space e.g. SEBI (1992), TRAI (1997), IRDA (1999) and
CCI (2002)
• NHRC and NCBC (1993)
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Taxonomy of agencies in India?
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Not all the statutory agencies are “regulators”
We don’t have an NDPB type classification and categorization of bodies
Not all have all-encompassing governance powers
Some agencies are largely executive in nature, e.g. NCBC’s main function is to
examine requests for inclusion as a backward class
• Some regulators’ powers are largely quasi-judicial, e.g. CCI’s function of
approving combinations involves the exercise of mainly quasi-judicial powers
• Some regulators have executive, legislative and quasi-judicial powers, e.g. most
financial sector regulators such as SEBI, RBI, IRDA and PFRDA
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SRAs and the Constitution of India I
• Article 53 (1) of the Constitution regulates the exercise of the executive powers
of the Union by officers of the Union
• Article 53 (3) enables the Parliament to confer by law “functions” to
“authorities”
• Constitution does not define “functions” or “authority” in this context.
Presumably, Article 53 (3) refers to executive functions
• Executive powers not explicitly defined in the Constitution
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SRAs and the Constitution of India II
• Jurisprudence however indicates that executive powers include
• Residue of governmental functions that remain after the legislative and judicial
functions are taken away
• Power to make subordinate legislation, when such powers are delegated by
law and
• Limited judicial functions, when such functions are delegated by law
• Authorities are not defined in the Constitution but RBI, SEBI & IRDA in the
financial sector & TRAI, etc. are clearly “authorities” under Article 53 (3)
• Outcome of all this is “state” power being exercised by new type of agency with
powers & limits on powers laid down by law
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Separation of powers
• Same persons cannot be part of more than one of the three organs of government,
e.g. Ministers should not sit in Parliament
• One organ of government cannot interfere in the functioning of another, e.g.
Legislature can only question but not interfere with executive actions
• One organ of government cannot exercise functions of another, e.g. Judiciary can
only interpret or set aside the law, not write it
• No Constitution in the world has adopted the doctrine in its rigid form
• Parliamentary privileges, power of judiciary to make rules of procedure, power
of executive to issue ordinances, power of legislature to impeach members of the
judiciary, etc. technically violate the the pure form of the doctrine
• Most Constitutions have adopted an adapted form of the doctrine
• Focus of the doctrine has shifted from a strict demarcation of functions and
powers to checks and balances
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Separation of powers & SRAs
• Functions of regulators can be classified into three buckets
• Legislative i.e. making regulations and internal bye-laws
• Executive i.e. licensing, exempting, investigating and prosecuting
• Judicial i.e. adjudicating and penalizing
• Doctrine of separation of powers requires that the buckets be separated within
the body of the delegate
• At the least, the doctrine must be applied to separate the judicial functions from
the other two buckets
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Elements of rule of law
• Means different things to different people and in different contexts
• Following elements are beyond debate
• Predictability and transparency of executive action
• Effective opportunity to be heard
• Opportunity to appeal to an impartial forum
• Judicial review of legislation
• Clarity and certainty of binding norms in discretion-based regulation
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Judicial pronouncements on regulatory authorities I
• Generally regulatory authorities are constitutionally permissible & valid
• Courts have emphasized the need for independent regulators such as TRAI (Delhi
Science Forum and Ors. v. Union of India 1996 SCC (2) 405)
• Courts have upheld powers conferred upon regulators such as SEBI’s powers to
issue directions under section 11 of SEBI Act and CCI’s powers to make inquiries
under section 26 of the CCI Act
• Outcome is that regulatory authorities can exercise powers that are:
• Quasi-judicial
• Quasi-legislative &
• Administrative
• Regulatory authorities can impose monetary penalties
• Regulatory authorities can licence, regulate & supervise
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Judicial pronouncements on regulatory authorities II
• Supreme Court has recognized the importance of the internal separation of powers
within a regulator
• In Clariant International Ltd. And anr. v. SEBI, a three-member bench observed:
“The SEBI Act confers a wide jurisdiction upon the Board. Its duties and
functions thereunder run counter to the doctrine of separation of powers. Integration
of powers by vesting legislative, executive and judicial powers in the same body, in
future, may raise several public law concerns as the principle of control of one body
over the other was the central theme underlying the doctrine of separation of powers”
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Financial sector legal issues
• Most financial sector legislations very old
• RBI Act 1934
• Insurance Act 1938
• Securities Contract Regulation Act 1956
• And based on the knowledge of those times
• Stand alone amendments leading to confusion & complexity
• Regulatory arbitrage, gaps, overlaps & inconsistency
• Regulatory governance
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RBI
• RBI grants licences to banks based on number of criteria including vague criteria
like public interest
• RBI may cancel a bank licence on several grounds including public interest
• No requirement for appointment of an adjudicating officer for investigation before
cancellation of licence
• Any person aggrieved by the cancellation of a bank license may appeal to Central
Government & decision of Central Government is final
• Fusion of executive and quasi-judicial powers
• This, coupled with the judicial tendency of deference, leaves an aggrieved party
virtually without a remedy
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SEBI
• An adjudicating officer is in charge of enquiring into suspected violations
• Adjudicating officer is also in charge of
• giving the investigated person an opportunity of being heard; and
• imposing penalties
• SEBI Board may examine any case disposed of by AO and only make orders
enhancing the quantum of penalty
• The executive function of conducting an enquiry is fused into the quasijudicial function of imposing penalties
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S. 11B of SEBI Act
... “if after making or causing to be made an enquiry, the Board is satisfied that it is
necessary, - (i) in the interest of investors, or orderly development of securities
market; or (ii) to prevent the affairs of any intermediary or other persons referred to
in section 12 being conducted in a manner detrimental to the interests of investors or
securities market; ... it may issue such directions, - (a) to any person or class of
persons referred to in section 12, or associated with the securities market; or (b) to
any company in respect of matters specified in section 11A, as may be appropriate in
the interests of investors in securities and the securities market”
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The problems with this
• SEBI has been given powers to pursue a vague objective (“the interest of
investors”)
• Public choice theory predicts this will be used!
• And guess what?
• SEBI has vigorously used 11B for writing regulations and orders
• In fact it is the source of the largest number of SEBI orders
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Another example of vague powers
• Objective of the Payments and Settlement Systems Act is “to regulate the payment
system”
• Power to issue directions under the Payments and Settlement Systems Act: “to
perform such acts as may be necessary, in the opinion of the Reserve Bank, to
remedy the situation”
• This can become unlimited power
• In the limit, vague objectives + vague powers
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Clarity of purpose
• When the agent has multiple objectives, this muddies the waters
• The agent will claim that Objective 1 was somehow the priority of the day so we
failed on Objective 2
• Things are worse when Objective 1 directly clashes with Objective 2
• Let’s achieve clarity of purpose
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Egregious examples
• Egregious examples:
• Issuance of informal instruments: Informal guidance issued by SEBI, Press
Releases issued by DIPP. Advice given by RBI to banks under section 36 of
Banking Regulation Act. None of these are legally binding, but informal
pressure to abide by it
• Powers of exemption or approval without guidance for exercise of those
powers: Approval route under ECB regulations. No guidelines on whether your
proposal for foreign currency borrowing will be approved. Ad-hoc exemptions
under FEMA (eg. Tata-Docomo case). No requirement to give reasons for
rejection of licenses to banks. (eg. no reason for approving payment bank
licenses for 11 banks and reasons for rejecting the others)
• Imposing vastly different penalties for the same class of violations in similar
circumstances; failure to publish compounding or settlement orders. Show
cause notice does not reveal the material relied upon; regulator refuses to
provide inspection of incriminatory or exculpatory evidence
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Regulatory authorities interface with GoI
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Prescription of rules on eligibility, terms & conditions
Process of appointment/removal
Source and application of funds & audit
Integrity enforcement in SRAs
Facilitation of parliamentary interface
Interaction with foreign governments
Regulation of entities owned by government
Miscellaneous
• VIP correspondence/public grievance redressal
• Administrative matters like foreign visits
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The Contract
• The law or the executive order is the contract between principal and agent
• The critical components:
• Objectives
• Powers given to the agent and
• Accountability mechanisms and governance arrangements
• Too many existing laws and executive orders lack these three components
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FSLRC Model
• Recognising expansive powers of regulators, the Financial Sector Legislative
Reforms Commission led by Justice B.N. Srikrishna recommended a model for
separating the quasi-judicial powers of the regulator from its executive and quasilegislative powers
“Once an investigation has taken place, and the supervisory team within a regulator
believes there have been violations, the principles of public administration suggest
that the actual order should be written by disinterested party.
… A systematic process would operate within the regulator, where administrative
law officers and the administrative law member would be presented with evidence
and write orders”
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FSLRC Model
• Financial Regulators will have a separate wing which will perform only quasijudicial functions
• Administrative law wing will be headed by a member of the board and will be
accountable only to that member
• Members of administrative law wing will not perform any function other than the
quasi-judicial functions such as levying penalties, granting and rejecting
applications for licenses, etc.
• Investigation is conducted by other officers who present the information to the
administrative law officers to make an impartial decision on the basis of the
information collected
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FSLRC Model
• Standard of show-cause notices:
• Must contain the action proposed to be taken by the regulator and the effect of
such action
• Must contain the information on the basis of which the allegation is made
• Must give an opportunity to make representations before the administrative
law wing
• Must give to the person investigated access to any exonerating material which can
be used in her own defense
• Standard of orders passed by regulators:
• Must take only that action which was proposed in the show-cause notice
• Must inform the person against whom it is passed of the right to appeal against
it and the time-limit for making such appeal
• Must state the material relied upon in making the order
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International examples
• Processes in the UK:
• Appointment of investigator – notice of appointment will be given to the firm
under investigation
• Investigator investigates – investigation report will be reviewed by an internal
lawyer who was not part of the investigation
• If any action is proposed, then matter referred to a Regulatory Decisions
Committee (RDC). Persons who participated in the investigation cannot be
members of RDC
• Firm under investigation may make representations to the RDC
• If further action is proposed, then a decision notice is issued which can be
challenged before the Tribunal
• If no appeal is made or if the Tribunal confirms the notice, Regulator can take
the proposed action
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International examples
• Processes in the US:
• An enforcement process begins with a Wells Notice identifying the specific
charges and offering an opportunity of representation
• After investigation is complete, the Administrative Law Judge within a
regulator to identify whether the allegations are true and issuing a decision
• Administrative Law Judges are independent judicial officers who in most
cases conduct hearings and rule on allegations of violations initiated by the
Commission’s Division of Enforcement
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Thank you
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