Sucheta Dalal :Another Attempt To Cripple Regulators (28 October 2002)
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » Another Attempt To Cripple Regulators (28 October 2002)
                       Previous           Next

Another Attempt To Cripple Regulators (28 October 2002)  

India’s experiment with the creation of independent regulators has ranged from moderately successful to disastrous. But instead of strengthening the regulators, the government seems determined to weaken them by pre-empting the surpluses they generate through fees and penalties. Recently, the law ministry ruled that the Insurance Regulatory and Development Authority (Irda) cannot park its annual surpluses in banks but will have to deposit them in the Public Account of India, in a non-interest bearing account.

Although the government claims that the Irda account will be non-lapsable, there is hardly any doubt that it will make the regulator more subservient to finance ministry mandarins, and face needless hurdles when it seeks additional funds in a given year.

The finance ministry is now threatening to issue a directive forcing the Securities and Exchange Board of India (Sebi) also to hand over all surpluses generated by it to the public account. The government seems to have missed the irony in this move to hamstring Sebi, coinciding with another attempt to increase its statutory powers by amending the Sebi Act.

Details of Irda’s battle to retain its funds reveals that the government had initially planned to ask it to deposit its surpluses with the Consolidated Fund of India. It was argued that this is in line with the American practice of asking the Securities and Exchange Commission (SEC) to deposit its proceeds into the Consolidated Fund of the US. In this context it is interesting to see what the noted economist Paul Krugman has to say in his New York Times column. According to Krugman, “the SEC has been under funded for years, and most observers — including Richard Breeden, who headed the agency when Mr Bush’s father was president — thought that even the budget Mr Bush signed back in July was seriously inadequate. But now the administration wants to cancel most of the ‘new funding’ that Mr Bush boasted about”.

“Administration officials claim that the SEC can still do its job with a much smaller budget. But the SEC is ludicrously under financed: staff lawyers and accountants are paid half what they could get in the private sector, usually find themselves heavily outnumbered by the legal departments of the companies they investigate, and often must do their own typing and copying. Officials say there are investigations that they should pursue but can’t for lack of resources.”

Krugman says that starving the SEC of funds is really about preventing the watchdog from doing its job effectively. He draws a parallel with the American Internal Revenue Service (IRS), which has been “systematically forced” by US Congress to shrink its operations even though it is clear that “giving the IRS more money actually reduces the federal budget deficit”. According to Krugman, starving the IRS of funds protects “affluent tax cheats” because it loses an estimated $30 billion a year in uncollected taxes, mainly from high-income taxpayers. Far from blindly quoting the American system as one to emulate when it is convenient, recent scandals should impel Indian authorities to do the reverse.

Instead of disempowering Sebi and Irda, the government needs to spin off the sprawling, money-guzzling investigative machineries of the Department of Company Affairs and the Income Tax department into independent bodies, which will be forced to become far more efficient and accountable. Both these departments have a pathetic record of supervision and revenue collection respectively, and the government probably spends more money on their staff and administrative expenses than they collect through their revenue collection function and supervision.

Also, instead of trumpeting the finance ministry’s victory over Irda (duly ratified by the law ministry), we need some fresh thinking on reform, regulation and supervision. One could start with an objective assessment of India’s experience of independent regulators. It would reveal that starting with Sebi, government mandarins have invariably ensured that the ‘independent’ regulator is crippled at birth. They have inadequate statutory powers and are made accountable to the parent ministry rather than to Parliament. This ensures constant interference in their working, starting with the politics involved in appointing their chairmen.

Strong, honest and independent chairmen are only appointed at times of crisis, or when the government is confident that the regulator will remain a non-starter. It is the latter consideration that saw G V Ramakrishna heading Sebi and later the Disinvestment Commission and yet making a worthwhile contribution at both organisations.

It is recognised around the world that empowerment of an ‘independent’ regulator depends on its ability to finance its own operations, through collection and retention of fees and penalties. This allows it to fulfill its mandate and insulates it from political influence that invariably accompanies government appropriations. Why then are we bent on following a flawed American model? The answer is simple. We do not want powerful independent regulators. Sebi and Irda are the only independent regulators that have created an impact on the system; they are both being hamstrung almost immediately after they have become financially independent.

Yet, both regulators have a long way to go before they attain people’s trust. Sebi’s performance can only be rated as patchy. Although it has achieved a great deal on the development front — thanks mainly to the independent efforts of the National Stock Exchange — it has not been able to staunch the continuous erosion in investor confidence over the last decade. This can happen with more empowerment and funds for investment in office space, cadre building and training.

At the other end of the scale we have the electricity regulator, the Central Electricity Authority (CEA), and the Telecom Regulatory Authority of India (Trai), which have been strangled through constant political interference and ill-defined powers. The CEA was established in the mid-1990s, followed by Trai. However, both regulators were not allowed to get off the ground because the bureaucracy would not let go of their powers and the regulators were too afraid to assert themselves.

Trai spent most of its time fighting government organisations in court. The Department of Telecommunications alone has filed over 20 cases against its orders and its regulatory powers. Consequently, plans to create a series of independent regulators in various other infrastructure sectors have been buried, because the regulators seemed to clutter up the courts with new disputes instead of resolving them. India’s experience only demonstrates that independent regulators without independent powers do not encourage investment or promote growth. Yet, independent regulators are more accountable than extensive, money-gobbling government departments and need to be empowered rather than hobbled.

-- Sucheta Dalal