By Pradeep S Mehta
The Joint Parliamentary Committee and Public Accounts Committee are heading towards a collision on who will have the primacy to enquire into the 2G scam. The Speaker will settle the issue, and we wait with bated breath as to how she will do it. This is but symptomatic of turf wars that we have been witnessing among our regulatory authorities, which are more knotty than political. We, therefore, need to settle the framework to ensure that such conflicts on overlapping issues do not occur, as they are inefficient and invite unnecessary policy arbitrage.
Witness the clash between Irda and Sebi over who will regulate Ulips. They were first advised to test it out in a court of law. But before they could do that, the finance ministry stepped in to roll out a new body headed by the minister; certainly not the best solution. Like the Irda/Sebi spat, there was another such spat on futures trading in electricity between the Forward Markets Commission (FMC) and Central Electricity Regulatory Commission, which went to the Bombay High Court. In a splendid judgement, the Court, after analysing the arguments and statutory provisions, held that futures contracts in electricity cannot be exclusively dealt with by any one of these regulators. The mixed nature of this subject falls in the domain of both these regulators, unless an appropriate enactment is made by way of statutory provision regulating the futures contract in electricity giving powers only to one authority.
While pronouncing the judgement, the High Court also suggested the two regulators look for possibilities to resolve this issue by setting up an expert committee. Regulatory feuds will get more rampant in India, not only between regulators but also between the Competition Commission of India and sector regulators, and in the absence of proper dispute resolution mechanism. This judgement demonstrates that even legislative interpretation tools are inefficient, unless there is a clear demarcation of roles of the regulators. However, considering the complex nature of the expanding market in India and its inscrutable nature, can there be an absolute demarcation of powers and functions of regulators?
In another such turf war, FMC forced the NSE to postpone the launch of gold exchange-traded funds (ETFs), despite Sebi having granted permission to the exchange. The FMC took the stance that regulation of such products was under its purview and not Sebi’s.
RBI has also found a place in the turf war bandwagon. The constitution of the Financial Stability and Development Council (FSDC) is the bone of contention between RBI and the finance ministry. RBI believes that financial sector development and regulation is an area within its independent jurisdiction and, hence, considers FSDC as a move to encroach upon its turf.
With disputes come the attempts to resolve them. In a move to resolve the turf wars among financial sector regulators, the Lok Sabha recently passed a Bill, which was earlier introduced as an ordinance by the finance ministry. This Bill ordains for the constitution of a joint committee of all four financial sector regulators, headed by the finance minister. The Bill also states that the decisions of the joint committee formed under the new law are binding on RBI, Sebi, Irda and PFRDA. Despite Pranab Mukherjee’s assurances, such a committee, headed by the minister is likely to encroach on the autonomy and independence of the sector regulators, which is not at all desirable.
The government has also constituted the Financial Sector Legislative Reforms Commission (FSLRC) to harmonise various laws prevalent in the financial sector. One hopes that this new commission can develop a framework for regulators to consult on overlap matters as a mandatory duty and come up with a consensual solution, thus making the new body headed by the finance minister a platform to discuss issues rather than resolve disputes.
Here, a lesson can be drawn from the Government National Mortgage Association (GNMA) case in the US. The Chicago Board of Trade and Securities and Exchange Commission (SEC) approached the district court over determination of their turf vis-à-vis securities-based derivatives, which involved the GNMA. Judge Campbell observed that: “I did not appreciate seeing two federal agencies expend their time and resources fighting a jurisdictional dispute in court. I believe their efforts would be more wisely spent in utilising their expertise to reach a solution which they would jointly recommend to Congress”. In 1981, while the GNMA case was still being tried in the Chicago court, John Shad and Philip Johnson were appointed chairs of SEC and the Commodity Futures Trading Commission, respectively. Despite the rivalry between the two agencies, both negotiation teams knew that the cash-settlement issue should be solved co-operatively. After long deliberations and consultations, both agencies reached an agreement, remembered as the Shad-Johnson accord deciding their respective domains amicably.
An opportunity for consultation will also ensure the independence and autonomy of the regulators. In the case of failed consultations, the matter can be referred to a High Powered Committee (HPC) consisting of secretaries of the various departments/ministries and headed by the Cabinet Secretary. Such a provision will be in line with the mandate of the apex court laid down in ONGC vs Collector of Central Excise, asking public bodies to resolve their disputes through an HPC, instead of coming to court at the cost of the public exchequer.
A pragmatic deliberation on the realities of the market suggests that there cannot be a perfect separation of functions among the regulators. All regulators are joined by the common sacrament of consumer welfare and market development. Interface and overlaps are opportunities to employ best expertise by the respective regulator to achieve optimum results, rather than end up in a jurisdictional gridlock. Also, courts are not the appropriate forum to resolve such disputes, expressed by the Bombay High Court judgement in FMC vs CERC. Therefore, the best approach would be to have a mandatory consultation between the regulators, which can be achieved by revisiting the legal framework. For example, the same can be a feature in the draft Regulatory Reform Bill, under discussions at the Planning Commission. Such a provision will ensure the responsibility of every regulator to keep in loop other regulators exercising domain over the same issue.
Pradeep S Mehta Secretary General, CUTS International and Vikas Kathuriya of CUTS contributed to this article