Regulatory Bodies

Regulatory Bodies

This article deals with ‘Regulatory Bodies.’ This is part of our series on ‘Governance’ which is important pillar of GS-2 syllabus . For more articles , you can click here

Introduction

  • Regulatory body is an organization set up by the Government to monitor, guide and control a particular sector such as banking, insurance, education or healthcare.
  • It is in contrast to laissez faire which demand complete unregulation/free economy. But since we know the perils of completely free market economy, regulation upto certain extend is very much desirable.
  • After Liberalisation and Privatisation, role of the state changed to rule-maker and regulator. With this, we saw emergence of special category of regulatory systems Independent Statutory Regulating Agencies.

Crux of the matter : When government goes out of particular sector => Make Independent Statutory Regulator for that sector

Need of Regulation

Regulation is needed due to following reasons :-

In case of Natural Monopoly Natural monopoly = when an entire market is more efficiently served by one firm than by two or more firms .
– In such cases, regulation may be necessary to protect consumer interests. 
In India, the transmission and distribution of electricity is still natural monopolies. 
 
To remove Asymmetric Information When one party to a transaction knows more about the product than another.
Eg: health  sector.  
Presence of Externalities Eg : an industrial plant discharging waste into a river . 

 
Check Anti Competitive practices    – Firms may resort to anti competitive practices
– Regulatory bodies check this
Promote Public Interest Regulation promotes the public interest.

Categories of Regulation in India

Regulation in India can be mapped under three broad categories: economic regulation, regulation in the public interest and environmental regulation. 

Economic Regulation Aims at preventing market failure.
By punishing market distorting behavior.
– Eg :  Electricity Act of 2003, which allows State regulators to fix tariffs for power consumption
 
Regulation in Public Interest Eg : Bureau of Indian Standards (BIS) => setting quality and safety standards for various products 
 
Environmental Regulation Protect the environment from harm.   

Reasons for Proliferation of Regulatory Bodies post 1991

  • Market economy demands the competition. Regulatory Bodies were made to ensure level playing field 
  • To attract Foreign Investment : Regulatory Bodies were made to ensure Foreign Investors that decisions will not be guided by Populistic considerations .
  • After LPG, Capacity of states to answer various business problems was limited . Bureaucracy failed to answer many questions related to emerging sectors. Hence, government decided to rope in Technocrats via Technocratic Regulators 

Important Regulatory Bodies (Prelims Point of view)

IRDA Regulator of Insurance Sector  
SEBI SEBI = Securities and Exchange Board of India
– Regulator of Equity Market
 
CCI CCI = Competition Commission of India
To check monopolistic tendencies in the market
 
TRAI TRAI = Telecom Regulatory Authority of India
Regulator of  telecom sector
 
CERC – CERC = Central Electricity Regulatory Commission
– Constituted under electricity act of 2003 Statutory body
 
FMC – FMC = Forward Market Commission
– It was  Regulator of Commodity Market Dissolved in budget(2015) .  Now Commodity market to be regulated by SEBI  
AERB Atomic Energy Regulatory Board  
 
FSSAI Food Safety and Standards Authority of India (FSSAI) 
Established under Food Safety and Standards Act, 2006 
Created for laying down science based standards for articles of food   

Issues related to Regulatory bodies in India

Based on Damodran Committee (formed in 2012 when World Bank ranked India 132 on Ease of Doing Business) and 2nd Administrative Reforms Commission.

1 . Independence

  • Functional independence is  curbed by dependence of regulators on concerned line ministries for
    • budgetary allocations
    • sanctioning of staff appointments 

2. Over-regulation

  • India  is  an  over regulated  country,  but  many  of  the  regulations  are  not  implemented  in  right earnest of complex procedure & outdated regulations

3. Regulatory Gaps

  • Justice BN Srikrishna Committee on Financial Sector Legislative Reforms Commission noted this . Eg : Ponzi Schemes don’t come under any regulation inspite of many regulators in Financial Sector like SEBI, IRDA etc.

4. Accountability

  • US = Regulators are accountable to Congress (legislature)
  • India = Regulators are accountable to Ministries

Parliamentary supervision is ideal form of political accountability because vested interest groups  find it easier to  pressurise the regulator through  ministry 

5. Regulator vs Executive

  • Executive tries to encroach space given to regulators to enforce populistic agendas 
  • Eg : Electricity Sector – State Governments tries to keep charges low in order to keep consumers and farmers lobby happy

6. Overlapping functions

  • Regulatory overlap between different Regulators. Eg : SEBI and Competition Commission of India etc.

7. Lack of Transparency

  •  Regulatory bodies suffer from lack of  transparency.

Future  Course  of  Action

  1. Regulate where it is necessary. Don’t over-regulate the sector because it chokes development (2nd ARC Recommendation)
  2. 2nd ARC has given 5 Principles on which Regulatory Mechanism should be based upon
    • Simplicity
    • Objectivity
    • Transparency
    • Convergence
    • Speedy Disposals
  3. Regulatory Impact Assessment (RIA) of every proposed regulation  
  4. Ensure  independence  of  regulatory  bodies
  5. Self Regulation is the best form of regulation. Eg : Broadcasting Standards Authority of India
  6. Still large number of sectors are under the regulation of State Departments . Eg : Director General of Civil Aviation under Civil Aviation Ministry etc. Government should move towards Independent Statutory Regulators for all non-strategic sectors.
  7. There should be constant interaction between Regulators and Policy makers and Regulators and other stakeholders so that regulator must be aware of the concerns of stakeholders and also regulator  can explain  the  rationale  of  various  regulatory  decisions.
  8. Reducing  the  overlap  of  jurisdiction  between  the  CCI (Competition Commission)  and  regulators
  9. Introducing  multi-sector  regulators:  To eliminate  proliferation  of  regulatory  commissions , government  is  contemplating  the establishment  of  multi-sector  regulators  for 
    • communications ; 
    • transport;  and 
    • electricity,  fuels  and  gas. 
  10. Constituting  appellate  tribunals  on  the  lines  of  telecom  and  electricity  appellate tribunals

Example : Good Regulator vs Bad Regulators

For regulator to work independently, it must be independent from Executive, Pressure Groups, Industrial Lobbies etc which can pressurise them to get favourable outcomes .

1 . Example of Bad Regulators

  • Forward Market Commission (FMC) : Was regulating Commodity Markets but wasn’t able to stop NSEL Scam .
  • MCI (Medical Council of India) : It’s Chairman Ketan Desai  took bribes to grant clearance to  medical colleges 
  • CERC (Central Electricity Regulatory Commission ) : Explained below.
  • Nuclear Safety Regulatory Authority (NSRA)  : It falls under Department of Atomic Energy (Promoter of any sector cant be its Regulator) Done in Nuclear Energy.
  • FSSAI : Maggi issue

2. Examples of Good Regulators

  • TRAI : Protected Mobile Customers against Mobile Companies
  • CCI : Broke Cartelisation of Cement Companies
  • SEBI : Managed Security Market well (in stark contrast to FMC)

In question such as Independence of Regulators is necessary to regulate sector effectively=> Give example of both good and bad regulators. Don’t just stick to bad ones.

Side Topic : SEBI and how it presents an example of good regulator?

  • Securities and Exchange Board of India (SEBI) works independent in 
    • hiring of professionals
    • Deciding salaries
    • generate finances to run via fee
    • crack down on companies without government pressure.

Side Topic : How CERC lead to downfall of whole electricity sector?

  • CERC = Central Electricity Regulatory Commission
  • CERC has a strength of 55, against sanctioned strength of 80. 
  • CERC has no independent fund and comes under public accounts.
  • There is  ceiling on the salaries of permanent staff

Due to this , although CERC is supposed to pass orders in 90 days of hearing but there are cases awaiting decision for years now. This leads to projects getting stalled, companies coming under financial stress and the subsequent increase in the cost of power.

Hence, inefficient working of regulator has stalled the development of sector .

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