RBI Governor Raghuram Rajan’s recent speech on the Financial Sector Legislative Reforms Commission (FSLRC) started with kind words about it and how its report’s influence “will be felt for many years to come”. However, there are two areas where he has disagreements with it.
The first is on judicial review. He argues that a regulator “fills in the gaps in laws, contracts and even regulations. Not everything the regulator does can be proven in a court of law.” He expresses concerns about tribunals as they lack domain knowledge. He suggests that a “healthy respect for the regulator” keeps participants in line.
Parliament passes laws. The RBI is a creature of the RBI Act. Under the rule of law, the RBI has absolutely no discretion to do things that the RBI Act does not clearly specify in terms of its objectives and powers. For example, if the RBI were to write a regulation forcing banks to not serve beef in their canteens, this is illegal. It is illegal for the RBI to reach beyond the law and do things based on its own assessment of what the “gaps in laws” are. The RBI is not Parliament.
Regulations are written by the RBI. So, if there is a feeling that there is a gap in the regulations, then it is up to the RBI to plug it — as long as its objective and the powers used to achieve the objective are specified in the primary law.
Finally, on judicial review. The Constitution empowers courts to review the work of the legislature and the executive. This is a healthy arrangement. All successful liberal democracies thrive on checks and balances.
Courts routinely go into complex matters. For instance, there is far more intellectual complexity to a biotechnology patent dispute than anything we see in finance. The answer to intellectual complexity is to establish specialised tribunals that amass domain knowledge. This is what the FSLRC proposes.
Liberal democracy is not about a perfect executive interacting with a perfect legislature interacting with a perfect judiciary. Liberal democracy has worked well because checks and balances deliver better results when all three are imperfect. Each of the three wings gets better by grinding against the others. The RBI and the courts are both imperfect. Imperfect judicial review will improve an imperfect RBI, and vice versa. Over the last 20 years, judicial review by an imperfect Securities Appellate Tribunal has strengthened an imperfect Sebi. The RBI has much catching up to do.
I am hostile to “healthy respect for the regulator”. At present, in India, what we have is a feudal environment where regulators lord over practitioners, threaten them, extort from them, and so on. Power corrupts and Indian finance is replete with examples of how things continued…