Tuesday, Dec 23, 2014

So many regulators

The new government needs to focus its reform agenda to address such regulatory duplicity to create a more enabling business environment for industry. The new government needs to focus its reform agenda to address such regulatory duplicity to create a more enabling business environment for industry.
Posted: July 30, 2014 12:17 am

BY: Payal Malik and Avirup Bose

Much has been written about the leanness of Narendra Modi’s cabinet, constituted on the mantra of “minimum government, maximum governance”. This shift may mean a shrinking government, but it also means a changing role for it. In several markets, government intervention is necessary to enhance market performance. Government intervention affecting industry structure and behaviour takes two forms: regulation and antitrust.

Regulatory agencies and antitrust authorities are only two of the several institutional players defining the competitive environment. Regulators define ex ante a set of permissible business conduct for operators by regulating entry conditions, licensing requirements, tariff standards, access, control over price, quantity and quality, etc. Antitrust enforcers, in contrast, check ex post that anti-competitive conduct as identified by competition law is not pursued.

This diarchy of economic regulation is meant to be complementary and ensure the structural and behavioural competitiveness of the Indian economy. However, sectoral regulators, taking advantage of their overlapping jurisdiction with the Competition Commission of India (CCI), the antitrust agency, have continuously tried to chip at its mandate. This has resulted in regulatory parallelism amongst sectoral regulators and the CCI.

For instance, in August 2012, the Central Electricity Regulatory Commission (CERC) introduced draft regulations to grant itself the power to regulate anti-competitive agreements, abuse of dominant position and anti-competitive mergers (all in the CCI’s domain) in the electricity sector. Such efforts would virtually eliminate the CCI’s regulatory oversight, creating

a parallel and conflicting competition regime for the electricity sector. Further, the CERC’s exercise took place without any enabling legislation or legislative mandate, and was rooted using a residual clause under the CERC’s parent legislation, the Electricity Act, 2003. Interestingly, the CERC, which was created in 2003, only chose to legislate on this after the CCI had been made fully functional. The CERC has the mandate to promote competition in electricity markets by creating appropriate competitive and efficient market structures. However, it cannot usurp the jurisdiction of the CCI to ex-post regulate distortion of such competitive markets through such conduct.

The RBI has also attempted to curb the CCI’s regulatory jurisdiction. It has successfully lobbied the government to exempt mergers of failing banks from the purview of the CCI’s antitrust scrutiny, and wants compulsory mergers to be exempted from competition scrutiny. This is in spite of the fact that the Competition Act specifically mandates the CCI to consider “failing business” as a factor while evaluating mergers. Therefore, the exemption to failing banks is an exercise of regulatory redundancy. The RBI is the prudential regulator of banks, limiting their risk-taking, ensuring the safety of depositors’ funds and stability of the financial sector, while the CCI’s review of bank mergers is aimed at ensuring that continued…

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