Rewind to red-tape

In the last one decade, the number of regulators and their bureaucracy have risen steadily. Since 1992, the government has successively set up market regulator Securities and Exchange Board of India (Sebi) to protect investors’ money in the stock markets; created the Telecom Regulatory Authority of India (TRAI) to adjudicate on telecom matters; developed the Insurance Regulatory and Development Authority (IRDA) to regulate the insurance industry and come out with Central Electricity Regulatory Commission (CERC) for the power sector.

And it’s not over yet. The coming months will see the birth of an oil sector regulator, a pension sector regulator and a new post of Deputy Governor at the Reserve Bank of India to regulate co-operative banks.

‘‘The finance panel felt there was need to check the creation of the regulators,’’ an MP privy to the meeting told The Sunday Express. ‘‘These regulators are islands of power and no one checks their accounts and functioning. IRDA and Sebi itself are sitting on mountains of money and there is no audit or accountability.’’ In fact, the IRDA even questioned a government move asking it to deposit its extra money with the consolidated fund of India.

However, despite the presence of so many regulators, investors and consumers complain that their interests are not protected. The scams — involving finance companies, public issues, co-operative banks, market manipulation, preferential offers — over the last five years have only heightened their insecurity.

Rewarding loyalty?

THERE is also a growing belief that the quasi-judicial regulators are just cosy retirement nests, rewards for bureaucrats loyal to the government of the day.

Consider TRAI, now headed by Pradip Baijal. Till recently, he sold government-owned companies to the private sector. And now his post-retirement avatar authorises Baijal to take on government bodies like the Mahanagar Telecom Nigam Ltd and the Bharat Sanchar Nigam Ltd — which he once intended to sell on grounds of inefficiency.

This is not the only incident that is making observers uneasy. One year ago, when the Centre wanted a chairman for Sebi, it zeroed in on Life Insurance Corporation chairman G N Bajpai, whose regulatory regime experience was zilch. Of his immediate predecessors, S S Nadkarni was a former chairman of IDBI and G V Ramakrishna, a former petroleum secretary.

The situation was not different at the Mint Road headquarters of the Reserve Bank of India. One of the three deputy governors is a retired banker, another is a former economic advisor to the Finance Minister. The last four RBI governors were either from the Planning Commission or retired finance secretaries.

Or take, for that matter, recently retired TRAI chairman M S Verma, who was so close to former finance minister Yashwant Sinha that even before retiring as chairman of the State Bank of India, his posting in TRAI was almost confirmed. N Rangachary was pulled out of retirement (he was the chairman of Central Board of Direct Taxes) and appointed as chairman of insurance regulator IRDA.

The credibility of the CERC did not get any fillip following the retirement of its first chairman, Dr S L Rao, in 2001. The post went empty for almost a year, till the present incumbent retired as power secretary and donned this mantle. This only served to bolster the foreign investors’ idea that regulators in India were just an extension of the bureaucracy.

Credibility under fire

‘‘How can a regulator be independent of the government if he has been handpicked by the government for his loyalty? The regulators should be impartial and above politics. But the Indian regulatory bodies are a retirement bonanza for bureaucrats — and their decisions are struck down by higher authorities,’’ says a top official of a rating agency. Understandably, the quality has suffered.

Whether it’s the telecom sector or the capital market or the financial sector regulators, there are allegations of government interference. But regulators vehemently deny the charge. ‘‘It is wrong to say that regulators are easily influenced by the government. Once you don the hat of a regulator, you have the responsibility for a fair and transparent decision-making process. Decisions that blatantly favour one side or the other cannot stand the test of legal scrutiny and hence have no meaning,’’ said CERC chief A K Basu.

But the criticism of the RBI, Sebi and Department of Company Affairs by the Joint Parliamentary Committee that probed the 2001 stock scam bolsters the common perception. Describing the RBI’s supervision as ‘‘weak and inefficient’’, the JPC said timely action was not taken in preventing diversion of funds from the country and checking irregularities in the functioning of certain banks. ‘‘A good regulator would have anticipated the possibility of diversion of funds and taken pre-emptive action to forestall it. It is not good regulation to wait for a loophole to be exploited before closing it,’’ the committee said. The JPC also came down heavily on the Sebi for its failure to highlight irregularities and defuse them before the scam surfaced.

The JPC further said the quality of inspection by DCA left much to be desired. ‘‘It is a matter of serious concern that DCA inspectors are untrained and unable to cope with the quality of inspection,’’ it observed.

Merchant bankers in Mumbai remember the sudden swooping down on BPL, Sterlite and Videocon on the eve of disinvestment in government companies. ‘‘The instruction apparently came from a section of the government opposed to the disinvestment… the Sebi, which had not taken any action for two years, suddenly decided to ban these companies on one fine morning,’’ reminisces a banker.

Investors still losers

Even as regulators mushroomed, lakhs of investors lost crores of rupees in stock markets, finance companies, co-operative banks and vanishing companies. Plantation companies and cooperative banks provide the best examples of

unscrupulous promoters disappearing with over Rs 10,000 crore in investors’ money while Sebi, RBI and Registrar of Co-operative Societies (RoCS) dithered over jurisdiction.

‘‘We had to move the courts on almost all big issues so that the investors’ get justice,’’ said BJP MP from Mumbai Kirit Somaiya. ‘‘Though these regulators were created to benefit the common man, I am yet to see any decision taken in his interest.’’

To that charge, Sebi chairman Bajpai countered: ‘‘As we have got more powers only in the last two months we will be applying these powers prospectively.’’ However, he is clear that ‘‘we can’t re-open all old cases’’.

While the financial markets regulators including, of course, the RBI, have managed to scare away investors from financial markets, the TRAI has managed to create such a logjam in the Indian telecom industry that no company knows policywise what the future holds for them. All TRAI decisions are now challenged by the affected party, which finally goes to the court for a judgment.

In this scenario, the formula for survival for regulators is simple: ‘Do not upset the apple cart. Just reap the benefits of liberalisation.’ Clearly, the road ahead is to cut down or merge various regulatory bodies so that instead of creating more hurdles for investments, it becomes easier for investors to invest in the Indian economy.

(with Navika Kumar and Harjeet Ahluwalia)