Opinion North shouldn’t block

Another capital market regulator or chairman of the Securities and Exchange Board of India (Sebi) would frustrate the finance secretary of the time by not answering calls or responding to text messages. Here again was a regulator who had turned around financial institutions,knew his domain well and refused to budge from decisions despite the government’s reservations.

These are just two examples to show that regulators never had an easy relationship with the government — thankfully. At times,the mandate of the government is different from that of a sector regulator. The government has political compulsions,for instance,of generating employment,increasing people’s income and striving for inclusive growth. The regulator’s primary role is to be a watchdog and,in some cases,promote and develop the sector. So,a cosy relationship between them may not always result in an outcome that is best for the country. However,mutual mistrust can do more harm,mar the regulatory environment and eat into the edifice of an independent,autonomous institution.

The last three years have left key financial sector regulators with an uneasy feeling that the government was looking over their shoulders and,at times,being vindictive. In fact,the North Block,with Pranab Mukherjee at the helm,did not think it was inappropriate to meddle with the regulators. They viewed the RBI,Sebi or the Insurance Regulatory and Development Authority (Irda) as an extension of the finance ministry and expected the regulators to seek their advice on all issues,if not listen to them. To give the regulators their due,they did try and handle the situation in their own unique ways. If one opened up more and touched heights in transparency by giving a detailed rationale for every regulatory decision,the other just clamped up,snapping all channels of communication between the government and the regulatory institution. Another gave in and worked in tandem with the government. Such responses,forced on the regulators by the government,have damaged the fabric of governance and affected the morale of officers. It is also true that there isn’t enough “protest” in the system against such devious government interference. Sending a tax notice to a regulator — as in the case of former Sebi chairman C.B. Bhave — after his term ends may not affect him if he has paid his dues,but it definitely serves to demoralise the entire HR in the institution.

It is true that the temperament of the political leadership matters a lot in creating the right atmosphere for constructive dialogue. In India,however,the malaise sets in right at the beginning. The eligibility norms for top regulatory functionaries are not well defined and,unfortunately,domain expertise is never an important criterion. For instance,why shouldn’t the Sebi chairman be required to have 20 years of experience in capital markets? Even if the government picks candidates from a defined universe of retiring or retired bureaucrats,it seldom undertakes a proper background check. It is time the government adopted a public inquiry or a scrutiny process,similar to that in the United States,before finalising a candidate for chairing regulatory bodies. For instance,the fracas around P.J. Thomas’ appointment as the central vigilance commissioner could have been avoided. It is possible that a public inquiry is misused with muck being raised by vested interests. But then,it is a price worth paying. After selecting a candidate,the government plays dirty by keeping the levers on tenure in its hands. For instance,the present insurance regulator got a five-year tenure when he was appointed four years ago,but the RBI governor or Sebi chairman was given only a three-year term. This is pernicious. Regulators need security of tenure to do a good job. They should not be required to look up to the North Block or the Prime Minister’s Office for information on their tenure extension. It is no secret that the PMO prevailed upon the finance ministry to give D. Subbarao,the present RBI governor,a two-year extension last September. Last but not the least,it is also about financial autonomy. Regulators must be allowed to retain the fees they charge from market players and not go begging every year ahead of the Union budget.

Ask the government,and it will swear that regulators are independent and autonomous. But that does not stop the minister or his office,for instance,from calling up the RBI governor to tell him that the rupee should be 55 to the US dollar,or the Sebi chief,asking him to go slow on investigating a particular market irregularity. What is at the centre of this debate is not just the failure to set right the appointment process — the relationship between the government and a regulator can also go awry midway. It is also not so much about the system’s ability to “protest”. It is about political reform or redistribution of power. Are our politicians willing to cede power and tie their own hands? The forgotten chapters of administrative reform need to be dusted and new ones written.

pv.iyer@expressindia.com