Introduction
The Reserve Bank of India (RBI) recently released a document titled the “Framework for Formulation of Regulations.” This document, although not widely recognized, marks a significant development in the field of regulation.
State Coercion and Democratic Legitimacy
The state's monopoly on violence and coercive power is exercised through laws backed by democratic legitimacy. This is ensured by legal procedures prescribed by the Indian Constitution and shaped by expert and parliamentary committees, along with stakeholder consultations.
Role of Statutory Regulatory Authorities (SRAs)
- SRAs in India are responsible for creating legal instruments that require specific behaviors from private entities, imposing penalties for non-compliance.
- For instance, the Securities and Exchange Board of India (Sebi) regulates insider trading with penalties including fines up to ₹25 crore and imprisonment.
- However, this power of SRAs to legislate can lead to a democratic deficit, as unelected officials write laws without a democratic process.
Financial Sector Legislative Reforms Commission (FSLRC)
In 2011, the Government of India set up the FSLRC, which included experts from various fields. The FSLRC submitted its report in 2013 after public consultations, resulting in a high-quality draft law called the Indian Financial Code (IFC).
Components of the Draft Indian Financial Code (IFC)
- Sections of law defining regulatory operations.
- An improved framework for financial agencies.
- Detailed tasks for financial and monetary policy.
Despite not being enacted, the IFC has significantly influenced India's financial policy landscape.
Implementation of FSLRC Recommendations
- Merger of the Forward Markets Commission into Sebi in 2013.
- Establishment of a system for accountability in monetary policy, such as inflation targeting and a diverse monetary policy committee, implemented in 2015-2016.
- Formation of the Securities Appellate Tribunal (SAT) for appeals against financial SRAs, except the RBI.
Recommendations for Addressing Democratic Deficit
The FSLRC suggested improving the legislative function of SRAs by incorporating:
- Expertise and public consultation in regulation formulation.
- Cost-benefit analyses and clear objectives for regulations.
- A board composed mainly of non-civil-servants to authorize laws.
Progress and Future Directions
- Post-FSLRC, several regulatory bodies, such as the Insurance Regulatory and Development Authority of India, have established self-imposed frameworks for regulation formulation.
- The Pensions Fund Regulatory and Development Authority and Sebi followed suit, with the RBI recently implementing a similar framework.
The advancement of these practices reflects a shift in norms regarding democratic legitimacy in regulation. The focus for the next decade will be on refining these processes and codifying them into parliamentary law.
