Capital Markets: Challenges and Developments

Consultative regulation-making that should go further

Why in the News?

India’s main financial regulators — the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) — have, for the first time, created clear step-by-step procedures for how they will create and update their rules.

What procedural reforms have the RBI and SEBI recently introduced in regulation-making?

  • Mandatory Public Consultation: Both RBI and SEBI now require a 21-day window for public feedback before finalizing regulations. Eg: When SEBI proposes changes to investment guidelines, stakeholders can submit suggestions during this consultation period.
  • Introduction of Impact Analysis and Regulatory Objectives: RBI must conduct an impact analysis to assess the effect of new regulations. SEBI must state the regulatory intent and objectives behind any proposed rule. Eg: Before introducing digital lending norms, RBI must assess how it affects NBFCs and consumers.
  • Periodic Review of Existing Regulations: Both regulators are now required to periodically review existing laws to ensure relevance and effectiveness. E.g.: SEBI may revisit earlier mutual fund rules to assess if they align with current market dynamics.

Why is identifying economic rationale important for regulatory interventions?

  • Targets Actual Market Failures: Ensures that regulations are introduced to solve real economic issues, not just perceived ones. Eg: RBI introducing regulations on digital lending platforms to tackle predatory lending practices.
  • Improves Resource Allocation: Helps in the efficient use of regulatory capacity and government resources by focusing only where intervention is necessary. Eg: SEBI focusing surveillance on high-risk investment products rather than low-risk ones.
  • Enables Evidence-Based Policy Making: Economic rationale demands data-backed decision-making, leading to more robust and defensible policies. Eg: Mandating minimum capital buffers after analysing risk exposure in banks post-2008 crisis.
  • Strengthens Cost-Benefit Analysis: Clarifies whether the expected benefits outweigh the compliance and administrative costs. Eg: Before enforcing stricter disclosure norms, SEBI can evaluate if the benefits to investors justify the burden on companies.
  • Increases Public and Stakeholder Trust: When the rationale is transparent, it builds confidence in the regulator’s objectivity and fairness. Eg: Clearly stating economic reasoning behind banning front-running in trading enhances credibility.

How do international practices like those in the US and EU guide regulatory impact assessment?

  • Mandatory Cost-Benefit Analysis: US regulators must evaluate the economic impact of any regulation before adoption to ensure benefits outweigh costs. Eg: The Office of Information and Regulatory Affairs (OIRA) reviews federal regulations to minimize economic burdens.
  • Problem Identification and Alternatives Assessment: The EU’s Better Regulation Framework requires identifying the core problem, evaluating alternative policy options, and selecting the most effective one. Eg: EU energy efficiency regulations involved assessing multiple alternatives before finalizing appliance labeling norms.
  • Monitoring and Evaluation Frameworks: Both the US and EU emphasize post-implementation reviews to check if regulations achieve intended goals. Eg: The EU conducts ex-post evaluations as part of its regulatory cycle to ensure continuous improvement.

When should regulations be reviewed and why?

  • At Pre-defined and Regular Intervals: Regulations should be reviewed periodically (e.g., every 3 years) to assess continued relevance. Eg: The IFSCA mandates review of its regulations every 3 years to align with changing market needs.
  • After Significant Economic or Sectoral Changes: Major changes like market failures, technological advancements, or crises should trigger a regulatory review. Eg: The COVID-19 pandemic led to a re-evaluation of financial sector norms to support liquidity and credit flow.
  • To Evaluate Effectiveness and Stakeholder Impact: Reviews help assess whether regulations have achieved their intended goals and consider public feedback. Eg: SEBI may review listing regulations based on feedback from companies and investors to enhance market transparency.

Who can ensure uniform regulatory standards in India?

  • Parliament through Enactment of a Common Law: Parliament can introduce a standardised law (similar to the U.S. Administrative Procedure Act) to ensure consistent regulatory practices like impact assessments, public consultations, and periodic reviews across all regulators. Eg: A central Regulation-Making Procedure Act could mandate that all financial regulators follow uniform protocols.
  • Government Agencies Issuing Common Guidelines: The Central Government or NITI Aayog can issue model guidelines or frameworks to harmonise regulation-making procedures among regulators. Eg: Like the UK and Canada, India can adopt unified regulatory guidelines to promote transparency and accountability across SEBI, RBI, IFSCA, etc.

Way forward: 

  • Enact a Unified Regulatory Procedure Law: Parliament should legislate a comprehensive framework for regulation-making that mandates impact analysis, public consultation, and periodic review across all regulators to ensure transparency and consistency.
  • Strengthen Institutional Capacity and Oversight: Build the capacity of regulatory bodies through training, digital tools, and staffing, and set up an independent oversight mechanism to monitor compliance with procedural norms and ensure accountability.

Mains PYQ:

[UPSC 2018] “Citizens’ Charter is an ideal instrument of organizational transparency and accountability, but it has its own limitations. Identify the limitations and suggest measures for greater effectiveness or the Citizens Charter.”

Linkage: The theme of “consultative regulation-making that should go further” as discussed in “Crafting India’s Regulatory Future”. In the article primarily discusses financial regulators and the PYQ addresses the Citizens’ Charter, both embody the fundamental principle of existing governance mechanisms needing to evolve and be strengthened to achieve their stated objectives of transparency, accountability, and more effective public engagement, moving beyond a “nascent stage” or “welcome start” to truly “go further.”

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