Consultative regulation-making that should go further, Pg8

Key Highlights:

1. Context: RBI and SEBI introduced new frameworks in 2024–25 mandating impact analyses, statements of objectives, and public consultations (21-day window).
2. SEBI must now state the regulatory intent, while RBI must consider “economic environments” in its impact analysis.
3. Both regulators will conduct periodic reviews of regulations, improving transparency.
4. Criticism: New frameworks lack mandatory economic rationale and specific market failure identification.
5. Recommendations include cost-benefit analysis, monitoring mechanisms, and clear accountability metrics.
6. Limited past public consultations: RBI (2.4% of circulars), SEBI (less than 50% of regulations) in 2014–15.
7. Suggestion: India needs a centralised law like the U.S. Administrative Procedure Act to standardise regulation-making.

Detailed Insights:

1. Need for Economic Justification: Regulatory proposals must articulate the specific market failure they aim to correct (e.g., monopolies, externalities). This mirrors best practices in the U.S. (Executive Memoranda) and EU (Better Regulation Framework).
2. Current Gaps: Neither RBI nor SEBI are mandated to explicitly link regulations to economic rationale. In contrast, IFSCA does require such justification.

Accountability Measures Suggested:

1. Annual reporting of number of consultations and their outcomes.
2. Transparency in how public feedback influences final regulations.
3. Clearly defined timelines and intervals for regulatory review (e.g., IFSCA mandates 3-year review cycles).
4. Structural Reform Needed: Piecemeal changes risk inconsistency across regulators. A Parliamentary law could codify procedures including public consultation, impact assessment, and mandatory periodic review across all regulatory bodies.
5. Capacity Challenges: Limited state capacity may impede effective implementation of these procedures, especially in complex sectors like finance.

Key Concepts Involved:

1. Market Failure: Economic situations where the free market fails to allocate resources efficiently (e.g., information asymmetry, externalities).
2. Cost-Benefit Analysis (CBA): A systematic process for evaluating the economic pros and cons of regulatory actions.
3. Regulatory Impact Assessment (RIA): An evidence-based tool to assess the expected impact of proposed regulations.

Mains Mock Question:

Regulatory bodies like the RBI and SEBI have initiated consultative rule-making processes. Critically analyse the adequacy of these reforms and suggest measures for institutionalising transparent and accountable regulation-making in India.