I have a piece in today’s Financial Express with Parker Karia and Aniket Charan on the way forward for regulators to co-operate, not just for enforcement but also for development, not just within the financial sector, but across commercial, corporate and financial worlds.
Over the last two to three decades, India has moved towards a multi-sectoral regulatory regime to handle the multitude of sector-specific issues. Today, we have the RBI, SEBI, CCI, IBBI, TRAI, IRDAI, PFRDA, CERC, and so many more, each of whom deal with the economic or industrial sector they are entrusted to regulate. Soon, India will have a regulator for data protection and privacy. Based on the nature, size, and business activities of a company, it interacts with one or more of these regulators. Naturally then, the company must structure its businesses, corporate governance, internal policies, practices, and procedures, etc. to ensure that it keeps all the concerned regulators satisfied. While this in itself has the potential for regulatory conflict, the real conflict starts to appear when someone wants to undertake an activity that requires the approval of more than one regulator.
An example helps explain this better. Consider a proposal of merger of conglomerates ‘A Ltd.’ and ‘B Ltd.’. Assume that they are in the business of providing, through their various listed and/or unlisted subsidiaries, banking, and financial services, including broking services and telecom services. This merger would then attract the scrutiny of the RBI, TRAI, CCI and SEBI. Each of these regulators would naturally be concerned with how the merger would be relevant to their field of regulation. For instance, the RBI would be primarily and broadly concerned with financial stability, impact on the (i) banking sector, (ii) depositors and borrowers, (iii) banking operations, and customer protection. On the other hand, TRAI would be concerned with the impact on the telecom sector, and SEBI would examine the merger from the perspective of the effect on the broking arms of the merging entities and the interest of shareholders of the listed entities. The CCI would inter alia rule on the effect on competition in the relevant sectors, such as banking, financial services, telecom, etc, and whether any adverse effects on competition are there, and whether they are outweighed by the benefit to consumers, if any. In fact, regulators such as the RBI and TRAI, while examining the impact on their sectors, would have to take into consideration the impact on competition in those sectors. Based on the findings of each regulator, the companies would have to chart out their next steps. In some instances, what one regulator signs off on, is refused by the other, or the impact of the directions of one regulator are in conflict with another’s. To elucidate, the RBI may prioritise financial stability and risk management, arguing in favour of consolidation, as opposed to the CCI’s concerns on reduced competition, leading to higher consumer costs. On the other hand, jurisdictional conflicts may arise as well. Determination of which regulator has primary authority could lead to disputes and delays. All of this of course, does not even consider the application that would have to be made to the NCLT. Practically, it is a regulatory nightmare for a business to navigate.
Further, such regulatory tussles are not exclusive to corporate arrangements such as mergers, acquisitions, etc. It could very well apply to the launch of a particular product or service that has features regulated by more than one regulator. In the ever-evolving industry of financial services and cross-linking and tying of products and services, such a situation is no longer in the fictional realm. Diverse businesses being operated under one conglomerate with listed entities within it is also not unprecedented. Of course, this does not go to say that the due process is unwarranted, or not necessary. Assessing the consequences of an arrangement between entities that have an effect on the sector that is regulated is one of the functions of a vigilant regulator. But there remains significant room for improvement in harmonising the manner in which such assessment is carried out in instances where more than one regulator is required to apply its mind and issue necessary directions.
Regulatory conflict is not something that happens on a routine basis. But just because it isn’t frequent, does not mean it’s not necessary to address the issue. Further, each regulator would stand by its decision, as it is required to look at only the universe that falls under its regulatory purview. As stated above, each regulator has a specific mandate, which may not always align with the mandate of another, thereby giving rise to regulatory conflict, cause unusual second order impact on a company and invariably result in delays and pointless bureaucracy. It can get intractable when two regulators insist, probably rightly so, on following their respective statutes or regulations, causing an impossible impasse of the unmovable meeting the unstoppable.
While regulators do liaise with each other, there exists no formal mechanism for regulators to act in cohesion. While Indian courts may not have tested the various issues that arise or may arise out of regulatory conflict yet, the prevailing judicial view in case two regulators having overlapping jurisdictions is that if a specialised regulator for the sector exists, it will take precedence over the general regulator, as was the case when the SC held the TRAI would have jurisdiction over the CCI while examining competition issues surrounding Reliance’s Jio.
Currently, the models that exist to tackle regulatory conflicts are (i) granting explicit and exclusive jurisdiction to regulators to remove ambiguity; (ii) regulators working jointly towards arriving at a decision by consulting each other; and (iii) mandatory consultation between regulators.
In the Indian context, the third approach seems to be appropriate. A standing committee, comprising of members nominated from each regulator, or the concerned ministry which supervises the regulator, could be created. The leadership of such committee could be on a rotational basis, and the members of such committee could perform a dual role, coming together when required to decide on an application. The decision of such committee, arrived at through a mandatory consultation among all regulators concerned with a particular arrangement or any matter that requires their consideration and/or approval, could be binding on all regulators. This results in a holistic view being taken, and a reasoned decision, even if it involves compromises on part of all parties involved. It serves as a single stop shop for businesses and would go a long way to ease the regulatory burden on such businesses. A forum does exist for discussing inter-regulatory issues in finance, but the Financial Sector Development Committee has had limited success till now on the ground. In fact, such an approach could be considered for enforcement purposes as well, wherein multiple regulators can act together as one, which will save time and costs on the regulator’s end as well as for the businesses. Indeed, the past few months have seen increasing cooperation between SEBI and RBI on enforcement.
Laying the roadmap for companies and regulators to work with each other in an efficient manner is essential to ensure stable growth. In a growing economy such as India’s, where these issues are only starting to appear, we must take steps at this opportune moment to prevent irreparable harm or to avoid costly solutions later, and adopt a whole-of-government approach rather than working in silos.
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