I have a piece in today's Economic Times on the need to eliminate 80% of all regulatory laws and how precision and brevity are important in designing law, specially law which is easy to pass without parliamentary approval. Below is the full piece:
It’s a Doge eat regulation world
Regulators think of introducing new regulations from two lenses. First in terms of errors. Whether the law will harm innocents or let the guilty get away. Second, in terms of cost-benefit analysis because every law has a cost on the market. In addition, for good process, they look at views of expert committees and exposing draft regulations to public comments.
Students of criminology (with its origin in logic and later statistics) will immediately recognize the two error types. Type I error occurs when a guilty person escapes because the law is too lax. This error prioritizes protecting the innocent at the risk of letting some guilty individuals go free. Type II error occurs when an innocent person is found guilty. This reflects an overly stringent or biased system that compromises individual rights and undermines justice.
Sadly, a lot of current regulations falls within these errors. In fact, the SEBI law against fraud is drafted so sloppily that it simultaneously creates both type I and type II errors at the same time. While it is easy to blame SEBI, many of these laws were created by market experts from the industry. The law against fraud, the law against insider trading and the takeover law are the most egregious examples (and also the cornerstone of securities laws).
Let’s take the example of the securities law against fraud. Fraud has been well understood for centuries under common law, even before a formal legislation came in. Based on the common law, five ingredients were identified: intent, materiality, mis-statement, causation and harm. These ingredients with minor modifications for the anonymous securities markets have created the US rule against fraud commonly called rule 10b-5 never modified since its introduction in 1942. There are now tens of thousands of US court rulings chiseling each of the requirements of the ingredients. That’s how the law becomes more sophisticated and nuanced.
Take the Indian law now, in what is called the Fraudulent and Unfair Trade Practices regulations of SEBI or FUTP. None of the five ingredients are required to prove fraud. I had written an article in this paper in Sept 2018 that under securities law I can prove that walking, running and swimming were all fraud. These kind of laws may sound fair to a layman, but if you put a lot of random people in jail for murder, likely-some-will-be- murderers kind of logic is not really a good way to draft law and puts the common law system of ‘innocent till proven guilty on its head’. Yes, it indeed makes the task of the prosecutor easy to put everyone they see in jail.
The other, somewhat related problem is prolixity. We love to write laws. With a lot of words. It may not make any qualitative difference in liberal arts subjects whether you describe an object with a thousand words or ten thousand. However, law is more akin to STEM subjects. At the cost of sounding pompous, I would go so far as to say, it is akin to surgery. Every single comma is like a millimeter while conducting surgery. Ask the insurers how the 9/11 insurance contract was drafted and whether the ‘event’ included two plane attacks or one, decided whether they paid an extra 3.5 billion dollars or not. With laws, the consequences can be alarmingly more serious than with drafting contracts.
Let’s just start with one comparison and two examples from the same domain of fraud and insider trading laws in the securities markets. First, the anti-fraud rule in the US has 124 words. The insider trading law has 0 additional words as it is subsumed in the anti-fraud Rule. The Indian equivalent FUTP has over 4,400 words and the insider trading regulation has over 20,000 words. These additional 24,000 words are not just surplusage, but cause harm to innocent people, and let the guilty free. And no, we didn’t try to create a better definition, Regulation 3 of FUTP is a virtual lift off of the US rule. We just chose to write another 24,000 words and stuck a long tail on what matters.
Just look at one example where the Supreme Court had to intervene in a case where a person who had good news sold in the markets and was accused of insider trading. In its argument, SEBI relied on the fact that the regulation does not mention the direction of trading and thus the person will be found guilty. Even a high school student will note the absurdity of this argument, buying while holding unpublished bad news or selling while in possession of good news is irrefutable proof that insider trading did not happen.
Even worse is the deeming provisions of these laws. For example, if a woman were to share the closure of a large M&A deal with her husband for going out on a celebratory dinner is a criminal according to SEBI laws on ‘need to know’ basis of sharing information even where no mis-use of the information occurs. The deeming provisions of insiders would deem almost any semi-random communication with any other person as refutable proof that the person illegally passed on information. If I were to give a legal opinion to a company on matters of intellectual property, and bought a few thousand shares contemporaneously, there could be a deemed provision that the company passed on illegal information (say quarterly earning) to me. The only way I will be able to disprove it would be for me to record every conversation had with company officials, and if I were to meet them, put a GoPro camera on my head while having dinner with them. The insider trading laws require no element of being an insider, no need to show trades and even no need to show any inside information. There is a need to take Elon’s scalpel, and cut down regulations and the overly broad laws. By my estimate, the existing laws of SEBI and other regulators could easily be improved by cutting them by 80% and bringing in precision. And we could see a real ease of doing business in India for public companies.
The author’s book Fraud, Manipulation and Insider Trading in the Indian Securities Markets fourth edition will be published by LexisNexis next month.
No comments:
Post a Comment