Consultative Regulation Making, A Welcome Step That Needs to Go Further

Consultative Regulation Making, A Welcome Step That Needs to Go Further

Why in News?

In May this year, the Reserve Bank of India (RBI) issued a new policy framework on how it will publish regulations, directions, guidelines, and notifications. This move follows a similar step taken earlier by the Securities and Exchange Board of India (SEBI) in February. Both frameworks are aimed at improving consultative processes in rule-making, ensuring better transparency and stakeholder involvement.

Introduction

Regulators like the RBI and SEBI operate under Acts of Parliament and have quasi-legislative powers. Strong procedural safeguards are essential to uphold checks and balances when these regulators exercise their rule-making authority. The recent frameworks of RBI and SEBI are welcome signs of progress, signalling a shift toward more transparent and accountable regulation. However, experts argue that these steps must go further to ensure genuine public participation and stronger regulatory outcomes.

Key Issues and Background

1. The Issue of Market Failure

• RBI and SEBI’s statements mark progress, but more is needed.

• Financial regulators in India (RBI, SEBI, IRDAI, PFRDA) and tax authorities wield significant power but often lack structured consultation processes.

• In contrast, jurisdictions like the United States require agencies to conduct cost-benefit analyses before proposing or adopting regulations.

2. The New Consultation Frameworks

• Both RBI and SEBI will now conduct impact analyses.

• SEBI will outline the regulatory intent and objectives and invite public comments for 21 days.

• The frameworks also require periodic review of regulations.

• Currently, SEBI’s framework mandates considering economic environments, but more clarity is needed.

3. Importance of Stronger Standards

• Impact analyses should identify the problem, assess alternatives, and monitor results.

• The European Union’s Better Regulation Framework provides an example of best practices in this area.

• SEBI’s current framework lacks transparency on how feedback from consultations will influence final decisions.

Specific Impacts or Effects

1. Strengthening Public Accountability

• The track record of regulators on consultations in India remains mixed.

• The 2014 FSLRC report had called for a uniform Financial Sector Regulatory Accountability Framework, which remains unimplemented.

• Meaningful consultation requires:

  • Clearly publishing draft regulations.

  • Providing sufficient time for public feedback.

  • Transparently summarising and responding to feedback.

2. Global Examples of Best Practice

• The United States, United Kingdom, and Canada have robust frameworks for public consultation and accountability.

• India’s new frameworks are a step forward but must match global standards.

Challenges and the Way Forward

Challenges

• Current consultation periods remain short (21 days), limiting meaningful public participation.

• No mandated requirement for regulators to respond to public comments.

• Lack of uniform application across all Indian regulators.

Steps Forward

• The RBI and SEBI should:

  • Adopt a uniform standardised framework across regulators.

  • Conduct proper cost-benefit analyses.

  • Publish a summary of responses and explain how feedback shaped the final regulations.

• Parliament should also:

  • Enact a Financial Sector Regulatory Accountability Framework to guide all regulators.

  • Ensure independent oversight of regulatory processes.

Conclusion

The RBI and SEBI’s new frameworks are important first steps toward greater consultative and transparent regulation-making. However, to truly empower stakeholders and improve regulatory quality, these processes must go further. Stronger standards, longer consultation periods, and transparent reporting of feedback will help build trust in India’s regulatory institutions and align Indian practice with global best practices.

5 Questions and Answers

Q1: What recent step did the RBI take regarding its regulation-making process?
A: The RBI issued a policy framework detailing how it will publish regulations, guidelines, and notifications with greater transparency and consultation.

Q2: What is the main goal of these new frameworks by RBI and SEBI?
A: To promote consultative regulation-making, ensuring that public feedback and impact analyses inform the final regulations.

Q3: What are some of the shortcomings in the current consultation processes?
A: Consultation periods are short (21 days), and regulators are not required to respond publicly to comments or explain how feedback is used.

Q4: What global practices can India learn from?
A: The United States, UK, and Canada have strong frameworks that include cost-benefit analysis, public feedback mechanisms, and transparent reporting.

Q5: What are the next steps recommended to improve India’s regulatory accountability?
A: Adopting a uniform standard across regulators, conducting rigorous cost-benefit analyses, and passing a Financial Sector Regulatory Accountability Framework through Parliament.