Statutory Regulators

Why in News?

• One of the most important changes in governance models was the creation of Statutory Regulators.
• These regulating bodies are becoming increasingly popular across the world as an alternate mode of governance.
• However, these statutory regulators need to be regulated as well to deliver the full potential of the enterprise they regulate. 

 

Statutory Regulators Primarily Focus on:

• The design of the apex design-making body.
• The substantive powers of the regulator.
• And accountability mechanisms such as audits, accounting, and reporting.

 

Understanding the Governance of Statutory Regulators

• Governance of these regulators centres around their Governing Boards (GB).
• The law creates a board governed by a board, an authority by an authority, a council by a council, and a commission by a commission.
• For example, there's a board, The Securities and Exchange Board of India (SEBI) established by the Security and Exchange Board of India Act, 1992.
• The general administration, direction and management of SEBI lie with the board of members or governing body.
• The former is an entity while the latter is a Governing Body.

 

Steps to Improve the Governance of Statutory Regulators

• By making a clear distinction between the entity and GB
  • Most statutes do not distinguish between the entity and governing body.
  • This leads to mix-ups or reversal of roles.
  • Also, it makes it difficult for the governing body to run the entity, meet the objective and hold the entity accountable for delivering its objectives.

• Having appropriate external representation
  • GB's primary objective is to hold the management accountable.
  • But if only the managers are members of the governing body, it will be hard for them to hold the management accountable.
  • There can be a few eminent persons in the GB as PTMs (Part Time Members) for important discussions, decisions, and voting.
  • They have an equal say in the board meetings at the same time they are free from management pressures.
  • The international best practice in corporate governance: There must be at least an equal number of independent directors as the number of management directors.
  • Therefore, the number of PTMs should match the number of whole-time members (WTMs).
  • The process of selection of PTMs, as well as of WTMs, needs to be robust and inspire confidence.

• There should not be any nominee on the GBs
  • The government typically has a few official nominees on the GBs of regulators.
  • Such nominees represent the government and they carry disproportionately more weight in the decision-making process.
  • Moreover, the government is a market participant and deals with pulls and pressures from many quarters.
  • Therefore, the official nominee generally has a conflict of interest as they can lean towards the government's position in all matters coming up before the GB.
  • Therefore, it is ideal for GBs to not have any nominees at all.

• By extending the tenure of leaders (chairperson) of a regulator
  • The independence of a regulator critically rests on the professional strength of the leaders - WTMs (including the chairperson) to withstand pressures of fear and favour from any quarter.
  • A term of 3-5 years for these positions comes in the way of such strength.
  • A term of three years is very short and by the time the members acquire the required knowledge, expertise, and efficiency, their term will be over.
  • Thus, younger individuals, who have demonstrated their capability in the relevant field, for a reasonable period of service should be given opportunities to become leaders.

• By exercising the separation of power
  • A regulator in India typically performs three functions, namely, quasi-legislative, executive, and quasi-judicial.
  • The statute should mandate the GB only to perform quasi-legislative functions and to provide direction to the organisation.
  • GB should be enabled to delegate executive and administrative tasks to different functionaries in the organisation.
  • Such separation as well as delegation would enhance the organisational capacity to ensure timely service delivery as well as promote greater accountability (by acting as mutual checks and balances).

 

Conclusion

• While the creation of these statutory regulators has been beneficial, their organisational structure could be redesigned to streamline their functioning.
• It would help improve the governance of the markets they regulate.

 

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Q1) What was the purpose of the Securities and Exchange Board of India Act 1992? 

 To provide for the establishment of a board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market. 

 

Q2) Why is there a need for external representation in the governing bodies?

External representatives are free from management pressures. Therefore, they can act independently and hold the management accountable. 

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Source: Indian Express