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RBI and SEBI’s New Regulation-Making Frameworks
Consultative regulation-making that should go further
Context: In a significant move toward improving regulatory governance in India’s financial sector, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have introduced structured frameworks for how they issue regulations, directions, guidelines, and notifications.
Why These Regulatory Reforms Matter
- Both RBI and SEBI are quasi-legislative bodies established through Acts of Parliament, empowered to frame laws that significantly affect the economy and financial markets.
- In such a context, procedural transparency and accountability are crucial to uphold the rule of law and ensure that regulations are fair, efficient, and grounded in sound economic reasoning.
Key Features of the New Regulatory Frameworks
- Impact Analysis and Stated Objectives: Under the new framework, the RBI must conduct an “impact analysis” before proposing new regulations, while SEBI is required to clearly state the “regulatory intent and objectives”. This shift promotes clarity in law-making and better communication of policy goals.
- Public Consultation Mandate: Both regulators will now invite public comments for a minimum of 21 days, allowing stakeholders to participate in shaping regulatory outcomes. This marks a step forward from past practices where public input was minimal.
- Periodic Review of Regulations: The RBI and SEBI will also undertake regular reviews of existing regulations to assess their relevance, effectiveness, and alignment with current market conditions and policy objectives.
Why India Needs a Stronger Regulatory Rationale
- Need to go Further: While these reforms are promising, experts argue they must go further. A strong economic rationale should underpin all proposed regulations. This includes:
- Identifying specific market failures that justify regulatory intervention.
- Demonstrating how proposed rules address these failures.
- Conducting cost-benefit analyses to evaluate the likely impact.
- Outlining a monitoring and evaluation framework to assess long-term effectiveness.
- Best Practices: Models from jurisdictions like the United States and European Union already follow this approach.
- For example, the EU’s Better Regulation Framework requires detailed impact assessments, while U.S. regulators must ensure minimum societal burden and evaluate non-regulatory alternatives.
Ensuring Accountability Through Transparent Reporting
- Past Data: Despite new commitments, past data suggests low levels of public consultation: between June 2014 and July 2015, only 2.4% of RBI circulars and fewer than half of SEBI’s regulations involved stakeholder feedback.
- Consultation Metrics: To build trust and accountability, regulators must commit to publicly reporting consultation metrics, such as: Number of consultations held, Responses received and their summary, Accepted and rejected suggestions with rationale, Influence of feedback on final regulation and Timelines for regulation-making and review.
- Currently, some of this information is buried in confidential board meeting notes—hardly the model of transparency.
Need for Institutionalised Regulatory Standards
- Comprehensive Framework: While RBI and SEBI’s frameworks are commendable, India needs a comprehensive legal framework, akin to the U.S. Administrative Procedure Act, to standardise regulatory practices across all agencies.
- This law should mandate: Impact assessments, Public consultation periods, Periodic reviews, and Transparent reporting mechanisms.
- Countries like the United Kingdom and Canada already follow such institutionalised regulatory guidelines, offering India a tested roadmap.
