Context

• In recent months, India’s financial regulatory landscape has witnessed promising reforms.
• The RBI and the Securities and Exchange Board of India (SEBI), two of the country’s most powerful regulators, have introduced new procedural frameworks to improve the way they issue regulations, directions, and guidelines.
• These developments represent a significant shift toward transparency and consultative governance; however, the frameworks remain incomplete in their current form.
• For India to establish a truly robust, rule-of-law-based regulatory regime, these early reforms must be supplemented by stronger economic reasoning, consistent public accountability, and institutionalised review mechanisms.

The Imperative for Transparent Regulatory Processes

• Regulatory bodies like the RBI and SEBI derive their authority from Acts of Parliament, wielding quasi-legislative powers that significantly influence the country’s financial and economic architecture.
• It is therefore critical that such powers be exercised with transparency, procedural rigor, and democratic accountability.
• In this context, the newly announced frameworks represent a step in the right direction.
• Both regulators have committed to conducting public consultations lasting 21 days, performing internal reviews of regulations, and stating regulatory intent (SEBI) or conducting impact analyses (RBI).
• These mechanisms are foundational to inclusive law-making and mark a departure from opaque regulatory processes of the past.
• However, history tempers optimism. Between 2014 and 2015, the RBI solicited public input on only 2.4% of its circulars, and SEBI on less than half of its regulations.
• While the new frameworks aim to improve this record, transparency must not be limited to procedural announcements, it must extend to the substance of regulation-making.
• The regulators must embrace a culture of openness, publishing detailed records of consultation outcomes, the rationale for accepting or rejecting public feedback, and timelines for implementation.

A Missing Link in the New Framework: Economic Rationale and Market Failure

• A key omission in the new frameworks is the absence of a mandate to identify the economic rationale underpinning regulatory proposals.
• Good regulatory practice begins with the recognition of a specific market failure or systemic risk.
• As highlighted by the Financial Sector Legislative Reforms Commission (FSLRC) in 2013, laws must be grounded in their economic purpose.
• This principle finds international resonance. In the United States, cost-benefit analysis is a statutory requirement for most federal regulations.
• Regulators must demonstrate that their rules impose the least societal burden while maximising benefits.
• The European Union's Better Regulation Framework similarly requires comprehensive impact assessments, encompassing problem identification, alternative solutions, and mechanisms for monitoring outcomes.
• While the RBI’s framework vaguely calls for impact analyses considering the economic environment, and SEBI outlines objectives, neither explicitly mandates a diagnosis of market failure or demonstration of economic necessity.
• In contrast, the International Financial Services Centres Authority (IFSCA) requires its regulations to clearly state the issue being addressed.
• Indian regulators must adopt this best practice, ensuring that any rule is justified by evidence of inefficiencies or failures that merit intervention.

The Capacity Challenge and the Case for Legislative Reform

• While institutional will is a prerequisite, it is not sufficient.
• Limited state capacity, manpower, expertise, and infrastructure, poses a serious obstacle to effective implementation of impact assessments and stakeholder consultations.
• These challenges call for capacity-building within regulatory agencies, as well as coordination across them.
• Piecemeal reforms by individual regulators also risk inconsistency. India needs a uniform legal architecture for regulation-making across sectors.
• Parliament should consider enacting a comprehensive law akin to the United States’ Administrative Procedure Act (APA), which codifies standard procedures including notice-and-comment, impact analysis, and periodic review.
• Countries like the United Kingdom and Canada have already institutionalised such principles through detailed regulatory guidelines.
• A legislative framework in India would cement transparency and accountability as non-negotiable norms for all regulatory bodies.

The Way Forward

• Institutionalising Accountability
  • Accountability mechanisms in the new frameworks remain nascent.
  • Regulators must not only consult stakeholders, but also demonstrate how feedback influences policy.
  • This involves disclosing, on an annual basis, the number of regulations subject to consultation, the nature of responses received, the rationale behind accepted or rejected suggestions, and the impact of public input.
  • Transparency in this regard is essential for cultivating trust and deterring arbitrary decision-making.
  • Presently, SEBI often redacts public comments from board meeting summaries under the pretext of confidentiality, undermining the ethos of consultative governance.
• Periodic Review
  • Another critical aspect of accountability is periodic review. Regulatory frameworks must remain dynamic, evolving in response to changing market conditions.
  • Yet neither the RBI nor SEBI specifies review intervals in their policies. Again, the IFSCA offers a model: it mandates a three-year review cycle for all regulations.
  • RBI and SEBI should similarly commit to predefined and frequent evaluations of whether their regulations continue to meet their intended objectives.
  • Such review cycles are especially vital in light of deregulation promises, ensuring that obsolete or counterproductive rules are retired systematically.

Conclusion

• The RBI and SEBI have taken important initial steps toward reforming India's regulatory environment, but the journey is far from complete.
• Real reform lies in embedding transparency, economic logic, and accountability at every stage of the regulation-making process.
• Identifying market failures, conducting rigorous cost-benefit analyses, and institutionalising periodic reviews are not just technical enhancements, they are democratic imperatives.
• To this end, Parliament must rise to the challenge, providing a consistent, cross-sectoral legal framework for regulation-making that ensures India’s regulators remain efficient, responsive, and fair stewards of public trust.