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Chaining the watch dogs

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By Are the regulatory agencies headed by bureaucrats really independent of government interference, asks Seetha
  • Published 25.02.07
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Can bureaucrats or retired bureaucrats who head regulatory agencies be independent of the government? That question grabbed public attention yet again last month after the appointments committee of the Cabinet shortlisted two former bureaucrats to head the Petroleum and Natural Gas Regulatory Board (PNGRB). Once the government picks one of them, every regulatory agency in India will be headed by a former bureaucrat or a serving civil servant.

These include the Securities & Exchange Board of India (SEBI), which lays down the rules for the stock market, the Insurance Regulatory and Development Authority (IRDA — the insurance industry watchdog), the Central Electricity Regulatory Commission (CERC — electricity utilities) and the Telecom Regulatory Authority of India (TRAI — the telecom industry).

Regulators are meant to ensure that all those involved in an industry play fair. In India, they oversee industries in which the government used to have a monopoly. So regulators must also not be seen as favouring state-owned companies. “Otherwise,” notes economist Bibek Debroy, “they could be captive to government diktat.” Adds Payal Malik, a consultant at the Delhi-based National Council of Applied Economic Research, “Some kind of a hand-in-glove relationship is inevitable, which compromises the independence of the regulators and, hence, regulatory outcomes.”

Such apprehensions aren’t entirely misplaced. In 2002, the Andhra Pradesh Electricity Regulatory Commission raised the charge private power plants have to pay for transporting energy through a state-owned grid to a consumer. The reason: state-owned power distribution companies suffered losses because industries had started buying power directly from the private companies. The high court reversed the decision.

Indian laws tie down regulators. The Acts setting up the telecom, insurance and petroleum regulatory agencies make it mandatory for them to follow central government directions on policy matters. Regulators also have little financial autonomy, making it easy for the government to pull strings, notes Malik. The fees TRAI and IRDA levy go into government coffers. The IRDA’s first chairman, N. Rangachary, a former chairman of the Central Board of Direct Taxes, refused to give up IRDA’s fees but they now go to the government. “Across the world, regulators are allowed to levy and retain fees,” says Pradip Baijal, an IAS officer who was TRAI chairman. G.V. Ramakrishna, SEBI’s first chairman and an IAS officer, however, feels this is not an issue. “Pliability can be ensured with one phone call,” he says.

The process of appointing former bureaucrats to head regulatory agencies gathered pace after the tenure of the first TRAI chairman, Justice S.S. Sodhi. The former high court judge headed TRAI when the government was allowing private companies to enter the telecom industry. The erstwhile department of telecom (DoT), which was both a telecom service provider and a policy making body, challenged in court practically all of TRAI’s orders that went against it. Finally, the government amended the TRAI Act and removed Sodhi. The TRAI chairman was earlier supposed to be a former judge. The amendment opened the door for others, including bureaucrats. “Sodhi was seen to be too independent and that was not acceptable to the ministry,” rues Malik.

To be sure, some regulators have been fiercely independent even though they had been civil servants. Ramakrishna was known as a no-nonsense regulator who introduced several regulations to discipline the market. Brokers complained to the finance ministry, Ramakrishna recalls, but it never interfered.

How independently a regulator functions, then, seems to depend on the person who heads the agency. “You can’t decide on the basis of a person’s resume whether he will be pliable or independent,” says Baijal, who frequently clashed with the government. “There is no guarantee that a non-bureaucrat will be less pliable,” adds Ramakrishna.

The choice of the individual to head a regulatory agency, therefore, becomes very important. The problem, notes Prithvi Haldea, managing director of Praxis Consulting and Information Services and stock market expert, arises from the law itself. Enabling provisions are created by bureaucrats which leave the door open for their tribe to head regulatory agencies, he points out. Nor do politicians object if a bureaucrat heads a regulatory agency. For them, says Baijal, the bureaucrat is someone they can manage. Indeed, regulatory positions are often seen to be plum, post-retirement sinecures. But some argue that only a bureaucrat has the ability to deliver in a constraint-filled environment. “The bureaucrat knows how to work the system,” says Baijal. And Ramakrishna declares that the public will never have the same confidence in the impartiality of someone from the private sector as it will in a bureaucrat. “Will SEBI have the same credibility if it’s headed by a broker,” Ramakrishna asks. Why not, retorts Haldea. The top management of Sebi’s US counterpart, the Securities and Exchange Commission (SEC) consists of people who have over 20 years’ experience in the markets.

As the debate rages, one thing is clear: the government prefers an ex-bureaucrat at the helm of regulatory bodies than someone from the private sector who will take a while to learn the way of the Great Indian System of Governance.