Consultative Regulation-making

Syllabus: GS3/Economy

Context

• The Reserve Bank of India (RBI) issued a policy framework for how it will publish regulations, directions, guidelines and notifications. 

Background 

• This follows a similar move by the Securities and Exchange Board of India (SEBI), which published regulations setting out the procedure it would follow to issue regulations.
• Both RBI and SEBI are statutory regulators with quasi-legislative powers, have initiated reforms to improve transparency and accountability in regulation-making.
• These reforms are in line with global best practices and are essential to uphold the rule of law.

Recent Reforms

• RBI will now conduct impact analyses before issuing regulations.
• SEBI will clarify the regulatory intent and objectives of its proposals.
• Both regulators will invite public comments for at least 21 days and will periodically review their existing regulations.

Significance

• Strengthens Democratic Legitimacy: It ensures that rule-making by unelected bodies (like RBI and SEBI) is democratically accountable.
• Improves Regulatory Quality: Inviting feedback from stakeholders (businesses, experts, civil society) helps regulators design better, more effective rules.
• Increases Public Trust: Transparency in regulation-making builds trust in the regulatory process.
• Enhances Compliance and Implementation: Regulations developed through consultation are more likely to be realistic and practical, leading to better compliance.
• Facilitates Periodic Review and Reform: Public inputs and defined review mechanisms ensure that outdated or ineffective regulations are identified and amended or repealed.
• Aligns with Global Best Practices: Advanced jurisdictions like the US, UK, and the EU have institutionalised consultative mechanisms.

Challenges

• Slows Down the Regulatory Process: Consultation and impact assessment add time to the regulation-making process.
• Risk of Regulatory Capture: Powerful interest groups or industry lobbies may dominate consultations.
• Resource and Capacity Constraints: Regulators like RBI and SEBI face limited administrative capacity and technical expertise.
  • Conducting detailed impact assessments, public consultations, and cost-benefit analyses for each regulation can overburden staff and divert resources from enforcement or supervision.
• Confidentiality and Sensitivity: Certain regulatory matters (e.g., monetary policy, cybersecurity, systemic risks) require confidentiality.
  • Public consultations in such cases can lead to speculation, market volatility, or information leakage.

Conclusion

• India has begun moving toward more transparent and consultative financial regulation-making through reforms by RBI and SEBI.
• However, further steps—like mandating economic justification, strengthening accountability mechanisms, and enacting a comprehensive procedural law—are needed to institutionalize good regulatory practices across the board.

Source: TH