Regulating regulators

Power without accountability is the bane of Indian regulation. Policy decisions are made by bureaucrats or government-appointed regulators, who are themselves usually retired bureaucrats or judicial officers. They aren't accountable as individuals for policy, or system failures.

In each failure, the general populace suffers. To take two glaring examples of sub-par regulation, Securities and Exchange Board of India and Telecom Regulatory Authority of India have not prevented confusion in their respective domains.

Sebi's existence hasn't prevented regular scams. Trai hasn't managed a smooth transparent awards of licences, or non-controversial tariff.

Even the Reserve Bank of India, a much more professional institution, hasn't plugged all the loopholes in the banking system.

Recent revelations about Life Insurance Corporation and General Insurance Corporation make it likely that massive problems could soon surface in insurance.

And matters are hardly improved when ministry officials issue selective, sensitive briefings about the sale of government equity in banks.

Some mess is inevitable in any transition and India is still in a process of transition with the 12th anniversary of the New Economic Policy round the corner.

Some of the mess is simply due to the tradition of interference with market mechanisms. But much is due to the lack of transparent regulation of regulators.

For example, it's standard practice for officers in equivalents of Sebi, such as the US Securities Exchange Commission or the Singapore Monetary Exchange to publicly declare incomes and to be debarred from investing in the markets they regulate.

It is also standard practice for officers in the Federal Reserve and other central banks to be debarred from investing in instruments other than blind trusts.

Such disclosures should be mandatory here and the declarations widely disseminated. In the Indian context, income restriction and disclosure should be extended to sensitive ministries, and to the families of officers.

I have no idea if such restrictions exist and disclosure is certainly not required. This ignorance is damning, since such details are easily available about the incomes of the Fed and SEC chairpersons.

And, importantly, about their juniors. Tighter restrictions and declaration norms would cut down on deliberate corruption. But it wouldn't promote sensible policy-making in itself.

Much damage is caused by persistent refusal to develop domain-specific expertise. Sebi reports, for example, often reveal an appalling fuzziness about market systems.

One way to promote domain-specific expertise is to tie compensation to performance. How many people would lobby for Sebi posts if 50 per cent of pensions and emoluments were paid in the units of index-funds or exchange-traded shares?

Such a structure would give regulators an incentive to make efficient long-term policy without increasing incentives for short-term corruption.

It won't happen, of course. The light would go out of too many lives. Which leaves us to cope with ticking timebombs.

The issue of government equity in banks and possible disinvestment prices is likely to explode soon. It will be coupled to a Sebi investigation.

This will presumably cause further drops in bank shareprices. Cynically speaking, that gives investors, who missed the bus when the Securitisation Act was passed, a second chance to enter the sector.

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