Immediate challenges for new Sebi chairman

Within Sebi, the chairman should hold an umbrella for both young and old employees

By Somasekhar Sundaresan

Very soon, will take charge at the Securities and Exchange Board of India (Sebi) as the new chairman. The task requires calm reflection on the problems on hand, and a mind open to fresh ideas and innovative thinking. The capital markets regulator is at a crossroads.  Never in the regulator’s history has this role been more complex than it is now. Here is a brief heads-up with pointers to what needs immediate attention.
First, is in crying need of a peacetime general. The very assumption of this office can make some incumbents believe that they are now at war with the big bad world of securities markets. As an institution, there is excessive focus on regulation of market conduct and lesser emphasis on prudential regulation. (The is diametrically opposite in approach. Both need adjustment).
Never have Sebi’s statutory enforcement powers been more extreme.  Contrary to popular belief, is armed with far greater power to inflict serious economic injury than counterparts in the and the UK. needs to convince no judge before imposing serious restraints on economic activity. Routinely, this is done based on suspicion, leaving it to those affected to shoulder the burden of disproving the suspicion — somewhat like preventive detention. The check and balance is appellate review after has drawn blood. The onus is then on the person challenging Sebi’s conduct to show that it was wrong in taking action.
Sebi’s legislative powers, too, are near absolute. The Act grants wide discretion to to make subordinate legislation. Prior consultation with the market, a reasonable articulation of the link between the proposed solution and a problem statement, and a system of review of regulations to see if they have met the articulated purpose are substantially missing. There is indeed some form of selective public consultation but neither a statement of what problems are being sought to be solved nor a timely review of whether the solutions have indeed worked is mandated either by law or by a policy approach.
As a result, the fear of the regulator is widespread. With serious powers at hand, it takes maturity to structure the role into one of maintaining peace rather than of being ever ready to declare war. This is an attitudinal change that is necessary. Hundreds of inputs about the market being full of crooks necessitating a crackdown and severe intervention would be received. It would be easy to get carried away. Headlines screaming about the absence of powers or being toothless despite having powers would further an urge to lash out without thought. Eschewing a carpet-bombing approach and sifting the grain from the chaff are what the job at the top entails.
Second, the primary market regulation needs deep review and research as to what can be done better. The size of funds that get raised can never be a barometer of success for how this segment of the market regulation is performing. Securities offering documents are extraordinarily bulky, barely tell a story in clear terms and have substantially been reduced to bulky formal compliance rather than resulting in substantive disclosures of high quality. Cleaning up the policy space in this area of the market is a critical immediate objective to which the new chairman must apply himself.
Third, a review is overdue in the M&A space. It has been nearly six years since the “new” takeover regulations came into effect. Today, India is a unique jurisdiction where one body of law (takeover regulations) forces an acquirer to potentially cross the maximum limit of substantial shareholding permitted in a listed company while another body of law (listing conditions) forces the shareholding back down to compliance and a third body of law (delisting regulations) would need to be complied with if the intent was always to maximise shareholding and delist the company. Transaction costs mount, transaction timelines prolong unreasonably, defeating the very objective of mandating an exit opportunity by making an open offer for public shareholders to tender their shares.
Finally, Tyagi must give special attention to human resources and matters within the organisation. Too many junior officers have been tempted to be indecisive or to take wrong but safe decisions thanks to vigilance probes and hounding of honest bona fide decisions.   is now well over 25 years old, and a full cadre of loyal employees is available at hand, despite the organisation having been the poaching ground for the private sector. Enthusing smart bright talent inside and leading them from the front to shield them from unfair targeting in criminal anti-corruption probes have to become a priority. Alignment and fitment of senior employees upon merger of the Forward Markets Commission into remains an open area of work. To begin with, Tyagi must ignore his own HR problem — his tenure was shrunk from five years to three even before he could take charge. As a seasoned bureaucrat, he would know that this the way of the government systems; there is nothing personal in it. But many in the organisation may not be seasoned in the ways of the government but would be highly talented in handling their regulatory work.  Holding an umbrella for them and bringing in respect for punctuality and professionalism and rewarding them for it would help him create a legacy during his tenure.
This was published as my column titled Without Contempt in the Business Standard edition dated February 23, 2017

No Relief without Interim Relief

By Somasekhar Sundaresan

It is raining interventions from constitutional courts across nations. A court in the United States passed a temporary restraint order against newly elected President Donald Trump’s executive order to abruptly stop the entry of individuals from seven Muslim-majority nations from entering the country. The of the United Kingdom has ruled that parliament cannot abdicate its role in handling through just a referendum. A high court in Kenya has intervened to strike down laws that provide for criminal action against defamation.

Of course, we too have a robust and vigilant culture of constitutional review by the higher judiciary where executive actions are challenged. Not too long ago, the struck down of the Information Technology Act, which it found would curb free speech.

However, as a practical matter, the record can get patchy in terms of granting urgent temporary restraints on executive action or even legislative action. In other words, say, a new law has been passed by Parliament, and its constitutional validity is challenged. It would be a high expectation that the operation of the law would be restrained as an urgent, interim measure while the court considers full-blown proceedings on all aspects of its merits. Indeed, such stay orders do get issued. The point is that they can be really tough to get.

The state gets away with a lot — particularly in “heavy matters” where terms such as “national security”, “interests of investors”, “public interest”, “integrity of securities markets” can be invoked, and a law officer representing the government is willing to raise the decibel level about tragic outcomes if the judiciary were to stop a decision by the government. Eventually, the courts may rule on the constitutional validity of a law (it is tougher if the law has been in play for a while, as compared with a newly introduced amendment) and hold that the law is unconstitutional.  Likewise, without granting any temporary restraint, courts could eventually hold an executive decision to be unconstitutional. At times, this could lead to a situation of “operation successful; patient dead” (for example, Maneka Gandhi’s challenge to her passport being taken away).

Judge James Robart, the US District judge who stayed nationwide the enforcement of Trump’s executive order (incidentally, carrying a grandiose title: “Protecting the Nation from Foreign Terrorist Entry into the United States”), says it well in his concluding paragraph.  The entire portion is worthy of being reproduced:

Fundamental to the work of this court is a vigilant recognition that it is but one of the three equal branches of our federal government. The work of the court is not to create policy or judge the wisdom of any particular policy…  That is the work of the legislative and executive branches and of the citizens of this country who ultimately exercise democratic control over these branches.  The work of the judiciary, and this court, is limited to ensuring that the actions taken by the other two branches comport with our country’s laws, and more importantly, our Constitution. The narrow question the court is asked to consider today is whether it is appropriate to enter a (temporary restraining order) against certain actions taken by the executive in the context of this specific lawsuit. Although the question is narrow, the court is mindful of the considerable impact its order may have on the parties before it, the executive branch of our government, and the country’s citizens and residents. The court concludes that the circumstances brought before it today are such that it must intervene to fulfil its constitutional role in our tripart government.

The states of Washington and Minnesota had challenged Trump’s order. Trump had won an election on the promise of bringing in such restrictions on the entry of Muslims and also refugees. But if that popular measure is not in line with the Constitution, the court would intervene. Perhaps, another judge may have had a different view.  Indeed, one could argue that there are as many courts as there are benches of the court. So far, none has in the USA.

Shift to India. The law enabling the creation of the Aadhaar system was pushed through by labelling it a money bill to avoid a discussion on the floor of the Rajya Sabha. The Speaker of the Lok Sabha has certified it to be a money bill (the Rajya Sabha has next to no say in draft laws that are money bills). A constitutional challenge is pending in the and one of the issues to be considered is whether the “final” nature of a Speaker’s certification can at all be questioned. We will all know eventually, many years down the line, but Aadhaar would become a way of life by then.

Same is the story with Courts were indeed approached the morning after the government declared 85 per cent of the currency in circulation to be illegal — quite similar to an abrupt and arbitrary stoppage of people from select countries entering the US regardless of whether they were US residents. No court intervened with a stay order. If the executive branch were to say that the move is aimed at fighting terrorists using counterfeit money, there is not much left to expect. We would end up eventually with guidelines on how the government and the Reserve Bank of India must conduct themselves. And when that happens, courts would in fact be dispensing wisdom on executive action — exactly what Judge Robart warns against.


This piece was published as my column titled Without Contempt in the February 9, 2017 edition of Business Standard.

Jallikattu and Tamil Pride

Jallikattu is in the news again.  Last January, I had written about it in the Mumbai Mirror.  I thought it would be in the fitness of things to pull them out and post the two pieces here.  Hence this post.


  It is another example of the interplay between policy, politics and law. Bowing to political pressure around election time in Tamil Nadu, a political system that is inclined to favour a ban on cow slaughter for trading in beef, was happy to favour removal of a ban Jallikattu.
Jallikattu is an ancient, bloody, bull-taming Tamil sport, played during the Pongal festival and involves human beings recovering a packet of prize money tied to the horns of a special breed of bulls that charge down a path. Yet, today, when this column is published, Tamil Nadu will witness another Jallikattu-free Pongal. Hearing a challenge by the Animal Welfare Board and others, the Supreme Court has issued an interim stay on the government’s notification permitting the sport. The court has refused to vacate its stay when a bunch of intervening petitioners from Tamil Nadu sought to have the stay revoked. This is not a final view of the court. It would eventually hear arguments on whether the government was right when it conducts a final hearing in the matter.Jallikattu has remained banned for the past four years. Arguments in favour of revoking the ban range from Tamil pride (“Jallikattu is one such precious heritage that has been preserved over millennia and our duty is to take this forward”) to counter-intuitive economic theories (“If Jallikattu is banned, livestock keepers will be forced to abandon the raising of native livestock, which already stands threatened due to the extensive use of mechanised agriculture. It would be the death knell of native cattle species in Tamil Nadu”).

The court has found that despite the safeguards claimed to have been introduced by the government to enable the sport to be played, it appears that the sport would still violate law preventing cruelty to animals. State governments have been asked to file replies on the issues raised in the petition being heard by the court. Until the petitions are heard, the sport will continue to remain banned.

The argument that introduction of “safeguards” on paper would remove cruelty to the bulls even while protecting heritage follows the famous Indian expectation that virtue can be legislated. Capacity constraints in enforcing law rendering provisions of law meaningless are legendary. Examples abound. We have a fantastic law on domestic violence without investing in infrastructure that is necessary to implement it. We create tribunals to dispense substantive justice without the constraints of formalities involved in courts but we do not create the state capacity to select the men and women who would conduct proceedings in the tribunals. The same is the case with punishments for violating the expectation of virtue. We have the most stringent anti-corruption law in the world—even removing the requirement to actually prove gratification—but corruption is rampant. We introduce death penalty for sexual assault on women, ignoring repeated pleas of women’s rights experts, and assaults continue unabated. On the contrary, the higher punishment increases the risk of victims being killed so that they do not live to tell the tale.

The more evident view is that the government clearly knew that the courts would strike down the removal of the ban. It seems to have consciously simply kicked the can upwards for the courts to protect animals since it was getting too politically emotive to continue the ban. More than the government’s removal of the ban or the court’s reinstatement of the ban, what is to be celebrated is the effective working of the tension between institutions.

The Animal Welfare Board acted autonomously and challenged the government’s revocation of the ban to test its belief that the law was being violated. Maneka Gandhi, an animal rights activist who is also a minister in the government openly expressed her disagreement with the move, provocatively terming the sport as a copy of Spanish bull fighting.

That the claim to pride in Tamil heritage cannot be monopolized too has become underlined. Senior officials of the Animal Welfare Board who challenged the government are Tamil. Senior counsels who fought against the revocation of the ban too were Tamil. For the record, so is this writer.

(This was published in the Mumbai Mirror on January 15, 2016, here:




The conflict between social conventions and social change is spreading across the Indian subcontinent. First, sections of societies in two South Indian states had a fracas that stirred sentiments nation-wide – on the issues of women entering the Sabarimalai Temple in Kerala, and the reintroduction of Jallikattu in Tamil Nadu. Then, a similar clash among segments of Pakistani society arose. Lawmakers struggled last week to table and pass stricter laws against child marriage, in the teeth of opposition on traditional and religious grounds.

Even speaking of the two in the same breath may be considered unnecessarily provocative. Last week’s edition of this column, simply articulating what the Supreme Court had done as an interim measure with Jallikattu, met with emotive reactions. An urban non-traditional Tamil was seen as having no sense of the matter at hand, and worse, as having no right to even discuss the issue.

A supporter of a ban on entry of women into the temple may feel that ban on Jallikattu may be right. Equally, an animal-lover supporting a ban on Jallikattu may have “religious” and sentimental opposition to letting women enter unfettered into the temple. One may hate child marriage but support Jallikattu and still oppose female entry into the temple. Given the breadth of polarising subjects, there are exponential combinations.

Recognising the right of a 16-year old to consent to marriage may sound jarring and unconscionable to the same human mind that roots for a 16-year old accused of rape to be executed, castrated or imprisoned for life. For the rapist, a human mind may justify thus: “If fit to commit adult crime, then fit to be treated as an adult criminal.” For the consenting 16-yeard-old, the same human mind may not be able to say: “If fit to conceive a child, then fit to be treated as an adult spouse.”

What a human perceives as unconscionable and unacceptable change in societal norms depends on the person’s own conditioning and politics and the consequent definition of a comfort zone. But if one were to dispassionately look through arguments made by those for and against each of these positions, a common thread will emerge. At the heart of the discourse lies a conflict between one segment of a society pushing for a new normal and another segment unable to accept that no tradition is permanent. Each can find reasons and arguments to support the stance taken.

No law can obtain happy endorsement from every single segment and sub-segment of society. There always has to be a give and take, a delicate balance of competing and conflicting objectives and desires, and a baseline acknowledgement of merit in some element of the contrary view. The mood of society varies with time and with that, the position taken by the laws which society desires to bound by, would vary too.

This is how eventually a society finds its own comfort zone. Dissenters critique the law if it does not suit their politics. And root for bringing about change. At every point in time in the history of any law, there will have been a greater emphasis or underlining of the interests of one segment of society over another. There is no other way that practices like sati or dowry would be banned by the law, and there is no other way that such practices would still be prevalent despite the law. Even as recently as the 1990s, incidences of sati and the construction of “sati temples” were reported, leading to a nationwide furore.

Child marriage, child labour, dowry, or for that matter, the caste system, all lend themselves to arguments for and against. It is amazing how the human mind can find reasons to support an argument for or against a legal intervention – if that intervention could lead to change, change that could be deemed desirable or undesirable, depending on one’s politics.

At the end of the day, all humans yearn to belong to a tribe. Tribal convention and belonging is as human as the desire to find meaning in life. After all, even those seeking to change the existing tribal conventions, constitute their own tribe.

Structural changes the govt must make

If you can effect and defend the note ban, so can you take these measures

It has been by far the most disruptive structural change in the recent history of Indian economic policy.  First, rendering illegal as much as 85 per cent of the floating currency stock, and then, also the currency that was not turned in, have been the government’s two “tough” calls. Much ink has been spilled over whether these were sensible moves and whether the objectives held out as the driving reasons have been met at all.


However, since the mood of the moment is to push for structural changes, no matter how risky they may be to popularity, this is the time to think about the next set of structural changes that could be pushed through. The government has demonstrated its proficiency in handling proposals that could have been fatal to popularity, by bringing to bear a combination of reductionist and simplistic logic and turning adversity into advantage.


More importantly, the appetite for swallowing structural changes that may cause pain has never been higher. Therefore, now is the time to move on some structural changes that are also backed by merit and reason, which should make them easier to achieve. If any of these sounds tough to carry out, remember, it cannot be tougher than demonetisation.


First, the role of our regulators, as currently structured, is crying for change. For example, the Reserve Bank of India as a regulator of banks can be divorced from its role as a central monetary authority. It is the latter that needs complete independence and autonomy; the former needs reform and clarity of thought. There is too much bundling of the regulatory objectives of ensuring good conduct by banks into the role of being a monetary authority, with a lack of clarity on which measure would address which objective.


Likewise, the Securities and Exchange Board of India inextricably interlinks the objective of regulating market conduct with that of prudential regulation. The former requires disciplining errant market players, the latter thinking on how to keep the market financially safe and how to ensure that intermediaries, who hold out promises to society, have the financial capacity to perform with intensity. The structure of the insurance regulator, or for that matter, the pension regulator,  needs similar attention.


The very structure of the regulatory architecture needs attention. It is time to separate the functions of regulating players in the financial markets into one regulatory agency that would focus on prudential regulatory requirements. This regulator has to think and breathe issues relating to prudential norms applicable to market participants: what sort of net worth they must have, what capacities they must develop and nurture, what they must do to address risk to their own existence to keep the market safe, and the like. A separate regulatory agency must focus on abusive conduct by players in the market. It would have the task of taking disciplinary action for wrongdoing.


In short, the entire financial sector regulatory framework can be re-engineered and recast to end up with three agencies — the central bank, a prudential regulator and a conduct regulator.  This is hardly an original idea — the United Kingdom has this structure. was not some original idea either. If that project can be achieved, so can this one, with far better outcomes.


Second, since our justice delivery system has been debilitated by a variety of state capacity issues, the small man does not get justice. There is too much focus on the speed of justice, with quality seen as being capable of compromise — a bit like not worrying about manuals of medical procedures when handling a large number of victims of disaster or war. Therefore, a Financial Redressal Agency, with its governance manned by representatives of the three regulators, can focus on redressing the grievances of smaller consumers of financial services. Today, a small complainant would be lucky if her letter with a tale of woe manages to get the attention of the governor or the chairman. If not, a computerised sarkari process deals with investor grievances in a robotic manner.  A lot of this work is even outsourced by regulators.


Yet, regulators loathe ceding ground in this space, for the ability to call up senior officials of market intermediaries and direct them to address grievances gives them unstructured muscle power over market intermediaries. However, actually formal assured redressal of customer grievances is an activity that needs round-the-clock attention of a dedicated agency that can also build up intelligence of malpractices and abusive conduct detected when handling complaints, and providing that to the conduct regulator to take pre-emptive and curative steps. Focused collection of such intelligence would also expose organisations that adopt standard processes in abusive conduct across sectors. This would be a tough measure to implement, considering that opposition comes from the regulators themselves, but remember, it cannot be tougher than demonetisation.


Finally, in the Union Budget due shortly, the government must have the courage to waive or drastically reduce transaction costs for consumers using electronic payments. If one element of state policy pushes consumers to use electronic platforms and online payment systems, another must not impose a cost. The recent stand-off between banks and fuel stations was only a teaser; it can lead to a far bigger problem. If those providing payment platforms need to be compensated for their service, it would be a fit case for the government to transparently assess how they may be subsidised, if necessary, to keep the customer protected from becoming captive to ridiculous transaction costs. If truly provides long-term aid to bring the economy into the banking system, there has to be payback and reward for consumers who “queued up with pride”. There can be no reward more appropriate.
This column was published in the Business Standard in the editions of January 19, 2017 titled Without Contempt

Near-term change, long-term effects

A few legal and regulatory areas fare in 2017 could hold key for larger reform beyond this year

It is that time of the year. A new year is born. Somehow, magically everything seems possible. Yet, the day’s sentiment makes it easy to get despondent about what can indeed be achieved. To quote Bill Gates, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.” Through that prism, what does the new year have in store? This piece will pick a few legal and regulatory areas that would be at the core of change this year.

First, the year may kick off with the appointment of a new chairperson of the securities market regulator. The new incumbent, if there is one, would face several challenges. Even while state policy appears to bring more of the population into financial assets, with financial technology paving the way, financial inclusion, particularly in the securities market, remains elusive. A range of policy measures intended to “protect” the small investor has backfired, with unintended and counterproductive outcomes — examples range from an informal “safety net” to save investors from equity risks killing the equity markets instead, to asking brokers to put away funds when small investors have a business dispute resulting in brokers, who care for their balance sheets steering clear of small investors. The process to participate in our equity markets is overwhelming, and householders who save are easily deterred by the burden of tapping into the securities market, and settle for gold and real estate instead.

There is still talk of the need to remove the age bar for regulatory chairpersons. The argument goes that the Reserve Bank of India’s governor does not face an age cap and yet “young” incumbents are found. But if that is an argument to keep the office warm for retired bureaucrats, it would be the tyranny of age in an age-discriminating society scoring a relentless march in one more sphere. Only last week, the Supreme Court directed an age cap for incumbents in the Board of Control for Cricket in India. What is good for the sports regulator is good for regulators of market activity. Changing the age limit would need an amendment of law. Only a presidential ordinance can pull this off, but appetite for an ordinance on this subject would be weak. A Constitution bench of the apex court recently deprecated the practice of resorting to ordinances lightly. The chairperson’s office apart, there is already one vacant office of full-time member and another will become empty this year, resulting in a complete change of guard this year. The key for this new team would be to shed the baggage of legacy if it becomes a hurdle to imaginative thinking while not trying to reinvent the wheel in the name of bringing a fresh mind to bear.

Second, in the market for lending and borrowing of funds, this will be the first year when the new bankruptcy law runs its full course. A regulator for bankruptcy professionals has been set up and it has begun work in earnest. The process for a creditor to initiate bankruptcy proceedings, with an intermediate step of attempting to resolve the defaulting borrower, if run well, would change the landscape. The design of the new law is meant to change the approach from one where the tendency of courts is to attempt revival of moribund business ideas with a large heart, to one where insolvency is not shied away from. Living in a dying state for decades has been the way of life in this space, and if administered well, this area of law and policy will be a game changer.

Much will depend on how effectively the Debt Recovery Tribunal and the National Company Law Tribunal function and operate this law. Business process re-engineering of these tribunals holds the key. If process reform does not take place, we would have thrown yet another law at the problem without creating an effective environment for a proper solution. If recent administrative decisions are any indication, it may be imprudent to hold one’s breath here. In Mumbai, the Debt Recovery Tribunal has been moved to outside Mumbai while the newly set up National Company Law Tribunal is located in south Mumbai, the old commercial business district.

Third, a blind merger of appellate tribunals is on the cards. One strange idea is the merger of the Securities Appellate Tribunal, which is now an appellate court to hear challenges to orders passed by regulators of capital markets (including commodity derivatives markets), the insurance sector and the pension sector, with the National Company Law Tribunal, a court that hears petitions of a specific nature set out in company law. The composition of these tribunals is different, the skill sets required are differentiated, and their experience and track record are substantially varied. If at all one wants convergence in matters of corporate regulation, one would need to first effect a merger between the capital market regulator and the office of the Registrar of Companies, coupled with a lot of the functioning of the Ministry of Corporate Affairs.

One could, of course, have a long-term goal of having an Upper Tribunal like in the United Kingdom, which, as an administrative tribunal, is not an appellate tribunal but, in fact, a trial court. Here in India, our regulators are the courts of the first instance, playing a quasi-judicial role despite playing a legislative role and an executive one, too, within the same organisation. In the UK, if the regulator cannot convince a party to accept sanctions, the regulator would have to prove its case in the Upper Tribunal and secure an administrative order. In India, our regulators are free to issue “such directions as deemed fit” in “public interest” and the appellate tribunal is only a post-event check and balance.

Finally, this year began with a new Chief Justice of India taking office. How J S Khehar, known for his candour and activist-leadership style, and Prime Minister Narendra Modi handle relations between the executive and the judiciary will set the tone for how the Modi administration performs not only this year but also for the rest of its term. Watch this space.
This column was published Without Contempt in the Business Standard edition dated January 5, 2017

Somasekhar Sundaresan: Where smooth governance is masked failure

Falling in line without an attempt to stand up for principle within the framework of law is a trait of obedient regimes
 Jerry Brown, the governor of California, has picked up the gauntlet thrown by US President-elect Donald Trump’s proposed policies that would underplay the reality of climate change. Referring to federal budget cuts for earth-monitoring satellite programmes, he is quoted as having said: “If Trump turns off the satellites, California will launch its own satellite… We’ve got the scientists, we’ve got the lawyers, and we’re ready to fight.” 


A few pointers are relevant here. First, a stand-off between the Centre and a state is not unique for India. Second, such a stand-off is not a bad thing. There may be short-term pain and awkwardness about two government instrumentalities not seeing eye to eye. However, inter-institutional tension is the stuff that checks and balances in governance is all about. Falling in line without any attempt at standing up for principle within the framework of law is a trait of obedient regimes. And obedience without reason is not healthy for a democracy.


Take the case of regulators in India. The laws that govern regulators contain a ubiquitous provision that enables the government to issue directions to regulators on what to do on matters of policy. In such provisions, what constitutes a matter of policy is the prerogative of the government. This sole provision is adequate to keep regulators in check and to ensure they are never out of line with the thinking of the government in power. The effect of such a provision is that the regulator would never be formally told what to do — a verbal indication is adequate to make the regulator fall in line.


Few regulatory chairmen have had the spine to ask the government to issue a formal direction using the power to issue such a direction. More importantly, few regulatory governance boards have had the courage to stand up and be counted if they were to disagree with the government. There is one known example of the capital market regulator taking such a position — when it came to regulating unit-linked insurance plans offered by insurance companies. According to the capital market regulator, these plans were mutual fund schemes in addition to being insurance schemes and therefore, would need dual regulation. The government was forced to take a stance. The then finance minister first asked the two regulators to fight it out in court. When it got unseemly, a Presidential Ordinance was brought in to override the objections of the capital market regulator.


With demonetisation, one is not yet sure of how events turned on November 8. The central board of the Reserve Bank of India (RBI) is required to make a recommendation to the government to change the denomination of currency. Public records available so far suggest that the central board of the RBI indeed made such a recommendation. That the proposed demonetisation was a closely-guarded secret until just before it was announced, is also well known. The central board of the RBI would have met just a few hours, if not minutes, before the announcement. One does not know what information members of the RBI central board sought to put their signatures in endorsement. Who proposed the measure with what supporting material, and whether it was satisfactory to all the directors are unclear. 


Chances are that the directors endorsed the measure unanimously. Chances are that if they had had a different view, the government could have issued them a policy directive to make the recommendation. Whether the government used its power to direct the RBI is not known. If it did, the notifications ought to have said so. They do not. Perhaps no one in the RBI’s central board was at all alarmed enough to think of the side effects of demonetisation, or capacity constraints in executing the outlawing of 85 per cent of the floating currency, or the technical ability of the banking system to cope with the burden that was to be unleashed on it without notice. That is the power of having the right to dictate terms. The power never has to be formally used.


However, any attempt at reforming the regulatory system to bring in accountability for regulatory action is usually attacked as interference with regulatory autonomy. For example, there is no performance appraisal for any of the senior management — even at the level of the governing boards of the regulators. It is another matter that regulators mandate appraisal of board effectiveness and intra-board self-appraisal among peers within the boards that govern the institutions regulated by the regulator.


On the federal structure in India, too, we have some parallels with the US political system. The “Delhi government” — a euphemism of sorts, since it is not a conventional state government (more like a municipal government without even policing powers) — often wants to creatively create and handle jurisdiction, armed with a massive mandate in the elections. Almost every step from the Delhi government is tripped by a sole bureaucrat appointed by the central government. The constitutional dispute is in the courts.


The story is no different with the corporate sector. Regulations that deal with corporate governance err on the side of being overly concerned with composition of the boards rather than effectiveness of their functioning. But that is a story for some other column.


This column was published Without Contempt in the Business Standard editions dated December 21, 2016 

Conflating objectives to imagined outcomes

By Somasekhar Sundaresan

Never before has the national anthem been debated so much. Indian society is abuzz with arguments for and against the Supreme Court’s ruling that the national anthem must be played in every movie hall with the doors of the hall being shut to avoid insult to the forced rendition of the anthem. But this column will not add to the verbiage on the merits (or the lack of it) of the judgement.

Instead, the anthem judgement brings to the fore the human propensity to assume human reaction to legislative instruments. Every arm of the State – the legislature, the executive and the judiciary – is guilty of blundering with mis-reading outcomes. The merits of the objective sought to be achieved is often conflated and projected as the legitimately anticipated outcome. 

The legislature (Parliament and State Assemblies that make law) as well as the executive (central and state governments that use delegated powers to make law) routinely mis-read potential outcomes when making law. Specificity in defining the objective is itself a tall ask. They rely primarily on intuition. The near absence of pre-legislative consultation makes matters worse. The measurement of intended outcomes is made difficult right from the time the law is written. 

However, the judiciary, which legislates, particularly when dealing with public interest litigation, too makes the same mistakes, although limited pre-legislative consultation takes place. Any member of society can call upon the judiciary to write law, often citing the reluctance or failure of the legislature and the executive to work on solutions. Despite growing reluctance, a lot of law gets written in this space. The parties before the court air their views about the measures the court must adopt, and eventually un-elected judges make policy choices. The consultation may be only with those before the court who are interested in defining the problem and the solution, but yet, severe capacity constraints make it hard for judges to take measures that deliver intended outcomes.

To write law, one would need to hone the capacity to think through a defined problem statement, and then choose from competing policy choices to structure a solution. The comparison of competing potential legislative measures and weighing it against the potential benefits of each measure, is not a matter of judicial skill or training. It is a matter of administrative training and policy choice skill. However, in this department, all three arms of the Indian State can display quite a serious degree of inadequacy. Worse, without articulation of intended outcomes, the measurement of the efficacy of the law becomes highly suspect.

Take the example of the environmental entry charge imposed on vehicles entering the National Capital Region comprising Delhi and its surroundings. The stated objective of the law was to curb air pollution in Delhi. It was believed that a substantial chunk of the pollution came from vehicles. It was felt that imposing a charge on entry of vehicles into Delhi would create disincentives to ply via Delhi and thereby curb pollution. This was fully judge-made law that later came to be adopted by the executive formally. This year, Delhi has faced its worst air pollution crisis. The thick haze is attributed to multiple factors – this time newer factors are being guessed – ranging from burning of farmland waste to fireworks after the Diwali festival. No one wondered how the law imposing a charge on entry of vehicles into Delhi, fundamentally driven by the intended (if not promised) outcome of curbing air pollution had not met its stated objective.

The death penalty is an easy example in legislature-made law failing to deliver promised outcomes. When the gruesome Nirbhaya assault case was discovered in December 2012, people took to the streets demanding action. As is the wont, instead of looking at how to better enforce existing laws, we ended up writing new law – partly as a measure of placating the mob with the demand for law being satisfied and to ensure that the demand for bloodshed was made redundant. Definitions of sexual assault were changed. Punishment was bumped up to bring in the death penalty. In August 2013, the gruesome Shakti Mills sexual assault was discovered. No one wondered how the new law, fundamentally driven by the outcome of the crime, had not met its stated objective.

On the executive side, demonetization is the live and classic example of the stated objective being conflated into the potential outcome. If the seriousness of the purpose for which a law is proposed were adequate to justify any ineffective measure, there would be no need to debate the measure. If the need for spirit of patriotism were lofty enough, the law-maker would hope that there need be no debate on whether the measure is successful. Whether singing the anthem before a movie starts would achieve the outpouring of love for the nation would then become secondary. Whether black money would actually be curtailed by demonetization would become secondary. So long as it is intended to hurt black money, supporters of the measure would not want a debate on the efficacy of the measure. In much the same way, the efficacy of an entry charge on vehicles plying into Delhi, would ostensibly curtail air pollution in Delhi.

This column was published Without Contempt in the Business Standard edition dated December 7, 2016