India: Rule-Making Petition – Bringing Regulators And Stakeholders Closer

In the recent years, India has seen a flurry of new legislations. Some of the notable laws are the Central Goods and Services Tax Act, 2017 (GST) and the Insolvency and Bankruptcy Code, 2016 (IBC). Most of these laws were enacted after wide public consultation which signifies a trend towards an evidence-based approach while drafting laws. However, implementation of some of them have been facing teething problems because of the transition from the old to the new regime, and therefore need constant tweaks as indeed all new laws do. For instance, soon after rolling out of the GST regime, the affected parties including certain small traders made various representations to the government to simplify the compliance procedure. Similarly, in the case of IBC, stakeholders brought to the government's notice a few loopholes and anomalies which has led to various amendments since its enactment.

Despite absence of any formal mechanism for stakeholders to present their grievances, both the above instances reveal that the stakeholders can play a key role towards upgradation of any legislation. Further, it also illustrates that despite their best of efforts and intentions, regulators may not always understand the ground realities and various nuances, as much and as early as the stakeholders might have. Thus, there is a clear need of a formal mechanism to enable the public at large to present their grievances and constructive suggestions. This would also make legislations more stakeholders friendly and enable the government to address the regulatory arbitrage.

Ways to evaluate any law

Typically, there are two ways to evaluate any law: an ex-ante evaluation and an ex-post evaluation. An ex-ante evaluation includes a consultation process with stakeholders when the law is at its conceptual stage or at drafting stage, whereas an ex-post evaluation involves an enabling mechanism to keep the laws in tune with changing realities. The former approach helps in improving the design and the implementation of the law while the latter aims to maximise its intended impact. Currently, some sector-specific regulators such as the Telecom Regulatory Authority of India (TRAI), the Airports Economic Regulatory Authority of India, and the Securities and Exchange Board of India (SEBI) follow a public consultative process before making any law. Further, some regulators have already hard-wired this consultative process into their laws. Given the wide impact of regulations, the Financial Sector Legislation Reforms Commission's report has emphasized on the importance of wide public consultation while making regulations in the financial regulatory landscape. Thus the focus on the ex-ante evaluation is evident. However, once any legislation is enacted, there is no formal mechanism in place through which the stakeholders can approach a regulator to give feedback on the enacted legislation.

Necessity of an ex-post evaluation

One can challenge a legislation before a court if it violates principles of natural justice or constitutional rights. However, there is no process to point out to a regulator how burdensome or ineffective the law has become or how the law has lost its relevance because of change in market dynamics. Although regulators like SEBI and TRAI review their regulations from time to time by engaging stakeholders, however, the same is done on an ad-hoc basis. The prevalent ex-post evaluation is an insulated process i.e., driven by the regulators and thereby initiation of regulation-making is at the mercy of the regulators. Thus, there is a greater need to transform this insulated process into one in which stakeholders can regularly give inputs. This approach is comparable to crowdsourcing of ideas. This would enable every idea to reach the regulator and enlarge the universe of ideas available with the regulator. The same would enable the regulator to produce a more efficient and nuanced regulatory framework.

Ways to achieve an ex-post evaluation

One of the ways to achieve such evaluation is to provide a platform to stakeholders to participate in the regulation-making process by giving them opportunities to file petitions on regulatory reforms to the regulators to either issue, amend or repeal any regulation. This concept is called a "rule-making petition" in regulatory parlance.

Globally, economies like Australia, South Korea, USA, and the UK appear to have placed significant emphasis on providing such a platform. The South Korean government introduced a regulatory petition system in 2014 called "Sin-Moon-Go" which allows a person to provide suggestions on the improvement of the regulatory landscape. This system mandated the relevant ministry to provide response to such suggestions within a time-bound manner. The introduction of the "Sin-Moon-Go" system in South Korea has shown remarkable results. In 2014, around 6,500 regulatory petitions were received, and the acceptance rate was 36.6%. Under this system, in South Korea, a petition was submitted to modify the requirement for installing side view mirrors in the wake of a new technology wherein a 360 degree monitoring system can be installed inside the vehicle. The concerned ministry revised the safety standards to allow an alternative system to replace side view mirrors. Similarly, in USA, each agency is required to give interested persons the right to petition for the issuance, amendment, or repeal of regulation. For instance, the U.S. Securities and Exchange Commission allows a person to request a change in the regulations by including a statement of interest and reasons in a petition.

The approach of crowdsourcing ideas through such platform to improve regulatory landscape is not unfamiliar to us. We see a glimpse of such approach in the Indian Constitution. Article 350 of the Indian Constitution presents an opportunity to citizens to give a representation for the redress of any grievance or on the matters of public importance to any authority of the union or a state. So any individual can give a petition on public importance to the legislature. This is based on a principle that citizens enjoy an inherent right to offer constructive suggestions.

Both the houses of parliament have a separate committee called "Committee on Petitions". These committees give a platform to the public to get their grievances addressed or provide suggestions on the matters of public importance. For instance, upon receiving a petition relating to working conditions of medical representatives and salesmen employed by pharmaceutical companies, the Committee of Petitions of Rajya Sabha recommended for enactment of a law in this respect. Consequently, today we see a separate law i.e., the Sales Promotion Employees (Condition of Service) Act, 1975. This instance depicts that how stakeholders, if given a platform, could help the legislators to improve the regulatory landscape.

The approach of crowdsourcing ideas is well established at the parliament level. However, the same does not provide any remedy with respect to subordinate legislations, where the executive has power to enact legislations on relevant matters. Thus, a look-alike approach is completely missing at the regulators' level. Post-liberalisation, various sector specific regulatory agencies were created to regulate various sectors, and they were empowered to make regulations and administer the same. This increased the power of bureaucracy and led to the rise of subordinate legislations. As a result, today, a regulator affects countless aspects of the everyday lives of the citizens and sets rules of the game. Thus, it is imperative that the regulators should give a platform through which stakeholders can present their grievances or give suggestions for betterment of the regulatory landscape. This would also complement their current dominant focus on ex-ante evaluation.

Proposed framework

Each regulator should come up with a detailed guideline to institutionalise the ex-post evaluation framework. The broad contours of such guidelines could be that the person making such petition should be required to include the text or substance of any proposed regulation or amendment. The said petition should contain the reasons for request of such changes, and a disclosure of his interest. Further, the regulator should be given a definitive time period to provide its response either by accepting or rejecting the petition. If any such petition is accepted by the regulator, the regulator should be required to initiate the regulation-making process in a time bound manner followed by a public consultation.

However, while rejecting any petition, the regulator should be required to give its reasons for such rejection. Considering the possibility that such a system might lead to frivolous, unreasonable, repetitive, or premature petitions, the regulator should also be empowered to summarily dispose of petitions of this nature. Additionally, any response of the regulator on such petitions should not be made subject to judicial scrutiny on merits as firstly, making a policy change is a prerogative of a regulator, and secondly, this approach is to bridge the gap between the regulators and the stakeholders and creating a framework of participatory rule-making process. Such a system is similar to systems in other developed economies.

Additionally, the regulators should provide the number of applications received in a given year, and the outcomes of such applications in its annual report.  

Conclusion

A rule-making petition could enable the stakeholders to play a more active role in making the regulations efficient as they may think about the critical issues in the regulatory framework that clog transactions and offer solutions to address them. Considering the market dynamics and on-going fintech disruption especially in the financial sector, it is imperative that the sector-specific regulators should strive to be more responsive and iterative to improve the laws administered by them. Further, this process will alert the regulators with respect to unnecessary burdens on business and citizens. It will help in relaxing regulations that produce equal and greater costs, and meet the actual requirements of the economy.

*The author is an associate with the Capital Markets team of L&L Partners (formerly known as Luthra & Luthra Law Offices). The views expressed here are personal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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