09 Jun 2025 : Consultative regulation-making that should go further

Editorial 1: ​Consultative regulation-making that should go further

Context

The RBI and SEBI have started the process, but Parliament should think about making a law with clear and standard steps for creating regulations.

Introduction

In May this year, the Reserve Bank of India (RBI) shared a clear policy on how it will release regulations, directions, guidelines, and notifications. This came after a similar step by the Securities and Exchange Board of India (SEBI) in February, when it published rules explaining how it will create and issue regulations.

Strengthening Transparency and Accountability in Regulation-Making

• Regulators like the Reserve Bank of India (RBI) and SEBI are created by Acts of Parliament and have quasi-legislative powers.
• Because of this, it is important to have strong procedural safeguards and checks and balances to protect the rule of law.
• Recently, both RBI and SEBI introduced frameworks that explain the steps they must follow when making laws, which is a good first step.
• When proposing new rules or changes, the RBI will now carry out impact analyses, and SEBI will clearly state the regulatory intent and objectives.
• Both regulators will also invite public comments for 21 days.
• Additionally, they will periodically review their own regulations.
• These reforms show a positive move towards more transparent and consultative rule-making.
• However, more can be done to strengthen these processes.
• Two important improvements are needed:
  1. Regulators should clearly explain the economic reasons behind their decisions.
  2. They should set up ways to ensure accountability for regular reviews and for responding to public feedback.

The issue of market failure

• RBI and SEBI must base their new rules on a clear economic rationale—they should identify what problem or market failure the rule is trying to fix.
• The Financial Sector Legislative Reforms Commission (FSLRC) in 2013 said that laws should be defined by their economic purpose, not just procedural goals.
• Many other countries follow strong regulatory practices that India can learn from.
• Current gaps:
  • RBI talks about "impact analysis" based on "economic environments",
  • SEBI explains its objectives,
  • But neither is required to clearly state the economic reason or market failure behind a proposed regulation.
• In contrast, the IFSCA framework demands a clear statement of the issue being addressed.

International Best Practices vs Indian Frameworks

What Financial Regulators in India Should Do

• Identify the market failure or core issue needing regulation.
• Explain how the proposed regulation will solve the problem.
• Conduct cost-benefit analysis to show how the rule will help or hurt.
• Create a monitoring plan to track how well the rule works after implementation.

Improving Transparency and Accountability in Consultative Regulation-Making

Current Challenges

• The track record of Indian regulators like the RBI and SEBI in consultative rule-making has been poor.
• A study (June 2014–July 2015) found that:
  • The RBI sought public comments on only 2.4% of its circulars.
  • SEBI invited public input on less than half of its regulations.
• This shows that stakeholders have had very few chances to give feedback on new regulations.
• There is hope that things will improve, but regulators need to become more transparent about their consultation processes.

Suggested Transparency Measures (Reported Annually)

To improve accountability, regulators should publish the following:

• Total number of public consultations vs. total number of regulations or amendments.
• Number of responses received.
• Details of suggestions accepted and rejected.
• Reasons for accepting or rejecting each suggestion.
• The impact of public feedback on the final version of the regulation.
• All associated timelines (e.g., when consultations began and ended).
• SEBI sometimes includes such data in board meeting agendas, but often removes public comment summaries citing confidentiality.

Importance of Regular Reviews

• Both RBI and SEBI should clearly mention how often they will review their regulations.
• This is important in light of the government’s commitment to deregulation and ensuring that rules remain relevant.
• In contrast, the IFSCA has a strong rule: it must review each regulation every three years.

Recommended Review Practice for Indian Regulators

• Suggestion: At pre-defined and frequent intervals, regulators must assess:
  • Whether the regulations are working as intended,
  • And whether they are still needed or need updating.
  • This will make Indian financial regulation more responsive, evidence-based, and public-friendly.

Conclusion

Good regulatory practice requires a clear and strong reason for any new rules. The RBI and SEBI have started working in this direction. However, a major challenge is the limited capacity of the government to carry out regulatory impact assessments and hold consultations. Also, small changes made by individual regulators may not be enough to keep good regulatory standards everywhere. The Parliament could think about passing a law like the Administrative Procedure Act in the United States, which sets standard procedures for making rules. This law would include steps like impact analysis, public consultation, and regular review. Countries like the United Kingdom and Canada have already created such guidelines for rule-making by government agencies. Adopting a similar system in India would make all regulators more transparent and accountable.