Damodaran Committee Report

8/12/2019 Damodaran Committee Report

1/94

Report of theCommittee for

Reforming the

RegulatoryEnvironment for

Doing Business in

India

September,

2013

Ministry of Corporate Affairs

Government of India

As submitted to the Ministry on 2nd

September 2013


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Index

S.No. Chapter Page No.

Preface 3

Executive Summary andRecommendations

6

1. Introduction 172 Legal Reforms 233 Regulatory rc!itecture 2"# $oosting Efficacy of Regulatory Process

#.1 Regulatory Processes#.2 Regulatory Revie% ut!ority#.3 Regulatory Im&act ssessment

'RI(

3)

) Ena*ling +S+Es 6,6 ddressing State Level Issues 6#7 ction on t!e -orld $an Re&ort 7,

nnexures

nnexure I/ 0otification 'eneralircular 0o. 262,12 dated

23.,4.2,12( of t!e constitution of t!eommittee

nnexure II / 0otification 'ircular0o. 272,12 dated 2".,4.2,12( of t!econstitution of t!e ommittee

nnexure II $/ 0otification 'eneralircular 0o. 322,12 dated

1).1,.2,12( of t!e constitution of t!eommittee

nnexure III/ Executive Summary oft!e Inde&endent Panel Revie% of t!e5oing $usiness re&ort


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Preface

If all you !ave is a !ammer everyt!ing loos lie a

nail Suc! are t!e concerns relating to raising economicgro%t! t!at everyt!ing in t!e *usiness environmentseems to *e a candidate for reforms. Reforming t!e*usiness environment !as &roved to *e a Sisy&!eanconstruct t!at governments across t!e glo*e includingIndia are rolling u& t!e !ill.

In t!e Indian context t!e landsca&e of regulatoryenvironment is &rimarily an outcome of t!e division of

su*8ects %!ere t!e 9nion and t!e State governmentscould frame la%s as &rovided in t!e Sevent! Sc!eduleof t!e onstitution of India. :!is ma;e is furt!ert!icened *y t!e &let!ora of la%s and regulationt!erein %!ic! !ave sim&ly failed to ee& &ace %it!time. :!erefore t!e ommittee too a serious note oft!e &ro*lem of uired. :!e ommittee alsoo*served t!at a large &art of &ro*lem emanates fromt!e %ay t!e a&&ointments in t!e regulatory agenciesand also t!e organi;ational structure are made and!eld. ?n t!is count infusing &rofessionali;ation t!roug!rig!t selection and ca&acity *uilding are t!e ey issuest!e ommittee c!ose to focus on.

:!e ommittee also felt t!at t!e use of information

tec!nology 'I:( can *e one &ossi*le solution %!ereverinformation asymmetry adversely im&acts t!eregulatory environment. +ore effective use of I: canaddress multi&le &ro*lems suc! as access to correctinformation exc!ange of *est &ractices and so on.

-!ile enter&rises a*ove a t!res!old may !ave t!e%!ere%it!al to deal %it! t!e com&lex *usinessenvironment t!e ommittee looed into t!e issues of

small and medium enter&rises and felt t!at greater


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coordination amongst ministries and t!e &olicy maersis t!e need of t!e !our.

:!e ommittee %as set u& in res&onse to t!e


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Cinally I %is! to &lace on record my sincerea&&reciation to all t!e mem*ers of t!e ommittee fors!aring t!eir comments on an earlier draft of t!isre&ort. It is a matter of regret t!at some suggestions

arising out of t!e draft re&ort came in after t!e re&ort%as finalised. I also %is! to t!an t!e Indian Instituteof or&orate ffairs 'II( for &roviding t!e ommitteet!e re>uired su&&ort in conducting t!e *usiness of t!eommittee. :!is &reface %ould *e incom&lete if I donot acno%ledge t!e significant contri*ution of Prof.0avneet S!arma of II.

0e% 5el!i +. 5amodaranSe&tem*er 2 2,13 !air&erson

ommittee for Reformingt!e Regulatory Environmentfor 5oing $usiness in India


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Executive Summary and Recommendations

Executive Summary

In ugust 2,12 t!e +inistry of or&orate ffairs set u&

t!e ommittee for Reforming t!e Regulatory

Environment for 5oing $usiness in India. :!e &roximate

cause of t!e esta*lis!ment of t!e ommittee %as t!e

-ord $an=s 5oing $usiness Re&ort %!ic! raned India

amongst t!e countries raned at t!e *ottom of various

su*@indices. :!e ommittee %as su*se>uently

ex&anded to *ring in re&resentation from State

overnments Pu*lic Sector Enter&rises and Regulatory

$odies. :!e ommittee %as tased to loo into various

&arameters %!ic! affect t!e regulatory environment for

doing *usiness in India and mae a&&ro&riate

recommendations.

:!e ommittee !eld t%o meetings and soug!t in&uts

from t!e mem*ers. :!e deli*erations of t!e ommittee

!ave *een crystalli;ed in six t!ematic c!a&ters covering


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t!e dis&ute resolution arc!itecture of t!e regulatory

s&ace measures to *oost efficacy of regulatory

&rocess im&roving *usiness environment for micro

small and medium enter&rises addressing issues at t!e

state level and revisiting t!e re&ort of t!e -orld $an

Revie% Panel on 5oing $usiness Re&ort.

Recommendations

:!e Section &resents t!e recommendations made *y

t!e ommittee. :!e Recommendations are classified in

various !eadings namely 'a( legal reforms '*(

regulatory arc!itecture 'c( *oosting efficacy of

regulatory &rocess 'd( ena*ling +S+Es and 'e(

addressing state level issues.

Legal Reforms

1(Review of laws and regulations/ It isrecommended t!at t!e overnment of India as

also t!e State overnments examine t!e content

of all la%s and rules %!ic! im&act on t!e ease of


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doing *usiness and cause a&&ro&riate c!anges

t!erein to reflect t!e re>uirements of modern day

trade and commerce.

2(Encouraging arbitration to resolvecontractual disputes/ It is im&ortant t!at t!e

8udicial aut!orities are a&&reciative of t!e need for

>uic resolution of dis&utes t!at are *roug!t u&

*efore t!em. :!erefore it is recommended t!at

t!ere s!ould *e a mec!anism to dis@incentivise

use of civil courts for resolving contractual

dis&utes so as to encourage ar*itration as a

&referred manner of resolution. Curt!er it is also

recommended t!at a&&ro&riate measure may *e

taen u& to create a large &ool of &ersons trained

in t!e &rocess of ar*itration %!o could *e

a&&roac!ed *y contending &arties to tae u& t!eir

matter.

Regulatory Architecture

3(Carving out clear mandate for a newregulatory authority/ $efore setting u& a ne%


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regulatory organisation ade>uate t!oug!t s!ould

go into t!e need for suc! an organisation t!e

a*ility to man t!at organisation a&&ro&riately and

to invest it %it! functional autonomy. Setting u& a

ne% regulatory organisation s!ould not *e a nee@

8er res&onse to a s&ecific situation or context *ut

a %ell t!oug!t@out disengagement &lan of t!e

+inistry or 5e&artment concerned to move a%ay

from %riting out and im&lementing regulations.

#(Appointments in and supervision ofregulatory authorities/ :!e a&&ointment of

&ersons to !ead regulatory organisations s!ould

*e attem&ted in a far more trans&arent manner. It

is recommended t!at t!ere s!ould *e a

trans&arent system in %!ic! t!e Dead of t!e

regulatory organisation and !is $oard level

colleagues a&&ear *efore an a&&ro&riate

Parliamentary ommittee once in six mont!s to

re&ort on t!e develo&ments of t!e &revious six

mont!s and t!e *road &lan of action for t!e next

six mont!s.


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)(Autonomy of regulatory authorities/ enuinefunctional autonomy %ould also !ave to *e

reinforced %it! financial autonomy *y &utting in

&lace a system %!ere regulatory organisations are

not de&endent on government de&artments for

financial su&&ort *y %ay of !andouts.

6(Self evaluation by regulatory organizations::!e ommittee recommends t!at eac! regulatory

organi;ation s!ould undertae a self@evaluation of

itself once in t!ree years and &ut@out t!e

conclusions in t!e &u*lic domain for informed

discussion and de*ate.

oosting Efficacy of Regulatory Process

7(Ensuring effective consultation through a

two-stage process/ It is recommended t!at eac!

government organisation de&artment %!ic! !as

t!e res&onsi*ility of %riting regulations s!ould

undertae a t%o@stage &rocess of consultation

%!erein a revised draft is &ut u& for consultation

after t!e first round of stae!older consultation.


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:!is %ould ensure t!at t!e avoida*le situations of

misinter&retation of t!e regulations do not exist.

4(Allocating priority to systemic issues/ :o*oost t!e effectiveness of regulatory a&&aratus it

is recommended t!at enforcement *and%idt! of a

regulatory *ody need to *e o&timally used to deal

%it! cases of systemic im&ortance on a &riority

*asis.

"(Putting in place consent mechanism formatters of low significance8 It is recommended

t!at regulatory aut!ority may &ut in &lace a

settlement or consent mec!anism %it! ade>uate

safeguards %!ere cases %!ic! !ave no systemic

im&act are dealt in a summary manner. :!is %ould

!el& in dealing %it! large volume of matters of

systemically unim&ortant matters.

1,( rafting regulation/ It is necessary toensure t!at sim&licity and clarity s!ould inform t!e

content of regulation leaving no &art of it o&en to

different inter&retations *y different &ersons.


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11( System of advance ruling/ It !as *eennoticed t!at in a num*er of cases different

aut!orities !ave %ritten different often conflicting

rules and Regulations governing identical

activities t!us creating avoida*le confusion in t!e

regulated s&ace. :!erefore it is recommended

t!at every organisation tased %it! t!e %riting of

regulations s!ould !ave a &rovision for an advance

aut!ority for rulings.

12( Setting up regulatory review authority/It is necessary to address t!e existing *ody of

regulations 't!e stoc( in terms of contem&orary

relevance clarity and continuity. :!is tas is *est

accom&lis!ed *y creating a Regulation Revie%

ut!ority in eac! organisation t!at is em&o%ered

to %rite rules and regulations. Every organisation

%!ic! %rites regulations or ot!er forms of

su&&orting legislation s!ould !ave a Regulation

Revie% ut!ority to continuously examine t!e

stoc of existing regulations and to %eed out t!ose

t!at do not !ave any continuing use. :!e


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Regulation Revie% ut!ority s!ould *e %it!in t!e

organisation t!at %rites regulations in order to

!ave a *etter sense of understanding t!e context.

13( Reviewing the proposed regulations/ :!einternal Regulation Revie% ut!ority can also *e

given t!e tas of revie%ing draft regulations t!at

are in t!e &i&eline in order to ensure t!at

unnecessary regulations are not given effect to.

Every regulatory aut!ority ministry or de&artment

of t!e entral or State overnment involved in t!e

%riting of regulations s!ould !ave %it!in it a

Regulation Revie% ut!ority also tased %it! t!e

&revie% of intended regulations. Suc! a *ody is

*est e>ui&&ed to undertae t!e regulatory im&act

assessment %!ic! s!ould *e a condition

&recedent to t!e %riting of regulations.

1#( Regulatory !mpact Assessment "R!A#/ regulatory im&act assessment of every &ro&osed

regulation s!ould &recede t!e &u*lic consultation

&rocess.


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Ena!ling "S"Es

1)( Setting up a overarching body to enablepolicy and process coordination for $S$Es/

:o address t!e &ro*lem of lac of coordination in

terms of &olicy formulation and statutory

enforcements among various entral and State

overnments an overarc!ing *ody can *e set u&

at t!e !ig!est level to identify and address ey

issues im&eding *usiness facilitation and to

interface %it! relevant +inistries and 5e&artments

in order to address identified ey im&ediments in a

time@*ound manner.

16( Single window mechanism/ It is necessaryto !ave single %indo% c!annels of com&liance to

!el& small *usiness entities and also a !assle free

tax &ayment regime. s regards t!e ne% entrants

to t!e *usiness environment t!ere s!ould *e

facilitation centres to !el& deal %it! t!e

com&lexities of filling cum*ersome forms and

dealing %it! ot!er &rocedural issues.


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17( %ime bound decision ma&ing/ :!egranting of &ermissions or t!e decision not to

grant &ermissions s!ould *e taen %it!in a

&rescri*ed time &eriod failing %!ic! t!ere s!ould

*e a &rovision for deemed &ermission. It is

necessary t!at for every a&&roval to *e accorded

t!ere s!ould *e an outside time limit %it!

sti&ulation t!at if an a&&roval is not accorded or a

final decision of re8ection is not communicated

during t!at time &eriod t!ere %ill *e a

&resum&tion of a&&roval.

Addressing State Level Issues

14( !nformation facilitation through nodalpoint/ It is recommended t!at eac! State

overnment a&&oints a nodal &erson and a nodal

office %!ic! can *e t!e single &oint contact for

&ersons intending to o*tain information on t!e

&rocedural and su*stantive conditions to *e

fulfilled for setting u& a *usiness.


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1"( !ncentivising regulatory reformsamongst states/ -it! an urgent need *eing felt

to accelerate t!e &rocess of sim&lification of

regulations and conse>uently ex&editing t!e

necessary a&&rovals t!e ommittee recommends

t!at State overnments t!at mae significant

&rogress in t!is matter s!ould *e a&&ro&riately

incentivised.

2,( 'uilding in appellate process by design/:!ere s!ould *e *uilt into t!e system an a&&ellate

&rocess %!ere a &erson aggrieved *y an order of

re8ection may as a matter of rig!t a&&roac! a

su&erior aut!ority for reconsideration of t!e

matter on merits.


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Chapter #ne

Introduction

$. Introduction

1.1 It !as often *een said not %it!out reason t!atdoing *usiness in India is lie taing &art in an o*stacle

race %it! one material difference. In an o*stacle race

t!e num*er of o*stacles t!e nature of o*stacles and

t!e location of t!e o*stacles are no%n in advance.

1.2 :!is uncomforta*le realisation !as not led to aconcerted effort to identify t!e difficulties t!at are

encountered *y &ersons attem&ting to do *usiness in

India. :!e fact t!at setting u& a *usiness enter&rise in

India necessitates successfully overcoming several

su*stantive and &rocedural !urdles is not a secret. In

t!e recent &ast t!ere !ave *een attem&ts too fe% and

far *et%een to mae a %ort!%!ile im&act on im&roving

t!e ease of doing *usiness in India. t t!e same time

several ot!er countries faced %it! similar &ro*lems


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and een to attract *ot! domestic and foreign

investments !ave dismantled cum*ersome regulatory

structures and eliminated from t!e Statute $oos t!e

cts Rules and Regulations %!ic! !ave outlived t!eir

utility. :!e result is t!at India=s raning for t!e ease of

doing *usiness is at a dismally lo% level %!ic! does not

reflect t!e enormous &otential t!at India !as as an

investment destination. :!e annual raning of nations

%it! regard to t!e ease of doing *usiness is an exercise

t!at t!e -orld $an !as *een attem&ting for some

time. India=s very lo% raning in t!e recent re&orts !as

*een t!e &roximate cause for setting u& t!is ommittee

to revie% t!e regulatory environment to im&rove t!e

*usiness climate in India. co&y of t!e 0otification

constituting t!e ommittee is at nnexe@I to t!is

re&ort.

1.3 :!e &resent ommittee %as initially constituted%it! a &re&onderance of re&resentatives from t!e

&rivate sector. Recogni;ing t!at a com&re!ensive vie%

of t!e issues arising from t!e terms of reference could


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*e !ad only %it! t!e State overnments and t!e Pu*lic

Sector 9ndertaing *eing re&resented in t!e

ommittee t!e +inistry of or&orate ffairs %as

re>uested to enlarge t!e com&osition of t!e ommittee.

:!e mem*ers su*se>uently added to t!e ommittee

are listed in nnexure@II of t!is re&ort.

1.# Su*stantive and &rocedural matters %!ic!adversely im&act t!e gro%ing of *usiness in India can

*e attri*uted to a num*er of factors. !ief among t!em

are t!e multi&licity of aut!orities t!e &let!ora of

regulations t!e lac of clarity and t!e a*sence of

continuity. :!e &ro*lem is furt!er com&ounded *y

com&eting and often conflicting &ostures ado&ted *y

t!ose tased %it! t!e ensuring of orderly and non@

discriminative conduct in t!e matter of enforcement.

udicial system t!at !as not cro%ned itself %it! glory in

t!e matter of s&eed of dis&osals and an alternate

dis&ute resolution mec!anism %!ic! does not seem to

!ave delivered !ave only added to t!e com&lexity of

t!e &ro*lem. :!is ommittee !as *een tased to


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unravel t!e regulatory ma;e and to address issues t!at

are sector@neutral *ut !ave a significant *earing on t!e

ease of doing *usiness.

1.) -!en t!e ommittee set out on its tas it %as feltt!at if t!e vie%s of all stae!olders %ere to *e o*tained

in a &artici&ative environment it %ould *e necessary to

!old a num*er of meetings in different locations and

%it! re&resentative associations of different categories

of &ersons.

1.6 iven t!e time constraint of t!e mem*ers of t!eommittee t!is a&&roac! and t!e alternative of

constituting su*@grou&s of t!e committee to address

s&ecific as&ects of t!e :erms of Reference could not *e

&ursued. :!e ommittee !eld t%o meetings su*se>uent

to %!ic! t!e +em*ers of t!e ommittee %ere

re>uested to send t!eir considered vie%s in %riting to

t!e ommittee. :!is %as felt to *e a *etter alternative

to !aving a large num*er of meetings %!ic! given t!e

si;e and t!e com&osition of t!e ommittee %as leading


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to su*o&timal attendance. It %as felt t!at t!e %ritten

vie%s of t!e +em*ers could ca&ture t!e essential

concerns relata*le to t!e doing of *usiness in India and

a&&ro&riate solutions t!ereto. :!e near@total a*sence of

res&onses from t!e ommittee +em*ers !as given rise

to t!e inconvenient conclusion t!at t!e regulatory

environment eit!er does not cause t!e ind of &ro*lems

t!at it is *elieved to cause or t!e more uncomforta*le

conclusion t!at t!e &rescri&tive arrangements in t!e

regulatory environment %!ile *eing adversely

commented on are *eing got round *y t!e cor&orates

concerned.

1.7 It is recogni;ed t!at t!ere !ave *een someattem&ts in t!e &ast to loo at sector s&ecific issues

t!at im&act on t!e doing of *usiness. -!ile

recommendations arising from suc! efforts mig!t !ave

*een acce&ted in %!ole or in &art t!e rolling out of t!e

recommendations !as not *een to t!e desired extent

and at t!e desired &ace. In t!is re&ort %e !ave taen

note of some of t!e %or already done %!ile revisiting


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t!ose recommendations in t!e context of t!eir current

relevance. :!is re&ort is founded on t!e *elief t!at

recommendations informed *y &ragmatism and

grounded in contextual reality !ave t!e *est c!ance of

finding acce&tance and *eing im&lemented.


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Chapter %&o

Legal Reforms

2.1 ?ne of t!e areas of concern identified *y t!e-orld $an Re&ort on doing $usiness in India is t!e

undue delay in t!e enforcement of contracts. -!ile t!e

Re&ort focuses on t!e delayed enforcement of contracts

as a s&ecific area of concern it is considered

a&&ro&riate to vie% t!is as one sym&tom of a larger

&ro*lem. It is %idely acno%ledged t!at t!e reform

&rocess %!ic! got under%ay in t!e early 1"",s did not

em*race legal reforms. It does no credit to a country of

India=s si;e and standing t!at s!e is raned 143 out of

14# countries in t!e area of contract enforcement. It is

no secret t!at ourts in India suffer from a !uge

*aclog and a seemingly limitless inflo% of ne% cases.

:!at com*ined %it! some%!at dated &rocesses

involving multi&le levels of a&&eal results in an

extraordinary long time *eing taen for resolution of

sim&le commercial dis&utes. ma8or &art of t!e

&ro*lem is t!e fact t!at legal enactments %!ic! are

several decades old do not address t!e re>uirements of


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modern day trade and commerce. :!e setting u& of

s&ecial courts or exclusive courts is a necessary *ut not

a sufficient condition for im&rovement. It %ill *e

necessary for t!e overnment of India as also t!e State

overnments to examine t!e content of all la%s and

rules %!ic! im&act on t!e ease of doing *usiness and

cause a&&ro&riate c!anges t!erein

to reflect t!e re>uirements of

modern day trade and commerce.

2.2 E>ually im&ortant is t!e needfor udicial aut!orities to *e

a&&reciative of t!e need for >uic

resolution of dis&utes t!at are

*roug!t u& *efore t!em. case in

&oint is t!e large num*er of &ending cases under

Section 134 of t!e 0egotia*le Instruments ct. :!e

s!eer volume of suc! &endency ensures t!at cases tae

years to *e decided %!en t!e fact in issue is relatively

sim&le. large num*er of t!ese cases arise from t!e

dis!onouring of &ost@dated c!e>ues as and %!en t!ey

!t will be necessary for

the (overnment of !ndia

as also the State

(overnments to e)amine

the content of all laws

and rules which impact

on the ease of doing

business* and cause

appropriate changes

therein to reflect the

re+uirements of modern

day trade and commerce,


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are &resented for &ayment. &ost@dated c!e>ue is an

im&ortant instrument in *usiness and t!e seemingly

casual manner in %!ic! suc! c!e>ues are not !onoured

after t!ey *ecome due tends to reduce t!e legitimacy

of t!e instrument. s it is an offence under t!e

0egotia*le Instruments ct is com&lete only %!en t!e

dra%er of t!e c!e>ue after *eing &ut on notice

regarding t!e dis!onouring of t!e c!e>ue refuses to

mae good t!e amount during a &eriod of 1) days. In

most ot!er countries t!e offence is com&lete if a

c!e>ue is issued %it!out ade>uate funds to ena*le its

*eing !onoured. It is easy to a&&reciate t!at dis&utes

even after a notice &eriod of a fortnig!t %ill seriously

o*struct t!e smoot! flo% of trade and commerce. It is

very !eartening to note t!at t!e &resent !ief ustice

of India in !is first %ee in office !as identified t!e

&endency of suc! cases as a ma8or contri*utor to t!e

overall *aclog of cases in t!e Indian 8udicial system

and !as resolved to address it ex&editiously.


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2.3 It is im&erative t!at &ersons involved incommercial dis&utes s!ould *e encouraged to loo at

alternate dis&ute resolution as t!e &referred instrument

for settlement of suc! dis&utes. 0ot%it!standing t!e

relatively sim&ler &rocesses of ar*itration and

conciliation &arties to commercial dis&utes are even

no% &rone to a&&roac! civil courts for dis&ute

resolution. Since a contract *et%een &arties is an

agreed commercial relations!i& it

mig!t not *e a&&ro&riate to

mandate t!at all dis&utes s!ould

*e settled *y %ay of alternate

dis&ute resolution. Do%ever

t!ere s!ould *e a mec!anism to

dis@incentivise suc! &ersons from

a&&roac!ing courts so t!at t!ey are &ersuaded over

time to include ar*itration as an element of t!eir

contract.

2.# It is relevant to note t!at %!ile in t!eoryar*itration is ex&ected to result in >uicer resolution

%here should !e a

mechanism to dis'

incentivise use of

civil courts forresolving contractual

disputes( so as to

encourage ar!itration

as a preferred

manner of resolution.


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t!e reality is often different. r*itrators once

a&&ointed seem to *elieve t!at ar*itration is a timeless

never ending &rocess and as a result it !as *een

noticed in some cases t!at ar*itration &roceedings

tae longer t!an t!e determination of identical issues

*y a ivil ourt. :!ere oug!t to *e a large &ool of

&ersons trained in t!e &rocess

of ar*itration %!o could *e

a&&roac!ed *y contending

&arties to tae u& t!eir

matter. :!e &resent cro& of

ar*itrators com&rising largely

of retired udges and

su&erannuated E?s is !ardly an ade>uate instrument

for s&eedier ar*itration.

2.) not!er %elcome develo&ment in recent times ist!e effort *eing made *y t!e !ig!er udiciary and t!e

a&ex udicial training academy to &romote t!e

understanding of recent commercial enactments *y t!e

Presiding ?fficers of t!e lo%er courts. :!ere is

%here ought to !e a

large pool of persons

trained in the process

of ar!itration &ho

could !e approached

!y contending parties

to ta)e up their

matter.


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26

increasing evidence t!at t!e lo%er courts are *etter

e>ui&&ed today to deal %it! contentious commercial

dis&utes t!an t!ey %ere in t!e &ast. It is im&ortant to

*uild on t!is as&ect.


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Chapter %hree

Regulatory Architecture

3.1 0o discussion on t!e im&rovement of t!eregulatory climate in India can afford to ignore t!e

content and structure of regulatory organisations.

9nfortunately muc! of t!e de*ate and discussion on

regulatory organisations !as tended to focus on t!e

*acground and &ersonality of t!e !ead of t!e

regulatory organisation. Suc! a sterile de*ate does not

ena*le t!e understanding of t!e organisation=s

regulatory &!iloso&!y %!ic! significantly influences t!e

content and sco&e of regulations. India=s regulatory

arc!itecture is getting increasingly com&lex %it! t!e

setting u& of ne% regulatory *odies %!ic! are

inade>uately em&o%ered and insufficiently manned in

terms of *ot! num*ers and sills. -!ile it is *eyond t!e

&rovince of t!is re&ort to address t!e s&ecifics of

manning regulatory organi;ations t!e committee is

strongly of t!e vie% t!at *efore setting u& a ne%

regulatory organisation ade>uate t!oug!t s!ould go


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3,

into t!e need for suc! an organisation t!e a*ility to

man t!at organisation a&&ro&riately and to invest it

%it! functional autonomy. :!e ex&erience of some

regulatory aut!orities !as *een t!at in t!e guise of

administrative accounta*ility functional autonomy

tends to get im&eded and conse>uently regulatory

organisations sometimes *egan to resem*le

su*ordinate offices of t!e overnment +inistries and

5e&artments.

3.2 Setting u& a ne% regulatory organisation s!ouldnot *e a nee@8er res&onse to a s&ecific situation or

context *ut a %ell t!oug!t@out disengagement &lan of

t!e +inistry or 5e&artment concerned to move a%ay

from %riting out and im&lementing regulations.

3.3 In order to reinforce t!e confidence of t!eregulated universe and ot!er stae!olders regulatory

organisations s!ould undertae a self@evaluation of

t!emselves once in t!ree years and &ut out t!e


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3

conclusions in t!e &u*lic domain for informed

discussion and de*ate.

3.# enuine functional autonomy %ould also !ave to*e reinforced %it! financial autonomy *y &utting in

&lace a system %!ere regulatory organisations are not

de&endent on government de&artments for financial

su&&ort *y %ay of !andouts.

strong and sustaina*le regulatory

organisation s!ould generate its

o%n funds in t!e form of fees and

&enalties su*8ect to suc!

safeguards as may *e &rescri*ed to

ensure t!at t!ere is no un8ust

enric!ment of t!e regulatory

organisation.

3.) Cunctional autonomy %it!outcorres&onding accounta*ility is a

sure reci&e for c!aos. Suc!

accounta*ility s!ould not *e on a continuing *asis to

%here should !e a

transparent system

in &hich the *ead of

the regulatory

organisation and his

oard level

colleagues appear

!efore an appropriate

Parliamentary

Committee once in

six months to report

on the developments

of the previous sixmonths and the

!road plan of action

for the next six

months.


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32

t!e administrative +inistry *ecause of t!e &erce&tion

often matc!ed *y reality t!at t!e regulatory

organisation is articulating t!e vie%&oint of t!e

concerned +inistry or 5e&artment. Instead t!ere

s!ould *e a trans&arent system in %!ic! t!e Dead of

t!e regulatory organisation and !is $oard level

colleagues a&&ear *efore an a&&ro&riate Parliamentary

ommittee once in six mont!s to re&ort on t!e

develo&ments of t!e &revious six

mont!s and t!e *road &lan of

action for t!e next six mont!s.

Suc! evidence as %ould *e given

*y t!e senior functionaries of t!e

regulatory organisation s!ould *e

in t!e &u*lic domain unless s&ecial circumstances

re>uire any &art of suc! evidence to *e e&t outside

t!e &u*lic domain.

3.6 Cunctional autonomy ensures t!e availa*ility of alevel &laying field for all entities irres&ective of

o%ners!i&. :!is %ill ensure t!at Pu*lic Sector

%he appointment of

persons to head

regulatory

organisations should!e attempted in a far

more transparent

manner.


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33

?rganisations %!ic! com&ete for *usiness %it! &rivate

sector organisations do not !ave t!e advantage of a

more li*eral &rescri&tive regime.

3.7 :!e a&&ointment of &ersons to !ead regulatoryorganisations s!ould *e attem&ted in a far more

trans&arent manner t!an is t!e case at &resent. :!e

&ractice of inviting a&&lications from interested

candidates and su*8ecting t!em to a &rocess of

intervie%s *y a &anel com&rising &ersons %it! no

familiarity %it! t!e regulatory organisation is t!e

surest %ay to cause loss of &u*lic confidence not only in

t!e &rocess *ut also in t!e organisation. :!e

res&onsi*ility attac!ed to suc! &ositions %ould seem to

necessitate t!at &ersons considered suita*le *y an

a&&ro&riately em&o%ered !ig! level committee s!ould

*e invited to !ead t!e organisations. :!e entire &rocess

s!ould *e trans&arent and s!ould over time re&licate

t!e &rocess follo%ed in some develo&ed countries

%!ere t!e suita*ility of t!e candidate concerned is t!e

su*8ect matter of informed &u*lic discussions *efore t!e


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34

a&&ointment is finalised. :o a&&oint an a&&licant or a

su&&licant to !ead a regulatory organisation is to

ensure t!e su*o&timal &erformance of t!e organisation

and its resultant loss of credi*ility.


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3

Chapter +our

oosting Efficacy of Regulatory Process

#.1 Cor a long time t!e *elief !ad &revailed t!atregulators alone s!ould decide t!e sco&e and content of

regulation. ?ver t!e years ex&erience !ad s!o%n t!at

a non@consultative &rocess ado&ted *y regulatory

*odies led to regulations %!ic! %ere eit!er

im&ractica*le of im&lementation or !ad no relevance to

t!e ra&idly c!anging environment of t!e regulated

universe. s inade>uacies on t!is account *egan to

surface it %as felt t!at t!e %riting of regulations s!ould

*e &receded *y a &rocess of effective consultation %it!

all stae!olders. s a conse>uence *arring a fe%

exce&tions t!e &ractice of &rior consultation t!roug!

a&&roac! &a&ers or t!e &utting out of draft regulations

!as *ecome t!e universal &ractice. 0ot%it!standing t!e

&rocess of consultation as &resently &ractised it !as

*een found t!at regulations often fall s!ort of t!e

desired o*8ective or are misdirected and give rise to

unintended conse>uences %it! negative im&lications.


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3

:!e &resent &ractice invaria*ly is to &ut out a

consultation &a&er setting out in considera*le detail

t!e ne% regulatory ground &ro&osed to *e covered or

t!e c!anges &ro&osed to *e made in t!e existing *ody

of regulations. 5uring t!e time availa*le for t!e

consultative &rocess t!e stae!olders are ex&ected to

res&ond %it! t!eir o*servations on any inade>uacies

t!at t!ey mig!t &erceive or any overreac! t!at t!ey

mig!t a&&re!end. fter t!e comments and o*8ections

are received and considered t!e regulatory *ody

&roceeds to finali;e t!e ne% set of regulations and to

*ring t!em into effect.

#.2 :!e consultation &rocess as descri*ed in t!e&receding &aragra&! often falls s!ort of t!e intended

o*8ective of ascertaining t!e vie%s of t!e stae!olders

and a&&ro&riately incor&orating in t!e regulations suc!

vie%s as are consistent %it! t!e stated o*8ective of t!e

&ro&osed regulation. +ore often t!an not it is noticed

t!at different sets of stae!olders %it! different

interests in mind res&ond in diametrically o&&osite


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35

fas!ion to t!e &ro&osed regulations. In suc! an event

it is not &ossi*le for t!e regulatory *ody to incor&orate

all t!e suggestions received and in t!e &rocess it may

*e a&&ro&riate to attem&t some !armonious

construction of seemingly conflicting vie% &oints

%it!out losing sig!t of t!e o*8ective of t!e regulation

concerned.

#.3 In order to mae consultation more meaningful itis necessary t!at after t!e first

round of consultations taes

&lace t!e regulatory *ody s!ould

attem&t a revised a&&roac! &a&er

accom&anied %!erever &ossi*le

*y a revised draft of t!e &ro&osed

regulations and t!en &ut out t!e revised &ro&osal for

&u*lic comment. -!ile suc! a t%o@stage &ro&osal mig!t

tae time and mig!t *e counter@&roductive in an

emergent situation it allo%s t!ose t!at !ave

commented on t!e first &ro&osal to tae note of !o%

many if any of t!eir suggestions are liely to find

A t&o'stage process

of consultation &ould

ensure that theavoida!le situations

of misinterpretation

of the regulations do

not exist.


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36

&lace in t!e revised regulations. In t!e a*sence of a

t%o@stage &rocess t!e stae!olders t!at send in t!eir

suggestions are often not a%are %!et!er t!eir

suggestions !ave *een taen into consideration t!oug!

not necessarily acce&ted. t%o@stage &rocess of

consultation %ould ensure t!at t!e avoida*le situations

of misinter&retation of t!e regulations do not exist. In

emergent cases not!ing %ould &revent t!e regulatory

*ody from giving effect to regulations to address t!e

&ro*lem on !and and simultaneously seeing

comments *y %ay of a &ost@decisional consultation

&rocess. Ceed*ac o*tained from regulators %ould

seem to indicate t!at t!ere is at *est lue%arm

res&onse to t!e draft &ro&osals &ut out in t!e &u*lic

domain for consultation. It %ould *e incum*ent on t!e

stae!olders to res&ond to t!e draft regulations %!ile

t!e &rocess of consultation is on rat!er t!an to

com&lain a*out t!e inade>uacies or t!e overreac! of

t!e regulations once t!ey are given effect to.


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37

#.# :!e effectiveness of a regulatory &rocess de&endsto a large extent on t!e enforcement of regulations.

-it! t!e economy gro%ing at a reasona*le rate and

%it! ne%er and ne%er activities and instruments !aving

to *e dealt %it! *y regulatory organisations it is

entirely liely t!at t!e num*er of enforcement actions

%ould *e far too many for any organisation to !andle

ex&editiously. It is also %ell@no%n t!at t!e

disincentivisation of ina&&ro&riate conduct *y

regulatory entities s!ould involve *ot! timely and

effective action. It is *eyond t!e ca&a*ility of most

organisations to dis&ense >uic and effective 8ustice

!aving regard to t!e large num*er of cases t!at t!ey

are o*liged to deal %it!. :!is is com&ounded *y t!e fact

t!at in an atmos&!ere of distrust and lac of

confidence regulatory organisations often tae u&

matters in a c!ronological order %it! t!e result t!at

smaller transgressions often get &recedence over

instances of larger misconduct. :!is is furt!er

com&ounded *y t!e fact t!at %!enever an investigation

is commenced regulatory aut!orities are some%!at


40/94

4,

!esitant to dro& t!e investigation for fear t!at some

external agency often %it! t!e *enefit of !indsig!t

%ould decide t!at t!e *ona fide error of 8udgment is a

mala fide decision. :!is can *e &artially addressed *y

t!e existence of a settlement or consent mec!anism

%it! ade>uate safeguards %!ere cases %!ic! !ave no

systemic im&act are dealt %it! in a summary manner.

:!e ex&erience already availa*le

in regard to t!e consent sc!eme

%it! one of t!e sectoral

regulations in t!e area of finance

s!ould *e studied so t!at similar

sc!emes %it! ade>uate

safeguards can *e introduced to

deal %it! t!e large volume of systemically unim&ortant

matters. :!is in turn %ould lead to t!e &ossi*ility of

>uic and !o&efully deterrent &unis!ment in &roven

cases t!at are of systemic im&ortance %it! t!e

signalling effect t!at is needed for t!e regulated

universe.

It is necessary to

ensure that

enforcement

!and&idth of a

regulatory !ody is

optimally used to

deal &ith cases of

systemic importance

on a priority !asis


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4

#.) Ex&erience !as s!o%n t!at on a num*er ofoccasions and across sectors t!ere !as *een

disconnect *et%een t!e intent of a &ro&osed legislation

and t!e manner in %!ic! it is understood *y t!e

regulated entity. :!is often !a&&ens *ecause of t!e

inelegant manner in %!ic! regulations are drafted.

9nless t!is is addressed t!ere %ould *e a &let!ora of

un&roductive litigation leading

to loss to *ot! t!e &rotagonists

in t!e dis&ute. &lain reading

of some of t!e regulations

drafted in recent times %ould

reinforce t!e vie% t!at

Flanguage %as given to man to

conceal !is t!oug!t and not to

ex&ress it.F 0ot%it!standing every attem&t to *ring

a*out sim&licity and clarity in t!e content of regulation

it is still necessary to &rovide for a mec!anism t!roug!

%!ic! &otential dis&utes in inter&retations can *e

addressed. :!ere are ministries and de&artments %!ic!

!ave set u& aut!orities for advance rulings %!ic! can

It is necessary to

ensure that simplicity

and clarity should

inform the content of

regulation( leaving nopart of it open to

different

interpretations !y

different persons.


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42

*e a&&roac!ed *y &ersons %!o are not clear a*out t!e

a&&lica*ility of a &articular regulation or a set of

regulations to an activity %!ic! t!ey intend to

undertae. In order to infuse confidence in t!e

regulated universe it is necessary

t!at every organisation tased

%it! t!e %riting of regulations

s!ould !ave a &rovision for an

advance aut!ority for rulings so

t!at &otential transgressions can

*e avoided and *usiness ventures can *e undertaen

%it!out a lingering dou*t a*out t!e legality of any

as&ect of t!e &ro&osed venture. :!e system of

informed guidance *eing not of a *inding nature is a

&oor su*stitute and s!ould *e done a%ay %it!. :!e

setting u& of an dvance ut!ority for Rulings is *y

itself not a com&lete solution. It s!ould *e incum*ent

on t!e ut!ority to give an o&inion on t!e issue raised

*efore it %it!in a &rescri*ed time. It s!ould also *e

incum*ent on t!e aut!ority to give a clear indication of

its vie% on t!e issue in >uestion %it!out &revarication

It is necessary that

every organisation

tas)ed &ith the

&riting of regulations

should have a

provision for an

advance authority for

rulings


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43

or fence@sitting. Suc! rulings given *y t!e ut!ority

could *e on a Gno nameG *asis so t!at %!en it is &ut out

in t!e &u*lic domain for t!e information of all

concerned no confidential *usiness information relating

to t!e entity t!at soug!t a ruling %ill *e made &u*lic.

Regulatory Review Authority

#.6 In an ideal %orld %it! unlimited resources and%it! all individuals and institutions *e!aving in a

manner consistent %it! &u*lic interest cts Rules and

Regulations %ould *e avoida*le irritants. Do%ever

since t!e real %orld is as different from t!e ideal %orld

as c!al is from c!eese it is necessary to !ave a *ody

of statutory enactments and su&&orting legislation to

regulate !uman and institutional conduct. In t!e

a*sence of suc! determination of conduct t!ere %ill *e

a tendency to tae avoida*le s!ortcuts t!at serve

&rivate good at t!e ex&ense of &u*lic interest and

national goals and o*8ectives. :!e num*er and

com&lexity of regulations and t!e fre>uency %it! %!ic!

ne%er and ne%er regulations are *eing s&rung on an


44/94

44

unsus&ecting &u*lic often leads to suc! a frame%or

%!ic! is a &art of t!e &ro*lem and not a &art of t!e

solution. :!e Indian ex&erience clearly !as *een t!at

t!ere are more la%s rules and regulations t!an t!e

country needs and t!e &ro*lem often lies in inade>uate

im&lementation com&ounded *y inter&retational

confusion. :!e ex&erience of t!e last fe% decades !as

*een t!at %!en confronted %it! a &ro*lem t!e

res&onse of t!e overnment or t!e regulator !as *een

to eit!er create a ne% institution or to %rite ne%

regulations. ?ften t!ese are nee 8er res&onses to

some isolated occurrence t!at could !ave *een solved

%it!in t!e existing frame%or of la%s and regulations.

#.7 :!e facts of t!e Satyam om&uters case illustratet!e &oint. -!en t!e founder !airman of t!e om&any

disclosed to t!e regulators and to t!e exc!anges t!at

t!e num*ers t!at %ere &ut out in t!e &u*lic domain

>uarter after >uarter did not reflect t!e correct state of

affairs of t!e om&any t!e res&onse of ot!er%ise

normally %ell@informed &ersons %as t!at ne%


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4

regulations s!ould *e %ritten to address t!e issue t!at

!ad surfaced. :!e demand for ne% regulations arose

even from sections of cor&orate India normally averse

to any additional regulations. :!e fact t!at t!e case in

>uestion manifested dis!onesty and t!at t!ere %as no

regulatory ga& %as lost sig!t of as %as t!e trut! of t!e

statement t!at no system can legislate for !onesty.

#.4 t t!e ot!er end of t!e s&ectrum is t!e interestingcase of a large 9S om&any %!ic! >uestioned t!e need

for a ne% accounting treatment t!at t!e Securities and

Exc!ange ommission 'SE( !ad soug!t to introduce

t!roug! a consultative &rocess. :!e om&any

contended t!at given its several strengt!s suc! as good

la%yers accountants systems &rocesses and t!e lie

it did not need a ne% regulation to determine its

conduct. fe% mont!s later t!e om&any ex&loded

%it! &oor governance identified as t!e single *iggest

contri*utor to its demise. :!is more t!an most ot!er

cases demonstrates t!e need for some regulations to

guide !uman and institutional conduct.


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4

#." Daving regard to IndiaGs federal setu& t!ere are anum*er of &o%ers and functions vested %it! t!e State

overnment a&art from t!ose t!at reside %it! t!e

9nion overnment. :!e exercise of t!ese &o%ers and

functions necessitates t!e %riting of Rules and

Regulations as %ell as t!e

enactment of la%s. In addition

t!ere are regulatory and

administrative *odies em&o%ered

to %rite regulations t!e rig!t for

%!ic! is derived from t!e

legislature. It !as *een noticed

t!at in a num*er of cases different

aut!orities !ave %ritten different

often conflicting Rules and

Regulations governing identical activities t!us creating

avoida*le confusion in t!e regulated s&ace. iven t!is

confusion and uncertainty it *ecomes extremely

difficult for individuals or institutions to tae investment

decisions. :!e fact t!at t!ese regulations are revisited

It has !een noticed

that in a num!er of

cases different

authorities have

&ritten different(

often conflicting(

rules and Regulationsgoverning identical

activities( thus

creating avoida!le

confusion in the

regulated space.


47/94

45

and revised fre>uently creates a climate of uncertainty

in %!ic! t!e investors and even advisors do not no%

%!at la%s are in vogue. dded to t!is is t!e &ro*lem of

clumsy drafting t!at creates dou*ts and difficulties

leading to t!e esta*lis!ment of an inter&retation

industry.

#.1,:!e &ro*lem of regulation isa &ro*lem of *ot! stoc and flo%.

It is necessary to address t!e

existing *ody of regulations 't!e

stoc( in terms of contem&orary

relevance clarity and continuity.

:!is tas is *est accom&lis!ed *y

creating a Regulation Revie%

ut!ority in eac! organisation t!at is em&o%ered to

%rite rules and regulations. It %ould *e t!e &rimary

res&onsi*ility of suc! an ut!ority to examine in

consultation %it! all stae!olders %!et!er an existing

rule or regulation !as outlived its utility. In t!e &rocess

regulations re@%ritten at different &oints of time on

It is necessary to

address the existing!ody of regulations

,the stoc)- in terms

of contemporary

relevance( clarity and

continuity. %his tas)

is !est accomplished

!y creating a

Regulation Revie&

Authority in each

organisation that is

empo&ered to &rite

rules and regulations.


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46

different as&ects of t!e same su*8ect can *e collated

%it! all &revious regulations on t!e su*8ect. :!is

exercise %ould address t!e issue of multi&licity of

regulations as %ell as contem&orary irrelevance of

some regulations.

#.11It !as *een *roug!t out earlier in t!is re&ort t!att!e ex&losive gro%t! in t!e num*er of regulations is

one of t!e ma8or constraints to doing *usiness in India.

Rarely if ever do institutions

and regulatory *odies tased

%it! t!e res&onsi*ility and

endo%ed %it! t!e &o%er to %rite

regulations revisit any

regulations of t!e &ast to assess

t!eir continuing relevance. :!e

ex&eriment %it! t!e setting u& of

a Regulation Revie% ut!ority *y

t!e Reserve $an of India in

India and aut!orities else%!ere

!ave yielded considera*le *enefits *ot! in terms of

%he Committee is of

the firm opinion thatevery organisation

&hich &rites

regulations or other

forms of supporting

legislation should

have a Regulation

Revie& Authority to

continuously examine

the stoc) of existing

regulations and to

&eed out those that

do not have any

continuing use.


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47

%eeding out regulations t!at are &ast t!eir s!elf@life

and in refining regulations t!at continue to *e relevant.

:!e ommittee is of t!e firm o&inion t!at every

organisation %!ic! %rites regulations or ot!er forms of

su&&orting legislation s!ould !ave a Regulation Revie%

ut!ority to continuously examine t!e stoc of existing

regulations and to %eed out t!ose t!at do not !ave any

continuing use. :!ere !ave often

*een o&inions ex&ressed t!at

suc! an ut!ority s!ould *e

esta*lis!ed outside of t!e

institution t!at %rites

regulations in order to ensure

o*8ectivity. :!e ommittee is

!o%ever &ersuaded t!at t!e Regulation Revie%

ut!ority s!ould *e %it!in eac! organisation t!at %rites

regulations in order to !ave a *etter sense of

understanding t!e context in %!ic! t!e regulations

%ere %ritten and to contextually assess t!eir continuing

relevance. Locating suc! a *ody outside regulatory

organisations could result in a cavalier a&&roac! arising

%he Regulation

Revie& Authority

should !e &ithin the

organisation that

&rites regulations in

order to have a !ettersense of

understanding the

context.


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,

from a lac of o%ners!i& in regard to t!e regulations.

n internal Regulation Revie% ut!ority can also *e

given t!e tas of revie%ing draft regulations t!at are in

t!e &i&eline in order to ensure t!at unnecessary

regulations are not given effect

to. +aing t!e Regulations

Revie% ut!ority also &erform

t!e function of revie%ing

&ros&ective Regulations could

ensure t!at unnecessary

regulations do not come into

*eing in order to cro%d t!e

already cro%ded regulatory landsca&e.

#.12:!e fre>uency %it! %!ic! regulations areamended and ne% regulations *roug!t into effect !as

an unsettling effect on t!e conduct of *usiness. It is

legitimate to &resume t!at &ersons %!o invest in

*usiness ventures %ould lie to !ave a clear idea of t!e

regulatory environment in %!ic! t!eir *usinesses exist

and function. s in t!e case of legislation it is

An internal

Regulation Revie&

Authority can also !e

given the tas) ofrevie&ing draft

regulations that are

in the pipeline in

order to ensure that

unnecessary

regulations are not

given effect to.


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im&ortant to ensure t!at t!ere is continuity and clarity

in t!e content of regulation. It !as *een noticed t!at

very often regulations are *roug!t into effect in order

to address a single instance of transgression or

misdemeanour or even non@com&liance intentionally

or ot!er%ise %it! t!e content or form of existing

regulations. In some cases it is entirely &ossi*le t!at a

constructive inter&retation of existing regulations could

address t!e &ro*lem on !and. Het regulatory

aut!orities %orld%ide !ave *een no%n to %rite ne%

regulations as a nee8er reaction to some solitary

instance of non@conformist *e!aviour.

Sunset Provisions in Regulation

#.13


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2

#.1#Sunset &rovisions !ave *een used in varyingcontexts and t!erefore differ greatly in t!eir details

!o%ever t!ey s!are t!e common *elief t!at it is useful

to com&el t!e legislature or t!e regulator to &eriodically

re@examine its delegations of aut!ority and to assess

t!e utility of t!ose delegations in t!e lig!t of

ex&erience. :!ere are t%o ty&es of

sunset &rovisions %!ic! !ave *een

o*served in &ractice in different

8urisdictions. In some instances t!e

statute creating a &articular

dministrative Regulatory gency

contains a sunset &rovision

a&&lica*le only to t!at agency. In ot!er instances a

state may enact a general sunset la% t!at may

eliminate any agency t!at is una*le to demonstrate its

effectiveness. In t!is lig!t t!e ommittee is of t!e vie%

t!at t!e entral and State governments and Regulatory

$odies s!ould consider a sunset &rovision %!ile

enacting a ne% la% or creating a ne% agency or

&rescri*ing a ne% regulation.

%he Central and State

governments and

Regulatory odies

should consider a

sunset provision

&hile enacting a ne&

la& or creating a ne&agency or prescri!ing

a ne& regulation.


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3

#.1):!e *asic &!iloso&!y in t!e regulatoryenvironment oug!t to *e not more regulations *ut

*etter regulation. In ot!er %ords instead of %riting out

ne% regulations at every conceiva*le o&&ortunity and

creating confusion t!ere oug!t to *e *etter

enforcement of existing regulations.

#.16In order to ensure t!at ade>uate t!oug!t goesinto ne% regulations it is reiterated t!at every ministry

of t!e entral overnment every de&artment of t!e

State overnment and every regulatory aut!ority !as

%it!in it a Regulation Revie% ut!ority. :!e tas of t!e

Regulation Revie% ut!ority %ould also extend to t!e

scrutini;ing of &ros&ective regulations *efore t!ey are

given effect to. In doing so t!e Regulation Revie%

ut!ority %ould also function as a regulation &revie%

aut!ority. It %ould *e for t!e aut!ority to examine

%!et!er any existing regulation eit!er in its &resent

form or %it! some modification can address t!e

o*8ective soug!t to *e attained t!roug! t!e &ro&osed


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4

ne% regulation. It is only %!en t!e aut!ority is satisfied

t!at t!e &ro&osed o*8ective cannot *e met *y any

existing regulation t!at it s!ould accord clearance to

t!e *ringing into effect of any ne% regulation. Suc! an

arrangement %ill ensure t!at ne% regulations do not

*ecome a fre>uent feature of t!e regulatory

environment.

RE(.A%/R0 !$PAC% ASSESS$E1%

#.17:!e seemingly mindless ex&losion of regulationsim&acting seriously on management time and cost !as

created a negative &erce&tion of t!e regulatory

environment in %!ic! *usiness is conducted. +ost

develo&ed countries !ave &ut in &lace a formal system

of regulatory im&act assessment 'RI( in order to

determine %!et!er t!e effort involved and t!e costs

re>uired to *e incurred are commensurate %it! t!e

results soug!t to *e ac!ieved. :!e regulated universe is

continuously c!anging in regard to &artici&ants

&roducts instruments and &rocesses %it! t!e

attendant attri*utes of si;e and t!e com&lexity t!at


55/94

t!ey engender. :!is c!allenge is *eing addressed more

often t!an not *y increased fre>uency of regulations

often resulting in regulatory overreac!. m*itious in

sco&e and ex&ansionist in effect many regulations are

a clear case of *iting of more t!an one can c!e%. In

suc! a situation it *ecomes im&erative to &ut in &lace a

formal system of regulatory im&act assessment.

#.14Else%!ere in t!is re&ort t!e ommittee !asrecommended t!at every regulatory aut!ority ministry

or de&artment of t!e entral or State overnment

involved in t!e %riting of regulations s!ould !ave %it!in

it a Regulation Revie% ut!ority also tased %it! t!e

&revie% of intended regulations. Suc! a *ody is *est

e>ui&&ed to undertae t!e regulatory im&act

assessment %!ic! s!ould *e a condition &recedent to

t!e %riting of regulations. Suc! an assessment %ill

include inter alia a clearly articulated statement of t!e

need for t!e action *eing &ro&osed and t!e

s!ortcomings in t!e system in t!e a*sence of suc!

action. It %ill *e re>uired to address alternatives rat!er

t!an to ado&t a *inary a&&roac! to a s&ecific regulatory


56/94

&ro&osal. ?ne of t!e alternatives could also *e t!at no

action is re>uired *y %ay of fres! regulations.

#.1"It is useful to remem*er t!at regulations aresoug!t to *e 8ustified in t!e

name of t!e &rotection of t!e

consumer %!et!er s!e is an

investor &olicy !older

de&ositor or reci&ient of any

service or &roduct.

om&liance %it! regulations is

never cost@free. It %ould *e

futile to ex&ect t!e &roviders

of &roducts or services to

a*sor* t!e costs of regulation.

Resultantly suc! costs are

met *y t!e reci&ients of t!e

&roduct or service in %!ose

name regulations are soug!t

to *e %ritten. :!e fact t!at t!e &erson %!ose interest is

soug!t to *e &rotected is t!e one %!o in t!e ultimate

Every regulatory

authority( ministry or

department of theCentral or State

overnment involved

in the &riting of

regulations should

have &ithin it a

Regulation Revie&

Authority also tas)ed

&ith the previe& ofintended regulations.

Such a !ody is !est

e/uipped to

underta)e the

regulatory impact

assessment ,RIA-(

&hich should !e a

condition precedent

to the &riting of

regulations.


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5

analysis meets t!e cost is a sufficiently &ersuasive

reason for undertaing a rigorous regulatory im&act

assessment.

#.2,It is sometimes argued t!at all *enefits are notnecessarily >uantifia*le and t!erefore regulatory

im&act assessment is an incom&lete exercise. -!ile

recogni;ing t!at every *enefit cannot *e >uantified it is

necessary to tae t!e vie% t!at a &ro&er a&&reciation of

t!e non@>uantitative *enefit soug!t to *e conferred on

t!e &rotected class s!ould lead

to a sufficiently satisfactory

regulatory im&act assessment.

#.21It must also *e recogni;edt!at t!e %riting of regulations

im&oses an additional

res&onsi*ility and a

conse>uent *urden on regulatory organisations.

-riting out regulations is t!e easier &art. Pro&erly

enforcing an increasing num*er of com&lex regulations

It must !e recogni0ed

that self'regulation in

the hands of an

industry !ody or a

professional

mem!ership !ody

often results in no

regulation !eing

enforced.


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6

%ould necessitate ca&acity@*uilding of a !ig! order

%it!in regulatory organisations suc! ca&acity@*uilding

*eing *ot! in terms of more &ersons and *etter and

more relevant sill@sets. :!e &let!ora of regulations

t!at regulated entities !ave to contend %it! often

&rom&ts t!e res&onse t!at it is *etter to *e free of all

external regulations. :!e &ro&onents of self@regulation

often argue t!at it %ould *e *ased on a *etter

understanding of ground realities and %ould *e *etter

targeted to meet t!e needs of t!e concerned sector. It

must *e recogni;ed t!at self@

regulation in t!e !ands of an

industry *ody or a &rofessional

mem*ers!i& *ody often results

in no regulation *eing enforced.

:!e &remise t!at regulations

exist to &rotect t!e %eaer &arty in a contractual

relations!i& s!ould not *e lost sig!t of %!ile maing a

case for self@regulation %it! attendant conflicts t!at are

difficult to manage.

A regulatory impact

assessment of every

proposed regulation

should precede the

pu!lic consultation

process


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7

#.22 regulatory im&act assessment of every &ro&osedregulation s!ould &recede t!e &u*lic consultation

&rocess %!ic! !as *een dealt %it! else%!ere in t!is

re&ort. :!is %ould lead to fe%er regulations %it! more

of t!em *eing more &roductive and &ur&oseful t!an at

&resent.


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,

Chapter +ive

Ena!ling "S"Es

).1 +S+Es &lay a very significant role in t!e Indianeconomy. 9nless t!eir concerns are addressed many of

t!em %ould *ecome uneconomic units and t!ere %ould

*e very fe% &ersons %illing to venture into t!is area of

*usiness.

).2 :!e first &ro*lem t!at +S+Es face is a lac ofcoordination in terms of &olicy formulation and

statutory enforcements among various entral

+inistries and State overnments. :!is could *e

addressed *y setting u& an overarc!ing *ody at t!e

!ig!est level to identify and address ey issues

im&eding *usiness facilitation and to interface %it!

relevant +inistries and 5e&artments in order to address

identified ey im&ediments in a time@*ound manner.

:!e State overnments and concerned entral

+inistries as %ell as re&resentatives of +S+Es could *e

t!e mem*ers of t!is over@arc!ing *ody.


61/94

).3 Cor a relatively small *usiness unit t!e multi&lec!annels of com&liance im&ose not only a !uge

financial cost *ut also strain t!e management

*and%idt! availa*le to suc! entities. It is necessary to

!ave single %indo% c!annels of com&liance to !el&

suc! small entities and also a !assle free tax &ayment

regime.

).# Insolvency is yet anot!er matter %!ic! needs to*e addressed ex&editiously. "7 of +S+Es are

&ro&rietors!i& firms or &artners!i&s and do not !ave an

ade>uate recourse for %inding u& t!e *usiness under

t!e om&anies ct. Similarly t!ere are no *anru&tcy

la%s ain to t!ose &revailing in develo&ed countries to

facilitate t!e %inding u& of uneconomic units in an

orderly fas!ion.

).) s far as a ne% entrant to t!e *usinessenvironment is concerned !e or s!e %ould *e *est

served if t!e %e*sites of t!e a&&ro&riate nodal

de&artments of t!e various overnments contain


62/94

2

detailed information regarding t!e num*er of

clearancesa&&rovals re>uired t!e aut!ority %!ic!

accords suc! clearances t!e documentation and ot!er

&rocedural re>uirements necessary for o*taining t!e

a&&rovals t!e time liely to *e taen for o*taining suc!

a&&rovals and t!e aut!orities %!o may *e a&&roac!ed

in t!e event of any grievance. :!ere s!ould also *e

facilitation entres to !el& suc!

a&&licants to deal %it! t!e

com&lexities of filling

cum*ersome forms and dealing

%it! ot!er &rocedural issues. It

%ould also *e extremely !el&ful

if every aut!ority vested %it!

t!e &o%ers of granting a&&roval &uts on its %e*site a

com&re!ensive list of t!e reasons for %!ic! a&&rovals

are liely to *e %it!!eld. :!is %ould ensure t!at an

a&&licant for setting u& a *usiness can address all

identified &rocedural and su*stantive s!ortcomings in

!is or !er &ro&osal *efore su*mitting t!e a&&lication for

a&&roval. :!e granting of &ermissions or t!e decision

%here should also !e

facilitation Centres to

help such applicants

to deal &ith the

complexities of filling

cum!ersome forms

and dealing &ith

other procedural

issues.


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3

not to grant &ermissions s!ould *e taen %it!in a

&rescri*ed time &eriod failing %!ic! t!ere s!ould *e a

&rovision for deemed &ermission. In some states


64/94

4

Chapter Six

Addressing State Level Issues

6.1 In attem&ting to im&rove t!e regulatoryenvironment in India it is necessary to focus on t!e

im&ortant role of t!e State overnments. large

num*er of regulations t!at im&act t!e doing of *usiness

in India &ertain to su*8ects or functional areas %!ic!

are %it!in t!e &rovince of t!e State overnments as

&er t!e se&aration of &o%ers &rovided for in t!e

onstitution of India. vaila*le information &oints to

t!e fact t!at %!ile some State overnments !ave

devoted ade>uate attention to reducing t!e com&lexity

of regulation and are moving in t!e direction of single

%indo% clearance mec!anism some ot!ers continue to

!ave multi&le aut!orities %it! overla&&ing functions

leading to a large num*er of a&&rovals *eing re>uired

for setting u& a *usiness. s is clearly t!e case in suc!

a situation t!e a&&ro&riate administrative aut!ority

t!at taes t!e longest time to accord a&&roval or


65/94

clearance determines t!e ease or t!e lac t!ereof of

doing *usiness %it! t!at

State.

6.2 Curt!er t!ere is nosingle source of information

from %!ic! a &erson

intending to set u& *usiness

can ascertain t!e num*er and

nature of a&&rovals re>uired. :!e limited sources of

information t!at are availa*le often do not reflect t!e

current &osition. ?utdated information causes as muc!

difficulty as t!e a*sence of t!e information. -e*sites

are often not u&dated and as a conse>uence

sometimes tend to mislead rat!er t!an inform. -!ile

t!e ommittee is strongly of t!e vie% t!at a tendency

to set u& ne% organisations and institutions s!ould *e

avoided it is necessary for eac! State overnment to

!ave a nodal &erson and a nodal office %!ic! can *e

t!e single &oint contact for &ersons intending to o*tain

%he appropriate

administrative

authority that ta)es

the longest time to

accord approval or

clearance determines

the ease( or the lac)

thereof( of doing

!usiness &ith thatState.


66/94

information on t!e &rocedural and su*stantive

conditions to *e fulfilled for

setting u& a *usiness.

6.3 5uring t!e ommitteeGsdeli*erations t!e >uestion arose

%!et!er State overnments

s!ould *e incentivised for

sim&lifying t!e regulatory

structure reducing t!e num*er of

regulations and re%riting t!em in

sim&ler language t!an at &resent. ?ne vie% %!ic! is

not %it!out merit is t!at t!e additional *usiness t!at a

State overnment %ould attract *y revam&ing t!e

regulatory environment s!ould itself incentivise t!e

State overnment to move in t!at direction. Do%ever

%it! an urgent need *eing felt to accelerate t!e &rocess

of sim&lification of regulations and conse>uently

ex&editing t!e necessary a&&rovals t!e ommittee is

of t!e vie% t!at State overnments t!at mae

significant &rogress in t!is matter s!ould *e

It is necessary foreach State

overnment to have

a nodal person and a

nodal office &hich

can !e the single

point contact for

persons intending to

o!tain information on

the procedural and

su!stantive

conditions to !e

fulfilled for setting up

a !usiness.


67/94

5

a&&ro&riately incentivised. :!e ommittee %ould leave

it to t!e 9nion overnment to determine t!e manner

and t!e instrumentality of

suc! incentivisation.

6.# It is also necessary fort!e 9nion overnment to

designate an a&&ro&riate

entral +inistry or

5e&artment as a clearing

!ouse for information on t!e

&ractices *eing ado&ted *y

different State overnments.

:!is %ould ena*le all State

overnments to ascertain t!e *est &ractices *eing

follo%ed in overnments in res&ect of t!e regulations

relating to eac! sector %it!in t!e s&!ere of

res&onsi*ility of t!e State overnments and to ado&t

or %!ere necessary ada&t t!e *est &ractices t!at are

in vogue else%!ere. It is not necessary to reinvent t!e

1ith an urgent need

!eing felt to

accelerate the

process of

simplifications of

regulations and

conse/uentlyexpediting the

necessary approvals(

the Committee is of

the vie& that State

overnments that

ma)e significant

progress in this

matter should !eappropriately

incentivised.


68/94

6

%!eel in regard to &ractices and &rocedures t!at

already exist in some ot!er States.

6.) ?ne area %!ic! needs to *e addressed is t!e delaycaused *y a&&roving aut!orities *y resorting to a time

tested met!od of se>uential >uerying. :!is involves t!e

&!enomenon of raising one >uery at a time so as to

delay t!e &rocess of granting

a&&roval and in t!e &rocess

increase t!e c!ances of s&eed

money c!anging !ands. In order

to address t!is &ernicious

&ractice it is necessary t!at for

every a&&roval to *e accorded

t!ere s!ould *e an outside time

limit %it! sti&ulation t!at if an

a&&roval is not accorded or a final

decision of re8ection is not communicated during t!at

time &eriod t!ere %ill *e a &resum&tion of a&&roval.

:!e exam&le of *uilding &lans can *e cited to illustrate

t!e &oint. If a local aut!ority does not accord a&&roval

It is necessary that

for every approval to

!e accorded there

should !e an outside

time limit( &ith

stipulation that if anapproval is not

accorded or a final

decision of re2ection

is not communicated

during that time

period( there &ill !e a

presumption of

approval.


69/94

7

for a *uilding &lan %it!in a reasona*le &eriod as may

*e &rescri*ed *y t!e State overnment concerned it

%ould *e &resumed on t!e ex&iry of t!at &eriod t!at

a&&roval !as *een accorded. t t!e same time it

s!ould *e incum*ent on all aut!orities vested %it! t!e

&o%ers of granting a&&rovals to record in %riting as to

%!y t!e &ro&osal is not

acce&ted and cannot *e

a&&roved. :!ere s!ould *e

*uilt into t!e system an

a&&ellate &rocess %!ere a

&erson aggrieved *y an order

of re8ection may as a matter

of rig!t a&&roac! a su&erior

aut!ority for reconsideration of

t!e matter on merits. Suc! a system %ould strie at

t!e root of enormous &o%ers vested in individuals and

%ould create a climate of confidence and t!e &ersons

seeing to do *usiness %ould *e encouraged to do so.

%here should !e !uilt

into the system an

appellate process

&here a person

aggrieved !y an

order of re2ection

may( as a matter of

right( approach a

superior authority for

reconsideration of

the matter on merits.


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5,

Chapter Seven

Action on the 1orld an) Report

7.1 :!e entral t!eme of t!is ommittee=s re&ort !as*een to tae a sector@neutral vie% of t!e a&&roac! to

regulation in order to attem&t a long overdue

sim&lification of t!e regulatory regime. Do%ever it

%ould *e useful not to lose sig!t of t!e s&ecifics of t!e

-orld $an Re&ort %!ic! over t!e last ten years !as

*ecome a reference &oint for &ersons seeing to do

*usiness.

7.2 $efore addressing t!e s&ecific &arameters on t!e*asis of %!ic! t!e -orld $an re&ort attem&ts t!e

raning of various countries it is significant to tae note

of t!e fact t!at t!e -orld $an !ad a&&ointed an

inde&endent revie% &anel in ?cto*er 2,12 to revie% a

*road range of issues surrounding t!e Adoing *usiness

re&ortB. fter a &rocess of extensive consultations %it!

all stae!olders t!e inde&endent revie% &anel made a

series of recommendations t!e c!ief of %!ic! is t!at


71/94

5

%!ile t!e doing *usiness re&ort s!ould *e retained t!e

aggregate ranings s!ould *e removed. num*er of

ot!er correctives %ere suggested in order to mae t!e

re&ort more useful to t!ose interested in t!e su*8ect.

7.3 :aing advantage of t!e s!ortcomings !ig!lig!tedand t!e concerns ex&ressed *y t!e &anel it is &er!a&s

tem&ting to ignore t!e re&ort in its entirety and to

continue doing A*usiness as usualB. :!is %ould *e a

retrograde ste&. It is &ossi*le to address t!e issues

raised in t!e re&ort %!ile factoring in t!e limitations of

t!e re&ort and to im&rove t!e content and &rocess of

t!e regulatory environment in India. :!erefore %!ile

as already stated t!e focus of t!is re&ort is on t!e

general issues t!at need to *e addressed across

sectors some attention needs to *e given to t!e some

of t!e ten indicators on t!e *asis of %!ic! t!e countries

!ave *een raned *y t!e -orld $an.

7.# :!e first indicator is a measure of t!e &rocedurestime cost and minimum ca&ital re>uired to start a ne%


72/94

52

*usiness. :!is is a &arameter in res&ect of %!ic! India

!as received a very &oor raning. :!e large num*er of

a&&rovals t!e difficulty in getting land t!e time taen

in getting electricity and %ater connections and a

num*er of ot!er factors mae it a daunting tas for any

&erson contem&lating to set u& a *usiness in India. :!e

fact t!at some of t!ese a&&roval &rocesses run

se>uentially and not &arallely also adds to t!e total

time taen for a &erson to set u& a ne% enter&rise.

-!ile single %indo% mec!anisms !ave often *een

taled a*out t!e im&lementation of t!is instrumentality

!as not e&t &ace. Curt!er %!erever single %indo%

aut!orities !ave *een set u& inade>uate em&o%erment

of suc! aut!orities !as turned out to *e a ma8or

stum*ling *loc in granting ex&editious a&&rovals.

7.) :!e second &arameter is t!e delay in o*tainingconstruction &ermits. Dere again time taing

&rocedures and multi&licity of a&&rovals not to mention

t!e difficulties in regard to land add u& to a

discouragingly long &eriod of delay. -!ile t!ere are


73/94

53

state %ise variations in t!e time taen for construction

&ermits it is necessary to &ut in &lace as a first ste& a

com&ilation of t!e *est &ractices in different states so

t!at some of t!e delay can *e eliminated.

Simultaneously t!e necessity for and t!e relevance of

some of t!e &ermissions needs to *e revisited %it! a

vie% to removing t!em from t!e com&lex &rocedural

frame%or.

7.6 &eculiar &oint to !ig!lig!t t!e limited usefulnessof t!e


74/94

54

%it!in t!e a&&lica*le collateral and *anru&tcy la%s.

:!e second set measure t!e coverage sco&e and

accessi*ility of credit information availa*le t!roug!

&u*lic credit registries and &rivate credit *ureaus. :!is

clearly fails to ca&ture t!e actual difficulty on t!e

ground %!ic! is ex&erienced *y Indian S+Es des&ite

sc!emes suc! as &riority landing. :!ere are numerous

met!odological infirmities %!ic! eit!er limit or &resent

an unintended &icture of t!e country vis@J@vis t!e 5$R

&arameters.

7.7 ccessing credit is &articularly significant in t!ecase of small and medium enter&rises. 0ot%it!standing

t!e nationalisation of *ans and t!e resultant s!ift

ex&ected from t!e credit%ort!iness of t!e &erson to t!e

credit%ort!iness of t!e &ur&ose t!e Indian *aning

system still fig!ts s!y of extending credit to &ersons

%!o are una*le to &rovide ade>uate collateral. Het

anot!er credit@related &ro*lem %!ic! *usiness is faced

is t!at credit is sometimes not availa*le to t!e desired

extent and at t!e rig!t time. Inade>uate and delayed


75/94

5

credit often leads to credit for &roductive &ur&oses

*eing a&&lied to consum&tion &ur&oses resulting in

deteriorating asset >uality. :!e a*sence of a Lender=s

Lia*ility ct furt!er com&ounds t!e &ro*lem of existing

and &otential *orro%ers.

7.4 Het anot!er im&ortant &arameter is t!e ease %it!%!ic! and t!e timing %!ic! tax returns can *e

&re&ared and taxes &aid. Indian aut!orities !ave often

claimed t!at &ayment of taxes is far sim&ler t!an

*efore es&ecially %it! t!e introduction of t!e electronic

filing system. -!ile t!ere is no dou*t t!at t!e filing of

returns and t!e &ayment of taxes !as *een significantly

sim&lified t!e same cannot *e said a*out t!e &ost filing

issues t!at t!e average tax &ayer often !as to contend

%it!. 5es&ite &rotestations of an im&rovement in

mindset t!e needless adversary relations!i& *et%een

assessing aut!orities and t!e tax&ayers continues to *e

a fact of life. :!is is furt!er com&ounded *y a &erverse

incentivisation system in %!ic! gross tax collections are

treated as a ma8or indicator of good &erformance. It


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5

!as also *een noticed t!at t!ere are a num*er of

&roceedings &ending in res&ect of matters t!e

&rinci&les of %!ic! !ave already *een decided *y a

!ig!er forum suc! as t!e Income :ax &&ellate

:ri*unal. In an attem&t to increase t!e annual

collection of taxes assessing aut!orities do not tae

cogni;ance of rulings *y !ig!er aut!orities in matters

%!ere t!e facts in issue and t!e &rinci&les of la% are

identical. :!is !as t!e furt!er dra%*ac of cro%ding t!e

system %it! matters %!ic! s!ould !ave *een decided at

t!e level of t!e assessing aut!ority. -!ile it is

a&&reciated t!at t!e 8udgement of t!e assessing

aut!ority cannot *e su*stituted *y t!e directions of

!ig!er aut!orities t!ere %ould *e no !arm in t!e

issuance of a general circular to t!e effect t!at

assessing aut!orities %ould *e o*liged to tae note of

rulings of !ig!er aut!orities in identical matters.

7." -!ile t!e -orld $an re&ort does not s&ecificallyaddress t!e &ro*lem of retros&ective taxation it is

considered necessary to touc! on t!e su*8ect. It !as

often *een said t!at deat! and taxes are e>ually


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55

undesira*le as&ects of !uman life. Het it can *e said in

favour of deat! t!at it is never retros&ective.

Retros&ective taxation !as t!e undesira*le effect of

creating ma8or uncertainties in t!e *usiness

environment and constituting a significant disincentive

for &ersons %is!ing to do *usiness in India. -!ile t!e

legal &o%ers of a overnment extend to giving

retros&ective effect to taxation &ro&osals it mig!t not

&ass t!e test of certainty and continuity. :!is is a ma8or

area %!ere im&rovements s!ould *e attem&ted sooner

rat!er t!an later since *usiness cannot tae corrective

action retros&ectively.


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General Circular no. 26/2012

No.11/08/2012-CL.V

Government of India

Ministry of Corporate Affairs

Shastri Bhavan, New Delhi

Dated: 23rd

August, 2012

OFFICE MEMORANDUM

Subject:-Constitution of a Committee for Reforming the Regulatory

Environment for doing Business in India.

The undersigned is directed to state as under:-

1. The report of The World Bank and the International Finance Corporation,entitled Doing Business 2012: Doing business in a very TransparentWorld, India has been ranked at a low of 132 amongst a sample of 183

countries. Although, there is a seven point improvement over 2010

ranking of 139. However, India continues to lag behind even the BRIC

and SAARC countries on most of the parameters.

2. Easing of business environment mandates extensive examination ofregulations in different areas of root functioning such as financial

reforms, governance reforms, liberalized policy framework, process

reforms, etc.,. Thus there is a need to conduct an in-depth study into the

entire gamut of regulatory frame

Documents

Damodaran Committee Report