By Sandeep Parekh,
Over the last two to three decades, India has moved towards a multi-sectoral regulatory regime to handle the multitude of issues. Today, we have the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi), Competition Commission of India (CCI), Insolvency and Bankruptcy Board of India, Telecom Regulatory Authority of India (Trai), Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority, Central Electricity Regulatory Commission, and so many more, each of whom deal with the economic or industrial sector. Soon, India will have a regulator for data protection and privacy. Based on the nature, size, and business of a company, it interacts with one or more regulators. The company must structure its businesses, corporate governance, internal policies, practices, and procedures, etc. to ensure it keeps all the regulators concerned satisfied. While this in itself has the potential for conflict, the real conflict starts when someone wants to undertake an activity that needs the approval of more than one regulator.
Consider a proposal of merger of conglomerates A Ltd. and B Ltd. Let’s assume they provide, through their listed and/or unlisted subsidiaries, banking and financial services, including broking and telecom services. The merger would then attract the scrutiny of the RBI, Trai, CCI, and Sebi. Each regulator would be concerned with how the merger would be relevant to their field. For instance, the RBI would be broadly concerned with financial stability, and impact on the banking sector; depositors and borrowers; banking operations and customer protection. Trai would focus on the impact on telecom, and Sebi would examine from the perspective of the effect on the broking arms of the merging entities and the interest of shareholders of the listed entities. The CCI would inter alia rule on the effect on competition in the relevant sectors, whether there are any adverse effects on competition, and whether they are outweighed by the benefit to consumers. In fact, regulators such as the RBI and Trai would have to consider the impact on competition in their sectors. Based on the findings of each regulator, the companies would have to chart their next steps. In some instances, what one regulator signs off on is refused by the other, or the impact of the directions of one is in conflict with another. To elucidate, the RBI may prioritise financial stability and risk management, arguing in favour of consolidation, as opposed to the CCI’s concerns on reduced competition leading to higher consumer costs. Jurisdictional conflicts may arise as well. Determining which regulator has primary authority could lead to disputes and delays. All of this, of course, does not even consider the application that would have to be made to the National Company Law Tribunal. It is a regulatory nightmare for a business to navigate.
Such regulatory tussles aren’t restricted to corporate arrangements like mergers and acquisitions. They could apply to the launch of a product or service that has features regulated by more than one regulator. In the ever-evolving industry of financial services and cross-linking and tying of products and services, such a situation is no longer in the fictional realm. Diverse businesses being run under one conglomerate with listed entities is also not unprecedented. Of course, it is not to say due process is unwarranted, or unnecessary. Assessing the consequences of an arrangement between entities is a function of a vigilant regulator. But there is much room for improvement in harmonising the manner in which such assessment is carried out in instances where more than one regulator is required.
Regulatory conflict does not happen routinely, but that does not mean it’s not necessary to address the issue. Further, each regulator would stand by its decision, as it is required to look at only the universe under its purview. As stated above, each regulator has a specific mandate, which may not always align with that of another, giving rise to regulatory conflict, causing unusual second order impact on a company and invariably resulting in delays and pointless bureaucracy. It can get intractable when two regulators insist, probably rightly so, on following their respective statutes or regulations, causing an impasse of the unmovable meeting the unstoppable.
While regulators do liaise with each other, there is no formal mechanism for them to act in cohesion. Indian courts may not have tested the various issues that arise or may arise out of regulatory conflict yet. But the prevailing judicial view in case of two regulators with overlapping jurisdictions is that if there is a specialised regulator for the sector it will take precedence over the general regulator — as was the case when the Supreme Court held that Trai would have jurisdiction over the CCI while examining competition issues surrounding Reliance’s Jio.
Existing models to tackle conflicts are granting explicit and exclusive jurisdiction to regulators to remove ambiguity; regulators working towards arriving at a decision by consulting each other; mandatory consultation between regulators.
In India, the third approach seems appropriate. A standing committee comprising members nominated from each regulator or the ministry that supervises the regulator could be created. The leadership of such committee could be on a rotational basis, and its members could perform a dual role, coming together when required to decide on an application. The decision of the committee, arrived at via mandatory consultation among all regulators concerned, could be binding on all regulators. This results in a holistic view and a reasoned decision, even if it involves compromises on the part of all parties involved. It serves as a single-stop shop for businesses and would go a long way to ease the regulatory burden. A forum exists for discussing inter-regulatory issues in finance, but the Financial Stability and Development Council has had limited success. Such an approach could be considered for enforcement as well, where multiple regulators can act together as one saving time and costs on their end as well as for businesses. Indeed, the past few months have seen increasing cooperation between Sebi and RBI on enforcement.
Laying a road map for companies and regulators to work together efficiently is essential for stable growth. In a growing economy like India, where these issues are only starting to appear, we must take steps at this opportune moment to prevent irreparable harm or avoid costly solutions later, and adopt a whole-of-government approach rather than working in silos.
The author is managing partner at Finsec Law Advisors. Co-authored with Parker Karia and Aniket Charan, respectively, senior associate and associate, Finsec Law Advisors.
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