Evaluating recent attempts at improving the legislative process at RBI

by Pratik Datta.

A regulator is a mini-State in that it combines legislative, executive and judicial functions. As part of the legislative function, it writes laws, which are called subordinate legislative instruments. There has been considerable criticism about the way the legislative function is organised in India, e.g. Pattanaik and Sharma, 2015.

RBI issues numerous different kinds of subordinate legislative instruments including "regulations", "notifications", "circulars". Each year in July, the RBI issues "master circulars" which consolidate all circulars in force for a particular area.

Existing confusion

1. The instruments themselves often do not identify themselves. For example, here is an instrument which is classified as a circular on the website, but the body of the instrument does not state that it is a circular.
   
   
2. There should be a sharp distinction between a legal instrument, and communication about it through press releases, FAQs, videos, etc. This clarity is at present lacking. For example, on April 28, 2014, a notification was issued informing certain banks and primary dealers that the Government of India has offered to sell certain securities. Here is another circular which has similar information. These should be mere press releases and not be mixed up with legal instruments.
   
   
3. Sometimes the same instrument is classified under both notifications as well as circulars on RBI's website. For example, on April 1, 2015, an instrument was issued on setting up of IFSC Banking Units, and it is available both under notification as well as circular. This creates heightened legal risk about the distinction between these two classes of instruments.

Recent developments

The Governor had earlier suggested that RBI will take initiatives to simplify its regulations. On January 4, RBI released a press release explaining its new initiative to simplify its communication process. RBI proposes to issue a new instrument named "master directions" on all regulatory matters. It has, thus far, issued 17 master directions. According to RBI, all instructions issued by RBI, on a particular subject matter, under regulations or rules will be consolidated and referred to as Master Direction. This seems to introduce a new word `instructions' which is as yet not understood. We may also point out that formal legal positions of the RBI should not be articulated in press releases. Law firms are grappling with the complexity of understanding the exact use and scope of these master directions.

New Confusion 1: Master Circulars v. Master Directions

The press release states that one master direction will be issued for each subject matter covering all instructions on that subject. It promises that the existing set of master circulars issued on various subjects will stand withdrawn with the issue of the master direction on the subject. This means that master directions will now subsume master circulars as well as all instructions issued on the subject matter. However, all instructions were anyways being issued as circulars, which used to get consolidated into the master circular. Therefore, it is unclear how master directions will be any different from master circulars. Moreover, RBI has already issued a Master Direction - Miscellaneous. This shows that the classification of subject matters has not been clearly thought through and suffers from the same vagueness.

New Confusion 2: Circulars for amendments

RBI's press release states:

Any change in the rules, regulation or policy will be communicated during the year by way of circulars. All the changes will get reflected in the Master Directions available on the RBI website along with the dates on which changes are made.

This appears confused. An amendment regulation or amendment rule is itself available in the public domain. Hence, there is no need for a circular to communicate the same. To illustrate, let us assume FEMA (xyz) Regulations, 2000 are amended by FEMA (xyz)(First Amendment) Regulations, 2010. There is no need to issue a circular (a legal instrument) to communicate the issuance of FEMA (xyz)(First Amendment) Regulations, 2010 (another legal instrument).

New Confusion 3: FAQs

RBI's press release again says:

Explanations of rules and regulations will be issued by way of Frequently Asked Questions (FAQs) after issue of the Master Directions in easy to understand language wherever necessary.

This assumes that regulations will suffer from ambiguity, and will need to be explained by FAQs. But if FAQs can be drafted lucidly, why can't regulation be similarly drafted? Why the reliance on FAQs?

FAQs are generally put up on the website by junior staff within the regulator. There is little formal due process for their issuance. They can be put up or removed from the website at the discretion of the junior staff. When market participants find some regulation to be badly drafted, junior regulatory staff issue FAQs to clarify their stand, and the ambiguity in the regulation itself is not addressed. There is legal risk in the form of unpredictable changes to FAQs in the future. There are many examples of FAQs being used by regulatory staff as a regulation-making tool (see here and here). The regulator's ability to issue FAQs generates perverse incentives for the staff and results in badly drafted regulations. On a similar note, Burman et. al., 2014, argued that the concepts of `special guidance' and `general guidance' in IFC 1.0 had serious problems, and these were addressed in IFC 1.1. RBI should consider doing away with FAQs, and instead upgrade the quality of drafting of legal instruments so as to remove ambiguities.

A better solution to improving the legislative function at RBI

While the aspiration to improve processes at RBI is a noble one, the recent efforts leave a lot to be desired. Designing the sound working of regulators is part of a specialised subject that is called administrative law. Thousands of man-years of knowledge in this field has coalesced into the work of FSLRC and IFC version 1.1. Instead of reinventing the wheel badly, RBI would do well to simply follow the FSLRC's recommendations on regulation making. Three key ideas are:

1. RBI should clearly distinguish legal instruments from other media releases. Legal instruments should be drafted at the level of simplicity, precision and clarity required of the drafting of law, e.g. as has been done with the IFC 1.1.
   
   
2. There should be only one permissible legal instrument: the `regulation'. All other tools such as circulars, notifications, master circulars, master directions etc. should be eliminated. Regulations should be amended by amending regulations and the complete updated version of the regulation should be made available on its website. A single comprehensive view of all subordinated legislation by RBI should be visible on the RBI website, as is the case with the UK FCA Handbook.
   
   
3. RBI should refrain from using FAQs. Instead of using FAQs, plain English drafting should be used for drafting all regulations.

References

Anirudh Burman, Pratik Datta, Suyash Rai, Arjun Rajagopal, Shubho Roy. Difficulties with Special Guidance and General Guidance in the IFC, Ajay Shah's blog, 11 February 2014.

Arpita Pattanaik and Anjali Sharma, Regulatory governance problems in the legislative function at RBI and SEBI, Ajay Shah's blog, 23 September 2015.


The author is a researcher at the National Institute for Public Finance and Policy.