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Thursday, September 22, 2022

Preparing for financially self-reliant and accountable regulators

by Rishika Rangarajan.


Indian regulators are tasked with important functions in key sectors such as standard setting, supervising, and monitoring entities, enforcing standards, etc. Crucially, some regulators, namely the Real Estate Regulatory Authority, need to work towards developing and promoting their respective sectors. Achieving these goals involves employing technical and scientific capacity, engaging with relevant stakeholders, collating, and analysing sectoral data, etc. A regulator's ability to conduct these activities, independently and efficiently, requires adequate financial resources and flexibility.

In June 2022, the Insolvency and Bankruptcy Board of India (IBBI) published a Discussion Paper proposing a methodology for the regulator to become financially self-reliant. Currently, IBBI largely meets its budgetary requirements from government grants, with only 20% of its financial resources coming from regulatory fees. The paper observed that IBBI’s mandate being a resource-intensive one, requires “financial independence which allows the Board to have the required flexibility and human resources”. In the past, regulators such as the Securities and Exchange Board of India (SEBI) and the Competition Commission of India (CCI) have also asserted their financial independence, claiming that fees are a means to achieve self-reliance. While it may seem intuitive to allow regulators to charge fees to secure independence, there may be important consequences of such a fee-based model on the accountability of regulators as well (Rangarajan, 2021).

In this article, I discuss the implications of a fee-based model and the potential concerns that may arise lacking such a framework - for example, an unchecked ability to raise fees by regulators may allow the misuse of funds. This article: first, discusses the key sources of funding and the importance of financial capacity; second, provides a summary of the incomes of SEBI, Pension Fund Regulatory and Development Authority (PFRDA) and Food Safety and Standards Authority of India (FSSAI) between 2015 and 2020; third, discusses important case laws on fee-based models; and finally, concludes the need for a formal and codified process for raising fees by Indian regulators, in line with accepted international practices.

Designing financially self-reliant, independent, and efficient regulators requires careful deliberation, which has not yet been done. It is critical that a fee-based model be designed to factor in principles of independence, accountability, and transparency.

Key Sources of Funding

Each parent Act creates separate accounts for regulators which will hold the grants of the government, fees and subscription charges and any other income such as interest, penalties, or disgorged amounts. Currently, the key sources of income for regulators are (i) grants-in-aid, (ii) fees and charges, and (iii) other funds. The process of raising money for each source is briefly summarised below:

  1. Grants-in-Aid: To receive funds from the Appropriate government, parent statutes of regulators require regulators to prepare a budget with estimated receipts and expenditures each Financial Year. This budget is forwarded to the respective central ministry each Financial Year which will grant money from their annual budget, after due appropriation. This money is then taken from the CFI and is approved during the annual Union Budget presentation.

    For example, each Financial Year, IBBI submits their estimated revenue, capital and expenditure to the Ministry of Corporate Affairs. The Ministry, after considering the Actual Revenue and Expenditure for the previous year, determines the budget for grants-in-aid during the annual Union Budget discussions. The funds, after approval, are credited to the IBBI Fund established under Section 222 of the IBBI Act 2016. All regulators follow a similar procedure to receive grants from the Appropriate government.

  2. Fees and charges: Regulators raise money through fees from regulated entities to conduct services such as registration, licensing, granting approvals, and other such activities. Commonly, regulators impose three types of fees: flat fees, fees based on the value of the transaction, and fees based on the nature of the transaction.

    The Act does not prescribe any process to calculate the quantum of fees and regulators have the flexibility to determine the required fees. Regulators issue regulations that prescribe the quantum procedure for collecting fees from regulated entities. These are laid before the Parliament. Currently, there is also no requirement for regulators to publicly disclose the rationale for imposing prescribed fees on regulated entities.

  3. Other funds: Regulators can also invest their funds and receive interest on such investments. Other sources of money include penalties, donations, income from publications, interest from deposits, income from the sale/disposal of assets, etc. In addition, some regulators have a separate fund that holds other incomes.

    PFRDA can establish a separate Subscriber Education and Protection Fund which holds grants and donations received, interest on investments made and penalties imposed by the authority. Similarly, SEBI credits all amounts disgorged to an Investor Protection and Education Fund. Regulators can also own capital assets and hold separate capital/corpus funds and earmarked/ endowment funds which are reflected in their Balance Sheet.

The importance of financial capacity

The mandate of regulators is resource intensive. Some of the key expenses regulators incur include: (i) establishment expenses for salaries, wages, allowances, and other such expenses for employees; (ii) administrative expenses consisting of expenses on rent, electricity and water, vehicles, stationary, etc; (iii) grants and subsidies given to institutions or individuals (for ex., FSSAI offers grants to strengthen Food Testing Labs in states); and (iv) expenses for developmental activities including monitoring and supervising their sector

OECD’s Best Practice Principles for Regulatory Policy highlights that funding is one of the important pillars of regulatory authorities. Financial capacity is not only linked to efficiency, but also independence. It ensures that regulators have sufficient funds to conduct their activities and remain independent from any external factors, including the government or private sector.

Despite the early optimism around regulators, they often face similar capacity issues as the State. In 2018, the FSSAI cited that financial constraints have led to failure in upgrading their food safety mechanism. FSSAI sought a ‘quantum jump in budgetary allocation’ pointing out that counterpart organisations in other countries have a much higher proportionate budget.

On the other hand, SEBI is an entirely self-reliant regulator raising over Rs 800 crores through investments and fees in the Financial Year 2021 with a surplus of close to Rs 200 crores. Although there have been calls for transferring SEBI’s surplus funds to the CFI, there is nothing in the mechanism preventing regulators from raising fees that go above their budgetary requirements. This goes against notions of accountability and transparency - principles that form the bedrock of any public institution. Although a fee-based model allows regulators greater flexibility by avoiding delays and complications arising from the CFI disbursement process, it lacks processes that ensure accountability that come with a grant or tax-based regime.

Comparing incomes of regulatory authorities

To understand the role of fees and grants in the financial capacity of regulators, I have considered the income sources of three regulatory authorities SEBI, PFRDA and FSSAI, between 2015 and 2020. Income accounts of regulatory authorities provide us with a summary of the two key sources of funds: grants and fees/charges.

Evidently, the three regulators largely rely on either of the two sources (i.e., grants and fees) while the proportion differs for each regulator. For example, while SEBI does not rely on any grants from the central government, PFRDA and FSSAI, through the five-year period, largely rely on grants. Both FSSAI and PFRDA’s reliance on fees and subscriptions fluctuates through the period.

SEBI was also able to raise a sizable amount of money through income and interest earned which includes deposits in banks and other institutions; interest through loans provided to employees and interest from brokers.

SEBI makes available their board meeting minutes on their website, which includes the meetings where they decide the quantum of fees. These meetings reveal some of the contexts for why and how SEBI charges fees and the methodology they follow to decide the quantum. For example, in 2017, SEBI reduced the fees payable by brokers by 25% taking into account the projected income and expenditure for the subsequent three financial years and reducing the overall cost of transactions in the market. Similarly, in April 2020 they reduced the broker turnover fees and filing fees on offer documents to counter the challenges faced due to COVID-19.

PFRDA also makes available some of their board meetings - but, of the available minutes, none of them discussed any determination of fee matters. FSSAI does not make any board meetings publicly available and therefore there is no information on their fee determination.

Moving towards fee-based models

Fees have emerged as an important source of income for regulatory authorities, being seen as their way to function independently of the government.

The Report on Financial Sector Legislative Reforms Committee (FSLRC Report) submitted to the Ministry of Finance in 2013 reviewed the legal and institutional framework of the Indian financial sector. While discussing recommendations to reform the regulatory ecosystem, the report raised the importance of maintaining regulators’ independence. Amongst the reasons put forth, the FSLRC Report stated that regulators funding itself through fees would create “operational efficiencies” and ensures that the stakeholders who are the beneficiaries of the relevant market will bear the cost of regulation rather than the public as a whole. Regulators can also achieve freedom from the government on pay, potentially facilitating the hiring of experts. Fees can empower regulators to maintain independence from regulators and enable them to take timely decisions.

Fees are also easier to raise as compared to taxes, the latter being an important source of revenue for the central and state governments. The process of raising taxes is codified in the Constitution of India under Article 265 - “No tax shall be levied or collected except by authority of law”.

The process to raise taxes follows a multi-step process which begins almost six months prior to the date of presentation. Each ministry is required to submit estimated receipts and expenditures to the Government of India for their financial year which is examined by the Ministry of Finance in consultation with the Union Cabinet or the Prime Minister. After a series of consultations and discussions, the budget is presented in the Lok Sabha, usually on February 1st every year (commonly known as the Union Budget most recently presented by the Finance Minister, Nirmala Sitharaman).

Fees, on the other hand, are used by government departments, local authorities, and regulators to raise money to cover the costs of any services rendered. Over the years, courts have differentiated fees from taxes, empowering regulators to use fees to fund their activities and services. Courts have recognised fees as a legal means to fund regulators' activities but highlighted the need for a fair correlation between the fee charged and the cost of services rendered.

Differing standards of fees

In 2001, the Supreme Court of India considered the petition filed by stockbrokers challenging SEBI’s high registration fee charges. SEBI required stockbrokers to pay an annual registration fee based on their annual turnover over a period of five years. This is one of the earliest cases that dealt with regulators’ right to impose fees on regulated entities to fund their activities. The petitioners argued that the high fees were “excessive”, “unreasonable and arbitrary”. Second, they claimed that the fee is without the authority of law and is a tax guised as a regulatory charge. Finally, the levy has no nexus to the purpose for which the fee is collected and the demand for collection based on annual turnover extended over five years is arbitrary.

The Court rejected their arguments and found that SEBI does have the right to impose fees under the parent statute and therefore is authorised by law. The court did not consider the arguments on the quantum of the fees but held that regulators are not required to show a co-relatable quid pro quo. The court, however, refers to the Justice Mody Committee report which recommended preferable methods to calculate reasonable fees with SEBI in principle agreeing to implement them.

More recently, in 2020, insolvency professionals filed a writ petition, seeking the striking down of IBBI’s regulation charging ad valorem professional fees on them. They contended that there was excessive delegation, and the Act does not empower them to charge fees based on annual turnover or remuneration. They also raised that IBBI has not provided a quid pro quo to justify the charges. The Madras High Court ruled that regulators do not have to present a direct correlation between the fee earned and service rendered. In recent years, other regulators including PFRDA, CCI and PNGRB have also started to charge fees on an ad valorem basis.

As evidenced by the instances above, fees are specifically differentiated from taxes. Currently, taxes are the largest source of revenue for central and state governments with the process to determine and raise taxes set forth in the Constitution. Fees are becoming similarly significant to regulators. However, the same institutional safeguards are not put in place for regulators.

Designing financially self-reliant regulators

To raise taxes, governments must go through a rigorous and intricate process which accounts for principles of independence, transparency, and accountability. This has been coded into the Constitution of India. A similar framework is lacking for regulators funded through fees and charges, raising some concerns. While flexibility is necessary for regulators, equally, checks and balances need to be formalised to prevent misuse of their powers.

An unfettered right to raise fees can have far-reaching consequences on the relevant sector. High fees can impact the market since they are often translated into costs to the public directly or indirectly. To avoid this, it is important to ensure that there is a reasonable nexus between the cost of the services rendered and the fees charged. The FSLRC report highlighted that regulators should “clearly explain the fees it is charging and demonstrate that the fee is not disproportionate to the cost for the regulator”. The OECD report on The Governance of Regulators stated that the funding processes of regulators should be transparent and efficient while protecting their independence and objectivity.

An international example of good practice in raising fees is the Financial Conduct Authority (FCA) in the United Kingdom which is funded entirely by the fees and levies from the firms they regulate. On their website, they explain how they calculate their annual fees and in addition publish an annual consultation paper which sets out its proposal on fees for the upcoming year and the model for calculating the various levies. The paper is open to comments from all FCA fee payers and businesses considering applying for FCA authorisation or registration. Similarly, the parliament of New Zealand also published a document on guiding principles for the levy of fees and charges.

Similar processes are lacking in the Indian context. Currently, regulators are not required to conduct consultations to determine fees nor required to disclose their justification of the fees to the public or the regulated entities. This makes it challenging for the government, regulated entities and the public at large, who indirectly bear the indirect burden of high regulatory fees to question and examine regulatory budgets.

Conclusion: formalising transparency and accountability

It is argued that budgetary independence is related to the larger autonomy of regulators - regulators can determine their staffing, they can incur sudden or additional expenditures without immediate justification to the State, and it may also improve the quality of their operations by allowing investment in new technologies or requirements to upgrade internal processes.

Regulators that raise money need to be accountable to regulated entities and the public. When governments raise taxes, they must comply with certain constitutional and legal principles before deciding on the quantum. Principles that are enshrined in the Constitution. The same processes are not sufficiently imposed on regulators - their parent Acts do not provide any limitation to their right to raise funds through levies nor does it prescribe any requirements for transparency.

With an increasing number of regulators and increasing responsibilities imposed on them, their role in Indian governance is critical. In this context, the need for financial capacity cannot be denied but does the current process to raise funds by regulators ensure the necessary accountability? We need to consider creating a codified framework that sets out the above principles for self-reliant regulators.


Rangarajan, R. (2021) Financial Autonomy of Independent Regulatory Authorities: Analysis of Legal Framework.

Kapur, D and Khosla, M (eds.). (2019). Regulation in India: Design, Capacity, Performance.

Burman, A., & Krishnan, K. (2019).Statutory regulatory authorities: Evolution and impact.

Burman, A., & Zaveri, B. (2018). Regulatory responsiveness in India: A normative and empirical framework for assessment. William & Mary Policy Review, 9 (2).

Sundaresan, S. (2018). Capacity building is imperative. Column titled Without Contempt in the editions of Business Standard dated August 2, 2018.

Report of the Comptroller and Auditor General of India. Union Government Accounts of the Union Government, No 44 of 2017.

Ministry of Finance, Department of Expenditure. General Financial Rules 2017.

Rishika Rangarajan is a Researcher at the National Law School of India University, Bengaluru

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