Regulating the regulators: Assessing regulation-making frameworks in India's financial sector

by Natasha Aggarwal and Renuka Sane.

Indian regulators, like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), routinely wield quasi-legislative powers. For example, Section 30 of the Securities and Exchange Board of India Act, 1992 empowers the SEBI Board to make regulations. According to its 2024-25 annual report, SEBI issued 104 consultation papers, 61 amendments to its regulations, one new set of regulations, 14 master circulars, and 154 "policy measures." Such regulatory interventions can significantly influence markets and affect economic outcomes. Yet the processes by which regulators design, consult on, and review delegated legislation have been fragmented and, in large part, left to each regulator's discretion.

Traditional safeguards on delegated legislation in India, i.e., parent statutes requiring regulations to be laid before Parliament, prior publication requirements under the General Clauses Act, 1897, and judicial review, provide important accountability functions, but do not regulate the internal process by which a regulator formulates its regulations. They do not require a regulator to identify the problem warranting intervention, weigh alternatives, or assess costs and benefits.

In 2013, the Financial Sector Legislative Reforms Commission proposed provisions to govern regulation-making and, through the Financial Sector Development Council Resolution of 24 October 2013, financial sector regulators agreed to comply with these procedures. Since then, six financial sector regulators (the Insurance Regulatory and Development Authority of India (IRDAI), Insolvency and Bankruptcy Board of India (IBBI), International Financial Services Centres Authority (IFSCA), Pension Fund Regulatory and Development Authority (PFRDA), SEBI and RBI) have each adopted some form of instrument governing how they make regulations, ranging from non-binding concept notes to regulations. More recently, the Economic Survey (2024-25) recommended strengthening regulatory impact assessment; the Securities Markets Code, 2025 proposes statutorily mandating public consultation and periodic review at SEBI; and in March 2026 the Standing Committee on Finance recommended a mandatory regulatory impact assessment framework for the IBBI.

In this backdrop, our paper, 'Regulating the regulators: Assessing regulation-making frameworks in India's financial sector', evaluates the regulation-making frameworks adopted by these six regulators against three principles of good regulation-making - consultation, evidence-based regulation-making, and periodic review - and then assesses a randomly selected 2025 consultation paper issued by each regulator against indicators derived from these principles and from each regulator's own framework.

We find that while all six financial regulators have adopted some form of instrument, these instruments vary considerably in legal form, substantive scope, and analytical ambition. Regulators operating under more demanding frameworks are more likely to clearly identify the regulatory problem in their consultation documents. However, this relationship is not linear: stronger frameworks do not consistently produce stronger performance on more analytically demanding requirements. No regulator, including those whose frameworks expressly require it, included a cost-benefit analysis in its consultation paper, and no regulator assessed available alternatives to direct regulation. Every regulator failed to comply with at least one of its own procedural requirements.

Indian legal frameworks

From 2016 onwards, Indian regulators have progressively formalised how they make their own regulations: IRDAI led the way with a concept note in 2016, followed by IBBI in 2018, IFSCA in 2021, and PFRDA in 2024. In 2025, IFSCA issued an updated and expanded framework for making regulations and subsidiary instructions, SEBI adopted regulations for making, amending, and reviewing regulations, and RBI opted for a non-binding policy framework rather than enforceable regulations.

While all regulators now subject regulation-making to some framework, they diverge along two axes: legal form and substantive scope. On legal form, IBBI, PFRDA, IFSCA, and SEBI have adopted regulations, signalling a commitment to enforceable constraints; RBI and IRDAI, by contrast, have adopted non-binding approaches, suggesting either a desire to retain discretion or a reluctance to subject internal processes to enforceable standards. On scope, PFRDA's framework is narrowly confined to the making of regulations; IBBI, SEBI and IRDAI expand this to include amendments; IFSCA moves further by bringing "subsidiary instructions" within its fold; and RBI adopts the broadest scope, extending its framework to directions, guidelines, notifications, and other instruments. In this context, IFSCA stands out as the strongest: it uses binding regulations, rather than non-binding frameworks, to govern its regulation-making process, and their applicability extends beyond regulations and amendments to subsidiary instructions.

On consultation specifically, most regulators (IRDAI, IFSCA, SEBI, RBI and IBBI) make public consultation mandatory, typically for a minimum of 21 days; PFRDA alone makes it optional, albeit with a longer 30-day window. IRDAI, IFSCA, IBBI and PFRDA publish stakeholder comments and provide responses to them, while SEBI and RBI provide responses but do not publish comments, limiting external visibility into the range of views considered.

On evidence-based regulation-making, the picture is fragmented: IRDAI and IFSCA require both a problem statement and a statement of regulatory intent; SEBI requires only regulatory intent; PFRDA and IBBI require a problem statement but not regulatory intent. Only RBI's framework requires an impact assessment, and only PFRDA and IBBI mandate cost-benefit analysis.

On periodic review, IBBI has the most frequent cycle (three years), followed by IFSCA (five years) and RBI (five to seven years); SEBI and PFRDA require review but specify no timeline, and IRDAI's concept note is silent on review altogether.

Evaluation of consultation papers

We evaluated one randomly selected 2025 consultation paper (for IRDAI, an exposure draft) issued by each regulator, against indicators drawn from the principles of good regulation-making and from each regulator's own framework. Notably, the RBI did not issue a formal consultation paper in the relevant period; the document evaluated for RBI is a circular proposing amendments to its directions, reflecting a broader pattern of the RBI using directions and circulars to make substantive regulatory changes.

The IRDAI Exposure Draft states the objective of its proposal and describes the key features of the framework, but does not clearly explain the problem it seeks to address, does not consider alternative approaches to regulation, and does not include a cost-benefit or impact analysis.

The IBBI Discussion Paper, for each of its three proposals, includes a statement of the problem, a proposed solution, and the draft regulation, but does not identify and assess available alternatives to direct regulation, does not include a cost-benefit analysis, and does not comply with the IBBI Regulations' requirement of an economic analysis, guidance from international standard-setting bodies, or the statutory provision enabling the proposed regulations.

The IFSCA Consultation Paper does not comply with any of the principles of good regulation-making, other than relying on market data as evidence of growth; it refers to fund management entities facing unspecified "operational hassles" without elaborating on what these are, and does not specify the statutory provision enabling the amendments or include guidance from international standard-setting bodies, both required under its own regulations.

The PFRDA Consultation Paper performs comparatively better: it identifies the problem to be addressed, assesses how existing frameworks contribute to the problem, and relies on evidence. However, it does not identify and assess available alternatives to direct regulation or include a cost-benefit analysis, and does not comply with several of its own regulations; it does not specify the statutory provision enabling the proposed regulations, attach a draft of the proposed regulations, include the required economic analysis, include guidance from international standard-setting bodies, or specify the manner of implementation.

The SEBI Consultation Paper does not comply with any of the principles of good regulation-making other than identifying the problem to be addressed; it does not assess how existing regulations contribute to the problem, identify alternatives, or include a cost-benefit analysis, an outcome that closely mirrors the design of SEBI's own framework, which requires only a statement of regulatory intent.

The RBI Circular likewise does not comply with any of the principles other than a rather broad articulation of the problem, and does not comply with the RBI Policy because it does not specify the statutory provision enabling the proposed regulations, or include an impact analysis or guidance from international standard-setting bodies.

Analysis

The results reveal a gap between the formal existence of regulation-making frameworks and their actual operationalisation in consultation documents. There are failures at two levels: compliance with general principles of good regulation-making and compliance with each regulator's own procedural requirements.

More broadly, regulators operating under more developed procedural frameworks, particularly IBBI and PFRDA, which explicitly require problem identification, perform better on basic problem-definition indicators. Both clearly identify the regulatory problem, and PFRDA goes further by examining whether existing regulations contribute to it. In contrast, SEBI and RBI, whose frameworks impose minimal analytical obligations, produce consultation documents that are largely limited to statements of regulatory intent, with little substantive justification. Second, there is inconsistent articulation of the regulatory problem, even at a basic level. While some regulators - such as IBBI, PFRDA, SEBI, and RBI - identify a problem, others (notably IRDAI and IFSCA) fail to do so clearly. Even where a problem is identified, it is often thinly specified and not linked to evidence or to failures in the existing regulatory framework.

However, stronger frameworks do not necessarily translate into stronger performance on more analytically demanding requirements. Despite formal mandates, both IBBI and PFRDA fail to include the economic analysis required by their own regulations. IBBI omits cost benefit analysis, while PFRDA fails to provide economic analysis, draft regulations, international benchmarking, and implementation details. No regulator assesses alternatives to direct regulation or conducts a cost benefit analysis. The absence is uniform and not explained by framework design alone: even regulators whose own frameworks require economic analysis (IBBI, PFRDA, and RBI) fail to provide it. Their universal absence suggests that regulators do not treat regulation as one option among many, but as the default response. As a result, consultation processes are narrowed: stakeholders are invited to comment on how to regulate, but not whether regulation is justified in the first place. This significantly weakens accountability and the quality of regulation-making.

Moreover, every regulator, without exception, fails to comply with at least one of its own procedural requirements. The most consistent gap is the failure to specify the statutory provision enabling the proposed regulation - a basic transparency requirement met only by IRDAI. This omission raises concerns about the legal legitimacy of the proposed regulation, as stakeholders are not informed of the source of regulatory authority. IBBI omits the economic analysis mandated by its framework. PFRDA fails to include draft regulations, economic analysis, implementation guidance, and international benchmarks. IFSCA omits both the problem statement and international benchmarks required under its framework. RBI, similarly, does not provide the impact analysis or international benchmarking contemplated by its policy. These are not merely formal deficiencies. The absence of draft regulatory text, as in the case of PFRDA, prevents stakeholders from engaging with the legal substance of the proposal, limiting consultation to broad regulatory intent. The absence of economic or impact analysis means that the regulatory choice cannot be independently assessed.

Across all six regulators, consultation papers ostensibly function as instruments for presenting pre-determined regulatory proposals, rather than as vehicles for reasoned, evidence-based decision-making.

Reforms

We propose five reforms: (i) legislative amendments to parent statutes that clearly define the scope of regulators' quasi-legislative powers and the processes governing their exercise; (ii) regulatory impact assessment should be made mandatory and comprehensive; all consultation papers should be required to identify the problem or market failure to be addressed, assess whether existing regulations contribute to it, consider available alternatives including non-intervention, and include a cost-benefit analysis; (iii) constituting Regulations Advisory Committees of domain experts, legal scholars and market participants at all regulators; (iv) requiring periodic review of regulations at defined intervals with a clear methodology specifying which regulations are to be reviewed, against what criteria, and within what timeframe; and (v) leveraging technology (for instance, dashboards tracking active consultations and regulators' responses, and automated tools that flag missing elements in consultation papers before publication).

The authors are researchers at TrustBridge Rule of Law Foundation.

The curious case of definition and adjudication of front running in India

by Natasha Aggarwal, Amol Kulkarni and Bhavin Patel.

One of the core legislative mandates of the Securities and Exchange Board of India (SEBI) is to prohibit fraudulent and unfair trade practices (FUTP) relating to securities markets. A practice commonly classified as FUTP is front running. It is generally understood as a set of two trades or positions: first, a trade or position taken in advance of a large order, and second, a squaring off of the initial trade or position after the large order, to benefit from the price movement it causes.

SEBI issued the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (the PFUTP Regulations) to deter and sanction front running and other FUTPs.

Neither the SEBI Act nor the PFUTP Regulations define front running. SEBI has, however, defined it elsewhere: in guidelines, glossaries, master circulars and consultation papers, and in a number of adjudicatory orders.

In our working paper, Front running: The law and enforcement of an ill-defined violation, we set out the legal elements that a violation under the PFUTP Regulations requires: fraud, manipulation and unfair trade practice. These elements should inform any definition of front running. We find that the characteristics of front running laid down by SEBI in its other regulatory instruments and adjudicatory orders are inconsistent with these legal requirements.

Through an empirical study of 33 SEBI adjudicatory orders on front running between 2019 and 2024, we show that SEBI's enforcement practice is also disconnected from the codified law, and does not engage with its key requirements.

This proliferation of inconsistent definitions and interpretations causes a range of problems:

• It creates confusion, and weakens the certainty and predictability of the law.
• It gives the regulator untrammelled discretion in deciding whether a violation has taken place.
• It raises concerns about separation of powers: the boundary between the regulator's law-making and adjudicatory functions is erased and re-drawn erratically, at cost to the integrity of each function.

The result is a lack of doctrinal clarity about what front running means, and a set of conflicting articulations of the violation with no clear grounding in the codified law.

We suggest that the term be defined clearly, either in the parent statute or in the PFUTP Regulations. There is now a nearly three-decade history of enforcement, which should be enough to identify the ingredients of this violation.

The Securities Markets Code Bill, 2025 (the SMC) is an opportunity to write such a definition into the parent law. This would take the power to define the violation away from the regulator, restore the integrity of SEBI's separate functions, and meet the requirements of separation of powers. In its present form, though, the SMC may fall short: we show the gaps and confusions that remain in its treatment of fraud, and its failure to define fraudulent or unfair trade practice, or front running, explicitly.

Part of the problem may lie in the absence of separation of powers within SEBI. The regulator can write subordinate legislation, investigate alleged violations, and adjudicate and sanction them, all without a strict separation between its quasi-legislative, investigative and adjudicatory arms.

This may incentivise SEBI to write broad, all-encompassing regulations in its quasi-legislative capacity, and then to widen their scope further to suit its quasi-judicial needs.

The regulator might defend this by pointing to the constantly changing methods used by fraudsters. International experience suggests otherwise: methods change, but the key constituents of securities fraud stay broadly constant.

In India, a lasting solution may require Parliament, not SEBI acting under its delegated powers, to define terms such as front running in the parent legislation.

Front running is only one example of an inconsistently defined and adjudicated practice within the broader category of FUTP. There are likely others. This points to the need for a wider review of how fraud, manipulation and unfair trade practice are defined and adjudicated under Indian securities law, with the aim of achieving consistency and certainty in interpretation and enforcement.

References

Front running: The law and enforcement of an ill-defined violation, TrustBridge working paper.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, Securities and Exchange Board of India.

Securities Markets Code Bill, 2025, Bill No. 200 of 2025.

Natasha Aggarwal, Amol Kulkarni and Bhavin Patel are researchers at TrustBridge Rule of Law Foundation.

When remedies become regulation: The Karnataka High Court's intervention in food licensing and street vending

by Prashant Narang, Aryan Pandey and Indira Unninayar.

I. When public health litigation expands into regulatory governance

On 19 September 2025, the Karnataka High Court delivered its decision in Karnataka Pradesh Hotel & Restaurants Association v. Union of India. The case began as a routine industry challenge to the Food Safety and Standards Act, 2006. The judgment oversteps statutory adjudication to engineer regulatory design. It answers a real public-health worry. But litigation like this rarely stays within the parties before the court. The Court encroached into the executive territory with no consideration of whether the state is actually capable of implementing what it now directs. Such directions tend to produce selective enforcement and compliance costs that fall hardest on those least able to bear them.

The petition arose from a 2012 directive on licensing enforcement. The judgment was delivered nearly a decade and a half later by which time, the regulatory landscape and the affected ecosystem had evolved substantially. Street vending, food delivery and the law on informal work had all changed and all bore directly on what the Court now ordered.

II. What the petition sought, and what the Court ultimately directed

Hotel and restaurant associations had challenged orders to enforce the FSS Act and its regulations. The trigger was a letter dated 13 March 2012 issued by the State Food Safety Commissioner, acting on the Union instructions, requiring all States to enforce the Food Safety and Standards Authority of India's (FSSAI) licensing and registration regime. Every Food Business Operator' ("FBOs") had to obtain a licence or registration as a condition for continuing their business.

The petitioners contended that this requirement was impractical and arbitrary, especially applied uniformly to establishments of vastly different scale and capacity. The burden, they said, fell hardest on smaller operators. They went further, asking the Court to strike down swathes of the Act and its regulations as unconstitutional.

The Court rejected these constitutional challenges in their entirety and upheld the validity of both the Act and the Regulations, noting that the Supreme Court had already affirmed the Act. It restated food safety as a public-health aim and accepted the State's claim that the rules rested on scientific and international standards.

It then issued two directions with implications beyond the immediate dispute.

1. It directed the Union Government to classify restaurants into small, medium, and large categories and to enact separate laws or frame separate guidelines for each, observing that reliance on turnover-based thresholds alone, was impractical and insufficiently responsive to differences in size and operational capacity.
2. The Court directed the State government to introduce health and safety rules specifically for street vendors and food trucks, and to establish a mechanism to ensure strict oversight of their implementation.

These directions are what give the judgment its broader regulatory significance.

III. Expanded prescriptions sans diagnosis risk over-regulation, arbitrary discretion, and regulatory incoherence.

A. New rules directed without a policy diagnosis -

The judgment's biggest gap is that it never finds that existing regulation has failed. Nor does it explain why new, vendor-specific rules are required, and whether existing processes for licensing, inspection, and enforcement have failed. It even concedes that the licensing rules already impose hygiene standards on every operator.

The FSS Act already establishes a comprehensive enforcement architecture. Section 30 vests primary responsibility in the State Commissioner of Food Safety, while Sections 36 and 38 operationalise enforcement through prescribed methods and designated officers at the district level within municipal and local jurisdictions.

The Court should have asked two questions: were existing standards inadequate, and had enforcement failed? However, the judgment neither raises nor answers these questions.

The reasoning moves from a general observation about the informality of street vending directly to remedial directions that materially reshape regulatory obligations. It does so without identifying any institutional deficiency that might have justified such an expansive remedy.

B. The Street Vendors Act framework was overlooked entirely -

The Court acts as if street vendors operate in a regulatory vacuum. They do not.

The Street Vendors (Protection of Livelihood and Regulation of Street Vending) Act, 2014 ("SVA") was specifically enacted to balance livelihoods against congestion, public health and urban order. It overrides inconsistent municipal laws and works through town vending committees ("TVCs"), surveys, and certificates of vending. The SVA is not merely a procedural architecture; it embodies a considered normative choice by Parliament, that street vendors are rights-holders, entitled to livelihood protection, meaningful participation through TVCs, and procedural safeguards before any restriction on their vending.

By directing new health and safety rules for vendors without engaging with this framework, the Court implicitly undoes that normative settlement. It treats vendors not as participants with protected rights but as subjects of fresh regulation – inverting the very premise of the statute Parliament enacted for them.

The result is regulatory incoherence and it is worth being specific about what that means in practice. Under the SVA, a vendor acquires a certificate of vending through a TVC process that must include vendor representation; this certificate is her legal entitlement to occupy a designated vending zone. Under the FSS Act, she must separately obtain a licence or registration from FSSAI, subject to turnover thresholds and hygiene standards. The Court's direction would now superimpose a third layer: vendor-specific health and safety rules with a fresh enforcement mechanism. Each of these three regimes carries its own authority, its own compliance requirements, and its own enforcement officer.

C. The Court's directions assume state capacity that does not exist -

As far back as 2020, only 47% of town vending committees had any vendor representation; seven states had not notified schemes under the SVA, and in four states no compliant TVC had been constituted at all (Narang et al., 2020).

The enforcement machinery under the FSS Act tells a similar story. As of 2021, there were only 2,531 Food Safety Officers nationally for roughly one crore street vendors, with vacancy rates between 33% and 90% across states (Mishra & Khattar, 2025). Between 2018 and 2021, fewer than 1% of food adulteration cases ended in conviction. None of this means enforcement has stopped. It means enforcement has changed. When an inspector cannot police everyone, he polices whomever he likes – and scarcity only raises the price of his goodwill.

Piling fresh directions onto this will not help; it will hurt. Pritchett, Woolcock and Andrews (2010) examined three well-funded reforms (schooling in India, budgeting in Mozambique, land titling in Cambodia) that all failed for one reason: each demanded transaction-intensive implementation, millions of scattered discretionary acts no centre can supervise. Street-food safety is the same kind of task. It is transaction-intensive (a crore of vendors, countless daily sales), discretionary (each inspector judges hygiene on the spot), high-stakes (a failed check can end a livelihood) and opaque (the encounter leaves no record). On all four counts, the very dimensions Kelkar and Shah (2022) name as the hardest for any state to master, it scores about as badly as a task can.

The sequencing is backwards, too. Early state-building, Kelkar and Shah argue, should begin with low-stakes, high-visibility tasks, short feedback loops, correctable errors – and reach for hard ones only once capacity exists. The order to keep "strict vigil" over vendors does the opposite: it escalates coercion before building the institutions that would restrain it.

This dynamic has become characteristic of the Indian regulatory ecosystem. Shah's account of the history of Indian finance documents a pattern of regulatory agencies consistently engaging in micro-management whilst lacking the state capacity to enforce their own frameworks.

High discretion combined with low capacity does not produce zero enforcement; it produces selective, rent-seeking enforcement. When inspectors are too few to visit every vendor, they must choose whom to visit and a shortage of inspectors does not dilute that discretionary power, it concentrates and rations it. The fewer the officers relative to a crore of vendors, the more valuable each discretionary decision becomes, and the higher the payment it can command.

As Rai and Shah (2015) observe, the Indian state is too often strong as in scary but not strong as in capable: it commands coercive reach without the institutional depth to convert that reach into governance outcomes. Ordering strict vigil onto a system with 90% officer vacancies in some states therefore does not produce better public-health outcomes; it produces more rent-seeking. Inspectors arrive not on a fixed schedule but whenever they are short of cash, and vague, subjective standards give them the pretext to do so (The Seen and the Unseen, Ep 18). The Court's directions thus simply widen the regulatory perimeter within which this behaviour can operate.

D. Cross-jurisdiction comparisons are persuasive only when capacity is comparable-

The judgment leans hard on foreign examples to justify a strong licensing and enforcement regime. It cites international norms to rebut the claim that the regime is impractical.

But it ignores the conditions that make those systems work. Licensing does not work in the abstract. It needs capacity, trained inspectors, predictable procedure and firm limits on discretion.

The judgment itself notes that regulators such as the United States Food and Drug Administration recognise wide variation in the size and capacity of food establishments, and that enforcement is typically carried out by local health authorities. These details matter. They determine whether regulation produces overall compliance or its very opposite by way of uneven and discretionary enforcement.

This is where the comparison breaks down. The FSLRC (2013) treats foreign models as inputs to adapt, warning against any bid to "mechanically transplant ideas from elsewhere". International standards inform; they do not, on their own, justify a domestic enforcement regime. The court inverted this. It used the FDA comparison as the justification itself, without asking whether the administrative architecture that makes those powers function exists here.

Pritchett, Woolcock and Andrews (2010) show why that architecture cannot simply be assumed to exist. As per them when governments copy institutional forms from higher-capacity settings, the laws, the agencies, the enforcement powers, without first building the administrative foundations that make those forms function, the result is the appearance of reform without its substance. It is, in their words, no reform at all.

The FDA comparison does not establish that India's enforcement regime should be intensified. It shows only that the FDA works within machinery that makes its powers function. Transplant the powers without that architecture and you import the coercion while leaving behind the restraint.

E. Non-parties bear the burden of directions issued without participation -

The High Court has not abided by one of the basic principles of natural justice, audi alteram partem – the 'right to be heard' before any orders are passed against a person, as it has not 'impleaded' and 'heard' street vendors and pliers of food trucks, before proceeding to pass directions concerning them. Yet it ordered the State to write new health-and-safety rules for them and to keep 'strict vigil' over them, without studying who they are or what they face.

The regulatory burden falls on informal workers operating under constrained economic conditions. The court treats informality as a regulatory gap to be closed, vendors operate outside the system, so the system must be extended to capture them. Shah (2026) inverts this reading. Where the state's enforcement is slow and unreliable, operating informally is not evasion of good rules but a rational adaptation to bad institutions. Vendors build workarounds precisely because formal compliance offers little protection and predictable harassment. The state then misreads the adaptation as defiance and tightens the rules, which raises the cost of formality further and entrenches the informality it set out to cure. A direction to bring a crore of vendors under "strict vigil" is the next turn of exactly this cycle.

IV. Food safety is a compelling goal, but cannot justify prescription without basis

The strongest defence of the Court's approach lies in the public interest at stake. Food safety directly impacts public health and the FSS Act itself emphasises risk management, consumer protection, and preventive regulation. The Court did not draft rules itself; it told the executive to. . Read this way, the judgment can perhaps be seen as an attempt to prompt more effective implementation of an existing legal framework.

However, that defence, has limited force if any, as the Court does not explain the reasons why such directions pertaining to street vendors and food trucks were required in the first place, and how the existing enforcement mechanisms under the FSS Act were inadequate. Without a demonstrated failure, intervention at the level of design has little to stand on.

The promise of later consultation cures nothing. Consultation after an order to make rules is not consultation about whether the rules are needed at all. Once the outcome is predetermined, the space for meaningful policy deliberation is confined to that predetermined outcome.

The Court unfortunately moved too quickly from concern to prescription, and in doing so, blurred the line between ensuring lawful administration and reshaping the regulatory architecture itself.

V. Conclusion: Prescriptions must stay focused and relevant

The judgment reflects a growing tendency: courts shifting from reviewing validity to supervising regulation, especially under the banner of public health or public interest. Such interventions may be well-intentioned. But good intentions do not substitute for institutional competence. In this case, the Court's directions go beyond correcting unlawful administration to enter the terrain of regulatory design, without any demonstrated failure of the existing framework and without hearing those most affected by the outcome.

This tendency is not confined to any single domain. As Jain and Reddy T (2025) observe, reform through judicial diktat characteristically bypasses public consultation on questions that carry complex second-order effects. The adversarial courtroom is not designed for the stakeholder deliberation that sound policymaking requires. When it substitutes for that process, the people most affected, here, street vendors and food truck operators, bear consequences that were never examined.

Lon Fuller, in The Forms and Limits of Adjudication (1978), offers a useful framework for understanding why. Fuller identified a class of problems he termed "polycentric", those where the disposition of any single issue carries implications for every other, such that pulling one strand "will distribute tensions after a complicated pattern throughout the web as a whole". In such contexts, he argued, adjudication becomes institutionally incapable, because the affected party's participation through proofs and reasoned arguments loses all meaning when no advocate "could possibly present to the tribunal the grounds that must be taken into account in the decision".

The Karnataka High Court's directions bear precisely this character. A judicial mandate to introduce new health and safety rules for street vendors does not resolve a discrete regulatory question, it simultaneously displaces an existing framework under the Street Vendors Act, imposes fresh compliance burdens on informal workers already operating at the economic margin, adds enforcement obligations to a system strained by Food Safety Officer vacancy rates and multiplies points of regulatory contact where discretion can be monetised. Each of these consequences shapes the others, and that interdependence is exactly what Fuller's framework identifies as lying beyond the proper limits of adjudication.

The cost is not only procedural. Compliance burdens imposed without the capacity to administer them do not produce better governance; they tax the everyday enterprise of people operating at the margin and dampen the very economic activity the state should want to encourage. As Shah (2026) puts it, this is the "effervescence of creativity and invention that a poor country cannot afford to extinguish."

The lesson is that remedial ambition must be matched by remedial discipline. Prescription without diagnosis, and supervision without capacity, do not produce better governance. They produce the illusion of it.

References

Bedi J. and Narang P., 2020. Progress Report 2020: Implementing the Street Vendors Act. Centre for Civil Society.

Mishra G. and Khattar J., 2025. FSS Act: Need for enforcement and accountability in India's food safety regime. Bar and Bench. 26 June 2025.

Pritchett L., Woolcock M. and Andrews M., 2010. Capability Traps? The Mechanisms of Persistent Implementation Failure. Center for Global Development.

Kelkar V. and Shah A., 2022. In Service of the Republic: The Art and Science of Economic Policy. Penguin Allen Lane.

Varma A. and Menon M., 2017. Restaurant Regulations in India. The Seen and the Unseen. 15 May 2017.

Financial Sector Legislative Reforms Commission, 2013. Report of the Financial Sector Legislative Reforms Commission. Ministry of Finance, Government of India. 22 March 2013.

Jain C. and Reddy T P., 2025. Why reform through judicial diktat is fraught with perils. Times of India. 8 November 2025.

Fuller L. and Winston K I., 1978. The Forms and Limits of Adjudication. Harvard Law Review, Vol. 92, No. 2.

Rai S. and Shah A., 2015. Going from strong as in scary to strong as in capable. The Leap Blog. 25 February 2015.

Shah A. and Varma A., 2026. Why Freedom Matters | Episode 10 | Everything is Everything. Everything is Everything. 1 September 2026.

Ahluwalia R. and Shah A., 2026. Why Firms Build Economies Ft. Ajay Shah | Growth is Good | Ep 25. Foundation for Economic Development. 27 March 2026.

Prashant Narang and Aryan Pandey are researchers at TrustBridge Rule of Law Foundation. Indira Unninayar is an Advocate-on-Record, Supreme Court of India.

Comments on the Securities Market Code Bill, 2025

by Natasha Aggarwal, Pratik Datta, K. P. Krishnan, Bhavin Patel, M. S. Sahoo, Renuka Sane, Ajay Shah and Bhargavi Zaveri-Shah.

Finance is the brain of the economy. It dictates allocative efficiency. The financial system chooses which industries and firms receive capital. This efficiency determines the extent to which investment translates into GDP growth. Getting finance right is critical. The prioritisation of financial reform must be absolute.

The Securities Market Code Bill, 2025 (SMC) marks a substantial advance over the existing Securities and Exchange Board of India Act, 1992, particularly in strengthening governance arrangements and formalising the processes of regulation-making. Importantly, it makes a serious attempt to end the ''circular raj'' by confining the issuance of subsidiary instruments to the Chairperson or senior members of the Board, rather than dispersed internal authorities. Further, it has introduced timelines for investigations and attempted to separate the investigation function from the adjudication function, making the first effort towards a clearer separation of powers. That said, the SMC can make further strides if it focuses on the issues described below.

We now address the issues in relation to specific provisions drafted within the current SMC.

Separation of powers

The SMC raises three related concerns, which demonstrate a concentration of powers at SEBI.

Issue 1: Excessive delegation of essential legislative functions

Clause 96 prescribes imprisonment, a fine, or both as penalties for market abuse (an offence defined under Clause 93). However, Clause 93 also grants the regulatory authority to define new offences within the 'market abuse' category, which would carry the same criminal sanctions. This raises concerns around excessive delegation: the identification of criminal offences is a core legislative function and cannot be delegated. Moreover, such excessive delegation is subject to being struck down in judicial review.

Issue 2: Regulation-making on adjudication

Clause 146(2)(j), read with Clause 17(4), permits SEBI to make regulations on the manner of conducting adjudication proceedings. This should not be done by SEBI itself. SEBI is the agent, and the Parliament is the principal. The Parliament must define the checks and balances on the coercive power of the agent. Otherwise, the agent always has incentives to appropriate more arbitrary power.

Issue 3: Ineffective separation of investigative and adjudicatory functions

Clauses 17 and 27 introduce limited separation of investigative and adjudicatory functions for specific matters. Investigation is an executive function, and adjudication is a quasi-judicial function. A conflation of these two functions in the same individual raises concerns about the separation of powers.

In summary, there is no clear separation of power between the three functions of the regulator. The same regulator is empowered to define the scope of violations and offences, investigate them, enforce them, adjudicate upon them, and impose sanctions for their violations, all under regulations of its own design. This combination blurs the distinction between legislative, executive, and adjudicatory functions and concentrates powers in the same persons.

Proposal:

Remove Clauses 17(4), 92(f), 93(g), and 146(2)(j) from the SMC. Implement strong structural separation between the investigative and adjudicatory functions. One way to do this is to create a distinct career track for adjudicatory officers as Administrative Law Officers (ALO). One SEBI board member should also be designated as an Administrative Law Member, who oversees the functions of ALOs. These officers should be solely responsible for adjudication and must have no involvement in investigative or quasi-legislative functions. Introduce extraordinary safeguards to mandate arm's length operation between investigation and adjudication.

Timelines for investigation and adjudication

Issue: Clauses 13, 16, and 27 introduce timelines for investigation and interim orders. However, provisos allow these timelines to be extended (Clause 27(4), proviso to Clause 13(2)). Additionally, the SMC specifies no timelines for the completion of adjudication proceedings. This allows investigations and adjudications to continue indefinitely, rendering the statutory limits ineffective.

Proposal: Remove the power to extend timelines for investigation. If extensions are retained, mandate the publication of written reasons, subject to mandatory review by the SEBI governing board. Introduce a strict statutory timeline for the conclusion of adjudicatory proceedings. These timelines should be part of the Parliament-specified regulations on the manner of conducting adjudication proceedings that we recommend in our preceding suggestions.

Methodology for calculating unlawful gains

Issue: The SMC requires the determination of unlawful gains by an investigating officer under Clause 13(3), but provides no calculation methodology. This virtually guarantees arbitrary and inconsistent determinations. It defeats the rule of law.

Proposal: Codify standard methods or guidelines for calculating unlawful gains within the SMC. Operationalise these through detailed regulations. Reference the Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024, as a baseline.

Sanction determination factors

Issue: The SMC lists factors for adjudicating officers to consider while imposing sanctions. Some mirror Section 15J of the SEBI Act, which are unimplementable in practice. Terms like 'impact of the default or contravention on the integrity of the securities markets' (Clause 19(b)(v)) lack precision and invite arbitrariness.

Proposal: Base sanctions strictly on the quantifiable extent of harm caused to specific persons. Codify this methodology. Alternatively, publish binding guidelines detailing specific aggravating and mitigating factors, expanding upon the approach in the SEBI (Settlement Proceedings) Regulations 2018.

Criminal enforcement

Issue: The SMC retains criminal liability, including imprisonment, for some offences. Establishing guilt in Indian criminal law requires proof beyond a reasonable doubt, typically coupled with the requirement to establish intention. This is an inefficient tool for complex financial markets. The boundary between aggressive trading and market manipulation is thin. The threat of criminal sanctions deters contrarian strategies. This reduces market liquidity and harms price discovery. Traditional fraud is adequately covered by the Bharatiya Nyaya Sanhita.

Proposal: Remove all criminal liabilities. Structure sanctions as punitive civil penalties or restorative remedies, scaling to a multiple of the illicit gains. Retain debarment for systemic misconduct.

Power to issue directions

Issue: Clause 23 vests SEBI with open-ended direction-making powers. Moreover, the requirement to record reasons in writing (currently included in Section 11(4) of the SEBI Act) has not been included in Clause 23.

Proposal: Delete Clause 23. Confine non-penal measures to specific, narrowly defined statutory triggers (e.g., immediate asset freezing powers under strict procedural safeguards). All adjudicatory actions must be justified by reasons in writing.

Nominee directors on the SEBI board

Issue: The SMC retains government nominee directors on the SEBI board. Nominee directors prioritise the perspective of their parent departments over market efficiency. They exercise disproportionate influence. Inter-agency coordination should not occur via board representation.

Proposal: Appoint mid-career professionals for fixed terms until a mandatory retirement age. Bind them statutorily to SEBI's specific objectives. Address inter-agency concerns externally through the Financial Stability and Development Council (FSDC).

Commodities markets

Issue: Clause 49 empowers the government to determine commodities eligible for trading. The market must decide which commodities warrant hedging instruments. State determination of eligible commodities is equivalent to the government deciding which firm is permitted to issue equity.

Proposal: Delete Clause 49. Empower SEBI to draft regulations defining objective eligibility criteria for commodity derivatives, identical to the framework for eligible scrips.

Ombudsperson

Issue: Clause 73 empowers SEBI to designate an Ombudsperson. This creates a conflict of interest. The SMC lacks an appeals mechanism for decisions made by the Ombudsperson.

Proposal: Mandate statutory independence for the Ombudsperson. Ensure job security separate from SEBI management. Define a clear appellate process.

Exemptions for PSUs

Issue: Clause 65(2) empowers the Central Government to exempt listed public sector companies from listing and disclosure requirements. This violates Article 14 of the Constitution. State-owned enterprises must face the identical market discipline applied to private enterprises.

Proposal: Delete Clause 65(2). Mandate equal treatment for all market participants.

References

Natasha Aggarwal and others, "'Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading'" (Working Papers, TrustBridge Rule of Law Foundation, 2025).

In Re: The Delhi Laws Act, 1912 (AIR 1951 SC 332).

M S Sahoo and V Anantha Nageswaran, 'Regulatory architecture 2.0: Securities Markets Code marks a decisive shift' (Business Standard, 25 December 2025).

M.S. Sahoo and Sumit Agrawal, "Reimagining SEBI's Consent Settlement Framework" (Chartered Secretary, January 2026).

C.K. Takwani, Lectures on Administrative Law (7th edition, 2023) at page 100.

Bhargavi Zaveri-Shah, 'SEBI does not need unlimited powers – here's what's wrong with the Securities Markets Code' (ThePrint, 5 January 2026).

Bhargavi Zaveri-Shah and Harsh Vardhan, 'Ghost of the Commodities Controller—why India's new financial law feels like the 1970s' (ThePrint, 19 January 2026).

Can technology augment order writing capacity at regulators?

by Natasha Aggarwal, Satyavrat Bondre, Amrutha Desikan, Bhavin Patel and Dipyaman Sanyal.

Indian regulators have extensive quasi-judicial powers that they express through adjudicatory orders. It is critical that these powers are exercised in a proportionate, legitimate, and well-reasoned manner, as they not only impact the persons directly involved, but also the wider ecosystem in which they operate. Arbitrary actions, unsubstantiated by clearly articulated reasoning, can raise serious concerns around the legitimacy of regulatory actions and lead to a loss of confidence in the regulator. Such actions may also be set aside by appellate and review fora. Clearly written, well-researched, and reasoned orders help provide clarity, predictability, and knowability of the law, which are key indicators of a rule of law system (Aggarwal, Patel and Singh, 2025). Our study of the state of Indian regulatory order writing shows there is room for improvement in this regard.

We notice a growing interest in the use of Generative Artificial Intelligence (Gen AI) to resolve procedural inefficiencies at quasi-judicial and judicial authorities in India (Supreme Court Committee on AI, 2025; Kerala High Court, 2025), coupled with concerns around the potential dangers of using such technologies without adequate safeguards. Against this background, in a new working paper titled, 'Can technology augment order writing capacity at regulators?' we critically examine the opportunities and challenges of using technology, in particular Large Language Models (LLMs), to assist regulatory order writing in quasi-judicial settings.

The paper proposes augmenting rather than replacing human decision-makers, aiming to improve regulatory order writing practice through responsible use of LLMs. It identifies the core principles of administrative law that must be upheld in these settings - such as application of mind, reasoned orders, non-arbitrariness, rules against bias, and transparency - and analyses how inherent limitations of LLMs, including their probabilistic reasoning, opacity, potential for bias, confabulation, and lack of metacognition, may undermine these principles.

While the available Indian literature on the topic focuses largely on these limitations, and on critiquing proposals based on an over-reliance on technocratic means to improve state capacity, this paper's contribution lies in its integrative work: we draw upon the design principles articulated in frameworks developed in other jurisdictions and relate them to the applicable principles of Indian administrative law. We use this synthesis to develop a Problem-Solution-Evaluation (PSE) framework that is attentive to international practice, the legal principles underpinning quasi-judicial decision-making in India, and problems and limitations inherent to GenAI and LLMs.

The PSE framework proposed in the paper maps specific technical, design, and systemic solutions to each identified risk, and outlines evaluation strategies - end-to-end, component-wise, human-in-the-loop, and automated - to ensure ongoing alignment with legal standards. An overview of the framework is set out in the table below:

Table 1: Applying the Problem-Solution-Evaluation framework. This table illustrates how the PSE framework can be operationalised to align the design, development and use of LLMs for order writing assistance with the requirements of Applicable Law.

Problem	Applicable law	Solution	Evaluation
Non-application of mind	Non-application of mind; Failure to provide reasons; Arbitrariness	Interface Checkpoints; Confidence Score Display; Dual-Prompt Pipelines; Functionality Limitation; Constraint Enforcement; Workflow Design for; Review Role-Based Access	Edit Rate; Turnaround Time (TAT); Prompt Divergence Rate; Coherence Score
Black-box problem	Failure to provide reasons; Transparency	Chain-of-thought prompting; Input Token Influence Identification Symbolic Reasoning Systems Traceability tools; Visualisation; Simplified model explanations	Clarity rating; Audit Trail Incidence Document Traceability Rate
Potential for bias	Rules against bias; Arbitrariness	Data Preprocessing; Bias penalisation; Domain-specific content filters; Automated Bias Flagging Tools; Establishment of Legal Fairness Criteria; Mandatory Periodic Benchmarking	Bias Flag Rate Override Percentage; Fairness Benchmark Scores
Confabulation problem	Non-application of mind; Failure to provide reasons; Arbitrariness	Retrieval Augmented Generation; Post-Generation Verification; Legal Knowledge Graph Integration; Mandatory reviewer verification; Watermarking for traceability; Communicate technical limitations	Secondary LLM ''Judge'' for Fact-Checking; End-to-End Evaluation Tools Hallucination Rate; Retrieval Precision@k/ MRR NLI Coherence Checks; Self-Consistency Rate
Lack of metacognition	Non-application of mind; Arbitrariness	Prompt engineering; LLM as a judge; Iterative improvement from feedback	Closeness Metric; Human evaluation on overconfidence in output
Training corpus	NA	Adaptive Scraping Frameworks; Sector-specific pre-training; Structured Entity; Extraction and Legal Knowledge Graphs; Isolated Model Containers; Source inclusion; Perplexity tracking; Legal Retrieval Benchmarking; Curate sector-specific legal databases	Crawl coverage; OCR Error Reduction; Validation perplexity; Retrieval lift
Data security and privacy	NA	Stringent access control; Synthetic supervision-based PII detectors; NLP filters for information masking; Isolated Model Containers; On-premise infrastructure	Unauthorised access attempts; Mean Time To Remediation (MTTR); Penetration Test Pass Rate; PII Detection Accuracy

By itself the framework may be insufficient. It must be supplemented with systemic measures taken at the regulatory level. We offer stage-wise recommendations on how LLM-based order review tools can be built for and used in regulatory adjudication.

References

Natasha Aggarwal, Bhavin Patel, and Karan Singh, "A Guide to Writing Good Regulatory Orders" [2025] Trustbridge Rule of Law Foundation Working Papers.

Anurag Bhaskar and others, "White Paper on Artificial Intelligence and Judiciary" Centre for Research and Planning, Supreme Court of India, 2025.

High Court of Kerala, "Policy Regarding the Use of Artificial Intelligence (AI) Tools in District Judiciary" Official Memorandum HCKL/7490/2025-DI-3-HC Kerala, 2025.

Natasha Aggarwal, Amrutha Desikan and Bhavin Patel are researchers at the TrustBridge Rule of Law Foundation. Satyavrat Bondre and Dipyaman Sanyal work on AI and technology at dōnō consulting.

How Indians rank their rights: what 26 interviews tell us about Article 19 and property

by Prashant Narang.

Citizens treat property as the material anchor that makes other freedoms meaningful; livelihood-enabling freedoms are prioritised, while free speech is cherished but policed asymmetrically.

In 1978, the Forty-Fourth Amendment removed the right to property from the Constitution's catalogue of fundamental rights. Lawyers and economists have debated the implications ever since. But do ordinary citizens internalise that demotion? This post introduces our Socio-Legal Review note - co-authored by Sehar Abdullah, Keerthana Satheesh, and Prashant Narang- which steps outside the courtroom to ask a simple question with big policy consequences: which rights do people treat as most important in their daily lives - and why? Drawing on 26 in-depth interviews across professions that are especially sensitive to rights restrictions (journalists, migrants, MSME owners, cab drivers, farmers, artists, street performers and more), we map how citizens rank the Article 19(1) freedoms alongside the right to property. The top-line finding: people continue to see property as foundational - often the precondition that makes other freedoms meaningful.

What we did

We used purposive and snowball sampling to reach respondents aged 19-65 whose livelihoods could be directly affected by limits on speech, association, movement, residence, profession, or on property. Most interviews were conducted in Delhi, with additional remote interviews in Kerala, Chennai, and Bengaluru. We piloted the instrument, then ran a three-part interview: background and demographics; general views on freedoms and "reasonable restrictions"; and case studies with graded constraints (for example, permits and bans; "public order" versus epidemic) to elicit trade-offs. Transcripts were thematically coded. This is qualitative research; insights are directional, not population estimates.

What we heard: the lived hierarchy

• Property as cornerstone - Across backgrounds, respondents described property as livelihood, security, and autonomy "a means to earn a living", as one farmer put it. People resisted permissions on buying and selling land and were most animated by compulsory acquisition scenarios. Support for acquisition often hinged on compensation: market-linked and predictable when the purpose was clearly public (for example, a metro), with sharper bargaining when it looked commercial (for example, a mall). The underlying intuition is economic: when property underwrites household security, the perceived risk of under-compensation looms large.
• Economic freedom as a gateway - Freedoms that enable livelihood - movement and residence for migrants (Article 19(1)(d) and (e)) and choice of occupation (Article 19(1)(g))- were consistently prioritised. A photojournalist linked movement directly to earning; an activist framed profession and property as part of a single "socio-economic" relationship that the state should ease rather than police. This fits a law-and-economics intuition: secure property and open markets reduce dependence and expand feasible choices, which then support speech and association.
• The free-speech asymmetry - Respondents valorised free expression for themselves - journalism as "the fourth pillar", bans as "the end of democracy" - but many were readier to restrict others, often using elastic notions of "harm" or "extremism". In short: pro-speech for me, pro-restriction for you. That asymmetry is a legitimacy warning: broad, vague grounds for curbing speech match the public's weakest intuitions and risk becoming catch-alls.
• Residence as identity - The right to reside and settle anywhere (Article 19(1)(e)) surfaced as a surprising anchor of national belonging. Several interviewees described the ability to live anywhere as central to Indian diversity - inking mobility to both opportunity and citizenship.

Why this matters for policy design

• Compensation design - Where acquisition feels commercial, citizens bargain harder and distrust adequacy; where purpose is plainly public, opposition is more about predictability than principle. Legislatures and agencies should therefore tighten "public purpose" definitions and commit to clear, market-linked compensation formulas (benchmarks, indexation, relocation assistance) and process timelines that reduce uncertainty rents and litigation.
• Targeted deregulation for livelihood rights -Frictions on movement, residence, and small-enterprise activity (permits, zoning that criminalises street vending, opaque lease and tenancy formalities) bite hardest on those who use these rights to earn. Policy wins lie in simplifying titles and transfers, digitising and time-bounding consents, rationalising vending, parking, and market rules, and reducing compliance steps for micro-businesses - exactly where our respondents located day-to-day pain points.
• Speech rules that travel well - The asymmetry we observed - tolerant for self, restrictive for others - suggests two drafting heuristics: (i) avoid vague grounds like "offence" without a tight harm standard, and (ii) pair restrictions with necessity-and-proportionality tests that officials must evidence ex ante. Narrow tailoring not only protects rights but also matches citizens' strongest defence of speech (for themselves) while tempering expansive instincts to curb others.

What this does not claim

This is a qualitative, urban-skewed sample. We do not estimate a numeric hierarchy or claim causal links between income and preferences. Our aim is to surface design hypotheses and legitimacy risks that can be tested at scale and used now for better drafting and implementation. Rural and longitudinal work are obvious next steps.

The big picture

Constitutional amendments can change a right's formal rank without changing its everyday salience. In our interviews, property remains the backbone of autonomy and a hedge against shocks; livelihood-enabling freedoms are the everyday workhorses; and speech is cherished but policed asymmetrically. For policymakers and drafters, the take-away is practical: align legal categories and procedures with how citizens actually use and trade off rights. That means predictable compensation and acquisition processes; frictions-down reforms for movement, residence, and micro-enterprise; and narrowly tailored, evidence-based limits on expression. This is the path to a constitutional order that people recognise in their daily choices - not just in the statute book.

Read the paper

Rights in the Eyes of the Beholder: The Lived Hierarchy of Rights in India's Democracy - Socio-Legal Review, 21(1), 2025. Authors: Sehar Abdullah, Keerthana Satheesh, and Prashant Narang.

Prashant Narang is a researcher at TrustBridge Rule of Law Foundation.

Registration of security interest: A peculiar Indian problem

by Pratik Datta.

When a lender extends credit to a company, it often secures repayment by way of a security (often referred to as a “charge”) created over certain assets or properties of that company. Company law usually requires such security to be registered with an agency. For instance, in the UK, company charges are registered with the Companies House. Registration of security could serve three different purposes:

1. the purpose of registration of security could be to publish the existence of such security to make it available for public inspection. This gives potential lenders to the company information about the extent of prior lending to the company which may rank ahead of their own contemplated advances. Such information may also be of interest to credit analysts, resolution professionals, shareholders and investors.

2. registration may be necessary for ‘perfection’ of the security. That is, registration may be treated by law as a necessary part of the process whereby a person obtains a security interest against the company. Without registration, the person in question would fail to obtain security interest and so would not be able to rely on it against the unsecured creditors of the company during the company’s insolvency.

3. registration could be used in law as a way of determining priority among secured creditors. For example, the law could require that priorities among secured creditors be determined by the date of registration of the security instead of the date of creation of security.

In India, we have a peculiar situation. When a bank or notified financial institution extends a secured credit facility to a company, three different registrations are necessary under three different laws for the same security.

1. Under section 77 of Companies Act 2013, a company creating charge on its assets or properties is required to register the particulars of such charge with the Registrar of Companies (‘RoC’). This involves providing the relevant information in Form No. CHG-1 (for charges other than debentures) or Form No. CHG-9 (for debentures), getting it signed by both the company and the charge holder, and then filing the Form along with the underlying credit agreement with the ROC.

2. Under section 23 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’), the particulars of every transaction (involving banks and notified financial institutions) creating security interest must be filed with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (‘CERSAI’). This involves filing Form I with CERSAI.

3. Under section 215(2) of the Insolvency and Bankruptcy Code 2016 (‘IBC’), a financial creditor (which typically includes banks and regulated financial institutions) is mandatorily required to submit financial information and information relating to assets, in relation to which any security interest has been created, to an Information Utility (“IU”). Unlike RoC or CERSAI, IUs are required to authenticate and verify information of default, and issue a record of default in Form D to its registered uses.

As a result of these legal provisions, every single secured credit transaction in India has to be mandatorily registered with the RoC, the CERSAI as well as an IU. More than increasing compliance burden, this institutional overlap increases the legal uncertainties around security creation and enforcement, with potentially adverse implications for the entire secured credit landscape. A recent case illustrates the point.

Case in point

In Bizloan Pvt. Ltd. v. Mr. Amit Chandrashekhar Poddar (“Bizloan judgment”), the NCLAT was seized of a unique situation where a corporate credit transaction was registered only with CERSAI but not with RoC. Bizloan Private Ltd. (“Bizloan”) provided financial credit facilities to Autocop (India) Pvt. Ltd. (“Autocop”) in the form of sales bill discounting and purchase bill discounting of Rs. 1 crore in aggregate. Subsequently, Autocop went into corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code 2016 (“IBC”). Bizloan filed its claims in Form C during CIRP, which were admitted in full without indicating if they were secured or unsecured. It was only when Bizloan received the final resolution plan for Autocop that it realized that Bizloan had been classified as an unsecured financial creditor. Bizloan challenged this classification but by then Autocop had been put into liquidation. The NCLT dismissed Bizloan’s challenge. Consequently, Bizloan approached NCLAT in appeal.

Bizloan’s arguments

1. Bizloan argued that proving security interest in liquidation proceedings under IBC should be governed by Regulation 21 of the IBB (Liquidation Process) Regulations, 2016, which states:

The existence of a security interest may be proved by a secured creditor on the basis of -

1. the records available in an information utility, if any;
2. certificate of registration of charge issued by the Registrar of Companies; or
3. proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

Evidently, proof of registration of charge with CERSAI is sufficient for proving security interest in a liquidation by virtue of Regulation 21(c) of the Liquidation Regulations.

2. Bizloan further argued that section 238 of the IBC overrides provisions of other statutes. Therefore, if there is any inconsistency between IBC and any other statute, IBC and the regulations issued under it should prevail.

Liquidator’s arguments

1. The Liquidator relied on section 77(3) of the Companies Act 2013, which states:

Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator appointed under this Act or the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be, or any other creditor unless it is duly registered under sub-section (1) and a certificate of registration of such charge is given by the Registrar under subsection (2).

The underlined portion of the above provision was inserted through the Eleventh Schedule of the IBC itself, which came into effect from November 15, 2016. The liquidator highlighted that the words “shall” makes him duty bound to follow the above provision. Further, if there is any conflict between section 77 of Companies Act 2013 and Regulation 21 of the Liquidation Regulations issued under the IBC, the former will override the latter since section 77 is a specific provision dealing with the particular situation (that is, registration of charges) and it explicitly uses the words ““notwithstanding anything contained in any other law”. Since Bizloan’s charge was not registered with the RoC under section 77 of the Companies Act 2013 and only registered with CERSAI, Bizloan cannot be treated as a secured financial creditor in liquidation governed by the IBC.

2. The liquidator further argued that Regulation 21 is an outcome of section 52(3)(b) of the IBC, which states:

Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either – (a) by the records of such security interest maintained by an information utility; or (b) by such other means as may be specified by the Board.

The liquidator argued that section 52(3) applies only before a secured creditor chooses to “realise” its security interest, which does not come into the picture in Bizloan’s case since Bizloan had effectively “relinquished it security interest to the liquidation estate” and was to receive the sale proceeds in terms of section 53 of IBC.

3. The Liquidator further highlighted that Regulation 21 uses the words “may prove”, which is discretionary and not mandatory. In contrast, section 77 uses the word “shall” which is mandatory and binding.

4. Additionally, the Liquidator argued that if there is a conflict between section 77 and Regulation 21, Regulation 21 of the Liquidation Regulations issued under section 240 of the IBC will have to give way to section 255 of the IBC, which amended section 77(3) of the Companies Act explicitly giving more weightage to section 77 of Companies Act 2013 in matters of registration of charges on a company’s assets or properties.

5. The Liquidator also drew attention to section 20(4) of the SARFAESI Act 2002, which reads:

The provisions of this Act pertaining to the Central Registry shall be in addition to and not in derogation of any of the provisions contained in the Registration Act, 1908 (16 of 1908), the Companies Act, 1956 (1 of 1956), the Merchant Shipping Act, 1958 (44 of 1958), the Patents Act, 1970 (39 of 1970), the Motor Vehicles Act, 1988 (49 of 1988), and the Designs Act, 2000 (16 of 2000) or any other law requiring registration of charges and shall not affect the priority of charges or validity thereof under those Acts or laws.

Accordingly, the Liquidator argued that SARFAESI Act 2002 is ‘only in addition and not in derogation of’ the provisions of Companies Act 2013 and any other law. Therefore, registration with CERSAI under SARFAESI Act 2002 cannot affect the priority of charges or validity thereof under those other Acts or laws.

NCLAT’s judgment

The NCLAT noted the well-established principle of statutory interpretation that a latter law prevails over an older law. Accordingly, it observed that the IBC came into effect on December 1, 2016 while the amendment to section 77(3) of Companies Act 2013 came into effect earlier on November 11, 2016. Further, Regulation 21 of the Liquidation Regulations came into effect on December 15, 2016, after the amendment to section 77(3) of Companies Act 2013. Therefore, NCLAT concluded that the IBC will override the amended section 77(3) of Companies Act 2013. Consequently, it was held that security interest of a creditor can be proved if the same is available only in CERSAI. It is not completely and exclusively dependent on charge registered with RoC under section 77 of Companies Act 2013. As a result, Bizloan should be treated as a secured financial creditor based on its CERSAI registration pursuant to Regulation 21 of the Liquidation Regulations.

Analysis of NCLAT’s reasoning

The NCLAT’s reasoning is problematic. The general principle of statutory interpretation that a new law overrides an old law is based on the assumption that if both laws have been enacted by the Parliament at different points in time, it is reasonable to assume that the latter law reflects the latest policy intent of the Parliament and therefore, should prevail over the earlier law.

When IBC was enacted by the Parliament, section 255 of IBC amended section 77(3) of Companies Act 2013 to clarify that a liquidator appointed under IBC must take into account a charge created by a company only if such charge was registered under section 77 of Companies Act 2013. The Parliamentary intent was clearly to ensure that only charges registered under section 77 of Companies Act 2013 are taken into account in a liquidation under IBC.

The Ministry of Corporate Affairs (“MCA”) notified different provisions of IBC at different points in time because of administrative convenience. Parliamentary intent cannot reasonably be determined based on whether a provision of IBC was notified before another provision of the IBC by the MCA, that too within a span of a month. Therefore, the fundamental basis of NCLAT’s reasoning stands of unsure footing.

Policy issues

The NCLAT noted that RoC and CERSAI registrations serve different purposes. Registration of charges with RoC under section 77 of Companies Act 2013 is relevant for determining priority of claimants of a company during liquidation under IBC or winding up under Companies Act 2013. In contrast, CERSAI registration under section 20 of SARFAESI Act 2002 is relevant for realization of security interests by banks and notified financial institutions through the SARFAESI Act 2002. It is also noted that CERSAI registration helps in fraud prevention by allowing lenders to check if the asset being offered as security is already hypothecated or mortgaged.

On closer examination, these stated purposes do not appear to be mutually exclusive. When a bank or a notified financial institution extends secured credit to a company, the borrower company is mandated by law to register the charges with the RoC under section 77 of Companies Act 2013. This RoC data is available for public inspection. Potential lenders to the company can use the RoC data to check if the company has already given any of its assets or properties as security to any prior lender(s). Clearly, fraud prevention in corporate lending by banks and notified financial institutions cannot be a reason for setting up CERSAI.

CERSAI becomes relevant only for fraud prevention in the case of loans extended by banks or notified financial institutions to non-corporate borrowers such as individuals, sole proprietorships, societies, partnerships etc. The RoC does not have information on prior borrowings by such non-corporate borrowers or the existing security on the assets or properties of such borrowers. In such cases, CERSAI plays a legitimate role in fraud prevention.

The problem in the current institutional design lies is the overlap between RoC, CERSAI and IUs with respect to corporate secured lending. Banks and notified financial institutions have a strong incentive to register security interests in corporate lending transactions with CERSAI because it enables them to enforce such security interests through the special out-of-court enforcement mechanism under SARFAESI Act 2002. These lenders also have an incentive to get the same information filed with an IU so that they can rely on the IU’s record of default in insolvency proceedings under IBC. And the corporate borrower is anyways legally mandated to register the security with RoC under Companies Act 2013. Overall, these laws have created layers of institutions over one another for the same purpose, muddying the functional clarity between RoC, CERSAI and IUs.

Conclusion

The blurring of functionalities between the RoC, CERSAI and IUs not only creates avoidable transaction cost in corporate secured credit transactions, it also leads to legal risks around security creation as the Bizloan judgment illustrates.

Registration of a particular security interest against assets or properties of a particular corporate debtor should be done only once. Let’s assume that the registration agency is RoC. The corporate debtor should register a particular security interest only once with the ROC. In case of default, that RoC registration alone should be enough for banks and notified institutions to use enforcement rights under SARFAESI against such corporate debtors. Similarly, the same ROC registration alone should be adequate proof of security interest against a corporate debtor for the purposes of IBC. The law should not require the same security interest against the same corporate debtor to be registered with CERSAI or any IU.

CERSAI would, of course, remain relevant for registration of security interests against non-corporate borrowers. The case for IUs is more nuanced. The BLRC had envisaged an open competitive industry in the market for information required for insolvency and bankruptcy. This should be achieved by enabling multiple private competing businesses to perform the role of RoC, which would require a fundamental rethinking of the RoC as a state monopoly under Companies Act 2013. Adding an additional layer of IUs over the existing RoC to perform exactly the same function is not exactly the reform that the BLRC had envisaged.

The legal mechanics of achieving these outcomes is not particularly complex. Suitable amendments would be required to Companies Act 2013, SARFAESI Act 2002 and Insolvency and Bankruptcy Code 2016 and some subordinate legislations issued under these statutes. But first of all, the MCA (for RoC and IUs) and Ministry of Finance (for CERSAI) need to recognize the problems with the current laws on registration of security interests and agree on the policy pathway ahead.

The author is a lawyer.

Examining the performance of ERCs at APTEL

by Chitrakshi Jain, Bhavin Patel, and Renuka Sane.

Introduction

The efficiency of the State Electricity Regulatory Commissions (SERC)s, the Central Electricity Regulatory Commission (CERC) and the Joint Electricity Regulatory Commission (JERC) influence investability and growth of the electricity sector. For example, it costs regulated entities time and resources to petition the relevant ERC for decisions and potentially, to challenge decisions taken by the ERC at the appellate tribunal (APTEL), which exercises supervisory control over the ERCs and reviews their decision-making.

This article studies how ERC decisions perform at APTEL. We collect information about aspects of the ERCs' functioning from the text of orders passed by APTEL. This helps us (a) identify the most-litigious areas across ERCs and (b) examine how the ERCs' decisions perform in appeal. We use sub-national comparative analysis to understand the variation in the functioning of the different ERCs and the litigiousness of issues in different states.

We ask the following questions:

1. Which ERCs contribute the most appeals at APTEL?
2. What are the most litigious issues at APTEL?
3. In how many appeals was the ERC's decision:
   1. Upheld, i.e. appeal was dismissed by APTEL?
   2. Partially upheld, i.e. appeal was partly allowed at APTEL?
   3. Overturned, i.e. appeal was fully allowed at APTEL?
4. How often were the ERCs ordered to reconsider their decisions, i.e. the matter was remanded?

Our results suggest that issues related to tariff determination and restructuring are the most litigated issues at APTEL across ERCs, with the exception of Maharashtra. ERCs are differently situated in their ability to defend their decisions at APTEL and in the quality and clarity of their orders. We argue that such assessments, if regularised, can assist ERCs in improving the quality and form of their decision-making by creating a feedback loop, and can also assist in identifying areas for policy reform at the sub-national level.

Methods: Data

We obtained the orders passed by APTEL between the years 2013-2022 where the ERCs are a party to the challenge before APTEL. We excluded interim orders given that they do not include the outcome of the case. We focused on ten states, including Andhra Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal. These were selected keeping in mind geographical coverage, size of the state, and installed renewable energy (RE) capacity in the state.

We collected information on 26 indicators from the orders, related to the following categories:

1. Time-related: e.g., date of orders, date of impugned order
2. Party-related: names of appellants, respondents
3. Bench-related: e.g., quorum, members' names
4. Subject-matter related: e.g., prayers, issues
5. Outcome-related: e.g., disposition and remand

We processed the text of the orders through LLMs, which we prompted to collect the information by placing reliance on explicit language in the text. After collecting the information for the relevant indicators, we ran verifications based on rules of legal consistency and logic to ensure that the collected information is accurate and reliable. For indicators related to outcome, we have made subjective inferences when the explicit information regarding its outcome was not articulated in the order. We have relied on individual appeals as the unit of analysis, given that outcomes are typically uniform for all parties in an order. We have integrated human verification at every stage of data collection to ensure reliability. Our final dataset consists of 513 orders and 919 appeals. The data is available here.

Methods: Issue categorisation

In order to study the issues that were being agitated before APTEL, we identified themes from the statement of issues in appeals which explicitly articulated them. There were 318 appeals (out of 919) that did not include a statement of issues. After classifying the issues thematically, we decided upon the final categories presented in Table 1 in consultation with practitioners. We ran keyword searches to sort the statement of issues into identified categories and verified the classification by reading the statements when they yielded unclear results for accuracy and reliability.

Table 1: Categorisation of Issues

Issue Category	Coverage
Tariff determination and restructuring	Challenges to tariff determination and adoption under Sections 62 and 63; inadequate attention to principles in arriving at tariff; revision of tariff and truing up.
Contractual disputes	Liquidated damages, outstanding payments, renegotiation or termination of contracts, excluding change in law and force majeure.
Change in law and force majeure	Subset of contractual disputes, relating to change in law and force majeure clauses in the contracts.
Procedural and jurisdictional	Procedural lapses, violation of principles of natural justice, challenges to ERC's jurisdiction.
Open access consumers	Wheeling and banking charges, and issues relevant to open access consumers.
Transmission and grid-related	Connectivity, ISTS and grid-related issues, including compliance with grid code.
Specific compliance with regulations	Mandatory non-tariff-related requirements for obligated entities, such as RPOs and RECs.
Captive status	Captive status of power plants or group captive power plants.
Others	Issues not falling under previous categories, e.g., distribution licensing.

Methods: Limitations

For the categorisation of issues we have relied on the statement of issues as determined by APTEL, in the instances it was explicitly identified in the order. Understandably, analysing the full text of the order will give deeper insights on the litigated questions. The outcomes, such as appeal allowed or dismissed, also do not provide information about outcomes on specific issues. This would entail reading the full orders and making subjective inferences. While the outcomes at APTEL have been used to assess the performance of ERCs, they do not measure the functioning of ERCs holistically, especially because studying the performance of APTEL is beyond the scope of this research.

Results

1. Distribution of litigation

Between the ERCs under study, Maharashtra followed by Karnataka, contribute to the most litigation at APTEL, as represented in Figure 1. These results indicate that the two states have a relatively larger private industry. However our analysis excludes writ proceedings, which are also used as a way to challenge ERC decisions. The total number of orders passed by ERCs is also not available uniformly across the ERCs to accurately calculate the rate of appeal.

Figure 1: Distribution of litigation at APTEL

2. Most litigious issues

ERCs are empowered to decide a wide range of issues. As a consequence, the issues dealt with by the APTEL in appeals are also varied. An appeal may involve more than one issue, and hence the number of issues involved is more than the number of appeals. As represented in Table 2, tariff determination and restructuring are the most litigated upon issues at APTEL across ERCs with the exception of Maharashtra. In Maharashtra, procedural and jurisdictional issues emerge as the most litigious. While the high incidence of such issues is concerning, issues of the procedural and jurisdictional variety can be resolved easily if ERCs invest in capacity building and follow the procedure under the law faithfully.

Our results corroborate the findings of an earlier study (Prayas 2018) which had found that a third of the issues being litigated before APTEL were concerned with tariff. Pertinently, the ERCs have enacted specific regulations related to tariff determination and made the calculation of tariff an exercise which is assisted by detailed delegated legislation. In this context, it is worrying that tariff continues to be the predominant category with regard to appellate litigation.

Table 2: Issue portfolio at different ERCs (Values in percentages)

State	Total Issues	Tariff related	Procedural & Jurisdictional	Contractual disputes	Specific Compliance	Change in law & force majeure	Open access	Trans-mission & grid	Captive status	Other
Maharashtra	248	26.61	32.66	2.82	3.63	3.63	6.85	4.44	16.53	2.82
Karnataka	171	30.41	26.90	22.81	1.75	2.34	6.43	6.43	0.00	2.92
Tamil Nadu	138	28.99	12.32	7.25	20.29	0.72	5.80	7.25	10.87	6.52
Punjab	96	33.33	11.46	15.62	14.58	8.33	7.29	4.17	1.04	4.17
Rajasthan	76	25.00	11.84	19.74	10.53	13.16	5.26	7.89	1.32	5.26
Madhya Pradesh	75	41.33	17.33	13.33	0.00	1.33	9.33	4.00	9.33	4.00
Andhra Pradesh	65	47.69	26.15	9.23	3.08	1.54	1.54	7.69	0.00	3.08
Uttar Pradesh	59	33.90	16.95	20.34	8.47	5.08	1.69	13.56	0.00	0.00
Odisha	49	34.69	16.33	6.12	16.33	0.00	8.16	10.20	6.12	2.04
West Bengal	29	62.07	13.79	3.45	13.79	3.45	0.00	3.45	0.00	0.00

In addition to the most litigated issues, we could also identify the states which contributed most to the litigation of a particular issue at APTEL. Maharashtra contributes the most to issues related to tariff, and procedure and jurisdiction. This outcome is also a function of Maharashtra being involved in the highest number of appeals in our dataset. The findings are presented in Table 3 below.

Table 3: Distribution of Issues

ERC which contributes most to the litigation of a particular issue at APTEL and the percentage share of their contribution

ERC	Issue	Contribution (%)
Maharashtra	Tariff related	20.1
Maharashtra	Procedural and jurisdictional	37.5
Karnataka	Contractual disputes	33
Tamil Nadu	Specific compliance with regulations	34.5

3. Outcomes

We focus on indicators related to the 'disposition' of the appeal from the information we had collected. We scored the performance of the ERCs relative to each other by making the number of decisions that were upheld, overturned or modified by APTEL as the basis of comparison. The results have been compiled in Table 4.

At an outcome level, if an ERC succeeds in defending its decisions, then it would indicate that the orders are well-reasoned, and the ERC follows the procedure under the law. A high overturn rate would indicate weak decision-making capacity.

Table 4: Dispositions at APTEL across ERCs

ERC	Allowed	Dismissed	Partly Allowed	Other	Remanded	Total
Andhra Pradesh	27	32	7	4	11	70
Karnataka	103	49	14	5	67	171
Maharashtra	92	61	31	62	35	246
Madhya Pradesh	22	17	11	8	13	58
Odisha	17	15	17	2	6	51
Punjab	18	28	22	6	13	74
Rajasthan	32	45	7	3	20	87
Tamil Nadu	22	33	19	9	20	83
Uttar Pradesh	15	26	11	5	10	57
West Bengal	4	8	6	4	5	22
Total	352	314	145	108	200	919

_{The categories "allowed", "dismissed", "partly allowed", and "other" are mutually exclusive. That is, if an appeal is allowed, it cannot be dismissed. However, the appeals that are remanded form a subset of either allowed or partly allowed.}

We find that ERCs are differently situated in their ability to defend their decisions at APTEL and the quality and clarity of their orders. Rajasthan found the most success at APTEL, Maharashtra had the least.

Typically, matters are remanded when APTEL is of the opinion that the relevant ERC did not, amongst other things, follow the procedure or frame the issues or determine question of facts sufficiently well. A high remand rate is worrying since it implies that either the ERCs in question are ill-equipped to resolve disputes in the first instance or that APTEL, unless it has insufficient evidence to make the decision, is abdicating its mandate.

Remands lengthen the resolution of disputes and burden regulated entities with legal and compliance costs. This can stymie the growth of the electricity sector, especially in states like Karnataka, for KERC has been asked to reconsider most number of its decisions when compared to other ERCs.

Recommendations

Both APTEL and ERCs are empowered to implement these recommendations.

1. Regularise assessments through use of emerging technologies

We recommend that such comparative assessment exercises be regularised through the use of emerging technologies. The composition of ERCs is constantly changing, and members would benefit from information about the performance of their decisions at APTEL closer to the date of the decisions. This can be made possible by creating a customised tool that leverages LLMs and the competence of researchers and practitioners familiar with the sector.

2. Publish granular statistics

APTEL can improve upon the collection and publication of litigation statistics and include the subject matter of litigation and the relevant laws that are under litigation, amongst other categories, in this exercise. Similarly, while some ERCs publish the number of orders they hear and decide annually, they can include more relevant details in this publication and also publish these at shorter intervals. Collecting this data at source would make the identification of litigious issues, which are often proxies for policy problems, easier.

3. Identify areas for policy reform

ERCs should study the precise reasons for disputes that correspond with the litigious issue categories in their states and respond by changing and adapting their regulations to minimise them. The persistence of tariff as the most litigious category is concerning, given that detailed regulations on calculation and imposition of tariff have been enacted by the regulators.

Conclusion

In summary, we find that:

• Between the ERCs under study, Maharashtra, followed by Karnataka, together contribute to the most litigation at APTEL.
• Issues related to tariff determination and restructuring are the most litigated issues at APTEL across ERCs. This is worrisome given the detailed subordinate legislation that govern the regulation of retail and other categories of tariff.
• ERCs are differently situated in their ability to defend their decisions at APTEL and the quality and clarity of their orders. We find that Rajasthan found the most success at APTEL, while Maharashtra had the least.
• Remands lengthen the resolution of disputes and burden regulated entities with legal and compliance costs. This can stymie the growth of the electricity sector, especially in states like Karnataka, since KERC has been asked to reconsider the most number of its decisions when compared to other ERCs.

References

Amicus Populi? A public interest review of the Appellate Tribunal for Electricity , by Vaishnava S, Chitnis A and Dixit S, 2018, Prayas Energy Group

The authors are researchers at TrustBridge Rule of Law Foundation. They would like to acknowledge and thank Natasha Aggarwal, Madhav Goel, Abhinav Hansaraman, Amol Kulkarni, Praduta Singh, Aparna Jha, Varun Soni, Gaurav Aswani, Tarang Rathi and Sumedh Gadham for compiling, collecting, and verifying the data used in our analysis. We would also like to thank Upasa Borah for helping with verifying, cleaning, and consolidating the dataset.