What happens when the CCI decides not to investigate?

by Natasha Aggarwal, Amol Kulkarni, Shruti Aji Murali, Bhavin Patel, and Vishnu Suresh.

The Competition Commission of India’s (the “CCI’s”) orders under Section 26(2) of the Competition Act, 2002 (the “Act”) are an important part of it’s preliminary screening function: they close proceedings at the threshold without directing an investigation, are appealable, and impact informants’ rights. They also utilise significant regulatory capacity. This is especially significant given the CCI’s capacity constraints: 42% of sanctioned posts are vacant, grants from the Ministry of Corporate Affairs were insufficient relative to expenditure, and 130 antitrust cases were pending at different stages (Reports of the 25th (2025) and 31st (2026) Standing Committee on Finance). Therefore, how the CCI decides which matters do not warrant investigation, and what resources it allocates to these decisions, becomes important.

In two new working papers, we examine the CCI’s Section 26(2) decision-making and ask what guardrails constrain its discretion, and how it allocates scarce regulatory resources.

In “Order writing and statutory discretion in the CCI's Section 26(2) determinations”, we use a customised set of indicators based on the Good Order Writing framework developed by Aggarwal et al. (2025) in “A guide to writing good regulatory orders”, to assess the completeness of a random sample of 111 Section 26(2) orders issued between 2014 and 2024 (the “Dataset”). We find that the orders are generally complete, with an average CCI-GOW score of 59.51%, and perform well in appeal, but that the statutory factors under Sections 19(3) and 19(4) are applied inconsistently. We recommend incremental improvements in order-writing alongside a dedicated framework for threshold-stage determinations under Section 26(2).

Our second paper, “The CCI's allocation of scarce resources in Section 26(2) matters”, examines how the CCI allocates limited regulatory capacity in such matters. We find that approximately 42% of the orders in the Dataset arise from “peripheral matters”, that is, complaints falling outside the scope of competition law or unsupported by evidence. These matters are processed through the same institutional procedures as substantive complaints, with a median disposal time of 30 days. We recommend a layered approach to improve screening, including clearer public guidance, guided filing mechanisms, AI-assisted review tools and statutory prioritisation frameworks, while preserving access to competition law enforcement.

We are pleased to invite you to a presentation of both papers on Friday, 21 August 2026 at 4:00 PM IST, followed by a discussion with competition law practitioners and academics. If you would like to join the discussion virtually, please register here.

References

Natasha Aggarwal, Bhavin Patel, and Karan Singh, “A Guide to Writing Good Regulatory Orders” [2025] Trustbridge Rule of Law Foundation Working Papers (https://trustbridge.in/publications/a-guide-to-writing-good-regulatory-orders/).

Standing Committee on Finance, Ministry of Corporate Affairs Demand for Grants (2026–27) (ThirtyFirst Report, Lok Sabha Secretariat 2026) (https://elibrary.sansad.in/server/api/core/bitstreams/418570d6-7f80-4a04-9eee-6d03ab9b9f03/view).

Standing Committee on Finance, Evolving Role of Competition Commission of India in the Economy, Particularly the Digital Landscape (Twenty Fifth Report, Lok Sabha Secretariat 2025) (https://elibrary.sansad.in/items/39840bff-3981-4e4d-9eda-28fba9cfc1a1).

Natasha Aggarwal, Amol Kulkarni, Bhavin Patel, and Vishnu Suresh are researchers at TrustBridge Rule of Law Foundation. Shruti Aji Murali is KM Counsel at Axiom5.

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.

Return to sender: The misuse of remand orders by appellate tribunals

by Natasha Aggarwal and Bhavin Patel.

Appellate tribunals were established to ensure speedy and expert adjudication of appeals from regulators' orders. A defining feature of their institutional design is the inclusion of both judicial and technical members. Judicial members possess legal training and skills and can ensure the application of, and compliance with, judicial principles, such as the principles of natural justice. Technical members are expected to bring sector-specific knowledge relevant to the domain of the tribunal's work. As such, tribunals are 'expert' bodies that are well-equipped to provide speedy and efficient resolution and it would be incorrect to assume that they lack the technical expertise necessary to decide a matter on merits.

However, tribunals in India frequently remand matters to regulators. Our analysis of 764 cases disposed of by the Securities Appellate Tribunal (SAT) from 2009 - 23 reveals that 76 cases (10%) resulted in a remand (Aggarwal and others, 2025). Further, our analysis of 919 cases disposed of by the the Appellate Tribunal for Electricity (APTEL) from 2013 - 22 reveals that 200 cases (21.7%) resulted in a remand (Jain, Patel and Sane, 2025). The fact that one in ten instances before the SAT and a staggering one in five instances before the APTEL are remanded is a matter of concern. Remands result in additional time and resources being spent on resolving a matter, since the dispute is first heard by the regulator, then in challenge by the tribunal, and then, once again by the regulator. Therefore, it is important to study the reasons provided by the tribunal when it remands a matter.

In a recent paper, titled "Return to sender: The misuse of remand orders by appellate tribunals", we study orders issued by the SAT and the APTEL in 2024, evaluate the instances in which the SAT and the APTEL remanded matters, and examine whether these remands are consistent with recognised legal principles regarding when a remand may be ordered. The paper was also included in Daksh's "The State of Tribunals Report", which was released on 25 September 2025.

Our paper addresses three questions:

• What costs do remands impose on the parties and the adjudicatory infrastructure of regulators?

  Our examination of two matters, one originating at SEBI and the other originating at the Kerala Electricity Regulatory Commission, shows that remands cause delays that span up to 14 years. This defeats one of the primary reasons for establishing tribunals, that is, to ensure speedy justice.

• What reasons does the law recognise as valid for remands by tribunals?

  Our earlier studies demonstrate frequent remands by SAT and APTEL. Indian law circumscribes the instances in which courts may order remands. These boundaries are set in the Code of Civil Procedure, 1908 (CPC) and in judicial decisions of superior courts. The CPC, parent statutes that establish tribunals, and rules of procedure framed by tribunals for themselves do not, however, clearly identify when tribunals may remand matters. There is limited guidance on this in superior court decisions. We argue that the reasons for which courts can order remands should also limit the discretion of tribunals in remanding matters. We call these reasons "Permissible Reasons" for remand, and classify any other reasons provided by tribunals when remanding matters as "Other Reasons".

• How many matters were remanded by SAT and APTEL in 2024? What reasons were provided? Are the reasons permissible under law?

  We study the orders of SAT and APTEL for 2024, in which there are 13/228 (5.7%) remands ordered by SAT and 28/171 (16.4%) remands ordered by APTEL. We find that the SAT ordered a remand for Permissible Reasons in 21 appeals and for Other Reasons in four appeals. The APTEL remanded the matter for Permissible Reasons in 26 appeals and for Other Reasons in 37 appeals.

We find that remands are often ordered for reasons that are not included in the CPC and applicable common law. Unnecessary remands add time and cost to regulatory proceedings. They undermine investor confidence in regulated sectors, since it is difficult to take business decisions in the face of uncertainty about whether a regulator's orders will have to be reconsidered and modified. This also adversely affects the rule of law requirements of predicability and certainty in regulatory proceedings.

There may be several ways to reduce this problem, including, possibly, by improving order writing practices at the regulators whose orders are challenged in appeal before tribunals. We suggest that it is also useful to consider how this problem can be addressed at tribunals, and therefore recommend that:

• Clear rules determining the scope of the power of ordering a remand should be made applicable to all tribunals. These rules should apply in a consistent manner across tribunals, rather than being framed by each tribunal for itself. This will help ensure consistency and predictability, and limit the discretion of tribunals in this matter.
• These rules should be incorporated in the parent statutes of tribunals.
• In the absence of any reason to deviate from the rules on remand provided in the CPC and applicable common law, the scope of remanding power for tribunals should be the same as that available to courts.

Providing this clarity would help avoid unnecessary and unreasonable orders of remand, and help ensure that the core rule of law principles of consistency, predictability, and clarity are satisfied in the procedural aspects of the functioning of tribunals.

References

Natasha Aggarwal, Amol Kulkarni, Bhavin Patel, Sonam Patel, and Renuka Sane, "Balancing Power and Accountability: An Evaluation of SEBI's Adjudication of Insider Trading" [2025] (13) Trustbridge Rule of Law Foundation Working Papers.

Chitrakshi Jain, Bhavin Patel, and Renuka Sane, "Examining the performance of ERCs at APTEL" [2025] The Leap Blog.

The authors are researchers at the TrustBridge Rule of Law Foundation.

The consequences of criminalising cheque bouncing

by Shubho Roy and Ajay Shah

Many countries (e.g. New Zealand, Poland, Germany, Norway) have discontinued paper cheques. In other countries (e.g. the U.K., the U.S.), the use of cheques is declining. But in India, the use of paper cheques in India has stabilised in terms of value and number over the last five years. This is despite the extent to which digital and instantaneous payments are now feasible. Why might this be the case?

Prior to 1988, cheques were primarily used as a tool of payment. In that age, there were delays in clearing. Paper cheques had to be transported to the bank branch where the cheque issuer had an account. In that branch, the issuer's signature would be verified against a sample. If the signatures matched, the balance would be cleared (assuming the issuer had adequate funds). This process took seven working days, even when the issuer and recipient had banks in the same city. If the parties were in different cities, the process would take 15 working days, on average.

Today, a cheque issuer can send a secure document showing that the issuer's bank account has adequate funds to honour the cheque. However, in 1988, there was no such system, and the cheque recipient faced the risk that the issuer was writing a cheque that her account could not honour.

Some technical mistakes can always happen, where a person fails to anticipate the date on which funds are required and there are unpredictable delays in the money moving in and out of the account. Alongside this, many unscrupulous people knowingly wrote bad cheques. This made sellers mistrust cheques and prefer cash. While cash as a payment mechanism has the virtues of instantaneity and privacy, it comes with difficulties on physical security.

The 1988 change of the law

In this setting, the Parliament criminalised the bouncing of cheques in 1988. Now, the cheque writer could be sent to jail if the cheque did not clear. The law also stated that every cheque is presumed to be written to clear a debt. This change helped the recipient of cheques because the recipients did not have to prove any underlying transaction. The recipient only had to demonstrate that the cheque was not honoured.

In 2016, the Supreme Court ratified the practice of using cheques as collateral in the case of Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited. Sampelly Satyanarana Rao (Mr. Rao) had written post-dated cheques as security for a loan from the Indian Renewable Energy Development Agency (IREDA). Mr. Rao did not take the loan personally but wrote the cheques as a director in the company that borrowed the money. The borrower company failed to pay the instalments when they became due. In response, IREDA (the creditor) initiated criminal proceedings against Mr. Rao under the 1988 law. Mr. Rao defended the claim by stating that the cheques were written before the creditor (IRDEA) disbursed the loan amount. IREDA pointed out that the cheques were deposited after the borrower (the company) had failed to pay the instalments, and therefore, the penal provisions of the 1988 Act applied. The Supreme Court agreed with the creditor and allowed for the criminal prosecution of Mr. Rao. This judgement provides legal certainty to the use of post-dated cheques as security. This date, i.e. 2016, is an important milestone in the journey, over and beyond the amendment of the N. I. Act in 1988.

The role of cheques in India today

The threat of imprisonment restored some faith in cheques. Anecdotally, it seems to have worked well in the initial years after the amendment. Cheques became more acceptable in commercial transactions and helped reduce frictions in economic activity. Many a cheque recipient was willing to take the risk of delivering goods without waiting one or two weeks for a cheque to clear.

These considerations do not exist in the present landscape. Instantaneous payment systems are ubiquitous in India, ranging from small value payments to the largest amounts possible. Any problem of trust between buyers and sellers can be readily solved by resorting to NEFT or RTGS. By this reasoning, the number of cheques written in India should have declined sharply. It has not.

People responded to incentives

Alongide this, the rest of the Indian legal system which enforces contracts works poorly. Ordinarily, a loan dispute would be resolved as a contract dispute through civil law, and, in some cases, bankruptcy law may be involved in situations where the debtor is insolvent. In 2020, in enforcing contracts, India ranked 163 out of 190 countries, while its overall rank was 63 (a difference of 100 ranks). India's rank in resolving insolvency was 52. Hence, creditors are unconfident about ordinary credit enforcement mechanisms.

One strand of credit enforcement systems is seizing assets that are pledged as collateral. This tends to work poorly in India. While the SARFAESI Act of 2002 is reasonably effective in getting collateral into the hands of the lender, many assets are hard to sell. Many land titles have encumbrances, and the land market works poorly, which hinders the recovery rate.

These weaknesses of the ordinary (civil) credit enforcement systems made criminal proceedings under S.138 attractive to creditors. Under S.138, a debtor faces up to two years of imprisonment if the debtor is convicted. In reality, the creditor does not even have to wait for the end of the litigation to get the debtor imprisoned. The debtor can be arrested at the beginning of the litigation so that the debtor can be produced before the court. In some cases, the debtor can also be imprisoned for the duration of trial under S.138. In contrast, a civil case proceeds without the debtor, if the debtor chooses not to appear. Most people will pay up to avoid being imprisoned, which gives heart to creditors.

When faced with legal difficulties around land title, it is better for the creditor to threaten imprisonment, and have the borrower solve the problem of selling the land, instead of seizing collateral and then facing legal difficulties in liquidating them.

As a consequence, after the new law was established in 1988, creditors started using cheques as a security. Creditors frequently demand that the debtor provide post-dated cheques for loan amounts. These cheques are payable deep into the future -- sometimes extending to multiple years. In such cases, both parties are aware that the cheque drawer does not have the money in the bank account at the point in time when the cheque was signed. Creditors sometimes demand a separate cheque for each instalment of loan repayment. Consequently, a debtor for a five-year loan may write 60 post-dated cheques. On a similar note, landlords sometimes asked for post-dated cheques for the payment of rent at multiple time points in the future.

Modern economies do not have a debtors prison: the choice of filing for bankruptcy is always there, in which case the creditor gets a low recovery rate. On one hand, in India, there is no legal framework for personal bankruptcy. When threatened with jail time, the borrower may reach into her web of relationships, and borrow from the community. This increases the resources available to the lender.

Weighing the pros and cons

The introduction of S.138 has thus exerted many complex impacts upon the working of the economy.

An increased level of violence in society

More people go jail, and more threats of incarceration are bandied about. This is a less civilised society.

Increased interest in lending

When lenders are given greater certainty about recoveries, they are likely to be more willing to lend to persons that might otherwise be excluded from the credit market.

Diminished interest in borrowing

When borrowers are shown the possibility of jail time, they will be more cautious and avoid borrowing. That has its own welfare consequences.

Conditions for state failure

The prospect of jail time is a `high stakes' situation where the policing system gets to make decisions which have a high impact upon the life of a citizen. This increases the incentives for corruption.

Hindering the emergence of a modern economy

All advanced economies have moved away from debtor's prison, and evolved civil mechanisms around borrowing, collateral and bankruptcy. These pathways reduce the extent of violence in society and increases user confidence in borrowing.

The threat versus the cash

Jail time is indeed a potent threat and creates strong incentives for the borrower to obtain cash, either by borrowing from someone else or by liquidating opaque assets. But once a person goes to jail, all future payments to the lender are stopped. With more civil processes of collatoral and bankruptcy, there is the strategy of keeping the delinquent active in economic life, and obtaining a stream of cashflows to the lender.

Incentives for policy makers

Lenders that got comfortable with the use of S.138 were less inclined to persuade policy makers of the need for the institutional apparatus of the credit market.

Conclusion

The introduction of S.138 into the N.I. Act in 1988 was a response to a problem of the time. Some other countries, like Taiwan, had also criminalised cheque bouncing. However, most countries have walked back since then because credit systems have improved and the use of cheques have declined. In those countries, cheques are not used as collateral for loans.

There is a strong argument for repealing this section. The consequences of such a repeal will, however, also be far reaching, particularly in the context where the institutional apparatus for contract enforcement remain weak. It is interesting to look at the list, presented above, of the consequences of criminalising cheque bouncing. We can then ask: Which of these would flip around and arise, in reverse, when cheque bouncing is de-criminalised.

Shubho Roy and Ajay Shah are researchers at XKDR Forum.

The difficulties of asset monetisation in the transmission sector

by Akshay Jaitly, Charmi Mehta, Rishika R, and Ajay Shah.

Introduction

About 95% of nationwide transmission assets in India are presently owned by the government company, Power Grid Corporation of India Limited (PGCIL). A transformation of electricity transmission systems is required to achieve decarbonisation, reflecting the distributed geography of renewables generation in India, and the eventual de-commissioning of present coal-based power generation. Several estimates suggest a total required investment, for electricity transmission, of over INR 2 trillion over the next five years.

Given the public finance and managerial constraints in the Indian state, private investment is critical to achieve the required investments. Land, compliances and clearances impede pure private greenfield transmission projects, so one method there is for the government to do development and then monetise the assets. Existing assets are relatively straightforward to operate and risk-free, with a steady stream of user charges, where private sector participation is then readily achieved.

While attempts at attracting private investment in this field have taken place from 2006, the outcomes so far have been poor. One response to this was in October 2022, where the Ministry of Power issued guiding principles for states to monetise 14% of transmission assets that are currently owned and operated by state-owned transmission utilities. This involved a new contracting mechanism: the "Acquire, Operate, Maintain and Transfer (AOMT) model".

This is the temporary transfer of asset ownership (i.e. not a sale) to private firms in exchange of an upfront payment. Firms are expected obtain cash from the operations (user charges) of the asset, depending on the model deployed for monetisation. Asset monetisation has twin benefits for governments - first, it provides short-term liquidity to the public sector entity in the form of upfront payment for the asset(s); and second, it allows the government to delegate the operations and maintenance (O&M) to the private sector, enabling public sector entities to harness private sector capabilities and reduce their scope.

How previous asset monetisation models worked

Asset monetisation has been used as a contracting model for O&M since 2018 when the National Highways Authority of India (NHAI) began using the toll-operate-transfer (TOT) model, which draws on ideas from Australia, North America and Europe. Besides this, InvITs have been used in the transmission sector. There is significant knowledge and experience around InvITs and TOT contracts in India: they constitute the baseline against which the new AOMT can be understood. Table 1 provides a comparison of the three models on key features.

Table 1: A comparison of key features across contracting models - InvITs, TOT and AOMT.

	InvITs	Toll Operate Transfer	AOMT
Description	Transfer of assets to listed registered trusts regulated by Securities Exchange Board of India which issues units to multiple investors. Comparable to equity for a limited time period.	Temporary transfer of asset ownership for an upfront payment from the private party who is granted this concession. The private party is also granted rights to collect user charges, and other charges to finance the O&M of the asset.	Temporary transfer of ownership of assets for upfront payment from the private party, in turn allowing them to operate and maintain the asset, and generate revenue from it.
Regulation of investment vehicle	Trust to be registered by SEBI; existing licences applicable	SPV/ investor entity regulated by contract terms	Transmission licence transfer/re-registration to be approved by State electricity regulator
Regulation of user charges	Approved by electricity regulator and governed by Transmission Service Agreement	As per National Highway Toll Determination Rules	Approved by electricity regulator and governed by Transmission Service Agreement
Mode of returns	Returns from dividends, interest and capital gains on units	Toll charges	Transmission charges (varied across states)
O&M	Public	Private	Private
Ownership	Pooled; investors	Single or consortium	Single or consortium

The Toll-Operate-Transfer model in Indian Highways

In 2018, the NHAI bundled approximately 500 km of highways for the first auction, and potential investors were to bid the upfront payment they would make for the bundle. In return, investors receive the right to operate the highway and collect tolls generated from it during the concession period. This model provides the awarded party autonomy on operations and revenue generation, eliminating the involvement of the public authority in O&M.

The NHAI has so far attempted to monetise ten bundles (rounds) of assets with varied rates of success. The lack of bids, undervalued bids, and low price recovery led to auctions being stalled, bids annulled and fresh auctions being called, several times. Most recently, the 9th and 10th TOT bundles up for auction were halted as they did not meet the reserve price set by NHAI. Despite using a familiar model, the implementation has not yielded positive outcomes. Large value disputes in highway contracting, low standards of public disclosure and the inability to make accurate revenue growth projections are some of the reasons for its substandard outcomes.

The InvIT model in the transmission sector

In 2020, the PGCIL became the first publicly owned company to set up its own investment trust (InvIT). The PGCIL InvIT holds transmission assets worth INR 7500 crores and it opened for subscription in early 2021. Within two days of the offer, 59% of the units were subscribed. When the session was closed, PGCIL benefited from a 3% premium over the issue price and the initial public offer was subscribed 4.83 times. During this period, investor perception was also positive with analysts predicting that the InvIT would yield steady long-term returns. PGCIL eventually auctioned 27.41 crore units, earning INR 2,736.02 crore in May 2021. However, concerns with the lack of transparent price discovery and taxation norms on long-term capital investments have prompted PGCIL to rethink its InvIT plans. Additionally, the retention of O&M as a function of the public sector entity may create a hesitation to investment by private entities.

Neither of the two distinct asset monetisation models that India has experimented with achieved the outcomes it set out to achieve. On one hand, InvIT provides a diversification of risk but O&M remains with the government. On the other hand, TOT provides autonomy over O&M but ownership is not diversified. This serves as a case study for the design of new models for asset monetisation, and whether it can address the concerns of previous models used.

There is no reason why an InvIT structure cannot be augmented to also include the contracting out of O&M functions to a private entity. This will bring in private sector efficiency and allay the fears of investors. There are two ways in which the InvIT could be presently undertaking O&M: (i) it is possible that PGCIL is charging the InvIT a fee and doing the O&M, or (ii) O&M staff may have been transferred with the assets and the InvIT is doing its own O&M. Either way the function is retained with the government, making it a potential point of concern for investors. To eliminate this friction, a third model is preferable, where O&M functions of an InvIT are contracted out. This could have been a plausible design option since InvITs have been around for a while, instead of opting for a fully different model.

Concerns about the AOMT

The importance of private investment in transmission is well taken. The question lies in the pathway to a solution. We recognise the immense complexities of getting up to a well-functioning institutional mechanism. We also recognise that different sectors may warrant different approaches to doing the same things. There are two main concerns with the AOMT model:

1. The contract design is not suited to state government assets due to problems of state-level electricity governance; the overall lack of control on streams and decisions of revenue (user charges) is a factor that models should solve for; and
2. The unfamiliarity with the model among state governments (and asset monetisation generally). There are two existing mechanisms for doing this, with precedents and understanding within infrastructure, finance and government establishments: InvIT and TOT. These represent natural pathways to take for electricity transmission assets.

It has been over one year since the introduction of the model and it has seen no uptake from states so far. States have expressed concerns with the design and feasibility of the model. When the Ministry of Power proposed AOMT, there was a need for a first principles argument and public consultation, about why a third strategy was proposed. They needed to show the difficulties that would arise through the three existing pathways, and how the modifications chosen under the AOMT model addressed these difficulties.

References

Ministry of Power, Guiding principles for Asset Monetisation in the Transmission sector for state governments, October 2022.

Utpal Bhaskar, Power firms finalize models for asset monetisation plan, Livemint, 2022.

KPMG, Global Infrastructure Asset Recycling and Infrastructure Capital, June 2020.

Charmi Mehta and Bhargavi Zaveri, Monetisation lessons from NHAI, The Business Standard, March 2021.

Surya Sarathi Ray, NHAI cancels two projects on low bids, Financial Express, March 2022.

P Manoj, NHAI annuls highest bid of Sekura Roads for ToT Bundle 10 as it was below reserve price, The Economic Times, Sept 2022.

Charmi Mehta and Susan Thomas, Identifying roadblocks in highway contracting: lessons from NHAI litigation, The LEAP Blog, July 2022.

Shreya Jai, PowerGrid's asset monetisation via InvITs gets Cabinet go-ahead, Business Standard, Sept 2020.

Sundar Sethuraman, PowerGrid Infrastructure Investment Trust ends debut trade at 3% premium, Business Standard, May 2021.

Sunil Shankar Matkar, PowerGrid InvIT IPO opens: Should you subscribe?, MoneyControl, April 2021.

Utpal Bhaskar, PGCIL drops second InvIT tranche plan, LiveMint, Jan 2023.

Akshay Jaitly is co-founder of Trustbridge Rule of Law Foundation and Trilegal, Charmi Mehta is a researcher with XKDR Forum, Rishika R is a researcher with Trustbridge Rule of Law Foundation, and Ajay Shah is co-founder of XKDR Forum.

Delays in government contracting: A tale of two metros

by Anirudh Burman and Pavithra Manivannan.

A state entity undertaking a procurement exercise must meet prescribed timelines throughout its procurement pipeline. Delays in one or more milestones adversely affect all parties involved: the procuring entity (increase in expenditure beyond the budget and disputes), the contracted vendors (uncertainty and delays in payment) and the public (delays in utilising public goods and services). At the outset, we recognise that the indicator of a successful procurement exercise are multi-fold: achieving required quality, adhering to timeline and limiting spending gap. Our approach employs the lack of delays as the indicator of a successful procurement exercise.

In a recent article, we examined the extent to which DMRC's (the Delhi Metro Rail Corporation) competence in timely project execution was borne out by data. We found that (a) DMRC is able to meet the Government of India's and its own stipulations in two stages of its procurement process, that is, contract award and vendor payments; and (b) In spite of this exemplary performance, DMRC has faced delays in overall project implementation that have gradually increased over time. This article seeks to understand the underlying factors that potentially contributed to DMRC's prompt performance in its procurement process.

It is not possible to understand DMRC's success in isolation. Instead, we analyse it relative to its predecessor, the Calcutta metro-rail system (Calcutta metro). The Calcutta metro was India's first metro-rail system to be implemented. It was plagued by delays and cost overruns. Such a comparative analysis of a successful public project to one that fared worse in execution is revealing. First, it shows the learning curve of the state in building capacity to execute public projects. Second, it helps to understand what works and what does not, when a state entity conducts a procurement exercise. The analysis can serve to provide valuable feedback in procurement reform policies.

Delays in execution of metro-rail systems

Formerly, the Ministry of Railways was responsible for the construction of mass rail services, including metro-rail systems in metropolitan cities. The Ministry undertook the construction of the Calcutta metro in 1971. In 1986, the Government of India (Allocation of Business) Rules, 1961 was amended to shift the responsibility of the urban transport system to the Ministry of Urban Development (now the Ministry of Housing and Urban Affairs). In contrast to the Calcutta metro, the construction of the Delhi metro-rail system (Delhi metro) was undertaken by the Ministry of Urban Development as the nodal union ministry. The role of Railways was limited to providing technical assistance.

We study the annual reports of the Delhi metro and the Parliamentary Public Accounts Committee Reports (1981; 1989; 1992) on the Calcutta metro, to estimate overall delays in both these projects. We source this data from the website of DMRC and the Parliament of India, respectively. Our data consists of six time periods during which there was significant procurement of works. The data includes the date of completion and submission of the detailed project report (DPR), the date on which the project received Union Cabinet approval, the date of commencement of works, the scheduled date of completion of the project, and the actual date of completion of the project, in part and full. These are presented in Table 1 below, as a timeline of events for the first line of the Calcutta metro and the first phase of the Delhi metro.

Table 1: Timeline of events

Event	Calcutta Metro Line-1	Delhi Metro Phase-1
Completion of Detailed Project Report (DPR)	1971	1995
Project sanction	1972	1996
Project commencement	1978	1997
Scheduled completion	1978	2005
Partial commission (one section)	1984	2002
Project completion (fully operational)	1995	2006

We find that the gap between estimated and actual date of completion is a little more than a year for the Delhi metro. This gap was close to two decades for the Calcutta metro. Further, the lag between the date of sanction of the project to the date of commencement of works for the project is wider for the Calcutta metro (4 years) than for the Delhi metro (about a year).

This suggests that, from 1971 to 1995, there appears to be much improvement in the way procurement was undertaken for Indian metro-rail systems. We posit that the Delhi metro's success was shaped by the challenges faced and the experiences gained in implementing the Calcutta metro. Our analysis attributes learnings from the Calcutta metro to the following structure and list of processes adopted by DMRC: its institutional design, its financing and revenue models, global transfer of technical know-how, and expertise of its early leadership. In the subsequent sections we analyse how each of these features enabled the Delhi metro to avoid inordinate delays.

The institutional design of the procuring entity

What motivated the institutional design of DMRC? To answer this we look at various Parliamentary Committee reports, CAG reports and literature on the subject. Our review suggests that there were three main institutional constraints faced by the Ministry of Railways in implementing the Calcutta metro.

1. The lack of coordination with the West Bengal State Government and the local agencies in Kolkata. There were delays in land acquisition, problems in utility diversions such as transport, water and sewage, and detection of uncharted utilities after commencement of works. These instances had a direct impact on the contracting process, such as frequent interruptions of works, revisions to scope of work, and change in construction methodology (Public Accounts Committee, 1981).
2. Frequent changes and vacancies within the Ministry of several important personnel such as the General Manager and Chief Engineer. This was due to the administrative process of the Ministry. The Railways had to follow the conditions laid down by the Appointment Committee of the Cabinet with respect to retirement, superannuation and promotion (Public Accounts Committee, 1981). This resulted in loss of experience and expertise within the procuring entity.
3. Inadequacy of financial powers delegated to the General Manager. From the year 1974 to 1982 the General Manager had the power to sanction tenders up to Rs. 1 crore only. This was increased to Rs. 2 crores in 1983 and Rs. 5 crores in 1985. This limited power of the General Manager meant, approvals for sanctions of higher value tenders had to be received from the Railway Board. This procedure was time consuming and caused delays in finalisation of contracts by up to 3 years (Public Accounts Committee, 1989).

We speculate that the above constraints prompted the authorities undertaking the Delhi metro project to adopt a different approach. The Calcutta experience provided two guides for the organisational structure of DMRC. One, to build institutional capabilities for executing a metro-rail system outside the Ministry of Railways. Second, to have a separate corporate entity with independent decision making authority. Thus, DMRC was set up with two distinguishing features which worked in its favour: It was formed as a limited liability company under the Companies Act, 1956 and the ownership of the entity vested equally in the Union and the State Government. The board of directors of DMRC constituted representatives from the Union Ministry of Urban Development, Department of Transport of GNCTD and the Delhi Development Authority. Such an institutional arrangement, by aligning incentives for all the stakeholders, enabled better coordination with the local government and ensured that the management had the backing of both the State and the Union Government. Further, functional directors appointed for distinct functions such as, project and planning, works, electrical, finance, business development and the like, had sufficient powers delegated to them under the Schedule of Powers (CAG, 2008). This facilitated quick decisions in expenditure approvals, qualification of bidders, finalisation and acceptance of contracts. Finally, the long tenure of key personnel such as the Managing Director, enabled the organisation to retain domain experience and expertise.

Financing and revenue models

For prompt execution and sustenance of any infrastructure project, timely flow of funds is essential. Metro-rail systems are capital-intensive projects. The Calcutta metro was fully funded by the Ministry of Railways. One of the main reported reasons for delay in the project was lack of funds and improper utilisation of allocated funds. Up until 1980, the Railways had not fully utilised the funds allocated for the project. Further, for subsequent years, sufficient funds were not made available for the construction. This resulted in shortage of raw materials, such as steel and signaling equipment, and delayed payments to vendors (Standing Committee on Railways, 1993; Public Accounts Committee, 1981). For the DMRC project, the Calcutta experience prompted the authorities to explore other avenues for funding such as, equity, external agency loans, subordinate loans from centre and state, property development revenue and central government grants. Most significant was the official development assistance (ODA) loan from the Japan International Cooperation Agency (JICA). Nearly 54-55 per cent of the first three phases of the DMRC projects was funded by JICA as a low-interest and long-term concessional loan. The funding pattern for each phase of the project sourced from the DMRC website is as set out in Table 2. Smooth flow of funds into DMRC enabled timely payment to vendors and ensured that the project was not delayed due to uncertainty in financing.

Table 2: Funding pattern for DMRC projects

	Phase I	Phase II	Phase III
JICA loan	60%	54.47%	48.57%
Equity from GoI	14%	16.39%	10.04%
Equity from GNCTD	14%	16.39%	10.04%
Loans from Union/States	5%	6.56%	13.39%
Grants from States	-	0.59%	10.62%
Property Development	7%	5.59%	7.34%

Another lesson came from the fact that the Calcutta Metro was not financially viable (Singh, 2002). The traffic earnings were inadequate to cover the operating expenses of the metro-rail system. This not only burdened the exchequer in the form of subsidies but also affected the public as the fare per trip that was charged had to be increased to sustain operations (Public Accounts Committee, 1989). Decrease in cash flow meant stalling of procurement of raw materials, and delays in payments to vendors.

The financial crunch faced by Calcutta Metro encouraged DMRC to generate revenue through non-conventional sources. DMRC adopted the examples of well-performing international metro-rail systems and sought to increase its non-farebox revenue. Table 3 below shows the revenue model of DMRC for 10 years (FY2011-FY2020) obtained from its annual reports. Revenue from traffic operations is categorised as fare-box revenue and revenue from real estate, consultancy and external projects are categorised as non fare-box revenue.

Table 3: DMRC Revenue Model (as percentage of total revenue)

Description	Fare revenue	Non fare revenue
FY20	65.49	34.51
FY19	62.92	37.08
FY18	55.22	44.78
FY17	45.69	54.31
FY16	53.35	46.65
FY15	60.34	39.66
FY14	55.74	44.26
FY13	62.93	37.07
FY12	65.74	34.26
FY11	65.05	34.95

On an average 58.49% of DMRC's revenue is from traffic operations (fare-box revenue) and 41.51% of the revenue is through other sources (non-fare box revenue). This is in line with international practice. For instance, the non-farebox revenue of some of the better performing metros in the world (in terms of ridership and network length), such as London, Singapore and Hong Kong, ranges from 25-60% of its total revenue. DMRC's capacity to source funds and remain financially viable has helped it to make timely payments to its contractors, repay its debts, and expand its network line.

Human capacity and technical know-how

Building human competence within the government is paramount to do procurement well. This includes both functional as well as technical competence. In India, the technical know-how to build metro-rail systems was lacking. The Calcutta metro was the first ever underground railway project undertaken in India. Despite this, global tenders were not invited for construction of the work. Neither the construction firms in the country nor the Railway Administration possessed the experience to construct underground structures for a rapid transit system. The lack of expertise led to frequent abandonment of works and changes in scope of work, resulting in huge financial implications in addition to time overruns (Public Accounts Committee 1989 and 1992). Thus, when the idea of a metro-rail system in Delhi was born, the need to rope in personnel with prior expertise and experience, such as, B.I. Singal and E. Sreedharan, was recognised.

Mr. B.I. Singal was the former Director General of the Institute of Urban Transport and the then Managing Director of RITES (Rail India Technical and Economic Service). Mr. Singal came in with 11 years of experience in the planning and building of some of the finest metro-rail systems in the world, such as the Hong Kong MTR (known for completing the project within time and budget) and Taipei metro-rail network. RITES prepared the feasibility study on building a metro-rail system for Delhi. Mr. Singal made sure that his RITES team had a few professionals who had previous experience of working with the Calcutta metro. Mr. E. Sreedharan, the first Managing Director of DMRC, had served as the Chairman and Managing Director of Konkan Railways. He brought in his domain experience of working with the Railways as well as the management experience of heading an autonomous entity. Studies document some effective practices adopted by Singal and Sreedharan which we speculate had an impact on the organisation's procurement practices. They insisted on independence in decision making, speed, and global exchange of knowledge and expertise (Ashokan, 2015; CPI, 2017). This resulted in creation of DMRC as a separate legal entity and in transfer of Japanese technology and know-how in building metro-rail systems.

After the failed attempt at indigenisation by the Calcutta metro, the authorities felt the need to tap in to global expertise for the Delhi metro project. In addition to funding from JICA, Japanese Consultants were also brought on board. This ensured transfer of foreign technological knowledge, skills and expertise to DMRC. DMRC engineers developed technical skills such as tunneling technologies, and functional skills such as management ethos, and value for time from their Japanese counterparts (Onishi, 2016). This enabled DMRC to build in-house capacity, which now helps other metro-rail networks in the country.

Discussion

Our work shows how the Indian state attempts to achieve better outcomes by identifying lessons from its past shortcomings. The challenges faced by the Calcutta metro shaped the Delhi metro's institutional design, financial structure, and human resource competence. Our article highlights the importance of these three factors in enabling desirable procurement outcomes.

A key insight from our analysis is that these factors do not work in isolation. Autonomy in decision making, efficient and experienced personnel, adequate financing, and right institutional choice are all inter-operable and go hand in hand. If a procuring entity seeks to realise better outcomes, procurement reforms must not merely pick the lowest hanging fruit of these factors. Instead, a sector-specific approach of studying the past experiences must be employed to act as feedback into future projects. Our research provides a framework to assess such past successes and failures, and demonstrates the potential of deploying such research.

References

Public Accounts Committee, Fifty-fifth Report, 1981, Hundred and Forty-second Report, 1989 and Ninth Report, 1991.

Standing Committee on Railways, Second Report, 1993 and Thirty-fourth Report, 2007.

Comptroller and Auditor General of India, Report No. Performance Audit 17, 2008.

Pavithra Manivannan, Lessons from the Delhi Metro, Business Standard, July 2021.

Anirudh Burman and Pavithra Manivannan, Timeliness in government contracting: Evidence from the country's largest metro-rail network, The Leap Blog, August 2022.

Yumiko Onishi, Breaking Ground: A Narrative on the making of Delhi Metro, JICA, 2016.

Centre for Public Impact, The Construction of the Delhi Metro, November 2017.

Saurabh Singhal, Non Farebox Revenue for Metro - A Global Perspective, Business World, May 2022.

The International Association of Public Transport (UITP), World Metro Figures, 2018.

M.S. Ashokan, Karmayogi - A biography of E. Sreedharan, Penguin, 2015.

Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute.

Learning by doing and public procurement in India

by Aneesha Chitgupi, Abhishek Gorsi, and Susan Thomas.

Introduction

State objectives can feature a mix of `make' (i.e. build an organisation, recruit people) vs. `buy' (i.e. contract to a private person for the same task). While private persons are, in general, more efficient than a comparable government organisation, the `buy' pathway is not a panacea when there are bottlenecks in state capacity to contract. Understanding how to achieve capacity in government contracting is one of the critical components of the overall question of enhancing state capacity in India.

How has this tradeoff evolved over time? Generally, when contracting capabilities go up, the fraction of work that is contracted-out goes up. Chitgupi and Thomas (2022) find that the government procurement spending has been at a steady 17 percent of the total expenditure across multiple years, which suggests a lack of movement on contracting capabilities.

What about cross-sectional variation in contracting capability between spending units? Sharma and Thomas (2021) finds that procurement expenditure varies significantly across ministries in 2016-2017, with a few ministries accounting for the larger share of procurement. This would, of course, largely reflect differences in the nature of their work.

In this article, we obtain insights into contracting capabilities by examining procurement under-spend across ministries and across time. We recognise that state capacity in procurement includes multiple dimensions: achieving a targeted level of quality at the minimum cost and on time. Our question is a more basic one about whether the spending happens at all. It requires a certain level of contracting capability in order to actually achieve the budgeted procurement expenditure. We then consider the role of learning by doing in procurement.

An insight in the field of state capacity is that it is extremely sticky; changes to state capacity arise only slowly (Kelkar and Shah, 2022). State capacity emerges from the organisation design (mandate, governance, organogram, processes, the feedback loops of accountability mechanisms). Repetition of the same task, over and over, under the influence of accountability mechanisms, induces the slow process of building capability. By this reasoning, we hypothesise that state entities which procure on a sustained basis will build the organisation design and capacity to doing procurement efficiently, and vice versa. The lack of sustained procurement activity will then predict procurement underspend.

Approach

In previous work, we developed the methodology to estimate the fraction of procurement in the accounts reported in the Detailed Demand for Grants (DDG) document published by a ministry. The DDG for a given year reports two sets of numbers by item head: the amount budgeted for the year, the amount actually spent two years previously. So, the DDG in 2016 for (say) the Ministry of Health and Family Welfare will report the budgeted amounts for 2016, as well as the amount spent in 2014. These are reported by item head, and allows us to calculate the actual amount spent but with a lag of two years.

For our current analysis, we calculate what was budgeted and what was actually spent on procurement, across ministries and across years. We use these to estimate the procurement spending gap for the ministry as:

100 x (actual procurement spend - budgeted procurement) / budgeted procurement

A negative spending gap has the ministry spending less than planned. If procurement capacity is the dominant factor driving the ability to procure, then we would say that a ministry with good procurement capacity will have a procurement spending gap close to zero. Further, if the learning-by-doing hypothesis holds, then those ministries that budget consistently for procurement will have built procurement capacity, and be able to show procurement spending gap close to zero.

Other than procurement, a ministry spends on operational expenses like salaries and pensions, and on grants-in-aid and schemes. These do not depend upon specialised capacity as with the contracting capacity required in the case of procurement spending. As a benchmark, we also calculate the total spending gap as the difference between the actual and budget total spending of the ministry, as a fraction of the total budgeted spending. We use the total spending gap of the ministry to benchmark their overall spending capacity.

We calculate the total spending gap of the ministry as:

100 x (actual total spent - total budgeted) / total budgeted

For our analysis, we do the following steps:

1. Estimate the amount of procurement expenditure for each ministry for each year for which we are able to obtain the DDG. We use this to identify which ministries have consistently higher fraction of their expenditure in procurement.
2. Estimate the procurement under-spend for each ministry across different years.
3. Examine whether there is a link between the ministries with a higher fraction of procurement expenditure and a relatively lower procurement under-spend.

Data

We collect the DDG published by the ministries of the Union Government to estimate the procurement and total spending gaps. The estimation procedure described in Sharma and Thomas (2021) requires the object head wise expenditure to be disclosed in the DDG. This level of information has been consistently disclosed across all ministries (other than for the Railways ministry which has a more complicated accounting structure) from 2014-2015 onward. The latest available DDGs are from 2020-2021.

There remains challenges in accessing the DDGs reliably for all the Union government ministries. In our exercise, we are able to locate the DDGs consistently from 2014-15 to 2020-21 for 10 ministries: Civil aviation, Coal, Environment, Finance, Health and Family Welfare, Home Affairs, Housing and Urban Affairs, Rural Development, Road Transport and Highways and Law and Justice.

For seven of these ministries, the DDGs contain ministry level object head wise expenditures directly. For three ministries, we had to sum up the expenditures across department DDGs. These include: the Ministry of Finance which is the sum of Economic affairs, Financial services, Revenue, Expenditure, and DIPAM. The Ministry of Health & Family Welfare is the sum of Health & Family Welfare, and Health Research. The Ministry of Home Affairs (MHA) covers Home Affairs, Cabinet, Police, and 8 departments for the UTs. The expenditure of Home Affairs, Cabinet and Police make up 74 percent of the MHA expenditure. In our analysis, we report the procurement expenditure for the MHA as the sum of these three departments, and do not include the UT departments in the analysis.

All rupee values used in these calculations are adjusted for inflation using the CPI index. The spending gaps are calculated for each year, from 2014-15 to 2018-19.

Is there a link between consistent procurement and lower procurement under-spend?

We organise our findings into three figures, where each is in the form of a heat map. In these graphs, each row is a ministry, where the values going from left to right are those for 2014-2015 to 2018-2019. The deeper / stronger the colours, the higher the values. In all three figures, the order of the ministries stay the same: in descending order of estimated procurement expenditure in 2014-2015. The ministry with the highest procurement spending is on top.

In Figure 1, we present the estimated procurement spending of the 10 ministries. The Ministry of Road Transport & Highways had the highest estimated procurement spending (in Rs. billion) in 2014-2015, and the ministry of coal had the least. There is large variation in the procurement spend across the 10 ministries, as described in Sharma and Thomas (2021). Ministries such as Coal and Rural Development spend less than Rs. 1 billion on procurement and have consistently done so over last 5 years. Ministry of Road Transport & Highways is the top procuring ministry followed by Home Affairs, of which Department of Police is largest procurer. There is more variation across the years for the remaining ministries. For example, the ministry of Health & Family Welfare shows an increased estimated procurement expenditure in 2017-2018 compared to other years in this period. The Ministry of Law & Justice has a steadily increasing procurement expenditure during this period.

 

Figure 1: Estimated procurement expenditure by ministry, 2014-15 to 2018-19

 

Figure 2 presents the estimated procurement spending gap from 2014-15 to 2019-20. Green stands for positive values (which is over-spending or under-budgeting). Red stands for negative values (which indicates under-spending or over-budgeting). Except for a few years, most ministries tend to under-spend. The exception is the Ministry of Road Transport & Highways, which is also the top procuring ministry.

 

Figure 2: Estimated procurement spending gap (%) by ministry, 2014-15 to 2018-19

Figure 2 also shows a sharper amount of under-spending towards the latter part for some of the ministries. These include Finance, Civil Aviation, Rural Development and Coal. This contradicts the proposition that procurement capacity is systematically increasing over time.

These ministries also have a lower fraction of procurement in their spending. These ministries are less likely to develop procurement capacity. Among ministries with similar procurement spending patterns, the Ministry of Environment appears to be building procurement capacity, with a procurement spending gap closer to zero.

Lastly, Figure 3 presents the spending gap for total expenditure for these ministries across time. There is much more capacity among the ministries in managing to spend their overall budgets. Most of the heat-map shows colours mapping to values closer to 0. In fact, there is more evidence of over-spending than under-spending compared to Figure 2. The ministries of Finance and Rural Development have more instances of over-spending in their overall spending, while these are ministries which have estimated procurement under-spend.

 

Figure 3: Total spending gap (%) by ministry, 2014-15 to 2018-19

Alternative explanations

Underspend can be driven by other compulsions also. In a public choice theory worldview, state organisations would give the highest priority to wage and pension expenditures, and sacrifice procurement expenditures when faced with formal or informal budget constraints. This makes procurement budgets the most vulnerable to sudden cuts.

However, this argument should apply equally across all ministries. In fact, the ministries which do higher amounts of procurement should be the prime target for mid-year budget cuts. This argument predicts that under-spend should take place roughly everywhere, and maybe to a greater extent in the high-procurement ministries. The evidence, however, shows that under-spend is more prevalent in low-procurement ministries.

Discussion

The main finding of this article is that ministries that tend to procure consistently, tend to have smaller procurement spending gaps. This is consistent with the idea that there is learning by doing, where doing procurement on a sustained basis gradually creates organisational capability for procurement.

If the key claim of this article is true -- that there is learning by doing in procurement -- this has a few interesting implications. In a department where there is low experience with procurement, the early years where procurement work begins will work poorly. In such a department, procurement under-spend is likely, with consequential failures in public expenditure programs and budgeting. In a department with low experience with procurement, a sudden jump in the procurement budget is likely to be associated with failure to spend. If the political leadership decides to push up the procurement spend of a department by three times, it would make sense to (a) increase the budget by only 20% and (b) initiate a capacity building program for procurement capability within that department.

Procurement is an expertise. No government organisation can sporadically do this well. It is an expertise which can be built, albeit over many years. In any government organisation, people and processes can be organised to focus on this expertise, and to devote time and effort on the entire pipeline of government contracting. The process of developing this capability can be accelerated by bringing in people with this specialised expertise. Strengthening the entire life cycle is required to successfully spend budget amounts. But this is only the beginning of success in procurement where government can contract to deliver quality projects efficiently, on time and at low cost.

References

Aneesha Chitgupi and Susan Thomas. The make vs. buy decision of the union government, The Leap Blog. September 10, 2022.

Vijay Kelkar and Ajay Shah. In service of the republic: The art and science of public policy. Second edition, 2022.

Shubho Roy and Anjali Sharma. What ails public procurement: an analysis of tender modifications in the pre-award process, The Leap Blog, November 26, 2020.

Anjali Sharma and Susan Thomas. The footprint of union government procurement in India, XKDR Working Paper 10, November 2021.

Aneesha Chitgupi is a Research Fellow at XKDR Forum, Abhishek Gorsi is a doctoral candidate at the IGIDR and Susan Thomas is a Senior Research Fellowe at XKDR Forum and a Research Professor of Business at Jindal Global University. We thank Josh Felman, Sudha Krishnan, Ajay Shah and Anjali Sharma for feedback and comments.

Preparing for financially self-reliant and accountable regulators

by Rishika Rangarajan.

Introduction

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

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

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

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

Key Sources of Funding

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

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

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

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

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

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

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

The importance of financial capacity

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

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

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

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

Comparing incomes of regulatory authorities

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

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

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

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

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

Moving towards fee-based models

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

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

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

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

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

Differing standards of fees

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

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

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

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

Designing financially self-reliant regulators

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

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

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

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

Conclusion: formalising transparency and accountability

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

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

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

References

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

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

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

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

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

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

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

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