A vigil must always be maintained to ensure that public regulators never demote or devalue the interests of Indian citizens
The TV series Dopesick, a dramatized retelling of how the notorious medicine OxyContin fuelled America’s opioid epidemic, hints that drug maker Purdue Pharma may have lobbied regulator Food and Drug Administration (FDA) into labelling its pill as ‘non-addictive’ even though it was designed to induce addiction, and resulted in many cases of over-dosing and deaths. Purdue’s baleful shadow of influence over the US regulator (which includes employing former FDA officials) fits what policy geeks define as “regulatory capture". As planet Earth gets ready for another orbit around the sun, it might be instructive to understand how regulatory capture is affecting the Indian economy.
Regulatory capture is common in all industry segments that have a sectoral regulator. It happens when a regulatory agency, set up to protect and promote the public interest, acts instead in favour of a company or particular special-interest group. The idea of regulatory capture was first voiced by Nobel laureate George J. Stigler in his 1971 landmark paper, ‘The Theory of Economic Regulation’, in which he argued that regulation “is acquired by the industry and is designed and operated primarily for its benefit."
This understanding acquires a sharper focus in India while viewing how the economy has tried, and failed repeatedly, to resolve a festering problem of bad loans for more than 35 years. Another valiant attempt is in the works with the launch of National Asset Reconstruction Company Ltd, which will acquire bad loans from banks and pursue their resolution through either liquidation or business revival. The latest Report on Trends and Progress of Banking in India released by Reserve Bank of India (RBI) echoes the central bank’s anxieties: “International experience, however, suggests that for the experiment to succeed and to avoid perverse incentives, risks to banks’ balance sheets are clearly identified; transparent transfer pricing for sale of assets are ensured; and management of the new entity is independent and professional".
It is perhaps the accumulated frustration of the past 35 years that finds expression in the last part of the above-quoted text. Regulatory capture has, unfortunately, become an integral part of the Indian system, especially given its close links to campaign finance.
Look at Yes Bank’s repeated attempts to recover its money from defaulter Dish TV, through the exercise of pledged shares. The Delhi high court recently expressed shock at a ruling by the Jaipur bench of the Debt Recovery Tribunal (DRT), which had frozen the bank’s voting rights; the high court further observed that the DRT’s orders exhibited complete lack of judicial discipline. While there is no proof that the DRT order was an example of regulatory capture, what is inescapable is that it privileged the original promoter’s brother, who was elected to the Rajya Sabha as an independent member backed by India’s ruling party, over the legal rights of lenders seeking to recover their dues. There was even an attempt by the Uttar Pradesh police, a state governed by the same party, to freeze Yes Bank’s voting rights, which subsequently attracted the Supreme Court’s ire.
The Supreme Court has even, on occasion, rebuked the National Company Law Tribunal (NCLT), an adjudication body, for shoddy rulings. On 13 September 2021, a two-member bench of the court expressed concern over the NCLT’s long delays in resolving insolvency cases under the Insolvency and Bankruptcy Code (IBC). The bench cited a report by a parliamentary panel which showed that over 70% of IBC cases were pending for more than 180 days, which defeats the Code’s purpose. These delays invariably result in value erosion and adversely affect resolution plans.
Stress tests on bank balance sheets, as outlined by RBI in its latest Financial Stability Report, reveal future asset quality deterioration, with bad loans expected to touch 8.1-9.5% of total assets by September 2022. The central bank, in fact, views asset corrosion as a major risk over the next 6-12 months. This is bound to test the insolvency and bankruptcy system’s regulatory fitness and stamina over the rest of this year.
The phenomenon of regulatory capture is evident in other sectors, too, especially where the regulator is part of the ministry overseeing a particular industry or sector. Take the example of the Director General of Civil Aviation, which is a part of the civil aviation ministry. A list of its duties on the civil aviation ministry’s website relate mostly to airlines and aircraft. Consequently, the design of aviation regulation, by default, would tend to rank airline viability and profitability over the protection of passenger rights. The earlier government’s systematic enfeeblement of public carriers in favour of private operators is also well documented. In some other ministries, regulators are observed to favour one set of industry players over another.
Interestingly, in India, it’s not just industry that indulges in regulatory capture. The government also attempts to either influence existing regulators or create new ones to implement a specific political agenda. The Digital Protection Authority suggested by the joint parliamentary committee examining India’s proposed bill on data protection is the subject of such apprehensions, especially because the state would not only be exempt from most data privacy norms, but would also wield the power to select the chairperson and other board members of the country’s new data regulator.
The larger question, though, remains: Who will protect ordinary citizens?
Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.