GOVERNANCE OF REGULATOR: FSLRC REPORT-I

Governance responsibilities are key element of any deliberation since last twenty years. Form United Nations to our families all has valid concerns about good governance and responsible behaviour. Corporate governance is just a reflection of this ongoing improvement process of governance of human society.

Present report of Financial Sector Legislative Reform Commission headed by Justice B N Srikrishna is just another but very powerful far – reaching discussion on corporate governance. The report in its first part “analysis and recommendations” very extensively discussed issues related to governance. In second part of report, draft code comprehensively proposed a law with an eye on good governance of proposed regulators.

This is very important to have good governance in functioning of regulator, who is responsible for establishment of corporate governance and responsible environment among its regulated entities; and therefore among whole corporate India and influence whole issue of governance in one manner or another.

The Commission highlights, the corporate governance of regulator was one among broad theme emerged from its interaction with experts and stakeholders. The commission pointed out:

“There were also strong views on the need for strengthening the corporate governance process of regulators – the process of appointment, tenure, compensation and overall skill formation and development of domain expertise. Regulatory expertise, it was felt, is in short supply and should be made a thrust area of focus. Transplanting civil service structures to regulatory authorities is against the basic premise of setting up independent regulatory authorities and a new culture should be built alongside constructing new structures.”

This is clear from use of terms here that the “corporate governance” was prime objective for commission. During its deliberation, this term was developed and emerged as “Regulatory Governance”. The draft code uses this emerged term “Regulatory governance”. Part III of draft code extensively enumerates principle of regulatory governance. This part has 53 clauses divided into 6 chapters. Here, we will discuss elements of good governance in this report.

Basic structure of the regulator:

The commission recommends that the regulatory organisation will be composed of three parts:

“(a) Board of the regulator: responsible for oversight and governance of the regulator;

(b) Chairperson: will be the chief executive of the regulator and will chair its board; and

(c) Office of the regulator: comprising of the employees, agents and assets of the regulator.”

The objective of basic structure, specify governance of regulator as prime function of its Board.

In draft code, Clause 4 dealing with Composition of the Financial Authority Board lay down that the total number of executive members must not be greater than half of the total number of members; and up to two members will be nominee members. This arrangement repeats itself in Clauses 8, 13, 17 and 25 for other authorities to be established under draft code. These authorities are Reserve Bank of India, Financial Redress Agency, Resolution Corporation and Public Debt Management Agency. The Clause 21 dealing with Financial Stability and Development Council recommend two executive and four nominee members.

The commission tried to make a fine balance of executive members and outside practical experience. The nominee members are to represent their respective organisation, which have been properly identified in the draft code.

The draft code ensures “balance of the board”. This requires the board of a Financial Agency represent expertise in fields of law, finance; governance, economics or such other fields as may be identified, in a fair proportion.

Selection of board members

The responsibility for appointing board members vests with the Government. While discharging this responsibility, the Government will be guided by the recommendations of a selection committee. The selection committee will shortlist at least three candidates for every position and provide the list to the Government. The structure of the selection committee will be as follows:

(a) The members will be appointed out of a list of experts maintained by the Government at all times, consisting of experts in the fields of finance, economics, law and public administration.

(b) It will consist of: a representative of the Government (who will serve as the chairperson), the chairperson of the regulator (and in the case of selection of the chairperson, another Government representative), and three experts from the list maintained by the Government.

(c) The majority of the members must be persons who are not related to the Government. This is to ensure that the selection committee is not biased towards short listing only Government officials.

Merit will be the guiding principle for the appointment of board members. Therefore, if the pool of applicants in a selection process is weak, the selection committee will have the right (after recording the reasons) to suggest other names to be considered for selection. Nominations by any member of the selection committee should be in writing, accompanied by a statement of competence and experience of the person.

Clause 30 of the draft code attempts to translate these recommendations into reality. The Central government must appoint all members of the board of a financial agency from list of persons short – listed by selection. This is good to recall that the clause do not use term “shall” as usual practice in India. To clarify, the commission explain its approach to drafting that it adopted internationally accepted “plain and simple” drafting technique. In this clause 30 and in many other clauses, must give same meaning as “shall”.

This clause also requires the selection committee that it must consider (a) merit, (b) independence, (c) balance of the board, and (d) conflict of interest, when selecting persons. The merit means qualifications, experience, past achievement and reputation. The independence conveys the ability to maintain and exercise independent judgment in the discharge of duties. The term “balance of the board” requires the board of a Financial Agency represent expertise in fields of law, finance; governance, economics or such other fields as may be identified, in a fair proportion. The “conflict of interest” denotes persons appointed as members do not have interests which may conflict with the duties of such member.

At the same time, the integrity of the selection procedure will be protected by requiring that all short-listing and decision making are done in a transparent manner – the committee should disclose all the relevant documents considered by it and prepare a report after the completion of the selection procedure. This will include the minutes of the discussion for nominating names, the criteria and process of selection and the reasons why specific persons were selected.

Followings are disqualification for a person for appointment as member of a Financial Agency, as per this clause 30:

(a) who has been appointed twice as a member of the board of that Financial Agency;

(b) who has served as the chairperson of any Financial Agency;

(c) whose age would not permit such person to serve a term of at least three years; or

(d) who is a non-executive member of any Financial Agency, for the position of non-executive member.

The commission ensures in its recommendation that the composition of boards of regulators shall not be biased towards any political influence even from the government of the day. This is a fundamental requirement for independent regulators which is going to discharge its function in all legislative, executive and judicial capacities. With this view, the report enumerate all principal related to selection of board member. The transparency is a key to fair selection and therefore good governance. Proper disclosure of selection procedure and relevant document ensure a proper transparency and open public discussion by informed stakeholders.

The recommendations of the commission have special emphasis on selection through recommendation by a selection committee consist of experts. The selection committee have majority of members from a list of experts maintained by the government. The commission recommend that the majority of members of selection committee must not be from government or biased towards short listing only government official. This is a requirement for a transparent selection of board members of regulators.

The draft code not only try good governance in selection and composition of Boards of financial Agencies but also that of Selection Committee. There shall be a list of at least ten independent experts who are available to serve as member of selection committee. Three of them, selected by chairperson of selection committee shall be selected as member of selection committee. Other two members of selection committee shall be chairperson and a variable member. The procedure to be followed by selection committee is mentioned in clause (2) of Schedule 1:

(a) The selection committee must make a document stating the procedure it will follow for selecting persons.

(b) The procedure must be fair, transparent and efficient.

(c) The selection committee must widely advertise the vacancy and the procedure for selecting person in the best possible way to attract attention of suitable candidates.

(d) Selection committees may consider persons who have not applied after recording reasons for considering such persons.

(e) The selection committee may nominate up to three persons for every vacancy for which it has been constituted.

(f) The selection committee must complete its process within one hundred and twenty days of being constituted.

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