Ministry of Corporate Affairs recently published a Report of the Committee of Experts to Examine the Need for an Institutional Framework for Regulation and Development of Valuation Professionals. This report proposed a new National Institute of Valuer as a bureaucratic institution for governing the nascent profession of valuers. We will discuss the same.
PROPOSED GOVERNING COUNCIL
The Central Government shall, by notification, constitute the Governing Council of the Institute consisting of the following members, namely: –
(a) the Chairperson;
(b) three whole-time members, of whom at least one shall be an administrative law member;
(c) one ex-officio member each from amongst the officers not below the rank of Joint Secretary as nominated by the Ministry of Finance, and Ministry of Corporate Affairs;
(d) one ex-officio member each from amongst the officers not below the rank of Executive Director as nominated by the Reserve Bank of India, Securities and Exchange Board of India, and Insolvency and Bankruptcy Board of India; and
(e) eight other part-time members.
The manner of appointment of these part-time members is not clearly spelt out in the report and the draft law. Even these part-time members are not elected members representing the regulated subjects the profession of valuers.
FOR BUREAUCRATIC SETUP
To understand the claimed reason for the bureaucratic setup, we will discuss the background reflected in the report.
There are broadly four institutional forms of regulation:
- self-regulation (regulations made by the users themselves voluntarily),
- statutory/regulated self-regulation (regulations made by users consistent with the provisions in the statute),
- state regulation, and
- co-regulation (mix of market regulation and state regulation).
Self-regulation is understood as a regulatory process whereby the industry-level organisation (such as a professional society), as opposed to a governmental level organisation, sets and enforces rules and standards relating to the conduct of firms in the industry.
The report claims:
Self-regulation fails as profession becomes impersonal, large and complicated and thereby fails to address inherent conflict of interests. It usually focuses on the benefit of the regulated and fails to protect the interest of the consumers and other stakeholders. It is vulnerable to regulatory capture and can be used by interested parties to orient the regulations to their advantage. It generally provides inefficient enforcement mechanisms against violators of its standards and principles. It lacks modern accountability mechanisms as the decisions are taken through a non-transparent process and are not reviewable…
According to the report, three developments have contributed to the declining role of self-regulation:
- First is the conflict of interests between public interest and private interest. Where the latter gets precedence over the former, self-regulation breaks down.
- Second is the emergence of empowered statutory regulators who are continuously in search of new turf.
- The third is the limited reach of SROs whose writ is limited to its members.
The report also refers to NFRA Rules. It states The NFRA Rules provide for one-tier state regulation of auditors of select companies for enforcement of auditing standards and ensuring the quality of audits.
Though the report states that both self-regulation and state regulation have respective advantages and concerns, it clearly fails to discuss the advantages and disadvantages of state regulations. There were a lot of state regulators which was abandoned with time famously Controller of Capital Issues replaced by Securities and Exchange Board of India (both primarily bureaucratic setups).
The report quotes BLRC Report,
BLRC (MoF, 2015) believed that the Indian experience on self-regulating professional bodies (such as ICAI, BCI, ICSI) has been reasonably positive in the development of their respective professions and professional standards. However, the experience as regards their role in regulating and disciplining their members has been mixed. In comparison, it claims, financial regulators (such as SEBI and RBI) have had greater success in preventing systemic market abuse and in promoting consumer protection.
However, the report conveniently fails to take into accounts that SEBI and RBI regulate multiple professions, not one and one can correctly claim that they, in fact, regulate markets not a single profession. Most of these regulated subjects of SEBI are not professionals but entities. On the contrast, IBBI which regulate a single profession has overburdened profession it regulates and practically forcing governing law impractical.
The report deceptively claims that profession of Insolvency and Valuer presently regulated by the statutory body (State) and Market (IPA/RVO). Experience presently shows:
- IPAs/RVOs does not practically represent the market but forced to act as a dummy for IBBI; and
- So-called Market regulation even small issues like fee etc are dealt with by State Regulator IBBI.
Unfortunately, most critics claim that most of the negative impacts of IBBI have imprints of over-regulation of regulated subjects by super regulators (IBBI and NCLT). However, it may be due to curable mix of early-stage learning, drafting loopholes in the law and bureaucratic mindset.
CLAIMED REASONS FOR TWO-TIER REGULATIONS
The Reports claims that professions such as CAs, CSs and CMAs have only one regulator. However, all these professions have MCA as an indirect second regulator which correctly do not interfere day to day business of these professions.
Presently, the valuation profession (outside the Valuation Rules) has several SROs, who compete among themselves. However, these RVOs do not have such powers, practically, and acts more like a dummy for state regulators IBBI.
The report correctly mentions the example of the Bar Council of India and State Bar Councils (SBCs) for two-tier regulators. The report explains various examples for two-tier regulatory hierarchy. The report reflects contract between SBC and Unlike SBCs or SMCs, IPAs are neither constituted by any Central or State law, nor do they have earmarked geographical jurisdiction.
I have not to concern with two-tier hierarchy second tier should exist with regulatory independence and super-regulator should not in any manner directly regulate the profession concern but the second tier regulator only. There is no requirement for geographical jurisdiction and it is better to have competitive structure but essence should open competition, self-regulation, independence and most importantly, they should not be forced to act as an extension of super-regulator.
The report is available for suggestions. I have pointed above, the reasons for my concerns. I may or may not have goods suggestions to mitigate all my concerns but certainly, I have a few suggestions:
- Super Regulators should regulate only second-tier regulators not the regulated subjects excepts for the limited cause of public concerns;
- Super regulators for single professions should have sufficient representation form regulated subjects and other stakeholders like industry;
- In no case, super-regulator should have more than one-third of bureaucratic members – including a chairperson, whole-time members, ex-officio members (9 in the present case)`;
- There is no reason why so many ex-officio members are required, they may be special invitee with no voting powers;
- Half of the part-time members should be representative of regulated subjects and another half may represent industry, judiciary and other stakeholders; and
- The instances of direct involvement of regulated subjects to super regulators should be kept bare minimum and if possible exceptional and it should be reflected in the governing statute.
Aishwarya Mohan Gahrana