Legal Issues in Regulation

1. Legal Issues in Regulation Adithya Krishna Chintapanti Partner , Aequitas Legal Aequitas Legal

2. Scheme of the Presentation • Regulatory Legislations – Political Context • Positioning the Regulator • Current Architecture of Indian Regulatory Legislations • Judicial Review of Regulatory Decisions • Regulators – Jurisdictional Conflicts • Proposed Regulatory Reform Bill • Creating an Institutional Architecture Facilitative of Regulatory Reform. Aequitas Legal

3. Regulatory Legislations – Political Context • Provision of basic infrastructure facilities is a priority for developing country governments. • Opening of infrastructure sectors for private participation calls for establishment of regulators. • Regulatory legislation is a means to institutionalise the independent management of the Sector, keeping in view the policy objectives and judicial guidelines. • Regulatory legislations are meant to insulate the technocratic decisions of the regulator in the nature of tariff setting, industry norms etc from political considerations. • These processes were earlier political in nature and influenced by electoral compulsions. Aequitas Legal

4. Regulatory Legislations – Political Context • Earlier issues such as tariff setting were primarily administrative orders or policy decisions and were addressed keeping in mind the populist pulse .   • This does not mean that the regulatory bodies do not have the need or requirement to balance the needs of multiple groups.  • Establishment of regulators creates a sense of loss of power in the executive, both political and bureaucratic. • Regulators are often under tremendous pressure from the executive to pursue a particular course of action which may be contrary to the sectoral and player interests. Aequitas Legal

5. Regulatory Legislations – Political Context • Regulatory decision making requires predictability, technical expertise, consistency and insulation from political uncertainty. • As any new institution the regulators will have to find their place and renegotiate their space vis-à-vis the other state institutions. • It is essential to formulate appropriate institutional framework to safeguard the independence of the regulator so as to facilitate regulatory reform. Aequitas Legal

6. Positioning regulator vis-à-vis the Executive, Legislature and Judiciary. Legislative scheme must ensure that • Executive can only issue broad policy guide lines and not interfere in day to day commercial decision making. • Quasi judicial / administrative decisions of the regulator are subject to judicial review.(Appellate Tribunals) • There is parliamentary oversight through the requirement to table periodic reports so as to monitor the functioning of the regulator. Aequitas Legal

7. Executive (Policy Supervision & Consultation) Legislature (Democratic Accountability) Judiciary (Review of Administrative Actions) Regulatory Authority Positioning the Regulator

8. IV. Current Architecture of the Indian Regulatory Legislations a. Legislations Reviewed • Telecom Regulatory Authority of India Act – 1997. (No power to issue licenses) • Insurance Regulatory & Development Authority Act -1999. (Financial) • The Electricity Act, 2003. ( Federal Set Up) b. Current Regulatory Architecture • Sector Specific • Address the issues concerning separation of powers. • Gradual evolution of regulatory structures. Eg. power to issue license, criteria for selecting regulatory authorities, consultative mechanisms etc. Aequitas Legal

9. Current Architecture of the Indian Regulatory Legislations • Vested with power to call for information, conduct investigations and impose penalties. • Legislations do not intend to micro-manage the sector and bestow flexibility on the regulator. • Sector specific regulations formulated after consulting the sectoral players and consumers. • The essential flexibility granted by the parent statutes helps the regulator formulate and implement appropriate sectoral regulations. Aequitas Legal

10. Current Architecture of the Indian Regulatory Legislations Answerability to the Executive and Legislature • The requirement to table the regulations before the Legislature, as and when formulated, ensures accountability to the Parliament/State Legislature. • The concerned RA is also required to furnish periodically reports in the format stipulated by the Central Government. • The RA is required to submit annual reports detailing their functioning and activities undertaken to the Government, which are tabled before the Parliament/State Legislature as the case may be. • The requirement to comply with the policy directions of the Central Government ensures that regulatory decision making takes place in accordance with the broader policy as formulated by the Executive. This is intended to avoid or minimize policy inconsistencies. Aequitas Legal

11. Current Architecture of the Indian Regulatory Legislations Clear Delineation of Relationship Between – Executive, Legislature and Judiciary. • The relationship between the RA and the Executive, Legislature and Judiciary is clearly defined, preventing any excessive interference by any organ of the State in the activities of the RA. • Regulatory legislations do not intend to micro-manage the sector and bestow flexibility on the RA. • The essential flexibility granted by the parent statutes helps the RA formulate and implement appropriate sectoral regulations. • It is such subordinate legislation which is in keeping with the statutory scheme that drives the regulatory processes. • While regulators are independent they have to be accountable for their decisions, therefore regulatory decisions are subject to appeal. Aequitas Legal

12. Judicial Review of Regulatory Decisions The Scope of Court’s Intervention in Regulator’s Decisions Cellular Operators Association of India and Ors. Vs. Union of India (UOI) and Ors. (2003) 3 SCC 186 • The Cellular Operators Association of India approached the TDSAT , challenging the decision of the Government taken after taking into consideration the recommendations of TRAI permitting the Fixed Service Providers to offer WLL with limited mobility. • The primary contention of the Appellants was that conferring the benefit of WLL with limited mobility to the Fixed Service Providers is nothing but a Cellular Mobile Service and as such is a substitution for the same and such a substitution ought not to have been allowed. • The Union Government as well as the Fixed Service Providers submitted that there was no prohibition in the policy of 1999 (NTP-1999) either for introduction of any new technology nor is there any bar on competent authority to accept the recommendations of TRAI (the Regulator) . Aequitas Legal

13. Judicial Review of Regulatory Decisions The Scope of Court’s Intervention in Regulator’s Decisions Court’s Decision • When decision of expert bodies or tribunal dealing with technical, scientific, academic or economic matters are assailed, courts grant greater latitude to the decision of such expert bodies and while exercising original or appellate jurisdiction, greater deference to such decision is accorded. • Judicial intervention is restricted to and is available if there is a breach of a constitutional or a statutory provision or the approach adopted is totally illegal or if the decision is vitiated by mala fides, properly pleaded and proven. • Judicial scrutiny would not extend to questioning the decision on the ground that it is unwise or unscientific or inappropriate or a better decision could have been given. Aequitas Legal

14. Judicial Review of Regulatory Decisions Power of the Appellate Tribunal PTC India Ltd.Vs.Central Electricity Regulatory Commission 2010 (4) SCC 603 • AT can interpret the regulations framed by the Central Electricity Regulatory Commission. • AT cannot go into the vires of validity of a regulation as it is a creature of the statute and the statute does not vest such powers on it. • Vires of a regulation can be challenged only before the Constitutional courts. Aequitas Legal

15. Judicial Review of Regulatory DecisionsTo whom to appeal to? Uttar Pradesh Power Corporation Ltd.Vs.N.T.P.C. Ltd. and Ors. 2011 (10) SCALE 499 • Whether challenge to the decisions of the Appellate Tribunal with regard to the Central Commissions determination of Tariff for generation and sale of electricity generated by different units of Respondent was justified? • Regulations determine the price at which the electricity generated by NTPC is sold to the State Electricity Boards. • NTPC aggrieved by the determination of tariffs challenged the same before the Tribunal and came on appeal before the Supreme Court of India. Court’s Decision • Issues regarding the determination of tariff should be left to the Central Electricity Regulatory Commission and ordinarily the High Court and even the Supreme Court should not interfere with the said determination of tariff. Aequitas Legal

16. Judicial Review of Regulatory DecisionsGrounds for Intervention in the Regulators Decision Centre for Public Interest Litigation and Ors. Vs . Union of India (UOI) and Ors. (MANU/SC/0089/2012) • Whether the recommendations made by the Telecom Regulatory Authority of India (TRAI) on 28.8.2007 for grant of Unified Access Service Licence (for short 'UAS Licence') with 2G spectrum in 800, 900 and 1800 MHz at the price fixed in 2001, which were approved by the Department of Telecommunications (DoT), were contrary to the decision taken by the Council of Ministers on 31.10.2003? • Recommendations dated 28.8.2007 show that as per TRAI's own assessment the existing system of spectrum allocation criteria, pricing methodology and the management system suffered from number of deficiencies and there was an urgent need to address the issues linked with spectrum efficiency and its management and yet it decided to recommend the allocation of spectrum at the price determined in 2001. All this was done in the name of growth, affordability, penetration of wireless services in semi urban and rural areas, etc. Aequitas Legal

17. Judicial Review of Regulatory DecisionsGrounds for Intervention in the Regulators Decision Court’s Decision • TRAI completely overlooked that one of the main objectives of NTP 1999 was that spectrum should be utilised efficiently, economically, rationally and optimally and there should be a transparent process of allocation of frequency spectrum as also the fact that in terms of the decision taken by the Council of Ministers in 2003 to approve the recommendations of the Group of Ministers the DoT and Ministry of Finance were required to discuss and finalise the spectrum pricing formula. • While it cannot be denied that TRAI is an expert body assigned with important functions under the 1997 Act, it cannot make recommendations overlooking the basic constitutional postulates and established principles and make recommendations which would deny people from participating in the distribution of national wealth and benefit a handful of persons. Aequitas Legal

18. Judicial Review of Regulatory DecisionsGrounds for Intervention in the Regulators Decision Court’s Direction • Keeping in view the decision taken by the Central Government in 2011, TRAI shall make fresh recommendations for grant of licence and allocation of spectrum in 2G band in 22 Service Areas by auction, as was done for allocation of spectrum in 3G band. • The Central Government shall consider the recommendations of TRAI and take appropriate decision within next one month and fresh licences be granted by auction. Aequitas Legal

19. Regulators – Jurisdictional ConflictsSEBI vs. IRDA • Unit Linked Insurance Plan (i.e. ULIP) is a Scheme combining benefits of Life Insurance as well as Investment in the stock market.   • SEBI issued show-cause notices to some life insurers asking why action should not be taken against them for selling ULIPs without its approval. • IRDA stated that, ULIPs globally are managed by insurance regulators, and under no circumstance will we let ULIPs to be taken over by SEBI.” • 9 April 2010 - SEBI issued an order asserting its authority over the ULIP scheme and asking 14 life insurance companies not to collect money under ULIPs. Both existing and new policies were covered in the circular. Aequitas Legal

20. Regulators – Jurisdictional ConflictsSEBI vs. IRDA • 10 April 2010 – IRDA directs the insurance companies to disregard SEBI’s directive. IRDA had claimed in March, “ULIPs globally are managed by insurance regulators, and under no circumstance will we let ULIPs to be taken over by SEBI”.  • 12 April 2010 - Finance Secretary Ashok Chawla said that it was an issue between the two regulators and they should resolve it among themselves.  • Subsequently, the two regulators were asked by the Finance Ministry to refer the matter to court for a legal interpretation with the judgment being binding on them and to maintain status quo until the decision was given.  • 15 April 2010 - SEBI moved the Supreme Court and some high courts (including high courts of Delhi, Bombay and Hyderabad) to guard against any ex parte decision. The clarification given by SEBI while withdrawing the order asked these companies not to launch schemes without its prior approval. Aequitas Legal

21. Regulators – Jurisdictional ConflictsSEBI vs. IRDA The Securities and Insurance Laws (Amendment & Validation) Act, 2010 • It clarifies that ULIPs shall be regulated by IRDA and not SEBI. • It also provides for a Joint Mechanism to resolve disputes between regulators over the right to regulate other such hybrid products. • The Finance Minister is appointed as chairman of the joint commission and RBI governor as ex-officio vice-chairperson of the joint commission. • This is a case where both regulators were under the same Ministry therefore the issue could be resolved. Aequitas Legal

22. Proposed Regulatory Reform Bill (RRB) • Regulatory architecture could not be replicated in other infrastructure sectors like Ports, Railways, and Posts etc… • Resistance from ministries, incumbent players and departments. • Proposed Bill is still at a consultative stage. Aequitas Legal

23. RRB - Some Areas of Concern • Umbrella Legislation • Intends to introduce a common institutional framework for the regulatory commissions. • Supersedes all existing sector specific legislations. • Enables the government (Central/State ) to establish or merge regulators and appellate tribunals by notification in the utility/infrastructure sectors mentioned in the schedule. • Sectors include i. Electricity , ii. Telecommunications & Internet, iii. Broadcasting and Cable TV, iv. Posts , v. Airports, vi. Ports, vii. Railways and Mass Rapid Transit System, viii. Highways, ix. Oil and Gas, x. Coal, xi. Water Supply and Sanitation and Waterways. Observations • Parliament has been legislating on a sector to sector basis. • There is no legislative guidance as to when to notify or merge regulatory commissions or appellate tribunal. • Excessive delegation of essential legislative functions. Aequitas Legal

24. RRB - Some Areas of Concern b. Centralisation of Institutional Processe • Appointment and removal of members and chairpersons of the commissions to be contingent on approval of Prime Minister, with concurrence of President. • All policy directions issued by the concerned ministry to the regulator to be approved by the Prime Minister. c. Licensing • Stipulates minimum license conditions in the statute. • Makes amendments to the license conditions , virtually impossible. Aequitas Legal

25. RRB - Some Areas of Concern d. Issues Concerning Competition Law • Primary jurisdiction over competition related issues given to the sectoral regulator. • Empowers sectoral regulator to decide matters pertaining to anticompetitive conduct and impose fines and penalties. e. Other Issues • Sweeping legislation on areas where centre and state have shared legislative competence violates the spirit of federalism. (Ports, Highways, Waterways). • One legislation superseding a whole array of legislations (in case of a conflict or redrawing the administration of the statute) may lead to confusion. Aequitas Legal

26. Probable Executive Intent? • No uniform strategy for introducing regulators. • Sector specific efforts to set up regulatory bodies have been taken up at individual ministry level despite the proposed Bill. i. Coal Regulatory Authority Bill for the Coal Sector. ii. Postal Regulatory Authority Bill for Postal Sector. iii. Major Ports Regulatory Authority Bill 2009 for the Port Sector. •  Coalition Politics? Aequitas Legal

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