Business Today

Industry watchdogs rise to the occasion

Of late, the heads of a number of regulatory bodies have been flexing their muscles in different ways, using the full extent of their powers in a manner their predecessors had never done.

Team BT | October 9, 2012 | Updated 21:21 IST

In March last year, three months after E.K. Bharat Bhushan took over as head of the Directorate General of Civil Aviation (DGCA), a pilot of IndiGo Airlines made a faulty landing at Goa airport. The Airbus she was steering touched down on its nose wheel first instead of the rear wheels, endangering the lives of passengers. Bharat Bhushan immediately ordered a probe and pursued it to the bitter end. The probe revealed not only that the pilot in question had a fake flying licence, but also exposed a widespread racket in providing such licences. Around a dozen people, including pilots, touts and some DGCA officials, were arrested, while several pilots lost their licences.

This is only one instance of the numerous proactive steps the 57-year-old Kerala cadre IAS officer took during his short but volatile stint at the helm of the DGCA , which regulates the airline industry, particularly its safety aspects. In November last year, he ordered the first-ever financial audit of all domestic airlines to ensure, given the financial difficulties the aviation sector was in, they were not compromising safety standards. All passed the test, barring Kingfisher Airlines and Air India. As Kingfisher floundered further, he sent it a showcause notice for not maintaining flight schedules and later summoned its senior executives for not adhering to the recovery plan the airline had submitted. In June this year he called a meeting of all domestic airline CEOs to ask why they had suddenly raised airfares by whopping amounts in May. The chastised airlines agreed to reduce fares by five to 20 per cent in the highest bracket.

It was too good to last. Already some in the aviation industry were saying Bharat Bhushan had overstepped his brief, since the DGCA's primary task was only to oversee safety. Finally, on July 10, a day after Bharat Bhushan sent Kingfisher another notice warning its operating licence could be suspended if it failed to pay its staff, whose dues had been pending for five months, Civil Aviation Minister Ajit Singh abruptly removed him from his position. Speculation about why exactly he did so remains rife.

But Bharat Bhushan is not the only one. Of late, the heads of a number of regulatory bodies have been flexing their muscles in different ways, using the full extent of their powers in a manner their predecessors had never done. They include Duvvuri Subbarao, Governor of the Reserve Bank of India (RBI), which regulates the banking sector,  J. Hari Narayan, Chairman of the Insurance Regulatory and Development Authority (IRDA ), which supervises the insurance companies, Ashok Chawla, who heads the Competition Commission of India (CCI), tasked with ensuring fair competition and preventing cartelisation, and P.H.Kurian, who till mid-March this year, was Director General of Patents, Designs and Trademarks  (DGPDT), a body which oversees the implementation of the Patents Act, the Designs Act and the Trademarks Act in the country.

If Bharat Bhushan cracked the whip on airlines, RBI Governor Subbarao, 63, has taken on no less formidable an adversary than the finance ministry itself. His dogged refusal to lower interest rates despite former finance minister (and now President) Pranab Mukherjee, along with practically the entire business community, exhorting him to do so, is another instance. In a bid to counter mounting inflation, Subbarao raised the repo rate - the rate at which the RBI lends to banks - 13 times in 18 months, until it reached a peak of 8.5 per cent, leading to widespread charges that he was choking growth. The clamour grew louder, when in the fourth quarter of 2011/12, gross domestic production fell to 5.3 per cent, the lowest in nine years. The next quarter was only a shade better, with 5.5 per cent GDP growth. But with inflation still above the comfortable limit, Subbarao, barring a single cut in April this year reducing the repo rate to eight per cent, has steadfastly refused to be influenced.

"The RBI will adjust the monetary policy to address the challenges before the economy," said Mukherjee at a banking and insurance seminar in Mumbai soon after the fourth quarter numbers were announced. Did Subbarao take the hint? Far from it. Instead two days later, he publicly retorted: "The role of an interest cut is minimal in reviving growth." He added the government needed to address supply side issue to do so.

The tensions between the RBI and the finance ministry actually have their origins in the post-2008 downturn, when Subbarao unsuccessfully opposed finance ministry's move to head the Financial Stability & Development Council (FSDA), formerly an RBI preserve. Perhaps in a bid to get a firmer grip on the RBI, the government has also amended the RBI Act to have two representatives on the RBI board instead of one as before. "The animosity between the two has come down to the level of trying to micro-manage banks, an area exclusive to RBI," says the CEO of a public sector bank on condition of anonymity.

J. Hari Narayan, a former Andhra Pradesh chief secretary, who became IRDA chief in mid-2008, soon began to display his true grit. Complaints against the unit linked insurance plans (ULIPs), which combine insurance with market investment and were introduced from 2003/04, had been growing for some years, but nothing had been done. Many customers claimed that agents selling ULIPs often concealed vital details about hidden costs from them, while earning huge commissions. Hari Narayan responded in mid-2010 by cracking down on the commissions and setting rules for ULIPs which made them more customer-friendly. Since then there has been no letting up. IRDA is now examining even the traditional policies issued by insurance firms. In May this year it fined ICICI Prudential Life Insurance Rs 1.18 crore for 42 violations which included paying agents and brokers more than the regulations allowed. "One of the principles of penal action in law is deterrence," says Hari Narayan, defending the high penalty.

It is less than a year since Ashok Chawla, 61, took over as Chairman of the CCI in October last, but under him the commission has already struck hard. In February this year it held 48 gas cylinder making companies guilty of forming a cartel and fined them Rs 165.58 crore. In April it took on United Phosphorus Ltd and two other companies penalising them Rs 317 crore. But the biggest step came in June when it ordered 11 cement companies - including heavyweights like Ambuja Cement and Ultra Tech - to pay 50 per cent of their 2011/12 earnings as fines, a massive Rs 6,300 crore, for deliberately keeping production down so that cement prices would not fall. "When there are acts that are against the spirit of competition, whereby companies are either abusing their position or forming agreements with one another and working to the disadvantage of consumers and businesses, the CCI comes into the picture," says Chawla.

Rajju Shroff, Chairman, United Phosphorus Ltd (UPL), however, defends himself strongly. "We got a hint of who was going to quote what," he says. "Ours is a highly competitive market. So we made our estimates and our final bid was the same as that of two other companies. We were not aware of the implications. He points out that the Competition Appellate Tribunal has stayed the CCI order penalising UPL. "Even the penalty levied is absurd. Our annual turnover of aluminium phosphide, the product with which we are accused of violating competition norms is around Rs 25 crore, but the penalty imposed in Rs 252 crore," he adds. But Shroff concedes that collusive bidding is a common practice in India. "As the CCI passes more orders, companies will themselves adhere to its rules and regulations," he says.  

Patent regulator P.H.Kurian's ruling on the limits of a drug patent is also a landmark. Though India is a signatory to the Trade Related Intellectual Property Rights (TRIPS) agreement, and thus committed to respecting global patents, both TRIPS and the Indian Patents Act provide for exceptions in special circumstances. The DGPDT has the power to make such exceptions by issuing a 'compulsory licence', but in practice the power had never been exercised till Kurian did so in March this year. A compulsory license is issued to a company to produce or import/export a cheaper version of a patented product without the consent of the patent holder. 'Bullet' Kurian, as he was called for his bold steps, in March granted such a licence to the Hyderabad-based pharma company Natco Pharma, to manufacture the generic version of the drug Nexavar, used to treat kidney and liver cancer, which had been patented by global pharma giant Bayer AG, on payment of a 6 per cent royalty on net sales to Bayer. While Bayer's branded drug costs Rs 2.8 lakh for a month's dose, Natco Pharma's is priced at Rs 8,800 per month. "When you consider that we have so many poor people, the reasoning behind the ruling can be appreciated," says Jatin Trivedi, an Ahmedabad-based intellectual property attorney. "But the compensation provided to the patent holder should also be adequate." Bayer appealed against the ruling at the Intellectual Property Appellate Board, which rejected its appeal in September.

What prompted this sudden zeal among some regulators? Former cabinet secretary, T.S.R. Subramaniam believes the Comptroller and Auditor General (CAG's) November 2010 report on the 2G spectrum scandal, which created a furore by estimating that the manner in which the spectrum was allocated robbed the country of Rs 1.73 trillion (a trillion is one lakh crore), was the catalyst. "Until then CAG reports were jokes," he says. "But Vinod Rai (who heads CAG) has put some spine into the regulators." Most of the proactive regulatory steps were taken thereafter, barring IRDA's drive against mis-sold ULIPs which began a few months before.

India is far from being the only country, however, where regulators are flexing their muscles. If Subbarao has been standing up to the finance ministry in India, Ben Bernanke, Chairman, US Federal Reserve, tried hard to hold back his government from going in for another round of quantitative easing (QE) to shore up the US economy, maintaining it would harm the economy in the long run. But it was in vain as the US government finally went ahead in mid-September. So too, a number of other countries such as Ghana, Eritrea, Thailand and Ecuador have lately resorted to compulsory licensing to make vital drugs affordable for their citizens. In 2007, even Canada provided a compulsory license to a local company to export a copy of a patented AIDS drug to Rwanda.  

The steps taken by these assertive regulators have been largely appreciated, but not unanimously. Some Indian pharma companies, for instance, are far from happy with Kurien's ruling on compulsory licensing. "Just as the government is responsible for affordable healthcare, it is also responsible for innovation," says Swati Piramal, Vice Chairperson, Piramal Healthcare, implying that pharma companies would be reluctant to fund innovation if rivals were allowed to make generic copies of new drugs they formulated. Others have noted that Kurian passed his order only three days before the end of his tenure, and wondered why he chose to display such grit so late. Some others have questioned the qualifications and competence of those manning the regulatory bodies to lay down rules or penalise companies. The CCI, in particular, is looked at askance because its jurisdiction is so vast. "It is difficult to have experts on so many subjects," says Arvind Panagariya, Professor of Economics at Columbia University.

Again, how much of the credit for the gutsy spirit displayed by these bodies should go the person heading it? There are some who claim that given the autonomy most of them have been guaranteed, enforcing the rule-book is no big deal. "It doesn't matter whether Chawla is aggressive or not," says a senior bureaucrat. "CCI has been given the powers to keep a check on systems without interference from the polity." Yet the past records of some of these men suggest a capacity to withstand pressures that not every bureaucrat possesses and which may well have strongly influenced the regulatory body's functioning. When he was Finance Secretary earlier, for instance, Chawla firmly resisted his minister Mukherjee's suggestion to set up a super-regulator which would sort out problems between regulators - made following the 2010 turf battle between the Securities and Exchange Board of India and IRDA over who should rein in wayward insurance companies. Similarly, Subbarao had crossed Mukherjee earlier too, while heading the Financial Stability and Development Council and again when, after he had been made RBI Governor, Mukherjee wanted the debt management office hived off from the RBI.

 "The independence of the regulator is crucial," says Panagariya. Regulators, appointed by the government, have to work closely with the government as well on policy matters, but a crucial distance has also to be maintained.

(By Anand Adhikari, E. Kumar Sharma, G. Seetharaman, Geetanjali Shukla and Manu Kaushik)

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