Source: Ideas and Institutions Issue #10
Analysis
Can Regulatory Fees Harm Markets?: Analyzing the Proposals of India’s Bankruptcy Regulator to Increase its Fees
A recent discussion paper published by the Insolvency and Bankruptcy Board of India (IBBI) is indicative of the impact regulators can have on markets just through their powers to impose and collect fees for their services. The IBBI proposes to increase the fees it charges regulated entities, such as fees for registration and recognition, by orders of magnitude. The IBBI is proposing this with the objective of becoming financially independent from the executive. However, if the proposal is implemented in its current form, it may have negative consequences for India’s incipient insolvency and bankruptcy ecosystem.
The IBBI is a young regulator, and a financially stable IBBI is important for India’s bankruptcy ecosystem in the long run. Its remit under the Insolvency and Bankruptcy Act, 2016 is to oversee the conduct of professionals involved in bankruptcy cases (Insolvency Professionals or IPs), the functioning of associations of these professionals (Insolvency Professional Entities or IPEs), and entities that provide authentic data related to the debts and liabilities of businesses (Information Utilities or IUs). In addition, the IBBI is required to frame rules regarding the processes through which firms go into and come out of bankruptcy. The IBBI’s financial stability is therefore important for the working of this entire ecosystem.
However, in addition to being financially stable, independent regulators like the IBBI need to balance considerations of financial independence and accountability. Financial dependency on the government can make regulators vulnerable to unnecessary political interference and can undermine the logic of independent regulation. In their early days, independent regulators are usually entirely funded by grants from government. For some regulators, the proportion of such grants, compared to their overall expenditure, reduces over time as they meet a higher proportion of their costs through fees charged from regulated entities. As already pointed out, this is desirable. However, the manner in which independent regulators move towards greater financial independence should be carefully considered for the following reasons:
- High fees and sudden increases in fees can become a reason to not enter or participate in the market.
- Fees should not be disproportionate to the costs of services being rendered by the regulator. They should not be a mechanism for generating large surpluses and distort the logic of financial independence.
The IBBI’s proposals therefore have to be considered for their impact on the regulated ecosystem, in addition to the consideration of IBBI’s financial independence.
IBBI’s Proposal
IBBI’s discussion paper states that the bulk of its expenditure since its establishment has been met from the government, and only 20 percent of its budgetary requirements are met from fees. In 2021-22, the gap between fee income and actual expenditure was INR 216,800,000 (Rs. 21.6 crore). The IBBI proposes to reduce its reliance on government grants by increasing the fees charged. While the proposal mentions that it intends to make up this shortfall gradually, the increases proposed would go into effect immediately:
- IPs will see a doubling of their registration fee and an eight-time increase in the annual fee to be paid to IBBI.
- The IBBI will also charge a fee from any other professional an IP might use as part of their work during the year.
- IPEs will see a quadrupling of registration fees and an eight-time increase in the annual fee to be paid to IBBI.
- IUs will see a doubling of registration fees, and an annual fee that is 20 percent of revenue for revenue under INR 100 crore and 10 percent for revenue over INR 100 crore.
These are significant increases and may impact many regulated entities severely if implemented in one go.
Problems with IBBI’s Proposal
First, IBBI’s proposal would mean a sudden and large increase for market participants. The switch from one source of funding for IBBI that amounts to 80 percent of its total budget in just one year is a large one. Given the incipient nature of the regulated ecosystem, the increased cost is being shared by a smaller group of regulated entities. The IBBI and the government should consider a gradual transition away from government funding over a period of three to five years and devise a plan to develop different mechanisms for recovering regulatory costs from regulated entities during this period.
Second, the proposals are not well explained. For example, it is unclear from the given information whether the fees are proportional to the costs of services rendered. For example, if IUs are going to be charged 20 percent of revenue annually, what is the cost of supervising them and providing them services? There is no clarity on the degree of cross-subsidization across regulated entities, if any.
Regulators globally have become adept at explaining how they impose fees and how this is optimal for their functioning and for the regulated ecosystem. For example, the UK’s financial conduct regulator, the FCA, has put out a consultation paper Regulatory Fees and Proposals, which explains how the costs of regulation are spread out across the regulated market when new firms are “brought into scope. . . . There may not be an existing body of fee-payers to recover the costs from. So the first phase of cost recovery comes through the application fees they pay at the gateway. . .” However, the FCA is now moving away from this model to pass some of the costs on to a wider body of fee-payers. It explains, “Instead of recovering the full costs of processing authorizations through the fees paid by applicants, we pass the balance to the wider body of fee-payers for recovery through periodic fees. It is reasonable to share the costs because all businesses benefit from the confidence that is generated by effective control. . .”
Third, there does not seem to be a clear business plan that estimates the changes in costs and revenues from fees by the IBBI. For example, the IBBI does not consider charging cost-based user fees for services other than registration. This includes inspections, audits, approvals for new lines of regulated activities, etc. Rather than increase annual fees significantly, the IBBI should consider the degree to which it can recoup the costs of services provided directly from such fees.
The Indian Finance Ministry established the Financial Sector Legislative Reforms Commission or FSLRC, which set up three different mechanisms through which regulators can charge fees:
- Flat fees, similar to the IBBI’s proposal for annual fees.
- Fees dependent on the nature of the transaction, similar to the registration fee charges proposed by IBBI.
- Fees dependent on the number or value of transactions.
The IBBI should formulate a business plan exploring different mechanisms through which it can distribute fees and charges equitably and efficiently via the regulated ecosystem.
Fourth, the economic analysis is incomplete and partial. It only considers economic costs and impact on the IBBI but not on regulated entities and the ecosystem for resolving cases under the IBC. The IBBI regulations, however, stipulate a comprehensive economic analysis. Australia’s Queensland Productivity Commission has published a useful guidance titled Undertaking a Regulatory Guidance for Fees that the IBBI can use.
Conclusion: Taking Stakeholders Along
By definition, every regulatory authority goes through a phase from a complete dependence on the political wings of the government to attaining a degree of financial self-sufficiency. The legitimacy of the regulator in the eyes of the market is determined by how it manages this transition. Many regulatory authorities have managed this transition by being more comprehensive and transparent about their transition path. For example, the same question was faced by the UK Homes and Communities Agency in 2014:
“Through this discussion document we are seeking views from the sector about the possibility of switching from the current grant-in-aid arrangement to a system where the Regulator recovers all or part of the cost of regulation through fees.”
In order to solicit effective feedback, the agency:
- Started with a basic question—Is there an in-principle case to charge fees for regulation?
- Laid out a map of its regulatory activities, and explained how the fees for each activity would be determined through further consultations.
- Explained that it was considering the degree to which government funding would always remain desirable in the interests of the regulated market: “If we were to charge the full cost of assessing each application for registration, it could serve to discourage applications. . . . An alternative approach would be to charge a set fee that would cover some of the cost and for the remainder to be covered by grant-in-aid.”
- Developed a set of principles to measure whether the fees being proposed were appropriate—reliability, simplicity, verifiability, impact on fee-payers, and the benefits of regulation.
In conclusion, the IBBI should consider revising its proposals along similar lines. The fees it charges will not only determine its self-sufficiency but also affect regulated entities.
—By Anirudh Burman
Review
The Theory of Populism According to Pierre Rosanvallon
In an an essay published in 1964, historian Richard Hofstadter coined the phrase “paranoid style” to describe a type of right-wing politics ascendant in the US at the time. Half a century later, this is how historian Philip Jenkins summarized Hofstadter’s framing: “We are liberal; you are mentally ill.” Ideological adversaries often draw from the manual of psychiatric disorders for rhetorical support. They also tend to catastrophize the worldviews of their opponents. Such rhetorical strategies serve partisan purposes, but they do not belong in scholarly works.
This tendency to disguise derision as description marks much scholarship on contemporary populisms. When not doomsaying or diagnosing derangements, this scholarship critiques populisms by emphasizing the “liberal” in “liberal democratic.” Populists embrace such liberal critiques so hard that they break in their strong arms. Populists readily accept that they want to unshackle democracy from the alleged excesses of liberalism.
In his recent book The Populist Century: History, Theory, Critique (translated by Catherine Porter) Pierre Rosanvallon makes a departure from the genre of contempt-as-critique. Early in the book, he issues a warning: “Political life is a graveyard of critiques and warnings that have been powerless to change the course of events.” Effective critique, he insists, should “advance arguments capable of modifying an opposing opinion.”
Rosanvallon describes five key elements of populist political cultures.
First, a conception of “the people” that brings together varied forms of grievances and transformational ambitions to distinguish between “us” and “them.” The “them” could be myriad "elites", "foreigners", and even those seen as “corrupt.” Unlike, say, class-based distinctions, this broad and malleable understanding of the people gives populists flexibility to make and remake the friend-enemy distinctions.
Second, a theory of democracy based on three elements—a preference for direct democracy (e.g., glorification of the referendum process); a polarized and hyper-electoralist vision of the people’s sovereignty that rejects intermediary bodies like the press and aims to domesticate unelected institutions like courts; and an understanding of the general will as capable of expressing itself spontaneously once the “enemies” are defeated.
Third, the figure of a “leader standing for the people,” an individual who manifests a quality of embodiment of the people as a remedy for the problems of representation. The populists’ preferred form of political organization is a “movement.” This is partly due to the “nebulous character” of the people they claim to speak for and partly due to the role played by the leader. Movements seek to bring “the people” together in unanimity, while parties tend to be expressions of specific groups.
Fourth, an emphasis on national protectionism understood not just in terms of economic policy but “inscribed in a sovereignist vision of remaking the political will and ensuring the security of a population.” Populism is motivated by a concern for sovereignty in opposition to forces of global “markets,” international organizations, and other powers that are seen as “vectors of the destruction of the political will.” Their policy demands tend to encompass financial regulation, trade barriers, immigration policy, and other policies seen to affect the exercise of sovereignty.
Fifth, political mobilization of specific emotions and passions related to a) making an increasingly illegible world more readable through recourse to simplistic narratives, b) rejecting certain incumbent regimes and power arrangements because of a feeling of disengagement or alienation, and c) seeking status and recognition to overcome feelings of being abandoned and made invisible. These emotions underpin the formation of “the people.” Rosanvallon hesitates to define a “populist personality,” but suggests that for any such definition, the decisive factor would lie in the register of passions and emotions.
Rosanvallon’s description of these constitutive elements is broad enough to allow for varieties of populism, but clear enough to distinguish populism from other ideal-types. He also carefully delineates the differences between populist movements and the regimes they create once they get power, and the differences and commonalities between left-wing and right-wing populisms, particularly in France.
Rosanvallon then turns to the history of populism, recounting three populist moments—the rise of Caesarism in nineteenth-century France; populist demands in several countries at the turn of the twentieth century; and the advent of populism in Latin America in the twentieth century. He identifies from this history certain contradictions that constitute the fundamentally indeterminate nature of democracy. These contradictions correspond to the elements of the populist ideal type, because populism seeks to radically resolve them by offering one-sided solutions. For instance, they seek to overcome the ambiguities of representation by offering a leader as an embodiment of a united people. Placing populism within the history of democracy, Rosanvallon shows how the complexity, vagueness, and openness of democracy sometimes enables populist experiments.
Finally, Rosanvallon offers his critique of populism, focusing on some of its elements. Analyzing the history of referendums, he acknowledges their limited role, but also highlights the problems that their excessive use can create. By collapsing the principal and the agent into “the people” they dissolve responsibility. By offering a binary choice, they reduce the role of deliberation. On the issue of democratic polarization, Rosanvallon offers a thoughtful critique of the populist claim of the majority expressing the general will. He reminds us of two other forms that the democratic “power of everyone” can take—the power of anyone (anybody is capable of social representation), and the power of no one (power cannot be usurped by any group or individual). Rosanvallon also critiques the social analysis that opposes the 1 percent to the 99 percent, and calls for a more precise and accurate understanding of the social world. His critiques of these constitutive elements are accompanied by suggestions on alternative methods of addressing the underlying concerns that fuel them. The long and the short of Rosanvallon’s critique is that democracy is hard work, and populisms are lazy responses to this stubborn fact.
Rosanvallon then highlights the conditions under which a populist regime becomes a democratorship – a neologism describing democratically elected regime consistently acting in an authoritarian manner. Populists, he shows through examples, seek to achieve irreversibility by changing the constitution to expand their powers, by polarizing and politicizing institutions, and by pursuing a generalized politicization of all epistemology and morality. In a way, these steps add up to a new founding that is difficult to reverse.
Rosanvallon sees a “populist atmosphere” in the world today, most clearly manifested in the politics of “rejectionism.” There is disenchantment with democracy and greater personalization of politics, as old parties are fading and individual-led movements are being formed. He sees in this “diffuse populism” the sign “that minds are available, open to the major themes that constitute populist political culture.” This also “results from the intellectual weakness of the critiques that have been addressed to populism, and from the absence of a sufficiently attractive political alternative to its promises.” So, what should those opposing populisms do?
As is customary for books on democracy, Rosanvallon ends by invoking Tocqueville. Tocqueville worried that in democracies, the notion of government was becoming oversimplified, as “numbers alone determined laws and rights.” Populism accentuates this tendency. Rosanvallon suggests that “democratic progress implies making democracy more complex, multiplying its forms.” He calls for reforming the relations between government and the governed to increase transparency, responsibility and responsiveness, and for defining the personal qualities of “good governors” required to establish a “democracy of trust.” There is no fixed model, but there is, he writes, “work to be done on a continuing basis, principles to bring to life in new ways.” The effort to take the contradictions into account is the work of democracy. Doing away with them would distort democracy.
Written in his characteristic style of seamlessly integrating historical analysis with political and sociological theorizing, the book is a considerable achievement. Rosanvallon is uniquely well-placed to interrogate and locate contemporary populisms in the history of democratic experimentation. Over decades of scholarship, his exploration of the history and theory of modern democracy forms a unique perspective for identifying the changes to which populisms seem to be responding.
Even though it is a major force behind populist politics in some countries, the word “religion” finds only two to three mentions in the book. Such context-specific knowledge should be applied by those working on a country. For those trying to understand the populisms in their respective contexts, the book provides a useful theoretical framework rooted in a comparative and historical perspective. That is, after all, the promise of political theory—by understanding “the political” well, we will understand “politics” better.
—By Suyash Rai