A forgotten Board ha stolen the limelight like no other.
Ila Patnaik and Shubho Roy compare RBI Board to Bank of England and Federal Reserve Boards. Obviously, RBI is least transparent. Actually, why go that far. As this blog shows, one could learn lessons from SEBI’s Board as well but we hardly look at it.
They say RBI Board is like any other and should be governed by similar laws:
An institution, as an inanimate object, does not have a human personality; it cannot reflect on its actions and change its behaviour. Rather, an institution’s DNA is the law that governs it. When this institution functions in an unexpected way, one must look at the legal structures governing it.
For example, in 2013, a series of unexpected corporate scams starting with Satyam rocked India. These created fresh urgency for Parliament to amend the Companies Act (1956) to address the issue. We did not stop at discussing whether Mr. Raju was a good person or a bad person; we went deeper and changed the Companies Act in ways that make such a crisis less likely.
RBI’s Central Board controls the functioning of the body corporate, i.e. RBI itself. Hence, the sound functioning of RBI requires sound functioning of its board. The RBI Act (1934) determines the working of RBI’s Central Board. Hence, we need to examine the RBI Act, and ask whether it features sound provisions for the working of the board.
In this article, we document how, when compared with similar laws in other jurisdictions, the RBI Act has many gaps in terms of transparency and accountability. Regulations are made by the Board to govern itself, which violates basic requirements of hygiene. The flaws in the RBI Act help us understand how the demonetisation event happened, and show the direction for reform.
RBI does not publish either the agenda or the minutes of any Central Board meeting. All that comes out is a press release. For a contrast, consider the Bank of England (BoE), which is grounded in the same legal tradition as India. It releases the minutes of every board meeting, 6 weeks after the meeting. This flows from the Financial Services Act of 2012 . These minutes go back historically, with minutes available for as far back as 1694. By this yardstick, RBI in 2017 lags the Bank of England of 1694.
Similarly in the U.S., the Federal Reserve Board (FRB) and numerous government entities are governed by a transparency law that is aptly called the Government in the Sunshine Act. This act lays down transparency and accountability measures that government regulatory bodies must comply with, covering both the way meetings of a regulator are conducted and how the regulator makes regulations. Board meetings are divided into two types of meetings, open meetings and closed meetings. For open meetings, subsection (a)(2) of the law mandates:
“every portion of every meeting of an agency shall be open to public observation.”
Under this law, prior notice stating the meeting agenda must be given for every open meeting (Example). Accurate minutes or transcripts are published after each open and closed meeting (Example), and a live video is provided for open meetings. If board members knew that the nation was watching each word that they uttered, each would be more responsible.
Now the central bank can randomly decide what is fit to show or not and choose not to disclose.
However, in case of Fed we have clear criterion:
- en clear criteria are provided under which a meeting may be closed. An item has to fall within this exhaustive list to justify closing a meeting. Public choice theory teaches us that the Agent, i.e. the agency, is biased in favour of opacity. Hence, this list of permitted exclusions should be controlled by the Principal, i.e. Parliament. The contents of this list cannot be modified either by the executive or the agency. As an example, the grounds for exemption under India’s Right to Information Act are written into the law and cannot be modified by the executive (e.g. Ministry of Finance) or an agency (e.g. RBI).
- Public notice: Even when a meeting is closed, the agency must issue a public notice containg a suitably abridged agenda, and stating that it proposes to hold a secret meeting.
- Transcripts and minutes: The agency must maintain transcripts and minutes of closed meetings. Any agenda item discussed that does not meet the criteria closing the meeting is made available to the public. The rest of the proceedings are kept in order to be released once the reasons for confidentiality cease to exist.
- For parts of a meeting to be closed and minutes withheld, the majority of the entire membership of the agency (not just those present and voting) must vote in favour of each agenda item or portion of the meeting to be closed.
The working of RBI, which is coded in the RBI Act, 1934, is inconsistent with contemporary thinking in Indian public administration. As an example, six years ago, the Chief Information Commissioner ordered RBI to disclose minutes of the board meeting. Oddly, this instruction appears to have been ignored.
The authors also alert one to this thing called Committee of Central Board which has sweeping powers to do anything. Plus just two members are needed in this Committee of Central Board to run the show. Whereas in the two other central banks, there are many committees.
What is even more frustrating is to see RBI let Government take advantage of these loopholes while announcing the currency exercise. There are just so many as we now are beginning to learn. These are exactly the cases where one would hope that the managers warn the owners against abuse of powers. Otherwise why have a Board at all of so called erudite and independent minds?