By a press release issued on 7th March, the Insolvency and Bankruptcy Board of India knowingly or unknowingly took a position on a seemingly endless debate in the world of corporate law – on the efficacy of the economic analysis of regulations. Appended to the press release were draft regulations (full name: “the Insolvency and Bankruptcy Board of India (Mechanism for Issuing Regulations) Regulations, 2018”). The intent of the regulations was to elucidate the manner in which the Board would propose and issue regulations in future, i.e. regulations on how to make regulations.
Tucked away in Regulation 5 was the surprise –
“The Board shall cause an economic analysis of the proposed regulations to be made.”
Regulation 5 further made clear that henceforth, every regulation issued by the Board would have to be subjected to a proper cost-benefit analysis.
In the United States of America, ever since 1981, when President Reagan signed an executive order mandating a cost-benefit analysis for each new major regulation, the debate on the necessity and effectiveness of such analyses has raged unabated.
Rule-makers have found themselves being pushed to carry out more and more rigorous cost-benefit analyses as time has passed, with a corresponding increase in costs. For instance, the SEC, the US equivalent of SEBI, was forced to issue this detailed guidance note to its rulewriting staff after the DC Circuit Court (which reviews federal regulations) repeatedly struck down its regulations for insufficient analyses.
Critics have pointed out that there is no conclusive evidence to show that such analyses actually work. As Harvard professor John Coates tweeted,
“Why impose new cost-benefit analysis tests when cost-benefit analysis tests haven’t been shown to satisfy a cost-benefit test?”
Further, there is a likelihood of bias if the department carrying out the analysis is not sufficiently autonomous – this could lead to the benefits arising from a proposed regulation being overestimated. Also, these analyses generally don’t take into account that businesses have a tendency to innovate based on a new rule and therefore costs can be overestimated equally often.
Here’s what I think. Despite the fact that there is no real evidence to show that cost-benefit analyses help, an attempt at assessing the impact of a new rule still feels right. As Robert Hahn and Paul Tetlock have opined, “The mere presence of an evaluation…may prevent agencies and others from adopting economically unsound regulations in the first place. This deterrent effect will not appear in most statistical analyses, but is nonetheless real.”
Might the odious amendment by which Section 29A was introduced to the Insolvency and Bankruptcy Code have never seen the light of day if its draftsmen had carried out a cost-benefit analysis? It is too late to say, but we might have been saved future 29As.
On the subject of the scant evidence to show how such analyses help, the same Hahn-Tetlock article states that “it is difficult to measure the effect of doing economic analysis on policy outcomes” and “the direct costs of regulatory evaluation appear to be small compared with the likely benefits, though we cannot prove it.”
So all in all, the Board need not worry – it has made the right move.
Having said that, my optimism was considerably deflated when I saw the Board’s first attempt at economic analysis. This was in the form of a one-page chart titled “Cost Benefit analysis for regulations on mechanism on issuing regulations” at the bottom of the press release. One of the primary goals of any cost-benefit analysis is monetising the costs and benefits that can be monetised to arrive at a clearer picture of the effect of the proposed regulation. The entire chart does not contain *a single number*. The chart divides itself into columns titled “cost” and “benefit”. An example of a “cost” to stakeholders of the proposed regulations is “Additional HR costs”. What is the Board’s estimate of these costs? We aren’t informed.
Worse still, an example of a “benefit” to stakeholders is “Feel involved in the regulation making process”. (Fire the person who made this chart.)
After this vague enumeration of costs and benefits, where is the analysis? We aren’t given one.
Assuming cost-benefit analyses of new Insolvency Board regulations might help, we certainly deserve better than the Board’s own lazy attempt. The Board might look to the travails of the US SEC before the DC Circuit Court and ensure it doesn’t suffer the same ignominy.
