Regulatory fee or unjust enrichment?

Regulators are empowered to levy fees for services rendered, not to impose tax-like levies to create surpluses for themselves

n an exchange filing recently, BSE stated that the Securities and Exchange Board of India (Sebi) has Lasked it to pay the regulatory fee on the annual turnover, considering the "notional value" in the case of options contracts. The communication from Sebi further advised BSE to pay this amount retrospectively, i.e., from the financial year (FY) 2006-07, with 15 per cent interest per annum. The amount is expected to be close to 70 crore. Financial and fiscal experts find this odd and wrong.

How does a regulator get resourced? One of the reasons why we have regulators is the desire to distance them from the fray of politics and the elected government. This domain autonomy, in turn, requires financial autonomy.

Arm's length regulators should not be dependent on the government for their spending, as this could undermine their independence. The regulator may feel pressured to align its decisions with the interests of the people controlling its purse strings. Even if the regulator maintains formal independence in its decision- making processes, financial dependence can create a perception of bias in the eyes of stakeholders. One of the reasons to have an independent regulator is to persuade private investors that there is a predictable rule-of-law environment. Hence, it is essential to establish mechanisms that achieve adequate and secure funding for regulators. This has been done through the power to charge fees.

The single big idea of public policy is that every power of a state organisation must be surrounded by an elaborate system of checks and balances. In India, regulators have had the power to impose fees without commensurate checks and balances. As a consequence, we have seen episodes of self-aggrandising behaviour.