A Regulation on Regulations – Rule of law checks by the Reserve Bank of India

– Aditya Iyer, Manager (Legal) | (finserv@vinodkothari.com) 

Background

In Rajeev Suri v. Delhi Development Authority, the Supreme Court of India^[1] noted that the ‘Rule of Law’ (RoL) posits four universal tenets, of which two are: (i) The laws must be just, clear, publicized, and stable; (ii) Open Government – the process by which laws are enacted, administered, and enforced are accessible, fair, and efficient. Further, it was noted that an integral part of a participatory democracy is public participation regarding decision-making (to a reasonable extent).

We have written elsewhere about how a strong RoL framework may play a role in improving investor confidence and encouraging investments in a given jurisdiction. Predictability and transparency are verily the lifeblood of the RoL.

On May 07, 2025, the RBI published via its policy statement, the “Framework for Formulation of Regulations” (‘Framework’). This is on similar lines as the SEBI (Procedure for making, amending and reviewing of Regulations) Regulations, 2025, notified on February 17, 2025.

The Framework is principally geared towards:

• Improving transparency and predictability;
• Allowing for public participation
• Giving the “regulated” an opportunity to align with the “regulator”
• A dynamic, responsive, and non-static regulatory approach

The Framework:

The framework lays down the principles for the formulation and amendment of regulations by the Reserve Bank of India. For regulated entities (REs), the salient features and our comments are as follows:

1. Scope & Ambit: This pertains to the formulation and amendment of “Regulation” – which has been defined widely to include all: regulations, directions, guidelines, notifications, orders, policies, specifications, and standards as issued by the RBI.

Our Comments: The implication of this is that the procedural safeguards and formalities captured below, would need to be ensured for all rule-making by the RBI, whether in the form of detailed directions or even notifications.

However, there are of course exceptions to this, as captured under Para 7 of this resource, such as where the matter is urgent/urgent intervention is required, or where following the framework would defeat the object of the regulation.

Additionally, RBI notifications are not always prescriptive/ formally rule-making in nature. Sometimes, they also merely observe certain irregularities and direct REs to remedy the same (e.g. RBI’s circular on irregular practices in gold lending). At this juncture, it is not wholly clear whether such notifications may also be subject to the captured safeguards.

2. Public consultation: Before issuance of a Regulation, the RBI shall publish the draft of such Regulation on the website for public consultation, along with a statement of particulars to seek comments. The statement of particulars shall specify the enabling provision that empowers the RBI to issue the Regulation, its objectives (including impact analysis to the extent feasible), guidance from international standard-setting bodies and best practices, the manner of implementation, and the timeline for receiving comments from the public.

3. Process of public consultation:
   1. Timeline: At least 21 days shall be provided to the stakeholders and public for comments
   2. Consultative process: The RBI shall consider the feedback and provide a “general” statement of its response to the comments received.
   3. If the RBI decides to issue the final regulation in a form substantially different from the initial draft, it may choose to repeat the process.
   4. The final regulation shall be published post approval of the competent authority, and the date of enforcement shall be from the specified date
   5. As and where found necessary, other mechanisms for engagement may be explored by the RBI, such as a discussion paper.

Our comments: If the regulator decides to issue the final regulation in a form substantially different from the initial draft, there is a choice it may exercise in repeating the process. This is not obligatory. There may be different views on this; however, intuitively, this appears to provide for situations where the substantial edits in the final draft are based on the inputs provided against the first, and hence, there would be no compulsion to repeat the process.

Further, the requirement to provide a general statement of response to comments received would ensure that the suggestions are considered and weighed.

4. Impact analysis: Under the framework, the RBI shall conduct an impact analysis before the issue of any Regulation.

Our comments: “Impact analysis” has been left undefined and broad, perhaps intentionally so, to accord practical flexibility to the regulator. However, it is to be noted that the impact analysis should be conducted before the issue of any Regulation, and “Regulation” also includes RBI notifications (which would include circulars periodically issued).

5. Amendment: Any “significant” amendments to the Regulation shall be subject to the process laid down in paragraphs 2, 3, and 4 above.

Our comments: The watchword here is “significant” amendments, and what is “significant” is entirely a subjective matter. However, this would appear to ensure that: (1) Significant regulatory updates to existing regulations (such as additions to Master Directions) are notified; and (2) Changes where the compliance obligations are increased, in particular, would be discussed and understood beforehand.

6. Review of the Regulation: Under the Framework, it is prescribed that the RBI shall periodically review its Regulations, considering the following key factors:
   1. The stated objective
   2. Experience gained through surveillance
   3. Relevant orders passed by courts and tribunals
   4. Global best practices and standards
   5. Its relevance in a changed environment
   6. The scope for reducing redundancies
   7. Any other relevant factors

Our comments: A review of regulation based on the global best practices and standards, along with the relevance of the regulation in a changed environment, highlights that the Regulation will not be made in a vacuum. Instead, it will be dynamic and responsive to changes, global best practices (for e.g. regulations in foreign jurisdictions), any operational challenges weighed against the benefit sought to be achieved, etc.

However, for REs, this also means that they will need to be mindful of the global practices (proactively) in addition to the domestic regulatory mandate.

7. Non-applicability: The framework will not be applicable to internal matters of the regulator, specific instructions given to REs, and procedural matters. However, the process prescribed may also be dispensed with in the following situations:
   • Where confidentiality would need to be maintained
   • Following the framework would defeat the object of the regulation
   • Public interest
   • Any urgent intervention required

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^[1] [2021] 15 S.C.R. 283

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Other resources on the topic:

1. Financial Sector Regulator – ‘Rule of Law’ Review