Mr. Sumant Batra*

The past two decades have witnessed both an unparalleled rise in new regulations as well as significant deregulatory reform around the world generating a hot debate on the impact of regulatory activity on the economy. 1 Few would deny that regulations have added substantially to the costs of doing business. This has increased the demand by market players for greater cost-benefit analysis (CBA) of regulations prompting the policy makers, regulators and scholars to undertake deep studies on this subject. The issue takes on even greater importance as firms find it increasingly difficult to compete in the global marketplace prone to economic slowdowns and other risks.

The CBA is now recognised as one the most elucidate tools to explain the trade-offs for a given policy or regulation although it has also received some criticism on efficiency grounds as being unnecessarily costly and time-consuming. But it can be safely stated that there is a general agreement that CBA as a mechanism provides a structured way to assess what costs and benefits a policy is expected to generate. It attempts to describe and quantify its likely impact on industry, consumers, markets and the concerned policy maker and regulator. Social scientists have attempted to measure the impacts of regulatory changes using a variety of estimation techniques in the CBA toolkit. Researchers have calculated very different estimates of regulatory costs. Economists and scholars also agree that the impact of regulation on the overall economy is challenging and difficult to measure with full certainty based on any available mechanism. The general perception is that in case of economic regulation, the benefits are negligible in most cases, while in social regulation, the potential to confer benefits is significant. Because social regulation can address specific ‘market failures’, it may provide net benefits to society. While potentially beneficial, such social regulation also has costs. Another challenge in estimating the costs and benefits of regulation requires a working definition of regulation itself. Scholars have grappled with this problem for some time with only limited success. 2 One difficulty in performing CBA is trying to accurately determine the human behavioural response to the implementation of a regulation. Predicting human choices involves modelling consumer behaviour in the market, statistical interpretations of available data, and some degree of uncertainty.

Quantification of outcomes also poses challenges in determining causation and measuring magnitudes of effects. After an estimate has been made of the quantity and magnitude of outcomes, those effects must be monetised because measuring the varied effects of a regulation requires a common unit of measurement. This becomes problematic when attempting to assign a dollar value to outcomes that do not have market prices. Regulatory benefits may often be more difficult to monetise than major costs. Costs are often economic costs, which may be more easily monetised, such as an industry’s reduction in economic activity or the added expense of complying with regulation. Benefits may be harder to quantify because of the difficulty in determining causation and because the outcomes are harder to price.

In financial sector regulation, some of the most compelling arguments for the application of CBA have come from regulators themselves. The United Kingdom Financial Services Authority (UK FSA) argued more than a decade ago that CBA provides benefits not just to regulated parties, but to the regulators themselves.3 The UK FSA notes that although CBA requires time and effort, the information gained from a good quality CBA can provide significant pay-backs by improving the quality of regulation and by increasing the confidence of the industry and the public in the regulatory process. Quality CBA also helps ensure that the regulator fulfils its obligation to explain why its proposed rules are compatible with its other general duties, including duties to facilitating innovation in regulated activities, minimise the adverse effects on competition, and facilitate competition between regulated persons.

The United States Securities and Exchange Commission (US SEC) records in its Guidelines that ‘high-quality economic analysis is an essential part of SEC rulemaking.’ Such analysis offers several benefits, including that the decisions to propose and adopt rules are informed by the best available evidence about a rule’s likely consequences, and that economic analysis allows the SEC ‘to meaningfully compare the proposed action with reasonable alternatives, including the alternative of not adopting a rule.’A rule’s potential benefits and costs should be considered in making a reasoned determination that adopting a rule is in the public interest. s The SEC thus, recognises CBA as an important check on potentially harmful regulation; regulation may have unintended negative consequences, and effective CBA provides a means of protecting against such consequences.

In a recent study on CBA, Financial Conduct Authority of United Kingdom (FCA) has explained how it goes about analysing and estimating the costs and benefits of its policies. The study outlines the steps taken by FCA and the key challenges it faces. The study sets out how CBA is used to inform decisions; the level of detail and accuracy aimed for, gathering the evidence; and how uncertainty is dealt with. It comprehensively discusses what is typically covered in the CBA. On costs, it presents new standardised approach to estimating compliance costs, designed to increase consistency of compliance cost estimates and reduce the information-gathering burden on firms. On benefits, it illustrates the types of benefits that FCA aims for when it intervenes in financial markets, the challenges in quantifying these, and the continuing efforts made in this area.


In the area of insolvency regulation, economists and scholars estimating the costs and benefits of regulation encounter formidable problems. The most important of which is identifying a reasonable benchmark with which to compare the current system. Unfortunately, such a counterfactual does not exist globally.

In India, estimating the costs and benefits of regulation assumes even greater significance. The Insolvency and Bankruptcy Code, 2016 (Code) is mainly a regulation-based law with substantive provisions of the law being heavily dependent on the regulations for their implementation. It is the procedural glue that holds the substantive provisions together. The choice of regulations, therefore, plays a crucial role on the costs they may impose on the market and their benefits. Dealing with a web of economics-based laws makes assessing CBA even more complex in India. The addition of immensely diverse social, cultural and human factors makes it more challenging. The challenges are compounded by the fact that the Code contains many new principles and concepts alien to the Indian market on which neither any best practices nor recorded precedents exist. For example, the Code introduces a shift from the debtor-in-possession regime to the creditor-in-control regime. Many new institutions were established under the Code. The Insolvency and Bankruptcy Board of India (IBBI) was set up and tasked with framing regulations for the corporate insolvency regulation process and liquidation process for corporate persons, and fresh start, insolvency and bankruptcy of class of individuals. Besides this, the IBBI is mandated to regulate insolvency professionals, insolvency professional agencies, valuers and others. The IBBI has a crucial role to translate general statutory imperatives into workable regulations.

Insolvency regulation is a dynamic exercise. Modification of regulations becomes necessary as a response or reaction to the developments in the market, changes in law or demand from the market. Initial regulations under the Code were framed on the basis of the policy framework introduced. Based on the learnings from ground, amendments made in the Code and the judicial pronouncements, IBBI tweaked the regulations over a dozen times in less than three years. One of the significant concerns with the increased pace of regulation making stems from the difference between getting rules done and getting them done right. While IBBI held a degree of consultation with stakeholders in the process of making changes in the regulations, the general sentiment of the market was that the impact of regulations was neither deeply thought through nor the consultation with stakeholders, adequate and meaningful. Moreover, there was no method to these changes. Most changes were in the form of reactions and responses to the market developments. There were also some concerns on lack of objectivity in regulation making and providing justification behind such changes.

In 2018, IBBI framed regulations to govern the mechanism for issuing regulations (Regulations Framing Mechanism).6 Regulation 5 of the Regulations Framing Mechanism provides that IBBI shall cause an economic analysis of the proposed regulations to be made. The economic analysis shall cover the expected costs to be incurred by, and the benefits that will accrue to, the society, economy, stakeholders, and IBBI, both directly and indirectly on account of the proposed regulation; and how the proposed regulations further strengthen the objectives of the Code. There is no doubt that a structured approach to CBA by way of Regulations Framing Mechanism will help IBBI systematise this process and provide an analytical template for the consideration of any new regulation. At the same time, it is crucial that the approach and process adopted by IBBI for undertaking CBA gives not only adequate consideration to a variety of significant economic questions but follows an inclusive, objective and transparent process that earns respect and confidence of stakeholder.


It is no exaggeration to say that IBBI is handling many times the normal rule-making volume of other regulators. It is dealing with the problem of rushed proposals that are pushed out in a bid to meet strict deadlines. However, the pace of rule-making required should not be an excuse for imprudent rule-making. While it is well-recognised that insolvency regulation making is a dynamic exercise and the regulator has to be evert alert and ready to step in to address the issues arising from market developments, a long-term policy view is equally essential while formulating or modifying regulations. It is also important that regulations address causes and not just symptoms. Applying economic analysis to financial regulation is the only way of getting to the bottom of these issues. CBA should be used by IBBI as a practical and rigorous means of identifying, targeting and checking the impacts of regulatory measures on the underlying causes of the ills with which it needs to deal with. These causes have to be market failures that justify regulatory intervention. 7 IBBI can seek useful guidance from this approach. Regulatory efforts that follow a ‘boom-bubble-bust-regulate cycle of financial market regulation’,8 and which Larry Ribstein characterised as ‘bubble laws’ create special risks. As Ribstein explains:

‘boom encourages unwarranted trust in markets, leading to the speculative frenzy of a bubble and then to the inevitable bust. The bust, in turn, leads first to the disclosure of fraud and then to the mirror image of the bubble-a kind of speculative frenzy in regulation. A political context combining long-standing interest group pressures with panic and populism virtually ensures against a careful balancing of the costs and benefits of regulation. Regulators are more likely to react to past market mistakes than to prevent future mistakes. Even worse, post-bust regulators are likely to ignore the benefits of market flexibility and, therefore, to impede the risk-taking and innovation that will bring the next boom.’

In its comprehensive study on analysis of the costs and benefits of its policies, the FCA has listed key steps to identify and estimate likely impacts (Refer Table).9 In addition, it is crucial that IBBI focuses on economic as well as administrative budgetary costs. A regulator’s budget reveals little about its effect on the economy. Indeed, the relatively small budgets of some regulatory agencies belie their large impact on the economy.

Table: Key steps to identify and estimate likely impacts

Key steps to assess impact Description Other points
Counterfactual or baseline scenario What would have happened in absence of the intervention If the baseline is the present state of the market, we look at whether the market is rapidly expanding or declining (to avoid under/over estimating impacts).
Identification of
direct impacts
Direct costs and benefits to market participants and to FCA Costs of complying with new regulatory requirements (or savings from removal of requirements). Costs to FCA of managing new/ extended reporting systems, supervising and enforcing new rules. Benefits to consumers (financial loss prevented, or other improvement in consumers’ well-being).
Identification of
indirect impacts
Impacts that are not an aim of the policy or a direct result from complying with the rules. If the baseline is the present state of the market, we look at whether the market is rapidly expanding or declining (to avoid under/over estimating impacts).
Quantification of impacts Quantification of any incremental costs and benefits, when possible. As well as estimates of direct and indirect impacts, this may include transfers between different

types of agents.

There are financial components (egg variations in prices multiplied by number of transactions, variations in financial losses from unsuitable products) and non – financial components (egg welfare gains, psychological benefits, time saved, welfare effects of innovation).
Monetisation of impacts Quantified impacts are converted into monetary impacts, where reasonably practicable For some of the non-financial components there are well-established measures, e.g. using salaries to infer the opportunity cost of working time. Other non- financial effects are more difficult to measure, as they require an attempt to estimate changes in consumers’ welfare (welfare analysis). We cannot always monetise all aspects of welfare, but we can get to some of them (for example well-being) quantitatively.


In the early stages of policy work, the process of undertaking a CBA helps think through the likely impact of a proposal; identifying alternative options for achieving the desired outcome; make sure the consultation exercise is meaningful by being explicit about intended and unintended impacts; determine whether the costs are proportionate in light of the expected benefits and whether there are any groups of society that will be disproportionately affected; and assess whether market processes (competition, innovation) will be affected for better or worse. 1 However, given that it is generally applied in the pre-investment stage of projects, its results are dependent on a range of assumptions regarding demand, cost, social prices as well as other parameters which are difficult to ascertain objectively ex-ante. Ex-post evaluation are useful for improving appraisal methodologies and refining the parameters and assumptions used in subsequent ex-ante evaluations. Ex-post analyses consists of reviewing the costs, implementation timeframes and compliance with the regulations, and in-depth analysis of the attainment of the benefits and expected costs after the project has been in operation for a reasonable period of time. IBBI undertook framing of regulations in the year 2016 without the fear of the unknown. The quality of regulations was reasonable considering there was little experience of a creditor-in-control regime. The aim was to improve the quality alongside the implementation of the Code. Amendments have been introduced by IBBI from time to time. Most changes were promoted by the experience of implementation of the Code as a response or reaction. There was no CBA undertaken as the need to amend was mostly, pressing. This approach, however, is expected to reduce in future and amendments are more likely to be the result of a though analysis. CBA will provide a template designed to ensure that, despite the accelerated pace, IBBI will not cut corners but will engage in more rational decision-making, will produce better regulations, and will promote good governance. The ex-post CBA should be carried out by an expert group of which no member of IBBI’s Governing Board should be a part.

Gathering data

Smart regulation requires taking the time to understand the problem that needs to be addressed, including not only the proximate cause of the problem but also the often complex and hidden factors underlying that problem. Therefore, data available to inform estimates, as well as the proportionality of gathering more data, has a bearing on the level of detail in a CBA. In its study, the FCA noted that it makes use of the best available internal information, including the judgement and experience of FCA supervisors and sector experts, information from previous CBA and consultations. There may be data available that is sufficient for its purposes, for example from: data cited in our previous publications, field trials or evaluations of previous policies; regulatory data, previous data requests, the surveys and the external information sources. When the above is not sufficient to produce reasonable estimates, evidence from informal consultation with stakeholders (such as industry representatives), stakeholder working groups and, where necessary and practical, with bespoke data requests to firms is used to supplement. Some remedies may be ruled out at an early stage on the basis of in-house evidence and knowledge. 11 Unfortunately, adequate evidence is not available in this early life of the Code to make an effective CBA. But, IBBI should make optimum use of the best available internal information. It is necessary that IBBI gathers maximum evidence to ascertain whether there is a problem that needs to be addressed and, if so, whether it is merely a perceptual one or whether evidence exists that a regulation is not working as intended. A targeted consultation should be undertaken requesting evidence rather than views. Evidence should be collected through a mix of direct requests for written evidence and telephone and face-to-face interviews with key informants. A set of generic questions maybe posted on the website for the review, to which a number of members of the public would respond, usually providing details of cases they had been involved in where they considered that the fees charged had been high. These responses would be from debtors, unsecured creditors and directors of companies that had experienced corporate insolvency.

In-depth analysis of the data is the key to achieving an effective CBA. All the available evidence should be subject to rigorous scrutiny, including requesting additional written evidence to substantiate any key points that had been raised in oral or written evidence. Evaluations can sometimes be manipulated, either consciously or unconsciously (optimistic bias), to yield unrealistic results. Consequently, there is a risk that public institutions may use this tool inappropriately, viewing it merely as a bureaucratic obstacle that has to be overcome prior to implementing a project that they want to promote or have already approved.12 The review should be to assess what further changes (if any) are required to address the problems (perceived and real) that have been identified. It should not be confined to issues of legislation and regulation, but also consider other possible changes such as the guidance and advice that is available to creditors and others who are affected by insolvencies. Analysis of the data by the IBBI should be at two levels – internal and external (research/publications, business surveys, etc.) The Regulations Framing Mechanism provides that IBBI shall upload on its website seeking comments from:

  • the public draft of proposed regulations;
  • the specific provision of the Code under which IBBI proposes regulations ;
  • a statement of the problem that the proposed regulation seeks to address;
  • an economic analysis of the proposed regulations;
  • a statement carrying norms advocated by international standard setting agencies and the international best practices, if any, relevant to the proposed regulation;
  • the manner of implementation of the proposed regulations; and
  • the manner, process and timelines for receiving comments from the public.

IBBI shall consider the public comments received and upload the same on its website along with a general statement of its response on the comments. While the process appears to be fair on the rule book, its real test will lie in it being following not just in letter but also in spirit. When the available data is not sufficient to produce reasonable estimates, IBBI should supplement this with evidence from informal consultation with stakeholders (such as industry representatives), stakeholder working groups and, where necessary and practical, with bespoke data requests to firms. When information is not readily available, nor forthcoming, IBBI should use its own judgement and experience.


CBA has long been extolled as the best method for stripping regulatory decisions of bias and anchoring them with objective, real-world economic consequences. The presumption that regulators have acted neutrally is linked to CBA. But this also means quantitative analyses have to be neutral? Yet, proper CBA will always require some degree of judgement and cannot pretend to be just a mechanical application of a set of norms, standards and methodologies. Analysts will always have some discretion over the details of a project’s appraisal. Thus, there will still be room for discrepancy between project proponents, project analysts and supervisors of the latter with respect to the appraisal of a particular project. IBBI should set high standards of objectivity in its analysis of evidence. It should not only be objective but appear to be objective. This will help in enhancing market confidence in the objectivity and independence of IBBI in the matter of regulation making. CBA is also about transparency and making sure powers are used appropriately. Transparency is the other critical benefit to the process, and one that seems particularly important in light of the nearly irresistible urge to game the analysis that is presented by the cost-benefit approach. Publishing a CBA before proposing or amending regulations should be an important part of IBBI’s accountability framework. Engagement with experts

The CBA as practiced in the modern administrative state enhances the ability of regulatory experts to leverage their expertise while limiting the dangers of reliance on such experts by promoting and enhancing opportunities for public debate and their legal and operational scrutiny. Some critics however, object to over-reliance on experts arguing that its increased use vests control in experts who subtly manipulate the evaluation so that it conforms to the procedures of the market-place. It is necessary to remember that the regulations framed by IBBI are subject to judicial review.13 Although, the National Company Law Appellate Tribunal (NCLAT) and the Adjudicating Authority do not have the jurisdiction to undertake judicial review of regulations, they can and will scorn at an arbitrary or capricious regulation or an abuse of discretion, or any regulation which is not in accordance with law. The cost of changing regulation, which may potentially fall in any of the above categories is high and off sets the benefits aimed at which such regulation is framed. Meaningful engagement with experts will help in minimising this risk and cost. IBBI statutory advisory committees comprising of experts should be convened more frequently to benefit from the expertise located therein.


CBA is as much an art as a science due to imperfect methodology and insufficient data. Assessing what people are willing to pay for a stable market is difficult. Significant uncertainties affect most cost estimates. These uncertainties arise in predicting how government will implement specific policies and how industry will respond. Although the benefits of regulation may equal or exceed its costs, the potential exists for far greater efficiency improvements since it is unlikely that marginal benefits equal marginal costs. Notwithstanding the challenges, CBA will help IBBI in providing assurance to the market that it will not adopt economically harmful regulations. Importantly, CBA would also serve a democratic function by making the discussion of new regulations more open to truly informed community comment. Stakeholders will know that their comments will be examined by sensible and knowledgeable experts through a credible and transparent process. A rigorous, objective and transparent CBA will help IBBI reduce the risk by considering not only what direct costs and benefits may be associated with compliance with a particular regulation, but also to more broadly consider how IBBI as a regulator fits in with the regulatory apparatus as a whole.


1 Hahn, Robert W. (1990). Regulation: Past, Present and Future. Harvard Journal of Law and Public Policy. 13, pp. 167- 228.

2Financial Conduct Authority (2018). How we analyse the Costs and Benefits of our Policies. analyse-costs-benefits-policies.pdf

3 Alfon, Isaac, & Andrews, Peter (1999). Cost-Benefit Analysis in Financial Regulation How to Do it and How it adds Value. Financial Services Authority Central Policy.

4 Id.

5 SEC Guidance Memorandum, (2012)

6 The IBBI (Mechanism for Issuing Regulations) Regulations, 2018.

7 Supra note 3.

8 Ribstein, Larry E. (2003). Bubble Laws, Houston Law Review. 40, pp. 77-79; This cycle has been noted by other scholars as well. See, e.g., Grundfest, Joseph A. (2002). Punctuated Equilibria in the Evolution of United States Securities Regulation, Stanford Journal of Law and Business Finance. 8, p. 1; Partnoy, Frank. (2000). Why Markets Crash and What Law Can Do About It, University of Pittsburgh Law Review, 61, p. 741.

9 Supra note 2

10 Ibid.


12 Gomez- Lobo, A. (2012). Institutional Safeguards for Cost Benefit Analysis: Lessons from the Chilean National Investment System. Journal of Benefit-Cost Analysis 3.

13 Zinke, Robert C. (1987). Cost-Benefit Analysis and Administrative Legitimation. Policy Studies Journal. 6, pp. 63-88. (citing David Dickson et al. (1981). The Cost-Benefit Swindle Puts Dollar Signs on Human Health, In These Times).


*(Mr. Sumant Batra is the President of Society of Insolvency Practitioners of India.)

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December 2020