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Why was SEBI appealing SAT order? Answer can give clue to fix India’s govt litigation crisis

Understanding the incentives of the bureaucracy to litigate to the highest court will help us determine how to undo those incentives.

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In a recent order, the Supreme Court directed the Securities and Exchange Board of India to return Rs 300 crore to the National Stock Exchange. The SEBI had collected Rs 625 crore under a disgorgement order against the NSE in 2019, which the Securities Appellate Tribunal had set aside. The SEBI was appealing this SAT judgment at the Supreme Court. The pertinent question to ask is, was the SEBI appealing the SAT order because that is what any government department in India does — appeal every order against it regardless of its chances? Or did the SEBI think that it actually had a strong case, after its loss at SAT? This question goes to the heart of the “government litigation crisis” that we see in India.

In August 2022, in an appeal filed by Reliance Industries Limited, the Supreme Court said: “Criminal action in commercial transactions, should take place with a lot of circumspection.” These are important words for a country where litigation by the government is a contributor to judicial pendency.

Also read: Indian securities tribunal gives relief to NSE in colocation case

Government as a litigant

One of our laments about the Indian judiciary is that it is overburdened. About half the cases in the courts involve the government. There are two ways in which the government finds itself in the court. Either it is a respondent to a case filed by a private party for not fulfilling its contract, or it is a petitioner appealing to a higher court having lost in a lower court or in arbitration. A large number of writ petitions in the Delhi High Court are linked to the enforcement of public contracts. One way to reduce government litigation is to improve how the government writes and lives up to its contracts. Another way is for the government to weigh its decision to pursue cases with a more careful cost-benefit analysis.

According to the Legal Information Management & Briefing System (LIMBS) database, there are more than 6 lakh pending court cases involving the government. If government litigation can be brought down even marginally, the burden on courts would be reduced enormously and save public money spent on pursuing cases. This would also reduce the time, resources, and cognitive burden on defendants who may, sometimes, have a stronger case.

An update to the National Litigation Policy of the government is in the works. As per the 2010 policy, the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) have issued directions that cases below certain thresholds should not be pressed further and focus should be placed on high-demand litigations. The policy also suggests that the filing of an appeal should be decided strictly on the merits of the case, and if the issue has been lost in two stages of appeal, it should not be contested further. There seems to be some effort to reduce the number of the 80,000 cases pending before the Customs Excise and Service Tax Appellate Tribunal (CESTAT). It would be interesting to study the policies put in place by the departments to reduce litigation. But policies are not useful unless they shape the incentives of the players.

Reducing the need to appeal

It’s not very obvious why the bureaucracy appeals cases. Anecdotes suggest that the reasons range from fear of allegations of corruption to the low costs of losing a case. For a bureaucrat, losing an appeal in court may have no consequences. This is especially so because the State doesn’t run out of money trying to hire lawyers, the interest rates awarded by the courts are low, and costs are rarely awarded. But not appealing may elicit allegations of corruption or incompetence. It is then, not surprising, that the default action is to appeal a loss. Understanding the incentives of the bureaucracy to litigate all the way to the highest court will help us determine how to undo those incentives. What we need is a system wherein each case is evaluated on the probability of a win and the size of the case.

In the meantime, a possibility that can be considered is to set up an external committee in the form of an ‘appeals approval committee’ that decides whether a government department or a regulatory body should appeal a case further. The committee could consist of members external to the government such as former judges of a court or subject matter experts. The sitting fee of the members should be equal to a post-retirement arbitration fee and the decision of the committee binding. This will force departments, and especially the regulators, to demonstrate why they have a good chance of winning a case on appeal. It will also put additional pressure on the regulator to write carefully reasoned orders that stand the scrutiny of the Appellate Tribunal.

Renuka Sane is research director at Trustbridge, which works on improving the rule of law for better economic outcomes for India. Views are personal.

(Edited by Humra Laeeq)

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