Legal reforms like ad-hoc judges, better technology to speed up FDI

India's FDI rate is on a decline for the last three years. To stem the slide, the government needs to drastically improve the efficacy of the country's judicial system

“In this country, 18,000 judges are handling 50 million cases. The avalanche of cases is putting the judicial system to tremendous stress. A major concern any foreign investor has regarding the safety of his investment is the efficacy of the judicial system of the country where he is going to invest. It is intensively and deeply connected with our ambition of attracting more and more investment from other countries. Arbitration is good. But the real trouble starts after the award. If the aggrieved in the arbitration challenges it, the case remains pending in a court for decades. Then what is the point?”

— Former Chief Justice T S Thakur, addressing a conference in 2016 for promoting institutional arbitration in the country

The slide in the growth rate of foreign direct investment over the last five years has put the spotlight on the efficacy of the judicial system in attracting foreign investors. What the former chief justice said — in the presence of the prime minister and the law minister — highlights the need for legal reforms to speed up FDI flow.

“Judicial bandwidth is a critical resource, particularly as it is scarce — India has 19 judges per million citizens,” points out Cyril Shroff, managing partner, Cyril Amarchand Mangaldas. In order to preserve judicial bandwidth, and ensure it is utilised for judicial matters rather than administrative ones, Shroff says it’s critical to undertake judicial process re-engineering of all administrative tasks.

What does not inspire confidence in foreign investors is India’s track record in the enforcement of contracts. India’s position is 163 in World Bank’s latest doing business parameter for enforcing contracts. It takes on average four years to resolve a commercial dispute — as against 164 days in Singapore, the top-ranked nation in terms of dispute resolution. “Our ranking, as well as the experience of investors, on enforcing contracts remains woeful and the effective implementation of the Commercial Courts Act could be a crucial intervention,” says Shroff.

Experts suggest harmonising inconsistencies between multiple laws and regulations and better cooperation between sector regulators.

From a deal completion perspective, to the extent court or regulatory approvals are required to complete a transaction, the existing system is grossly overburdened, says Rajat Sethi, partner, S&R Associates. The National Company Law Tribunals (NCLTs) have jurisdiction over multiple areas, such as schemes and arrangements, capital reductions, the Insolvency and Bankruptcy Code, oppression and mismanagement actions, and other company law matters.

“However, there are not enough judges to deal with all these matters,” says Sethi.

Specialisation may be desirable within NCLTs to address the issue of overburdened courts. For instance, the commercial Bench should exclusively deal with such matter, says Bharat Anand, partner, Khaitan & Co.

While the government needs to take steps to fill vacancies in the judiciary on a war footing, to meet the shortfall in judicial members in the short term, experts suggest appointing retired judges as ad-hoc judges in tribunals.

Another way to address delays in dispute resolution is for courts to come down heavily on frivolous claims and delay tactics by the imposition of heavy costs and penalties. “Delay in adjudicating of disputes by judiciary often gives leverage to dishonest litigants in India,” says Mohit Saraf, partner, L& L Partners.

Saraf suggests if the adjournment is to be provided, then the party seeking it must be imposed with cost, which is in line with the actual cost suffered and not just token amount.

Much of the commercial litigation takes place before tribunals. And experts highlight the need to transform the tribunals handling critical areas like insolvency, competition law, tax and environment disputes. “The government can transform tribunals that are under its administration to demonstrate how appropriate use of technology and re-designing processes and practices can ensure speedy, transparent dispute resolution,” says Surya Prakash B S, programme director at DAKSH.

There is also a need to monitor the working of the tribunals through a single nodal agency, under the aegis of the Ministry of Law and Justice, experts suggest. Some are in favour of creating a National Tribunals Commission to independently recruit members to the central tribunals and bring uniformity in service conditions. While most experts are in favour of strengthening the tribunal system, some who feel ‘tribunalisation’ of the courts have not helped to reduce the pendency of cases in the judicial system.  

Payal Chawla, board member at Nani Palkhivala Arbitration Centre, feels designated specialised court for special laws within the mainstream court system would work better. According to Prashant Reddy, who leads the vertical on judicial reforms at Vidhi Centre for Legal Policy, “The government must consider abolishing these tribunals and return disputes to high courts which enjoy more credibility because of their independence.”

Most experts are in favour of managing government litigation more efficiently through the use of technology and analytics.

Key concerns of foreign investors

• Delay in the adjudication of disputes by the judiciary often gives leverage to dishonest litigants in India
• A common fear among investors is that the Indian judicial system could be held hostage by frivolous claims and manufactured delays by litigants to avoid time-bound resolution of disputes
• From a deal completion perspective, to the extent court or regulatory approvals are required to complete a transaction, the existing system is grossly overburdened
• The perception among investors is that moving the responsibility of issuing FDI approvals to the relevant administrative ministry from the Department of Economic Affairs (FIPB) has slowed down the approval process
• Sometimes Indian judiciary, wanting to look fairer, end up re-interpreting settled principles of law. This makes investors nervous 

What the experts prescribe

• Recognise that judicial bandwidth is critical, but scare resource (India has19 judges per million citizens)
• To preserve judicial bandwidth, and ensure it is utilised for judicial matters rather than administrative ones, undertake judicial process re-engineering of all administrative tasks
• Ramp up judicial capacity on a war footing. To meet the shortfall in judicial members, appoint retired judges as ad-hocs in the short term
• One way to address delays is for the courts to come down heavily on frivolous claims and delay tactics by the imposition of heavy costs and penalties
• Prescribe a time-bound resolution of certain corporate processes, such as schemes of arrangement
• Harmonise inconsistencies between multiple laws and regulations, better cooperation between sector regulators
• Transform the tribunals handling critical areas like insolvency, competition law, tax and environment disputes
• Monitor the working of the tribunals through a single nodal agency, under the aegis of the Ministry of Law and Justice
• Create a National Tribunals Commission to independently recruit members to the central tribunals, bring uniformity in service conditions
• Manage government litigation more efficiently through the use of technology and analytics