Somasekhar Sundaresan: Rule by men - not the rule - of law

The next round of deep regulatory intervention from the judiciary seems to be brewing. It could result in matters for which specific regulators have been created coming in for direct policy-making from the judiciary. Utterances from the bench have indicated that wisdom of regulatory policy will be tested this time.

Last week, the Supreme Court issued directions to two agencies of state - the Reserve Bank of India (RBI) and the civil aviation ministry. Hearing a public interest writ petition against Housing and Urban Development Corporation, where the RBI was not even a party, the court took judicial notice of news reports about ballooning non-performing assets in the banking sector. The counsel, who usually appears for the RBI, is reported to have been present and was directed to submit information about loans of more than Rs 500 crore having gone bad within six weeks.

With the civil aviation folks, the court is reported to have remarked that private airlines ought to be forced to fly unremunerative sectors. The court was hearing an appeal from Air India challenging a decision of the Himachal Pradesh High Court directing that the state-owned airline should be forced to operate flights to Shimla, the state capital. The court is reported to have said that if the government did not force airlines to offer flights to unviable destinations, the court would cancel all licences and force a restatement of aviation policy. The government has been given time to respond, but the policy direction the court would take seems to have been indicated.

Directing airlines to mandatorily fly on any sector without any statistical or empirical analysis of viability of traffic to these destinations, or worse, only because they are indeed unviable, without any measure of state incentive or subsidy would be a serious policy decision rather than a judicial decision. In concept, mandatory servicing of a sector in the airline space would be quite similar to "priority sector lending" in the banking sector, where banks are forced by regulation to direct a fixed percentage of their credit to sectors such as agriculture, small industries and the like. This stigmatizes the borrowers in this sector. But the priority sector lending policy is subjected to serious review of reams of data and literature. A conscious "out" is provided, enabling investing in securities issued by designated financial institutions that lend in these sectors. If courts were to prescribe policy of mandatory flying to destinations considered unviable, none of the effort involved in priority sector lending policy would go into court-made aviation policy.

One does not know really what the court would do with information about bad loans of above Rs 500 crore. But, if the court were to say appoint a "special investigation team" to go into why they went bad, it would lead to a witch-hunt and numerous loan officers would have to stand trial indiscriminately. Worse, this would be an unlegislated regulatory system running parallel to the RBI, and undermining the regulator's painstaking effort at addressing the non-performing asset problem.

It is true that judicial activism is now an integral feature of life in the republic. However, interventions of this sort could, despite best intentions, be counter-productive. Even if the court eventually refrains from making its own regulatory policy, utterances from the bench that resonate with "Debate TV" (a phrase now popular thanks to NDTV's Ravish Kumar) can have serious repercussions. There is already an extraordinary lack of credit appraising capacity in the senior management of banks because of the presumption that a bad loan is necessarily an outcome of corruption by the employees who approved the loan. Loan appraisal executives have to be lucky not to get tripped in their career paths without vigilance cases being mounted when a loan goes into default.

RBI governor Raghuram Rajan had famously argued against tribunals to hear appeals from regulatory punishments on the ground that writ courts are doing a commendable job. Now, it is the writ court that may make serious inroads into the RBI's policy. Only recently, the court made a serious intervention against the RBI's approach to confidential treatment of data gathered as a regulator.

Governments have repeatedly ceded ground to judges - first, by not working on social issues that scream for attention, and second, by not legislating despite judicial attention being drawn to the issues. A case in point is the public interest litigation relating to regulating purchase of acid in the wake of rampant acid attacks. Buying a gun had always been highly regulated, but not buying acid. Even in that litigation, the government counsel invited the Supreme Court to legislate through its orders, instead of the government writing new policy. None less than the then solicitor general of India explained that government policy was vulnerable to a challenge in a writ court, which the Supreme Court's directions would be immune from.

Yet, governments can obstinately undo legal and constitutional defeats with retrospective legislation. Blatant examples are seen with fiscal policy. Examples: the retrospective amendments to excise law to defeat ITC, and income tax law to defeat Vodafone. Remove the revenue driver, and elected politicians lack the intellectual courage or interest to stand up to the popularity of court directives to correct messy policy interventions from the judiciary. So long as the executive government keeps failing in this regard, society must necessarily forego the rule of law and live with the rule by men.

The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own. Email: somasekhar@jsalaw.com