## Monday, September 13, 2021

by Pratik Datta.

### Introduction

Ever since Caballero et al (2008) coined the phrase, ‘zombie firms’ have attracted much attention in both academic and policy circles. Macey (2021) recently extended the concept to a wholly new genre of zombies - ‘zombie laws’. Freedom from the clutches of zombie laws is a policy priority for India. The Prime Minister himself highlighted the challenge in his recent Independence Day speech. This piece will use the phrase ‘zombie laws’ broadly to refer to provisions of statutes, regulations, and judicial precedents that continue to apply after their underlying economic and legal bases dissipate. Although there are many obvious examples of zombie laws strewn across the Indian legal landscape, this post will illustrate the problem using a slightly more nuanced example. It will explain why section 13(4)(b) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) has become a zombie law since the enactment of the Insolvency and Bankruptcy Code in 2016. To appreciate the original rationale behind this provision, it would be useful to set out the broader legislative backdrop.

### Background

Section 69 of the Transfer of Property Act, 1882 allows only some mortgagees the right to sell the mortgaged property (security) without court intervention. This right is not available where the mortgagor is of native origin or where the mortgaged property is situated outside presidency towns or any notified area. This legislative design at the time was meant to ensure that the law does not inadvertently empower unscrupulous moneylenders (as mortgagees) against vulnerable native mortgagors in mofussil towns and villages across India. In contrast, European mortgagors in presidency towns were presumed capable enough to take care of their own interests.

Post-independence, this limited right to sell mortgaged property without court intervention proved unsatisfactory for a state-led financial system. Instead of reforming the general law, the Transfer of Property Act, special statutes were enacted to vest the power of sale without court intervention in certain financial institutions like Land Development Banks and State Finance Corporations (‘SFCs’). For example, section 29 of the State Finance Corporations Act, 1951, empowered an SFC to take over the management, possession, or both, of the borrower industrial concern for recovery of its dues. If the borrower still didn’t pay up, the SFC could sell the unit to recover its dues.

In late 1990s, demands were made to extend similar powers to banks and financial institutions to tackle the fledgling non-performing assets problem. This demand resonated with the Andhyarujina Committee, which in March 2000 recommended a special law to empower banks and financial institutions to take possession of securities anywhere in India and sell them for recovery of loans without court intervention. The SARFAESI Act 2002 was the result of this policy thinking.

Section 13 of SARFAESI Act empowers a secured creditor (bank or financial institution) to enforce a security interest created in its favour without court intervention anywhere in India. On default by a borrower, the creditor may serve a notice in writing to the borrower to repay in full within 60 days of receiving such notice. If the borrower fails to comply, the creditor may take recourse to various measures under section 13(4). Clause (b) of section 13(4) initially empowered banks and financial institutions to take over management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets.

In 2004, section 13(4)(b) was amended to empower banks and financial institutions to take over not only the ‘management of the secured assets’, but the entire ‘management of the business’ of the borrower company without court intervention. This includes the right to transfer by way of sale for realising the secured assets. These powers were not originally envisaged by the Andhyarujina Committee.

### A Zombie law

In 2000, the Andhyarujina Committee had envisaged the SARFAESI Act as an exception to the general foreclosure law contained in the Transfer of Property Act. Consequently, SARFAESI Act was designed as a special foreclosure law. Like any other foreclosure law, it dealt only with transfer of security (mortgaged property) and not transfer of corporate control of the borrower’s business from shareholders to creditors (or an administrator). The latter is the subject of corporate insolvency law.

When a corporate debtor faces financial distress, shareholders have a perverse incentive to engage in risky strategies. If the strategy pays off, shareholders benefit. If the strategy fails, the creditors bear the losses. To address this moral hazard inherent in the structure of a limited liability company, corporate insolvency law shifts the power to decide on the future of a financially distressed company from its shareholders to its creditors. The creditors could use insolvency law to either restructure their debt in the company or sale the business as a going concern to a third party. This enables the business to exit financial distress with minimal value destruction.

To achieve this outcome, corporate insolvency laws usually provide sophisticated rules to facilitate collective bargaining by the company’s creditors for debt restructuring, appoint an administrator (resolution professional) to monitor a sale, and market the business publicly to maximise the sale value. They also provide various safeguards to check against unfair wealth transfer away from vulnerable claimants of the corporate debtor such as dissenting financial creditors and operational creditors. These safeguards include several unique provisions dealing with preferential transactions, avoidance transactions, wrongful trading, cram down provisions etc. Implementing these safeguards require court supervision.

Foreclosure laws do not require such complicated rules and safeguards since they simply deal with transfer of security and not transfer of corporate control. As a result, court supervision is not as relevant in foreclosure laws. Since SARFAESI Act was initially designed as a special foreclosure law, neither did it provide for the usual safeguards necessary during transfer of corporate control nor did it mandate court supervision to protect vulnerable claimants during such transfers.

The 2004 amendment fundamentally altered this basic design of SARFAESI Act as a foreclosure law. The amended section 13(4)(b) empowered a secured creditor to take over control of the corporate debtor’s business and decide on its future through a sale, a function akin to that of a corporate insolvency law. Yet, unlike a corporate insolvency law, the amendment did not introduce any safeguard or court supervision during takeover of management and subsequent sale of the distressed business. Effectively, the 2004 amendment inserted selective features of corporate insolvency law within a foreclosure law. As a result of this legislative mashup, the amended SARFAESI Act vested disproportionate powers with secured creditors, without safeguarding the interests of other claimants of a corporate debtor. This is not expected of either a foreclosure law or a corporate insolvency law.

This hybrid section 13(4)(b) of SARFAESI Act could have been justified in 2004 as a mechanism to achieve going concern sale of distressed businesses in the absence of a modern corporate insolvency law in India. In 2016 however, India got a comprehensive corporate insolvency law - the Insolvency and Bankruptcy Code (‘IBC’). The IBC now provides a well-defined mechanism to take over management of a distressed corporate debtor to achieve a going concern sale.  On triggering the IBC, the promoter loses control of the corporate debtor. A resolution professional takes over the management, invites plans from potential investors, and places the eligible plans before a committee of financial creditors. This committee can approve a resolution plan by not less than 66% voting share. Such a resolution plan becomes binding only after it is approved by the court (adjudicating authority). Given such elaborate mechanism (with appropriate safeguards) to achieve going concern sales under the IBC, the underlying economic and legal bases for section 13(4)(b) of SARFAESI Act have dissipated. Yet, when SARFAESI Act was amended in 2016 to harmonise it with the IBC, section 13(4)(b) was not revisited. This provision lives on in the statute book only as a zombie law.

Continued existence of such a zombie law is not only unnecessary but it can also be harmful. For instance, the IBC provides stringent safeguards to prevent unfair wealth transfer from dissenting financial creditors and operational creditors. In contrast, section 13(4)(b) of the SARFAESI Act is designed to protect only the interests of secured creditors. It does not offer any credible safeguard for other claimants of a distressed corporate debtor. Therefore, continued use of this section of the SARFAESI Act to take over the management of a distressed corporate debtor without court intervention is detrimental to a wide range of corporate stakeholders.

This problem could be resolved simply by amending section 13(4)(b) to revert to its pre-2004 position. Banks and financial institutions should be able to use section 13(4)(b) only to take over the ‘management of the secured assets’ of the corporate debtor without court intervention and not the management of its entire business. The latter should be permissible only under the IBC. This legal architecture would restore the character of the SARFAESI Act as a special foreclosure law, as originally recommended by the Andhyarujina Committee.

### Conclusion

Section 13(4)(b) of SARFAESI Act became a zombie law with the introduction of the IBC. Many such zombies remain scattered across the Indian legal landscape. The government had in 2014 taken a conscious initiative to repeal such laws. Such initiatives are mostly ad hoc. There is no institutional mechanism to tackle the menace. While highlighting this lacuna, former Finance Secretary Dr. Vijay Kelkar suggested that every new economic legislation should ideally have a sunset clause. Incorporating such clauses could nudge the development of requisite institutional capacity to periodically review parliamentary laws and check the rise of the zombies.

Pratik Datta is a Senior Research Fellow at Shardul Amarchand Mangaldas & Co. All views expressed are personal. The author thanks Rajeswari Sengupta, Ajay Shah and two anonymous referees for their useful suggestions.

## Wednesday, August 25, 2021

### What year in the history of an advanced economy is like India today?

by Ananya Goyal, Renuka Sane and Ajay Shah.

India has been stepping out from poverty into middle income. It is estimated that the proportion of persons below the PPP$1.90 poverty line has dropped to an estimated 87 million in 2020. In thinking about India's journey, it is interesting to ask: In the historical journey of advanced economies, What year in the history of the US or UK roughly corresponds to India of 2021? This is a good way to obtain intuition on where India is, in the development journey. GDP measurement is a daunting enterprise. GDP measurement is particularly weak when it concerns the deep past of the UK or the US, or the Indian present. Measuring asset ownership such as cars and other assets can induce valuable insights. For many products (e.g. cars, washing machines, mobile phones, denim) we should look at the extent to which the product has reached into the households of the country. In this article, we ask: What is a time point in the history of the US or the UK which is comparable with where India is today, in terms of household asset ownership? This is connected with the question "How big is the Indian middle class?" when we apply certain thumb rules such as "to own a car is to be middle class". While these are fascinating questions, such comparisons have to be undertaken with care. When the highways are weak or when the public transport is strong, households will find cars less attractive. Closer to the equator, cooling technologies will be more appealing. And, most important, technological progress across the years has resulted in a sharp decline in the prices of many of these assets, through the wonders of mass production of assets like cars, and through Moore's law for CPUs. In the interpretation of asset ownership information, we should maintain a distinction between causes and consequences. The causes are the factors such as household prosperity or climate or cost reduction, which shape the decision of household purchase. The consequences are about how a given household asset reshapes the welfare and culture of the household. The consequences appear more similar across space and time. As an example, the impact of personal transportation upon an individual is similar across countries and decades, regardless of the the decline in the real price of an automobile and the expansion of household income. GDP measurement is faulty, and asset ownership measures across space and time are clouded by differences in the climate and by technological progress. No one element of this article is the single truth. We should assemble an overall picture in our minds, pooling all these aspects of the truth. ### Per capita GDP In 2020, per capita GDP in India (in PPP terms at 2011 prices), is$6806. Looking back into the history of the US and the UK, we get the dates:

 Comparable year in US history Comparable year in UK history Per capita GDP 1896 1894

This places India of today as being roughly like these advanced economies at the dawn of the 20th century. By this measure, India is about 120 years behind the US or the UK in terms of economic development.

### Women's labour force participation

Looking back into US history, the first measurement of women's LFP seems to be in 1890 and it shows a value of 18.2% (Smith & Ward, 1985). The women's LFP in India for 2020-21 is measured by CMIE at 9.2%. By this measure, India is at a state of maturity which is older than 1890 for the US.

### Asset ownership

We use data from the September - December, 2019 Consumer Pyramids Household Survey to measure asset ownership in India. For each asset, we compute the fraction of households which own a stated asset.

 Asset Share in India today (%) Comparable year in US history Car 6 1915 Refrigerator 59 1945 Air conditioner 7 1955 Washing machine 25 1955 TV 95 2000 Computer 8 1985
Cars
In India today, 6% of households have a car. This value was obtained in the US in 1915.
The Ford Model T was introduced in 1908. Thus, the productivity gains associated with modern manufacturing have been in play for over a century before we get to the India of today. It was harder for a US household in 1915 to buy a car, as cars were then more expensive. Our measure (1915) is an over-estimate on account of improvements in mass production.
There are about 300 million households in India, so the installed base of cars used by households is about 18 million.
Cooling equipment
Demand for refrigerators and air conditioners in the US is likely to be lower than what we see in India owing to the climate. And, there have been great advances by way of cost reduction of refrigerators.
At present, 59% of Indian households have fridges, and the US was at such a value in 1945. Similarly, 7% of households in India have air conditioners, a value that was seen in the US in 1955. Both these values (1945 and 1955) are an over-estimate owing to (a) Differences in the climate and (b) Improvements in mass production.
With about 300 million households, these values map to about 20 million air conditioners and about 180 million refrigerators, in homes. The total Indian market size for these products is, of course, greater as there are also purchases by organisations like restaurants.
Washing machines
Washing machines are interesting in that there is no difficulty with the difference in climate, but there are cost reductions owing to improvements in mass production.
The US was at the present Indian value of 25% in 1955. This estimate (1955) is likely to be an over-estimate on account of improvements in mass production. An anonymous commentator points out that if clothes can be washed using cheap labour, the incentive to buy a washing machine is lower.
About a quarter of 300m households is about 75 million washing machines in existence in households in India today.
Electronics
The Indian value for television sets of 95% looks near-complete. This was only achieved in 2000 in the US.
With home computers, the Indian value of 8% is comparable to that seen in the US in 1985.
Both these values (2000 and 1985) are over-estimates owing to the dramatic decline of prices of electronic equipment.

Where is India when compared with the historical journey of the US or the UK? We have many answers. We have values of pre-1890 (women's LFP), 1896 (PPP per capita GDP), 1915 (cars), 1945 (fridges), 1955 (washing machines and air conditioners), 1985 (home computers) and 2000 (television sets). We think that overall, the asset-ownership based estimates are over-estimates on account of improvements in technology, and because households would value cooling equipment to a greater extent in the Indian warmth.

In terms of consequences, refrigerators and washing machines are both mechanisms to reduce household drudgery. When food can be stored in a refrigerator, the need to cook multiple times within the day is eliminated. The present Indian values are comparable with the US of 1945 (fridges) or 1955 (washing machines). India may then be at the cusp of change, with the emancipation of women that came in the US in the 1950s and the 1960s, when these appliances reduced the demands upon women for housework.

Economic development is hard to reduce into any single metric. As Yashwant Sinha once said, India lives in many different centuries at the same time. There are people and cultural traits in India today which are medieval, and there are pockets of India which are living at the global frontier of 2021. Each aspect of India is evolving through its own historical forces. We need to embrace and understand all aspects of this reality at once. In understanding India, we have to appreciate all these different clocks that are unfolding before us. The numbers discovered in this article help in building this intuition.

### Sources

Nicholas Felton (2008), Consumption spreads faster today, The New York Times.

Homi Kharas, Laurence Chandy (2014) What Do New Price Data Mean for the Goal of Ending Extreme Poverty? , Brookings Institution

World Poverty Clock , World Data Lab. Retreived August 2021.

Maddison Project Database, version 2020. Bolt, Jutta and Jan Luiten van Zanden (2020), “Maddison style estimates of the evolution of the world economy. A new 2020 update ”.

Consumer Pyramids Household Survey (2019), Centre for Monitoring Indian Economy.

Smith, J., & Ward, M. (1985). Time-Series Growth in the Female Labor Force. Journal of Labor Economics, 3(1), S59-S90.

## Monday, August 23, 2021

### Author: Harleen Kaur

Harleen Kaur is a regulatory affairs and public policy researcher and lawyer practising in a Delhi-based law firm.

On this blog:

## Thursday, August 19, 2021

### How elements of the Indian state purchase drugs

by Harleen Kaur, Ajay Shah, Siddhartha Srivastava.

There is one well known problem in India: the problem of drug quality. A significant fraction of the drugs purchased and consumed are sub-standard.

There is another well known problem in India: the difficulties of government contracting. When state organisations choose to buy instead of make, they face difficulties in the entire pipeline from bid preparation to tendering to contract disputes to contract renegotiation to payments. Weaknesses in government contracting are a cross-cutting problem that hamper the emergence of state capacity in all fields.

Research on government drug purchase thus lies at the intersection of two literatures: the drug quality literature in the field of health and the government contracting literature in the field of public administration.

Government purchase of drugs is particularly important for three reasons:

1. The government is a large buyer of drugs, and the people would become more healthy if the quality of government-purchased drugs could go up.
2. If procedures for drug purchase by the government are improved, this could potentially have an impact on the optimisation of an important subset of firms who may then improve their quality standards, and this would impose positive externalities upon private buyers of drugs.
3. There are some policy pathways based on information about government testing of drugs, where the release of test data into the public domain, as a side effect of a well structured government purchase procedure, can also reshape the incentives of private firms in favour of higher quality.

A research literature on government drug purchase is required. For all researchers looking at this field, obtaining basic institutional knowledge is a bottleneck. A first building block of this is a description of how various elements of the Indian state buys drugs. This is the kind of paper that everyone wants to read but nobody wants to write. We have made a first attempt at this descriptive paper.

## Tuesday, August 17, 2021

### Author: Devendra Damle

Devendra Damle is a researcher at the National Institute of Public Finance and Policy.

## Monday, August 09, 2021

### Sudden Rise of the Floaters

The first two months of 2021-22 have witnessed a remarkable new trend in the corporate bond market—a sudden rise in the issuance of floating rate bonds or “floaters” and the use of the 91-day treasury bill yield as the reference rate in these bonds, instead of the yields on dated government securities (G-Secs).

We conjecture that one possible reason behind this new development could be an increase in the perception of interest risk on the part of the bond market participants. This in turn may have been a result of the active yield curve management undertaken by the Reserve Bank of India (RBI). If indeed dated government bonds such as the 10-year G-Secs have lost relevance as benchmark securities then this can lead to serious mispricing of risk in the economy, an unintended consequence of the RBI’s bond market intervention.

### An interesting development in the bond market

Over the three-month period from April to June 2021, about 7 percent of the total corporate bond issuance of Rs 1.02 trillion consisted of floating rate bonds. While this percentage looks small, it is important to keep in mind that for the previous ten years or more, the share of floating rate bonds in the total issuance of corporate bonds has been less than 1 percent.

It is also important to note that the firms issuing these bonds and the investors investing in them are not a new class of issuers and investors. They are the same issuers and investors who were issuing and buying fixed-rate bonds until recently. In particular, 100 percent of the floating rate bond issuers now are non-banking finance companies (NBFCs) who were earlier issuing fixed rate bonds, and the investors are the same mutual funds and banks who were investing in fixed rate bonds earlier. This could imply that their behaviour has now changed due to external developments. It is as if the bond issuers and investors have suddenly developed a taste for floaters.

Corporate bonds are typically issued with a maturity of more than one year, along with a coupon, which is the rate of interest to be paid on the bond. Most bonds have a ‘fixed’ coupon—the rate of interest on the bond is decided at the time of issuance of the bond and remains fixed over the life of the bond.

This rate is a function of two factors – (i) the prevailing risk-free interest rate for the maturity matching that of the bond, and (ii) the credit risk spread that is added to compensate the investors for the default risk associated with the issuer.

The risk-free reference rate is ideally the interest rate on the government security of similar maturity. The credit spread is the function of the credit rating of the issuer. For example, if a AAA-rated issuer wants to issue a 5-year maturity corporate bond, then the risk-free reference rate will be the rate for a 5-year government security (let’s say 5.7 percent). If the credit spread of the AAA-rated issuer is an additional 100 basis points (1 percent), then the bond will be issued with a fixed coupon of roughly 6.7 percent. Note that this rate will apply to all the future interest payments by the issuer until the bond matures even if the underlying risk-free rate changes. This means that the investor in this bond is taking the interest rate risk. The secondary market price of these bonds reacts to changes in the underlying interest rates – the bond prices fall if the risk-free interest rate increases and bond prices go up if the risk-free rate decreases.

In the case of a floating rate bond, the main components of determining the coupon remain the same—a reference rate and a credit risk premium. The crucial difference is that the reference rate is no longer fixed but changes over time. Hence, these bonds are referred to as ‘floating’. The coupon on these bonds clearly specifies the reference-floating rate.

If the bond in the example cited above were a floating rate bond, then the coupon on it will not be a fixed rate of 6.7 percent. Instead, it will be the rate on 5-year government security at the time of interest payment plus 1 percent. In other words, for a floating bond, the applicable interest is computed at the time of payment of interest. If the 5-year government security rate moves up by 0.5 percent in a year then the interest rate payable will become 7.2 percent. The investor in such a bond is more protected from interest rate risk and the prices of these bonds in the secondary market fluctuate much less with movements in interest rates.

In the last two months, floating rate bonds worth Rs 70 billion have been issued in the corporate bond market, almost entirely by private companies. Overall, bonds worth Rs 793 billion have been issued by the private sector including NBFCs. The floating rate bond issues in these two months thus represent around 10 percent of private sector bond issuance.

An interesting feature of these floaters issued in the last two months is that all of them have used the yield on 91-day treasury bills (T Bills) as the reference rate. Notwithstanding the fact that these corporate bonds have maturities ranging from 2 to 4 years, yields on dated government securities (i.e., G-Secs with maturity of more than 1 year) have not been used as a reference.

What might explain this sudden preference on the part of the issuers and investors for these floating bonds?

### What might be going on?

One possibility could be a heightened perception of interest rate risk. Bond investors might be harbouring the belief that the interest rates on dated G-Secs are unlikely to remain at their current levels. As discussed earlier, issuing floating rate bonds is one way to mitigate interest rate risk. This raises the next question – why would the perception of interest rate risk suddenly go up now?

We conjecture that this could be a result of the manner in which the RBI has been managing interest rates in the government bond market. The Covid-19 pandemic presented the Indian economy with an unprecedented challenge. A combination of falling tax revenues and rising expenditure on account of fiscal stimulus resulted in a massive increase in the fiscal deficit of the government, and a corresponding rise in government borrowing from the bond market. In 2020-21 the consolidated government borrowing was a whopping Rs 21.5 trillion and the planned borrowing for 2021-22 is roughly Rs 19.6 trillion. The overall government debt to GDP ratio is roughly 90 percent, the highest ever.

The RBI on its part has taken multiple steps to ensure that interest rates are kept low in the bond market so that the government’s cost of borrowing remains under control. It has allowed several primary auctions of G-Secs to devolve on primary dealers and has even canceled auctions when it did not receive bids at rates that were low enough. In addition to its standard open market operations (OMOs), it initiated the Operation Twist program whose objective was to bring down interest rates at the long end of the yield curve and push up rates at the short end. This meant that the RBI was buying long-dated G-Secs and selling shorter maturity bonds.

In March 2021 the RBI launched a program called the G-SAP wherein for the first time it pre-committed to buying a specific amount of G-Secs. These bond market interventions are mostly aimed at capping the interest rate on the benchmark 10-year G-Sec at 6 percent. As a consequence of these actions, the RBI has ended up owning a substantial amount of the 10 year benchmark government bonds (link).

It is possible that bond investors believe that the RBI will not be able to suppress the interest rates for too long, and the rates will rise sharply and suddenly. This could be either because of the large volume of G-Secs the government needs to issue to finance its deficit or because of growing inflationary concerns in the Indian economy (CPI inflation has exceeded the upper limit of 6 percent of the RBI’s targeted inflation band in both May and June 2021), or because of external factors such as rising inflation in the US.

This is akin to a spring that has been forcefully compressed but can bounce back anytime. If the rates suddenly go up, holding fixed coupon bonds will lead to losses, as explained earlier. This increased risk perception might be one possible explanation as to why the investors now prefer floating rate bonds.

Arguably, another unintended consequence of the steps taken by the RBI to lower the long-term G-Sec yields and suppress the organic evolution of the yield curve in response to market forces may have been that the bond market participants have lost confidence in the yield curve.

In the past whenever inflation went up, 10-year G-Sec yields would also go up, implying a positive correlation between the two variables. The underlying idea is that rising inflation is usually followed by a tightening of the monetary policy stance which in turn leads to higher long term bond yields.

For instance, figure 1 below plots the 10-year G-Sec yield alongside CPI (consumer price index) inflation from 2004-05 to 2013-14. This was a period of high and rising inflation. CPI inflation went up from 3.8 percent in 2004-05 to more than 10 percent in 2012-13. Concomitantly, the 10- year rate went up from 6.6 percent in 2004-05 to more than 8 percent by 2012-13.

Figure 1: CPI Inflation and 10year G-Sec yield, 2004-05 to 2013-14

But recently this correlation seems to have broken down. We can see this clearly in figure 2, which plots the two series using monthly data, focusing on the period from March 2020 to June 2021. CPI inflation began rising from May 2020 onward. It consistently breached the 6 percent upper limit of the RBI’s targeted inflation band during the period April-October 2020, increasing from 5.8 percent in March to 7.6 percent in October. More recently it went up from 4.2 percent in April 2021 to 6.3 percent in June 2021.

Figure 2: CPI Inflation and 10year G-Sec yield, March 2020 to June 2021

However, this time around, rather than increasing, the 10-year G-Sec yield actually fell from 7.5 percent in April 2020 to 5.8 percent in May, since then holding more or less steady around 6 percent. These developments suggest that G-Sec rate might be distorted by the RBI’s interventions, which in turn might explain why some investors are turning to the T Bill rate as a preferred reference rate.

Other explanations are, of course, possible. The rise of floaters could also be a result of companies expecting interest rates to come down, in which case they would not want to issue long-term debt at higher rates. This however seems unlikely. Given that inflation continues to be a concern, interest rates are more likely to go up rather than down, and sooner or later RBI would need to start normalising the surplus liquidity situation that the financial system is currently in.

Alternatively, floaters could be issued if the private sector is tapping a new class of investors, who are interested in buying bonds but do not want to run any interest rate risk. But the issuers of and the investors in the floaters are exactly the same entities that were participating in fixed-rate bond transactions earlier.

Finally, it is also possible that the funding requirements of the NBFCs (the sole issuers of floating rate bonds right now) have undergone some changes which might have increased their preference for these bonds.

### Conclusion

We are observing an interesting new development in the corporate bond market. The rise of floating rate bond issuances by private NBFCs, and the use of the 91day T Bill rate as the reference rate seem to indicate a change in the preferences on the part of both issuers and investors.

We conjecture that one reason that might explain this development is the intervention in the bond market by the RBI to control G-Sec yields. Specifically, it is possible that the RBI’s persistent interventions have caused some market participants to lose trust in the yield curve. This possibility needs to be explored further in the future.

If there has indeed been an erosion of credibility in the yield curve, then this would be a serious problem. The yield curve is a fundamental construct in a market economy, as it defines the interest rate structure that is used to price debt. As a result, if the yield curve is distorted, then interest rate risk is being mispriced. The associated misallocation of resources could prove to be costly, damaging the economy just as it struggles to recover from the Covid crisis.

Harsh Vardhan is Executive in Residence at the Center for Financial Studies (CFS) at the SP Jain Institute of Management and Research. Rajeswari Sengupta is an Assistant Professor of Economics at the Indira Gandhi Institute of Development Research (IGIDR). The authors thank Josh Felman and an anonymous referee for their useful suggestions.

## Tuesday, July 20, 2021

### Call for Papers: CMI Field Workshop on Firm Finance

18th September, 2021

We invite submissions for a one day workshop on Firm Finance by the Chennai Mathematical Institute. The workshop will feature research papers and one panel discussion. The workshop aims to cover presentations and discussions across the following set of research topics:

• Capital structure of firms
• Corporate investment decisions
• Firm financing and macro events
• Firm financing and financial risk management
• Firm financing and corporate governance
• The role of old financial intermediaries (banks) and new (venture capital and private equity)
• MSME financing

Preliminary versions of the paper may be considered provided that the research question is clearly outlined along with preliminary results.

The workshop will be in electronic form on 18th September, 2021. Please send in your submissions before 09th August, 2021. Selection decisions will be announced by 16th August, 2021. For submission and further queries, write to shyna.adhiya@gmail.com

## Monday, June 28, 2021

### Announcements (this position is closed now)

The National Institute of Public Finance and Policy (NIPFP) is looking to hire two legal researchers on a full-time basis. The position is based in New Delhi. Our work is inter-disciplinary, bringing together knowledge of public economics, public administration, law, and quantitative research.

Job description

NIPFP is currently engaged in projects on financial markets and regulation. You would be expected to provide legal research inputs for these projects. This includes understanding the current legal landscape in India on a specific question/field, researching on experience in other jurisdictions, and outlining the possibilities for policy change in the Indian context. You would also work on other research projects and outputs as instructed.

Some examples of our work include:

1. Rajat Asthana, Renuka Sane and S. Vivek, An analysis of the SEBI WhatsApp Orders: Some observations on regulation-making and adjudication, The Leap Blog, 27 May 2021.

2. Sudipto Banerjee, Renuka Sane and Srishti Sharma, The five paths of disinvestment in India, The Leap Blog, 7 July, 2020.

3. Karan Gulati and Renuka Sane, Why do we not see class-action suits in India? The case of consumer finance, The Leap Blog, 3 May, 2020.

4. Radhika Pandey, Rajeswari Sengupta and Bhargavi Zaveri, Liberalising foreign capital flows in Government debt: No time for incrementalism, The Leap Blog, 23 April, 2020.

5. Pratik Datta, Radhika Pandey and Sumant Prashant,Replacing FIPB with Standard Operating Procedure not enough, The Leap Blog, 13 July, 2017.

Requirements
1. You must have a bachelor's degree in law (LLB). Masters' degree (LLM) would be an added advantage
2. 3 - 5 years of prior work experience
3. Very strong written and spoken English.
4. We use various open-source programs like LaTex in our daily work. While prior knowledge of these programs is not necessary, you must be willing to learn these once you join.
5. You must be comfortable in working in an inter disciplinary research environment with people from varying backgrounds such as economics, law, public policy and data science. You must be curious and passionate about research and must be willing to work on independent outputs as well as in teams.
Remuneration

The remuneration will be commensurate with the candidate's experience and will be comparable with what is found in other research institutions.

How to apply

Interested candidates may send in their covering letter and updated CV to: lepg-recruitment@nipfp.org.in. The email must contain the subject line: 'Legal Researcher'

## Wednesday, June 23, 2021

### Exchange Market Pressure: Data release Version 2.1

by Madhur Mehta.

Girton and Roper (1977) introduced the concept of Exchange Market Pressure (EMP). They defined it as the measure of total pressure on exchange rate, some part of which is resisted through central bank interventions, while some is indicated in exchange rate changes.

This concept was intruiging, and many researchers have tried to devise methods that would yield sound EMP measures. Some developments to EMP measurement were made by Eichengreen et al. (1996), Sachs et al. (1996), and Kaminsky et al. (1998). These developments have had their own share of well documented problems with respect to crisis threshold and arbitrary choice of weights.

An innovative pathway to measuring EMP was introduced in Patnaik et al. (2017). On May 27th, 2017, the authors published a cross-country EMP data set which covered 139 countries for the period, January 1996 till May 2017. This was followed by the second release of the same data set, which covered 135 countries for the period, January 1996 till November 2018, which was released on April 6th, 2020.

This article unveils the third release of the cross-country EMP data set. This covers 75 countries for a period of 23 years, starting from January 1996 till December 2019. The data is available on our EMP project page. In the interests of reproducible research, all the three datasets are available for download from this page.

Updation to December 2019 has come at a cost, of a reduced number of countries. For versions 1.1 and 2.0 of the dataset, we were using data from Datastream. Now we have switched to IMF data. This has given the reduced country coverage.

On the EMP project page, we have .csv files for the datasets. We also show the (tiny) R code that is required to load the data and make graphs.

We now show some pictures for the EMP for a few countries.

### Example: EMP for China

The above figure plots China's EMP measure. In the years prior to the Lehman collapse and Chinese financial crisis, the renminbi was under a persistent pressure to appreciate. However, after the crisis, the renminbi has been under a consistent pressure to depreciate.

### Example: EMP for India

In India's case, before the Lehman collapse, rupee was under pressure to appreciate. However after the Lehman collapse, rupee EMP went through high volatility with considerable number of months of high depreciation pressure. The EMP estimates for the taper tantrum line up nicely with a careful analysis. Since 2018, there has been persistent pressure to appreciate.

### Example: EMP for Russia

Before the collapse of the Lehman Brother's, rouble experienced persistent appreciation pressure. However, in all months after the collapse and prior to taper tantrum and conflict in Ukraine, rouble saw high EMP volatility. Since 2018, rouble has been under pressure to appreciate.

### Example: EMP for Brazil

Prior to taper tantrum, brazilian real had a highly volatile EMP, with months that saw high depreciation pressure. However, since 2018, real has been under a persistent depreciation pressure.

### References

Desai, M., Patnaik, I., Felman, J. and Shah, A., 2017. A cross-country Exchange Market Pressure (EMP) Dataset . Data in Brief.

Eichengreen, B., Rose, A., Wyplosz, C., 1996. Contagious Currency Crises , Technical Report. National Bureau of Economic Research.

Felman, J., Patnaik, I., and Shah, A., 2017. Improved measurement of Exchange Market Pressure (EMP). The Leap Blog.

Felman, J., Mehta, M., Patnaik, I., Shah, A., and Sharma, B., 2020. Release of v2.0 of the Exchange Market Pressure dataset associated with PFM 2017. The Leap Blog.

Girton, L., and Roper, D., 1977. A monetary model of exchange market pressure applied to the postwar Canadian experience. American Economic Review, vol. 67, pp.537-538.

Kaminsky, G.A., Lizondo, S. and Reinhart, C.M., 1998.Leading indicators of currency crises. Staff Papers-Int. Monet. Fund (1998), pp. 1-48.

Patnaik, I., Felman, J. and Shah, A., 2017. An exchange market pressure measure for cross country analysis . Journal of International Money and Finance, 73, pp.62-77.

Sachs, J., Tornell, A., Velasco, A., 1996. Financial crises in emerging markets: The lessons from 1995. National Bureau of Economic Research.

Madhur Mehta is a researcher at the National Institute of Public Finance and Policy.

## Tuesday, June 01, 2021

### Incentive compatibility and state-level regulation in Indian drug quality

by Harleen Kaur, Shubho Roy, Ajay Shah and Siddhartha Srivastava.

The Indian pharmaceutical market is the third largest in the world by volume of drugs sold and is dominated by local players that produce branded generics at low prices. Existing government estimates suggest that 3.16% of drugs at retail pharmacies and 10.02% of the drugs at government pharmacies are not of standard quality. Independent surveys hint at higher estimates of inadequate quality. While India is a powerhouse of drugs export, foreign drug regulators routinely classify Indian origin drugs as not of standard quality. This problem has been around for a while. Reports of the Comptroller and Auditor General of India (CAG) and Parliamentary Committees have repeatedly highlighted the problems and poor regulatory capacity.

There is a need for better policy pathways to address these problems. In this article, we argue that an incentive problem inhibits the existing regulatory structure. The present law is set up in such a way, that it may be in the interest of the regulator to not carefully monitor the manufacture of pharmaceuticals. Unlike other areas where a statutory regulator is responsible for the safety of an industry, the legislative system of for the pharmaceutical sector does not create a body dedicated to ensuring that medicines are safe and up to standards. Alongside this, there are long-standing problems with regulators in India, where laws create arbitrary power, and the feedback loops of accountability mechanisms do not create a striving for improved state capacity. Certain solutions flow directly from this reasoning.

### The current system

Unlike the working of the market economy in most goods and services, market discipline through consumers in the field of pharmaceuticals is limited; there is market failure caused by asymmetric problem. The user (usually the patient) does not have the skills or experience to know if a pill actually contains the claimed active ingredient. When (say) a pen does not work, this is evident to a consumer. However, it is very difficult for an individual patient or even a doctor to know if a drug is substandard. When medication fails to cure the patient, this could be because of three different possibilities -- a wrong diagnosis, or the patient just did not respond to the correct drug, or a problem with drug quality. This induces an identification problem, so there is no feedback loop when a substandard drug is purchased. Similarly, when a patient does get better, a lot of the time, this would have happened through the working of the human body and is helped by a placebo effect. Here also, there are no feedback loops based on quality signals.

The consequences of inadequate quality can be grave: substandard medication can even cause the death of a patient. And even if a patient dies, it is extremely difficult to establish (after the fact) that the medication was defective.

As with most other countries, India has a law that creates a government apparatus for approval and manufacture of medicines in the country: the Drugs and Cosmetics Act, 1940 (DC Act). This divides the functions of regulation between the union government and state governments. The union government is responsible for the approval of new drugs, regulation of drug imports, and laying down standards for drugs, cosmetics, diagnostics and devices. State governments are responsible for licensing and monitoring manufacturers for drug quality and initiating legal action against offenders.

The parliamentary law does not separate the regulatory duties between the union and state governments. The primary legislation allows the union government to appoint licensing authorities (S. 33 of the Act). Under this authority, the union government has delegated licensing functions to state governments (Rule 59 under the Act).

What was the text of the law which generated this separation? Section 33 of the legislation empowers the union government to appoint the 'licensing authority' for the manufacturing and sale of drugs and the union government has used this power to anoint the state government using subordinate legislation (See rule 59 of the DC Rules). As a result of this delegation, State governments (through their State Drug Regulatory Agencies) are responsible for licensing pharmaceutical manufacturing facilities and inspecting them.

### Misplaced incentives under the law

The present arrangement of delegating inspection of manufacturing facilities to the state government, however, has problematic implications. In a unified national market, where goods flow across state borders seamlessly, pharmaceutical manufacturing factories do not limit their sales to one state. Many firms are harnessing the economies of scale that come from producing for the entire country or even the global market from a few very large manufacturing plants. Small states like Himachal Pradesh and Goa contribute disproportionately to India's total pharmaceutical production.

This unification of markets creates a problem of incentives for the state governments where these plants are located. These states benefit from the tax revenue, jobs and licensing fees that these large plants bring to the state. If the state government is vigilant and runs a tight inspection regime, it risks discouraging pharmaceutical companies from setting up plants in their state. Companies may engage in jurisdiction-shopping, taking the tax base and manufacturing jobs to states with a lax regulatory regime. On the other hand the welfare costs associated with a poor regime -- the adverse impacts on the health of users -- is not borne by the state exclusively, but by the entire country. If the state has a small population (e.g. Goa or Himachal Pradesh) and the medicine is not commonly used, the failure of the regulatory regime may be invisible to the voters of the state. Therefore, it is not in the interest of a state government to run an efficient inspection regime.

Another dimension in the incentive problems of state governments lies in the cost and complexity of regulation. State governments are being asked to spend on manpower, testing facilities and institutional capacity for regulation, while the benefits of regulation are enjoyed by customers all over India.

This incentive problem leads to a race to the bottom with states competing on laxity of regulation. As an example, while a single database for providing information about substandard drugs to the public exists, only five state regulators provide such information through this database.

Finally, even if a drug manufactured in one state is found to be substandard by a regulatory agency in another state, it is difficult to organise enforcement actions that cut across state borders.

Additionally, the separation of roles between state and union is not clear and leads to confusion about who is actually responsible for inspecting manufacturing facilities. For instance, under the DC Act, drug inspectors are responsible for inspecting manufacturing sites and detecting substandard medicines (Sections 22, 23). However drug inspectors can be appointed by both the central and state governments (Section 21), and function under the control/directions of an officer appointed by the relevant government (Rule 50).

Crucially, the DC Act and Rules do not clarify the instances in which the drug inspectors are to be appointed by the central government and when they are to be appointed by the state government. Neither do they outline a scheme of accountability wherein the quality enforcement actions of the drug inspectors can be scrutinised or audited by either a state or central body.

This results in a quality enforcement framework where there is no clear statutory body responsible for the failure in drug quality at the central or state level and therefore no incentive for individual drug inspectors to investigate and prosecute quality violations adequately. Both levels of the governments may consider the other responsible for the failure to inspect a facility.

### Solutions proposed in the prevailing literature

There are broadly two schools of thought on how to reform the problem of drug quality in India. The first set of arguments favour the creation of a new central regulatory authority (Pharmaceutical Enquiry Committee (1954), Drug Policy (1994), Mashelkar Committee Report (2003)). The second set of arguments suggest that the existing State Drug Regulatory Authorities (SDRAs) be strengthened for better implementation of drug quality regulation (Hathi Committee Report (1975), Department-related Parliamentary Standing Committee on Health and Family Welfare 59th Report on the Functioning of CDSCO (2012)).

Does the solution to the problems of drug quality in India lie in building a single agency at the union government and giving it high powers to investigate and punish? In thinking about the federal architecture of the Republic, there is merit in the separation envisaged in the 1940 Act. It is difficult for the union government to build an operational capability in any field, which is effective all across the country. The Constitution of India is imbued with federalism: India is not a unitary country ruled from New Delhi, but a union of states. The Constitution envisages a limited role for the union government: the establishment of standards for quality of goods to be transported from one State to another (See Entry 51 of List I of Schedule 7 of the Constitution).

Multiple legislative attempts have been made so far to create a centralised drug authority along the lines of these recommendations but without much success. In all these instances, the bills have been opposed by state manufacturers associations and state drug regulators. But going beyond these political economy constraints, there are concerns about this pathway to policy design. Simplistic centralisation, drawing on the existing text of the DC Act, will be problematic both on the grounds that decentralisation is a valuable approach and on the grounds that the present Act has flaws on incentive compatibility. The proposals for reform have not analyzed the incentive problems and ambiguity created by the 1940 legislation. The regulatory framework for pharmaceuticals in India suffers from multiple failures which need to be addressed, over and beyond the question of decentralisation. For example, you can check the inspection dates and reports of all drug manufacturing plants in the U.S (here), but we do not know when Indian manufacturing plants are inspected. There is no obligation on either the state or union governments to regularly inspect manufacturing plants, and the DC Act is the site where such obligations need to be imposed upon state agencies.

One possibility lies in reversing the focus of state-level agencies from factories to consumers of their state. E.g. if a factory makes drugs in Goa which are sold in Maharashtra, their quality characteristics would be the responsibility of the Maharashtra drugs regulator. Such a drugs regulator would achieve greater alignment with the interests of consumers in Maharashtra, and have a reduced conflict of interest with jobs and prosperity. However, there are difficulties in establishing the powers of the Maharashtra drugs regulator over a factory in Goa. There are also dangers of creating barriers to inter-state commerce.

### How to reshape incentives

Better working of regulators. An extensive body of knowledge has developed in India, in the last decade, on the working of regulators and regulation. This literature has argued that the path to high state capacity in regulation lies in: Clarity of purpose, the role/composition/working of the board, formal processes for legislative/executive/judicial functions which are written into the law, reporting and accountability mechanisms, the budget process, and low powers of investigation and punishment (FSLRC 2015, Roy et. al. 2019, Kelkar and Shah 2019). This knowledge needs to be brought into a deeper transformation of the DC Act.

Transparency reforms that reshape incentives. A low cost intervention could be based on reputation costs and can usefully be placed at the level of the union government. There are multiple channels through which drug testing is taking place in India today. Whenever a drug is found to be substandard, the union government should obtain this information and upload that information to a publicly available repository along with the name of the manufacturer and the state in which it was manufactured. This will impose a cost on states which are lax on inspecting manufacturing facilities. The public will come to associate drugs from that state to be of poor quality and avoid them. Pharmaceutical firms will then face a market based penalty if they locate manufacturing facilities in states with lax regulatory regimes. On the other hand, states which set up good regulatory regimes will benefit from the positive publicity. Pharmaceutical manufacturers would gain respectability and may even command a price premium by locating their manufacturing facilities in states with a reputation for high inspection standards. Consequently, such states would gain from licensing fees, revenue, and jobs by establishing a good regulatory regime. Therefore, with a modest work program at the union government, naming and shaming bad actors and their state level regulators, we can reverse the incentive problem and create a virtuous cycle instead of the present race to the bottom.

Greater transparency would also kick off market discipline. Households would become more aware of quality characteristics associated with the brand names of various drugs and that would kick off greater pricing power in the hands of higher quality drugs. This process would, however, be curtailed by the extant system of price controls for drugs.

### Conclusion

The current regulatory framework does not adequately define the objective, functions or powers of the de-facto regulators, the CDSCO and the SDRAs in the primary law or rules thereunder. This leads to creation of unaccountable regulators that have misaligned incentives. In this article, we have shown elements of a drug regulatory regime that are consistent with the federal vision of the Republic, and can effectively reshape the incentives of state level regulators. The union should be responsible for national public goods : drug quality standards, cGMP standards, randomised testing on a national scale, and release of this testing data. The laws that create state level regulators need to draw on modern Indian thinking about how regulators should be constructed. Put together, these reforms will modify the incentives of state level regulators.

### References and further reading

Arrow, 1963: Kenneth J. Arrow, Uncertainty and the welfare economics of medical care The American Economic Review, December 1963.

National Drug Survey Report, 2016: Ministry of Health and Family Welfare, Survey of extent of problems of spurious and not of standard quality drugs in the Country, 2014-16, Ministry of Health and Family Welfare.

Government of India, 2012: Department-related parliamentary standing committee on health and family welfare, 59th report on the functioning of the Central Drugs Standard Control Organisation (CDSCO) Rajya Sabha Secretariat, May 2012.

CAG, 2007 Report No. 20 of 2007 for the perriod ended March 2006 - Performance audit of Procurement of medicines and medical equipment Comptroller and Auditor General, 2007.

Khan et al. 2016: AN Khan, RK Khar and Malairaman Udayabanu, Quality and affordability of amoxicillin generic products: A patient concern Indian Journal of Pharmacy and Pharmaceutical Sciences, 2016.

Stanton et al, 2014: Cynthia Stanton et al, Accessibility and potency of uterotonic drugs purchased by simulated clients in four districts in India BMC Pregnancy and Childbirth, 2014.

Thakur and Reddy, 2016: Dinesh S. Thakur and Prashant Reddy T, A report on fixing India's broken drug regulatory framework Spicy-IP, June 2016.

Singh et al, 2020: Prachi Singh, Shamika Ravi and David Dam, Medicines in India: Accessibility, Affordability and Quality Brookings India, March 2020.

Krishnan, 2020: KP Krishnan, The three tiers of government in public health The Leap Blog, August 2020.

MoHFW, 2017: Ministry of Health and Family Welfare, Department of Health and Family Welfare, Notification G.S.R. 1337(E), CDSCO, Oct 2017.

Drugs Enquiry Committee, 1930-31: Government of India, Report of the Drugs Enquiry Committee, 1930-31.

Pharmaceutical Enquiry Committee, 1954: Ministry of Commerce and Industry, Report of the pharmaceutical enquiry committee,1954.

Hathi Committee, 1975: Ministry of Petroleum and Chemicals, Report of the Committee on Drugs and Pharmaceutical Industry, 1975.

Drug Policy, 1986: Government of India, Measures for Rationalisation, Quality Control and Growth of Drugs and; Pharmaceutical Industry In India, 1986.

Drug Policy, 1994: Government of India, Modification in Drug Policy, 1986, 1994.

FSLRC, Indian Financial Code, version 1.1, Ministry of Finance, 2015.

Vijay Kelkar and Ajay Shah, In Service of the Republic: The art and science of economic policy, Penguin Allen Lane, 2019.

Mashelkar Committee, 2003: Ministry of Health and Family Welfare, Report of the expert committee on a comprehensive examination of drug regulatory issues, including the problem of spurious drugs, 2003.

Shubho Roy, Ajay Shah, B. N. Srikrishna and Somasekhar Sundaresan, Building State capacity for regulation in India in "Regulation in India: Design, Capacity, Performance" edited by Devesh Kapur and Madhav Khosla. Oxford: Hart Publishing, April 2019.

Task force under the Chairmanship of Dr. Pronab Sen, 2005: Government of India, Task Force to Explore Options other than Price Control for Achieving the Objective of Making Available Life-saving Drugs at Reasonable Prices, 2005.

Jeffery and Santhosh M.R., 2009: Roger Jeffery and Santhosh M.R., Architecture of Drug Regulation in India - What are the Barriers to Regulatory Reform?, 2009.

The authors acknowledge the support of Thakur Foundation in this work, and valuable conversations with Dinesh Thakur and Prashant Reddy. All errors are ours.

## Thursday, May 27, 2021

### An analysis of the SEBI WhatsApp Orders: Some observations on regulation-making and adjudication

by Rajat Asthana and Renuka Sane and S. Vivek.

The idea of company insiders making huge profits on the basis of non-public information has always elicited a rich discussion on the regulation of insider trading. If the goal of regulation is to craft market participants' behaviour, both, the text of the regulations, and the subsequent enforcement actions of regulators should support this objective. When these are unclear or contradictory, merely having regulations on the book, is unlikely to help. At worst, this may even hinder market efficiency. It is important, therefore, to look at how regulations have been drafted, and to see whether there is a consistent communication of what the regulations mean. This includes questions on the clarity of the regulations, the process of regulation-making, as well as the predictability in enforcement.

In this article we use the example of recent orders in the "WhatsApp case" to demonstrate the problems in: (1) the process of regulation-making, and (2) adjudication, in the context of insider trading regulations. The orders raise several substantive questions. These relate to the scope of the term 'insider', meaning of Unpublished Price Sensitive Information (UPSI), and use of messaging platforms. However, in this article, we mainly focus on the issue of the working of the regulator.

India may have formal provisions against insider trading, and satisfy international standards in that regard. However, the substantive content of the regulations, the rationale for these regulations, the manner of prosecution by the regulator, and the imposition of penalties have all raised concerns on the clarity, consistency and predictability in the regulatory process. This may impose significant costs on regulated entities, and consequently, on cost of capital.

### Background: The WhatsApp case

Insider trading in India comprises two types of offences: trading with unpublished price sensitive information ("UPSI") and communication of UPSI (even in the absence of trading). In November 2017, Reuters reported that information about financial results of listed companies was being exchanged on WhatsApp groups, in advance of such results being announced publicly. The news report identified 12 companies where the messages proved to be "prescient" - i.e., they appeared to accurately predict the actual results. Based on this news report, the Securities and Exchange Board of India (SEBI) initiated an investigation into the matter. Basis this investigation, separate showcause notices were issued to certain individuals who are part of the WhatsApp group, and it was alleged that the noticees had communicated UPSI, which even in the absence trading, constituted a violation of provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and the SEBI (Prevention of Insider Trading) Regulations, 2015 (Insider Trading Regulations).

The noticees set up a defense on the basis that the information that they shared on the WhatsApp group was not UPSI. The information had not been sourced from the relevant company or any insider. Further, the messages were not 'price sensitive information' or 'financial results' but in the nature of gossip or 'Heard on the Street'. Additionally, messages were exchanged about several companies - a few of which were consistent with the actual financial results, and many others which were not - and accordingly, the allegations were based on cherry-picked messages. It was also argued that the source of the messages on the WhatsApp group could be analyst reports which had predicted similar results, and therefore should be considered as generally available information (and not UPSI).

The SEBI Adjudicating Officer (AO) dismissed these defenses and held that the messages were UPSI. The AO reasoned that while the source could not be identified because the messages were being shared on WhatsApp, they were UPSI because: (1) the messages were shared just prior to the results being released publicly, and (2) they were so similar to the actual financial results, that it was unlikely to be a coincidence. Further, since the noticees did not clearly establish the analyst reports as the source of the messages, they are not entitled to the 'benefit of doubt' that the messages were in fact sourced from such reports. Accordingly, a penalty of Rs.15 lakh was imposed on the noticees.

On appeal, the Securities Appellate Tribunal (SAT) set aside the SEBI order. It held that SEBI had not given adequate consideration to some of the defences. It also held that for information to be UPSI, the recipient had to know that it was UPSI. The evidence available did not establish the state of mind of the recipients and accordingly, the SEBI order was set aside.

### Standard-setting Choices

Standards for insider trading are not uniform across jurisdictions. For example, in the US, liability arises only if the person owes a fiduciary duty to the company or its shareholders or the source of the UPSI. Other jurisdictions such as the UK and Singapore, have adopted the 'parity of information' approach where the emphasis is on the information with the person trading, and not on how it was obtained or whether there was an intention to violate the law (Varottil, 2016).

In India, the language of Regulations 3 and 4 of the Insider Trading Regulations indicates a strict liability regime, where the focus is on the UPSI, and not on the intention behind the trade or the source of the information. Regulation 3(1) prohibits communication of UPSI and Regulation 4 prohibits trading when in possession of UPSI.

Committee reports on insider trading have recommended that communication of UPSI by itself should be an offence. While the offence is drafted broadly, the interpretive note provided in regulations appears to indicate that the emphasis is on the company to ensure that UPSI is not leaked. The High Level Committee to Review the SEBI (Prohibition of Insider Trading), 1992 under the chairmanship of Justice N.K. Sodhi dated December 7, 2013 (Sodhi Committee Report), observed that 'to maintain hygiene' and to 'ensure that UPSI is not handled lightly... and is not communicated except where necessary', communication of UPSI is to be prohibited (Sodhi Committee Report, 2014). The report of the Committee on Fair Market Conduct under the chairmanship of T.K. Viswanathan dated August 8, 2018 (TK Viswanathan Committee Report), observed that UPSI may be communicated for legitimate purposes. The report clarified the meaning of the term 'legitimate purpose', and also recommended maintaining a database of persons to whom such UPSI is being communicated, to prevent misuse.

However, neither the Insider Trading Regulations nor the committee reports distinguish between persons who have a duty to keep the information confidential (such as directors and officers of the company), and outsiders who may chance upon this information but do not have any such obligation. In Singapore, for example, it is presumed that connected persons were aware that the information is UPSI; however, this presumption is not 'available' for others including tippees. In the absence of such guiding principles or specific rules, these critical questions are left entirely to the AO's discretion.

Further, the SEBI Board made certain modifications to the draft regulations suggested by the Sodhi Committee Report, but the reasons for such modifications are not available publicly. One of the changes was to delete the clear language in the draft regulations that research reports should be considered as generally available information. While there may be good reasons for the SEBI Board to have made this modification, the absence of reasons for this choice leads to confusion about how information in research reports should treated. For example, if it were clear that information in research reports is generally available information, then similar numbers appearing in a Whastsapp group should not have raised UPSI concerns.

Lack of clarity on reasons for specific legislative choices could also lead to different views being taken by various adjudication officers and the appellate tribunal.

### Adjudicatory Discipline

There will always be some uncertainty inherent in legal rules, despite best efforts during the standard-setting process. Disagreement among judicial officers on the interpretation of the law is expected to be settled by appeals to higher tribunals/courts. However, for this process to work, judicial officers will have to look to previous interpretations and record reasons if a new interpretation is preferred in a specific case, especially if a higher tribunal has already indicated a particular interpretation. How has uncertainty been resolved in the WhatsApp orders?

The SEBI AO order states that it was not possible to identify the original source of the messages shared on the Whastapp group. Inquiries with the relevant companies also did not establish any leak of the financial information. The noticees were not clear as to how they received the messages, but they suggested that the messages could have been sourced from analyst reports. How should information in the hands of unconnected third parties be evaluated?

The committee reports do not provide an answer in the context of the communication offence. However, in the context of the trading offence, the Sodhi Committee Report states that SEBI will be required to demonstrate that: (1) trading took place, and (2) that there can be a reasonable inference of the person being in possession of UPSI at the time of execution of the trade. If the trade is by an 'outsider' i.e. a person not connected to the company, then SEBI has to further demonstrate a prima facie case that the noticee was in possession of UPSI at the time of trading (Sodhi Committee Report).

The AO order states that since the information is closely aligned to the actual results, and the noticees have not been able to demonstrate how they came to be in possession of the information, it is to be presumed that the information is UPSI. Further, while the source of the information could not be traced, the noticeees cannot be given the 'benefit of doubt' given the 'gravity of consequences' resulting from the sharing of such information.

In terms of the AO's interpretation, the Insider Trading Regulations do not require the source of the information to be identified for a violation to be established. However, this issue has been considered earlier by both - SEBI and the SAT. The SAT has held that the source of the information is an important element in establishing UPSI (Samir Arora v. SEBI). The AO orders have neither accepted that principle nor sought to distinguish that precedent based on specific facts. Further, while there are references in the AO orders to judicial decisions on circumstantial evidence being sufficient in certain cases, this issue was not in dispute. The AO orders do not cite any precedent to justify how mere similarity of some information with the actual results is sufficient for it to be classified as UPSI. Further, while the AO order cites various extracts from the Sodhi Committee Report, there is no reference to the portion, which states (albeit in the context of trading), that it is SEBI's obligation, to prima facie show how an unconnected person was in possession of UPSI.

Additionally, it is worth noting the approach in some other SEBI orders on insider trading issued around the same time: One held that the noticee was not liable for insider trading (even though the noticee had UPSI and had traded) since the intention behind the Insider Trading Regulations is that the person in possession of UPSI should not benefit compared to the general investor. In another, even though a director had access to UPSI and benefited from trading, it was held that although price sensitive, the information was wrongly disclosed by the company and therefore was not UPSI; and that the director's conduct did not indicate that he intended to maximise profits (a defense that the SEBI Board expressly rejected while adopting the other recommendations of the Sodhi Committee Report). In a third case, a company official had traded when the trading window was closed, but it was held not to be in violation of the Insider Trading Regulations as there was no material to show that the trading was on the basis of the UPSI (although this is not the requirement under the Insider Trading Regulations). If any one of these principles had been applied in the WhatsApp orders, the result could have been different.

Further, while the SAT records its earlier judgment emphasizing the importance of the source of UPSI, it sets out a new test for subjective knowledge of the recipient. Again, there is no reference to precedent or to the background reports for setting out this new test. Indeed, the SAT could have set aside the SEBI order by merely reiterating the principle in its earlier judgment and avoided setting out a new test.

### Penalty

The AO's order on penalty also demonstrates that when there are gaps in the law, officials use their discretion completely. Section 15J of the SEBI Act sets out the factors which are to be considered when an AO imposes penalties:

1. Amount of disproportionate gain or unfair advantage, where quantifiable, as a result of the default;

2. Amount of loss caused to investors as a result of the default; and

3. Repetitive nature of the default.

In imposing a penalty on the noticees, the AO is forced to concede that none of these factors apply in this case. By merely communicating UPSI, no loss or advantage had been caused to anyone. The AO then proceeds to impose a penalty of Rs. 15 lakh, as such acts may compromise the confidence of investors in the market.

Evidently, the considerations for imposing the penalty do not relate to the different types of offences. In Adjudicating Officer, SEBI v. Bhavesh Pabari, the Supreme Court held that the factors set out in Section 15J are not exhaustive, particularly in the context of offences such as failure to furnish information and returns, which will typically not involve the factors set out above. It is arguable if this holding entirely applies in the context of insider trading where these factors are typically relevant. In any event, even if these factors do not apply, the order should state what other factors outside of Section 15J have been considered relevant. Without these reasons, it is not clear how the penalty amount of Rs. 15 lakh was calculated. These are concerns not specific to the individual penalty imposed in this case but for the overall design of the regulations.

### Implications for the design of the legal framework

The learnings from the WhatsApp case has implications for the design of the insider trading framework in India:

1. Standard-setting: Lack of clarity on why certain choices were made at the time of standard-setting makes it challenging to interpret the principles inherent in the regulations. Further, even where the SEBI Board has deviated from some recommendations of the expert committee, the reasons for such deviation have not been disclosed. This information is critical, not only from the perspective of transparency, but also as a guide to officials as to the purpose of creating an offence, when they adjudicate cases in connection with such matters.

2. Adjudicatory process: While the common law judicial tradition is well suited to clarify existing principles in light of changes in technology and markets (Report of the Financial Sector Legislative Reforms Commission), this requires officials to record their interpretation of law and explain if that is different from an earlier interpretation. Similarly, while imposing penalties, the factors considered should be made explicit to ensure clear communication to stakeholders and consistency among orders.

3. Taking stock: More than five years have passed since this iteration of the Insider Trading Regulations were issued. It is not possible to think of every situation at the drafting stage, particularly for an area that is constantly changing. Further, there have been changes to some portions of the regulations pursuant to the TK Viswanathan Committee Report. However, a comprehensive review of the effectiveness of the regulations, and a transparent discussion of the various choices made in framing the regulations, will benefit all stakeholders.

### Conclusion

The problems of the insider trading legal framework discussed in this article connect to an emerging literature on the problems of regulatory governance in India. For example, Burman and Zaveri (2018) study the process of public consultation in regulation making across three regulators in India and find that much more needs to bedone. Others have argued that there is little guidance given to regulators on how to translate the principles of law into practice (Burman & Krishnan, 2019; Sundaresan, 2018; Goyal and Sane, 2021). This leads to a situation of weak state capacity in India (Roy et. al., 2019).

Ultimately, if the goal of regulation is to (dis)incentivise market participants from (not) behaving in a particular manner, then the text of the regulations, and subsequent actions of regulators should support such an objective. If the text and the subsequent actions of the legal regime are weak, unclear, confusing, or inconsistent, then the mere existence of a legal framework may at best not help, and at worst, actually hinder the working of the market. It is also important to study how the text of the law was arrived at - whether there is adequate rationale provided on the choices made, whether public consultations have been undertaken, and whether sufficient guidance is provided to both; the regulator, and the regulated entities, so that there is a shared understanding of the objective, and the process of the legal framework. It is also critical to ensure that the regulator moves towards a consistent interpretation of the regulations that allows for predictability, instead of each order interpreting the regulations in their own way.

References

Burman, A., & Krishnan, K. (2019). Statutory regulatory authorities: Evolution and impact.

Burman, A., & Zaveri, B. (2018). [https://bit.ly/32eDCdX]Regulatory responsiveness in India: A normative and empirical framework for assessment. William & Mary Policy Review, 9 (2), 1-26.

Roy, S., Shah, A., Srikrishna, B. N., & Sundaresan, S. (2019). Building state capacity for regulation in India. Devesh Kapur and Madhav Khosla (eds.), Regulation in India: Design, Capacity, Performance, Oxford: Hart Publishing.

Samir Arora v. SEBI, (2004) SCC Online 90.

Sodhi Committee report - Part II, paragraph 43, page 27; SEBI Board Agenda dated November 14, 2014 - paragraph 2.2.

Sundaresan, S. (2018). Capacity building is imperative. Column titled Without Contempt in the editions of Business Standard dated August 2, 2018.

Varottil, U. (2016), "Due Diligence in Share Acquisitions: Navigating the Insider Trading Regime", NUS working paper at page 9 (April 2016).

Rajat Asthana and S. Vivek are researchers with the Regulatory Governance Project at the National Law School of India University, Bengaluru. Renuka Sane is a researcher at NIPFP. Author names are in alphabetical order. We thank two referees for useful comments. Views are personal.

## Wednesday, May 26, 2021

### Litigation in public contracts: some estimates from court data

by Devendra Damle, Karan Gulati, Anjali Sharma and Bhargavi Zaveri.

### Introduction

Public contracts are contracts executed by the government and its agencies to procure goods, services and works. Public contracts in India are perceived to be litigation prone. There is evidence that more than half the road projects awarded by the government of India were the subject matter of litigation before the courts and arbitration tribunals, and that a significantly large value of infrastructure projects are stuck in litigation for prolonged periods. This article seeks to estimate and understand the volume and nature of litigation relating to public contracts by observing litigation in one high court in India.

Understanding the volume, value and nature of litigation arising in public contracts is critical. First, the government is an active procurer of goods, services and works in several large sectors such as natural resources and infrastructure. The state's litigation propensity in contracts is a key factor in the ease of doing business in such sectors. Second, the propensity of each government department and agency, such as the union, states, urban local bodies, CPSEs and SPSEs, to engage in litigation may vary. Assessing the litigation propensity of different government departments and agencies helps contractual counterparties assess the costs of dealing with them. Third, estimating the volume, value, costs and outcomes of government litigation helps understand its impact on the exchequer. It can serve as a useful feedback loop in planning the litigation policy of the government and its agencies.

Our analysis suggests that the government is a counterparty to more than half the civil commercial litigation in the Delhi High Court. However, a small proportion of this litigation can be linked to disputes in public contracts. Second, we find that the government is not a major initiator of, but is a large defender in litigation involving public contracts. However, more than 50% of the cases filed by the government against businesses are of one type, namely, challenges to arbitration awards passed in disputes arising in public contracts. Finally, we find that businesses are not using the standard legal remedy of suits for enforcing contractual claims against the government or its agencies. This suggests that most of this litigation is related to the pre-award stages of the business-government engagement. This could also be attributed to the procedural simplicity of proving claims in writ petitions and the relatively quicker duration within which they get disposed.

The popular discourse on government litigation has focused on the volume and pendency of the litigation to which the government or its agencies are a counterparty. Our findings, although limited to observations to the Delhi High Court, provide a foundation for drawing up data-backed country-level estimates of the government's propensity to litigate, and the time, costs and court capacity consumed in litigation relating to public contracts.

### Data and approach

For our analysis, we start with a dataset of cases filed before the Delhi High Court from 1st January 2007 until 30th September 2020 ("study period"). We select the Delhi High Court for our analysis for two reasons. First, the Delhi High Court is one of the five High Courts in India exercising original jurisdiction over contractual disputes. All High Courts in India, except these five, exercise appellate jurisdiction. This means that they restrict themselves to reviewing the lower courts' orders. The Delhi High Court is the first level dispute redressal forum for disputes within its territorial jurisdiction in commercial contracts exceeding Rs. 2 crores. The second reason is the physical proximity of the Delhi High Court to the central government and its agencies.

The objective of our analysis is to understand litigation in public contracts. The Delhi High Court classifies case-types into 288 categories. During the study period, 5,42,355 cases have been filed before the Delhi High Court across these categories. These categories cover every type of case that the court deals with, ranging from admiralty cases to family disputes. We undertake three rounds of data filtering to arrive at a subset of cases that are the closest proxies of contractual disputes involving the government.

Filtering out cases not involving contractual disputes with the government

In the first instance, we filter out all the case-types which are not related to contracts. For instance, we filter out bail and criminal applications, testamentary and tax matters and matters under the Companies Act and contempt petitions. We filter out all appellate matters and references from lower courts. We filter out cases where either of the parties is unknown or the data is not machine-readable. This gives us a dataset of 2.2 lakh civil cases filed in the study period. Of these, 1,37,734 cases (about 62%) have the government or its agencies as a counterparty (Table 1). This dataset includes completed as well as pending cases. 81% of the cases in our dataset are disposed of.

Sr.No. Party-type As Petitioner As Total (% of government cases) respondent 1. Union of India 8020 58,184 66,204 (48.06) 2. State Government 2443 31,539 33,982 (24.62) 3. Municipal bodies/panchayats 2174 16,121 18,295 (13.28) 4. CPSEs 3908 9021 12,119 (8.79) 5. SPSEs 1161 3427 4,588 (3.33) 6. Court 171 833 1,004 (0.72) 7. Constitutional bodies 189 543 732 (0.53) Total 18,066 1,19,668 1,37,734 (100)

Constitutional bodies in Table 1 refer to constitutional authorities, such as the Comptroller and Auditor and General of India. The Union of India includes the government of India, statutory authorities set up under a central law such as the National Highways Authority of India (NHAI), and statutory regulators such as SEBI and TRAI. Table 1 demonstrates that a bulk of the civil commercial litigation in the Delhi High Court has the government as a counterparty. It also shows that while the state is not responsible for initiating large amounts of civil commercial litigation, the state and its agencies constitute the largest respondent in such litigation.

We classify the Government-cases in Table 1 into five categories: civil writ petition, civil suits (original side and commercial), miscellaneous petitions (original and civil misc main), arbitration petitions and applications and land acquisition-related disputes (Table 2).

Sr.No. Civil writ petitions Govt. as Govt. as Total (% of government cases) Petitioner respondent 1. Writ petitions 10,476 1,06,179 1,16,655 (84.69) 2. Miscellaneous petitions 3,493 5,168 8,661 (6.28) 3. Land Acquisition related cases 3,180 3,663 6,843 (4.9) 4. Arbitration petitions and applications 221 2,837 3,058 (2.54) 5. Civil suits 696 1,818 2,514 (1.8) Total 18,066 1,19,668 1,37,734 (100)

Table 2 shows that civil writ petitions constitute the bulk of the cases involving the government and its agencies. Writ petitions are, by design, cases filed against the government or its agencies for the violation of fundamental rights and not contracts. However, anecdotally, we know that contractual claims against the government and its agencies are often agitated through civil writ petitions. Hence, we retain civil writ petitions for our analysis.

### Findings

While the government is a counterparty to 1.4 lakh or 60% of the civil commercial cases in our data-set, a bulk of these cases are by and against individuals and other types of entities such as trade unions or political parties. These disputes would therefore largely pertain to employment matters such as unfair dismissals, denial of promotion in government service or pension and evictions from public premises. The objective of our study is to understand the litigation arising out of public contracts.

Litigiousness

For our study, we characterise only cases filed by or against businesses (body corporates incorporated as private or public limited companies) as public contracts-related litigation. This is because our data covers public contracts whose value exceeds Rs. 2 crores. Public contracts exceeding this threshold value are awarded through a tender process. The condition that a bidder for public contracts should be incorporated as a company is commonly found in government tender documents.

In the sub-set of writ petitions, we retain writ petitions between businesses and a sub-set of government agencies, such as CPSEs (except banks) and SPSEs, and statutory agencies that are engaged in procurement, such as the National Highways Authority of India (NHAI), Airports Authority of India (AAI), the Delhi Metro Rail Corporation (DMRC) and the National Buildings Construction Corporation Limited (NBCC) in our data.

We exclude writ petitions filed against government owned banks as they largely pertain to debt restructuring and not procurement-related disputes. We also exclude the writ petitions filed by businesses against the government of India, constitutional authorities and State Governments from our analysis as a large percentage of them pertain to tax matters, constitutional challenges to laws enacted by the Parliament and state legislatures respectively, and executive actions, such as notifications and circulars issued by the government and state governments respectively. Similarly, a review of a sample of writ petitions filed by businesses against municipal bodies and panchayats suggests that they largely pertain to matters involving eviction from public premises and violations of licensing norms governing commercial establishments operated by such businesses. We also exclude land acquisition-related matters as they are largely challenges to notifications issued by the government notifying land parcels for compulsory acquisition and other actions undertaken by the government under the land acquisition laws.

This exercise of filtering may exclude some contractual disputes between the government and its contractors or vendors. Our findings are therefore based on a conservative estimate of the volume of litigation in public contracts.

This filtering exercise generates a subset of 9,313 cases between businesses and the government and its agencies (Table 3). We use this subset of cases as a proxy for litigation between the government and businesses in connection with public contracts. Table 3 suggests that such litigation is a small proportion (about 7%) of the overall litigation involving the government. Further, the state is not a major initiator of such litigation. Businesses initiate the bulk of the government-business contractual litigation. The CPSEs account for nearly half of such litigation in the Delhi High Court. This suggests that while CPSEs are a small contributor to the overall commercial litigation involving the government (as shown in Table 1), they are a large contributor to the litigation involving public contracts. The central government and several states have issued policies to manage and curb litigation by the government and its agencies ( example, example and example). These policies have largely taken a top-down approach towards minimising litigation at the level of the union and state governments. Our assessment suggests that there is potential for the government to explore the incentive structures at the level of the departments within the Union government and CPSEs that drive litigation arising from public contracts.

 Business as Business as Respondent Total (% Petitioner share) CPSE 3,329 1,223 4,552 (48.87) Union 2,027 885 2,912 (30.26) State 711 249 960 (10.30) Panchayat/Urban local body 412 124 536 (5.75) SPSE 239 111 350 (3.75) Autonomous constitutional 3 0 3 (0.03) 6,721 (72.16) 2,592 (27.83) 9,313 (100.0)

Case types

Table 4 shows that the bulk of the government initiated litigation is in the 'original miscellaneous petitions' (OMPs) category. Conversations with practitioners and support staff of the judges in the Delhi High Court suggest that as large as 70% of the cases filed as OMPs in the Delhi High court involve challenges to the enforcement of arbitration awards. We also reviewed a small sample of OMPs, which confirmed this perception. Arbitration petitions and applications account for the second-largest type of cases involving the government and businesses. These petitions are generally filed for directions from the court for the appointment of an arbitrator where either party to the dispute fails to appoint one, interim relief during arbitration proceedings and extension of timelines for conducting the arbitration. The high proportion of 'OMPs' and 'arbitration' cases in our data suggests that a significant proportion of government-business contractual litigation is getting resolved by arbitration.

We also find that a bulk of the writ petitions filed by businesses in our dataset (a little more than 84%) are against CPSEs. This pattern holds over the entire window of observation. We estimate that these writ petitions could pertain to disputes in two areas of public procurement. They may pertain to violation by CPSEs of procurement norms in the tendering phase of public procurement. The second possibility is that they could pertain to disputes in the post-award stage, such as delayed payments or other wrongful acts during the term of the contract. This is problematic because writ petitions are a remedy for the enforcement of fundamental rights against the government. Courts have repeatedly denied purely contractual claims against the government through the remedy of writ petitions. However, if the writ petitions against CPSEs indeed pertain to disputes arising post the tender award, it suggests that businesses find it efficient to agitate contractual claims through writ petitions. This may indicate a judicial tendency to prioritise writ petitions over other matters. This could also be attributed to the relatively lower threshold for proving claims in writ petitions.

 WP CS OMP Arbitration Others Total G2B 69 276 1938 152 157 2,592 B2G 932 895 2704 1973 217 6,721 Total 1,001 1,171 4,642 2,124 374 9,313

Time taken

Approximately 1.7 lakh of the 2.2 lakh cases in our dataset are disposed cases. We find that the average disposal period for a case in our data is about one year from its institution. For this subset of disposed cases, we calculate the average duration for disposal in years based on the year of institution to the year of disposal (Table 5). The average duration for the disposal of writ petitions is lower than that for civil suits and lower than the overall average. This reinforces the notion that counterparties to government contracts may be enforcing their contractual claims through writ petitions.

 Case-type Writ petitions (civil) 0.81 Civil suits (original)* 2.30 Civil suits (commercial bench)** 1.01 Miscellaneous petition 1.17 Arbitration petitions, applications, etc. 0.56 Overall 0.98 *Suits disposed of by a regular bench of the court. **Suits disposed of by the commercial division of the High Court set up under the Commercial Courts Act, 2015.

Table 6 shows the number of years for the disposal of cases in the overall data, cases to which the government is a party, and other cases. Table 6 suggests that a bulk of the commercial cases are disposed of by the Delhi High Court within two years from the date of their institution. We also find that a significantly higher number of commercial cases involving the government are disposed of within a year compared to the other cases. This is contrary to the popular perception that delays prolong government litigation. This does not appear to the case for commercial litigation involving the government. In fact, we find that commercial cases involving the government as a respondent and those not involving the government require, on average, the same number of hearings by the court before their disposal. This suggests that a commercial case involving the government does not, on average, consume more resources of the court than regular cases.

 Number of cases (% share) Less than 1 95,962 (54.01) 13,867 (57.75) 19,724 (43.74) [1, 2) 42,931 (24.16) 5,618 (23.4) 13,521 (29.98) [2, 3) 17,064 (9.6) 1,902 (7.92) 4,901 (10.87) [3, 4) 9,475 (5.33) 1,011 (4.21) 2,716 (6.02) [4, 5) 4,682 (2.64) 467 (1.94) 1,414 (3.14) [5, 10) 6,807 (3.83) 993 (4.14) 2,576 (5.71) Greater than 10 745 (0.42) 153 (0.64) 246 (0.55)

### Conclusion

Our findings are limited to our observations on the government litigation in the Delhi High Court.

Some of these observations confirm pre-conceived notions of litigation between the state and businesses in India. For example, data from the Delhi High Court demonstrates that so far as concerns civil commercial cases, the government is a party to more than the popularly cited 46% of the cases in courts. However, very little of this litigation is attributable to public contracts between business and the state. Similarly, the usage of writ petitions to enforce contractual claims against the state is documented to some extent in court judgements. Our data demonstrates a high proportion of writ petitions linked to the enforcement of public contracts. This may be partly attributable to the nature of the claim involved and the relatively higher average duration for the disposal of suits. Some of our findings help dispel some pre-conceived notions. For example, the widely held perception that the government prolongs litigation is not true of commercial cases adjudicated before the Delhi High Court, as shown by the average number of hearings taken for commercial cases involving the government and those not involving the government. This may also be reflective of the capacity of the Delhi High Court itself.

A quantitative assessment of the government's litigation is important for identifying the precise bottlenecks that lead to the government being sued and designing a litigation policy that responds to these considerations. Data backed assessments of the litigation load of the government holds important insights into the costs of doing business with the government and the resources required within the state and in courts to deal with such litigation. This work provides a foundational understanding of commercial litigation involving the government in India. Better and deeper country-level insights can be obtained by expanding the assessment to more courts and potentially undertaking a textual analysis of the final orders in such litigation to identify aspects such as the success ratio and litigation costs.

Bhargavi Zaveri is a researcher at xKDR- Chennai Mathematical Institute. Devendra Damle and Karan Gulati are researchers at the National Institute of Public Finance and Policy. Anjali Sharma is at National eGovernance Services Limited.