Context: India needs a special arbitration body for financial disputes.
Why financial institutions resort to litigation instead of arbitration for settling disputes?
- Courts are more powerful: Litigation, offers a more potent forum for recovery of money and resolving financial disputes as the judges are vested with stronger powers than an arbitrator. such as interim measures, summary judgments, warrants for non-appearance, etc., which are not available in arbitration.
- Creates more pressure on defaulter: In addition, the public nature of disputes in courts allows the banks to create pressure on the defaulters to discharge their debts as public disclosure hinders their future investment prospects.
Why settling financial disputes through courts is disadvantageous?
- Judges lack technical knowledge: The judges in these jurisdictions are not competent enough to understand complex transactions and financial instruments. After 2009-09 financial crisis, the financial institutes felt a need for adjudicators who possess a deep knowledge of finance and an understanding of complex transactions.
- Litigation negatively impacts economy as a whole: Moreover, financial disputes of large size often lead to public distress, resulting in negative impacting listed stocks which could consequently lead to collapse of economies, if big financial institutions are involved.
What is the advantage of resorting to arbitration over litigation?
- Confidentiality: Arbitration maintains privacy of proceedings and ensures that the adjudicator is a person with expertise in finance
- Relatively Easy enforcement: It is easier to enforce an arbitral award as opposed to a court judgment which can be appealed multiple times.
Why India needs a special arbitration body?
- No special body for financial arbitration exists in India and such arbitrations continue to be adjudicated by retired judges, who are generalists and do not possess a specialized knowledge of finance and financial markets.
- Considering the rise of financial disputes in India, including defaults by some of the biggest Indian corporations such as Anil Ambani’s Reliance Group, Vijay Mallya’s Kingfisher and Nirav Modi’s Firestar Diamonds, there is a need for providing a specialised institution to deal with financial arbitrations.
What we can Learn from the International experience?
- In America, the Financial Industry Regulatory Authority (FINRA) provides assistance and advice for dispute resolution involving securities.
- Similarly, The Panel of Recognised Market Experts in Finance (P.R.I.M.E. Finance) was set up in The Hague, Netherlands, in 2012 for providing a panel of arbitrators specialising in banking and finance, offering arbitration rules tailor-made for financial arbitrations and providing financial experts for assistance during such arbitrations.
- The Institute of Chartered Accountants of India (ICAI) is one such institution which possesses a body of some of the most prominent financial experts in India. Perhaps, the government should create a panel in consultation with the ICAI for facilitation of financial arbitrations.