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Thursday, Dec 02, 2004

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The law on brotherhood

Mohan R. Lavi

Mohan R. Lavi looks at the Reliance drama from the company law perspective

"BUSINESS has only two basic functions — marketing and innovation," said Peter Drucker.

The sibling rivalry that is at present hogging the limelight in one of India's most known business empires has diverted the attention from the innovations the group has made over the years — the high-profile Vimal ad blitz, the spat with the Indian Express group, waking up the Customs Department by importing an entire PTA plant, conducting annual general meetings in football stadia, not paying income-tax for years forcing the Government to introduce the Minimum Alternate Tax and the more recent access deficit charges controversy with BSNL are some instances.


The dispute at issue appears to be a non-issue. It appears that one of the brothers assumed the role of the chairman with absolute powers.

This was approved by the board of directors of the company in "Item No 17" of the board meeting that was held on July 27, 2004. "17-2004" appears to be heading to be as commonly talked as "9/11".

The other sibling claims that this item was not pre-circulated, pre-discussed as required, but was morphed into the resolution that sought to form a Health, Safety and Environment Committee. He has been objecting to the adoption of the resolution on that day and ever since, but his pleas have fallen on deaf ears.

The common opinion appears to be that since the resolution was approved by the board of directors, nothing much could be done to rescind it. There does not appear to be a specific provision in the Companies Act to force companies to pre-circulate and pre-discuss such agenda items.

Even if there are and the company has missed out on this, the vetting of the resolution by the board would make these mistakes passť.


However, the Companies Act does have a Section to prevent oppression and mismanagement, which permits shareholders to represent their case before the Company Law Board. In P. Natarajan vs Central Government of India (2004 49 (I) CC 84), the additional directors of a private sector bank, who were on board for a specific period, had the gumption to dismiss the chairman of the company who was nominated by the Reserve Bank of India.

The Company Law Board (CLB) heard the case of oppression and mismanagement and dismissed the additional directors.

In D. Ramkishore & Ors vs Vijayawada Share Brokers Ltd and Ors (2004 49 (I) CC 111), the petitioner requested CLB to interfere and ask the company to show him their books of account. The CLB gave the petitioner a better solution — the office of the Registrar of Companies.

In Airtouch International Mauritius Ltd vs RPG Cellular Investments and Holdings Ltd (2004 49 (I) CC 104), the petitioners requested the CLB to permit referring the dispute to arbitration which the CLB accepted.

In Winfred Investments Ltd and Anr. vs Mainstay Teleservices (P) Ltd and Ors (2004 48 (I) CC 721), the CLB rejected the attempts of a person with 3 per cent shareholding to get permission from the CLB to participate in the management of the company when the remaining 97 per cent did not want to have anything to do with him.

In G. Rama Raju and Ors vs South India Research Institute (P) Ltd and Ors (2004 48 (I) CC 714), a person who claimed without substantial evidence and details that the company had not sent him annual accounts and notices for the AGM was shown the door by the CLB.

The trend in these decisions shows that the CLB may not be the right door to tap for the warring brother since they would pardon minor slip-ups regarding circulation, and so on, and would look at the whole situation holistically — that is, whether the board of directors approved the resolution.

The CLB would not be too interested in the cover-up operation leading to the resolution or the objection of the warring brother.

Conclusion for the shareholder

The lay shareholder should be wondering that there must be a more scientific way of having a nose to spot trouble at the top in a company than for a TV channel to whistle-blow the news during an interview, get a denial from the management only to wake up next day and finding the spat across everything printed in black and white that could be called a newspaper.

The Sensex, ever waiting to nosedive at the smallest scent of trouble, nosedived riding piggyback on the company's shares, thereby short-changing many of the stakeholders of the company.

However, the index seems to have shrugged off the effects thereafter. The "circuit-breaker" norms of SEBI would probably not apply to family feuds. The only lesson that one can get from this is: Smile as long as the going is good.

(The author is a Hyderabad-based chartered accountant.)

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