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How assertive are Indian shareholders? The Department of Corporate Affairs (DCA) website updates the total number of cases added in the Company Law Tribunal (CLB) every year; these include disputes arising from “oppression and mismanagement”. The total number of cases under this head that were added to the existing disputes in the last four years are: 393 (2009-10), 384 (2010-11), 447 (2011-12) and 365 (2012-13). That’s a total of 1,589 cases.
Taking into consideration cases that have been disposed of, there are 1,261 pending cases as of March 31, 2013. Add the pending 200 cases pertaining to whether shareholders can assert their right to transfer shares in their favour, and the total is 1,461.
This constitutes a paltry 0.12 per cent of the total number of companies — 11.60 lakh! Deducting the number of dormant companies (about 4 lakh) from the total, shareholders’ disputes account for only 0.2 per cent of the 7.6 lakh functional companies.
The CLB adjudicates disputes between shareholders and even settles procedural matters such as change of registered office, delayed registration of charges and so on. Even if all the cases pending before the CLB as of March 2013 — 10,823 —are taken into account, it amounts to less than 1 per cent of the total companies extant! The legal fraternity knows only about arrears of pending cases and congestion in different courts owing to the exponential growth of litigation. The litigation within CLB comes as a refreshing contrast!
How it works
Why is this? It’s important to understand a thing or two about companies in India. The DCA states that out of a total of 11, 63,136 companies registered in India, 95.84 per cent have a paid-up capital of less than Rs 2 crore (one-third of $1 million), which is nothing compared to the global standards. Such ‘small companies’ are unlisted, closely owned by family and/or close friends with no outside interests to be protected by law.
In fact, if we take the sum total of all registered companies in India, and varied sections under which disputes can be raised within that corporate structure, the extent of litigation within small companies would be far less than 1 per cent.
Western society and its jurisprudence is built on celebrating ‘individual rights’; the law jealously safeguards such rights, offering remedies/relief whenever such right is actually or apprehended to be invaded or injured. Therefore, in the Western model, corporate governance, regulations to protect class rights, prohibiting related party transactions, and protecting arm’s length transactions have to be provided through rules.
The Articles of Association (AOA) of a limited company (an internal charter providing rules for members vis-à-vis the company and vis-à-vis other members) was enabled as the ‘statutory contract’ whereby the rights of individual member could be asserted.
Big contrast
In contrast, given the nature of the majority of Indian companies, the foundation is not a contract (read AOA) offered by law, but ‘relationship’. Relationships have chosen the corporate vehicle to carry on business. Personal capital is risked and there is little third party support by way of credit. Indian investors run their businesses not by following the AOA, but by ignoring it; their individual rights are ‘accommodated’ not asserted, as, individual rights merge with collective rights for the common good. That explains negligible shareholder litigation in corporate relationships.
This does not mean differences or disputes do not crop up. What it means is that when such disputes arise, they are settled amicably outside the law. This sociological reality is not recognised by our lawmakers and policymakers who blindly work on tinkering with laws imported from the West.
Our policymakers should look at the ‘numbers game’. The entire corporate income is only around 15 per cent of GDP. It is the combined effort of the large number (98 per cent) of small companies that are impact players in India’s business scenario.
(The author is a practising corporate lawyer and fellow of ICAI.)
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