Question From A Law Student: Why Are Derivative Suits So Rare In India Despite Their Role In Corporate Accountability?

Why do derivative suits and shareholder activism remain rare in India, despite being essential mechanisms for corporate governance, and what structural, cultural, or legal barriers prevent retail investors from holding corporate leadership accountable?

The Corporate Governance Gap

In 2013, a shareholder with just 9 shares in Tesla successfully brought a derivative action against Elon Musk for breach of fiduciary duty. This case, Tornetta v. Musk exemplifies a reality in common law jurisdictions like the United States and United Kingdom, that derivative suits are accessible mechanisms through which minority shareholders can hold controlling boards accountable.

Compare this to India. Despite being home to over 2 million registered companies, and a capital market increasingly dominated by retail investors, derivative suits remain extraordinarily rare. A student researcher examining derivative action jurisprudence finds that Indian courts have produced contradictory rulings (Darius Rutton Kavasmanek v. Gharda Chemicals, ICP Investments v. Uppal Housing, Rajeev Saumitra v. Neetu Singh), leaving practitioners uncertain about whether these suits are maintainable at all.

Meanwhile, oppression and mismanagement petitions under Section 241 of the Companies Act, 2013, an alternative remedy, remain the default recourse for aggrieved shareholders. This gap is not merely doctrinal. It reflects a systemic problem, that India lacks a clear, accessible framework for shareholder initiated accountability mechanisms. In an economy where corporate scandals regularly make headlines, from family controlled conglomerates siphoning funds to audit failures exposing insider trading, the absence of an effective derivative suit regime leaves a governance vacuum.

Why This Question Matters Now

India's corporate governance landscape is at a critical inflection point. The 2023 amendments to the Companies Act expanded the “fit and proper person” test and mandated explicit bars on severance compensation for removed directors, procedural safeguards that assume there are mechanisms to trigger them. Yet the Companies Act remains ambiguous on derivative suits, the very tool that would activate these protections.

Retail investor participation in Indian capital markets has surged. The National Stock Exchange now counts tens of millions of active retail traders. Yet this democratization of capital ownership has not translated into democratic participation in corporate governance. Retail investors largely remain spectators, unable to challenge management decisions because the legal pathway is unclear, procedurally cumbersome, and doctrinally contested.

The question is not whether India needs derivative suits, jurisprudence from the UK, US, and Singapore demonstrates their utility. The question is why we remain stuck with an English common law rule (Foss v. Harbottle, 1843) and an equity doctrine (clean hands) that were designed for 19th century shareholder disputes, when modern corporate architecture demands 21st century accountability mechanisms.

What Prompted This Question

Recent legislative developments suggest policymakers recognize the need for stronger shareholder protections, Section 245 class action suits, expanded oppression remedies, and the fit and proper person framework all point toward enhanced minority safeguards. Yet these provisions sit awkwardly alongside a derivative suit regime that remains judicially hostile and conceptually muddled.

Simultaneously, corporate law scholarship increasingly documents the “rarity problem”, derivative suits are not merely uncommon, they are treated as presumptively illegitimate by courts that impose stringent procedural hurdles, demand extraordinary proof of good faith, and scrutinize plaintiff motives with suspicion that would be unthinkable in Delaware or London.

The question becomes, is this rarity a symptom of good corporate governance in India (where controlling shareholders self police)? Or is it a governance failure, the absence of an accountability mechanism precisely when family controlled and promoter dominated companies dominate the market?

Why the Legal Community Must Engage

Corporate lawyers drafting M&A; agreements, in-house counsel advising on governance, market analysts evaluating corporate risk, and Tribunal judges interpreting shareholder remedies all operate within this ambiguous space. If derivative suits are to become viable, the legal profession must move beyond inherited English doctrine and articulate a framework suited to India's corporate reality.

The question is ultimately about institutional design, how do we structure derivative suits so they deter baseless litigation but enable legitimate accountability? How do we lower the threshold without creating frivolous petition factories? What role should the Tribunal play?

These are not academic questions, and they are not addressed to a general audience, this proposition specifically seeks a response from corporate law practitioners and M&A; partners who draft shareholder agreements and advise on governance structures, in house legal teams managing shareholder relations and governance risk, NCLAT judges and legal scholars who interpret shareholder remedy provisions, capital markets regulators and securities law specialists designing investor protection frameworks, market analysts and institutional investors who evaluate corporate governance risk in Indian companies, and law firm partners specializing in shareholder disputes who are positioned to articulate the barriers and potential reforms.

It is to this cross section of practitioners, regulators, and scholars that the question is put, are they prepared to build a workable Indian derivative suit framework, or will retail investors remain locked out of the governance processes that shape their investments?

'Question From A Law Student' Vertical, steered by Himanshi Hans