Promoter-investor disputes may be solved by mediation

Startups, early-stage and even growth-stage companies seek investors with capital, experience and connections to help fuel their business, while investors hope for an exit with fabulous returns. Private equity funds have a finite life so time is of the essence for their exit, and problems or delays can result in conflicts. The past couple of years have seen a rise in the number of disputes between investors and promoters that are finding their way to arbitration and to courts.

Although most transaction documents specify arbitration as the preferred mode of dispute resolution, disputing parties sometimes approach the National Company Law Tribunal (NCLT) or courts. The dispute resolution process can take years and often results in erosion of value. Negotiation to facilitate a speedy settlement is not effective when there is a breakdown in communication between disputing parties or when they mistrust each other. Mediation can be considered in such situations, since it involves a neutral third party who could help facilitate a settlement.

Worldwide statistics show that most matters that have been referred for mediation are settled. The Centre for Effective Dispute Resolution has reported a settlement rate of 70-80% and the Singapore Mediation Centre also has a settlement rate of about 75%. The Financial Industry Regulatory Authority, a self-regulatory body in the US, has reported settlement rates of 73-85% and turnaround of 109-135 days over the past three years. In India, the Bangalore Mediation Centre has reported a success rate of about 65% with 146 minutes of time spent per case.

Ekta Bahl is a partner at the Hyderabad office of Samvad Partners.