Legal expenses of India Inc rose almost 21% in the last fiscal year amid robust deal activities, heavy spending on disputes and increased compliance costs, show data compiled by ETIG from the annual reports of 3,972 companies listed on Indian bourses.
These companies spent Rs 63,807 crore ($7.69 billion) in legal expenses for the year ended March 2023, compared with Rs 52,741 crore the previous year, according to the data.
Legal expenses include spending on litigation and arbitration, professional fees, regulatory filings, penalties, and general stamp duty among others.
“The term ‘legal expenses’ is very broadly interpreted by companies as an accounting entry. It does not refer merely to fees paid to lawyers. Companies tend to include government fines, penalties and the like also in legal expenses,” said Vishwang Desai, managing partner at law firm Desai & Diwanji. “These fines, penalties and the like constitute a majority of the amounts shown under legal expenses. Therefore, legal fees will be a fairly small part of the amounts shown under legal expenses.”
In addition, government, statutory authorities and courts have shown a higher tendency to impose greater fines and penalties than earlier in fit cases, thus raising the amounts shown under legal expenses, Desai added.
The top five spenders in terms of legal costs in FY23 were Reliance Industries (Rs 2,916 crore), Sun Pharmaceutical Industries (Rs 2,312 crore), Infosys (Rs 1,684 crore), Larsen & Toubro (Rs 1,512 crore) and Fortis Healthcare (Rs 1,399 crore).
On account of the Covid overhang, companies were conserving cash in FY22, and deal-making and litigation, constrained due to government and judicial measures such as fewer investigations and penalties, and moratoriums, might have increased significantly in FY23, said Avimukt Dar, founding partner of law firm IndusLaw.
“The removal of these factors and consequent increased compliance costs and penalties coupled with more in-person travel and meetings in India and abroad could have contributed to this increase,” added Dar.
The total legal spending of all the listed companies on Indian bourses may sound big, but it is minuscule at just 0.4% of their total revenue and about 0.5% of their total expenditure.
As per data compiled by ETIG, the research and analysis division of ET, the revenue of all listed companies in FY23 totalled Rs 1,61,09,743 crore, up 20.80% from the year before. Their total expenditure, too, rose over 22.7% to Rs 1,27,52,393 crore.
Rajiv Choubey, group general counsel at Dalmia Bharat Group, said increased spending reflects the increased M&A and deal flow activity in India. When compared to other global economies, the Indian economy is growing at a decent rate. The growth trajectory is further positive. Several factors work in India’s favour right now, ensuring a strong interest in FDI and other investments, he said.
“From in-house legal perspective, there is immense focus on reducing legal costs, better negotiation of fees, etc. On the litigation front, with the new Mediation Act, corporates should explore negotiated settlements, which will reduce the costs and the burden on courts,” said Choubey.