How New Companies Bill will empower small investors

The class action suit, a handy weapon for small investors seeking relief from errant corporations, will soon be available in India.

The Companies Bill, 2011, tabled in Parliament last week, provides for the lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group. Section 245 and 246 of the Bill contain the provisions relating to class action.

Under these provisions, lawsuits "may be filed by members or depositors or any class of them, if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interest of the company, its members or depositors."

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Mass Action

Class action suits can ask tribunal to:

Claim damages or compensation or demand any other suitable action against the company or its directors

Restrain from committing an act ultra vires articles or memorandum

Restrain from committing breach of memorandum or articles

Declare a resolution altering the memorandum or articles of the company as void

Restrain the company and its directors from acting on such a resolution

Restrain from doing an act which is contrary to the provisions of this Act or any other law in force for the time being

Restrain from taking action contrary to any resolution that has been passed by the members

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Tribunal can issue directions to:

Companies > Directors > Auditors > Advisors > Consultants
Source: Companies Bill, 2011

Investors and depositors can claim damages or compensation or demand any other suitable action for improper conduct, misleading statements and fraudulent or illegal acts by the company or its directors.

Such suits can also be filed against auditors and any expert or advisor or consultant associated with the company.

The National Company Law Tribunal, which the Bill proposes to set up, will hear these suits and pass directions.

"The provisions for class action lawsuit will give more power to minority shareholders in redressing their grievances," said Hinesh Doshi, vice-president of the Investors' Grievances Forum (IGF), which has fought several legal battles against companies on behalf of minority shareholders.

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Amit Tandon of Institutional Investors Advisory Services (IIAS) said codifying the law in this respect was a step in the right direction. "What happened in Satyam seemed to have resulted in these provisions," he said.

Three years on, Indian investors are yet to get any meaningful compensation in the Rs 8,000-crore fraud allegedly committed by the promoters of the erstwhile Satyam Computer Services.

But some of their American counterparts, who owned American depositary shares (ADS), have made the company agree to pay $125 million (over Rs 625 crore) in settlement due to a strong class action framework in the US.

The proposed law requires at least 100 people to come together to file such suits. Doshi feels this number is too high.

"The requirement should be brought down to 50. We have found in a lot of cases, for example in Cadbury India, it's difficult to get that many shareholders willing to go to court," he said. IGF is fighting a case against Cadbury India on behalf of minority shareholders in the Bombay high court related to the chocolate maker's buyback offer.

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"Enough people need to be motivated, they need to be able to manage the expenses and also stay patient with the timelines in court. A combination of all these is required to make these suits successful," Tandon of IIAS said.

According to Tandon, a move by the Securities and Exchange Board of India (Sebi) to fund such suits in deserving cases will be welcome.

Under the existing Companies Act, Section 397 allows minority shareholders t oapply for relief in such cases. The new Bill says applications under this Section may be filed or any other action may be taken under this Section by any person, group of persons or any association of persons representing the persons affected.

"This means an NGO (non-governmental organisation) or any other organisation can file a suit on behalf of all aggrieved parties in a particular case, say Satyam," said Pavan Kumar Vijay, managing director of Corporate Professionals Ltd.

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Section 397 in the current law does not cover depositors who are not shareholders. But the new Bill allows depositors to bring class action on par with shareholders.

Some lawyers find this decision to include depositors flawed. "You can't put depositors at the same footing as shareholders. That's incorrect. Depositors' right to file a class action lawsuit should be restricted to their deposits or claims and should be covered separately," said Kumar Desai, advocate, Bombay high court.

Desai, who has represented Sebi in several cases, feels specific instances of mismanagement need to be defined clearly. "The acts of mismanagement for which you can file a class action lawsuit have not been defined. Instead, the Bill mentions the orders that the tribunal can pass."

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There are concerns that vested interests may misuse these provisions to blackmail companies. "Initially, people may come up with frivolous or motivated cases. But like the courts have done in the case of public interest litigation, the tribunal can play a key role in discouraging these," said Vijay of Corporate Professionals.

The Bill proposes the tribunal take into account whether a member or depositor is acting in good faith in making the application for an order.

Doshi of IGF said the definition of the term "good faith" in Section 245 to decide the eligibility for making the class action lawsuit application was, too, general and needed to be more specific.