In the first move of its kind in the country, the Securities and Exchange Board of India (Sebi) has decided to finance investor associations that propose to fight collective suits — which resemble US or European-style class action suits — in Indian courts.
The stock market regulator will announce detailed guidelines on this shortly and has introduced a new clause in the regulation for the Investor Protection and Education Fund that was notified recently. Sebi has already made a one-time contribution of Rs 14 crore towards this fund.
The funds will be allocated only to 25 Sebi-registered investor associations and on a reimbursement basis — that is only after the associations have incurred the expenditure. To minimise frivolous lawsuits, Sebi has stipulated that the associations will have to prove that each case they are fighting has affected at least 1,000 investors.
A class action suit, otherwise known as representative action as is prevalent now in the US and other European countries, is a lawsuit in which a large group of investors or consumers collectively bring a claim to a court. These lawsuits typically define a certain amount for admission of cases as class action, but Sebi felt that the issues and their implications were more important than the amount involved in these cases, officials said.
Cases that will receive funding cover issues related to the sale and purchase of securities, non-receipt of securities allotted or refund of application money, non-payment of dividend, default in redemption of securities or payment of interest in terms of the offer document, fraudulent and unfair trade practices or market manipulation or any other market misconduct to be decided by the Sebi board.
The funding to investors’ associations will not exceed 75 per cent of the total expenditure on legal proceedings and that too on one legal proceeding in a particular matter. If more than one investors’ associations apply for legal aid, the fund allocation will be done on first-come, first-served basis.
The various sources for funding the investor protection corpus are contributions from the Sebi board, grants and donations made by the Central and state governments, security deposits held by stock exchanges for public issues and rights issue or amounts in the investor protection fund and Investor Services Fund of a stock exchange if such exchanges are de-recognised, interest or other income received out of any investments made from the fund and so on.