Will class action suits become a reality in India?

Such suits will be a potent tool to keep the company or management accountable but it can also be open to misuse by unscrupulous minority shareholders

Among the various new inductions in the Companies Bill, the concept of ‘class action’ which is aimed at increasing investor protection is definitely pronounced. The concept of class action, which originated in and is predominant in the US, is sought to be introduced in India in the Companies Bill, in the aftermath of the Satyam corporate scandal. In the Satyam case, wherein numerous small investors of Satyam Group in India were unable to seek effective relief against Satyam’s management as against their counterparts in the US who brought class action suits against Satyam and got recompensed in the process.
 

A ‘class action suit’ in common parlance may be defined as a lawsuit in which a group of shareholders of a company collectively bring an action in court against an identified group of defendants belonging to the company. The Companies Bill mandates the initiation of class actions suits by the members and depositors of a company in case they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors. Let us briefly look at some of the salient attributes of the concept of ‘class action suits’ under the Companies Bill:

 
(a) Under the Companies Bill, class action suits can be commenced collectively by a minimum of 100 shareholders or depositors, or a minimum prescribed percentage of such shareholders or depositors, whichever is less.  
 

(b) A class action suit may be brought against the company, its directors, auditors or any experts, advisors and consultants for their inactions and wrongdoings. Hence, the Companies Bill attempts to cast a wide net on the erring management of the company. 
 
(c) Upon admission of a class action application, all similar applications in any jurisdiction are required to be consolidated into one single application. This provision would reduce multiplicity of litigation on the same subject matter.

 
(d) However, banking companies have been granted immunity against a class action.
 
The features of a class action suit under the Companies Bill certainly carry benefits for investors of a company. It provides investors with a medium to fight as one unit against the errant company or management, thereby reducing multiplicity of suits, costs of ligation and increasing their chances of success in the process. No doubt, ‘class action suits’ under the Companies Bill may prove to be a potent tool to keep the accountability of a company/management in check and to contain any likely prejudice against the minority. However, on the flipside, such a concept may be open to misuse by unscrupulous minority shareholders in furtherance of their vested interest thereby hampering the efficacious functioning of the company.

 
Suffice to say that courts may need to exercise caution while hearing and deciding class action suits in order to ensure that a company is allowed to function effectively while keeping intact required minority investor protection.
 
Amish Tandon is a corporate lawyer. Views expressed in the article are personal