Shareholders and depositors will now have a statutory right to claim compensation against not only erring managements but also auditors, consultants and advisors to such managements.
The Companies Bill, passed by the Rajya Sabha on Thursday and now awaiting Presidential assent, will usher in the concept of class action suits in India.
Class action is a right to members or deposit holders or their representatives to file an application before a tribunal for restraining a company from some specified acts. The shareholders or depositors can claim damages against a company, directors, auditors, experts and advisors for their wrongful conduct.
“It is a huge step forward in investor protection,” said Virendra Jain, founder and president of Midas Touch Investors Association, which had taken up the cause of seeking compensation on behalf of its cheated retail investors in the Satyam Computers corporate scandal.
About three lakh retail investors in India had lost about Rs 5,000 crore in the Satyam case. At the same time, investors of Satyam in the US, who had filed class action suit against the Indian IT firm, were compensated to an extent of about Rs 675 crore.
“The concept of class action suits has been introduced giving right to a group of shareholders or depositors to move NCLT if they believe that the management or conduct of the affairs of the company are prejudicial to them, such concept is already permitted in the US.
“Frivolous applications, if any, made by the group of shareholders or depositors will be rejected and the applicant can be asked to pay up to Rs 1 lakh to the opposite party,” said Lalit Kumar, Partner, J. Sagar Associates.
So far, the only recourse for aggrieved shareholders was to file a case of oppression and mismanagement before the courts. The class action concept will take shareholder and depositor actions outside the purview of the court.
Class action suits were till date filed under the guise of public interest litigation (PIL). But the courts were free to dismiss such PILs.
With the class action concept in place, managements, directors and auditors will have to be on their toes and look over their shoulders for potential legal action, say corporate observers.