Class action suits, predominantly a US phenomenon, are common in other developed countries, but are not as predominant in India. Some of the large suits filed were Master Tobacco ($206 billion), Dukes vs. Wal-Mart ($11 billion), Enron ($7.20 billion), WorldCom ($6.20 billion). The numbers are staggering.

The Companies Bill 2012 proposes to introduce Clauses 245 and 246 on ‘Class action suits’. Class-action suits may be filed by investors with the National Company Law Tribunal (NCLT) if they believe that the affairs of the company are being conducted in a manner detrimental to the interest of the company and its shareholders. This is likely to give a small investor, who can now sue the management of a company, its auditors or a section of shareholders in case of suspected wrongdoing, an option hitherto not available under the current regulations. In 2009, in what is widely referred to as ‘India’s Enron’, 3 lakh shareholders of Satyam came together and sued the company. Satyam’s founder Ramalinga Raju confessed a fraud, and Satyam’s share price collapsed from 179 to Rs 6. Consequently the shareholders lost about Rs 5,000 crore.

The shareholders went from the National Consumer Disputes Redressal Commission to the Supreme Court, and had their claims rejected and even after four years, are yet to get any meaningful compensation. But the shareholders in the US for the same fraud were able to get $125 million (Rs 675 crore) from the company in settlement due to a strong class-action framework in US. This experience has raised several calls for instilling the culture of shareholder activism in India.

Class action suits in India have so far been filed under the guise of Public Interest Litigations. Courts are free to dismiss these. The key advantage of encouraging these is that it keeps Indian companies, its management, directors, auditors, on their toes and looking over their shoulders for potential legal action.

So far, filing a case of oppression and mismanagement was the only recourse available to the aggrieved shareholders. This amendment would give them a tool to go after the players in the corporate drama namely management, directors, auditors. This will also ensure that experts, advisors and auditors of the company act carefully and diligently before advising the company. The facility to file suit through any person, group of person or associations may also motivate NGOs and other activists to take up causes for the affected people.

In sum, it is useful that the Companies Bill expressly provides for remedies in the form of class actions and takes shareholder actions outside the purview of the court and places them within the jurisdiction of the NCLT, which, due to its specialised nature, is expected to be more efficient and time-sensitive than the normal court system. The recognition of such remedies under statute will provide some relief to affected minority shareholders. Allowing such class-action suits should help improve the quality of financial reporting as well as the quality of corporate governance in India Inc.

The company, the management and key management personnel, directors and their auditors would think very carefully and would own up their responsibility. The auditors along with others have to not only play the role of a blood hound but also run the risk of getting killed in the chase.

The flip side is that this may bring in a new breed of legal firms who specialise in class action suits and charge contingent fees as in the US. It is also likely that the proposed law may bring genuine management who has erred in their judgment “bona fide” to face litigation and pay huge penalties.

Swapnil Dakshindas and Nilesh Lahoti are Senior Managers and Amar Shah is Manager, Deloitte Haskins & Sells

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