It’s interesting how stories move forward. On 11 May the National Consumer Dispute Redressal Commission in New Delhi threw out a suit filed by Midas Touch Investors Association, an investor assocation registered with the Securities and Exchange Board of India (Sebi), claiming damages on behalf of 300,000 consumers—shareholders of Satyam Computer Services Ltd —who, said the complaint, were defrauded by the software company. The court said it could not examine the case under the Consumer Protection Act and dismissed it. The suit is against the Raju brothers, auditors Price Waterhouse and the independent directors. The activist outfit has demanded Rs4,987.5 crore at the rate of Rs570 per share for 87.5 million shares on behalf of the shareholders. Last week the market regulator, Sebi, put its weight behind class action suits in general by contributing Rs14 crore to a fund that will reimburse any of its 25 registered investor associations to take on the big guys in a class action suit.
Satyam shareholders, and all consumers of financial products and services, including mutual funds that fall under the purview of Sebi, should take these two pieces of news very seriously. One, that Sebi is giving its approval to class action suits and is willing to fund genuine cases of investor grievances that go beyond breast-beating. Two, in Midas Touch, led by its one-man army Virender Jain, they have a tiny activist outfit that was actually able to gouge out Rs975 crore for 200,000 investors from a dense legal system and an economic superstructure that favours companies and service providers.
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The story of Midas’ achievement reads like this: It is 1990 and Canbank Mutual Fund becomes one of the first non-UTI (Unit Trust of India, the government owned mutual fund monopoly before the industry was opened up to competition) mutual funds to launch a scheme in the market. It floats a 10-year closed-end scheme that would transform Rs10 into Rs40 at the end of the period (assured return; the fund says so in the offer document) and raises Rs800 crore of retail money. By 1995 the fund house has run out of steam and tries to wriggle out of this assured return commitment; it offers Rs11 per unit, while the assured price at that time should have been Rs20. Jain, not a unit holder but with an activist bent of mind, is approached by some investors and then begins a battle that would create history. After failing to get redressal from the capital market and banking regulators, he files a case in the Allahabad high court. And to the surprise of all, he is able to actually get money out of the system. The court orders the fund house to pay Rs23 per unit to shareholders who want to exit, while the net asset value at that point is Rs13. The 200,000 investors got what was promised to them. What is little known is that, when the term of the scheme came to an end, the fund house was forced to return Rs40 each to the 50,000 or so unit holders left in the scheme.
Well, Jain is on the move again and in him, Satyam shareholders have an activist who will keep chipping away at the problem—an attribute probably more effective than the media-grabbing antics of some other investor activists, who take to the streets at the drop of the Sensex. Jain asks that if Enron can pay $7 billion and WorldCom $6 billion in damages to investors for an accounting fraud, why should it be different in India?
His petition names the Raju brothers (whose personal assets include villas in 63 countries), the auditors, the directors including independent directors and the company itself.
He is now filing a petition with the Supreme Court to get the consumer forum to hear the case. While this is happening, Sebi, probably in an unrelated action, is giving its approval to such cases. Which is quite jaw-dropping: Here is a regulator putting money down to allow somebody to challenge a system that the regulator is supposed to regulate. So what I understand the regulator to be saying is this: There is no system in the world that is free from the risk of wilful fraud and while a regulator will do what it can, it is also up to the consumers of the products to protest in a structured way. And to help such investors, the regulator is willing to bear the cost of a legal case.
How this will progress has to be seen, but Satyam shareholders need to watch this case very carefully. As should all others who are consumers of financial products and feel cheated by verbal and non-verbal promises made by product sellers or their agents. Is Jain a large shareholder in Satyam? No, he just has an activist itch. And if you are a Satyam shareholder, hope hard that he keeps scratching away at it. The last time it yielded Rs975 crore.
Monika Halan is a certified financial planner and is currently working as adviser, Pension Fund Regulatory and Development Authority. Your comments and personal finance queries are welcome at email@example.com