Opinion | Stage is set for corporate class action in India

A self-step forward and advice for all engaging so collectively is to appoint for themselves a leader and not only a mere representative

May 8 Notification by the Corporate Affairs Ministry amending the requisite rules for identifying the class threshold for a corporate class action is a welcome and awaited announcement and should pave the way for the prosecution of delinquent management and the co-conspiring or fraudulent consultants. The changes touch both listed and non-listed companies. Banks remain excluded. For listed companies, lesser of 2% of the issued share capital; 100 shareholders; or 5% of the total number of shareholders, would form a threshold for the ‘class’. The law was already in place in the form of S. 245 of the Companies Act, only this threshold was awaited. The powers of the forum of adjudication, the NCLT, in deciding such claims are wide and the causes for which reliefs can be sought are exhaustive.

There are several Aunt Sallies who will be soon, hopefully, and deservedly, receiving the class action dispatch post this government enabler. A self-step forward and advice for all engaging so collectively is to appoint for themselves a leader and not only a mere representative. This is to avoid the tragedy of the commons. As there is no direction towards this in the notification or in the Companies Act, it may be judicious to bring this about by a viable self-governing mechanism before approaching the NCLT. Additionally,such actions invariably face what in economics is known as the free-rider problem, it cannot usually be overcome and to the extent possible must be discounted.

This notification would likely usher in three new possibilities, one, a positive change in the corporate governance – class actions have the ability to bring about a positive change in the corporate attitudes; two, the real prospect of the suitors getting some real compensation and not just a satisfactory regulatory retribution against the wrongdoers; three, it may be a tenable boost for the third party funders of litigation, who may get a viable and clean headway. Indian legal fraternity, for the reasons of champerty, can only fancy the large morsels that they often witness their international counterparts shovel down and should expect a good nip and not more. A successful class action would likely be followed with criminal prosecutions based on the findings in a positive order, which may also be the real clincher against the delinquents unlike in other jurisdictions where it climaxes with an award of damages.

Along however may come a spider frightening little miss Muffet. There have been accompanying reports that the class action proceedings may get active encouragement and financial assistance from the government. These reports quote the government on such plans who have interspersed their reason for such assistance on the lack of means with the class action suitors and on the lack of strong prosecutorial infrastructure to meet the demand of timely, strong and effective prosecution. This may be a step in the wrong direction. For the reason most apparently of conflict of interests, this vigour for providing assistance by the government, should it be formally notified, may not meet the imprimatur of the courts.

It is only therefore appropriate that the shareholders find their ways and means to take up the prosecution by themselves and not be assisted by a giant conflicted and interested party like the government in such proceedings, especially, when S. 125(3)(d)provides for reimbursement of legal expenses incurred by the suitors from the coffers of the Investor Education and Protection Fund as may be sanctioned by the NCLT. The government is, more often than not, likely to be running investigations and prosecutions against such delinquents, parallelly, and as indicated above, in the event of a positive outcome, also be the post-decision de-jure complainant or the primary prosecutor. In its core, a class action prosecution under the instant provision, is nothing but a private dispute prosecution and in these inter-se disputes, no active role may be sought from such third parties - read government - other than their investigation reports on the delinquent's conduct, investigated separately, being placed on record as an aid for Adjudication.

Another issue, which is unattended is on the extent of monetary liability that may be fall on the delinquents and thereby the consequent rewards for the suitors by way of damages. There is no criterion or parameter fixed for determining the quantum of damages. Hopefully, S. 125(3)(d) would not act as the limit. NCLT members are not full-fledged judges - even judges in our context award damages in quantum which are only notional, damaging the very concept. This may hamper the immediate fruiting of the possibilities kindled by the notification and it may, therefore, be some time before this becomes a weapon of credible enforcement of rights in terms of compensation and not merely a corporate arm-twister in the hands of pressure groups. However, the stage is now set for corporate class actions in India.

(Sajid Mohamed is the Managing Partner of Agrud Partners, a Mumbai based law firm)

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