01 September 2016

Class action suits - Potent, yet problematic?

I have a short piece on class actions under the new Companies Act and its dysfunctionality linked here and copied below:

After the Satyam fraud, India, as a country, realized that shareholders, of Indian companies, who have faced fraud, could not be made whole. In contrast, the international shareholders could obtain US $125 million by filing a class action suit at a US court. The Irani Committee proposed the inclusion of class action law suits in the then proposed Companies Act.

Section 245 of the Companies Act provides a right to members and depositors to bring an action against the company, its directors, auditors, experts, or consultants, for any fraudulent act or omission committed or likely to be committed by them. This has so far remained a dead letter since we have not yet seen a single class action law suit since 2014. This is primarily because of what economists call the tragedy of the commons. An investor must fight alone bearing the costs of, and delays in, litigation, but the benefits are enjoyed by all investors. In addition, the provision is clumsily drafted, complete with a glaring typo, provides barely any benefit, puts an onus of collecting a sufficient number of investors or depositors, and even has a provision for imposing costs in some cases.

For class actions to be effective, the right place to introduce a beneficial provision is in the Civil Procedure Code and the provisions should have clear benefits, deal with the tragedy of commons, reduce the burden on the litigating investor/depositor and finally, for this to really succeed, there will need to be an introduction of contingent fees payable to lawyers.

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