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[Link]/class-action-suits-under-companies-act-2013/

[Link]/paper/benefits-challenges-effectiveness-of-class-action-suits-in-enhancing-
corporate-governance-in-india/

CLASS ACTION

The introduction of class action suits is one of the major changes introduced by the Companies Act,
2013. The major objective behind the provision of the class suit is to safeguard the interests of the
minority shareholders. So, class action suits are expected to play an important role to address
numerous prejudicial and abusive conduct committed by the Board of Directors and other managerial
personnel as it has been statutory under the Companies Act, 2013.

A class action suit is a lawsuit where a group of people representing a common interest may approach
the Tribunal to sue or be sued.

It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on
behalf of a larger group or class having common rights and grievances.

Class action suits, as legal actions taken by a number of people bearing similar grievances to each
other, act as an effective tool available to minority shareholders in order to fight against the injustice
and/or corporate misdeeds. When more and more corporations fail to demonstrate good corporate
governance, the economic community faces dreadful losses and the collapse of trust from investors
making it significant to understand the importance and extent of these suits.

BACKGROUND OF CLASS ACTION SUITS IN INDIA

The origin of class action suits in India can be traced back to the requirement of collective legal
redressal especially as highlighted by large corporate frauds, the most famous of which is the Satyam
scandal in 20093 Before the introduction of these suits, the Indian shareholders were struggling to
seek remedies for their grievances against corporations because there was no legal provision for a
class action suit. The Satyam case where investors in India could not seek remedies for their losses
while investors in the United States filed for class action suits were examples of the Indian legal
system’s failure to protect investors. This led to the inclusion of class action provisions in the
Companies Act, 2013, more specifically under section 245 which provides for a group of
shareholders or depositors to bring an action against a company on the grounds of mismanagement,
fraud or other detrimental conduct. Although the legal framework has been created in India, the use
of class action suits has been relatively rare because of the high qualifying criteria, the necessity of a
large number of claimants, and the legal formalities of the process. The National Company Law
Tribunal (NCLT) is the forum to hear such matters which is expected to reduce the burden of higher
courts and also to provide a specialized forum for hearing corporate law matters. In conclusion,
although the introduction of class action suits is a major step in the improvement of corporate
governance and investor protection, the practical and procedural issues remain as the key factors
determining the success of class action suits.
BENEFITS OF CLASS ACTION SUITS

Class action suits in India have several possible advantages that greatly improve corporate
governance by providing shareholders with more power and ensuring corporations’ responsibility.

 Empowerment of Shareholders: Class action suits allow minority shareholders to join other
like-minded individuals in the company to challenge decisions that are unfavourable to them.
This collective legal action enables those who cannot afford to file claims on their own to
seek remedies against large corporations, thus making the fight for corporate governance not
only the preserve of big shareholders but also small shareholders.

 Deterrence of Fraud and Mismanagement: Class action suits act as a deterrent to corporate
wrong doing since it is an indication that there is a law against it. Business entities that are
informed of the possibilities of group legal proceedings are likely to enhance their compliance
and governance standards to prevent legal cases, consequently promoting accountability in
organizational structures

 Facilitation of Collective Redress: Class action suits also minimize the costs that individual
shareholders have to meet through sharing of costs in the process of seeking legal redress.
This collective action allows shareholders to bring claims that they would otherwise be unable
to afford to bring individually, thus increasing the probability of success and making justice
more accessible.

 Clubbing of Similar Claims: The legal system permits consolidation of similar complaints
into one case, and this is efficient in the legal system as it avoids repetition in different cases.
This efficiency not only saves judicial resources but also offers a more logical solution to the
problems that occur in many cases concerning a vast number of shareholders.

 Promotion of a Culture of Accountability: The increase in class action suits plays a part in
the change of the culture of firms in India by holding them accountable. In this way, as more
of such suits are filed, the notion that companies should act in a transparent and ethical
manner is further strengthened, thus creating a more responsible corporate environment.

CHALLENGES OF CLASS ACTION SUITS

While class action suits hold significant potential for enhancing corporate governance in India, they
face several challenges and limitations that have hindered their widespread adoption and
effectiveness:

 High Thresholds for Eligibility: The Companies Act, 2013 has placed a very high standard
for filing of class action suits where the claim has to be filed by at least one hundred members
or ten percent of the total members as the case may be. This threshold is hard to cross,
particularly for the minority shareholders who lack adequate capital to fund their collective
action.

 Ambiguity in Legal Provisions: The Companies Act class action provisions still have
several ambiguities including the meaning of ‘prejudicial to the interests of the company or its
members’ and the type of relief that can be claimed. This is rather ambiguous, and it makes it
rather difficult for shareholders to deal with the legal issues as they are.
  Uncertainty of the Law: Class action suits are not very well known in Indian legal system
and hence, there is a lack of well established case laws and judicial precedents to help the
courts in interpreting and applying the provisions. This uncertainty can result in variation in
the decisions made and may deter shareholders from filing these suits.

 Risk of Abuse and Vexatious Proceedings: Some people have argued that class action suits
may be abused by shareholders to intimidate firms or gain more than they deserve. The risk of
having to spend a great deal of money and time in the courtroom may force firms to pay out
on dubious claims, thus encouraging more baseless lawsuits and higher legal expenses for
firms.

 Interconnection with Other Legal Actions: Class action suits under the Companies Act are
similar to other legal actions that shareholders can take such as oppression and
mismanagement actions. While this overlap may not necessarily be problematic in all cases, it
can cause confusion and lead to a duplication of efforts, which may weaken the role of class
action suits as a separate legal instrument.

 Funding Challenges: It is financially expensive to conduct a class action suit, especially for
individual shareholders. Contingency fees are not allowed in India, which implies that
lawyers need to be paid before they can represent such cases. This is compounded by the fact
that there is limited well-developed litigation funding market to help shareholders with
funding their litigation costs.

Some of the most famous class action suits and their results:

1. Satyam Computer Services (2009)

The case of Satyam where the company’s founders were convicted of accounting fraud is a
significant case that gives a background to the class action suits in India. More than 300,000
shareholders lost a huge amount of money but Indian shareholders could not get collective
remedy because there was no proper legal framework for this purpose in India at that time.
This case brought out the need for class action provisions in Indian law resulting in the
addition of Section 245 in the Companies Act, 201311.

While no actual class action suit was brought during the Satyam scandal, the events that
followed the case paved way for future class action suits. Class action provisions were
introduced to correct the shortcoming that arose from the Satyam scandal and show how such
suits can be used to fight corporate malfeasance and fraud.

2. Nestle India and Maggi noodles case (2015)

Another such example is the class action suit against Nestlé India over the alleged contamination
of its Maggi noodles. The consumers stated that the product was laced with lead and monosodium
glutamate which resulted to the product being banned and a major uproar. The legal action being
on behalf of a group of people led to Nestlé being penalized about ₹640 million (around $96,000)
by the Food Safety and Standards Authority of India (FSSAI).

The result of this case highlighted the issue of product safety and corporate responsibility. Nestlé
was forced to improve quality control procedures and increase the level of transparency in its
actions. The Maggi noodles case was a landmark case in consumer rights and also brought into
focus the efficiency of class action suits in enforcing ethical business practices.