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Class action lawsuits are unicorn-like: Worthy but rare

Similar provisions have been incorporated in the Consumer Protection Act of 2019 and the Competition Act of 2002. Further, class action suits are often clothed as public interest litigation (PIL) under Articles 32 and 226 of the Constitution. However, none of these statutes specifically covered shareholders as a class.

In a landmark move, India introduced shareholder class action and derivative action lawsuits through Section 245 of the Companies Act of 2013. Surprisingly, for 11 years, this provision has remained largely theoretical, with only two cases—Jindal Poly Films and ICICI Securities Ltd—being filed.

A class-action suit, or representative action, allows a large group of people with similar interests to collectively bring a claim to court. This collective group is known as a ‘class.’ Class action suits have immense potential to protect minority shareholders, depositors and investors from corporate wrongdoers. 

Fighting as a class enables them to secure better legal representation, share litigation costs and pool their knowledge and experiences to build a strong case. In a country where lawsuits are expensive and lengthy, minority stakeholders are often at a disadvantage against the formidable legal and financial muscle of corporate houses. In such cases, a class action, backed by the strength of many, is likely to be taken seriously by businesses and courts.

The biggest challenge remains the high cost and slow pace of litigation, coupled with the apparent reluctance of Indian courts to award substantial damages and penalties.

Over the past few years, the Indian stock market has witnessed a significant influx of retail investors . This surge is complemented by an increasing number of businesses getting listed for their shares to be traded publicly. Shareholder activism, aimed at better corporate governance and involving the scrutiny of management actions, has been rising too. 

This usually happens when shareholders believe the company is being poorly run, potentially leading to financial losses or societal harm. Shareholders whose rights have been infringed upon, or who believe the company is being managed in a way detrimental to their interests, may initiate a class action lawsuit. 

Such suits offer a vital remedy for breaches of minority-rights by enabling collective legal action against corporate misconduct. The existence of the provision, thus, promotes higher standards of transparency and accountability in corporate India.

While such lawsuits can help level the playing field, for them to be truly effective, the provisions for class action should include all categories of minority stakeholders affected by mismanagement.

Two amendments have allowed class action to inch forward. A 2016 amendment of the Companies Act simplified procedures and eligibility criteria for filing class action suits. In May 2019, new thresholds for defining a ‘class’ under Section 245 were notified. 

An eligible class can now comprise 5% of members holding 5% of the issued capital in an unlisted company or 2% of the issued capital in a listed company, or 100 members, whichever count is lower. Similarly, 5% of the total number of depositors or total deposits, or 100 members, whichever is lower, would constitute a class. 

However, creating a pool of 100 is still a challenge. Borrowing from Western practices, India could further simplify these requirements. For instance, the US does not insist on a minimum number to form a class; Australia requires only seven, while Canada permits a single shareholder to file an action.

Introducing ‘contingent fees’ for lawyers, to be paid if the suit succeeds, would create an incentive for them to gather 100 persons for a class action. This would require deviation from the currently permitted remuneration structure for lawyers, under which a contingent fee is not allowed. Further, to mitigate the risk of exploitation by an errant lawyer, all contingent arrangements should be disclosed and monitored by the Bar Council.

However, to strike a balance and disincentivize frivolous class actions, the judiciary must also levy exemplary penalties on litigants in such instances and also on lawyers with contingent-fee deals.

On the whole, the courts and government must adopt a more accommodative approach to class action lawsuits. Without significant legal reform, true class action will remain limited to stray cases where someone assumes leadership and financial responsibility.

Class action suits in India have the potential to democratize access to justice and hold powerful entities accountable. Yet, so far, class action suits have not been embraced with the enthusiasm they should be. For minority shareholders to achieve justice, especially, class action suits could offer a speedy legal process. 

Implementing fast-track judicial processes for class action suits would reinforce the faith of citizens in the concept as well as overall judicial system.

The urgency of embracing class action suits in India cannot be overstated, particularly as the Indian economy expands further and integrates itself more deeply with the global economy. Effective class action mechanisms can significantly enhance corporate accountability, thereby boosting investor confidence and attracting more investments from overseas.

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