Class action suit in India- Interpretations overlap remedies -Part III

Class actions aim to minimise litigation by reducing multiplicity of suits, however, the ambiguous provisions leave no option for commoners other than to look up to the courts for clarity and interpretation. This is the concluding part of a three part series

The provision for class action suit in the new Companies Act, 2013 was brought in to provide stakeholders an edge in retrenching their rights. The provisions were introduced to bring together stakeholders with common interest on a shared platform so as to lower costs of litigation and boost the efficiency of the legal adjudication.


Upon perusal of the sections pertaining to class action as contained under the Act, one finds that the provisions are neither purely “class actions” as prevalent in US nor purely “derivative” as prevalent in UK. The interpretations of the sections overlap with remedies already available under section 241 of the Act and also intersect and are opposed to provisions provided under common law. The language of the section at numerous places lacks clarity, for which one would have to depend upon the courts to finally come up with right and just interpretations.


It is highly ironical that one hand, the section completely banishes jurisdiction of civil courts to try class action and on the other, one will have to resort to the wisdom of the courts to finally get a clarity regarding interpretation of the section. On one hand class actions aim to minimise litigation by reducing multiplicity of suits, while on the other the ambiguous provisions leave no option for commoners than to look up to the courts for clarity of such provisions.


Also, the Act is also silent upon how the class litigation shall be funded. In US, all class actions lawyers work on contingency model i.e.; they retain a portion of the settlement amount and charge no fees upfront. In absence of provisions with respect to funding, actioners would have to succumb to the prevailing costs of suit filing and adjudication expenses. Moreover, this does not provide an incentive to the lawyers to take up class action cases and fight them.


The intention behind introducing the class action provision was indeed a noble one expected to benefit the stakeholders by empowering them additionally to proceed against the company with minimal costs of litigation. But sadly, the idea forthwith loses its nobility when one peruses the provisions only to find them unclear, ambiguous, vague and hazy. In absence of discreet clarity what comes across is a fuzzy and lax remedy in place of a robust and concrete provision. Further, lack of clarity could lead to widespread abuse of legal procedure. For example, class actions can become a means for plaintiffs' lawyers to make a lot of money on issues of dubious merit.


It is also important to ask here whether there is really any social and legal value in class action lawsuits. In small claims class actions, there would be little value of supporting litigation in which individual class members have trivial interests. The individual claimants, because they have so little at stake, would not exercise any control over the litigation or would elect to opt out of the class and pursue individual claims. In these kinds of litigation, it is ultimately the plaintiffs' lawyer who is in total control and has the largest interest in the suit’s outcome, even if the suits result in minimal payouts to the class members. The legislation and court rules should have given more power to the courts to examine class action applications. Courts should carefully review the applications and deny class status to small claims cases with little social value in the adjudicating the claims.


What are the Reliefs?


Section 245(1) of the Companies Act, 2013 sets out the kinds of relief that the Tribunal can grant in a Class Action:


Restrain the company from committing an act, which is ultra vires the Articles or Memorandum of the company.


Restrain the company from committing breach of any provision of the company‘s Memorandum or Articles.


Declare a resolution altering the Memorandum or Articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors, and thus restrain the company and its directors from acting on such resolution;


Restrain the company from doing an act which is contrary to the provisions of the Act or any other law for the time being in force;


Restrain the company from taking action contrary to any resolution passed by the members;


Claim damages or compensation or demand any other suitable action or remedy that the Tribunal may deem fit.


Consequences of Class Action Suits


An order passed by the Tribunal shall be binding on the company, its members, depositors, auditors, advisors, consultants, experts and other persons associated with the company. Any failure of company to comply with the order shall be liable to a fine of Rs5 lakh extendable up to Rs25 lakh and every officer in default shall be punishable with an imprisonment of three years and with fine of Rs25,000 extendable up to Rs1 lakh.


Consequences of Frivolous Action


Section 245(10) states that where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding Rs1 lakh, as may be specified in the order. Given that a minimum of 100 members can join together to file a class action, this comes down to a maximum cost of Rs1,000 each member. The cost would be much less if more members join. Such minimal amount may not be enough to deter frivolous litigation.


Can a plaintiff opt out of a Class Action?


In the US, courts have held that the principle of “Due Process” requires that absent class members be given adequate notice, adequate representation, and adequate opportunity to opt out, before they can be bound by a final judgment in the suit. (Phillips Petroleum Co. v. Shutts)


Under Companies Act 2013, there is no provision for opting out.


Effect on Subsequent Litigation


What is the effect of class actions on subsequent litigation? The general rule of res judicata requires that each and every cause of action should be litigated only once. To require the same case to be litigated more than once on the merits is a waste of the court’s time, without offering any assurance to either side that the outcome in the second trial is any better than that in the first. So, the legal system has to make sure that one trial is done well, after which the parties and their privies are bound. For example, if the trustee has lost the suit against the third party, then his beneficiary should be bound by that initial litigation, for otherwise the beneficiary has the incentive to hang back at the outset and then intervene, if and only if the trustee loses the first suit. No legal system should encourage the proliferation of suits by several persons who have partial interests in the same basic claim.


In the US, there is a bar on subsequent suits and it will be interesting to see whether the same principle will be applied by NCLT as well.


You may also want to read…

Class action suit in India- Will it deliver or fail? -Part I

Class action suit in India- Absence of a distinguishing factor -Part II


(Both Shambo Dey  and Prachi Narayan are researchers at Vinod Kothari & Co)



Pricing a product at Rs99, Rs199, Rs299, or Rs1,999 is called psychological pricing, in marketing. Some telemarketing companies have now started the sale of spiritual products. These are being sold by a company called GTM networks. They have prominent ads on specific news channels. Common in all these advertisements is:

(a) All of them have out-of-work and long-forgotten actors/actresses as brand ambassadors (have-beens, like Manoj Kumar, Jackie Shroff and Govinda, are also not spared).

(b) The products are herbal and ayurvedic made from raw materials sourced from forests in Nepal and Bhutan (which you and I have no access to).

(c) Invariably, the price of most of these products hovers around Rs2,999.

So, if you buy ayurvedic massage oil, or a Hanuman Chalisa yantra, the price is always Rs2,999. Yes, there is also a money-back policy; you can return the product, if you are not satisfied.

The advertising claims of these marketers are ludicrous. Buy a Kubera yantra and you will have gold coins falling from your roof! Apply herbal oil on your knees and your knee-pain will vanish in 10 days. Consume a powder, touted to be an aphrodisiac, and you will be blessed with a child in the next nine months. Keep a Sankat Mochan yantra in your room and MNCs will come knocking at your door with plum job offers. Apply a unique herbal powder to your plants and you can soon have an orchard full of fruits like mangoes, guavas, apples, grapes and chikoos.

Are you suffering from constipation? Please partake of this petsaaf shuddhi karan herbal powder priced only at Rs2,999 and there is no need to visit any doctor —but regular visits to the toilet are guaranteed! Not getting enough sleep? Buy anidramoksha churan—a powder that drives away fatigue and insomnia. After consuming this powder in milk for 12 days, from the 13th day onwards, you can be assured of peaceful sleep. Yes, there is also a free offer. If you buy this churan for Rs2,999 (you guessed it right!), you get a free booklet on “Healthy living in modern world”. Even without taking the powder, reading this book will guarantee you peaceful sleep. This is a bonus.

This industry also needs to be commended for innovative and breakthrough thinking. Have you lost a precious object? Have you lost something that you desperately need? Buy the yantra called Vyastu Wapasi yantra. Keeping this yantra near your entrance will ensure recovery of the lost product in seven days. Price of the yantra? Rs2,999. There is also a discount if you buy two yantras—buy two, get one free. You can actually keep this yantra everywhere including the bathroom.

Then there is the Vastu Shakti yantra. This yantra is a metal plate on which Sage Valmiki’s inscriptions are carved; the same Sage Valmiki who wrote the Ramayana! Vastu Shakti yantra is priced only at Rs2,999 and can be kept anywhere and everywhere. It will absorb all the negative energy in your home and also burn a big hole in your pocket.

Honestly, one wonders how many gullible consumers have fallen prey to such unsubstantiated claims. Who is the mastermind behind all these products and claims? It is perplexing.

Valliyoor Satya, Bengaluru, by email


To err is human. Mistakes do, or can, occur when returns are filed by taxpayers (or while filling up data by data-entry operators). No one ever admits to having made mistakes. In fact, many aggressively defend whatever action/stand they have taken. The I-T (income-tax) department puts the onus on rectifying the mistake on the assessee. Without undertaking to accept the information as per the certificate from TRACES, one cannot even access the Form 26AS.

Can the I-T department not ameliorate the tension and hassles faced by assesees, particularly senior citizens, in filing of I-T returns and also in getting the assessments completed? The I-T department should also make it simpler to rectify mistakes (for which they are not responsible).

I have faced this problem every year and I am sure many others too would have faced similar difficulties. If there is a difference between Form 26AS and the return is filed, can the I-T department not ask both the parties concerned to provide proof and fine heavily the one responsible for the mistake? This may make the tax deductee more cautious or more responsive to making corrections, wherever necessary.
Venu Nallur, by email


The Letter to the Editor titled “Delay in making payment by SHCIL” by RM Ramanathan, Chennai, in Moneylife (20 February 2014) got two replies from SHCIL: one from Rohini Henriques and the other from Karpagam S. Both are reproduced below. — Editor

Rohini Henriques, DP-customer care wrote:
Our concerned Branch has spoken to the client,
Mr Ramanathan. He confirms that he has received the cheque and it has long since been cleared. We trust you will treat this matter as resolved.

Karpagam S, area manager, Chennai wrote:
We, at SHCIL are always committed to maintaining the highest service standards. In this instance, the delay was due to a technical reason. We had already apologised to the client for the delay in refund of credit balances. Due care has been taken to avoid such stray instances in future.


With Facebook raking in billions by promoting fashion houses and retail outlets selling goods on the worldwide web, here is one more story of a shopping experience gone awry.
Based on a ‘Suggested Post’ featuring Yepme Shopping, I gave it a go. During the Google Online Shopping Festival, on 14 December 2013, I bought two products under order reference

# 4499050 on The payment was made via a nationalised bank’s netbanking payment gateway.

When the product was not delivered by 23 December 2013, I called up their customer-care staff who notified me that the payment had not gone through. They asked me to check with my bank and ask them to refund the money instead. I produced my bank statement which stated otherwise and forwarded it to the Yepme’s customer-care team to highlight the fact that the money had been transferred to the ‘emvantage payment gateway’ and the onus of refund was on Yepme. Well, that was just the beginning of the awful experience I was to undergo.

After about 20-odd phone calls to their customer-care team, and a dozen e-mail exchanges, the refund has not been processed till date. Each time I call them (customer care), I am assured that the refund would be processed within the next three days which, so far, have not arrived as per their calendar. Though it is a matter of a few hundred rupees, I think it goes a long way in showcasing how small businesses, like Yepme, are lacking in customer-care.

Even after notifying their customer-care team—that I would complain against them using the customer appellate forum—they are hardly moved into action. It is high time their services are reviewed. I thought of bringing this to the attention of your readers, to prevent others from being duped by such business houses. Hope this opens the eyes of the Yepme management.
Munish Sharma, by email

This is with regard to “Has the scope of CSR been too narrowly defined?” Any initiative to bring transparency in spending from CSR (corporate social responsibility) funds and to curb use of black money for fighting elections should be welcomed. Even the long list of ‘eligible’ activities that can be funded with CSR allocations has not satisfied the corporates which crave for more flexibility.

In the matter of social responsibility and avoidance of unethical practices in election expenditure, there are bound to be constraints for any regulatory approach to succeed. The final ‘judge’ will be the society and the aam aadmi who exercises his right to vote. The media and the educated population should play their role in creating awareness about the guidelines among the masses, who, in turn, should press for self-regulation by corporates and politicians.
MG Warrier

This is with regard to “Why healthcare costs are shooting up?—Part I” by Prof BM Hegde. A great revelation! Governments do not budget adequately for safe drinking water and good drainage and sewerage systems but go after budgeting for expenditure on health administration. If the former two are taken care of, the budgets of all families—rural and urban—will go into more and good food and better health. But doctors, consultants, educationists and executives in governments and insurance companies survive on poor systems and lack of basic amenities. Coming to Harvardians, after all, they (do not exclude IIMA) are hired intellectuals. When I told somebody that there is intellectual prostitution, he asked me ‘why do we want to insult prostitutes?’ I feel he is right.
Yerram Raju Behara

This is with regard to “What Really Happened at United Bank of India?” by Sucheta Dalal. Sure, PSU banks are in a bad shape, thanks to political interference. I want to pose two questions: (a) What is the need to re-capitalise these losing banks again and again? Instead, it would be better to let them die a natural death. (b) Why is Dr Raghuram Rajan not taking stronger measures to rein in errant banks and their chairmen? Remember Mr Seshan? As election commissioner, he cleaned up the whole system, the benefits of which are evident even now. Why can’t Mr Rajan also be a crusader in the same way?
BV Krishnan


Can RBI’s policies alone tackle rising NPAs deftly?

RBI’s initiatives to curb NPAs are good and would help minimise the stress. However, given the past record on a number of failed reforms, one question arises – can the regulator alone be able to tackle rising NPAs deftly?

Good health of banks is critical to the health of the economy and is a pre-requisite for the overall economic development and financial stability of a nation. An ailing banking sector indicates distress in economy as well and over the last couple of years, the banking sector is weighed down by the ever increasing non-performing assets (NPAs).

One can justify this rise in the level of NPAs through a number of reasons like, a) impulsive implementation of law by regulators b) policy changes happening dynamically c) infrastructure sector being in a deadlock, d) overseas investors becoming sceptic about making investments in India due to the sluggish economic condition prevailing in the country e) political uncertainty prevailing in the country f) now that the US economy is reviving from the economic slowdown, the money is flowing back there from India.

The Reserve Bank of India (RBI) along with the other regulators, has constantly been trying several policy reforms to deal with the rising NPAs with not much impact.

Looking at the current market scenario and various steps taken by RBI, it would be interesting to see, how bad loans can be minimised.

Current market scenario-

One can easily make out the amount of stress prevailing over the financial system after 40 listed companies together reported the growth of Rs2.4 lakh crores worth NPAs  during the quarter ending on December 2013. While this has been the overall scenario, some of the banks individually have made it to the headlines by reporting huge amount of NPAs in the December quarter. In terms of quantum, the State Bank of India (SBI) reported highest NPAs worth Rs67,799 crore. However, it is Bank of Maharashtra and United Bank of India, which made the headlines by reporting a growth of 209% and 188%, respectively in NPAs. Even one of the recent releases by RBI  also highlights the growing concerns over NPAs within the country. The table below would show us the trend in the gross advances by the banks and the gross NPAs since 2001.

End of March

Total Gross Advances

Gross NPAs

Growth in Gross Advances (%)

Growth in Gross NPAs (%)

(Amt in Rs crore)


































































* As at the end of September, 2013

Source: RBI

This scenario was seemingly favourable till 2007, thereafter the gross NPAs started rising and got worse as years passed, reaching 45% in 2012.

However, RBI from time to time has taken various initiatives to curtail ever increasing NPAs.

RBI measures to control NPAs in recent times

Over the last few months, RBI has brought in various reforms in order to control the growing NPAs both for the banks and the non-banking financial companies (NBFCs).

(i)Increase in FDI cap for ARCs:

The RBI, in order to promote the business of asset reconstruction in India, increased foreign direct investment (FDI) cap on asset reconstruction companies to 74% from 49% under the automatic route. It also allowed the foreign institutional investors (FIIs) to participate in the equity of the ARCs, however, the maximum shareholding by FII cannot exceed 10% of the paid up capital of the ARC.

(ii)Framework for Distressed Assets:

This is one such framework, through which the RBI has tried to bring in a number of changes in order to stabilise the current stressed out situation in the economy. It has concentrated more on early recognition of stressed assets as requires the banks and financial institutions to route the assets through three classes of special mention accounts-SMA (SMA-0, SMA-1 and SMA-2) before finally classifying it as a NPA. It also requires the all lenders with respect to the borrower classified under SMA-2 to form a joint lenders forum (JLF) whereby they are to formulate a corrective action plan in order to remove the stress over the asset. This framework also requires the formation of a Central Registry of Information on Large Credits (CRILC), which will be responsible to accumulate the data relating to the borrowers having aggregate fund based and non-fund based exposures worth Rs500 crore or more from the banks, non-banking financial companies- systemically important (NBFC-SIs) and NBFC-Factors. There are various other things that RBI has brought forward including the requirement of a proper credit risk management mechanism within the organisation.

(iii)Central Registry of Information on Large Credits (CRILC):

The main intent of setting up this registry was to keep a record of the large borrowers and those which are under stress. The RBI requires all the banks, NBFC-SIs and NBFC-Factors to report all the data relating to the borrowers having an aggregate fund based and non-fund based exposure of Rs500 crore or more or of such borrowers who have been classified as SMA-0 in the books.

(iv)Corporate debt restructuring norms for the NBFCs:

Earlier, the NBFCs were not allowed to be part of the corporate debt restructuring mechanism under the corporate debt restructuring (CDR) cell, but with this notification, RBI has now allowed the NBFCs to restructure their assets under the CDR cell and made their restructuring regulations at par with that of the banks. This has created a lot of buzz in the NBFC sector and it is believed that RBI has made this move in tune with the soaring concerns over NPAs. Henceforth, the NBFCs will be able to restructure their stressed asset either through one on one arrangement with the borrowers or along with other lenders through the CDR cell. Through this notification, the RBI has brought an incentive for the NBFCs, whereby they can retain their “standard” assets in the books even after restructuring, only if it is able to implement the restructuring scheme within a period of 120 days from the date of receipt of application for restructuring by the NBFCs. This incentive may encourage the NBFCs to restructure the stressed assets and make an effort to make them good. However, this special incentive is available with the NBFCs only till 31 March, 2015.

Apart from the above measures, the RBI earlier came out with several other such reforms, however, still it could not get the control over the rising NPAs.

The misses by policy makers?

In spite of so many measures, NPAs still remain to be a matter of concern for all. The reason for such an uncontrollable situation is the lack of practicality in policy making. The main check should be implemented at the initial stages of a transaction – strict credibility criteria and guidelines for implementation for the same should be formulated by the RBI itself, instead of relying on the board of the respective financial institution. This would ensure that the money lent goes to the right hands. The policy makers should try to make good use of the ARCs. Currently, there are only 13 ARCs existing in India of which not more than two-three are active and given the amount of non-productive loans in the economy, this number is very miniscule. The RBI should promote ARCs more and try to utilise this in order to utilise the collateral backing the stressed assets. These ARCs, if utilised properly, can actually turn out to be very strong measure of control for the policy makers in future.

Considering the number of reforms by the policy makers in order to reduce the NPAs and the number of misses being more than the hits, they should now shift their focus on asset creation as well. In the IFC’s Doing Business Report, 2014, India stands at 134th rank among 189 economies across the world in terms of ease of doing business in India, in spite of the enormous size of the economy. This indicates the need of an enabling and facilitating environment for doing more business in the country. The only other thing, apart from reducing the NPAs, which the regulators have concentrated upon in recent times, is the clogging of the scams with reactive law making, which in turn has affected business generation adversely. The Companies Act, 2013, with stringent penal provisions, stands out to be a clear example of reactive law-making by the country. In the times to come, doing business is not just for the corporate sector. For the professionals, it would be the most daunting task ever. A lot of problems will be taken care of, if the regulators look forward to create new avenues of revenue generations of the businesses, so that the sick ones can be revived.

The rise of the NPAs is a clear indicator that the Indian corporate sector is much on incubator and the intentions of the policy-makers do not seem like the recovery of the India Inc. 

Most of the policies by the RBI, have come after banks reported their disastrous third quarter results and the impact of these reforms will be understood only after the next set reporting by banks. Though initiatives taken by the RBI to curb NPAs are good and would help minimise the stress within economy, given the past record of the number of failed reforms, only one question arises – can RBI’s policies tackle rising NPAs deftly?

(Abhirup Ghosh is research analyst at Vinod Kothari & Company)



Yerram Raju Behara

3 years ago

When one decomposes the NPAs we would know what the India Inc and PSUs contributed to this monster. Second, why would it take years for the banks to charge the known willful defaulters like the Kingfisher? Banks too well know that when the attack the big wigs who indulge in the luxury of near-nude blondes on the annual calendars, fashion shows, car and horse races, acquisitions of foreign firms, diverting the gold pie of bank credit in the naked eye of the regulator, the Chairman would be in trouble. He passes of his time by making lofty announcements. The regulator only send paper tigers to convene consortia meetings and arrive at CDR package for such large scale diversions. The Courts give adjournments after adjournments finally to halt the attachment and sale of the defaulter properties!!
These are no reasons for Banks to themselves default on due diligence processes and keeping their records straight and this has been truly the casualty during the last decade.
Both the Government and the RBi are represented on the Bank Boards that accumulated these NPAs. What queries have been raised in the Board Meetings by these representatives? Their mouths are perhaps so full for the half day or day with cashew and sweets and mouthwatering lunches and happy retreats and occasional private gifts, that kept their mouths unopened and hands not to scribble. Credit Risk management, poor governance are to blame for the remedies in time and not always the distress in the economy.

Hemlata Mohan

3 years ago

Regardless of the measures that RBI or the Government bring in, if the business climate of a country is not suited to entrepreneurs, the NPAs are going to stay. Where is the incentive for a businessman to stay honest?Why is it that even after 65 years of independence, it is so difficult to set up even a kirana shop and stay competitive? For PSBs to hold 75% of the country's business where is the freedom to say "no" to projects like Kingfisher, Lanco Infratech etc.?And by chance if the officials do make a genuine mistake inn granting a loan, where is the security blanket to keep them away from CVC and CBI?


S K Nataraj

In Reply to Hemlata Mohan 3 years ago

I am in full agreement with what you have said. The CMD's of Banks get away, while the others ( lower ranked officials) are made sacrificial goats. As long as the fear of the CVC dangles like a damocle's sword , bankers can never perform without fear, I.e. The honest ones, I mean. What you have said of industrialists reminds me of the ever popular saying in banking circles that " only the industries are sick, the industrialists are healthy, and in the pink of health." What a tragedy that cases like those of Ketan Parekh continue to drag on for years and years, while that of Nick Leeson of the famous Barings Bank case was not only over, but he he has served out his sentence as well. Our judiciary also is badly in need of reform. The sooner we change, the better for our future.

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