In what appeared to be a landmark move, India introduced class action lawsuit through Section 245 of the Companies Act of 2013; but it has remained a purely theoretical concept for 11 long years. Are things beginning to change? Two recent cases filed by minority investors are holding out hope that amendments and clarifications in 2016 and 2019 have, finally, opened the doors to collective action by minority investors/stakeholders. But a closer look reveals that a lot more needs to be done.
Class action suits have an immense potential to protect minority shareholders, depositors and investors from corporate wrongdoers because fighting as a class allows them to get better legal representation, share the cost of litigation and pool their knowledge and experiences to build a strong case. In a country where lawsuits are expensive and drag on interminably, minority stakeholders are further disadvantaged by being pitted against the formidable legal and financial muscle of corporate houses. Any action by the minority is essentially a David-Goliath battle.
Class action lawsuit would have levelled the playing field; perhaps that is why it was kept toothless and impractical, by delaying rules and notifications and also by restricting its scope. To be truly effective, the provisions for class action need to be more inclusive of all categories of minority stakeholders who are impacted by corporate mismanagement.
Two amendments have allowed class action to inch forward. First, the 2016 amendment to the Companies Act that simplified procedures and eligibility criteria for filing class action suits. Second, in May 2019, thresholds for what would be considered a ‘class’ for action under Section 245 were notified. Accordingly, 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 is less, would comprise an eligible class. Similarly, 5% of the total number of depositors or total deposits or 100 members, whichever is lower, would constitute a class. Creating a pool of 100 is still a huge challenge. Well-known financial consultant Vinod Kothari points out that 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.
On the positive side, class action is being tested in two cases – Jindal Poly Films and ICICI Securities Ltd.
Two Cases: Jindal Poly Films and ICICI Securities
In Jindal Poly Films Ltd, a few minority shareholders with a 4.99% stake have approached the national company law tribunal (NCLT) in Delhi (CP/58/PB/2024), under Section 245 of the Companies Act, alleging gross financial mismanagement and fraudulent conduct, leading to losses amounting to Rs2,500 crore.
The petition seeks judicial intervention to investigate allegedly irregular transactions, undervalued sale of financial instruments, bailing out a group entity followed by loan write-offs and sale of shares to related parties, caused losses to Jindal Poly Films and thus the petitioners. The next hearing of the case will be held on 11 July 2024.
The ICICI Securities (I-Sec) case is even more interesting. It is led by Manu Rishi Guptha, a portfolio manager who had got together 100 investors to qualify as a class under Section 245. They have claimed significant and deliberate undervaluation of I-Sec (as much as 40%) through a swap ratio based on old data, which has heavily short-changed minority investors and benefited the parent ICICI Bank. Post-delisting, I-Sec becomes a wholly-owned subsidiary of the parent. I-Sec and ICICI Bank challenged the class action on various grounds, including jurisdiction and composition of the class of 100 investors! This case is significant because of exemptions granted by the market regulator that enabled the delisting of I-Sec, a company that was once headed by the incumbent SEBI chairman. SEBI is also a respondent in this case.
The petition wants the whole e-voting process declared null and void, nullifying all resolutions passed in the shareholders’ meeting. This case has also been posted for hearing in July when the courts reopen after the summer break.
While these cases represent important milestones, they also expose the limitations of the current legal framework. The Companies Act, 2013, restricts the right to file class action suits to members or depositors of a company, excluding other stakeholders such as bond-holders, debenture-holders and home-buyers. This exclusion is particularly worrying, given the significant financial losses that these groups can suffer due to corporate mismanagement. Consequently, such investors struggle to find other avenues for class action.
Alternative Routes
Homebuyers of Aakriti Aquacity, a large realty company, tasted success by filing a class action suit under Section 12(1)(b) of the Consumer Protection Act. It led to a landmark order against the Aakriti group and DB Corp (Read: Aquacity Homebuyers and MP-RERA Get Landmark Order against Aakriti Group and DB Corp). These home-buyers formed an association which, in turn, filed a petition that would specifically benefit its members. They won at the national consumer disputes redressal commission (NCDRC) and, on appeal by the builder, got a Supreme Court (SC) judgement in their favour (along with the Madhya Pradesh Real Estate Regulatory Authority), ordering full refund to home-buyers. However, the battle is far from over and a contempt petition continues. In another positive development, on 16 May 2024, the insolvency and bankruptcy board of India (IBBI) suspended Anil Goel, the insolvency professional in this case, for a year, for violations.
The struggles of Aakriti Aquacity’s homebuyers highlight the need for expanding the scope of class action suits under the Companies Act to include homebuyers and cut out several layers of litigation. The current provisions limit eligibility to shareholders and depositors, leaving other stakeholders without adequate legal recourse.
A second example is the litigation filed by depositors who invested in additional tier-1 (AT1) bonds of Yes Bank and Lakshmi Vilas Bank (LVB), assuming they were safer than fixed deposits. These depositors have challenged the write-off of AT1 bonds during the respective financial resolution and change in management of the Banks. In the Yes Bank case, where Rs8,415 crore was written off, the Bombay High Court ruled in their favour but the decision was stayed by the SC. The LVB lawsuit is still in progress.
A third battle is being waged by the non-convertible debenture (NCD)-holders of Infrastructure Leasing & Financial Services (IL&FS) demanding that they should be considered on par with other financial creditors. They have contested the restructuring plan and sought a more equitable distribution of IL&FS's remaining assets. This case, too, has been dragging on before the bankruptcy tribunal despite government-appointed management being involved in the IL&FS resolution since 2018.
In fact, the facility of filing class action lawsuits should be extended to all categories of investors who are duped by large businesses. For instance, thousands of investors who were cheated during the rash of stock broker defaults on the National Stock Exchange (NSE) around 2020-21, or millions of small depositors in dubious multi-level-marketing schemes masquerading as chit funds or cooperative societies (PEARLs, Sahara, PanCard Club, Alchemy, Rose Valley, Saradha and others).
The Way Forward
Expanding the scope of class action suits to include bond-holders, debenture-holders, homebuyers, and every set of small depositors victimised by financially powerful entities is crucial for ensuring a comprehensive framework of legal action for all stakeholders.
The biggest challenge is the high cost and slow pace of litigation, coupled with the reluctance of Indian courts to award substantial costs, damages and penalties. The introduction of ‘contingent fees’ for lawyers would create an incentive to put together the 100 persons required for a class action.
Clearly, without significant legal reform, true class action will not become a reality and remain limited to stray cases where someone assumes leadership and financial responsibility to put up a fight.
Requested Mr Manoj Govil, IAS, Secretary to Govt of India, Ministry of Corporate Affairs, Garage No.14, "A" Wing, Shastri Bhawan, Rajendra Prasad Road, New Delhi to kindly let me Know as to Why Need 100 Investors for a Class Action Lawsuit in India unlike Australia, Canada & USA and Awaiting Response.
In fact, the various approvals granted by NCLT as per RP's resolution and CoC's approval, the practice of completely writing off of entire share capital to zero is also a wrong precedent and must be stopped henceforth. Debt capital should never be written off to zero level under any circumstance. They are entitled for the share in the company's assets.
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