Class action suit-in New Companies Act "and it's a Six"

The Satyam Lesson:

The U.S. investors, who held American Depository Receipts or ADR of Satyam Computer Services, filed a class action suit against the company after Ramalinga Raju, former chairperson of the company, admitted to a fraud in January 2009. Tech Mahindra, which took over Satyam in 2009, had to settle all pending litigations with several investors who had claimed losses due to the fall in share value, including the New York Stock Exchange where Satyam ADRs were listed. And what happened to domestic investors? In a fraud that happened in India, domestic investors have got, and will get, nothing. The problem is that for the same company and the same case, investors in US have the compensation but Indian investors will not get (anything) for the lack of a provision in our laws. The lesson seems to have been learnt. The long awaited new company law plugs these loopholes.

The new Companies Bill allows class action suits, together with a national financial reporting authority, gender equality on boards, and mandatory audit firm rotation. It is up to India Inc. to align itself with the new law that replaces the Companies Act of 1956. It’s simply a sixer hit by New Companies Act.

What is Class Action Suit?

A class action suit, widespread in the US, UK and Singapore, permits a large number of people with common interest in a matter to prosecute a company as a group. Section 245 of the new Bill allows members, depositors, or any class of them to move toward the National Company Law Tribunal (NCLT), if they consider that the management or conduct of the affairs of the company prejudices the interest of the company, its members or depositors.

Claims apart from company management:

In addition, the new Bill empowers the shareholders to claim damages from auditors, experts, advisors or consultants separately from the company and its management for any unacceptable or ambiguous statement made for any fake, illegal or criminal act or conduct. Civil remedy and remedy against oppression and mismanagement are offered in the existing law, but they are seemingly inadequate to stop scam. The recognition to the Serious Fraud Investigation Office and Class Action Suits will be an efficient tool to forbid corporate scamsters and wrong­doers. In the recent past, various scams and frauds have been initiated by corporate fraudsters in India, and there was a need for some effectual provisions in the Company Law for investor protection.

Joint Stock company:

The new legislation unambiguously recognizes the foundation of the joint stock company, that is, while the liability of the shareholders of a company is limited, the liability of the company itself is unlimited. The logic is since the liability of a company goes ahead of the liability of shareholders; the fortune of a company cannot be left in the hands of shareholders only. Other stakeholders must have a logical say in the governance of the company and the authority has to be responsive and accountable.

India as business destination:

Few day’s back one of my friend show me a stunning fact that at present, India ranks 132 out of 185 countries in the World Bank's ranking of ease of doing business. Long periods and complex procedures in setting up, reorganizing and even winding up businesses have contributed largely to this uninvited positioning of India on the global platform. Provisions of fast track approvals, measures of transparency and increased governance norms are anticipated to put companies on an easier and smoother ride.

Cross border mergers:

The new legislation also permits inbound and outbound mergers with a simplified and fast track process of merger/demerger in cases of specified small companies. The law facilitates cross border mergers. An Indian company with prior approval of RBI may merge into a foreign company and vice versa by discharging the consideration to the shareholders of the merging company in cash or Depository Receipts or partly in cash and partly in Depository Receipts. The new Law also provides for the acquisition of minority shareholders. Such a framework is expected to address the problem of long litigation, which India has been witnessing in many cases of minority buyouts, notable amongst them being the cases of Cadbury India and Wartsila India. Quite often, some shareholders delay a merger and acquisition on a playful ground. This would not be possible under the new law as only shareholders having more than 10% stake or more than 5% of the total debt can go up against any scheme of management. In case of merger of a listed company with an unlisted company, the Bill gives option to the transferee company to continue as an unlisted company with an option to the dissenting shareholders of the listed company to exit if upon merger they do not wish to become the shareholders of the unlisted company. Most importantly, the merger activities have been made time-bound.

National Financial Reporting Authority (NFRA):

Another significant feature has been the formation of the National Financial Reporting Authority (NFRA). There are the Public Company Accounting Oversight Board in the US and the Financial Reporting Council in the UK to answer the question of “who audits the auditors”. However, such a provision may run into opposition from the Institute of Chartered Accountants of India. Nevertheless, shareholders might prefer to rely on audited financial statements in a jurisdiction where the auditors' work also becomes subject to review or check by an independent agency. Moreover, the new legislation also provides that companies would have to rotate audit firms over a ten-year period. This move may provide a solution to break the auditor-client nexus and the threat posed by the long-term association between firms-and-clients. However, it also throws up a challenge to about 7,000 listed companies to choose one audit firm from about 1000 firms that serve such companies. Nevertheless, provisions relating to the role of independent directors and auditors, resolution of conflict of interests, transparency in terms of disclosures, e-services, and corporate social responsibility recognize a new corporate foundation to widen the frontiers of governance in the corporate sector.