Class Action: A stillborn Section of company law

It has been four years since Parliament passed the amended Companies Act. Yet one key Section of the law remains inoperative.

In the long run-up to the passing of the new law and during its initial days, Section 245 of the Companies Act, which provides for class action suits, was presented as one of its exciting new elements.

A lot of analysis has been made about how this will mark the dawn of a new era, in which large groups of investors could get their grievances redressed or receive damages from errant companies.

It was supposed to be India’s answer to Satyam Computer-like scams. These cases were supposed to be heard by the National Company Law Tribunal (NCLT). But not many such suits have seen the light of the day in India. There was one against the Tata group, filed in the Bombay High Court under the Civil Procedure Code, but it was dismissed on grounds of technicality.

This is curious. It would be one thing if the cases were filed and thrown out. But we have not heard of the NCLT being moved. Is it because Indian companies have suddenly become all clean? Is it because all the investors are happy and do not have grievances?

This is highly unlikely. Last week, a US-based law firm initiated action against Dr Reddy’s Labs, alleging disclosure violations. There have been reports of Infosys shareholders using this provision in the US. So, what is stopping the local investors and the lawyers here from invoking class action?

The company law has many Sections, which have the words “as may be prescribed”. The Union Ministry of Corporate Affairs (MCA) was required to fill in these gaps by drafting rules and notifying them. Over the years, the Ministry has indeed drafted rules for many Sections of the law and notified them. However, it seems to have forgotten the rules relating to Section 245. Though the draft rules were published sometime last year — three years after the law was passed — legal experts say these are yet to be notified.

According to the MCA website, under the head “Chapter XVI Prevention of Oppression and Mismanagement”, the status given is “Notification awaited”. See here: http://ebook.mca.gov.in/Default.aspx?page=rules  

Though some parts of the Section are addressed under the rules for the chapter governing the NCLT, many experts say these are not enough. Param Pandya, Research Fellow, Corporate Law and Financial Regulation, Vidhi Centre for Legal Policy, said: “The Prevention of Oppression and Mismanagement Rules, which, inter alia, allow shareholders holding an aggregate of 10 per cent to file class action, are not yet notified. This creates a procedural infirmity.” 

Pandya added, “It is high time the Rules were notified to promote shareholder activism in India.”

Corporate law and accounting circles say that it is not clear if the government intends to notify these anytime soon. The dilemma seems to be deeper than just the procedure of notification. The administration seems to be having second thoughts, probably owing to concerns expressed by companies. There are some views that our system is not ready for “such new legislation” and that this could open the Pandora’s box.  

But howsoever reasonable these concerns are, could the intent of parliament be torpedoed in this manner? The matter could be referred to the appropriate house committee or an amendment moved. That way everyone would be able to participate in the discussion and find a solution. Such non-transparent smothering, affecting millions of shareholders, could itself be a fit case for a class action suit.