Very soon, you, a small shareholder, might be able to take on company managements. The class action suit, a handy weapon for small investors seeking relief from errant corporations, will soon be available in India. Last Thursday, the Cabinet cleared a long-pending piece of legislation that will, if passed by Parliament, revamp the Companies Act of 1956.
The class action suit is a powerful tool, says Shriram Subramanian, promoter, Ingovern Research Services, a proxy advisory and corporate governance firm. “Just like how people file for Right to Information (RTI), shareholders should use the class action suit route in case they feel there is some wrongdoing in the company in which they hold shares,” says Subramanian.
Small investors who at present are not able to get compensation in cases of fraud due to the absence of any such law will be able to fight for justice with such suits. This suit is brought by one party on behalf of a group of individuals to file for claims against erring companies in a court.
| THE WAY AHEAD Proposed Companies Bill, 2011 | |
| Class action suits | Can be used by holders of securities who suffer losses due to fraud by the company’s management, auditors |
| Compulsory rotation of auditors/auditor firms | Shareholders will have to annually appoint auditors for straight 5 years |
| Exit option for shareholders if object clause changes | If the company changes the object clause of its public issue, the minority shareholder will be given an exit option, if he is not happy |
| Transfer of profits to reserves for declaring dividend | Discretion to transfer such per cent is with the company |
| Limitation of investment companies | Every company is proposed to have only one investment company* |
| Issue of shares at a discount | Company cannot issue shares at a discount other than as sweat equity |
| First AGM | Will be held 9 months from closure of financial year |
| Voting by electronic means | Vote by electronic means permitted |
| Wages/ salary payable in case of winding up | Payables to workmen for a period of 2 years protected |
| *investment company means a company whose principal business is the acquisition of shares, debentures or other securitiesSource: Edelweiss Securities | |
For example, three years after the Satyam fraud, Indian investors are yet to get any meaningful compensation in the Rs 8,000-crore fraud committed by the promoters of Satyam Computer Services. But some of their American counterparts, who owned American Depositary Receipts (ADR), have made the company agree to pay $125 million (Rs 625 crore) in settlement due to a strong class-action framework in the US.
According to the Companies Bill, depositors or any investor group can act on behalf of the shareholders and use the class action suit route. To file the suit, a group of 100 shareholders need to combine.
This is just one of the points that could impact shareholders. There are such proposals in the Bill that a shareholder should be aware of.
“A company desirous of changing its object clause will be required to provide an exit to the dissenting shareholders if it has not utilised the money raised from the public through the prospectus,” says Anand Mehta, partner, Khaitan & Co.
He says the exit option is a measure to deal with investor angst over companies either suddenly entering new areas by changing the 'objects' for which the money was raised or by demerging a profitable business.
“Though it will not stop the company from diversifying, it will allow the minority shareholder to exit in case he is unsure of this kind of a business move. Investors will not only have a right to object to a major proposal, but also exit the company,” says a Mumbai-based corporate lawyer.
According to reports, at least than 100 companies in recent years have changed their object clause. For example, Raymond changed their object clause to include real estate in their business.
Another important amendment one needs to keep in mind is the rotation of the auditors of a company. Shareholders will now have to approve annually, at the company’s annual general meeting, the appointment of an auditor for five years. It has also limited the number of companies an auditor can serve at any time to 20. At present, here is no such requirement.
A recent report by Edelweiss Securities says the move will ensure the promoter/company/management does not change the auditor who is doing a good job prematurely. The vice versa can also be said, where an auditor can be given the boot if the shareholders think his job in not up to the mark. This could help cut frauds in which auditors work in cahoots with the company management.
Ingovern’s Subramanian says another point that could be of consequence to shareholder is that for every listed company, at least a-third of the directors should be independent, with every such board member allowed a maximum of two terms of five years each.
