Class Action Suit – adds muscle to Corporate Governance
In January 2009, 300,000 shareholders of Satyam Computer Services (now Mahindra Satyam) came together and sued the company. Satyam’s founder Ramalinga Raju had confessed to misusing and siphoning accounts; obviously the company’s stocks nose-dived. This case is widely referred to as ‘India’s Enron’. The shareholders claimed damages worth Rs 5,000 crore. For people so obviously wronged, it should have been easy to get compensation. But India then had no law enabling class action lawsuits. The shareholders went from the National Consumer Disputes Redressal Commission to the Supreme Court, and had their claims rejected. But their counterparts (the US shareholders of Satyam) were able to claim $125 million (about Rs 675 crore) from the company. The small investor in India watched helplessly and miserably overseas investors claiming damages with class action suits.
The concept of a class action suit is originated in the United States. It offers a platform to investors facing common legal challenges to join hands and participate in a lawsuit. It is a cost-effective way to seek legal redress as otherwise it would be expensive for an individual shareholder to launch a lawsuit and seek compensation.
In India last year in August 2013 Parliament approved a long-awaited overhaul of the legislation vide the new company’s law which governs Indian business world. The amended law is aimed at easing the process of doing business in the country and improving governance by making firms more accountable, making this one of the few reform measures that the Congress-led United Progressive Alliance has succeeded in getting through the House. We should loud the efforts of minister of state for corporate affairs, Mr. Sachin Pilot for this historic move! The private companies, while maximizing growth, also have a greater responsibility towards society, besides balanced and sustainable growth of the country. Mr.Pilot’s efforts in getting the bill passed in parliament have ushered in a new era for the company law.
The new law will mandate the setting up of a National Financial Reporting Authority, which will monitor compliance with accounting and auditing standards. It will also have the power to investigate auditors that are registered under section 22 of the Chartered Accountants Act, 1949. And, the new legislation will, for the first time, also permit class action suits against companies. A class action suit is typically a lawsuit in which a group of people file a claim before a court in which a specific class of defendants is being sued.
About 10 years back, Indian companies used to take people from India to the US and give them lower salaries compared to the local employees. Many did not comply with minimum salary norms. The other problems such as racial, sex, colour-creed discrimination added to problems. The language used for running operations at times is foul. Some smaller Indian companies are seen to be not complying with local labour laws. This is lowering the image of the big Indian companies as well. But, there the class action law suit is a powerful tool for individual workers to seek justice.
In February 2013, Tata Consultancy Services had to settle a class action lawsuit brought against it by Indian former employees working in the US over what they claimed were unpaid wages. The lawsuit dates back to 2006, when TCS staff working onsite for US clients alleged that the company had unfairly docked their salaries and forced them to refund it for tax payments. TCS first tried to have the case moved to India, then twice motioned to have the lawsuit dismissed. In April last year, a California court ruled that the trial could proceed. The law firm representing the plaintiffs won the case. TCS agreed to set up a £29.75 million settlement fund available for all members of the class. TCS spokesperson said in a statement that they decided to end this case so that they could focus their energies entirely on continuing to provide world class service to their clients. Obviously, it agreed to settle this matter to eliminate any on-going distraction to its associates and management. The workers were lucky that the case was heard in US.
Between – March 2012 till May 2013, outsourcing firm iGate has been slapped with class action lawsuit in the US for alleged violations of federal securities laws in view of its sacked CEO Phaneesh Murthy’s “improper relationship” with a subordinate employee. The suit has been filed on behalf of persons or entities that purchased or acquired securities of iGate between March 14, 2012 and May 21, 2013. The shareholders have a say in moral conduct, decency and of honesty of the management and governance of the company in which they have invested money.
Back home, four investors have filed a class action lawsuit against Financial Technologies (India) Ltd, Jignesh Shah, in Bombay high court to prevent it from selling its assets as the company’s unit National Spot Exchange Ltd (NSEL) battles a Rs.5, 574.35 crore payment crisis. The case has been filed as a representative suit under the Civil Procedure Code, 1908 because the new law enacted in August to regulate Indian companies, which provides for class action suits, but is yet to be notified.
So how will class action law suit be helping the Indian business environment?
The new Companies Bill allows class action suits, including a national financial reporting authority, gender equality on boards, and mandatory audit firm rotation. It is up to India Inc. to side itself with the new law that replaces the Companies Act of 1956. The new Companies Bill, on its enactment, will allow the country to have a modern legislation for growth and regulation of corporate India. The new law will facilitate business-friendly corporate regulation, improve corporate governance standards, enhance accountability on the part of corporates/ auditors, raise levels of transparency and protect interests of investors, predominantly small investors.
At present, India ranks 132 out of 185 countries in the World Bank’s ranking on the parameter for ease of doing business. Long periods and complex procedures in setting up, reorganizing and even winding up of businesses have contributed largely to this undesirable positioning of India on the global platform. With the new law, a One-Person Company may get an impetus to structure its emerging business in a corporate form and what more – provisions of fast track approvals, measures of transparency and increased governance norms are expected to put companies on an easier and smoother ride.
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. This will also facilitate cross border mergers. An Indian company with prior approval of RBI may merge into a foreign company and vice versa by discharging the deliberation to the shareholders of the merging company in cash or Depository Receipts or partly in cash and partly in Depository Receipts.
In addition, the new legislation 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. At present we have approximately 1000 audit firms registered, so this legislation has paved way more auditors, lawyers, company secretaries!! So, the new company’s law – 2013 has strengthened the corporate governance while widening the frontiers of trade and commerce.