Thursday, August 15, 2013

The Companies Bill passed by Parliament last week has a provision for class action. 

Under this, shareholders and depositors of a company will now be able to claim damages if they suffer due to the management’s wrong and unlawful action, which is not in the interest of the stakeholders.

let us take a example to understand this !

What had happened in the Satyam Computers 

Services Ltd. cases ?

  • In 2009, after Ramalinga Raju, founder of Satyam Computers Services Ltd, confessed that he mis-stated company accounts for years and the cash reserves shown in the books actually did not exist, the stock was in a freefall. 
  • Satyam shareholders in the US filed a lawsuit against the company, claimed damages and got compensated. 
  • However, the Indian shareholders had no such provision in the law and could not claim compensation even in a clear case of fraud. 
  • But stakeholders in India will now have this option and will be able to hold the company and its officers accountable.

What’s proposed in the new Companies Bill to 

safegaurd the interests of stakeholders ?

  • According to the new Companies Bill, if investors or depositors are of the view that the management or the company is conducting affairs that go against the interest of shareholders and depositors, they can collectively file an application before a tribunal. 
  • As per the Bill, a National Company Law Tribunal and Appellate Tribunal will be set up to deal with such cases.
  • The law also provides an option for shareholders and depositors to file an application and seek orders to restrain a company from moves such as acting against the memorandum of the company and to restrain it from acting against the resolutions passed by shareholders.
  • Shareholders will be able to seek damages and compensation from the company and its directors for wrongdoing and unlawful acts. 
  • Compensation can also be claimed from the auditors and the audit firm in case of mis-statement of facts or unlawful acts.

Conditions for appealing

Like in the Companies Act, 1956, there are conditions for appealing here too. An appeal can be filed against a company only if the appealing group constitutes at least 100 shareholders or holds a certain percentage of the company’s paid-up capital. Also, not more than one application will be admitted for the same cause.

What’s there for the defaulters ?
  • If a company fails to obey the orders of the tribunal, a penalty would be imposed and the defaulting officer may also face imprisonment. 
  • Interestingly, the Bill also states that if the complaint is found to be “frivolous or vexatious”, the applicant will be liable to pay the other party. 
  • The idea is to ensure that only genuine applications are filed.
  • The provision of class action is being seen as a major positive. 
  • This will help investors by making companies and its officials more accountable.


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