Class Action Suits in India: A Journey of Challenges and Potential
Mahak Agarwal | corplaw@vinodkothari.com
Background
Investor protection provisions have been an inherent part of company laws in India. Whether it be S.34 of the Companies Act, 2013 (‘the Act’) imposing criminal liability on directors/ promoters in case of misrepresentation in prospectus, S.35 which imposes civil liability on persons involved in mis-statement of prospectus, S. 36 which imposes criminal liability on any person who fraudulently inducing persons to invest money and so on.
Following the Satyam fiasco in India, investor protection gained further light and the Company Law Bills of 2009 as well as 2011 contained provisions for introducing class actions as a measure available to the members and depositors of the company if the affairs of the company are conducted in a manner prejudicial to the interest of the company, or its members and depositors. However, it was only in 2016 that the same was introduced under S.245 of the Act.
Class action suits permit a group of persons to file a suit for a common cause on behalf of them as well as others. The concept was introduced in India in the J.J. Irani 2005 Report on Company Law which expressed the need for recognition of such suits. Although class action provisions have been in place for nearly 8 years, only recently have a few such cases started to be filed in India.
Further, despite the additionalities of class action over oppression and mis-management suits including in terms of parties who may bring an action and parties against whom an action can be brought, class action suits have remained a stagnant affair in India.
Discussed below in this article are certain drawbacks of the class action provisions in the Indian context.
Drawbacks of class action provisions in India
I. 100 is a large number
The requisite number of members/depositors required for the purpose of initiating a class action suit in India is lower of 5% of total number of members/depositors or 100. Having said that, the number of shareholders in a listed company is quite high, and hence, 100 would actually become the minimum limit on number of members required to lodge a class action suit. The minimum limit itself is a big number, creating a pool of 100 members/ depositors could be quite challenging. If one refers to the global scenario in this respect, the laws in the US allow one or more members of a class, in Australia, 7 or more persons having claims against the same person and in Canada one or more members of a class to initiate a class action suit. Evidently, thus, the pooling of members/depositors in India, as compared to its global counterparts continues to be a challenge in India.
II. Exclusion of other stakeholders
Class action provisions in India restrict lawsuits to members and depositors, excluding other stakeholders such as bond holders and debenture holders, i.e. creditors. This gap is particularly concerning as these stakeholder groups are often vulnerable to significant financial losses arising from corporate mismanagement.
III. Exclusion of banking companies
Another missing aspect of the class action law is the exclusion of banking companies from its purview. This is to say that the shareholders of a bank cannot bring a class action against it. The significance of the drawback of such exclusion becomes further evident from the 2018 PNB bank fraud where shareholders suffered massive losses due to fall in share prices but could not claim damages from those in default- the directors and auditors of the company. While criminal actions were initiated against those in default, there was no relief available to the shareholders against the bank.
IV. Low settlement claims
Class action litigation is costly and protracted. In India, commercial disputes are typically resolved in around 1,445 days, significantly longer than the 589.6 days in OECD countries (World Bank’s Ease of Doing Report)[1]. Further, litigation costs in India, averaging 31% of the claim value, are notably high compared to OECD standards.
While the instances of class action in cases in India is still very low to draw an inference, referring to the pattern of class action suits in the US, it may be noted that settlements are the predominant outcome in class action suits, given the complexities and costs associated with these cases[2]. Further, there are several research papers which also indicate that in most cases of settlement:
(i) only a small fraction of class members receive any monetary benefit at all from the settlements;
(ii) class counsel are often given very large attorneys’ fee awards even when class members receive little to no monetary recovery; and
(iii) in claims-made settlements, class members as a whole receive on average only 23% of the settlement amount, with the remainder being consumed by attorneys’ fees, expenses, or cy pres distributions; and even considering all types of settlements, more than 60% on average goes to attorneys or others who are not members of the class.[3]
These patterns highlight why class action lawsuits can be unattractive, as the financial benefits to shareholders are often minimal.
Way forward
Having explored the primary reasons why class action suits struggle to gain traction in India, what steps could pave the way forward? Firstly, there should be a reevaluation of the minimum threshold of members/depositors required under current legislation. Additionally, the issue of contingency fees should carefully be assessed in light of both- their benefits and drawbacks.
Funding availability for these suits remains a challenge, especially for small shareholders with limited resources. Establishing a regulatory framework for third-party funding arrangements could encourage more class actions by providing a structured approach to managing and overseeing such funding. This combined strategy could help foster a more robust environment for class action litigation in India.
Conclusion
In summary, although class action lawsuits in India have been stagnant for some time, recent filings indicate a potential shift. To fully realize the benefits of class actions, it will be crucial to overcome regulatory obstacles, revise fee structures, and develop a strong legal framework. These steps could help enhance investor protection in India.
[1] Litigation Funding: A breakthrough for Avoidance Proceedings under IBC
[2] Largest Securities-Related Class Action Settlements of 2023
[3] An Empirical Analysis of Federal Consumer Fraud Class Action Settlements (2010–2018)
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