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Companies Bill - Class action suit: Big measures for small investors

Feb 22 2013, 11:35 IST
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SummaryUnder Cos Bill, large firms must turn philanthropic while small investors get the power to sue.

Class action suit: With the Lok Sabha clearing the Companies Bill, 2011, the biggest boost for the small investor comes in the form of the provision for class-action lawsuits, which can allow a group of investors with common interest in a matter to sue the management of a firm, its auditors or a section of shareholders in case of suspected wrongdoing, a option not available under the current regulations.

Under Section 245 and 246 of the Bill, class-action suits may be filed by investors in a court of law if they believe that the affairs of the company are being conducted in a manner detrimental to the interest of the company and its shareholders. Enabling such class-action suits should, in the long-run, help improve the quality of financial reporting as well as the quality of corporate governance among firms.

The importance of the provision can be gauged by the experience of the Satyam fraud. Well over three years after the scandal broke; Indian investors are yet to get any significant compensation in the 8,000-crore fraud allegedly committed by the promoters of Satyam Computer Services. But some of their counterparts in the US, who owned American depositary receipts, have made the company commit to pay $125 million in settlement by taking recourse to the strong class-action framework.

Other provision in the Bill that has arguably ignited the biggest debate is the provision of mandatory spending on corporate social responsibility (CSR). The legislation, to be now introduced in the Rajya Sabha during the budget session, has put the philanthropy by India Inc back in the limelight. Even as corporate have largely voiced their concerns over the mandatory nature of the provision, the jury is still out on whether the CSR spending track record will, in the coming years, impact the valuation of a company by investors.

The concept of mandatory CSR spends, in the Indian context, according to analysts, it would take some time to sink in. But as has been the experience in the West, as consumers and investors become more socially aware, they are more likely to prefer companies that have a better tract record on discharging their social commitments, including possibly CSR activities, as compared to those who are found wanting on these fronts. This might not work over a short-term horizon, but in the long run, those adhering to the norms are likely to be preferred by investors, job seekers, advertisers,

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