Class action boon for depositors in unlisted firms too

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Aug 8 2011, 06:30am hrs
The facility of class action lawsuit to be included in the country's soon-to-be amended Company Law for the benefit of small investors will also be extended to public depositors in unlisted companies currently deprived of any armour of protection, according to sources from the ministry of corporate affairs.

Class action is a suit in which a group of people with the same grievance sue a defendant claiming damages. This is reckoned to be a facility especially suitable for small investors and is set to find a place in the Companies Bill which has recently been vetted by a Parliamentary committee and is expected top be tabled in the House in the winter session.

Concerned over the lack of regulatory oversight over fund raising from the public by unlisted companies through issuance of bonds and debentures, the ministry has decided to empower such investors with the tool of the class action suit. Last month, the finance ministry, too, has made a proposal to this effect, the sources said. Investors subscribe to these bonds on the promise of high returns and there are several instances of them taken for a ride by the firms concerned.

Investors are lured by companies on the promise of higher returns. But it turns out that they have no intention of paying back. What option do investors have in such cases an official source wondered.

He said that the provision has been included in the Companies Bill which needs approval from the Prime Minister Office before going to Parliament in a couple of weeks. Since unlisted companies are not required to follow stringent disclosure norms, the government feels it could have a damaging impact on investors.

In an interview to FE last week, corporate affairs minister Veerappa Moily had said that the ministry of corporate affairs would be addressing the issue of small investors in unlisted companies very seriously. We are very serious about the matter. Small holders cannot go to the court because it is not viable. However, if a group of investors or depositors as a class can go to court, it would save them of a lot of legal hassles, he had said.

Managing director of Corporate Professionals Pavan K Vijay said that the governments move would go a long way in empowering small investors.

He said that since it was difficult for government to oversee every activity of unlisted companies the investors should play that role. At present public depositors in unlisted companies have little power. Once the class action suit comes into force, it should keep such erring companies on their toes, he said.

The matter recently came to light when media reports blew the lid over various unlisted companies that were taking deposits from the public on the promise of very high returns. We want investors to become more vigilant. Government cannot monitor every activity; hence investors need to be forthright in this matter, a government source said.

The mechanism of class action suit was first introduced in the Companies Bill in 2009 following the Satyam carnage.

However, it was restricted only to the shareholders of the listed companies. In fact, soon after the scam broke out, two leading law firms in the US had filed class action suits against the promoters of Satyam on behalf of shareholders.