Minority shareholder? This class action rule change gives you more power to fight big companies

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Updated: May 10, 2019 4:37:56 PM

The government’s latest move of notifying the thresholds for filing class action lawsuits will go a long way in protecting the rights of minority shareholders, according to experts.

Equity investment: How to separate value stocks from value trapsThe latest provisions will help ensure that the minority interests are better able to defend their rights.

The government’s latest move of notifying the thresholds for filing class action lawsuits will go a long way in protecting the rights of minority shareholders, according to experts. Notably, in a bid to aid minority shareholders, the corporate affairs ministry on Thursday notified the thresholds for filing class action against companies–a provision which aimed at providing a redressal mechanism. According to the latest rules, an application for a class action can be filed by a member or members representing 5% of the total members of a company or by 100 members of a company, whichever is less. The same criteria will also be applicable for depositors of deposit-taking companies. In case of an unlisted company, members holding at least 5% per cent of the issued share capital can file for class action. Listed companies have a 2% threshold limit.

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Taking stock of the latest changes, Umesh Mehta, Head of Research, SAMCO Securities said that these provisions will go a long way in improving corporate governance in India, while at the same time reduce the frivolous mala-fide intent of a few individuals.

Explaining these changes, Mehta noted that in the old Companies Act of 1956, M&A procedures were encapsulated in section 396 to 400 which entitled even a single dissenting minority shareholders to challenge the acquisition. This had led to many frivolous litigations delaying the mergers/acquisitions.

“Therefore in 2013, amendments to the Companies Act introduced the concept of class action suit wherein any 100 or more members of the Company or at a minimum, 10% of equity shareholders whichever is less are required to file a class action suit against the Company,” Mehta told Financial Express Online. However, this was a very onerous condition, as bringing together these many investors was a difficult task.  Therefore, the latest changes should be helpful in protecting the interests of minority shareholders, he said.

An amendment to this effect was overdue as in many instances involving mergers & acquisitions in the past, the interests of the minority stakeholders were often ignored, noted technical analyst Milan Vaishnav. Therefore the latest provisions will help ensure that the minority interests are better able to defend their rights, he said.  “For the corporates, it will make sure that they do not overlook and disregard the interests of the minority stakeholders,” Consulting technical analyst Milan Vaishnav told Financial Express Online.

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