Clearing the way for class action

Rohit Mahajan | Updated on February 03, 2013

Without the promise of expeditious disposal, class action lawsuits may lose their attraction for small investors.

Companies Bill 2011, which was recently passed by the Lok Sabha, prescribes several new guidelines for corporate governance. The one that permits filing class action suits against companies has, in particular, raised curiosity amongst businesses and the public.

These lawsuits, prevalent in more litigious societies like the US, are representative actions through which people or companies can collectively bring a claim to court, or in which a class of defendants is being sued. The objective is to empower end-users and safeguard their interests. But can class action suits be potent enough to help investors in India claim damages from fraudulent companies?

Let us take the example of the Satyam Computer accounting fraud, one of the largest in India in recent times. When the company collapsed, it eroded the wealth of countless Indian investors. However, these investors were unable to stake any claim on the $125 million settlement that their US counterparts were able to on the back of several class action suits.

By allowing class action suits in India, small networth investors can get together and file for claims against erring companies, irrespective of the extent of individual investment.

Class action suits can be used in several other circumstances too. An example is the Fraley vs. Facebook Inc suit, which alleged that the social media giant had violated users’ right to privacy by sharing their personal details with advertising platforms without their consent. Although Facebook denied any wrongdoing, it agreed to a $20 million settlement. Critics may contest the effectiveness of the class action lawsuit in terms of an out-of-court settlement, which limits its scope of reaching out to millions of potentially exploited users. But in terms of the intangible valuation of Facebook, the settlement can be seen as a symbolic triumph of individual rights.

A more comprehensive class action lawsuit settlement was reached between British Petroleum and the residents and businesses affected by the ‘Transocean Deepwater Horizon’ oilrig spill in the Gulf of Mexico on April 20, 2010.

Around 80 class action suits were filed by fishermen, hotel operators, landowners, rental companies, seafood processors and restaurants, claiming damages for current or potential loss of business due to the oil spill. Some suffered economic and property damage while others had medical claims arising from the oilrig explosion that spilled more than 4 million barrels of oil into the ocean. Without the class action suit, the affected residents and businesses may not have been able to individually claim their share of the damages.

The very nature of a class action lawsuit makes it potent enough to help investors claim damages from fraudulent companies. However, in the Indian context, the lawsuit may lose effectiveness unless handled a bit differently. Without the promise of expeditious disposal, class action lawsuits may lose the momentum at the initial stage itself, failing to encourage small investors to take the plunge. The nuances of out-of-court settlements can be structured and subsequently evolved once class action lawsuits deepen roots here.

The victims of the Bhopal gas tragedy who were unable to fully prosecute a class action litigation against Union Carbide due to procedural rules, took recourse in the Indian Government’s right of parens patriae to appropriate all the claims, with the Government proceeding to litigate on their behalf.

However, with the rising complexity of cases, such as the NGO Midas Touch Investor Association’s petition to the National Consumer Disputes Redressal Commission seeking compensation on behalf of Satyam investors, alleging that they were misled into buying the shares at a manipulated price, class action lawsuits are the need of the hour in India.

Rohit Mahajan is Partner and Co-Head of Forensic Services, KPMG in India

Sushmit Bhattacharya Associate Director — Forensic services KPMG in India contributed to the article.

Published on February 03, 2013

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