Workshop on October 28, 2009 at India Habitat Centre

Topic: Companies Bill, 2009: Class Action Suit & Compensation.

Fraudulent acts have been committed from time immemorial. Regardless of laws, human ingenuousness always finds ways to circumvent it. The Indian corporate sector and Securities Market is no exception, and, over the years, has had its share of frauds. The recent Satyam episode has sharply brought into focus the gaps in law (s) to deal effectively with such a situation, post event, viz. compensation to the cheated investors by those who perpetuated the fraud.

In India, the concept of compensation is yet to take root. The Companies Act, 1956 does not contain any such provision. Similarly, SEBI Act and Securities Contracts (Regulation) Act, 1956 do not contain any provision for compensation to investors in case of frauds or any unfair trade practice. The Consumer Protection Act, 1986 empowers a consumer to seek compensation / damages for fraud, unfair trade practice, deficiency of services etc. It empowers “one or more consumers, where there are numerous consumers having the same interest, with the permission of the District Forum, on behalf of, or for the benefit of, all consumers so interested” to file a complaint. The Act has also empowered any recognized consumer association to file a complaint on behalf of a consumer even if the consumer is not a member of the association. However the complaints are to be disposed of through summary procedure. This virtually rules out adjudication of complaints relating to large scale frauds, under the Act.

The Companies Bill 2009 was introduced in the last session of Parliament. Clause 212 to 217 of the Bill deals with “Prevention of Oppression and Mismanagement”. Under Clause 212, any member can move an application to Tribunal in cases of oppression and mismanagement for order to repay or restore the money / property or pay compensation to the company for misapplication, retainer, misfeasance or breach of trust.

This provision does not empower the shareholder of the company to seek and/or get compensation in the event of fraud or breach of trust or misfeasance committed by the management.

In Clause 216 Class Action is dealt with. Clause 217 extended the provisions of Clauses 312 to 316 to the applications made under Clause 212 or Clause 216. Clauses 312 to 316 interalia provides for imposition of penalty on officers for frauds, liability where proper accounts are not kept or fraudulent conduct of business and power of tribunal etc.

In order to protect interest of investors, a large number of countries have incorporated the concept of compensation to defrauded investors in their corresponding Companies Act and Securities laws. In USA, the Securities Laws have empowered defrauded investors to get compensation from the errant parties. Where the number of investors is large, in a single issue, a provision of “Class Action Suit” has been made wherein the decision of the court benefits all the investors in that class, through a single order. In addition, Securities and Exchange Commission, the regulator, can also enforce action and get damages / compensation, which can be distributed amongst the affected investors. The system adopted has been effective which is evidenced by the huge amount of compensation paid to investors, over the years, for various types of frauds and misleading / incomplete disclosures. This has been largely facilitated through settlements—arrived at mid-way during the proceedings—between the plaintiff and the defendants and accepted by the respective courts.  

The theme of the workshop is to discuss:

“Defrauded shareholders should have a right to claim, and get, “Compensation”, directly, from the errant in case a fraud has been perpetuated on them. This may be done either individually or collectively as a group, by way of “Class Action Suit”.