Class-action suits come to Indian markets, finally

By Andy Mukherjee

Eight years ago, India borrowed a powerful idea from the American legal system to help the country’s besieged minority investors level a playing field that’s heavily tilted against them: class-action suits.

It’s only now that the tool is finally being put to use. Two separate challenges are being heard by India’s company law tribunal. The future of corporate governance in the most-populous nation may depend a great deal on the jurisprudence that gets developed while deciding them.

The controlling shareholders — or “promoters,” as they are known locally — have a long history of exerting influence significantly in excess of their capital contribution. Earlier, any small investor who felt robbed or cheated by their overreach would have to protect her own individual interest at a prohibitive cost.

But following the insertion in 2016 of a class-action provision in the Companies Act, a number of them could, in theory, come together and seek compensation from the company, its directors, auditors and even external consultants for acting in bad faith. The tribunal might order the legal costs to be defrayed by the company or any other person responsible for the oppression.

Yet, the remedy remained untested. Initially, it was because nobody knew the thresholds. That problem was resolved in 2019 when it was decided that at least 100 investors — or shareholders owning 2 per cent or more of a publicly traded firm — were sufficient to constitute a class. This was more liberal than other (non-class-action) provisions in the law against oppression and mismanagement that required at least 100 investors, or 10 per cent of ownership interest.

Just what can be litigated under the class-action code is also in dispute. Take the very first case, involving New Delhi-based Jindal Poly Films Ltd. Ankit Jain and two other shareholders, owning about 5 per cent of the firm, have alleged that the B C Jindal Group, the promoter, has caused the maker of flexible plastic films a loss of Rs 2,778 crore through various related-party deals. After the suit was filed in March, the company told the stock exchanges that it wouldn’t be appropriate to comment on the merit of an ongoing petition. The plaintiffs want the transactions canceled. Or, they want the promoters to make Jindal Poly Films, which has a market value of Rs 2,219 crore, whole.

Jindal’s lawyers claimed last week at the tribunal that class-action law is about current, ongoing issues, such as restraining a company from doing something wrong. It is not meant for past, concluded acts. They also disputed the suit on the grounds that the petitioners are trying to get relief for the company when they’re only permitted to seek damages from it — for their class of investors.

The plaintiffs’ lawyers argued that the Indian law, though it may have its origin partly in American jurisprudence, is intended to have a much wider application. Setting aside illegal related-party deals has the same effect as preventing a company from entering such arrangements. Besides, the law allows investors to seek damages not just from the company but “any other person,” which is what petitioners are doing by asking that the promoters give back what they have taken from minority shareholders of Jindal Poly Films.

The tribunal has asked the parties to come back in July. That’s just as well. It’s all rather complex and novel even for the judges who are more familiar with US consumer class-action suits, thanks to Julia Roberts’ Oscar-winning portrayal of Erin Brockovich, the legal clerk who successfully built a large groundwater-contamination case against PG&E Corp. Class action in securities law is more prosaic, by comparison.

But it may be no less important. The Jindal Poly Films case will be watched keenly for establishing the domain of class action in India. Ditto for the lawsuit brought by Manu Rishi Guptha and other minority shareholders of ICICI Securities Ltd. last month against the company and its promoter, ICICI Bank Ltd. More than 100 public, non-institutional investors have come together to challenge the validity of a shareholder vote in March, approving the delisting of ICICI Securities, which is being swallowed by its banking parent.

The petitioners’ contention is that the merger ratio is skewed against the shareholders of the brokerage firm, and that their class of investors has lost more than Rs 1,669 crore. ICICI Securities and ICICI Bank have said that the terms of the merger were determined by independent valuation experts, and the pricing was found to be fair by multiple proxy advisory firms.

While deciding the two landmark cases, the tribunal must avoid copying American jurisprudence blindly. The all-powerful Indian promoter, whether family-run or otherwise, carries the DNA of now-defunct managing agency, a 200-year-old system for separating control from ownership invented in India during the British Raj, well before the advent of the executive-led corporation in the US.

The managing agencies exercised control well beyond their skin in the game. They stuffed corporate boards with family and friends and rode roughshod over other investors — a dubious legacy carried forward by modern promoters. The only check on their errant behavior may be to make them pay. If class-action suits can help do that, then investors globally will enjoy the fruit of better governance in an increasingly important market.