Bhumesh
Government arming minority shareholders by funding class action suits
Bhumesh Verma 16 May 2019

Government arming minority shareholders by funding class action suits

Minority shareholders are the foremost/worst victims of any unofficial/illegal/fraudulent act of the company management or majority shareholders.

There are certain existing laws which accord protection to legal rights/monetary interest of the minority investors. However, enforcement of these rights requires litigation or other legal proceedings - lack of funds is one of the reasons for minority investors’ inability to shield their legal rights with the succor of existing laws. Not all minority investors are financially well armored to file a class action suit to preserve their legal rights and economic interest in the company.

In this backdrop, the central government is working on formulation of a scheme to confer financial assistance on the minority shareholders who are filing class action suits pursuant to provisions of the companies’ law to ensure that the minority investors have not fall short of required financial support to preserve their legal rights.

In course of reinforcing the legal regime for protection of minority shareholders from the atrocities of majority shareholders, the Ministry of Corporate Affairs (MCA) is also taking measures to back up the investors to pursue the class action suits

The prospect of class action suit is the instance in which investors will be provided with a route to seek remedy as a group against the company for mismanagement of company business operations/unofficial siphoning of funds.

Pursuant to Section 245 of the Companies Act, 2013 investors are competent to instigate a class action suit against the company management provided that the management of company affairs or conduct of company business operations are executed in a manner detrimental to the economic interest of investors.

The underlying intent of the proposed scheme is to expedite minority investors to file class action suit by providing financial assistance via Investor Education and Protection Fund (IEPF).

Following the inception of the proposed scheme – Investors will be entitled to procure the reimbursement of legal expenses incurred for filing the class action suit.

IEPF authority will manage the IEPF which comes under the ambit of MCA. The corpus of IEPF is in excess of INR 4,000 crores.

The eligible parameters (minimum number of members, minimum shareholding/deposits) will soon be rolled out by the central government.

The primary reason for backing up the prospect of class action suit is repeated occurrence of fraudulent cases (involving unofficial siphoning of funds) causing monetary loss to investors and downgrading the corporate governance standards.

The proposed scheme will not only bolster investors to resort to class action suit but also provide the necessitated financial succor to ensure that no case of class action suit is being dropped on ground of lack of funds.

Several quarters including majority shareholders, auditors, credit rating agencies etc., would be exposed to class action suit for violating the legal rights of minority shareholders and unauthorized use of minority investors’ funds.

The scheme will certainly facilitate minority investors to pursue class action suit against the atrocities of company management and to defend their legal rights.

Companies should, therefore, be aware of the new weapon in the armor of the minority shareholders, mend their ways and conduct their business operations by striking right balance securing the respective rights and financial prospects of majority and minority shareholders – else the eventuality of class action suit looms large.
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