Class action lawsuits are like unicorns: valuable but rare

Similar provisions have been included in the Consumer Protection Act, 2019 and the Competition Act, 2002. In addition, class actions are often referred to as Public Interest Litigation (PIL) under Articles 32 and 226 of the Constitution. However, none of these laws explicitly deal with shareholders as a group.

In a groundbreaking move, India introduced class actions and subsequent actions by shareholders through Section 245 of the Companies Act in 2013. Surprisingly, this provision remained largely theoretical for 11 years, with only two cases – Jindal Poly Films and ICICI Securities Ltd – being filed.

A class action lawsuit allows a large group of people with similar interests to bring a lawsuit together in court. This group is called a “class.” Class action lawsuits have enormous potential to protect minority shareholders, depositors and investors from corporate wrongdoing.

Fighting as a group allows them to secure better legal representation, share litigation costs, and pool their knowledge and experience to build a strong position. In a country where litigation is expensive and lengthy, minority shareholders are often at a disadvantage against the vast legal and financial power of corporations. In such cases, a class action lawsuit backed by the strength of many is likely to be taken seriously by companies and courts.

The greatest challenge remains the high cost and length of legal proceedings, coupled with the apparent reluctance of Indian courts to award significant damages and penalties.

In recent years, the Indian stock market has witnessed a significant influx of retail investors. This boom is complemented by an increasing number of companies listing their shares publicly. Shareholder activism, which aims at better corporate governance and includes scrutiny of management actions, has also increased.

This typically happens when shareholders believe the company is being poorly managed, potentially causing financial loss or societal harm. Shareholders whose rights have been violated or who believe the company is being managed in a way that is detrimental to their interests can file a class action lawsuit.

Such litigation provides an important remedy against violations of minority rights by enabling collective action against corporate misconduct. The existence of this provision thus promotes higher standards of transparency and accountability in the Indian corporate world.

While such actions can help to level the playing field, to be truly effective, class action provisions must cover all categories of minority shareholders affected by mismanagement.

Two amendments have allowed class actions to take a small step forward. A 2016 amendment to the Companies Act simplified the procedures and eligibility criteria for filing class actions. In May 2019, new thresholds for defining a “class” under Section 245 were announced.

An eligible class may now consist of 5% of members holding 5% of the issued capital of an unlisted company or 2% of the issued capital of a listed company, or 100 members, whichever is lower. Similarly, 5% of the total number of depositors or total deposits, or 100 members, whichever is lower, would constitute a class.

However, creating a pool of 100 shareholders is still a challenge. India could follow Western practices and further simplify these requirements. The US, for example, does not require a minimum number to form a group; Australia requires only seven, while in Canada a single shareholder can file a lawsuit.

Introducing contingency fees for lawyers, paid out if they win, would give them an incentive to recruit 100 people to a class action. This would require a departure from the current permitted remuneration structure for lawyers, which does not allow contingency fees. To reduce the risk of exploitation by an errant lawyer, all contingency fees should be disclosed and monitored by the Bar Council.

However, in order to strike a balance and prevent frivolous class action lawsuits, the judiciary must also impose fines on the parties to such cases and on lawyers with contingency fees.

Overall, courts and government need to be more accommodating to class action lawsuits. Without comprehensive legal reform, true class action lawsuits will be limited to individual cases where someone takes the lead and financial responsibility.

Class actions in India have the potential to democratise access to justice and hold powerful actors to account. However, class actions have not been received with the enthusiasm they deserve. For minority shareholders in particular, class actions could provide a speedy legal process to obtain justice.

The introduction of expedited trials for class actions would strengthen citizens’ confidence in the concept and the justice system as a whole.

The urgency of introducing class redress in India cannot be overemphasized, especially as the Indian economy continues to grow and become more integrated into the global economy. Effective class redress mechanisms can significantly increase corporate accountability, thereby enhancing investor confidence and attracting more foreign investment.