Recent developments in the Indian corporate sphere - Satyam being the prime example – have raised several calls for instilling the culture of shareholder activism in
The Economics of Class Actions
Class actions are most prominent in the
First, the permissibility of contingency fees in the
Second, in the
Therefore, plaintiffs and their attorneys have significant incentives to bring lawsuits against errant companies in the
Indian Law and Practice
At the outset, it is necessary to deal with a misconception that class actions are not possible in
Given the current disposition under Indian law that carries disincentives against class actions, SEBI has recently taken steps to create a class action mechanism. In the recently issued SEBI (Investor Protection and Education Fund) Guidelines, 2009, SEBI has the retained the power, in rule 5(2)(d) to aid investors’ associations recognised by SEBI to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed. The expression “aid” in this context is quite wide, and this could include the provision of funding to investors’ association to initiate class actions. A report in today’s Business Standard indicates that SEBI proposes to fund class actions on behalf of investors utilizing this legal provision. The report also contains some details regarding SEBI’s thought process on the types of actions that will be funded as well as other modalities.
As funding has been identified as the key incentive to the creation of a class action mechanism, SEBI’s proposal may help create that incentive in
Apart from procedural aspects, there may have to be changes to securities laws if class actions are to be successful. The current rules on several fronts, particularly in areas such as price manipulation and insider trading require plaintiffs to discharge a fairly high burden of proof. Encouraging class actions alone may not be enough, and it may be necessary to address some of the substantive and evidentiary issues as well.