In a significant move, the government is readying a scheme to provide financial assistance to minority investors filing class action lawsuits under the companies law, a senior official said.
Working on ways to further bolster measures to protect the interest of investors, the corporate affairs ministry would also be encouraging investors to resort to class action suits.
Under Section 245 of the Companies Act, investors can file a class action suit in case they feel that the management or conduct of the affairs of a company is prejudicial to their interests.
The concept of the class action suit, that provides an option for investors to seek remedy as a group, is well known in Western countries.
"We are looking at class action suits. We will be soon coming out with a scheme for providing financial assistance to minority investors to file class action by using the IEPF (Investor Education and Protection Fund).
"The IEPF will introduce a scheme for reimbursing legal expenses incurred on class action," Corporate Affairs Secretary Injeti Srinivas told PTI in an interview.
The Investor Education and Protection Fund (IEPF) is managed by the IEPF Authority, which comes under the ministry.
The IEPF's accumulated corpus is around Rs 4,138 crore, according to an official statement issued last month.
"We will define the threshold such as the minimum number of members, minimum shareholding or deposits. That will be notified very soon," Srinivas said about the eligibility criteria for filing class action suits.
The push for class action suits also assumes significance against the backdrop of various instances of investors getting duped by illegal money pooling schemes as well as being impacted by corporate governance issues and fraudulent practices at some companies.
According to the secretary, a class action is not easy, as there is information asymmetry.
"Minority investors are not well equipped to pursue a class action. There is provision for disgorgement also... Class action suit is an important way to empower minority shareholders who are worst sufferers," he said, adding that the rules would be notified at the earliest.
"Auditors, credit rating agencies, everybody would be liable to a class action. Minority investors who are suffering should resort to class action suits, which is provided for in the Companies Act. We will certainly do whatever is necessary to encourage investors to resort to a class action," Srinivas said.
Among others, if statutory auditors have been callous and negligent, endorsing falsified statements, the investors can certainly proceed against them with a class action.