Aggrieved investors can file class action suits: NCLT

Aggrieved investors can now file class action lawsuits against corporates for misdoings and even seek compensation from auditors concerned, following the establishment of the National Company Law Tribunal (NCLT).

The move, which would enable a group of 100 or more investors or depositors to come together for filing such suits under the Companies Act, is expected to further help in protecting the interest of shareholders in case of violations and mismanagement at the firms concerned.

The concept is very popular in many foreign jurisdictions but there has been no such provision in India.

While most provisions of the Companies Act, 2013 came into force from April 1, 2014, the provision pertaining to class action suits under the Act was not operative till the Tribunal came into existence this month.

After much delay, the constitution of NCLT and its Appellate Authority was notified with effect from June 1 by the Corporate Affairs Ministry.

Section 245 of the Act provides for class action suits, which can be filed by a group of shareholders or depositors before the Tribunal.

Through class action suits, shareholders can seek to restrain the company from committing an act which is ultra vires the articles or memorandum.

Among other provisions, compensation can also be sought from the auditor of the company for any misleading statement of particulars made in the audit report or for any other fraudulent activities.

Sai Venkateshwaran, Partner and Head (Accounting Advisory Services), KPMG in India, said that two classes of people -- shareholders and deposit holders -- can initiate class action suits.

Noting that an individual investor cannot move such a suit before the tribunal, he said there should be at least 100 members or depositors in order to file it.

Notifying constitution of NCLT and National Company Law Appellate Tribunal (NCLAT), the Ministry said there would be 11 benches of the Tribunal initially in different cities.

Venkateshwaran said NCLT would help in streamlining a lot of actions related to companies and there would be dedicated tribunals looking at matters under the Companies Act.

NCLT would have the powers to allow inspection of minutes book of general meeting as requested by a member in a situation of refusal or default, PwC India said in a note.

"Re-opening of accounts to be done only on approval of the tribunal. Approval of the tribunal required for voluntary revision of financial statements or board's report," it added.

NCLT has replaced the Company Law Board, which was set up under the Companies Act, 1956.

Insolvency matters would also come to the Tribunal once the new bankruptcy law is implemented.

According to PwC India, the Ministry may gradually notify provisions relating to powers of High Court under the Companies Act in respect of reduction of share capital, winding-up and compromise or arrangement (merger/demerger) and these matters may get transferred to NCLT later on.

Justice S J Mukhopadhaya, Judge (Retd), Supreme Court of India, has joined as NCLAT Chairperson while Justice M M Kumar, Judge (Retd) has become President of NCLT.