Stung by the accounting manipulations in Satyam Computer Services Ltd, the government is readying a stringent set of rules and norms that would arm even small investors to fight for their rights collectively through “class action suits”.
The government will shortly introduce a new Companies Bill in Parliament. The previous one, which was introduced in October 2008, lapsed after the Lok Sabha was dissolved.
The new Bill, a draft copy of which is with Hindustan Times, contains specific clauses allowing “articulation of shareholders democracy with protection of the rights of minority stakeholders and responsible self-regulation with disclosures and accountability.”
“Shareholders associations or group of shareholders will be enabled to take legal action in case of any fraudulent action on the part of the company and to take part in investor protection activities in class action suits,” the Bill said.
Under current norms, a person who holds shares worth Rs 1 lakh or less in a company is categorised as a small investor. However, while large investors can question corporate strategies through voting rights and other means, small investors do not have any specific instrument to hold promoters of companies accountable under existing laws.
The provisions of class action suit are aimed at suitably empowering small and minority stakeholders in case of any wrongdoing by promoters or management of a firm.
A class action or a representative action is a form of lawsuit where a large group of people collectively bring a claim to court.
Additionally, the Bill has also proposed several new provisions. It sets new accounting and auditing standards, defines the role, rights and duties of auditors so as to maintain “integrity and independence” of the audit process and defines the role and responsibilities of an independent director.
An “independent director” should be a person of integrity with relevant experience and should not have any monetary relationship or transaction with the company, its subsidiaries, or promoters. A single forum for approval of mergers and acquisitions along with a shorter merger process for holding and wholly-owned subsidiary companies has also been introduced in the Bill.