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Lack of timely resolution, legal costs may hold back class action suits



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A combination of legal costs, which would be significant for minority shareholders, and the lack of timely resolution may stymie the use of class action suits for some time to come.

Shareholders are likely to continue voting with their feet when faced with issues in their companies, according to experts. News of shareholders of a large conglomerate, reportedly planning class action suit against an auditor whose resignation allegedly led to a decline in share price, may well mark more of an exception than the rule.

A class action suit allows depositors or shareholders to collectively seek compensation following wrongdoing by a company, its directors, auditors or any other consultant.

Shriram Subramanian, founder and managing director of domestic proxy advisor InGovern Research Services, said such suits would catch on if there are investors who wish to pursue these to their logical conclusion and are willing to bear the costs of extended litigation.

Lack of timely resolution, legal costs may hold back class action suits

“If there is a motivated shareholder, then it may come into the picture,” said Subramanian. But such investors may not be common, he added.

This is more likely to happen with those having concentrated portfolios. Institutional investors, with 100 or more companies in their portfolio, are unlikely to lead the first forays into such class action suits, said Subramanian. They are more likely to seek an exit in the stock market rather than a protracted legal battle over company decisions that they feel would negatively impact shareholder value.

There have been a few instances in recent times where companies have backtracked following such a fall in share prices.

Sun Pharmaceutical Industries had to clarify on governance issues after fresh allegations of impropriety led to selling pressure in January 2019. The stock had fallen to a six-year low.

Jubilant FoodWorks, which runs Domino’s Pizza India and Dunkin’ Donuts, retracted a decision by the company to pay owners royalty for the use of the Jubilant brand in February 2019. The stock fell 6.45 per cent, and the decision was retracted within hours of the announcement.

Automotive component manufacturer Endurance Technologies fell 20 per cent on August 8 after it announced that it would get into tyre manufacturing. The company subsequently reversed its decision.

The Ministry of Corporate Affairs threw light on norms on May 8. The rules now put a clear threshold on who can file a class action suit in the National Company Law Tribunal (NCLT). The NCLT is a body which deals with company-related cases.

The lower of 100 shareholders, or 5 per cent of the total number of shareholders by number, can now collectively file a suit. It can be also be filed by any shareholder or group of shareholders who collectively own 2 per cent of the total stake in the company.

Meanwhile, cases have also been taking time to make their way through the NCLT, which may further deter minority shareholders. Minister of Finance and Corporate Affairs Nirmala Sitharaman had said in a recent Parliament session that efforts were ongoing to unclog the tribunal.

The success of class action suits will also depend on factors such as how soon such cases will be decided and the ability of members or depositors to fund the costs and expenses of litigation, according to Yogesh Chande, partner at legal firm Shardul Amarchand Mangaldas.

“It will also depend on the willingness of law firms to take up such matters which can’t be contingency- or success-based, considering how advertising is currently prohibited,” said Chande.

Law firms in other countries are allowed to advertise and take fees based on the results that they deliver. This allows them to take up class action suits without any upfront payment, lowering the entry barriers for litigants.

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Market Updates

Sitharaman’s sops for NBFCs may perk up lending, ease liquidity stress



Illustration by Binay Sinha

To further ease the liquidity stress in the non-banking sector and nudge them to revive their lending activities, Finance Minister (FM) Nirmala Sitharaman on Friday announced a slew of measures for non-banking financial companies (NBFCs) and housing finance companies (HFCs). The government hopes this will result in more credit support for purchase of houses, vehicles, and consumption goods.

The government has provided additional support of Rs 20,000 crore to the stressed housing finance companies from National Housing Bank (NHB). With this, the additional liquidity support for the HFCs from NHB has gone up to Rs 30,000 crore.

In the Union Budget last month, the FM had encouraged public sector banks (PSBs) to buy high-quality pooled assets of NBFCs up to Rs 1 trillion for which the government would provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent.

The Reserve Bank of India (RBI) had also chipped in by tweaking banks’ bond-holding norms. This will allow banks to borrow an additional Rs 1.34 trillion exclusively for buying such pooled assets and giving loans to NBFCs. The FM on Friday said this partial credit guarantee scheme will be monitored at the highest level in each bank. Through this, it is expected that many of the assets will get quickly pooled and NBFCs will receive the necessary liquidity. “NHB has already settled some of the issues. NBFCs are receiving money from the banks and are moving towards funding,” said Sitharaman.

Sanjaya Gupta, managing director, PNB Housing Finance, said “This will support growth and ease the liquidity crunch. HFCs will now get an additional Rs 20,000 crore from NHB. The initiatives have potential to kick start the real estate sector.”

The government has also permitted NBFCs to use Aadhaar-authenticated bank KYC to avoid repeating the same process when a customer approaches it for credit. This has been a long-standing demand. The necessary changes in the Aadhaar regulations and Prevention of Money Laundering Act rules will be made, the FM said.

“This will streamline the process and also reduce frauds,” said Raman Aggarwal, chairman, Finance Industry Development Council.

The government has also asked PSBs and NBFCs to fast-track their collaboration to provide credit to micro, small and medium enterprises, small traders, self-help groups, and micro finance industry client borrowers.

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PACL Case: Sebi panel invites expression of interest for 28,974 properties




A committee headed by Justice R M Lodha has invited expression of interest (EoI) from prospective buyers for a total of 28,974 properties belonging to PACL Group.

Market regulator Sebi had set up a committee headed by former Chief Justice of India R M Lodha following a Supreme Court order to refund money to investors in the matter of PACL Group.

As per the notice issued by Sebi, the committee has divided the total 28,974 properties belonging to PACL group in four zones — east, west, north and south — with maximum properties being located in the southern zone.

Regarding PACL properties, the apex court’s order dated July 30 observed “we also leave it open to the committee to receive any further offers and to explore them after duly publishing a further notice on the website,” the notice said.

In pursuance of apex court’s order, the committee “invites Expression of Interest from prospective buyers clearly indicating therein, list of properties in each zone, its circle rate, the offer amount and other relevant details,” the Friday notice said.

“The proposal should be for properties in each zone aggregating in value not less than Rs 1,000 crore,” the notice added.

The notice further said that the last date of receipt of proposals is September 9.

PACL, also known as Pearl Group, had raised Rs 60,000 crore from public in the name of agriculture and real estate businesses and was found by Sebi to have collected these funds through illegal collective investment schemes over 18 years.

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Improved market access for domestic retail investors with Aadhaar-based kYC



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The government will allow Aadhaar-based KYC for domestic retail investors, and necessary amendments to the rules under the Prevention of Money Laundering Act will be issued.

Announcing a slew of measures to boost the economy, the government said the Depository Receipt Scheme 2014 is expected to be operationalised soon by Sebi. “This will give Indian companies increased access to foreign funds through American Depository Receipt (ADR)/ Global Depository Receipt (GDR),” she said.

In order to improve market access for the domestic retail investors, Aadhaar-based KYC will be permitted for opening of demat account and making investment in mutual funds. In this regard, necessary notification for amendments in PMLA rules would be issued.

Besides, steps would be taken with regard to offshore rupee market.

“To bring offshore rupee market to domestic stock exchanges and permit trading of USD-INR derivatives in GIFT IFSC, Ministry of Finance is working with RBI to introduce this measure shortly,” the government said.

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