Once enacted, the provision will empower shareholders to hold companies and their managements responsible for wrong-doing.
Though the principles of class or representative action (and derivative suits) by shareholders against managements have been upheld by various Courts in the past, these are yet to be reflected in law.
Accordingly, the ministry of corporate affairs (MCA) headed by Prem Chand Gupta has circulated a Cabinet note containing the class action clause for inter-ministerial consultation.
"We hope it will be cleared by the Cabinet soon, allowing us to table the Bill in Parliament in the coming session," an official told Business Standard.
The need to codify class action and derivative suits in Indian law had been recommended by the J J Irani-headed expert committee, which had been tasked with framing a new company law in December 2004. It submitted its report to the MCA on May 31, 2005.
Since then, the ministry has been working on the new law, which aims to update India's corporate laws and make them globally competitive, transparent and investment-friendly.
Corporate lawyer Naveen Goel said the current law enabled people to file public interest litigation that was limited to the violation of fundamental rights and not for civil claims or torts (the latter being the body of law that governs negligence, intentional interference and other wrongful acts for which civil action can be brought).
"This is the first such instance of a class action provision in Indian corporate law," he added.
"This will empower consumers and investors, and discourage sharp practices by certain companies. A codified law is always easier to implement and be enforced in a court. Plus, it removes ambiguity and establishes the unequivocal intent of Parliament. Courts in India have always leaned in favour of giving effect to the law as framed by the legislature," said leading corporate lawyer Ramji Srinivasan.
Class action is common in the developed world, particularly the United States and Europe. In the US, tobacco companies have had to bear massive awards in giant class action suits that held them responsible for misleading smokers about the harmful effects of cigarettes.
Noted lawyer Pavan Duggal said companies will have to start preparing for similar class actions suits in India and set aside funds for meeting any eventualities. "Tobacco, alcohol, drug firms and infotech companies face a high risk for class action," he said.
Another lawyer said one emerging area for class action suits could be mobile handset companies.
"Some studies claim that there are ill-effects from sustained usage of mobiles. Till now there is nothing firm on this, but a few years later it will become possible to claim damages," he said.
UNITED WE GAIN
Class action allows shareholders and consumers, especially smaller ones, to band together and claim damages for wrong-doing
Such suits will lessen the burden on Indian courts, as a large number of lawsuits can be clubbed together, allowing one judge to hear them
Clubbing cases will also lower litigation costs and overcome the problem of small recoveries (awards), which discourages an individual from filing a solo action to protect his or her rights