A Critical Analysis Of Class Action Suit With Reference To Satyam Scandal

Author: LawSphereX

Category: General Law

Published: 2026-08-23T17:03:31.421795+00:00

Updated: 2026-08-26T17:12:42.681+00:00

A CRITICAL ANALYSIS OF CLASS ACTION SUIT WITH

REFERENCE TO SATYAM SCANDAL

Rani Sindra, Kirit P. Mehta School of Law, NMIMS Mumbai

ABSTRACT

The Satyam scandal, which many refer to as India's largest corporate fraud, shocked the nation. The government's eyes were opened to systemic flaws, the need to ensure that auditors operate fairly and openly, etc. The protection of a company's minority shareholders in such a circumstance, however, was of utmost importance. The Companies Act of 2013 contained a number of provisions that the government introduced with the intention of protecting minority shareholders. The "class action suit" was one of the major elements added by this statute. When a board member acts in a way that is detrimental to the interests of the firm or its members, a group of minority shareholders have a way to complain to the tribunals. Yet, because this clause was first enacted in 2013, it is clear that it cannot apply retroactively.

The research paper deals with the meaning of class action suit and its genesis in India. The paper further discusses the Satyam scandal in detail and how it created the necessity to adopt the concept of class action suit in India. The researcher also discusses the challenges associated with class action suit in India and in the end gives suggestions to fill certain lacunae. Keywords: Class action suit, companies Act 2013, Satyam scam etc.

INTRODUCTION

In the 18th century, the United States of America was the first country to adopt the class action suit concept. The Satyam Computers Service Limited scandal necessitated the filing of a class action suit in India. Earlier no provisions were there regarding class action suits in India under the Companies Act of 1956, therefore, legislative recognition was provided in the Companies Act of 2013. The Parliament of India expressed the necessity to adopt the idea of class action suits in India as a result of the Satyam scandal. The Companies Bill, 2009 was created as a result. Eventually led to the creation of the "Class Action Suit. " Sections 245 and section 246 of the Companies Act, 2013 included all provisions for class action suits empowering impacted shareholders.

The majority of the clauses of India's Companies Act were taken from the pertinent laws in force in the United States and UK. One of them is the idea of a class action suit. The National Company Law Tribunal (NCLT) may be contacted by depositors as well as members under these enabling laws if they believe that the company's affairs are being managed against the interests of the firm and its shareholders. class action suits is also known as representative suit. “Section 245 of the companies Act, 2013 contains the concept of class action suit, wherein the neighbouring provisions have been made with a similar objective i. e, protection of interest of stakeholders”.

“As per the Companies Act, 2013, Section 245 empowers two classes of persons to file classaction suits on behalf of the members or depositors before the Tribunal: Member/Members, Depositor/Depositors, and Any class of members or depositors”. “A class-action suit can be filed against: Company, Directors of the Company, Auditors of the company, and Experts, advisors, consultants”. A class action suit is generally one that is filed on behalf of a larger group of people as

opposed to filing large number of expensive individual suits for the same claim. The Companies Act 2013 adopted this clause as Section 245 of the law. For the members and depositor to file a class action suit, there are two requirements. “The first condition is that there should not be less than 100 members of company or not less than 10% of total number of its members or not less than 1/5 of the total number of members

and the second condition is that the number of depositors should not be less than 100 or not less than 10% of total number of its depositor”.

GENESIS OF CLASS ACTION SUIT IN INDIA

Dr. Jamshed J Irani Report in India at first supported the concept of class action lawsuits (2005)1. In cases of fraud on the minority by wrongdoers in authority, the report asserts that courts have allowed derivative lawsuits since doing so would prevent the firm itself from bringing a claim in its own name. These derivative lawsuits are brought by shareholders, not in their individual capacities, in response to wrongdoing committed against the company. Courts have similarly approved the concept of "Class/Representative Action" by one shareholder on behalf of one or more shareholders of the same kind on the premise of individuals having the same locus standi. The law has not yet caught up with these beliefs, despite the fact that courts have regularly upheld them. The report emphasized how crucial it is to recognize these concepts.

Such a provision was included in the Companies Act of 2013 (which replaced the earlier Act of 1956) with the main objectives of protecting small shareholders, increasing the accountability of auditors, and preventing potential corporate fraud and scams. Including this clause was justified by the Ministry of Corporate Affairs as a way to ensure that "the shareholder feels like a king" in areas like managerial remuneration2. Yet, the circumstances that followed Mr. R. R’s confession on January 7, 2009 made it clear how vital it is for India to implement a class action procedure. The researcher will now go into great depth on the financial fraud and improper behavior at Satyam Computer Services Limited, which led to the 2013 Companies Act's addition of Section 245 as a result.

RESEARCH OBJECTIVE

The research paper has certain objectives to be followed: • To study the meaning of class action suit in the context of section 245 of companies Act, 1 Expert Committee on Company Law, Ministry of Corporate Affairs, Government of India, Report on Company Law, May 31, 2005.

2 Class Action Suits to Ensure Shareholder Democracy, The Hindu, Nov 8, 2009.

2013 and its genesis in India.

To study the Satyam scandal in detail and how it created the necessity to adopt the idea of filing class action suits in India. • To study the challenges associated with the class action suits in India. • To do the comparative analysis of application of prevention of oppression and mismanagement (section 241 to 244) and class action suit (section 245).

RESEARCH METHODOLOGY

In this research paper, the researcher has opted doctrinal research methodology. The secondary sources of data collection such as the books and various reputed journals have been used with the help of the access to the library and the software.

LIMITATION OF THE STUDY

The study's reliance on secondary data gathered from books, journals, newspaper articles, websites, and other sources could be considered as limitation of the study.

REVIEW OF LITERATURE

Sinha [2015] - In India, the phrase "shareholder activism" is in flux; it refers to the active engagement of shareholders in all facets of sound corporate governance as well as their opposition to dishonest and improper business practices. Khuntia [2014] - The weakest group within a company is its minority shareholders, and the Foss v. Harbottle rule prevents them from taking legal action. The rule's subsequent development has demonstrated that it has been applied to stifle minority opinion. The culpability for fraudulent and illegal conduct done alongside directors and specialists extends to the auditors and the firm, which is a significant implication of section 245 in this context.

Pandya [2014|] - Because of costs and adjudication delays, small and retail investors who otherwise would not have been able to pursue their rights through litigation under current remedies now have a powerful option for redress in the form of class actions.

Chen [2017] - The inclusion of the class action lawsuit clause was done so that stakeholders would have an advantage when restraining their rights. The provisions were put in place to bring parties with similar interests together on one common ground in an effort to reduce litigation costs and increase the effectiveness of the legal system.

SATYAM SCANDAL – NEED FOR CLASS ACTION SUIT

Both Mr. Byrraju Ramalinga Raju, the company's then chairman, and Satyam Computer Services, which was established in 1987 in Hyderabad, have at one point reached the peak of success. Satyam was regarded as one of the finest Indian success stories during its heyday. With a CAGR of 40%, operational profits of 21%, and a 300% increase in stock price, Satyam employed more than 50,000 people and conducted business in more than 60 countries. The business, which had a value of about billion in 2003, later exceeded $2 billion in value in 2008. In 2008, Satyam won a number of honors, including the Golden Peacock Award for "corporate accountability. " Later in 2008, the Satyam board decided to acquire "Maytas," a real estate firm controlled by Mr. B. Ramalinga Raju, but was forced to change its mind in less than 12 hours as a result of fierce shareholder resistance.

Satyam was forbidden by the World Bank from engaging in commercial transactions with any of the bank's direct connections. for a period of eight years on December 23, 2008, citing factors such as "the company providing improper benefits to the banks' staff and failure to maintain documentation to support fees charged to its subcontractors". This was regarded as one of the worst punishments the World Bank had ever imposed on an Indian outsourcing firm3. But this was merely the start of the demise of one of India's greatest success stories; by 2009, the biggest corporate scam in Indian history had been exposed. The Satyam Scandal was centered on Mr. B. Ramalinga Raju's attempts to massively increase the company's earnings in order to raise the share price on the BSE and New York Stock Exchange.

For five years, from the year 2003 to 2008, the Raju brothers inflated the revenue in the accounting records. A total of over 7,000 crores of rupees worth of the company's accounts had been fabricated. During the course of five or six years, more than 7,500 fictitious sales invoices that never happened were introduced into computers to artificially increase 3 Aron Almeida, Satyam Scam – The Story of India’s Biggest Corporate Fraud, Trade Brains (1st Oct. 2021).

Satyam's revenue by Rs. 4,783 crores. The company's books had been modified to omit some revenues and payments, which resulted in a total misrepresentation of Rs. 12,318 crores. Software was used to establish fake employee recruitments, and these fake employees' salaries were calculated on their behalf. Satyam reported sales of Rs. 5200 crores in 2008–09, although actual sales were probably closer to Rs. 4100 crores. The business used a network of 356 companies that engaged in a large number of intra-corporate advances, investments, and loans both within and among them in order to divert the money from investors around the world who bought into Mr. B. Ramalinga Raju's false portrayal of Satyam as a glorious company. There had been numerous fruitless attempts to preserve the business.

As previously noted, the final attempt to cash out Maytas Infrastructure by selling it to Satyam for around Rs. 7,800 crores also failed. According to Mr. B. Ramalinga Raju “it was like riding a tiger, not knowing how to get off without being eaten”. As these sales fell through, the gap in the company's revenues continued to widen, eventually pushing Mr. B. Ramalinga Raju to admit to the fraud when the business was no longer able to pay salaries. He had admitted that the company's accounting records showed overstated liabilities of Rs. 1230 crores and false cash and bank balances of roughly Rs. 5040 crores. One of India's most prosperous IT businesses has collapsed. Compared to Rs. 554 on the BSE and 29. 10$ on the New York Stock Exchange in 2008, the Satyam share price dropped to an all-time low of Rs. 11. 5 on the BSE and 1. 80$ on the NYSE.

Beginning in 2018, PricewaterhouseCoopers (PwC), Satyam's auditor, was prohibited by SEBI from performing audit work for any company in India for the ensuing two years4. Two days following his confession, Mr. B. Ramalinga Raju was detained on charges of criminal conspiracy, forgery, and breach of trust. On November 4, 2011, he was granted release. Later in 2015, a special CBI court sentenced Mr. Ramalinga Raju and his brothers to 7 years in prison and assessed him a fine of Rs. 5 crores5.

HOW THE INVESTORS WERE PROTECTED

Although the offenders were detained, it was important to protect shareholders' and investors' interests. As a result, the government chose the new Board of Directors to prevent the

4 Adithyan, Satyam Scam, Satyam Scandal, cleartax (Jan. 5, 2022).

5 Bobins Abraham, Ramalinga Raju and Satyam Scam: All You Need to Know, India Times (Oct. 9, 2020).

company from failing. Ultimately, Satyam Corporation was bought by Tech Mahindra. Known as Mahindra Satyam, Tech Mahindra acquired a 51% share in Satyam Corporation in

2009. Subsequently, in 2013, Tech Mahindra and Mahindra Satyam combined.

While shareholders and investors in India incurred losses as a result of the absence of a provision on class action lawsuits, the interests of their counterparts in the United States were protected by a settlement that Satyam paid out of 25 million and PwC paid out of $25.5 million6. However, Mahindra Satyam, which succeeded Satyam, was ordered to settle all remaining suits with the investor who claimed loss due to depreciation in the value of the share for 125 million dollars in the United States Tech Mahindra, which succeeded Satyam, exceeded Satyam.

CHALLENGES ASSOCIATED WITH CLASS ACTION SUIT IN INDIA

Due to numerous new changes and pieces of law that have been passed over the years, class actions— despite not being particularly popular—are being used increasingly frequently in India. PILs and class actions under the IDA have been the two most typical class action forms that have been decided in India throughout the years. However, for the reasons listed below, the idea has not been able to take off. The individual or persons addressing the court must be representatives of or representing a pre-specified fraction of the class, according to several Indian statutes that allow for class actions (such as the CPA, Companies Act, and IB Code). It is not always possible to achieve such a percentage, especially in a large class (ex: consumers of goods from major manufacturers, shareholders and homebuyers).

Cost of litigation: Class action suits in India are difficult to maintain due to a variety of litigation costs, such as stamp duty, court costs, attorney fees, and other charges. Additionally, since attorneys are not permitted to charge contingency fees, it is frequently challenging to find competent legal counsel when bringing a class action. In India, third-party funding (TPF) hasn't taken off, and the TPF framework is unclear. The courts do not forbid TPF agreements, but if they are deemed to be unfair or extortionate, they 6 Varottil, Umakanth, The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India (February 11, 2014). NUS - Centre for Law & Business Working Paper No. 14/01; NUS Law Working Paper No. 2014/001.

may be annulled. In India, litigation can be protracted and time-consuming, and the courts frequently order the losing side to cover the winning party's costs. This serves as one another strong barrier against bringing class action lawsuits without sufficient financial support.

COMPARATIVE STUDY

Distinction between the application of class action suits under section 245 of The Companies Act, 2013 and prevention of oppression and mismanagement from sections 241 to 244. Class action suit under Prevention of oppression and mismanagement from section 241 to 244 section 245 Application is Members as well as deposit Company’s members filed by whom? holders of the company Whom can an application be Any director, auditor (including Against the company and audit firm expert), advisor, consultant, or other representative its statutory appointees made against? of the corporation may bring a claim against it.

In order for class action lawsuits to be a real possibility in India, this needs to change for the public interest of the country. • Small and retail investors would be disadvantaged by the set threshold of minimum members to begin a class action suit in India because they are in the minority and easily can be silenced by the dominant shareholders. They cannot, therefore, be disregarded on the grounds that they could not fulfil the necessary requirements. Sometimes, individual concerns are taken into account. • In some circumstances, due to the overcrowding of the investors in a class action suit leads to tiny proportion of compensation granted to them compared with the damages caused to them and in such cases the members must be equitably rewarded.

• The funding of class action lawsuits was not addressed in the Companies Act of 2013, and SEBI is required to establish an appropriate structure for that funding as well as to guarantee that the Investor Education and Protection Fund is used effectively.

CONCLUSION

In terms of the viability of a class action suit in India, initially, prior to the implementation of The Company Act, 2013, it was difficult to obtain judicial recourse in any circumstances, such as the Satyam case. However, with the implementation of Company Law 2013, it has become very viable in the context of the Indian judicial system. In contrast to the early days, when the only option was a civil suit, which was not at all viable being highly time and cost consuming, people have started choosing these class action suits since they have received an additional ground while fighting against any abuse of powers by the company management.

The incorporation of class action suit is a positive step for Indian society in general and the corporate sector in particular, but its success in the sector is still uncertain due to the exclusion of major stakeholder groups, primarily creditors, bankers, and debenture holders. The removal of banks from the purview of this part was one of the additional factors that hampered the community. Furthermore, since they are not permitted to register a complaint under this law, which has drawn heavy criticism across India, even the regulatory agencies have been excluded from the purview of class action lawsuits. It is possible to draw the conclusion that

in addition to the technological and procedural aspects, other modifications are necessary for the class action lawsuit concept to be more successful in India.

REFERENCES

Shah, V. (2018) Class Action Suit in India viz. International Perspective. South Asian Law Review Journal (SALRJ). (Accessed: July 4, 2024). • Majumdar, A.B. and Bhawnani, S. (2016) Class Action Lawsuits - Genesis, Analysis and Comparison. ResearchGate. (Accessed: July 4, 2024). • Kumari, M. (2021) Role of class action in corporate governance, Social Science Research Network (SSRN). (Accessed: July 4, 2024). • Dang, R. and Sharma, N. (2015) Class Action Suits: A tool of togetherness. RET Academy for International Journals of Multidisciplinary Research (RAIJMR). (Accessed: July 4, 2024). • Garg, A.V. (2019) A Jurisdictional Analysis of Class Action Suits under Section 245 of the Companies Act, 2013. International Journal of Legal Science and Innovation (IJLSI). (Accessed: July 4, 2024).

Indian Journal of Law and Legal Research Volume VI Issue III | ISSN: 2582-8878