Claims

General climate

Describe the nature and extent of securities litigation in your jurisdiction.

The Companies Act 2013 (the 2013 Act) provides for a statutory cause of action to any person who has subscribed for securities of a company offered through a prospectus and has suffered losses by relying on any statement in the prospectus that was untrue or misleading or owing to omission of any matter in the prospectus. However, rarely has any such litigation been initiated in the recent past.

In addition to the above, securities litigation also arises owing to enforcement actions initiated by Securities and Exchange Board of India (SEBI), being the securities market regulator in India. SEBI has the power to conduct investigations and pass orders prohibiting individuals or entities who were involved in matters pertaining to market manipulation and price rigging, issue-related manipulation, insider trading, takeovers and other matters.

Most of the securities litigations in India have dwelt upon the enforceability of restriction on transfer of shares of the company until substantial provisions of the 2013 Act were brought into force. Prior to the coming into effect of the 2013 Act, the Companies Act 1956 (the 1956 Act), which was the governing statute dealing with shares and securities, provided that the shares or debentures and any interest therein of a company shall be freely transferable subject to the provisions of the 1956 Act. Commercially, restrictions on transfer of shares are common and often form the basis of joint venture or investment arrangements. The enforceability of restrictions on transfer of shares of the company was unclear following the rulings of various High Courts in India. There was considerable confusion on whether restrictions on transfer of shares of a public company are enforceable if these are not included in the articles of association of the company. This position was settled by the 2013 Act, which permitted share transfer restrictions between inter se shareholders of the company under a contract.

In addition, the central government in 2015 also notified the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015 (Commercial Courts Act) pursuant to which commercial courts have been established to expedite adjudication of matters arising out of various commercial transactions including joint venture agreements and shareholders’ agreements.

There have also been litigations involving oppression and mismanagement. The 2013 Act provides a right to the shareholders of the company to approach the National Company Law Tribunal (NCLT) in case of oppression and mismanagement. Pursuant to the 2013 Act, shareholders constituting not less than 100 members of a company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company may approach the NCLT to complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and to accordingly seek specified reliefs.

Further, with the notification of the Insolvency and Bankruptcy Code 2016 (IBC), which is meant to introduce a time-bound and systematic mechanism for resolution of insolvencies while ensuring that the interests of all stakeholders are protected, questions have arisen in situations of a conflict between the non-obstante provisions of the IBC and enforcement powers of SEBI, especially during the moratorium period under the IBC.

Available claims

What are the types of securities claim available to investors?

Section 35 of the 2013 Act provides for statutory cause of action to any person who has subscribed for securities of a company offered through a prospectus and has suffered losses because of relying on any statement in the prospectus that was untrue or misleading or owing to omission of any matter in the prospectus. An investor can make a claim for compensation under section 35 of the 2013 Act against the company, its directors, promoters, expert referred in the prospectus and any person who has authorised the issue of prospectus. This statutory right is in addition and does not diminish or reduce the right of an investor to file a criminal complaint under sections 34, 36 and 447 of the 2013 Act.

The provisions of the 2013 Act do not omit or diminish any liability that any person may incur under general law or under other provisions. The investor is entitled to terminate his or her contract for subscribing the securities of the company and seek repayment and compensation under the provisions of the Indian Contract Act 1872 (the Contract Act) if there is a misrepresentation or an omission in the prospectus.

Shareholders of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members can approach the relevant forum for specified reliefs provided that such members are eligible to file such complaints in terms of the provisions of the 2013 Act. Further, such specified number of members or depositors or any class of them can initiate a class action suit if they are of the opinion that the management or conduct of affairs of the company are being conducted in a manner prejudicial to the interest of the company, its members or its depositors, and may, inter alia, seek appropriate reliefs against the company, its directors, auditors, or any expert, adviser or consultant for any fraudulent, unlawful or wrongful act or conduct.

As an additional protective measure for listed companies, SEBI has formulated the SEBI Complaints Redressal System (SCORES), which mandates all listed companies to redress the grievance of the shareholders raised on the SCORES platform and inform them about the steps taken within 30 days of the receipt of the complaints. The company failing to file the action taken report under SCORES within 30 days as aforesaid is liable under the provisions of Securities and Exchange Board of India Act 1992.

Offerings versus secondary-market purchases

How do claims arising out of securities offerings differ from those based on secondary-market purchases of securities?

In the case of secondary market purchases, the investor would have a remedy under section 36 of the 2013 Act, which is a generic provision covering all instances of misstatements or fraud.

Section 35 of the 2013 Act provides for statutory cause of action for misrepresentation in the prospectus as discussed in question 2. Under section 36 of the 2013 Act, any person who knowingly makes any statement, promise or forecast that is false or misleading or deliberately conceals a material fact to induce an investor to purchase securities would be guilty and liable for consequence under section 447 of the 2013 Act. Additionally, an investor would have a remedy under the Contract Act for seeking damages for breach of contract.

Investors who have purchased shares from a secondary market can also file a complaint with SEBI against the company on the SCORES platform and a general complaint can also be filed against any wrongdoing in relation to a particular scrip or raise their grievance with the company on the SCORES platform.

Public versus private securities

Are there differences in the claims available for publicly traded securities and for privately issued securities?

The rights of an investor to file a criminal complaint under section 34 and seek compensation under section 35 of the 2013 Act are limited to untrue or misleading statements made in the prospectus and thus are not available to investors who have purchased securities that were issued on private placement. However, such investors have a right to proceed under sections 36 and 447 of the 2013 Act against any person who knowingly makes any statement, promise or forecast that is false or misleading or deliberately conceals a material fact inducing an investor to purchase securities. The right under section 36 is in addition to the rights available to the investor under general laws.

Additionally, in case of publicly traded securities, the investors may seek recourse from SEBI in case of any damages suffered by the investor due to any non-compliance by the company of any of the regulations prescribed by SEBI, such as: insider trading norms under the SEBI (Prohibition of Insider Trading) Regulations 2015; fraudulent and unlawful trade practices under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003; or any non-compliance under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011. The investor may also seek redressal under the SCORES platform.

Primary elements of claim

What are the elements of the main types of securities claim?

The principal elements of a securities claim are as under the following.

Misrepresentation and omission (section 35 of the 2013 Act)

  • Subscription of securities by an investor acting on misleading representation or omission or incorrect statement.
  • The investor suffering any loss or damage because of relying on such statement, misleading representation or omission or incorrect statement.

A claim can be brought against the company, its directors, promoters, expert referred in a prospectus and any person who has authorised the issue of prospectus. If it is proved that the prospectus has been issued with intent to defraud the investors then the company, its directors, promoters, expert referred as such in the prospectus and any person who has authorised the issue of prospectus are personally liable without any limitation of liability for all or any of the losses suffered by the investors.

Fraudulent actions (section 36 of the 2013 Act)

  • Knowingly or recklessly making any statement, promise or forecast that is false, deceptive or misleading or deliberately conceals a material fact.
  • Inducing the investor to enter into any agreement for acquiring the securities.

Refusal for registration (section 58 of the 2013 Act)

Refusal of a public company to register a transfer without sufficient cause within 30 days of receipt of the instrument of transfer from transferee.

Oppression and mismanagement (sections 241 of the 2013 Act)

  • Affairs of the company are being conducted in the manner prejudicial to public interest or prejudicial or oppressive to the interest of the members or to the interest of the company will have to be demonstrated.
  • Complaints to be filed by members who are eligible to file such complaints in terms of the provisions of the 2013 Act.

Rescinding from a contract (section 19 of the Contract Act)

  • Consent for entering into the transaction was obtained by fraud, coercion or misrepresentation.
  • The fraud could not have been discovered with ordinary diligence by the party whose consent was taken through such misrepresentation.
  • The fraud or misrepresentation should have a direct relation with the consent received from such party to enter into the transaction.

Damages (section 73 of the Contract Act)

  • Breach of any of the terms or conditions of the contract;
  • breach should result into a damage or loss to the investor; or
  • such loss or damage should not be remote or indirect loss.
Materiality

What is the standard for determining whether the offering documents or other statements by defendants are actionable?

The plaintiff will have to demonstrate that there was a misstatement in the prospectus, either through a positively inaccurate statement contained in the prospectus or the omission of a statement of fact that ought to have been contained in the prospectus to give a right of claim under section 35 of the 2013 Act. In case, any claim is raised on account of fraud then the plaintiff will have to demonstrate the culpable state of mind of the person against whom the claim is made. If the plaintiff has to proceed under section 36 of the 2013 Act then he or she will also have to demonstrate that the defendant had knowingly or recklessly made the statement, promise or forecast that was false, deceptive or misleading or deliberately concealed a material fact.

Scienter

What is the standard for determining whether a defendant has a culpable state of mind?

The person making the claim under section 35(1) of the 2013 Act is not required to demonstrate a culpable state of mind of the defendant. However, if the claim is raised on account of fraud under section 35(3) of the 2013 Act then the plaintiff will have to demonstrate the culpable state of mind of the person against whom the claim is made. While there are no specified thresholds, the courts and tribunals generally look into the facts and circumstances surrounding the claim in order to ascertain the motivation and intention of the parties and whether there existed a culpable state of mind.

Reliance

Is proof of reliance required, and are there any presumptions of reliance available to assist plaintiffs?

Section 35 of the 2013 Act does not require the claimant to demonstrate that he or she had placed reliance on the prospectus or any misstatement in the prospectus or omission of any matter in the prospectus. However, the claimant will have to establish that the loss or damage was caused due to the relevant misstatement in the prospectus or owing to any omission of material fact in the prospectus.

In the event that directors, promoters or persons-in-charge have been convicted for any of their past conduct of then, a presumption may also be drawn regarding their involvement in subsequent violations.

Causation

Is proof of causation required? How is causation established?

Section 35 of the 2013 Act provides that the loss should have been caused as a consequence of the misstatement in the prospectus or due to omission of any matter in the prospectus. As such, the claimant will have to establish that the loss or damage was caused owing to the relevant misstatement in the prospectus or owing to any omission of material fact in the prospectus.

Even under common law, a claimant needs to demonstrate that the loss or damage suffered was due to the misrepresentation by the defendant.

Other elements of claim

What elements present special issues in the securities litigation context?

In terms of misstatement in the prospectus or omission of any matter in the prospectus, the challenge has always been in establishing the alleged non-disclosures or misrepresentation in the prospectus, which resulted in losses to the claimant and the quantum of compensation.

Securities litigation also presents a unique situation in the sense that once an investor has made a claim for losses against any company, and where such claims generally have a material impact on the reputation of the company, such a claim further affects the market price of the securities, causing a twofold loss to the company as well as to the investors.

Further, in case of publicly traded securities, where interests of the public stakeholders are also involved, the tribunal or the regulator would bear in mind the interests of such stakeholders, before passing any orders in favour of the complainant.

Lastly, securities litigation generally proves to be a time-consuming process in India.

Limitation period

What is the relevant limitation period? When does it begin to run? Can it be extended or shortened?

The limitation period for a securities claim on the ground of fraud or misleading statement or misrepresentation in the prospectus is three years from the date on which such fraud or misleading statement or misrepresentation was discovered. Statutorily prescribed period of limitation cannot be shortened by way of agreement between parties. However, the period of limitation can be extended by the court or relevant tribunal, in cases where ‘sufficient cause’ for delay in instituting proceedings is satisfactorily explained to such court or relevant tribunal. There is no limitation period prescribed for regulatory action that may be initiated by SEBI.

Defence, remedies and pleading

Defences

What defences present special issues in the securities litigation context?

Defences available in a securities litigation generally include withdrawal of consent, non-existence of knowledge or consent or a bona fide belief regarding the materiality and completeness of the disclosures. Since these defences are based on facts of each case and are subjective, proving these is very challenging. In the event, directors, promoters or persons-in-charge have been convicted for any of their past conduct then, a presumption may also be drawn regarding their involvement in subsequent violations.

Remedies

What remedies are available? What is the measure of damages?

Civil law remedies

In addition to the remedies discussed in question 2, an investor can also approach SEBI by way of a formal complaint. Under the regulatory framework, SEBI can pass appropriate directions and orders to safeguard the interest of investors in case of public issues, including, restricting an issuer company from making fresh issue of security, directing the merchant banker not to release funds raised from the public issue to the company, calling upon the issuer company to repay the proceeds of the issue. Additionally, the investors may seek recourse from SEBI in case of any damages suffered by an investor owing to any non-compliance by the company of any of the regulations prescribed by SEBI, such as: the insider trading norms under the SEBI (Prohibition of Insider Trading) Regulations 2015; fraudulent and unlawful trade practices under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003; or any non-compliance under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011. The investor may also seek redressal under the SCORES platform, as mentioned above.

The company is liable to be punished with a fine if it has issued a prospectus in contravention of section 26 of the 2013 Act. Further, every person who is knowingly a party to the issue of such prospectus is also liable to be punished with imprisonment of up to three years or a fine, or both.

Criminal law remedies

Section 447 of the 2013 Act provides for criminal liability and specifies the punishment for fraud committed under sections 34 and 36 of the 2013 Act. Any person who is found guilty of fraud may be imprisoned for a term of six months, which may extend up to 10 years. In the event, the fraud in question involves public interest, the minimum term of imprisonment is three years. Section 447 of the 2013 Act also provides for a fine equivalent to the amount involved in the fraud, which may be extended to three times the amount involved in the fraud.

Measure of damages

The measure of damages for the loss suffered owing to an untrue statement or any non-disclosure has not been specified under the statute and is always contentious. Measures of damages vary depending upon the nature of claim for losses and also on the intent of the defendant and demonstration of knowledge, recklessness or fraud.

Pleading requirements

What is required to plead the claim adequately and proceed past the initial pleading?

To plead the claim, the plaintiff must file a statement of claim by way of a plaint setting out the facts of the case, the nature of claim, the documents on which the plaintiff relies for the facts and in support of his or her claim, jurisdiction of the forum, statement to the effect that the suit is not barred by limitation and that the requisite court fee has been paid.

Procedural defence mechanisms

What are the procedural mechanisms available to defendants to defeat, dispose of or narrow claims at an early stage of proceedings? What requirements must be satisfied to obtain each form of pretrial resolution?

Under the provisions of Code of Civil Procedure 1908 (CPC) a suit can be defeated at an early stage on the ground of lack of jurisdiction of the court or a bar on the suit created by any law for the time being in force. Apart from this, there is no mechanism through which a suit can be defeated at an early stage. A defendant seeking such a relief will have to make an application under Order 14 rule 2 of the CPC.

A defendant can also narrow down the scope of a suit at an initial stage by admitting a partial claim by filing a written statement to this effect. In such a circumstance, the court will pass a preliminary decree to the extent of the amount admitted by the defendant. However, the same shall in no manner affect the maintainability of the suit as regards the remaining claim amount.

Further, the CPC also allows for settlement of disputes, whereby a settlement agreement is drawn and the court passes a decree in terms of the settlement agreement.

In cases wherein a regulatory action has been initiated by SEBI, the defending entity can make an application under provisions of SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2018. Under these regulations the party seeking a settlement is required to file a settlement proposal along with a non-refundable settlement fee. Such an application must be made within 60 days of the show-cause notice issued to the entity.

In cases where a claim has been brought before the NCLT, the NCLT has been empowered to determine the procedure to dispose of a claim in accordance with the rules of natural justice.

Liability

Secondary liability

Are the principles of secondary, vicarious or ‘controlling person’ liability recognised in your jurisdiction?

Under Indian laws, the principal is liable for any fraud or misrepresentation committed by his or her agent within the scope of the agent’s authority. Where a company is the principal it would also be liable for any fraud of its officers. The liability of the company will depend upon the extent to which the fraudulent state of mind of an officer is attributable to the company. These principles are also applicable to the issue of a prospectus containing fraudulent or misleading statements. The company will be liable:

  • where the misrepresentations are made by the directors or other general agents of the company entitled to act on behalf of the company and acting as such;
  • where the misrepresentations are made by an agent who is specially authorised for the purpose;
  • where the directors making the allotment were aware of the fact of misrepresentation and also knew that the applicants for shares were induced by the misrepresentation; and
  • where, to the knowledge of the company or its agents, the contract is made on the basis of particular representations that later turn out to be untrue.

Section 35 of the Act specifically imposes liability on every person who has authorised the issue of the prospectus, which includes the directors, promoters and experts, named as such in the prospectus. Indian law also recognises the principle of vicarious liability, in connection with every person who at the time when the offence was conducted was in charge of, or was responsible to the company for the conduct of the business of the company. The said principle is also recognised by SEBI and the same has been upheld by the Supreme Court of India in the matter of N Narayan v Adjudicating Officer.

Claims against directors

What are the special issues in your jurisdiction with respect to securities claims against directors?

The term director in India includes a person appointed as a director as well as a person acting in that capacity. Liability of directors with respect to issuance of securities has been laid out in sections 34 and 35 of the 2013 Act. A director may attract both civil and criminal liability for issuing a misleading prospectus. Civil liability vests irrespective of whether there was an intention to issue a misleading prospectus, but in case of presence of intention, the liability is greater. Criminal liability vests only when there is an intention to defraud potential investors, and when there was knowledge of misleading statements or omissions.

However, liability of independent directors is quite different and contentious, as penal action against independent directors can only be initiated after the registrar of companies concludes that the director is an officer in default. This protection has been accorded to safeguard the interests of independent directors. Even in cases of regulatory action, SEBI has been cautious in taking action against independent directors in cases of misstatement in the prospectus.

Claims against underwriters

What are the special issues in your jurisdiction with respect to securities claims against underwriters?

The underwriters and other intermediaries involved in the listing of securities are governed by the regulations framed by SEBI. The merchant bankers are required to conduct comprehensive due diligence for the purpose of meeting with statutory obligations and to reduce the risks involved in a transaction. The liability of the merchant bankers has increased with the increase in statutory compliances and unwritten practices being mandated by SEBI. The merchant bankers cannot limit themselves to conducting a due diligence merely to comply with the statutory requirements, but are required to play a more active role with an intent to ensure that all the disclosures made in the offer documents are true and fair in every aspect. If the merchant bankers are in default then they can be subjected to a penalty and can also be made liable for suspension or cancellation of their licence. SEBI has in the past suspended the registration certificates of underwriters in cases where it was found that underwriters had not carried out their duty of conducting a comprehensive due diligence in an adequate manner.

There are no specific provisions under the 2013 Act dealing with the liability of the underwriters. The scope of section 35 of the 2013 Act is very wide as it makes every person liable who has authorised the contents and the issue of the prospectus.

The underwriters can also attract liability under section 35 of the 2013 Act if they had accepted the responsibility for the contents of the prospectus. In practice, the underwriters do not accept any such responsibility as regards the contents of the prospectus nor do they authorise the issue of the prospectus. As such, claims under section 35 of the 2013 Act against the underwriters are improbable.

Claims against auditors

What are the special issues in your jurisdiction with respect to securities claims against auditors?

In the event of a non-compliance by an auditor of the provisions of the 2013 Act, such auditor would be punishable with a fine, not less than 5,000 rupees, which may extend to 500,000 rupees. However, if the contravention of the aforesaid provisions is done knowingly or wilfully with an intention to deceive the company or its shareholders or creditors or tax authorities, such auditor would be punishable with imprisonment for a term that may extend to one year and with a fine ranging from 100,000 to 2.5 million rupees.

In the event, an auditor is convicted of any non-compliance, such auditor can be made liable to refund the remuneration received by him of her and can also be required to pay for damages suffered by the company, statutory bodies or authorities or any other persons for any loss arising out of incorrect or misleading statements of particulars made in his or her audit report.

In addition to the above, section 35 of the 2013 Act makes every person who has authorised the contents and the issue of prospectus liable. The auditors would be liable under section 35 of the 2013 Act if they have provided incorrect or misleading statements or particulars in their audit report, which forms part of the prospectus. In terms of section 245 of the 2013 Act, where any class action is initiated against the auditors to seek damages or compensation or to demand any other suitable action from or against the audit firm, then the liability accrues to such audit firm and on each partner of such audit firm, who was involved in making any improper or misleading statement of particulars in their audit report or who acted in a fraudulent, unlawful or wrongful manner. Additionally, the Institute of Chartered Accountants may also initiate proceedings against an auditor for making improper or misleading statements in the audit report.

Additionally, where the financial statements of listed companies are involved, SEBI has regularly exercised its powers to issue directions against auditors for their complicity in or their failure to detect financial statement fraud. The most significant of such directions include restrictions on the impugned auditor from taking up mandates from listed companies for specified time periods.

Collective proceedings

Availability

In what circumstances does your jurisdiction allow collective proceedings?

Section 37 of the 2013 Act provides for the manner in which the affected person may take any action under sections 34, 35 and 36 of the 2013 Act. Section 37 provides that a suit may be filed by any person or any group of persons or association of persons affected by the misleading statement or the inclusion or omission of any matter in the prospectus.

The recently notified section 245 of the 2013 Act also allows for initiation of class action suits by a specified number of members or depositors or any class of them, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, and to, inter alia, claim damages or compensation or demand any other suitable action from or against the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any such likely act or conduct on their part. Such a class action can also be initiated against the auditors as well as any expert, adviser or consultant or any other person for making any misleading statement or for any fraudulent, unlawful or wrongful act or conduct. An application of a class action suit is required to be filed before the NCLT.

Further, a representative suit can also be filed in this regard under Order 1, Rule 8 of the CPC. The provisions of this rule apply only if:

  • the parties are numerous;
  • they have the same interest;
  • the necessary permission of the court is obtained or direction is given; and
  • notice is given to all the parties who are sought to be represented by the representative suit.
Opt-in/opt-out

In collective proceedings, are claims opt-in or opt-out?

In class action proceeding referred to in the previous question, the claims are assessed on a class-wide basis and the outcome of such a proceeding is binding on all the members of such class, until and unless a member has decided to opt out of the same by following the procedure as provided under the 2013 Act.

Damages

Can damages be determined on a class-wide basis, or must damages be assessed individually?

Generally, damages are assessed on an individual basis. However, in case of a class action proceeding under section 245 of the 2013 Act, the claims are assessed on a class-wide basis and the outcome of such a proceeding is binding on all the members of such class, until and unless a member has decided to opt out of the same by following the specified procedure.

Court involvement

What is the involvement of the court in collective proceedings?

In cases of representative suits, the power to grant permission to the parties either to sue or be sued in a representative capacity is conferred on the court and the said power is required to be exercised after being satisfied as to whether the subject matter of the suit concerns the interest of numerous persons or not. On this question, the court will have to apply its rationale and grant permission accordingly. The courts will have to satisfy all the conditions laid down under Order 1 Rule 8 of the CPC to proceed with the representative suit. If the plaintiff who has been permitted to proceed with the representative suit is not proceeding with due diligence then the court can replace the lead plaintiff and substitute him with another person. Similarly, the NCLT, a quasi-judicial body, constituted under the 2013 Act, with powers of dealing with various disputes involving the company, has the power to determine the procedure in a particular case in accordance with the principles of natural justice.

Regulator and third-party involvement

What role do regulators, professional bodies, and other third parties play in collective proceedings?

No role has been prescribed or has been attributed to the regulators, professional bodies and other third parties in representative suits under Order 1, Rule 8 of the CPC or under class action suits under section 245 of the 2013 Act.

Funding and costs

Claim funding

What options are available for plaintiffs to obtain funding for their claims?

Section 125 of the 2013 Act provides for the establishment of a fund named the Investor Education and Protection Fund. The money credited to this fund may be utilised, among other things, for distribution of disgorged funds to those who have suffered losses due to the unlawful actions of any person. The Investor Education and Protection Fund can also be utilised to reimburse legal expenses incurred in pursuing of collective suits under sections 37 and 245 of the 2013 Act, as may be sanctioned by the court.

The plaintiffs may also approach proxy firms who may assist the investors in funding their claim, along with providing legal and advisory services.

Costs

Who is liable to pay costs in securities litigation? How are they calculated? Are there other procedural issues relevant to costs?

There are no specific provisions related to levy of cost in cases of securities litigation and the issue of levy of cost is governed by the general procedure provided under CPC. CPC, in effect, empowers the courts to levy cost on the following four different counts:

  • section 35 of the CPC provides that a successful party in litigation should generally be awarded cost for the litigation and the unsuccessful party should pay the same. However, the levy of general cost is always to the discretion of the court;
  • section 35-A of the CPC empowers the court to award compensatory cost to a party if:
    • the claim or defence is false or vexatious;
    • objections must have been taken by the other party that the claim or defence was false or vexatious to the knowledge of the party raising it; and
    • such claim must have been disallowed or withdrawn or abandoned in whole or part;
  • section 35-B of the CPC empowers the court to levy cost on parties who are causing delay at any stage of the proceedings; and
  • Order 20A of the CPC empowers courts to levy cost on any of the party to make payment for any specific expenditure incurred by another party or the court.

Under the 2013 Act and the allied rules thereto, the NCLT is also empowered to levy costs on the following counts.

Section 245 of the 2013 Act provides as follows:

where the company fails to comply with an order passed by the NCLT shall be punishable with a minimum fine of INR 5 lakhs, and which may extend to INR 25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term up to three years and with fine which shall not be less than INR 25 thousand which may extend to INR 1 lakh; and in case the application is found to be frivolous or vexatious, NCLT may impose cost on the applicant to pay to the opposite party such cost, not exceeding INR 1 lakh.

The NCLT may in suitable cases direct appellant or respondent to bear the cost of litigation of the other side, and in case of abuse of process of court, impose exemplary costs on defaulting party.

However, instances of levy of cost on unsuccessful litigants are quite rare and the amount of cost awarded is usually insufficient to cover the entire cost of litigation.

Investment funds and structured finance

Interests in investment funds

Are there special issues in your jurisdiction with respect to interests in investment funds? What claims are available to investors in a fund against the fund and its directors, and against an investment manager or adviser?

Various kinds of investments funds are used in India, such as mutual funds, alternative investment funds and real estate investment funds, which are operated through investment trusts. All these funds operate in a regulated framework and are governed by the regulations and rules framed by SEBI. In order to safeguard the interest of the investors, SEBI allows investors to file their complaints with SEBI under the mechanism of SCORES. Under the said mechanism, SEBI upon receipt of complaints can call upon the funds to resolve the complaint filed by a complainant within a stipulated time frame. However, the SCORES mechanism is, without prejudice to the right of the investors to adopt other civil and criminal remedies, available to members and depositors under the 2013 Act and the Contract Act.

In addition, an investor can also proceed against the trustee on the ground of breach. Section 23 of the Indian Trust Act 1882 provides that a trustee shall be personally liable to the beneficiary of the trust and is liable to make good for the loss sustained by the trust property or the beneficiary. The courts over time have held that activities such as unauthorised investment of trust money, realisation of profit from trust without authority and retaining trust money that should have otherwise been invested, etc, as instances of breach of trust. In addition to make good the losses, the trustee, in certain circumstances, can also be made liable to pay interest to the beneficiaries such as receipt of interest by the trustee, unreasonable delay in paying trust money to the beneficiary, where interest has been collected by the trustee, where the trustee is fairly presumed to have received interest, where the trustee fails to invest trust funds and collect interest on it and where he or she invested trust money in any business or trade. However, a trustee cannot be held liable if the beneficiary has induced the trustee to commit the breach by fraud, or the beneficiary, being competent to contract, has concurred in the breach without coercion or undue influence or has himself or herself subsequently acquiesced in the breach.

Structured finance vehicles

Are there special issues in your country in the structured finance context?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) is the primary legislation governing securitisations in India, which for most of the part deals with the mechanism for controlling non-performing assets and controlling the same through special purpose vehicles. In addition, the Reserve Bank of India issued Guidelines on Securitisation of Standard Assets on 1 February 2006, which lays down regulatory framework in relation to the securitisation of standard assets of banks, financial institutions and non-banking financial companies in India.

SARFAESI is limited in scope as it applies to financial institutions and banks only, and has been enacted to provide greater control for banks and financial institutions (secured creditors) over the assets of defaulting borrowers and to enable banks and financial institutions to resolve their non-performing assets without the intervention of the courts by transferring their non-performing assets to asset reconstruction companies for management, dealing or disposal and realisation of proceeds.

SARFAESI deals with three distinct concepts, namely:

  • the securitisation of financial assets;
  • the reconstruction of financial assets of banks and financial institutions; and
  • the enforcements of security interests by banks and financial institutions.

SARFAESI contains substantive provisions in relation to these areas.

It is important to note herein, that risk may arise in relation to the sustained generation of the receivables at certain levels from a number of factors that are beyond the control of the borrower, for instance, anticipated reserves may not materialise or seasonal variations in the anticipated levels of receivables may occur. Adequate over-collateralisation may help in mitigating such risk. Further, in order to protect investors against more sustained long-term declines in the levels of receivables generated, early amortisation triggers are usually built into the trans­action that will trigger the repayment of the securities on an accelerated basis if a predefined trigger level is breached.

Cross-border issues

Foreign claimants and securities

What are the requirements for foreign residents or for holders of securities purchased in other jurisdictions to bring a successful claim in your jurisdiction?

To bring a successful claim, the foreign investors should be compliant with the regulatory framework prescribed for foreign investments, such as reporting of investments or obtaining prior approval in sectors specified under the extant foreign direct investment (FDI) policy. Additionally, the holders of securities should not breach the investment limits, if any, prescribed under the FDI policy.

Other than the above, the residency of a holder of securities or the jurisdiction in which one has purchased the securities does not affect one’s ability to bring a claim in India. All other recourse set out in our previous responses shall also be available to the non-resident investor. An investor has to satisfy the courts that they have jurisdiction as per the provisions of CPC to try the matter in dispute before them in order to bring a successful claim.

CPC prescribes that a court can assume jurisdiction if any of the following conditions is met:

  • the defendant at the time of the commencement of the proceedings reside, carry on business or have office in India. At this stage, it is pertinent to mention that only the courts within whose local limits the defendant resides, carries on business or has office will have jurisdiction in such a case; or
  • an investor can also bring a successful claim in India if he or she establishes that the cause of action, whether wholly or in part, has arisen in India and the within the territorial jurisdiction of the court before which he or she preferred his or her claim.
Foreign defendants and issuers

What are the requirements for investors to bring a successful claim in your jurisdiction against foreign defendants or issuers of securities traded on a foreign exchange?

In order to bring a successful claim against a foreign defendant, it will be the primary responsibility of the claimant to show that the cause of action arose in India. Further, the courts in India can also assume jurisdiction if the company whose securities are traded on a foreign exchange has a place of business in India.

Multiple cross-border claims

How do courts in your jurisdiction deal with multiple securities claims in different jurisdictions?

The right to initiate a proceeding in India always lies with the claimant and there is no bar under law to file multiple proceedings in similar circumstances by different claimants before different courts. Courts can stay a proceeding if the issues under consideration are directly and substantially common to the issues in a previously instituted suit between the same parties before a separate court of competent jurisdiction in terms of section 10 of the CPC. However, if the claim has been filed by multiple claimants against a common defendant before different courts in connection with similar facts and circumstances, then the defendant can make an application in terms of section 22 of the CPC and pray for transfer of all the cases before different courts to any one of the courts and thus, avoid multiple proceedings. Further, courts in matters involving multiple claims relating to similar facts and circumstances against a common party, can also permit any one of the claimants to file a suit on behalf of all the other claimants in a representative capacity in terms of Order 1, Rule 8 of the CPC. The judgment passed in a representative suit under Order 1, Rule 8 is binding on all the other parties who are sought to be represented by the representative suit.

Enforcement of foreign judgements

What are the requirements in your jurisdiction to enforce foreign-court judgments relating to securities transactions?

A judgment (not being an ex parte judgment) obtained in the foreign courts would, subject to the compliance of sections 13 and 44-A of the CPC, be enforced by the courts of India without re-examination of the merits of the case. Section 13 provides that a foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim litigation under the same title, except where:

  • the judgment has not been pronounced by a court of competent jurisdiction;
  • it has not been given on the merits of the case;
  • it appears on the face of the judgment to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable;
  • the proceedings in which the judgment was obtained are opposed to natural justice;
  • it has been obtained by fraud; or
  • it sustains a claim founded on a breach of any law in force in India.

Section 44A of the CPC provides that where a foreign judgment has been rendered by a court in any country of territory outside India, with respect to which the government has by a notification declared such territory to be reciprocating territory, such foreign judgment may be permitted to be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India.

Alternative dispute resolution

Options, advantages and disadvantages

What alternatives to litigation are available in your jurisdiction to redress losses on securities transactions? What are the advantages and disadvantages of arbitration as compared with litigation in your jurisdiction in securities disputes?

Proceedings for claims under section 35 of the 2013 Act or under the Contract Act are in the nature of suits, the procedure for which is prescribed in CPC.

The claimants can also apply to SEBI to investigate the alleged wrongdoings by a company. SEBI has the power to conduct investigations and pass orders prohibiting individuals or entities who were involved in matters pertaining to market manipulation and price rigging, issue-related manipulation, insider trading, takeovers and other matters. SEBI has also in the past, passed directions to issuer companies involved in manipulation relating to issuances, to refund the amount collected from the investors.

The benefit of resolving disputes through arbitration over general court proceedings is that the parties to such disputes, are not bound by provisions of CPC and the Indian Evidence Act 1872 and can decide on the procedure governing the conduct of arbitration as per their convenience. Other benefits include speedy disposal and confidentiality of the proceedings. Additionally, with a view to make arbitration more cost-effective and time-efficient, the government has introduced the Arbitration and Conciliation (Amendment) Act 2015, which inter alia requires the arbitral tribunal to render an award within a period of 12 months from the date the tribunal enters reference, with an extension of six months with the parties’ consent. Breach of these timelines may entail penalties on the arbitrators by way of reduction of fees. Further, the parties may also agree to a fast-track procedure of arbitration, wherein, the tribunal is required to decide the dispute and pass an award within six months from the date of reference. The tribunal shall decide the dispute only on the basis of written pleadings, documents and submissions and no oral hearing shall be conducted unless requested by both the parties or such hearing is called for by the tribunal to seek certain clarification, as may be required.

Disadvantages of arbitration proceedings are that the arbitral tribunal is not empowered to enforce an award passed by it and the successful party is required to once again move to the courts for enforcement of the same. Further, it is not flexible to have arbitration in multi-party proceedings, where parties do not have any arbitration agreement and matters involving right in rem.

UPDATE & TRENDS

Recent developments

What are the most significant recent legal developments in securities litigation in your jurisdiction? What are the current issues of note and trends relating to securities litigation in your jurisdiction? What issues do you foresee arising in the next few years?

SEBI’s Committee on Fair Market Conduct, constituted to make recommendations for improving the integrity of the securities market and to improve fair market conduct, submitted its final report in August 2018. The Report has suggested numerous revisions to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Trade Market) Regulation 2003 (the regulations governing market abuse and manipulation) and the SEBI (Prohibition of Insider Trading) Regulations 2015 (the regulations governing insider trading). The recommendations are inter alia based on learnings from recent SEBI investigations and include both broad concept level changes and precise revisions to specific restrictions. A number of these recommendations have already been implemented by way of amendments to the above specified regulations and look certain to assist SEBI in their future investigations and enforcement actions. A greater focus on cases involving diversion or siphoning of funds from listed companies by the controlling shareholders is also expected.

Some of the other recommendations of the Fair Market Conduct Committee include: (i) fast-track procedures for investigation and enforcement in sensitive case, new types of manipulation or cases involving large-cap companies; (ii) empowering SEBI to intercept telephone calls to aid in investigation; and (iii) signing of a memorandum of understanding among the various regulatory bodies and enforcement agencies for information-sharing and joint investigation in certain cases. If these measures are implemented, they are bound to greatly impact several facets of securities litigation in the years to come.

Further, SEBI has also introduced restrictions on transferability of shares held in physical form and has implemented measures mandating disclosures by listed companies of their significant beneficial owners (persons holding stakes greater than 10 per cent either directly or indirectly). These measures are also likely to prevent fraudulent transactions and assist SEBI in investigations.

The Ministry of Corporate Affairs had constituted a committee to review the offences prescribed under the 2013 Act, to recategorise offences that are technical defaults or procedural lapses as civil liabilities. The committee has inter alia suggested that, to relieve special courts from adjudicating routine offences, 16 offences be brought under the jurisdiction of an in-house e-adjudication framework wherein defaults would be subject to levy of penalty by the authorised adjudicating officer (ie, Registrar of Companies). This is expected to reduce the case load of the special courts thereby assisting in speedy disposal of serious offences.

One of the most significant reforms in the past few years has been the enactment of the comprehensive IBC. While the IBC has been successful in dealing with the large cases, the overwhelming number of applications has resulted in delays in resolution of small and medium-sized cases. Interplays between the IBC regime and the regulations prescribed by SEBI are constantly evolving. SEBI has introduced provisions in its regulations to assist in giving effect to resolution plans approved through the IBC. Further, SEBI has notified the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations 2018 (Administrator Regulations) which will govern the appointment of administrators for recovery of monies from defaulters against whom the SEBI has passed orders, and to regulate the process of refund of such monies to investors. In cases where recovery proceedings under the Administrator Regulations and the resolution process under the IBC are under way, it remains to be seen whether the interests of creditors or those of investors will be given precedence.

In the background of the Indian government’s efforts to tackle black money and tax evasion, in 2017, SEBI had commenced taking stringent action against 331 listed shell companies that were allegedly used as vehicles for siphoning off funds and market manipulation. Measures included suspension of trading of such companies. In October 2018, SEBI and the stock exchanges commenced a forensic audit of some of these shell companies for verifying their credentials or fundamentals. On conclusion of such audit in the coming months, enforcement actions against such shell companies are expected to rise.

Revelations from several recent high-profile matters have caused regulators to focus on the critical role played by auditors, company secretaries, valuers, market intermediaries, etc. In response, SEBI has been exercising its powers to penalise auditors for their alleged failure to detect financial statement fraud and market intermediaries for their involvement in misstatements in offer documents. Further regulations governing such entities are also being considered and are expected to result in enforcement actions in the years to come.

Further, SEBI has commenced a number of investigations on instances of leakage and communication of price-sensitive information using internet-based messaging applications. While listed companies are taking measures to address such issues and avoid future litigation, with the recent amendments to the SEBI (Prohibition of Insider Trading) Regulations 2015, there is bound to be greater focus on detection, investigation and enforcement relating to such matters.