India is in the process of taking some incredibly bad steps to crush investor rights. How? They're currently working to setup defense funds for corporations which are sued for Securities violations. This is all being funded by SEBI (the Securities and Exchange Board of India.) On the outside this might look like a great thing for those companies but you need to get a bigger picture to see the whole thing.

These funds will pay up to 75% of the cost of the securities class action lawsuits under the guise of "protecting" the investors in the company being sued. Now you have to ask yourself, who is it TRULY protecting? In every single securities class action lawsuit settlement we've ever covered the investors who were mislead, lied to and otherwise conned into losing money benefited from the settlement. They all got PAID! So, how does this protect the investor? It doesn't, it protects the executives at the top of the food chain and the insurance companies who cover those executives at each corporation.

You see, when these lawsuits take place the companies themselves aren't just the ones being named in the lawsuit. The lawsuits typically name the company, the executives involved in the alleged fraud or other offense, and the financial institutions backing the stock. The settlements are typically paid by insurers, not the companies themselves. What these funds do is give them a HUGE get out of jail free card. They know that if they make a mistake which costs their investors money they have a shot at a government funded defense.

India has recently struggled with problems that the U.S. had for years. Executives run into some problems, start playing with their financial numbers to make their estimates work, fail to fix the problem, and then their companies run into significant problems. Just take a look at Satyam for an example. This was unheard of in India 10 or 15 years ago. As their economy has skyrocketed and their workforce modernized, more Indian companies have been listed on the NASDAQ and NYSE, inviting American problems into their country. Now, executive malfeasance is definitely NOT a problem restricted to America, but, we do tend to have more than our fair share of it. When you look at Satyam the CEO admitted to inflating numbers and misleading investors, causing the stock to tank 80%. Should the Indian public be made to pay for that Satyam's defense? Should they have to cough up the  millions of dollars it will cost to pay out the settlement? Will the investors benefit by having the Indian government back the defense? I think not.

On the surface I can understand how politicians who don't have a clear understanding of the class action lawsuit system can see this as helping companies. They may see class actions as frivolous or just something which cost corporations money. What they don't see are the investor benefits. Unless you're an institutional investor (i.e., banks, retirement funds, or hedge funds) you don't have the time, money or experience to take a company to court when you lose thousands. You might want to, but, you might not even know that they did something (or were alleged to do something) illegal. All you know is you're out $10,000. Thanks to the class action lawsuit system, if there truly was a problem, you might actually get a portion of that back. Will you get all of it back? No, probably not, but some is better than none, right? Without the class action system you would have been stuck a whole lot poorer with little place to go. Giving corporations one more financial "out" isn't a good idea in my book.

That's my opinion and I'm sticking to it. What's yours? Let us know below.

Warm Regards,

Scott

Updated June 2nd, 2009