The action begins

Government v Nestle is an opportunity to shine a light on the regulation of safety standards

By Mohan Sule

The progress of the Union government's class action suit against Nestle India will be keenly watched for many reasons. The legal step will be the first of its kind since the introduction of the concept in the Companies Act, 2013. It could be a test case for similar strikes going ahead. India might soon have its own ambulance chasers, the breed of lawyers ready to spring into action by encouraging users to take on the services provider or the manufacturer responsible for any deficiency. Second is the curiosity to observe the defendant's ability to bounce back post penalty. The damage has been quantified at Rs 640crore (as against Rs 1185 crore net profit made in the year ended December 2014) in the Maggi noodle case. How the figure was arrived is not clear. In many health-related cases, the side-effects take years to manifest. Juries in the US are known to award multi-million-dollar compensation. Cigarette maker Philip Morris was directed in 2006 to pay US$10 billion to plaintiffs. The third will be to assess the impact on investments. The target is an MNC with a long presence in India. As it is India is known to be a tough market to crack. Besides red tape, users are price conscious. Patent infringement is common. Fear of harassment from multiple levels of the state machinery responsible for oversight for any perceived deviation scares off scarce capital. The procedure, therefore, comes at a delicate juncture. India is well positioned to attract investors disillusioned with China. The echoes are still reverberating of the din arising from taxing (US$ 2.5 billion) the capital gains made during the transfer of Hongkong-based Hutchison Telecommunications International's 67% stake in its telecom services joint with Essar to Vodafone's Netherlands subsidiary for US$1.2 1 billion in 2007 and the minimum alternate tax levied on foreign investors retrospectively.

Yet there is a need to display firmness to demonstrate that the Indian market cannot be taken for granted. The resolve gave birth to amendments in regulation to tax capital gains made outside India on transfer of assets in India. Providing the medium of class-action suit is an acknowledgement of the helplessness of consumers in India. The forerunner was the formation of statutory bodies to oversee various markets. The Reserve Bank of India is the banking industry's ombudsman and the Securities and Exchange Board of India of the capital markets. Sebi has of late started the practice of consent decree. Companies under investigation agree to pay a fine without admitting to wrongdoing, thereby preventing years of costly litigation. The Telecom Regulatory Authority of India, the Insurance Regulatory and Development Authority and the Central Electricity Regulatory Commission have been created to monitor niche markets. The Competition Commission of India scotches unfair trade practices. It has penalized many companies including cement makers for cartelization and rigging prices. In the US, the Department of Justice is known to have cracked down on many powerful companies including Microsoft, resulting in a settlement in July 1994, with the software maker agreeing not to tie its products to the sale of Windows.

An antitrust lawsuit blocked AT&T's proposed US $39-billion acquisition of T-Mobile that would have substantially reduced competition for mobile wireless telecommunications services across the US, resulting in higher prices, poorer quality services and fewer choices and innovative products. BP agreed to pay US$ 18.7 billion to settle federal and state claims arising from the 2010 oil spill, the biggest pollution penalty in the US. The European Union is toying on how to tame the all-pervasive Google to create a space for other search engines. An interesting inference is that many companies in legal tangle for their negligence and arrogance are leaders in their market and have enriched shareholders. Most have eventually settled with the litigants to focus on their businesses. The bottom line is that class action suits need not necessarily mean the end of the road for a company. The US Food and Drug Administration routinely blocks shipments from Indian facilities. Serious players take steps to bring their production plants in line with international standards and do not spurn the market instead. Nestle can use the opportunity to shine a light on the substandard government testing facilities in India. The Union minister for food processing has admitted that the inspector raj is resulting in rotting of food grains in warehouses. As the drama is played out in the court, the producers, consumers, the market and the government will get to know how to set right the many wrongs to tap the potential of the industry to the fullest.