Bombay HC clears the way for FTIL-NSEL merger
Mumbai: The Bombay high court on Monday dismissed a plea filed by 63 Moons Technologies Ltd, formerly Financial Technologies India Ltd (FTIL), opposing a forced merger with its subsidiary National Spot Exchange Ltd (NSEL). The ruling clears way for the merger of the two entities.
FTIL said it will challenge the court’s order. “The Honourable Bombay High Court has dismissed our writ petition. However, it has granted 12-week stay on the operation of the merger order. We will be moving the Supreme Court during this 12-week period. We have full faith in the judiciary and continue to believe that ultimately the truth and justice shall prevail,” said a 63 Moons spokesperson in an emailed statement.
Justice M.S. Sonak in his order held that it is not a forced amalgamation between two unrelated entities but of a wholly owned subsidiary with its parent in public interest. The order said it was an extraordinary case of a collapse of “a commodity stock exchange” and the government deemed fit to pass the merger order in public interest.
“The merger is important to safeguard public confidence in forward contracts, prevent FTIL from distancing itself from NSEL and pooling resources from FTIL for recovering dues from defaulters,” the order said.
The court also noted that the position of recoveries to NSEL investors is not very promising and may further deteriorate if NSEL is to fend for itself.
The ministry of corporate affairs on 12 February 2016 had ordered a merger of FTIL and NSEL, making the parent responsible for the liabilities of its fraud-hit subsidiary. It will be the first time any two private entities in India are merged by fiat, using a provision of the Companies Act that allows the government do so in public interest.
Controlled by entrepreneur Jignesh Shah, FTIL owns 99.99% of NSEL. Trading on NSEL was suspended in July 2013 after a Rs5,574.35 crore fraud surfaced.
Court clearance for the merger essentially means FTIL will have to shoulder NSEL’s current outstanding liabilities worth Rs5,269 crore.
“This order has a serious impact on the limited liability concept that is the corner stone of the Indian corporate sector, by lifting the corporate veil by an executive order and without running a full evidence-led adjudication,” said Venkat Chary, chairman, 63 Moons.
However, Madhu P. Desai, trustee of NAARA, an NSEL investor association, said this judgement sends out a strong message, to all those who indulge in “economic genocide”.
“This is a strong message for those who misuse corporate law and regulatory vacuum to devise schemes to loot public and that they cannot escape by invoking limited liability,” said Desai.
Arguing for FTIL, senior counsel Harish Salve said the executive order violated principles of natural justice. “It did not give an opportunity to parties to oppose the merger, it did not give an opportunity to the parties to contest why the FMC proposal was flawed and it prejudiced NSEL as a corporate entity and FTIL shareholders,” Salve argued. He added the merger penalizes FTIL shareholders and creditors who have a networth of Rs2,800 crore by imposing a liability of Rs5,600 crore.
To this, the court observed, “The principle of natural justice though universal has to be realistically and pragmatically employed.”
Shares of shareholders of FTIL will remain the same in the resultant company; so it cannot be said that the interest of shareholders and their rights in the resultant company are diminished. Economic value or market value of shares are not the constructs of shareholder interest, the court observed.
The government, represented by senior counsel Darius Khambata, argued that NSEL was not independent from its parent. “NSEL’s dependence on FTIL for paying legal and other expenses, the bourse’s unquestioning use of the latter’s software to sell illegal contracts and the parent rushing to pre-pay a foreign loan immediately after a scam at NSEL came to light in July 2013 show that NSEL was not an independent company in the truest sense,” the government had said in its reply to FTIL’s plea.