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Mumbai: The central government in a reply to a writ petition filed by Financial Technologies (India) Ltd (FTIL) has defended its proposal to merge the now-defunct National Spot Exchange Ltd (NSEL) with its parent FTIL.

The government’s response tries to allay concerns that the merger proposal does not take minority shareholder interests into account by arguing that most decisions at FTIL have been controlled by a few large shareholders in any case.

It also argues that NSEL and FTIL (which was recently renamed as 63 Moons Technologies Ltd) do not have a separate corporate identity.

Mint has reviewed a copy of the response which was filed with the Bombay high court on Tuesday.

“All the general resolution can be passed by only four shareholders—namely Jignesh Shah, La-Fin Financial Services Pvt. Ltd (which is company with majority shareholders Jignesh Shah and his wife), and two other individual shareholders Ravi K Sheth and Bharat K Sheth...," said the reply filed by the government.

FTIL has argued that in proposing a merger between FTIL and NSEL, the government has overlooked the interests of minority shareholders.

The NSEL fraud surfaced in July 2013 when trading was halted on the commodities bourse in all but its e-series contracts. These, too, were suspended a week later.

The suspension may have been prompted by an instruction from the ministry of consumer affairs to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL had been doing that. The trade halt led to a payment default of 5,574.35 crore and a loss to 13,000 investors.

The ministry of corporate affairs on 12 February ordered a merger between FTIL and NSEL, seeking to make FTIL responsible for the liabilities of the fraud-hit commodities bourse.

It was the first attempt by the government to force a merger between two private entities, using provision No. 396 of the Companies Act, which allows it do so in public interest.

FTIL opposed the merger on 16 February. On 2 May, the Bombay high court extended a stay on the merger as the central government needed time to examine and file a reply to an FTIL submission in the court.

The government in its reply also highlighted that NSEL’s operations depended largely on FTIL, the promoter, and it did not have a separate corporate identity.

The matter is scheduled to be heard next on 25 July.

“We deny both the following points brought out by UOI (Union of India) on its reply to affidavit (filed by FTIL opposing the merger). The matter is subjudice, hence it would not be appropriate to comment in detail on your query. The company will file its reply in due course of time," said an FTIL spokesperson in an email reply to Mint.

Arguing that the interests of FTIL have largely been controlled by a few shareholders, the government has highlighted the company’s shareholding pattern.

Four shareholders, namely La-Fin Financial Services Ltd (26.76%), Shah (18.08%), Ravi K. Sheth (5.34%) and Bharat K. Sheth (2.76%), together hold 52.94% of the equity in FTIL.

Under the Companies Act, a general resolution can be passed if 50% of the shareholders vote in favour.

Shiram Subramanian, managing director and founder of InGovern Research Services Pvt. Ltd, said there is nothing illegal about the shareholding pattern.

“Legally, there is nothing wrong with the shareholding pattern and the resolutions getting passed through these shareholders. However, if these shareholders are found to be promoters acting in concert, then it is a different story," he said.

La-Fin is a company owned and promoted by Jignesh Shah.

“La-Fin Financial Services Ltd is a private company with 50% shares each being held by Jignesh Shah and his mother Pusha P. Shah," said the government in its reply to the FTIL writ petition.

The government is also arguing that NSEL did not have a corporate identity independent of FTIL.

“It is indisputable that Respondent No. 3 (NSEL) was a 99.99% subsidiary of Petitioner No. 1 (FTIL) and that it acted at the behest of Petitioner No. 1 and was not in any true sense an independent/separate company," according to the government reply.

The government in its reply observed that the minutes of the board meetings of NSEL were regularly tabled before FTIL’s board. FTIL kept itself apprised about the affairs of NSEL and also approved/ratified the actions of NSEL in its board meetings on a regular basis.

According to the government, NSEL, for all practical purposes, worked as a department of FTIL.

“The merger is justified as it seems that FTIL management was aware of activities at NSEL and many of the decisions pertaining to NSEL passed through the promoter group," said Subramanian. “Considering it is a 99.99% owned subsidiary, the FTIL management can be held liable for the fraud that happened at NSEL."

Meanwhile, the enforcement directorate (ED) has also started examining the role of brokers that sold the NSEL scheme. This action comes after the ED arrested Jignesh Shah on 13 July. Shah has been remanded to judicial custody till 1 August.

ED, a specialized financial investigation agency under the ministry of finance, said that it had found evidence of money laundering against Shah under the Prevention of Money Laundering Act, 2002 (PMLA).

“Brokers are being summoned for questioning to help us in filing a supplementary chargesheet in the NSEL scam," said an ED official requesting anonymity. A second person aware of the developments said that brokers are being asked to submit data pertaining to NSEL.

In the chargesheet filed in April 2015, ED alleged a criminal conspiracy leading to the scam at NSEL. The ED had registered a criminal case against Shah under the PMLA in 2013.

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