Mumbai: The Company Law Board (CLB) will hear a government petition to supersede the board of Financial Technologies India Ltd (FTIL) in New Delhi on 19 March, with the Bombay high court on Tuesday refusing to entertain an FTIL plea to prevent the hearing.

The court was hearing an FTIL petition challenging the attempt by the ministry of corporate affairs (MCA) to replace existing FTIL directors by government nominees.

A division bench comprising justices B.R. Gavai and A.S. Gadkari said the proceedings initiated by the MCA under sections 397 and 398 of the Companies Act for superseding the board of FTIL is separate from the merger of the company with its subsidiary, the National Spot Exchange Ltd (NSEL).

“The CLB should hear the contentions of all the parties and should take into consideration the diverse arguments presented in the case before passing a final order," said Gavai.

The high court also pointed out that the order of the CLB can be challenged in the court if any party is aggrieved by it.

On 25 February, the MCA had filed a petition before the CLB asking it to bar all FTIL directors from remaining in office and allow the government to appoint its own nominees in their place to “prevent further acts of fraud, misfeasance, breach of trust".

The government move came against the backdrop of the 5,574.34 crore payment fraud at NSEL, in which FTIL holds a 99.99% stake.

The company then filed a petition in the Bombay high court seeking a stay on the proceedings at the CLB on the grounds that it had not been given enough time to file a reply.

On Tuesday, Janak Dwarkadas, senior counsel for FTIL, said the government is trying to supersede the company board so that it would not face any opposition while merging the company with NSEL under section 396 of the Companies Act.

“This challenge to the draft merger order will not be mounted if the board of directors is substituted by government nominees; then the objection to 396 will be withdrawn," said Dwarkadas.

The government, in its petition before the CLB, has alleged that the current board of FTIL is trying to “scuttle any attempts made to carry out amalgamation between respondent No 1 (FTIL) and respondent No 29 (NSEL)".

According to the MCA’s plea, the FTIL board is also trying to “thwart the recovery process of respondent no 29 (NSEL) and fraudulent sale of assets of respondent no 1(FTIL)".

Earlier, in a notice to the exchanges, FTIL had said a resolution was passed in which the board of directors said the move is a “clear attempt by the MCA to render ineffective and, in fact, defeat FTIL’s challenge and opposition to the proposed amalgamation of NSEL with FTIL".

FTIL’s management is fighting to retain control of the firm founded by entrepreneur Jignesh Shah in 1988. Shah and other promoter entities hold nearly 46% of FTIL, although Shah stepped down from all key management positions in November 2014 as a way to ring-fence FTIL from the payments fraud at the commodities spot exchange.

“The Honourable Bombay High Court has stated that all contentions of Financial Technologies India Ltd (FTIL), pertaining to application of the government seeking supersession of the Board should be argued by FTIL before the Company Law Board, who is bound to consider all rival submissions in the matter," FTIL said on Tuesday.

On 21 October 2014, the government passed a draft order to merge NSEL with FTIL, an order that has been opposed by FTIL and its shareholders in the Bombay high court. The court has allowed the government to proceed with a final order while holding that the implementation of that order would be subject to the court’s clearance.

As per the petition filed in the CLB, the government also wants FTIL’s board to be barred from carrying out any moves towards a restructuring, merger or demerger of the company.

The government is of the view that such moves indicate “ill designs" of the company, said the petition filed with the CLB. FTIL has asked its shareholders to oppose the proposed merger.

The merger has been proposed under section 396 of the Companies Act, which empowers the government to order such a union when it is deemed to be in public interest.

This is the first time that the government has invoked the provision in a case involving non-state entities.

The merger was recommended by the Forward Markets Commission (FMC) and has also been demanded by investors affected by the fraud at NSEL.

In a December 2013 order, FMC ruled that FTIL and Shah, then chairman of FTIL, were unfit to run any exchange in the country and barred Shah from holding a management position in any recognized exchange in India. This led to FTIL selling its stake in all its exchange ventures including Multi Commodity Exchange of India Ltd (MCX). FTIL, which originally held a 26% stake in MCX, sold a 15% stake in the exchange for 459 crore to Kotak Mahindra Bank Ltd and the remaining 11% in the open market to public and private investors.

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