BackNSEL-FTIL merger may not speed up refunds to investors
NSEL has not listed the dues to investors who lost money in the payments crisis as a liability in its books
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Mumbai: The government’s recent order forcing a merger between Financial Technologies India Ltd (FTIL) and the now defunct National Spot Exchange Ltd (NSEL) was seen as a victory for the 13,000 investors who lost money in the 2013 fraud at the commodities bourse. But a closer look at the manner in which investors’ dues are classified in NSEL’s accounts could mean that the recovery of the ₹ 5,269 crore owed to them may not be expedited by the order.
Out of the ₹ 5,574.35 crore due to investors, NSEL distributed ₹ 304.50 crore to small investors in September 2013. So, the current outstanding stands at ₹ 5,269 crore.
NSEL does not list the dues to investors who lost money in the payments crisis as a liability in its books.
“The commodities lying in the designated delivery centres relating to transactions carried out by members on the exchange platform were not the property of the company and hence such inventory of commodities is not getting reflected in the books of accounts of the company," read NSEL’s annual report for financial year 2014-2015.
A legal expert, who spoke on condition of anonymity, said that a disputed claim is generally reflected in the accounts as a contingent liability. However, in the case of NSEL, the books do not mention this amount.
“Such inventory was never purchased by the company and hence any liability thereto was neither the liability of the company nor contingent liability of the company requiring any disclosure in the accounts or notes to accounts of the company," said the annual report.
Since the dues are not listed as a liability or a contingent liability, the burden of compensating investors may not pass on to FTIL even if the merger with NSEL is cleared by the courts, the legal expert said.
“As per accounting standards, any claim and disputed amount whose outcome is uncertain needs to be disclosed in the book of accounts as contingent liability. One is free to add a caveat that they do not agree to the claim but it needs to be in the disclosure. If the merger passes through all legal hurdles then the parent company would assume the book of accounts as it is and the dues may not reflect as a liability in FTIL’s annual reports too," said Amarjit Chopra, former president of the Institute of Chartered Accountants of India.
As per accounting standards, a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
“In this case, it is expected that FTIL would assume the same financial and accounting practices that were being followed by NSEL post the merger clearing all hurdles. So, the provisioning of the contingent liability may not happen. But, investors of FTIL should be cautious that there is a possibility of future cash outflow," said Shriram Subramanian, founder and managing director, InGovern Research Services Pvt. Ltd, a proxy advisory firm.
Rakesh Bhartia, CEO, India Glycols Ltd, speaking on behalf of NSEL investors, said that the defunct commodities bourse is liable to make good on the dues to investors. Post a merger, this responsibility passes to FTIL.
A subsidiary of India Glycols, IGL Finance, is awaiting recovery of ₹ 125 crore which it had invested in NSEL.
“There are well established principles and judicial precedents under law where the liability rests with the exchange in the event of a settlement default and it gets transferred to a holding company in the event of a fraud. Thus NSEL remains liable and with the lifting of the corporate veil, FTIL would become liable," said Bhartia.
On 12 February, the ministry of corporate affairs (MCA) ordered a merger between FTIL and NSEL. FTIL holds a 99.99% stake in NSEL, on which trading was suspended after the ₹ 5,574.35 crore fraud came to light in July 2013. This is the first time that the government is invoking Section 396 of the Companies Act, 1956 to force the union of two private sector entities on the grounds of public interest.
Companies Act 1956 was used to bring about the merger as all aspects of Companies Act, 2013 were not operative when the draft order was passed in 2014.
On Tuesday, FTIL moved Bombay high court against the merger order. The matter will be heard next on 17 March. FTIL will submit a revised petition before 15 March.
“The Bombay high court granted an extension of stay on the final order of merger of NSEL with FTIL issued by MCA till 31 March 2016," said an FTIL spokesperson.
An FTIL spokesperson, in an e-mail response, told Mint that NSEL investors were “grossly misled".
“No court of law has adjudicated anything against NSEL, leave alone FTIL. There is no liability on FTIL due to the final order on merger. No court of law has yet held even NSEL liable for the payment default. Moreover, the entire money trail has been established to 22 defaulters and their assets have been seized or frozen. So the question of liability contingent or otherwise on FTIL does not arise.
“However, the fact that FTIL at present has obtained a stay on the final order and will be challenging the same before the Bombay high court, the same issue is academic in nature," the spokesperson added.
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