Business News/ Opinion / Government stance in FTIL-NSEL case: fit and proper?

The Forward Markets Commission has handled the fallout of the National Spot Exchange Ltd (NSEL) crisis fairly well. Of course, as NSEL was kept outside regulatory purview by the previous government, it couldn’t do much except alert the government about the impending doom. But with respect to Multi-Commodity Exchange of India Ltd (MCX), which it regulates, it quickly moved to ring-fence it from NSEL’s troubles. It shunted out the management appointed by the Financial Technologies (India) Ltd (FTIL) group. Eventually, it also forced the group to sell its entire stake in MCX by ruling that FTIL was unfit to hold shares in commodity futures exchange.

The new government is now getting into the swing of things, having ordered NSEL’s merger with FTIL to speed up the former’s recovery. The government can take a leaf or two on how FMC acted with the FTIL group.

But first, here’s the backdrop in which the merger proposal came about. Last August, the government had given FMC the additional role of supervising the settlement of outstanding contracts on the NSEL, which amounted to about 5,600 crore. FMC found that NSEL hemmed and hawed while pursuing the firms who had defaulted on payments. Investors who are owed money point out that while FTIL has engaged many top lawyers to defend its promoter, Jignesh Shah, the legal effort in recovering dues from defaulting firms is negligible. FMC chairman Ramesh Abhishek told The Economic Times that while NSEL should be aggressively pursuing cheque-bouncing and other cases against defaulters, it has little capacity to do so.

“So, we felt that since this company has virtually no capacity to fight cases and pursue the legal process of recovery, the holding company (FTIL) should step in," Abhishek said in the interview. “NSEL has been asking FTIL for funds, we were told in meetings, but they were not getting much help."

FMC, hence, proposed the merger of NSEL with FTIL in mid-August. The expectation, at least based on what’s stated in the government’s draft order to merge the two companies, is that with the resources of FTIL at its disposal, the recovery process will gain steam. Having said that, no one really expects FTIL to earnestly pursue defaulters. That’s where FMC’s other suggestion to the government comes in: that FTIL’s board should be superseded.

In fact, this proposal was made by a working group set up by the government last year, on the grounds that FTIL, being a provider of technology solutions in the sensitive financial markets space, should be run by a new set of professionals.

If both these measures are taken—FTIL is run by a new management and is merged with NSEL—one can expect a far greater resolve in the chasing of defaulting firms. Besides, if the courts rule that NSEL must act as the counter party to all outstanding transactions, then the amount owed to investors will end up being a liability on the books of FTIL. Naturally, investors who lost money on the NSEL platform are enthused about these proposals.

A moot question is if principles of natural justice are being followed, like they were when FMC acted against FTIL. The commodities market regulator first issued a show-cause notice; then gave FTIL and its lawyers considerable time to respond, granted personal hearings, before issuing a well-reasoned order against the company. One can argue that the draft order issued by the ministry of corporate affairs acts as a show-cause notice, and the time of two months given to FTIL to respond (in electronic form) amounts to a hearing. Even so, the government comes out looking as if in a hurry to close the matter, rather than be concerned about natural justice.

Also, while the government’s draft order invokes section 396 of the Companies Act, 1956, which allows the government to order an amalgamation of two companies in public interest, its order doesn’t say why the merger is in the public interest. Of course, it has another chance to correct this in its final order. But the point is that the hurried fashion in which the government issued its draft order doesn’t look appropriate.

The fact that this section in the companies law has never before been used for a forced merger between two private companies should have served as an additional caution. While this section allows the government to lift the corporate veil, it must be appreciated that this is normally a judicial process, the use of which has become lesser over the years as it involves difficult-to-prove issues such as the company was set up with the intention of fraud. Though some may argue that this is a foregone conclusion in the FTIL-NSEL matter, the government should clearly articulate the process it used to come to the conclusions it did before assigning NSEL’s liabilities upon FTIL.

Of course, this is not to say there is no merit in the government’s line of reasoning. But considering that its actions can have consequences on how investors perceive issues such as limited liability and lifting of the corporate veil, it will do well for the government to be more articulate and follow a process that is adequately healthy from the perspective of natural justice.

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Updated: 03 Nov 2014, 09:03 PM IST
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