Home >market >stock-market-news >Govt nod for FTIL merger with NSEL

Mumbai: The ministry of corporate affairs (MCA) on Friday ordered a merger between Financial Technologies India Ltd (FTIL) and its unit National Spot Exchange Ltd (NSEL), making FTIL responsible for the liabilities of the fraud-hit commodities bourse.

It’s the first time that the government is forcing a merger between two private entities, using a provision of the Companies Act that allows it do so in public interest.

FTIL, controlled by entrepreneur Jignesh Shah, immediately said it will challenge the order in the Bombay high court.

FTIL owns 99.99% of NSEL, on which trading was suspended after a Rs.5,574.35 crore fraud at the latter came to light in July 2013.

Friday’s final order follows a draft order issued on 21 October 2014, wherein the government proposed to merge the two entities in public interest, forcing FTIL to assume all the liabilities of NSEL and also making it a party to all contracts and agreements entered into by NSEL.

The merger order, if it’s upheld by the courts, will mean that the outstanding liabilities of NSEL, which currently stand at 5,269 crore (after some repayments to small investors), will be absorbed by parent company FTIL.

In a statement, FTIL expressed disappointment over the order, which it said had placed the interests of trading clients above those of the shareholders in a listed company.

FTIL said it had presented its case to the MCA at a hearing that followed the draft merger order.

“The way the hearing went and the way thousands of shareholders, employees and creditors had objected to the proposed merger, we were hopeful that the MCA will take an objective view of the matter and withdraw the Draft Merger Order. Hence, the passing of the Merger Order today - while matters are sub-judice - is highly disappointing," FTIL managing director Prashant Desai said in the statement.

“As per Hon’ble Bombay High Court’s earlier Order, there is an automatic stay of two weeks on the operation of the Merger Order. We will challenge the Merger Order before the Hon’ble High Court at the earliest, and are confident that justice will be done," Desai added.

The merger was first recommended by the commodities market regulator Forward Markets Commission (FMC) and has also been demanded by investors affected by the fraud at NSEL. FMC has now been merged with the Securities and Exchange Board of India (Sebi).

FTIL has challenged the constitutional validity of Section 396 of the Companies Act, 1956, under which the government proposed to merge the two entities in public interest.

The Bombay high court asked the government to pass a final order, but said that there will be a two week stay on the final order before the court gives its final go-ahead to the merger.

Ahead of the decision, FTIL has been doing all it can to push back against a possible merger.

In a letter to the stock exchanges in September last year, FTIL said that under the Companies Act, the government can merge two companies only if such a union is essential in public interest.

“The interest of the 13,000 clients of the brokers who traded on the NSEL platform for higher returns cannot be termed as public interest when 66% of the entire outstanding amount is being claimed by just 6% of the trading clients," FTIL said in its letter.

FTIL also appealed to all its shareholders to file their objections to the draft order with the MCA. The government, however, has submitted in court that the objections are an attempt to stall the passing of a final order.

NSEL investors have been pushing for a merger between the two entities and want FTIL to assume the liabilities of NSEL.

“We welcome this step and we thank the government for taking this step for the NSEL investors. After this move, the liability of refunding the investors will fall on the parent company, which is FTIL," said Ketan Shah, the head of the NSEL Investor Forum.

According to Shriram Subramanian, managing director of proxy advisory firm InGovern Research Pvt Ltd, NSEL was a wholly owned subsidiary of FTIL and so the parent company had to take over its liabilities.

“The shareholders from the beginning knew that NSEL is a wholly owned subsidiary of FTIL and so the liability was likely to fall on the parent company. One can question whether all shareholders should be punished for a default by a subsidiary but since the management of both the companies was the same, FTIL will have to bear the liability," said Subramanian.

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