HC clears NSEL merger, FTIL to challenge order
MUMBAI: The Bombay high court on Monday dismissed a plea filed by 63 Moons Technologies Ltd, formerly Financial Technologies India Ltd (FTIL), opposing a forced merger with its subsidiary National Spot Exchange Ltd (NSEL). The ruling clears way for the merger of the two entities.
FTIL said it will challenge the court’s order. “The Honourable Bombay High Court has dismissed our writ petition. However, it has granted 12-week stay on the operation of the merger order. We will be moving the Supreme Court during this 12-week period. We have full faith in the judiciary and continue to believe that ultimately the truth and justice shall prevail, ” a 63 Moons spokesperson in an emailed statement.
The ministry of corporate affairs on February 12, 2016 had ordered a merger of FTIL and NSEL, making the parent responsible for the liabilities of its fraud-hit subsidiary. It will be the first time any two private entities in India are merged by fiat, using a provision of the Companies Act that allows the government do so in public interest.
Controlled by entrepreneur Jignesh Shah, FTIL owns 99.99% of NSEL. Trading on NSEL was suspended in July 2013 after a Rs5,574.35 crore fraud surfaced.
Court clearance for the merger essentially means FTIL will have to shoulder the burden of NSEL’s current outstanding liabilities worth ₹5,269 crore.
“This order has a serious impact on the limited liability concept that is the corner stone of the Indian corporate sector, by lifting the corporate veil by an executive order and without running a full evidence-led adjudication,” said Venkat Chary, chairman, 63 Moons.
However, Madhu P Desai, trustee of NAARA, an NSEL investor association, said this judgement sends out a strong message, to all those who indulge in “economic genocide”.
“This is a strong message for those who misuse corporate law and regulatory vacuum to devise schemes to loot public and that they cannot escape by invoking limited liability. Most importantly, institutions of public trust, financial market infrastructures cannot become breeding grounds for fraud,” said Desai.
The merger was first recommended by the commodities market regulator Forward Markets Commission (FMC) and demanded by investors affected by the fraud at NSEL. FMC has since been merged with the Securities and Exchange Board of India.
The corporate affairs ministry’s directive in February 2016 came after a draft order issued on October 21, 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.
Senior counsel Harish Salve, arguing for FTIL said that the executive order violated principals of natural justice. It did not give an opportunity to parties to oppose the merger, it did not give an opportunity to the parties to contest why the FMC proposal was flawed and it prejudice NSEL as a corporate entity and FTIL shareholders, Salve argued.
It is penalising FTIL shareholders and creditors who have a networth of ₹2,800 crore by imposing a liability of ₹5,600 crore, he added.
To this the court observed that, “the prinicipal of natural justice though universal have to be realistically and pragmatically employed”
The shares of shareholders of FTIL will remain the same in the resultant company so it cannot be said that interest of the shareholders and their rights in the resultant company are diminished. Economic value or market value of shares are not the constructs of shareholder interest, the court observed.