June 15, 2019

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Corporate India Saved Setting Aside The Ftil-NSEL Merger Order

- Madhavi Gokhlay, [ ]


Recently, the Apex Court order set aside a Bombay High Court judgment approving the merger of crisishit NSEL with parent company, 63 Moons Technologies Limited, formerly known as FTIL, in public interest under Section 396 of the Companies Act

India Incorporated heaved a collective sigh of relief after the Supreme Court (SC) on April 30, 2019, in a landmark judgment, dismissed a Bombay High Court (HC) ruling approving a Ministry of Corporate Affairs (MCA), Government of India, move, to merge the National Spot Exchange Limited (NSEL) with its parent company, 63 Moons Technologies Limited.

The apex court set aside the 222-page Bombay High Court order dated December 4, 2017. The MCA had passed the order largely on the basis of the Grant Thornton Report and the flawed “Not Fit & Proper” recommendation from the erstwhile commodity markets’ regulator, Forward Markets Commission (FMC), under the pretext of public interest.

In the event, the Supreme Court set aside the Bombay High Court order dated December 4, 2017. The MCA had passed the order based on the flawed recommendation from by the erstwhile commodity markets regulator, Forward Markets Commission (FMC), under the pretext of “public interest”. If the merger order would have been passed, it would have irreversibly impaired the concept of public interest, set a dangerous precedent for the corporate world and hurt business sentiments of both domestic as well as foreign investors alike.

How NSEL Went Under

It was in July 2013 that a `5,600-crore payment default crisis surfaced at NSEL after about two dozen counterparties defaulted in payment obligations. After all investigating agencies such as the Economic Offences Wing (EOW), the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED), carried out detailed investigations, they stated that not a single paisa went to NSEL, FTIL or its founder Jignesh Shah.

Even the Bombay High Court endorsed that, “The money invested has not come to NSEL, but has gone to the borrowers, ie. bogus sellers. It is the borrowers who have been benefitted by the transactions and the money of ‘investors’ has gone to them.” Despite this fact, the FMC, without running an evidential-led trial, recommended the merger under the pretext of “public interest”.

Acting on the FMC recommendation, the MCA, invoked Section 396 of the Companies Act, which permits the compulsory merger of two private companies only if it is essential in public interest. The MCA order dated February 12, 2016, thus qualified as the government’s first-ever attempt to merge two private companies in public interest. The Bombay HC, on December 4, 2017, only ratified the MCA, ruling, paving the way for the actual merger to take place.

Supreme Court Ruling

However, 63 Moons Technologies Limited, moved the SC against the Bombay HC order. In a landmark judgment, a SC bench of Justice Rohinton Fali Nariman and Justice Vineet Saran held that the MCA’s amalgamation order, upon which the HC order was based, was ultra vires Section 396 of the Companies Act, thereby setting aside the HC order.

The 133-page verdict reasoned: “It will be seen that all the expressions used in relation to ‘public interest’ have relation only to the businesses of the two companies that are sought to be amalgamated. What is important to note is that there is no interest of the general public as opposed to the businesses of the two companies that are referred to.”

“Each one of these expressions, when read with the rest of the order, therefore, only shows that the sole object of the amalgamation order is very far from the high-sounding phrases used in the opening, and is really only to effect speedy recovery of dues of `5,600 crore, which has been referred to in the letter of the FMC to the Secretary, MCA, dated August 18, 2014,” it stated.

The SC order further argued: “What concerned the FMC in August 2014 has, by the date of the final amalgamation order, been largely redressed without amalgamation. The ‘emergency situation’ of 2013 which, even according to the central government, required the emergent step of compulsory amalgamation, has, by the time of passing of the central government order, disappeared. Thus, the raison d’etre for applying Section 396 of the Companies Act has, by the passage of time, itself disappeared”.

“In fact, as on April 30, 2019, decrees/awards worth `3,365 crore have been obtained against the defaulters, with `835.88 crore crystallized by the committee set up by the HC, pending acceptance by the HC, even without using the financial resources of FTIL, as an amalgamated company,” it read to drive home the point.

The SC bench contended that the only reason that really remained for the merger was to facilitate NSEL recover its dues from defaulters by pooling the human and financial resources of FTIL and NSEL and this reason, was, by itself, the protection of the private interest of a group of investors or traders, as distinct from “public interest”.

The bench concluded, “Though other wide-ranging arguments were made with respect to the validity of the central government amalgamation order, we have not addressed the same as we have held that the order dated February 12, 2016, is ultra vires (beyond its legal authority) Section 396 of the Companies Act, and violative of Article 14 of the Constitution of India for the reasons stated by us hereinabove. The appeals are accordingly allowed, and the impugned judgment of the Bombay High Court is set aside. The writ petition is disposed off in light of this judgment.”

Had the ruling been different, it would have shaken the very foundations of India Incorporated.

How The FMC Failed

At the helm of the recommendation that NSEL be merged with its parent company, 63 Moons Technologies (then FTIL), in public interest under Section 396 of the Companies Act, was the then Chairman of FMC, Ramesh Abhishek, a Bihar cadre IAS officer. The SC order flew in the face of his recommendation, and perhaps, rightly so, for targeting the exchange, its parent company and founder instead of going after the key conspirators of the NSEL crisis i.e. the defaulting brokers, to whom the entire money trail was traced.

Long after the crisis, it emerged that a large number of the exchange’s clients were fictitious, so much so that only a few hundred came forward to claim their money, implying that a majority of them simply did not exist. Worse still, Abhishek’s August 4, 2013, announcement, that there were 23 entities that owed `5,600 crore to NSEL and through NSEL, to the people who had put their money there, and 16 of them actually attended the meeting to discuss the modalities of repayment, was made following a “closeddoor meeting with the defaulters”, revealed an investigation by the Serious Fraud Investigation Office (SFIO).

The Credit Goes To

63 Moons Technologies was represented by counsels including Mukul Rohatgi, Abhishek Manu Singhvi, Sourabh Kripal, Vikas Singh, Arvind Lakhawat and Pravin Gulati. M. Narsimhan and Kapil Sibal were on record. While Mahesh Aggarwal, Ankur Saigal and Harsh of EC Aggarwal and Co. were the Advocates on Record (AOR) from Delhi and Shaheen Parikh of CAM was the AOR from Mumbai.

63 Moons internal legal team included the Mentor and Chairman Emeritus, 63 Moons, Jignesh Shah, Mihir Kamdar, Ashish Kakade, Paras Ajmera and Priyanka Vora.

In 2012 as well, Jignesh Shah and 63 Moons played a pivotal role in saving the venture capital and private equity industry. The then SEBI chairman C.B. Bhave had declared Shah’s exchange MCX-SX as ‘not fit and proper’, by declaring buyback contracts as illegal. Finally, the Bombay High Court set aside SEBI’s order and subsequently, the order was upheld by the Supreme Court, thereby saving the interests of private equity, venture capitalists and general investors. This, along with the recent landmark judgment by the Supreme Court, in which the forced amalgamation of NSEL with its parent company 63 Moons was set aside, have become the biggest judgments in the history of Indian corporate law, by saving the concept of limited liability.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.


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