The draft order for merger of National Spot Exchange Ltd (NSEL) with Financial Technologies India Ltd (FTIL), mooted by the Ministry of Corporate Affairs (MCA) on the sole recommendation of the Forward Markets Commission (FMC) sets a dangerous precedent.
The draft order for merger of National Spot Exchange Ltd (NSEL) with Financial Technologies India Ltd (FTIL), mooted by the Ministry of Corporate Affairs (MCA) on the sole recommendation of the Forward Markets Commission (FMC) sets a dangerous precedent.
The government has never used Section 396 of the Companies Act to merge two companies and use to the assets of one company to pay of the liabilities of other.
The merger also deals a serious blow to the corporate culture by shaking one of the rudimentary principles of limited liability, on which the entire corporate edifice rests.
FMC, on the one hand, has asked FTIL to sell the assets, which may lead to distress sale of those assets and, on the other hand, the same MCA filed a notice of motion to vacate stay against its order to merge FTIL with NSEL and curb FTIL from selling those assets. Either way the 58,000 shareholders of FTIL are at a loss.
The regulator's recommendation of merger seems one sided as NSEL has been shut down, and after being merged with FTIL, would not add any value to the latter. Rather, with the merger taking effect, all liabilities and litigation will be borne by the FTIL.
FMC's recommendation of merger will also not help in repayment of Rs 5,300 crore dues of over 13,000 trading clients of NSEL, because these dues have to be repaid by the 24 defaulting companies, and not NSEL which merely provided a platform for trading.
NSEL, on its part, has so far recovered Rs 360 crore from the defaulting members, whose assets are currently attached by Economic Offences Wing (EOW) of Mumbai police. It also filed arbitration petitions, recovery suits and third-party proceedings against defaulters which led to defaulters committing in the court of law to pay Rs 2,000 crore with settlement schedule. NSEL has also settled, out of 46,000 trading clients, 100% redemption, of 33,000 e series clients. A total payment of Rs 297.44 crore was made to e series clients in the financial closure.
The Monitoring cum Action committee (MAC), which was set up by the FMC itself expressed that the recovery process has gained momentum since the joint meeting with NSEL board, but FMC ignored its own committee report and suggested merger of NSEL with FTIL to the MCA. Calls made to FMC chairman Ramesh Abhishek for did not elicit a response.
By seeking for merger of NSEL with FTIL, two private entities under Section 396 of the Companies Act, the government has sought to force-merge two private entities by applying a section which is meant for Public Sector Enterprises. Also, the section says that the merger can happen only with the consent of both parties.
Questions raised by the FMC's recommendation of merger
1) Did the FMC conduct a fact finding exercise before the merger, especially when such an order was being sent out for the first time in last 60 years and could have a cascading impact on corporate India?
2) Even while the NSEL case is sub judice, why is FMC pressing for the merger of NSEL with FTIL?
3) Who will gain from the merger of NSEL with FTIL, because NSEL is not liable to pay back the money, but the 24 trading companies who used NSEL's platform
4) The proposed merger of NSEL with FTIL will erode the entire net worth of FTIL, and harm its over 58,000 shareholders, lift the corporate veil and set a dangerous precedent, who will it benefit?
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