The Ministry of Corporate Affairs (MCA) in the Government of India issued on October 21, 2014, a draft order of amalgamation of NSEL (National Spot Exchange Limited - Dissolved Company) with FTIL (Financial Technologies India Limited - Transferee Company) under Section 396 of the Companies Act, 1956. The reasons for proposing such an order of amalgamation have been set out in the Annexure to the Draft Order.
The crux of these reasons, as explicitly specified by the Ministry is that “NSEL is not having the resources, financial or human, or the organizational capability to successfully recover the dues to the investors pending for over a year. Further, NSEL is not left with any viable, sustainable business while FTIL has the necessary resources to facilitate speedy recovery of dues”
“In the above background, a proposal has been received from FMC (Forward Markets Commission) vide letter dated 18-08-2014, proposing the merger of NSEL with FTIL by the Central Government under the provisions of Section 396 of the Companies Act, 1956.The proposal has been supported by the Department of Economic Affairs (DEA), Ministry of Finance. FMC has proposed the merger/amalgamation of NSEL with FTIL in essential public interest so that human/financial resources of FTIL are also directed towards facilitating speedy recovery of dues from the defaulters at NSEL and the FTIL takes responsibility to resolve the payment crisis at NSEL at the earliest.”
“Further, FMC vide its letter dated 17-10-2014 has forwarded representations from various members/investor bodies requesting for merger of NSEL with FTIL and has reiterated its recommendation submitted vide letter dated 18-08-2014.”
After considering the proposal received from FMC and DEA, the Central Government is said to have arrived at “the considered opinion that to leverage combined assets, capital and reserves for efficient administration and satisfactory settlement of rights and liabilities of stakeholders and creditors of NSEL, it will be in essential public interest to amalgamate NSEL with FTIL.”
FMC’s False Accusation
Clearly, the MCA has relied on the recommendations of FMC and representations of the alleged member/investor bodies associated with NSEL. As it is, by its Order dated December 17, 2013, the Forward Markets Commission (FMC) had declared, among others, that the FTIL is “not fit and proper” to hold more than 2% share holdings in the paid-up share capital of the Multicommodity Exchange of India Limited (MCX), a company promoted by the FTIL. The Order was issued by the FMC, in public interest and in the interest of commodity derivative traders. The truth is that in its Order, the FMC did not then dispute that subsidiary and holding companies are separate legal entities. Nevertheless, contrary to the statutory position, the FMC concluded that NSEL, by virtue of being a separate legal entity, was not independent from the control of the FTIL. It had, however, adduced no provision in any law to support its conclusion, which seems unsound in terms of facts and reasoning.
In defence of its order against the FTIL, the FMC had then alleged mismanagement and poor governance of the NSEL. A propos, the responsibility for the management and governance of was strictly with the Managing Director (MD) and the senior executives of NSEL. It is unjust to believe, or even presume, that FTIL was liable in either facts or law for the suspected mismanagement and poor governance of the NSEL. If truth were to be told, the principle of demutualization, which FMC so strongly espoused all along, calls for separation of management from ownership. How can then FMC hold FTIL responsible for the mismanagement of NSEL? In fact by the demutualization logic, FTIL, as a company cannot be held liable for the mismanagement of NSEL. FTIL was therefore truly meeting all the criteria of “fit and proper”, as laid down in Clause 4 of the guidelines as originally issued by MCA on May 14, 2008, and subsequently amended by it on June 17, 2010, and did not suffer from any of the disqualifications provided in the said clause.
Incidentally FMC had then used coercing tactics to pressurize MCX by denying it to commence trades in the futures contracts for the year 2015 till FTIL and Mr. Jignesh Shah, the MD of FTIL, divest their shareholding in MCX. Such denial in reality prevented commodity derivative traders at the MCX from rolling over their maturing contracts in different commodities to contracts for the delivery months in 2015. How could FMC then argue that it has passed the order in public interest and in the interest of commodity derivative traders? The denial of trading at MCX for 2015 delivery months affected adversely even the public interest. FMC’s order of declaring FTIL as not fit and proper neither served the public interest nor the interest of commodity derivative traders. How can MCA now rely on FMC’s recommendation for the proposed merger of NSEL with FTIL?
No Locus Standi for Member/Investor Bodies
While the so-called members/investors may deserve sympathy for their losses on their trades in NSEL, it needs to be clearly recognized that these persons were not investors by any stretch of logic. They were really traders (as observed by Hon’ble Justice Abhay Thipse in his judgement while granting bail to Mr. Jignesh Shah, M.D. of FTIL), buying and selling commodities for either receiving or issuing deliveries on the same day. Even if NSEL had allowed trades for deliveries of goods and payment of price thereof up to 11 days, such trades, being non-transferable specific delivery (NTSD) , were exempted from regulation under the Forward Contracts (Regulation) Act, 1952 (FCRA), and were neither unlawful nor void. But as all commodity trades are not free from risks, the alleged investor-cum-traders were definitely taking risks in their trades, whether regulated or not. It is, however, strange for FMC to support the representations received by it from the defaulting members and investor-cum-trader bodies requesting for merger of NSEL with FTIL, instead of acting against such defaulters in law. It both logically and lawfully follows that MCA should reject their demand for the merger of NSEL with FTIL.
By the way, the fact that FTIL gave a loan of Rs. 179.26 crore to NSEL does not imply that it owns up some responsibility for the NSEL payment crisis. It was a mere bonafide act of good gesture and charity. When International Monetary Fund (IMF) gives a transitional loan to a nation in default on its overseas payments on current account, it is erroneous to infer that IMF owns some responsibility for the payment crisis of that nation.
NSEL – A Dormant Company
NSEL has long ceased to be a platform for spot trades. It has ceased to carry out any business of whatsoever, except to seek recoveries from the tainted defaulters. As MCA’s draft order admits, “The company is hardly left with any financial resources to meet even legal expenses apart from defraying staff salaries and other expenses related to the recovery process. In the circumstances, what public purpose would be served by seeking to merge a dormant and a virtually broke company with an active company, solely because the former was almost a wholly subsidiary of the latter? Whose interest MCA would like to serve by the proposed merger – the interests of criminal traders?
Without serving either the public interests or the interests of genuine investors, who are just not there, the proposed merger will actually harm the interests of the innocent shareholders, the thousands of clients, also over a thousand employees, of FTIL. That would not only add to the unemployment in the country, but, more importantly, be also a great loss to the financial markets in the country. At a time, when the NDA government, under the dynamic leadership of Hon’ble Prime Minister, Narendra Modi, is initiating new and innovative steps to strengthen the financial markets in the country to woo foreign investors, it would be sardonic for MCA to propose such a retrograde merger of NSEL with a leading financial company, FTIL. That would stoke further fears in the minds of foreign financial institutions meditating to enter India.
DEA’s Gameplan
MCA’s argument on DEA’s backing to FMC’s recommendation on the proposed merger is nothing but the travesty of truth. The truth is that the former finance minister was all along desirous of bringing FMC within the fold of DEA. Efforts made by him in that direction in the early 20th century failed in the face of stiff resistance from the commodity exchanges in the country and strong opposition from the then Ministry of Agriculture, Food, and Consumer Affairs. The NSEL scam came handy to him to grab FMC under his arms. Thereafter, he, and the then Secretary and Additional Secretary in DEA, functioning at his will on the one hand, and under their advice, left no stone unturned to twist the arms of the gullible FMC to squash MCX, and through MCX, FTIL, as the latter had brought up MCX to be the largest commodity exchange in the country, and the seventh largest in the world. MCX was the pride of the country, but proved to be an eyesore to the then finance minister and his DEA, as their National Stock Exchange (NSE) sponsored National Commodity Derivative Exchange (NCDEX) lagged way behind, and failed to grow in the face of competition from FTIL’s MCX.
Now, at the behest of DEA, FMC has forced FTIL to give up its shareholding in MCX, it is out to destroy FTIL. It is therefore not surprising that before their transfer, the former Secretary and Additional Secretary of DEA had backed the recommendation of FMC for the proposed merger. So, if MCA wishes to serve the real national interest, and wants to fulfill the noble dream of our vibrant and visionary Hon’ble Prime Minister, it must not fall prey to the nefarious gameplan of the former DEA officials, but drop its draft order to merge NSEL with FTIL, and, instead initiate steps to wind up NSEL, and allow FTIL to grow to new heights with its innovative and new technologies. Simultaneously, it should ask the new Maharashtra government to initiate steps to auction the attached properties of NSEL defaulters to meet the dues, if any, of legitimate past traders of NSEL.
Madhoo Pavaskar is an economist by profession and is at present Director, Research and Strategy Division, Financial Technologies (India) Ltd. (FTIL). All views expressed are personal
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