Proceeds pushed for next – Bombay HC adjourns NSEL-FTIL merger hearing

FTIL’s quest for pivots to save numerous stakes has been a determined effort. The Bombay Court, on 27 November, 2014, adjourned the NSEL-FTIL merger issue till 22 December, 2014. The merger draft order came as a stinker from the Ministry of Corporate Affairs (MCA) on 22^nd October, 2014, which was swilled by many from the business community and several of the media mouth pieces and vents ever since, calling it unwarranted and uncalled for. The swarming views were - the pragmatic shortcomings from the amalgamation will wear away the fundamentals of limited liability; it may also affect the corporate business moorings adversely, apart from discouraging new and enthusiastic investors and traders. In entirety, it may be detrimental to the economy as a whole.  

Apparently, the adjournment, if construed specifically, means the hearing has been deferred till 22 December, 2014; momentarily, it can be seen as the idea is devoid of enough reasoning, as the basis of Article 396 and ‘public interest’ nomenclature can’t be held to be entirely realising. Thus no parity can be drawn in this case. Also, as per a former argument by Abhishek Manu Singhvi, counsel for FTIL, at Supreme Court, section 396 of the Companies Act, 1956, has been exercised, with a thoroughgoing approach, maximum four times, on government companies – that too, with their consent. While in this case, the rummage for expedited merger implementation is on two private companies; needless to say, without their consent, which is unprecedented. Implicitly, the motive seems to be ‘hurried implementation’, which, as per several views and reviews, will emasculate the sanctity of limited liability, affecting the interests of stakeholders, viz. employees and shareholders of FTIL, largely. Therefore, it hasn’t been taken in good taste, for the most part.

It’s been a dour demeanour of FTIL; at first, challenging government’s order for merger of NSEL with FTIL. Then tenaciously striding ahead to protect the sanctity of ‘limited liability.’ Earlier, FTIL had moved Bombay HC against the government’s order. Vehemently put by FTIL, against several arguments – the matter is currently sub-judice before the Bombay HC; thus liability through piercing the corporate veil does not arise.

Myriad voices and arguments against the order were put forward by the business community as well as the media fraternity, to galvanise the matter to reach the authoritative and law dispensing ears. Their objective, seemingly, was to converge fortitudes of the stakeholders, future investors and entrepreneurs at large.

As per the excerpts, mentioned in quotes in the news edit of Economic Times, on 13^th Nov., 2014, reads – “The issue of lifting the corporate veil is, thus, already sub-judice before this court. The petitioners crave leave to refer to and rely upon the papers and proceedings, including various interlocutory applications and orders passed by this Hon-'ble Court, in the said suits."

Now, FTIL is all the more determined to protect the interests of the corporate India, along with those of 60,000 shareholders and 1000 employees. On 21^st October, 2014, questions have been raised on the Ministry Corporate Affairs’ impugned order of enforced amalgamation of the crisis-hit NSEL with FTIL. FTIL solicited in the petition that the government’s order was “bad in law and needs to be quashed.”

FTIL spurs against government merger order in HC

Amidst the attempts to entrench an off beam precedent by calling for NSEL-FTIL merger; whilst myriad media vents calling it untenable, there’s barely a recourse to save the sanctity of limited liability. Also, the hoot and holler of the business community against the merger order has gone unheeded.

Fending off the unwarranted blitzkrieg is perhaps the panacea to subdue the tempest, thus FTIL moved the Bombay HC for reprieve.

Several actions were intrepid and radical, resonating impulse activism. Distraughtly, a recommendation of the NSEL-FTIL merger by Forward Markets Commission (FMC) led to a draft order by the government. Not limiting to that, the government also indicated replication of actions taken against Satyam on FTIL; in other words, a complete take-over of the management, revamping the board. Every debate, redact and views by the media outlets across-the-board stated that government seems to be raring to impose actions on FTIL. Every now and then, it was stated by most of them, including FTIL that it will ‘defeat and destroy’ the fundamental edifice of limited liability and independent corporate personality in company law, but in vain.

Therefore, FTIL opted for legal resort; thus moved the court, to challenge the order. A petition filed by FTIL in the Bombay High Court against FMC, the commodity futures market and the government, raises crucial issues. Some of them happen to be, as stated in The Economic Times news report on12th Nov. 2014 - “the merger will destroy and defeat the fundamental edifice of limited liability and independent corporate personality in company law.” Secondly, “it will open the floodgates for vested interests for seeking such forced mergers of subsidiaries with their parent companies or other entities whenever there is a problem at the subsidiary level. Finally, “The company has also prayed, among others, that the court prohibit the government and its servants, agents, officers and subordinates from superseding, substituting or otherwise howsoever changing the management of FTIL.”

FTIL is equipoised to pursue the matter, propounding the issues strongly against the government draft order, based on FMC’s recommendations of amalgamation of NSEL with FTIL, under Section 396 of Companies Act 1956. The section is a provision to empower central government for mergers or amalgamation of companies in public interest.

The petition has been filed to challenge the constitutional cogency of Section 396 of Companies Act. The bone of contention is while the edict is being construed, the High Court should interpret that the provisions of the said statute, in order to confirm the same, to be constitutionally legal and valid. Further the petition contends that enactment of Section 396 of the Act was to make available precisely little exception pared out for adherence to the provisions of Section 394 and 395 of the Act – as these put down extensive provisions pertaining to the revamp or merger of companies, along with the supplementary components.

NSEL-FTIL merger proposal- Standards ruptured. How Satyam case is different from FTIL’s.

Appalling ideas wished-for, to further impose on FTIL! Earlier, it was the proposed idea of NSEL-FTIL merger by Forward Markets Commission, which was subsequently ordered by the Ministry of Corporate Affairs (MCA); then taking possession of FTIL management has been on government’s anvil. Now, is it just getting arms over resources or getting the claws into the healthily operational organisation, for which the activism is being sped up?

“The government owes the nation an explanation as to why and on what grounds the Forward Markets Commission (FMC) has been making these proposals to breach FTIL’s limited liability……..”(Source – EconomicTimes, Oct. 28, 2014. Edit, PageNo.16).

Would there be a tenable reasoning to all that the nation is looking up for. Also, suggests the excerpts of the Economic Times’ edit page titled “Who’s Targeting FTILBreaching all Norms?”It reads as –“It is entirely unwarranted to do a Satyam on FTIL, on the pretext of speeding up the process of recovery from the defaulting traders of NSEL.

The government owes the nation an explanation as to why and on what grounds the Forward Markets Commission(FMC)has been making these proposals to breach FTIL’s limited liability when no wrongdoing or improper pecuniary gain has yet been established against its management and when there are clearly identified defaulters who carried out trades with non-existent underlying stocks and whose obligation to pay is beyond dispute? And why have the ministries of law and corporate affairs been indulging in these patently misconceived demands by the FMC?”

As it has been talked on countless forums that the Economic Offences Wing (EOW) has identified and frozen the assets of the defaulters and a panel has been set up by the Bombay High Court for recovery, what’s the panic to merge and take over all about? But what’s more stroppy is that the hounding actions taken on Satyam are being proposed for FTIL.

Straightforwardly, these are two diverse gears! There are contrasting events in both the cases, thus no parity can be drawn between the two. FTIL’s case cannot be labelled as a corporate scandal.

Here are some contrasting reasons as to how FTIL’s case is far different from Satyam’s, in detail:

Firstly, in the case of Satyam, the promoter had confessed in writing to the regulator of his wrong-doings, whereas there was vehement and consistent denial by the promoter of FTIL, of any wrong-doings whatsoever. The matter of his culpability is sub-judice. Also, the question whether NSEL itself is liable for the trading losses incurred by the 13,000 clients of the brokers who traded on the NSEL platform for higher returns (“Trading Clients”) is currently sub-judice before the Bombay High Court. Hence, the question of FTIL being held liable through piercing the corporate veil does not arise.

Secondly, Satyam’s promoter confessed siphoning-off the company’s funds to his realty firm Maytas infra. Whereas in the case of FTIL, even after 12 months of investigation byEOW, ED and CBI, not a single paisa of the Trading Clients’ money traced eitherto NSEL, Mr. Jignesh Shah or FTIL. On the contrary, the entire money of the Trading Clients (i.e. Rs. 5,500 Crores) has been traced to 22 Defaulters who used that for repaying loans, working capital requirements, real estate and luxury cars. In fact, 85% of the Trading Clients’ money is with just 7 Defaulters. Both the above aspects confirmed by the Bombay High Court’s Order of 22 August 2014 granting bail to Mr. Jignesh Shah.

Thirdly, Satyam’s promoter confessed fudging of books of account of Satyam. But in FTIL’s case, No major irregularities found in the ROC’s inspection of FTIL. FTIL audited by one of the Big-4 accounting firms which has not found any irregularities in FTIL’s accounts so far. Further, no loan defaults by FTIL till date have been found. FTIL was granted licenses to set up exchanges by Indian regulators (such as SEBI, CERC, FMC) and overseas regulators such as Singapore, Dubai, Mauritius, Bahrain etc. after thorough due-diligence and background check of the company and its promoters.

Thus, in the case of Satyam, there was a fraud in the company (i.e. Satyam) itself perpetrated by the promoters who were also in management. Hence, the remedy was to change the management- whereas in the case of FTIL, no fraud has been detected by the courts or investigating agencies. It is a case of payment and settlement defaults at FTIL’s subsidiary NSEL due to the 22 Defaulters failing to honor their pay-in obligations towards NSEL. Hence, the remedy lies in chasing these Defaulters and ensuring recovery of the Trading Clients’ monies from them.

In spite of all that, the actions are planned to be cuffed on FTIL. The sanctity of limited liability is expected to hobble with such actions, and it’s been time and again voiced out by numerous media houses. ‘Coming up good times’, as the colloquial more coined now and then - will it see the times when norms and laws are not violated, and also, the rights and ‘limited liability’ privileges of the investors across-the-board are protected, by even-handed outlook.

NSEL-FTIL merger call likely to create pangs of discontent

Privileges of limited liability emasculated in one blow!

As the course of law is yet to dispose, why did the government propose the merger? Is it some kind of hurry or prejudice? These are the questions raised by several media houses besides the business fraternity. There’s a lobe of hope still flickering as the business community and media guilds resonate their concerns over government’s NSEL-FTIL merger order.

Like the most, one of the excerpts from an article featured in Economic Times on 23^rd October, 2014, reads that, “Merger Violates Limited Liability”; it specifically states –“This kind of governmental activism will not help the traders who are owed money to recover their dues, but will taint India’s record on respecting the basic principle of limited liability. The move will, in all probability, also amount to contempt of court, as the Bombay High Court is already seized of the matter and is in the process of recovering the amount from defaulters.”

Devoid of dispute, the defaulting traders’ blameworthiness has been established! As much veracity lies in the crisis that unfolded, mugging trading clients, there’s as much credibility in the Economic Offences Wing (EOW) of Mumbai Police having identified defaulters and frozen their assets- almost the entire amount. It was further fortified by the committee formed by the Bombay High Court, chaired by a former high court judge, in order to diligently function and initiate money recovery efforts from the defaulters. Thus when the feisty approach can be reflected in redeeming the seized assets, why the government cannot expedite it on priority basis than condoning the importance of limited liability.

“This kind of governmental activism will not help the traders who are owed money to recover their dues, but will taint India’s record on respecting the basic principle of limited liability. The move will, in all probability, also amount to contempt of court, as the Bombay High Court is already seized of the matter and is in the process of recovering the amount from defaulters.”(Source – ET, 23^rd Oct ’14)

Abiding by the law - the proceeds in the court of law happens to be sub-judice, which, in all fairness, is supreme. Also, no linkage of FTIL promoters or the company in neither the whole crisis nor any money trail has been established; therefore, unwavering focus, plausibly, should be on recovery than anything else. So, is it prejudice triggering radical activism of this magnitude? Numerous questions have been raised; predominantly, if FTIL should be substituted for NSEL, and make its investors face the brunt and suchlike. In any circumstance, it is bound to have a cascading effect on the ‘corporate India’, Investments and economy, as a whole. Does it make us ponder over it pensively? 

FINANCIAL TECHNOLOGIES INDUCTS MR. BERJIS DESAI AND MR. ANIL SINGHVI ON ITS BOARD OF DIRECTORS

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