In July, 2013, an alleged systematic and pre-meditated payment fraud to the tune of Rs 5,600 crore surfaced in connection with the dealings of National Spot Exchange Ltd (“NSEL”), a majority held subsidiary of Financial Technologies (India) Ltd.(“FTIL). Through a draft order dated 21st October, 2014, the Ministry of Corporate Affairs (“MCA”) proposed amalgamation of NSEL with FTIL by invoking Section 396 of the Companies Act,1956 (“Act’). The merger was recommended by the commodities market regulator Forward Markets Commission (“FMC”). Without issuing a final order, the MCA moved the Company Law Board (“CLB”) to supersede the FTIL Board. On 10th November,2014, FTIL assailed the draft order before the Bombay High Court by way of a writ petition. The Sheth brothers Ravi Sheth and Bharat Sheth, Directors of Great Eastern Shipping Co.Ltd., who together held 8 % stake in FTIL, filed another Writ Petition before the Bombay High Court challenging the proposed amalgamation. As things stand as of now, the Bombay High Court has given the Government time until 30th October,2015 to pass a final order on the proposed amalgamation.
The forced amalgamation of NSEL with FTIL and the supersession of FTIL’s Board will have a deleterious effect on investments into India and the Indian economy as a whole, as follows:
1.The sustained endeavours to attract foreign investments into India by themultiple action plans of the Central Government under the dynamicstewardship of Modi (a name which is now becoming synonymous with the“Mission Of Developing India”!) may not yield the desired results as the forcedamalgamation would erode confidence of the investors’ community. At thesame time, the MCA’s proposal to supersede FTIL’s Board is most likely tocreate chaos and confusion in India’s corporate landscape and would open avirtual floodgate of unnecessary and time consuming litigation that would bedifficult, nay impossible, to breach.
2. India is ranked at 142nd place in the “Ease of Doing Business” index compiledby the World Bank. A forced amalgamation on the singular plea of “publicinterest”, which is not clearly defined and has room for ambiguity, will furtherdrag down India’s rank in the index.
3. It is estimated that India will require over US$1 trillion to fund criticalprojects in the days to come. In the absence of a business-friendly climate, theattempts to attract this gigantic investment from global investors may not yieldthe desired results, which may have a cascading effect on India’s ambitiousroadmap for accelerated growth.
4. The laudable “Make in India” initiative recently set in motion by theGovernment of India will be adversely affected by the forced amalgamation as itwill destroy the concept of limited liability in India and Indian corporate lawwill sink into the abyss of a new Dark Age. This will also cause a setback to thePM’s vision of “Minimum Government & Maximum Governance”.In recent days, there has been a studied attempt to breach one of therudimentary tenets upon which the entire corporate edifice stands by throwingto the winds the due process of law on the pretext of “Public Interest”. Forcefulamalgamation of two private sector companies using Section 396 of the Act,especially when the entire matter is sub-judice, is tantamount to gross violationof Article 14 of the Constitution that guarantees “Equality before Law” or“Equal Protection of Law. Moreover, forced amalgamation constitutesexpropriation of the property rights of FTIL and its shareholders which is inbreach of Article 300-A of the Constitution that reads “No person shall bedeprived of his property save by authority of law”. Conspicuously, the pre-requisite of “essential public interest” for the exercise of power under Section396 is absent, as the interest of over 63,000 shareholders of FTIL has beengnored vis-à-vis the interest of 13,000 trading clients of NSEL. Section 396was used previously in only a few rare instances, wherein two publiccompanies were merged. No private Company has ever been forced to mergewith another independent Company. Again, the forced amalgamation of twoprivate sector companies is discriminatory and ignores the MCA’s own circulardated 20th April, 2011, which sets out clear guidelines for amalgamation of twoGovernment companies under Section 396 wherein consent of 100%shareholders and 90% creditors is required. As no such opportunity has beenafforded to the shareholders and creditors of NSEL or FTIL, Article 14 of theConstitution stands flagrantly violated. Significantly, while hearing the case,the Bombay High Court has allowed FMC to be a party to the case. The HighCourt has also allowed the shareholders of FTIL to be a party to the case, whounanimously (99.55%) voted against the amalgamation of NSEL with FTIL. Inthe meantime, the Board of Directors of FTIL (100%), it’s creditors (100%)and employees (100%) have also voted against the amalgamation.In conclusion, I wish to assert my absolute and unshakable faith in the Rule ofLaw, the Independence of the Judiciary and the Supremacy of the Judiciary,about which the venerable American judge, lawyer and jurist Robert Jacksonsaid – “We are not final because we are infallible, but we are infallible onlybecause we are final.”