NSEL-FTIL merger proposal makes no sense, also sets a bad precedent: Venkat Chary

Interview with Chairman, FTIL

The government has proposed amalgamation of the now-defunct National Spot Exchange (NSEL) with its holding company, Financial Technologies (FTIL), to ensure the 13,000 investors in the former who’d lost Rs 5,600 crore in the payments default there, can be repaid. Venkat Chary, chairman and independent non-executive director, FTIL, and former chairman, Forward Markets Commission (FMC), tells Rajesh Bhayani such a merger would set a dangerous precedent. Edited excerpts:

What’s your view on the proposal to merge NSEL with FTIL?

The merger will not help solve the problem in any way. The proposal has been made by FMC in undue and unexplained haste. Amalgamation of a limited liability firm with the parent holding company would set a very dangerous precedent in India’s corporate sector and scare investors away from India. It will strengthen the existing perception that it is difficult to do business in India. Even the assumptions made to come to the conclusion for merging NSEL with its parent company are baseless.

NSEL was making a profit and FTIL shareholders benefited from the higher dividend. When investors lost money in NSEL products, it was the turn of FTIL shareholders to pay back. What is wrong in that?

FTIL shareholders have not benefited from an NSEL profit; rather, they have been the losers. Profit, if any, made by NSEL in 2012-13 was used to pay the so-called ‘investors’ during the settlements. On the balance sheet, that profit was not approved by NSEL’s auditors; NSEL’s annual accounts are yet not finalised. In its life, NSEL has not paid a single rupee of dividend to FTIL. It had paid a meagre amount of fees to FTIL for some technology services it had used.

So, the argument that FTIL shareholders have benefited due to NSEL’s profits doesn’t stand scrutiny. Rather, the entire capital of Rs 45 crore invested by FTIL in NSEL was lost and has been written off by FTIL, along with the exchange’s Rs 145 crore reserves and the loan it had given in the past. So, FTIL shareholders are the losers.

When a payment crisis as large as Rs 5,600 crore happens, the government had no option but to quickly step in to protect the interest of investors, isn’t it?

If the issue is one of acting with speed, do recall that FMC was the nominated authority and given omnibus powers by the department of consumer affairs (DCA) as far back as on August 5, 2011, for oversight of all spot exchanges given a one-day forwards exemption under section 27 of the relevant law. It could and should have acted in early 2012 itself to nip a crisis in the bud.

Both DCA and FMC miserably failed to do so. When the payment crisis burst out following DCA’s order dated July 12, 2013, after a long silence of 11 months, to peremptorily stop new trades, which completely spooked the market, FMC and the subject of commodity derivatives trading was just transferred to the ministry of finance.

Another point is that NSEL investors are not investors in the real sense. They were traders and have shown gains from NSEL investment as business gains. Judge Abhay Thipsay of the Mumbai high court has, in his order, called them ‘bogus traders.’ Protecting their interest and making 58,000 FTIL shareholders to suffer for them can never be regarded as being in the public interest. More, as little as 781 of the 13,000 so-called “investors” have to receive 69 per cent of the total current dues.

But if, somehow, the amalgamation goes through, won’t the liabilities of Rs 5,600 crore fall on FTIL?

That liability is not on NSEL’s books even as of now. It can happen only if the court rules that it should be NSEL’s liability. But, several decisions have been taken in haste even before the court has delivered a judgement. Withdrawal of FTIL’s ‘fit and proper’ status by FMC was challenged in the high court but even before that has been heard and decided, the regulators have forced FTIL to divest its assets at whatever price. If the court eventually rules in FTIL’s favour, the loss due to forceful sale of assets would be irreparable. In fact, the liability is of the 25 borrowers who have raised money from the ‘so-called NSEL investors’ and who have been declared as defaulters.

Irrespective of that, won’t the amalgamation of NSEL help the defunct exchange to get the required muscle to carry on the recovery process?

The truth is that NSEL has been taking all possible measures to recover the money. The NSEL management report given to FTIL lists their filing of 47 cheque bouncing cases against borrowers, 45 cases in the MPID court, five arbitration cases and several recovery suits in the high court. This process has not been affected for want of funds, as FTIL had sanctioned a loan to NSEL of Rs 40.09 crore in the past year to meet its expenses, mostly legal.

In sum, NSEL’s recovery job has not been affected for want of funds and FTIL’s shareholders are bearing that cost. As far as the staff is concerned, NSEL still has 52 employees looking after legal and recovery processes, with external consultants and advisors assisting them.