Proposal for NSEL merger into FTIL might go to Jaitley

According to Section 396 of the Companies Act, 1956, the Centre can order merging of two companies if it is essential in the public interest

Finance Minister Arun Jaitley might have to step in to decide on the Forward Markets Commission (FMC)’s proposal to merge scam-hit National Spot Exchange Ltd (NSEL) with its parent, Financial Technologies India Ltd (FTIL).

It is learnt the finance ministry is backing the proposal but the ministry of corporate affairs (MCA), also headed by Jaitley, has reservations. “We have sought the finance ministry’s views,” said a senior MCA official.

In August, FMC wrote to MCA to merge the now-defunct NSEL with its promoter and 99 per cent owner, FTIL. The Jignesh Shah-promoted spot exchange had defaulted on payment of Rs 5,574 crore to depositors.

According to Section 396 of the Companies Act, 1956, the central government can order merging of two companies if it is essential in the public interest. As the issue of “public interest” is not clear in this matter, MCA decided to ask the finance ministry for its view. The final word on this rests with MCA and Jaitley, being the minister for both, can iron out the issues.

“FMC has suggested the two be merged under the Companies Act. It is one option to protect the interest of investors,” said a finance ministry official who did not wish to be named.

The FMC proposal was made after some investors met Minister of State for Finance Nirmala Sitharaman and suggested the merger as an option.

“FTIL, being the parent, should take the full responsibility. But this parent-child relationship is a grey area. The parent can argue it is a separate legal entity,” said a government official.

According to experts, there is no precedent where such power was exercised by the government to merge a private company into a listed one. The government has used its powers under the Companies Act on amalgamation of companies in cases related to public sector enterprises. Experts say a case can be made for these two companies to be amalgamated in the public interest, since the money of 13,000 investors in NSEL is at stake. However, “merger of NSEL with FTIL might be seen as transfer of NSEL liabilities to FTIL, detrimental to the 58,000 public shareholders of FTIL, especially when the money that investors lost on NSEL had gone only to 24 borrowers of the exchange, as stated in the police chargesheet against Jignesh Shah, promoter of FTIL”.