Setting a precedent for private companies, the Bombay High Court here upheld the order of the Union Ministry of Corporate Affairs (MCA) for a merger of scam-tainted National Spot Exchange Ltd (NSEL) with its parent, 63 moons technologies, earlier named Financial Technologies (India) Ltd).
The two-judge bench of Chief Justice Manjula Chellur and M S Sonak rejected the petition of 63 moons against the order; it, however, agreed to a stay on its operation for 12 weeks, for time to appeal. The company has decided to appeal to Supreme Court.
63 moons' share price closed in the five per cent lower circuit, at Rs 131.1.
The order clears the legal way for a government to order the merger of two private entities. Also noteworthy since NSEL is a limited liability company. Its liabilities, by the order, when confirmed by the court, will become 63 moons' once a merger takes place.
The government exercised its power under Article 396 of the Companies Act.
"We will be moving the Supreme Court. We have full faith in the judiciary," said a 63 moons spokesperson.
MCA had issued a draft merger order in October 2014, followed by a final order in February 2016, citing the public interest. This followed the Rs 5,574 payment crisis in NSEL, involving the money of about 13,000 investors. MCA said its order would ensure the investors would get their money.
To which, 63 moons contended the government order would hit its 60,000-plus investors, for no fault of theirs'.
The payment crisis on NSEL came to light in July 2013, when commodities traded on the tainted exchange were found to be not backed by stocks in its warehouses.
63 moons has 99.9 per cent stake in NSEL. If a merger takes place, all Rs 5,270 crore of pending dues would be transferred on the books of 63 moons.
"It is a welcome judgement. The concept of limited liability allows you to trade and commerce, not to give you licence to commit fraud. The decision has reinvigorated the hopes of NSEL victims, who had almost given up," said Ketan Shah of NSEL Investors Action Group, a body formed to fight for recovery of the said dues.Venkat Chary, chairman, 63 moons technologies limited, said in a statement that the order passed through an executive fiat is devastating for corporate India. Terming it as a 'black day' in the history of Corporate India, Chary said this order has a serious impact on the limited liability concept, which is the cornerstone of the Indian corporate sector. "This is a worrisome development for corporate India as the aftermath is likely to be chaotic, impacting investment flow into India by way of domestic investments, FDIs, FIIs and also the spirit of entrepreneurship, so vital for the country’s economic development as investors will always be scared to invest in parent companies with subsidiary companies," he said. “We compliment MCA for taking a bold decision of invoking section 396 of Companies Act first time in the corporate history of India. It (the merger) will discourage corporate from floating subsidiaries and be disowning them when they commit frauds. We are also anxiously waiting for judgment by National Company Law Tribunal (NCLT) where MCA has proposed supersession of FTIL board. After four years, the victims of the NSEL scam have some hope of getting justice and recovery of their investment,” said Sharad Kumar Saraf, Chairman, NIF. Major Developments
- July 31, 2013: NSEL suspends trading in forward contracts following a govt order
- August 15, 2013: NSEL submits 33-week settlement plan to regulator FMC, as it defaults in payment of Rs 5574 cr to 13,000 investors
- September 2013: The finance ministry takes over the regulatory powers of regulating commodity futures markets from the consumer affairs ministry
- August 2014: FMC recommends merger of NSEL with its parent Financial Technologies, now 63 moons technologies
- October 21, 2014: MCA issues draft merger order
- February 2, 2016: MCA issues final merger order
- February 2016: FTIL challenges MCA order in HC
- February 16, 2016: Bombay HC stays implementation of MCA order till March 2017
- October 24, 2017: HC reserves order
- December 4, 2017: Court rejects FTIL’s petition by upholding MCA order. FTIL pays Rs 304 cr of the principal amount; Rs 5270 cr remains payable