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Financial Technologies (FTIL) is planning to file a caveat before the Chennai branch of the Company Law Board (CLB) against the government's proposal to change the management of the company post the merger of National Spot Exchange Ltd (NSEL) with it.
The caveat is likely to be filed in a day or two. Even some of the shareholders of FTIL are opposing the government's move to merge NSEL with it and to change the management or supersede its board, said sources familiar with the developments, adding even they were considering to oppose the government's move. FTIL declined to comment on the matter.
The move follows the draft order issued by the ministry of corporate affairs last week proposing to merge NSEL with FTIL, its promoter and 99 per cent owner, following the default by NSEL in July 2013 to the tune of Rs 5,600 crore.
Following the draft order, reports came in that the government is considering to change the management of FTIL after NSEL is merged with FTIL. The government has given two months' time to FTIL and other stakeholders to respond. The move has already raised a debate on whether such action will be legally tenable.
One of the significant minority shareholders said on the condition of anonymity that the government's move "reminds them of the Putin regime of Russia".
In 2003, the Russian government targeted Yukos, at the time one of Russia's largest oil companies, headed by Mikhail Khodorkovsky, a multi-billionaire with political ambitions. Claiming that the company had dodged taxes - but rejecting every Yukos settlement offer - the Russian government drove the firm into bankruptcy and imprisoned its top executives. An international tribunal ruled a couple of months ago that the Russian government stole the Yukos oil company a decade ago and ordered Moscow to pay $50 billion in damages to its former owners.
The shareholder said superseding the FTIL board or changing its management was a case similar to that of Yukos.
Merging a limited liability company like NSEL with its parent is also an unprecedented move. Said another shareholder, "Limited liability companies are formed to protect the parent from unforeseen liabilities. Infrastructure companies set up project-specific special purpose vehicle companies in a similar fashion. Several companies defrauded banks by not repaying loans but the government never took over those companies and paid banks their loans."
In NSEL's case, even the Mumbai police have said in the court that the money trail suggests that money raised by borrowers on the NSEL platform has gone to them and not to FTIL, they said. "How can the government take action against FTIL hurting the interests of its shareholders?" asked the shareholder, who is a former board member of the company.
Anil Singhvi, founder director of proxy advisory firm IIAS, said, "NSEL's so-called investors are actually traders because they were treating gains from NSEL trades as business income and they had even paid VAT and adjusted other business expenses and losses against such gains, a facility available for speculation gains and losses." If investors are traders, they need not get the protection, hence nullifying the basic foundation of the government's draft order, he said.
A legal expert who has studied the case closely said, "In case of the Modern India suit filed in the high court, the issue of who should bear the NSEL liability is debated and hence the case is sub judice. Hence issuing such an order is not in the good taste of law." In this case, one of the NSEL investors approached court to lift the corporate veil of FTIL and pay back NSEL investors but the court has set up a committee, which is like a court receiver, to recover dues from those who have borrowed funds using the NSEL platform and later didn't pay up.
M S Ananth of Nishith Desai Associates said, "Section 396 of the Companies Act, 1956 gives powers to the Central government to order an amalgamation of two or more companies in 'public interest'. The crucial factor is, whether such powers are exercised in 'public interest'." He however said that, "the proposed arrangement can have its impact. This decision may affect future special purpose vehicles (SPVs) formed for carrying out certain businesses as well. If, however, this arrangement is given effect to smoothly and FTIL is able to transition commercially in a successful manner, the effect on other SPVs will be minimal."
