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The 1.37 lakh people who will benefit from NSEL-FTIL merger

NSEL's ambitious pay-off plan will serve far less people than the 137,665 shareholders who will benefit from the merger

N Sundaresha Subramanian  |  New Delhi 

NSEL Investors protest

A spirited campaign is underway against the government move to bring an end to the National Spot Exchange crisis that has hit the financial community badly over the past couple of years. The government move under companies act involves various sections governing forced mergers, superseding the board etc.

While efforts made by the FTIL group to get relief from courts for staying the government action altogether did not succeed, the matter of board supersession is before company law board.

Separately, the court has directed the government to give two weeks’ time for appeal before any such order merging FTIL and NSEL is implemented. In the meanwhile, the government has put up a proposed swap-ratio for the merger.

One of the key arguments against the merger proposal is that it would affect some 62,000 small shareholders of FTIL. While there have been many supporters of this argument including a Business Standard editorial that also focused on the limited liability concept, the following blog argued against its merits in October.

Recently, the FTIL group has come up with a settlement proposal, which seeks to settle dues of smaller of the investors. Accordingly, the plan under which contributions of brokers are also sought, NSEL wants to pay off the smaller investors with dues of less than Rs 10 lakh each. These 6,445 investors who account for over half of the 12,735 hit by the scam, would be paid off their entire dues of Rs 164 crore in the first month or so. Another 4900 wealthier clients with exposure of over Rs 10 lakh but less than a crore totaling Rs 1,345 crore are to be paid half of their dues in the first month. This part of settlement is supposed to be funded equally by FTIL and brokers. Thus, by spending about Rs 320 crore, FTIL hopes to settle over 11,000 investors. But, there's no firm commitment from brokers, who are supposed to bring in Rs 500 crore, agreeing to this. On the contrary, brokers and FTIL are on a collision course suing and counter-suing each other for defamation.

That would leave about 781 entities with an exposure of over Rs 1 crore or more, whose repayment depends on recovery from defaulters, from whom very little has been recovered in the past two years. Assets of these defaulters are tangled in multiple legal proceedings , attachment orders and investigations by various central agencies.

In response to an earlier version of this blog, an FTIL spokesperson clarified,” The centre of the theme of the article is that the merger would benefit 1.37 lakh persons as the 3 listed corporate will get their due payment. Sir, I would like to mention that your learned journalist has not gone through the proposal submitted by the FTIL through its legal advisor Amarchand Mangaldas. He has conveniently ignored the facts that two PSUs – MMTC and PEC would receive 100% of their outstanding amount if the proposal is implemented.” See the response of FTIL below.

Of this, 779 investors, which include listed entities such as India glycols and Technocraft, will be paid 50% of dues, two PSUs MMTC and PEC would be paid in full.

Investors of NSEL organized under various groups such as NSEL investor forum, NSEL Recovery group, NAARA etc have rejected this proposal while some reports have quoted some individual investors being keen on getting settled this way.

The organized group of investors smells foul and seeing this as an effort to break the unity and whittle down the numbers, which will then dilute the ‘public interest’ argument which is at the heart of the government’s merger plan.

What is public interest? That of 781 rich entities or 62,000-odd small guys, the argument would have gone.

However, there is a catch.

Among the entities with exposure of Rs 1 crore or more are many listed companies. Let us take the three large ones as sample.

MMTC, the state-run firm, which has the largest exposure of Rs 220 crore in NSEL had 59,671 shareholders at the end of June 2013, a month before the scam broke. Today, it has 92,491 shareholders.

Similarly, India Glycols, which has an exposure of over Rs 100 crore, had 32,428 shareholders in June 2013 and 32,081 shareholders as per latest filings. Technocraft India had around 13,700 shareholders in June 2013, which is down to 13,093.

Thus, over 105,800 shareholders of these listed firms were affected by the scam, the same way FTIL group argues that its shareholders would be affected by the merger.

NSEL’s proposed settlement plan completely ignores the desperation of these people and keeps their companies at the end of the pecking order. As per the plan, their settlement is going to take '3-4 months' and is contingent upon recovery from defaulters. What was their fault? Like the FTIL shareholders who are carrying the can of their management’s follies or the follies of people hired by their management to run the subsidiary, these shareholders have also paid a heavy price for decisions taken by their management.

Today, 137,665 people who hold shares in these three companies, are eagerly awaiting the merger of NSEL with FTIL, which will pave way for their companies to get back their legitimate dues and get back to profitability. There might be more such shareholders. Some estimates put the total number of people affected indirectly at around 0.45 million.

It is safe to assume that at least two times the small shareholder interest is in favour of the merger than against it. It would be in 'public interest' for the government to provide a platform for these investors to express their views and opinions on the NSEL-FTIL merger proposal.

Note: This blog has been modified to include a few explanatory paragraphs after clarifications from an FTIL spokesperson. Kindly read FTIL's clarifications below.

1) In the second paragraph, it is mentioned that the merger is objected as 62,000 shareholders of FTIL will be adversely effected

Clarification: This is not “THE” argument but one of the arguments against the merger. The interest of 63,000 shareholders of FTIL is ignored by MCA vis a vis the so-called trading clients of NSEL. Not only that the forced amalgamation will destroy the concept of limited liability which is the fundamental principle of corporate jurisprudence, notably, the forced amalgamation of NSEL (a limited liability subsidiary company) with FTIL (its parent holding company) is without even seeking the consent of the stakeholders (including shareholders and creditors of both the companies). Using the executive fiat, through an administrative order issued under section 396 of the Companies Act 1956 would set a very dangerous precedent in India’s corporate sector as it lifts the corporate veil between two companies in the private sector without any sound reason and ignores valuable rights granted under the law to the various stake holders of the company.

The Business Standard has also, in its editorial in October 2014, has voiced its opposition to forced merger of NSEL with FTIL by saying “Forced mergers are wrong” – Govt violates principle of limited liability.

2) 1.37 lakh people benefit from NSEL-FTIL merger

Clarification: The centre of the theme of the article is that the merger would benefit 1.37 lakh persons as the 3 listed corporate will get their due payment.

Sir, I would like to mention that your learned journalist has not gone through the proposal submitted by the FTIL through its legal advisor Amarchand Mangaldas. He has conveniently ignored the facts that two PSUs – MMTC and PEC would receive 100% of their outstanding amount if the proposal is implemented.

Please find below the Brief of proposed settlement.

The structure of the “without prejudice” proposal envisages an escalating waterfall pattern –

• The Small Claimants (below Rs.10 lakhs, being 7,053 in number) constituting 55.38% will receive 100% of their claim

• The mid-level claimants (between Rs. 10 lakhs and Rs. 1 crore, being 4901 in number) constituting 38.48% will receive 50% of their claim

This aggregates to 11,954 in number constituting 93.86% of the total claimants.

• The PSUs will receive 100% of their claim.

• High Net-worth trading clients (781 in number) constituting 6% of the total claimants will receive 50% of their claim.

• With the support of the government and other regulatory agencies brokers & trading clients under the supervision of Hon’ble High Court appointed Committee (HCC), recovery from the defaulters can be further expedited, who owe the money ultimately to the trading clients and their attached assets can be auctioned expeditiously under the supervision of HCC.

• The recovery process, with further acceleration will first make payout to the above 6% high net-worth trading clients and if any monies are received over and above all trading clients receiving 100% pay out, then the same will be distributed between the contributors (i.e. NSEL and the brokers) in the proportion of their contribution

• The without prejudice proposal assumes that all trading clients who are approximately 13,000 in number are genuine. NSEL is in the process of collecting data from trading clients to ascertain their genuineness

First Published: Fri, April 17 2015. 12:30 IST