NSEL-FTIL Merger – From the People, for the People?

Setting up a dramatic arena, when the curtains fell in October 2014 on NSEL-FTIL case the government hinted towards a merger of the two mentioned private companies. 15 months later, the curtains actually fell on heads of the “people” when a ‘forced merger’ was announced, under Section 396 in the Companies Act, 1956.

Section 396 of the Companies Act states that the Central Government holds power to provide for amalgamation of companies in public interest.However, the forced merger under the dogma of public interest seems to be unfit, and against governance rules. Forced mergers tend to be a problematic situation when it comes to limited liability, which is the bedrock of corporate law. The act itself states that the merger needs to be in public interest, but what baffles ‘people’ is to how this serves to the interest of people? Civilians expected comprehensive and intelligent explanations of the same from Ministry of Corporate Affairs (MCA) to explain how this merger came to table, and how does it serve the nation. But much to everyone’s disappointment, MCA failed to do so. The cumbersome situation remained unattended, much to everyone’s surprise, even when government gave its final nod for merger few days back. No explanations, no answers, no clarifications. That is quite where “public is interested, isn’t it?”

Quoting Venkatesh Panchapagesan, adjunct professor, finance and control area, at the IIM-B, “To say that public or national interest is involved is quite a stretch. It’s been over two years since the case was detected, and no systemic risk has manifested, either in India’s commodities or any other financial markets.”MCA could not provide concrete evidence as to why this merger shall happen. NSEL investors put their argument in the favour of merger by putting up that the NSEL is child of FTIL and thus no evidences are required. But is this the lawful way to go about a case, which is now being handled by the law actually? How does this serve the nation, but rather extends the case for quite a long period of time.

People believe this case to be as the government’s whim and fancy of merging two companies, one of which is a survivor and other has lost the battle, for example the merger of Global Trust Bank with publicly owned banks. But the catch here was that one of the merging companies was owned publicly and had an active say in the merger. But did NSEL-FTIL did get a chance to nod to the forced action stamped on their fates, is still a mind boggler! But the question boils down to one problem, how does this help public? Under limited liabilities, why should FTIL repay the 5600 crore that NSEL owes to their investors, by burdening their own 63k investors? They will not. One of the leading dailies went on to say that this merger seems to be a step to keep NSEL’s investors at bay. The only question is that there are various other grim situations with government that need immediate attention. Rather than forcing a merger on two privately owned companies, government should devise a better plan to curb the issue in nation’s interest.

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FTIL Case: Mis-selling of products by NSEL brokers to be probed

As market regulator SEBI continues its extensive probe against NSEL brokers, the focus on mis-selling of products is gaining credence. Five to six leading brokers who traded on NSEL are under the scanner, but more brokers could be identified as offenders.

SEBI recently amped up its radar along with the Bombay HC to get to examine the case at its roots.  The intervention was overdue because the Forward Markets Commission had failed to bring broker offences to light.

There has been some strange decision making in the case, such as the proposal to merge NSEL with its parent company FTIL. It invoked criticism from all corners of the corporate world and even FTIL promoter Jignesh Shah said that the move would put undue burden of 64k shareholders.

SEBI, which is probing the account of brokers that sold NSEL schemes on false and exaggerated promises of returns, has also picked on black money routing by sister concerns and associates of brokers that traded on the platform. The SEBI committee has also issued an interim order for further investigation into source of funds of brokers and other traders who involved sister concerns and associates during trading.

This explains the glaring discrepancies in the data and details submitted by investors to make their claim against the data which was submitted by NSEL.

Submission of wrong PANs (Permanent Account Numbers), suspicious source of funds are some of the discrepancies and authorisation letters and trade execution documents submitted by brokers have also been rendered questionable.

In a one-of-its-kind case, it has been observed that the brokers themselves were the real traders. To add to the long list of criminal activities, the brokers also allegedly created fake ledger accounts in the name of their clients without consent.

"It has also been alleged that funds of sister concerns of brokers, which could have been derived from illegal sources, were used to trade on the NSEL platform with an intent to legitimise the said funds, which amounts to money laundering," a senior official had said.

Multiple agencies are now dedicated to uncover the entire truth about the case and the affected parties can hang on to that as a silver lining in a case mired with traces of executive overreach and policy infringement. 

FTIL Merger Order with NSEL Faulty, Against Public Interest

Ministry of Corporate Affairs in a recent order proposed the merger of NSEL with FTIL citing it in public interest. Interestingly enough, the order violates a circular issued earlier on April 20, 2011 and therefore seems to be  driven by forces possibly attempting to belittle the 63k shareholders of FTIL who could be left hanging by a thread. Currently, the order faces scrutiny in the court and is up for hearing on 22^nd of April.

My question to all in very unambiguous terms is this- How can an autonomous entity from the private sector be forced to merge with another by a mere executive fiat? Are we not a democracy with a clearly defined concept of separation of powers? How are we so comfortable with such a classic example of executive over-reach?

The two companies in question have separate balance sheets and that means the profits/losses arising in any of these belong to its shareholders. Now, while NSEL is facing a crunch of Rs. 5600 crore, FTIL has cash reserves of Rs. 2000 crore. The cash reserves of FTIL belong solely to the FTIL shareholders as a legal right and the merger would erode this net worth and make the company commercially unviable.

Though it is important to find a way to settle claims of NSEL traders, the merger does not seem to be the best recourse available. It is unjustified and discriminatory towards the shareholders of FTIL and its promoter Jignesh Shah and by all means goes against the grain of financial prudence. The whole world is currently watching how we treat our private sector and the merger may prove to be fatal for our plans of receiving foreign investments.

It is a blow to the cornerstone of corporate jurisprudence- limited liability- and may also open floodgates for similar action to be taken in cases where a subsidiary faces a liability- unproven or potential.

Instead of forcing a merger on two companies that have no synergy in their operations whatsoever, the government should try finding a plausible solution to the whole issue. And that’s why the next hearing is critical if new legislative benchmarks are to be set.

FTIL-NSEL Merger Flies in the Face of Limited Liability

An executive fiat passed by MCA in February has stirred up financial circles with a big question mark on financial prudence. The order proposes merger of NSEL with its parent body FTIL in what seems to be a case of executive overreach and wrongful interpretation of section 396 of the Companies Act. The order also violates Article 14 of the constitution as it suffers from excessive delegation.

Furthermore, it comes down heavily on the concept of limited liability which is at the core of corporate jurisprudence in our nation. The merger has the potential of not only destroying that and opening floodgates for vested interests to seek amalgamation of subsidiaries with their parent companies whenever confronted with a problem at the subsidiary level.

More importantly, if there is a rationale behind burdening FTIL shareholders with a liability to the tune of 5600 crore, it appears flawed and discriminatory as a company with cash reserves worth Rs. 2000 crore to be piled up with liabilities worth Rs. 5600 crore is not just eroding its net worth but also rendering it commercially unviable. How can the interests of the shareholders of FTIL be sacrificed to uphold trading interests of NSEL brokers when none of them can benefit from the merger?

To add on, the forced merger is being proposed without any regard to stakeholder’s will. This may be a very dangerous precedent for the corporate sector which needs foreign interests to develop.  Besides adversely affecting the shareholders, the merger entails far reaching ramifications for ‘Make in India’ as global investors keenly watch our comfort level with excesses being committed on a private entity.

The bottom line then is--if the merger were to take place, who would really gain except those with vested interests involved?  While the proposal stands judicial scrutiny at the Bombay High Court with dissent brewing around it, it has to be seen if the outcome upholds India as an entrepreneur haven or a nation against its own wealth creators.

Brokers under the scanner in NSEL Scam

Probe into irregularities worth Rs 5,600 crore in the NSEL case is finally penetrating untouched territories. Recently, the Bombay High Court panel ordered audits into investor claims observing discrepancies in the figures submitted by NSEL traders and brokers-a move that widely vindicates Jignesh Shah’s position on the case.

Furthermore, fresh evidence around black money being routed by sister concerns and associates of various NSEL brokers has caught investigators’ attention.  

"It has also been alleged that funds of sister concerns of brokers, which could have been derived from illegal sources, were used to trade on the NSEL platform with an intent to legitimize the said funds, which amounts to money laundering," a senior investigating official said.

The interim order of the HC panel already states, “The committee while processing the claims received from various investors noticed large scale discrepancies between the claim set up by the investors vis-à-vis the data submitted by NSEL. Even the discrepancies in Permanent Account Number were noticed.” It observed 15 instances of such discrepancies with respect to 8 brokers. The order also stated that no reservations would be made I submitting data and information for verification of investor claims.

It should be noted here that there have been complaints against brokers, in the past, related to false assurances, misrepresentation, trading without client’s authority, modification of client code and selling contracts as investment vehicles. There have also been allegations against NSEL brokers and traders for having created fake ledger accounts in the name of their clients without their consent.

While commenting on the case, a senior regulatory official stated that the case seems to be unique as brokers themselves appear to be investors. This is quite in sync with Jignesh Shah’s stand on the issue and the line FTIL has towed since the beginning.

The investigation holds special significance in respect to the facts of the case. Considering the role brokers play on any exchange, the investigation could lead to a landmark step but the questions is—couldn’t it have come earlier especially with FTIL investors, who stand to be crippled pending the forced merger, vehemently trying to get heard ever since the scam broke out.


Read more articles here:
SEBI starts probing NSEL brokers for mis-selling products
Read more about Jignesh Shah & FTIL