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.