If the buzz in the corridors of the ministry of corporate affairs is to be believed, the government is keen on removing the management of Financial Technologies India (FTIL), which substantially owns the National Spot Exchange (NSEL).



The sudden sense of urgency is strange, given that the ministry apparently doesn’t want to wait for the two-month deadline it had set for getting feedback on its proposal to merge NSEL with FTIL. The logic goes like this: Since the merger proposal may take time to fructify, it makes sense to do a Satyam on FTIL and banish the existing management from Exchange Square, the company’s imposing headquarters at Andheri in Mumbai.

Doing a Satyam on FTIL may sound heroic, but there are several reasons why it is a stupid move – both legally as well as logically.

First, in the Satyam case, the promoter, who was actively part of the day-to-day management of the company, had confessed to siphoning off the company’s funds. But in the case of FTIL, the promoter has been vehemently and consistently denying any wrong-doing whatsoever, and no money trail has led to the promoter or FTIL. In Jignesh Shah’s bail order, Justice Thipsay clearly states that FTIL or its promoter, board and management have not received any direct monetary benefit. All trading clients’ funds have been traced to the last paisa to the 22 borrowers /defaulters.

Second, post the crisis in Satyam, the board was completely paralysed, investors lost their faith in the board and management and top executives failed to turn around Satyam, leading to erosion in profitability. In stark contrast, the FTIL board is still quite active (look at the speed with which it has been exiting its investments in exchanges abroad), with majority of independent non-executive directors and its core management is intact. The same management at FTIL has delivered dividends to shareholders consistently for the past 36 consecutive quarters.

Thirdly, FTIL has not benefitted from NSEL. For example, NSEL has never paid any dividend to FTIL. So, FTIL dividend payouts do not have any profit component of NSEL. Also, FTIL is “cash-negative” in terms of investment in NSEL. FTIL has invested around Rs 200 crore in NSEL and has gained Rs 89 crore over 10 years from NSEL, including technology licensing fees, rent and common services like human resources.

Even granting that these are debatable issues and need to be thought through carefully, there is a fourth reason against any rush job on throwing out the FTIL management. And that is the principle of natural justice. The government’s draft order invoking Section 396 of the Companies Act does not anywhere says why a merger of NSEL with FTIL is in public interest. This is more so as 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.

The government has also not spelt out clearly why it thinks supersession of the FTIL management is necessary, especially when no wrongdoing or improper pecuniary gain has as yet been legally established against its management. No court or tribunal, till date, has held NSEL, FTIL or their respective managements liable for trading clients’ dues. The question whether NSEL is at all liable for the alleged dues of trading clients is currently sub-judice in four civil suits before the Bombay High Court.

No doubt, there is a cloak of suspicion over the FTIL management. But can any drastic action be taken on the basis of suspicion alone? The government should allow the judicial process to run its course. Any action to the contrary may bring the government’s real intention under the needle of suspicion.