The government has bulldozed its way into a corporate boardroom, citing public interest. The big question is if its plan to forcibly merge National Spot Exchange Ltd (NSEL) with Financial Technologies (India) Ltd will stand the scrutiny of the courts.

This column has argued before that forced mergers are bad in policy—they fly in the face of the concept of limited liability, a bedrock of corporate law. To be sure, this has never been done before. As such, one would have expected that the ministry of corporate affairs (MCA) would have taken great pains to explain its rationale for forcibly merging the two companies. It has failed to do so.

Its draft merger order, issued in October 2014, was a slipshod job. But then, in MCA’s own words, the draft order was based on a view that there was a prima facie case for invoking the never-used forced merger rule. Its final order was issued last Friday, more than 15 months later, and hence there are hardly any excuses for the fairly weak arguments that the order brings to the table.

The government can order two companies to be merged under section 396 of the Companies Act, 1956, if it is satisfied that this is essential in public interest. So, more than anything else, the question that the ministry of corporate affairs should have answered in its final order is: How is this merger essential in public interest?

The order states: “The public interest driving the merger are set out in the business realities of the case, it is noted from the facts of the case and the recommendations of FMC (Forward Markets Commission) as well as its order dated 17-12-2013 which throw ample light to the grave shattering of public confidence and the purpose of establishing commodity exchange has been defeated." Venkatesh Panchapagesan, adjunct professor, finance and control area, at the Indian Institute of Management-Bangalore says, “To say that public or national interest is involved is quite a stretch. It’s been over two years since the fraud was detected, and no systemic risk has manifested, either in India’s commodities or any other financial markets." In fact, even immediately after the scam came to light, it wasn’t the case that traders and investors fled all financial markets. NSEL’s was clearly seen as an isolated case of fraud. Public confidence in that institution was shattered undoubtedly; but public confidence in the area of commodity or financial markets trading wasn’t. Interestingly enough, because of an alert regulator in the FMC, another entity controlled by Financial Technologies—Multi-Commodity Exchange of India Ltd (MCX)—retains market leadership in commodity futures trading.

The order also states that “by all intents and purposes, the way both the companies were being managed, owned and controlled, NSEL is the alter ego of FTIL and thus, the two companies have been practically one entity. All stakeholders were also looking at them as one entity. The amalgamation under section 396 only formalizes this practical reality in essential public interest." When we last checked, the law looks at a subsidiary company as a separate entity. If the liabilities of a company are to be borne by its parent company, it involves an elaborate and tedious process called lifting of the corporate veil.

The MCA order, however, does not bother about providing any evidence of how it has gone about this task. It has relied largely on FMC’s 2013 order—which had ruled that FTIL and certain MCX directors including Shah were not fit and proper persons to run a commodity exchange—for evidence and it remains to be seen if the courts tolerate this. In fact, it hasn’t even bothered to point out in its order, which portions of the FMC order it has relied on to come to the above-mentioned conclusion. NSEL investors may argue that it is obvious to everyone that NSEL is an alter ego of Financial Technologies, and that no evidence is required. But honestly, can this be said in a court of law? As such, the arguments in the MCA order are underwhelming, to say the least.

NSEL’s aggrieved investors point to other instances when regulators such as the central bank have in a sense forced mergers of troubled banks such as Global Trust Bank with healthy publicly owned banks. The Financial Technologies-NSEL forced merger, they say, is just in continuation with this legacy. But there is a difference. In each of the so-called forced bank mergers, it was always a government-owned bank that agreed to the merger. Also, whatever the compulsions put on them for these mergers, each of these banks passed a board resolution approving the merger. Financial Technologies, on the other hand, has taken the government to court. Panchapagesan says that by forcibly entering its boardroom, the government has created a bigger problem than the one it is trying to address.

“While no one’s arguing the fact that a massive fraud took place at NSEL, the recourse for aggrieved investors should have been the courts and not an executive order that favours one set of investors over another," he said. The government and its various agencies should rather spend their resources efficiently in bringing the fraudsters to book. That would be the best way to restore confidence in this situation. The merger order, in any case, comes across like a half-hearted attempt to keep NSEL’s agitated investors at bay.

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