Why is MCA Ignoring Recoveries?

The MCA issued the draft order of NSEL-FTIL merger on October 21, 2014. This was order was based on the recommendations made by the Forward Markets Commission (FMC). The constitutional validity of Section 396 of the Companies Act, 1956, was challenged and, in turn, the legality of the draft order was challenged by FTIL before the Bombay High Court.

If the merger is being forced on FTIL to ensure recovery for trading clients, then MCA needs to first consider that Rs.542 crore has already been paid off. Additionally, NSEL has made substantial recovery efforts by filing over 150 cases against defaulters, obtaining Rs.1,233crore of decrees, and Rs. 3,428.86 crore of injunctions.
Hope for Justice
Initiatives like encouraging the investments and FDI into our country and rolling back EPF have boosted immense faith among the entrepreneur fraternity into our government. However, instances like the Vodafone tax issue and ban on Maggi raised questions towards corporate governance in the nation. A favorable and thoughtful decision on the forced merger of NSEL-FTIL is a great opportunity for the government to boost and encourage entrepreneur spirit amongst young and dynamic business minds.

MCA blind-folded towards real defaulters

The forcible merger of NSEL into its promoter, Financial Technologies (India) Ltd (FTIL) has evoked a huge response and quivered the pillars of the prevailing system of administration of justice.
The case of FTIL promoting NSEL and being merged together for bearing the latter’s responsibilities, is against the Indian law and order apart from being a not-a-public-interest-litigation. The authenticity of 13,000 alleged trading clients is still under investigation and the proposal of the merger in-between the inquiry process is undoubtedly a premature decision taken by the Government. Clearly, the Forward Markets Commission (FMC) which has been appointed by the Ministry of Corporate Affairs (MCA) has levied ill-proportioned and unfair punishment of merging the promoter, FTIL and its subsidiary, NSEL with this improvident decision, and that too without investigating the real trade players and their genuineness. It seems like MCA is washing its hands off the real defaulters through this merger. The implausibility and ambiguity of MCA is clearly evident from its application to seek six weeks’ time to respond to Financial Technologies’ challenge of final merger order issued in February this year. The ministry seems to be uncertain about its own decision and is continuously seeking extension of time in filling of affidavit to defend its case despite having over a year to prepare for the same.
Merger is clearly not the solution in this case and is a digression from the real issue. The premise for proposing it in the first place is misleading as the real solution lies in the recovery from defaulters. Instead of proposing an irrational merger, the concerned authorities should have focused on the recovery of the dues from the real defaulters. It is a complete failure on their part to realize that this hogwash will open an easy escape route for real DEFAULTERS to get off.

Why Amalgamate Private Sector Entities?

The Government’s draft order directing the merger of NSEL with FTIL is one of its kind, as this is the first instance involving two private sector companies. Both NSEL and FTIL belong to one group in the private sector. This is the first time that a listed entity in the private sector is involved in a Section 396 order of the Central Government. Moreover, FTIL has challenged this order before the Bombay High Court.

Limited Liability Destroyed
While considering the pros and cons of this forced merger, it is evident that the merger will destroy the concept of “limited liability”. It may also lead to global and local investors losing confidence in investing, given that FTIL has FDI and FII investments. It will further set a precedent to an array of PILs seeking merger of companies facing financial problems with their solvent parent companies.
Burden on Shareholders

The MCA has ignored the agony of 63000 shareholders of FTIL in its order to merge NSEL-FTIL. Why should these shareholders be forced to pay Rs.5,600Crsof NSEL’s defaulting brokers? In fact, even if this merger were to be executed, it would be nothing more than a farce, since FTIL cash reserves only amount to Rs.2000 Crs. “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,” says Venkatesh Panchapagesan, adjunct professor, finance and control area, IIM-B.