The Bombay High Court on Monday dismissed a petition filed by Financial Technologies (India) Ltd (FTIL) (now 63 Moons Technologies Ltd) challenging a 2016 decision of the Union government ordering its merger with its subsidiary, National Spot Exchange Ltd (NSEL), which is embroiled in over Rs 5,600 crore payment crisis.
“The petition is dismissed,” said a division bench of Chief Justice Manjula Chellur and Justice M S Sonak.
“The failure of a national level commodity exchange under circumstances as stated in the impugned order, is clearly, a matter of serious concern. It is reported that almost 99.99 per cent of the ostensible spot trading in commodities in the entire country was taking place on the NSEL spot exchange. The paired contracts offered by NSEL, which were in breach of the conditions of exemption notification, alone accounted for a turnover of Rs 1,34,000 crore between 2009 to 2013. If exchanges such as these are permitted to be subverted or fail without honouring their obligations and commitments, the confidence in national economic institutions is bound to suffer and the repercussion to the national economy will be severe…. The Central Government, quite conscious of all such factors, has taken a balanced decision in the facts and circumstances of the present case,” said the Bombay High Court order.
While dismissing the plea of FTIL that opposed the merger, the high court gave the company 12 weeks to file an appeal before the Supreme Court, before which the companies cannot be merged. In an email statement, the company said it will appeal against the high court order in the apex court.
“…this order has a serious impact on the limited liability concept that is the corner stone of the Indian corporate sector, by lifting the corporate veil by an executive order and without running a full evidence-led adjudication,” said Venkat Chary, chairman, 63 Moons Technologies.
“This is a worrisome development for corporate India as the aftermath is likely to be chaotic, impacting investment flow into India by way of domestic investments, FDIs, FIIs and also the spirit of entrepreneurship, so vital for the country’s economic development as investors will always be scared to invest in parent companies with subsidiary companies,” said Chary .
In February 2016, the Ministry of Corporate Affairs had directed the merger of scam-hit NSEL with parent firm Financial Technologies India (FTIL), in a first-ever order to merge the two private companies under section 396 of the Companies Act 1956. Section 396 gives power to the central government to merge companies in public interest.
The government order for merger came after its draft merger order of October 2014 which recommended a merger, in order to get FTIL to assume all the liabilities of NSEL and also making it a party to all contracts and agreements entered into by NSEL.
FTIL has challenged the Constitutional validity of this section 396 in the court.
The NSEL payment fraud came to light on 31 July 2013 when the exchange suspended trading in all its contracts. NSEL proposed a payout plan on 14 August 2013, but the commodity spot exchange had not been able to make a single successful payout till date. Since then NSEL and its directors have been under the scanner of multiple investigative agencies in the country.
On Monday, shares of 63 Moons Technologies plunged 5 per cent to hit the lower circuit limit following the Bombay High Court order. At the end of the trading day, the company shares ended at Rs 131.10 a piece down 5 per cent at the BSE.