The ministry of law and justice has rejected the ministry of corporate affairs’ proposal to invoke legal provisions to take control of Financial Technologies India Ltd (FTIL) for ‘deliberate bungling’ in National Spot Exchange Ltd (NSEL) that is under scanner for Rs 5,500 crore payment crisis.
NSEL is a subsidiary of Jignesh Shah-led FTIL.
Terming that the legal provisions do not apply in the case, the law ministry has limited the scope of action on NSEL and Multi Commodity Exchange (MCX).
The ministry of corporate affairs (MCA) had, through a letter dated January 24, sought legal opinion from the law ministry to pursue action against FTIL as it concluded that the firm purposely faulted on conducting prudent and sound business of its subsidiaries — NSEL and MCX.
While MCA alleged “oppression and mismanagement” by a “common” board of directors of parent and subsidiaries under Sections 397 & 398 of the Companies Act and invoked Sections 401, 402 and 408 to approach the Company Law Board to take over or dissolve FTIL, the law ministry has in its opinion dated June 4, said that the said Sections are not applicable to FTIL.
“Section 397 might not apply as NSEL which is (almost) wholly owned subsidiary of FTIL and NSEL’s majority shareholders (i.e. FTIL) have never acted in any manner which could be termed as ‘oppressive’ against the minority shareholder of the company,” said the deputy legal advisor in the ministry of law and justice in his opinion.
He further said, “Section 398 might also not be applicable as fraud and acts and mismanagement were allegedly done by the key officials and employees of NSEL and not FTIL and different statutory auditors have issued clearances to them.”
While Section 397 of the Act relates to application for relief in cases of oppression, Section 398 is for relief in cases of mismanagement.
In September 2013, MCA ordered an inspection on FTIL, NSEL and MCX in the wake of the payment default of around Rs 5,500 crore at NSEL. The interim inspection report put FTIL at fault on various accounts of mismanagement and recommended the MCA to take legal action under various sections.
Earlier, the management at MCX and MCX-SX regulated by FMC and Sebi respectively underwent complete overhaul and the board was made independent of FTIL by their respective regulators.
At NSEL, which defaulted on the payments and did not fall under Sebi or FMC’s regulatory domain also witnessed changes in its management and board.