The government is considering a proposal to supersede the management of Jignesh Shah-promoted Financial Technologies (India) Ltd, a company that develops software for stock and commodity exchanges. If undertaken, this would be the second such takeover forced by the government in recent corporate history after Satyam Computer Services Ltd in January 2009.
Jignesh Shah and FTIL are currently being investigated by the Mumbai Police Economic Offences Wing for their role in the Rs 5,600-odd crore default by FTIL’s subsidiary National Spot Exchange Ltd (NSEL).
According to the proposal, post-management takeover, the company may be handed over to financial institutions during a transition phase when the government can consider bringing in new promoters. Jignesh Shah owns/ controls 45.63 per cent in FTIL as on June 30, 2014.
The management takeover has been proposed by commodities market regulator Forward Markets Commission (FMC) to the Ministry of Corporate Affairs. The Department of Economic Affairs in the Finance Ministry too has favoured the proposal and has observed that NSEL was effectively controlled by the key managerial persons of FTIL, and was fully in the know of NSEL affairs.
The NSEL merger with FTIL proposed by the Ministry of Corporate Affairs last week, if followed by a management takeover, would dramatically expedite the recovery process, said government sources. In the last year or so, NSEL has been able to honour payments of only Rs 362.43 crore as against dues of Rs 5,689.95 crore involving around 13,000 investors.
According to sources, the proposed management takeover can be seen as Part II of the government’s plan to clear the mess NSEL landed itself in in August 2013. Part I of the plan was given effect through the Corporate Affairs Ministry’s draft order on October 21, 2014 that proposed merging NSEL with FTIL in public interest. “Ideally, FTIL should have been superseded first. NSEL merger with FTIL should have been the second step,” said a government source.
While FTIL’s minority investors argue about limited liability of the company in challenging the government’s merger order — which effectively requires FTIL to take on NSEL’s liabilities — sources in the government said this was a case of lifting the corporate veil. “Last August itself, FTIL paid up about Rs 177 crore towards meeting NSEL’s payment obligation. NSEL is held almost entirely (99.9 per cent) by FTIL. FTIL has all along been in the know of NSEL activities,” the source said.
In September 2013, a committee under then Finance Secretary Arvind Mayaram submitted a report to the government recommending a management takeover of all three exchanges floated by FTIL — MCX, MCX-SX and NSEL. No action was, however, taken on this report.
Later, in an order dated December 17, 2013, FMC declared FTIL and Jignesh Shah among others as “not fit and proper” to be shareholder/ director in the management or board of any exchange. It also pointed out that NSEL cannot be said to be independent since 99.9998 per cent of its shares were held with FTIL and two FTIL board members were on NSEL board too, one of them being Jignesh Shah, who was vice-chairman.
In India, superseding managements of private sector limited companies has been rare. In January 2009, the government superseded the board of B Ramalinga Raju-promoted Satyam Computer Services Ltd, after Raju admitted to inflated cash and bank balances of Rs 5,040 crore in the company’s financial statements. The management was then handed over to eminent corporate sector professionals including HDFC’s Deepak Parekh, CII’s Tarun Das and Nasscom’s Kiran Karnik. Within four months, the government-appointed board brought in a new promoter, Tech Mahindra.