The Central government is considering a proposal to take over the management of Financial Technologies (India) Ltd. It would be the second such takeover after that of Satyam in 2009. FTIL and its promoter, Jignesh Shah, are currently being investigated for a Rs 5,600 crore default by FTIL subsidiary, National Spot Exchange Limited. This comes in the wake of another proposal to merge NSEL with FTIL to allow NSEL investors to recover their investments from FTIL. Over the last year or so, NSEL paid back only Rs 263 crore to investors.
The NSEL case is one of government failure and corporate misdemeanour more than regulatory lapses. First, the ministry of consumer affairs — under whose administrative purview the FMC operated — gave special exemption to NSEL to undertake activities that are not allowed for spot exchanges. Later, even after the regulator pointed out that NSEL’s activities risked investor money, the ministry did not intervene, resulting in a payment crisis. The regulator declared Jignesh Shah and FTIL “not fit and proper” last year. A committee under then finance secretary Arvind Mayaram recommended management takeover of all exchanges — MCX, MCX-SX and NSEL — promoted by FTIL. That too was ignored. Clearly, the FMC has established that NSEL conducted its affairs under the control, direction and supervision of FTIL. A merger, which has been prescribed in a draft order by the corporate affairs ministry, and a management takeover would effectively lift the corporate veil and not only allow NSEL investors direct recourse to FTIL but also expedite the recovery process.
It is important that investors who have suffered losses recoup their investments. It is equally crucial that a “fit and proper” promoter replaces one who has knowingly led NSEL into this mess. This would have a salutary effect on the legitimacy of markets and the ability of government to regulate effectively. There is no inevitable conflict between investor protection and the upholding of the rule of law. Given the drastic steps being proposed, however, the government has an obligation to explain the circumstances that necessitate them. If the proposal is agreed upon, minority shareholders of FTIL may be adversely affected. While many crucial facts are currently under investigation and the Central government may be wary of making such disclosures, if the proposals are acted on before a final closure of the investigative process, the grounds for such a decision must be communicated clearly to the general public. Anything less would raise suspicions about the government’s motives.