The government can point out in its defence that FTIL owned 99 per cent of NSEL, and that both were essentially controlled by FTIL promoter Jignesh Shah. But Mr Shah and his associates own less than half of FTIL. What about the shareholders who own the other 55 per cent? They have just been forced by a government fiat to take a major capital loss, taking on the liabilities of another company. Is this how the government intends to protect minority shareholders? The ministry said that it is "essential, in the public interest" that FTIL and NSEL be merged. This evades the truth. In fact, it is essential, in the public interest, that minority shareholders be shown that they will not be held unfairly responsible for misjudgements and mismanagement by promoters. It is essential, in the public interest, to show that the government respects the norms that form the basis of capital markets and well-functioning corporate structures. Seen in this context, this order violates the public interest.
A basic rule underlying modern markets is being violated here. The ministry for corporate affairs, it appears, is unsure about why subsidiaries exist. They exist precisely to ensure that liabilities are properly managed. Parent corporations' liabilities in a limited company are, well, "limited" by how much it actually invested in the subsidiary firm. This is a basic principle of modern economic organisation that the government has chosen to arbitrarily dump, sending out a wrong signal to investors. Limited liability is a concept that has stood the test of time, and is an essential spur to entrepreneurship and to investment. Is the government now declaring that limited liability can be suspended whenever a bureaucrat decides "the public interest" is at stake? Worse, the idea that the public interest in this case is necessarily on the side of the creditors of NSEL rather than the many FTIL shareholders is open to question. It has been reported in the past that only nine brokers account for the bulk of NSEL's exposure. So the government is suspending the rule of law, and one of the most sacred principles of corporate finance, in order to ensure that nine brokers are compensated by the minority shareholders of FTIL. Remember, FTIL itself has a solid, viable business model. Why destroy the company because of its promoters' actions elsewhere?