Why FTIL-NSEL merger is not an injustice to minority investors

A look at the minority investors in FTIL and why they need no sympathy

The corporate affairs ministry’s draft order for merger of Financial Technologies (FTIL) and National Spot Exchange (NSEL) has raised heated debates around the legal and financial issues. Lot of commentary has been focussed on how the move is against rule of law and an injustice to the minority investors etc. 

 

While there cannot be a second opinion about protecting the interest of the small investor, the question here really is which small investor are you fighting for? It is then important to understand who the major minority shareholders of FTIL are. The largest holding among minority investors goes to Blackstone Capital Partners fund which holds 7.02 per cent.

The next big investor is Ravi K Sheth with 5.34 per cent and his brother Bharat holds another big chunk of 2.76 per cent. Between a handful of influential funds and individuals lies another 10 per cent. When NSEL investors are castigated for arriving at protests in big cars and having entered their trades with thorough knowledge (a recent order by Bombay High Court granting bail to Jignesh Shah called the NSEL victims bogus traders), these FTIL ‘minority investors’ also do not deserve to be treated as innocent lambs. 

 

Secondly, some of these minority investors of FTIL are those who have entered after the scam broke out in the anticipation of reaping super profits. For example, Laxmi Shivanand Mankekar, a high net worth individual, who holds 2.93 per cent in FTIL today piled up most these holdings after December 2013, after the NSEL scam broke. This investor popped up in the list of major non-promoter shareholders only in March 2014, when the scam, the role of promoters and the risks it posed were very much in the public domain. 

 

Thus, one set of minority investors had all the time in the world to sell and walk away but still chose not to do so and the other set was walking in to the landmine with “eyes wide open” to borrow the phrase of a former finance minister. May be a distinction needs to be made between people who hold shares worth Rs 1 lakh or less and the bigger shareholders here.  The precedence of FTIL compensating a select section of small investors of NSEL can be used as a good starting point.

 

Now, you are a well-heeled institution or a rich guy. Does that take away your right to demand an application of rules of limited liability or take cover under corporate veil, depending on which side of Jignesh Shah’s empire your money was riding on?

 

As a smart investor with high stakes, you are expected to look around and look behind before taking such big calls. When you look around, one of the striking similarities between FTIL- NSEL comes from the financial crisis of 2008. AIG and FTIL may not be identical twins. But, they gave birth to troubled children, who brought them to verge of collapse. AIG Financial Products (AIGFP) was a subsidiary of the US insurance major AIG. For best part of two decades, AIGFP was the star performer for the boring insurance company. It underwrote huge amount of derivatives. AIG, the parent, could not escape liability by quoting the theory of subsidiaries, principles of rules of law and limited liability. It had to be bailed out. It got nationalised to meet the liabilities arising out of this dirty unit. Nobody sympathised for the minority shareholders of AIG. They enjoyed the fruits, they paid the price. 

 

Closer home, the Satyam Computer Services case was an example where certain rights of the minority shareholders were suspended for achieving closure to the crisis.Though there are many differences between the two cases, Satyam was exempted from various provisions under the takeover regulation such as declaration of latest financial data, exempted merchant bankers from giving due diligence certificate etc. In fact, Sebi altered the takeover code itself to provide for special exemptions such as barring rival bids and relaxation of pricing formula etc. Eminent people took the decisions that brought about these changes. When Sebi could do this to ensure ‘smooth takeover’ under 'difficult circumstances' to achieve closure to the issue, it is safe to assume the Forward Markets commission and ministry of corporate affairs are well within their rights in recommending the merger. In fact, today's Indian Express says the government plans to follow up the merger with a management takeover of FTIL, making it more similar to the Satyam case. 

 

Thus, there has been enough precedence internationally and locally to show that in special cases and in a crisis situation, such suspension of certain rights are in order to achieve a swift closure to an issue that threatens to drag along in courts forever.

 

It is in the interest of the larger business confidence, that a message that people who take devious routes and those who fancy riding on them will be punished, even if it means lifting the corporate veil.  

 

Swift justice and certainty of punishment for wrongdoing are the greatest business enablers, not quoting meaningless rules to extend the stalemate. Conditions apply only inside the box. So, don’t throw rule books at out-of-the-box solutions.

 

In fact, it is also possible to argue that a closure of the NSEL issue will be a great boon for the minority investors, who can then expect the company to focus on core business and recreate shareholder value.FTIL, which has better manpower and resources, can also speed up the recovery process from the defaulters.If anything is recovered from them, it all goes to the FTIL balance sheet and minority investors will sure get their share. 

 

It sounds like a win-win, so why complain?