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The cash-strapped National Spot Exchange Ltd (NSEL) is set to be merged with its parent, Jignesh Shah-promoted Financial Technologies (India) Ltd, or FTIL, with the government on Tuesday issuing a draft order to this effect. The order comes about a year after a Rs 5,600-crore payment crisis broke out at NSEL, leaving 13,000 investors in the lurch.
"It is essential in public interest that FTIL and NSEL should be amalgamated into a single company," said the draft order, issued by the Ministry of Corporate Affairs. The move will help resolve the payment crisis but FTIL will be hit with NSEL's liabilities. The parent could, however, recover the money from defaulters.
The order led to selling of the FTIL stock, resulting in it falling 20 per cent (the lower circuit) on BSE, to close at Rs 169.65. FTIL told BSE it was taking appropriate steps on the matter, in consultation with its legal counsel.
After the order comes into effect, NSEL will be dissolved. This is likely only after two months, as the ministry has given this time to FTIL and NSEL to give suggestions and objections.
"With 99 per cent share holding, you cannot say there is no responsibility...the money would have come much earlier. This shows the government wants to clean the system," said Arun Dalmia, secretary of the NSEL Investors' Forum.
FTIL holds about 99 per cent stake in NSEL, which will be cancelled, according to the draft order.
The National Agricultural Cooperative Marketing Federation of India, as well as a few others, hold about one per cent stake. FTIL will intimate these entities about the share swap in the new company. For accounting, NSEL's audited accounts and balance sheets will factor in the amalgamation with effect from March 31 this year. All transactions after that will be pooled into a common account.
The government's order said it felt prima facie, there was a case of invoking section 396 of the Companies Act in this regard. The section entrusts the government with powers to amalgamate companies in public interest.
P R Ramesh, legal advisor to the FTIL group, said, "The matter, however, remains sub judice…But the government should first establish public interest has been violated, before taking such a measure."
The draft order is based on recommendations of the Forward Markets Commission (FMC) and the Department of Economic Affairs in the finance ministry, as well as inspection of the books of NSEL and FTIL. The inspection showed the management of NSEL's was being controlled and directed by FTIL, as well as its key managerial persons.
The corporate affairs ministry said Tuesday's order was based on the fact that the FMC had stated FTIL, its contention that it was ignorant of the affairs and conduct of NSEL notwithstanding, exerted a dominant influence on the management of the exchange. "It directed, controlled and supervised the governance of NSEL," the draft order said, quoting FMC's findings. On the payment crisis at NSEL, the FMC had said the exchange had been able to make a payment of only Rs 362.43 crore to its members, against the dues of about Rs 5,689.95 crore. As such, only 6.7 per cent of the amount was recovered.
As of July 31 this year, NSEL's staff count had fallen to 33, against 193 a year ago, adversely affecting the recovery process, the FMC had told the government.
The FMC had received feedback from representatives of investors, etc, stating due to the loss of credibility, the weak organisational structure, fall in staff count and lack of financial resources, NSEL had become very weak. As the exchange was a wholly-owned subsidiary of FTIL, it was the responsibility of the parent company to take matters into its hands, investors had told the FMC.
"In this background, a proposal has been received from FMC vide letter 18-08-2014, proposing the merger of NSEL and FTIL... The proposal has been supported by the DEA... so that the human and financial resources of FTIL are directed towards facilitating a speedy recovery of dues from the defaulters of NSEL, and FTIL takes responsibility to resolve the payment crisis at the earliest," the ministry said.
The recommendations to the government also pointed to the fact that while the going was good, NSEL had given benefits such as higher dividend to FTIL shareholders and, therefore, shareholders were bound to be aware of the fact that they might have to bear the risk associated with the acts of omission and commission by the holding company.
Anil Singhvi, founder of proxy advisory firm IIAS said, "The draft order is shocking because it ignores the larger public interest of 70,000 FTIL shareholders. While on the one hand it says FTIL shareholders have been benefited by higher dividend paid out of NSEL's profits, on the other, even NSEL investors have earned attractive returns by investing in the exchange, which cannot be ignored."
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