Limited liability at NSEL PDF Print E-mail
Thursday, 23 October 2014 02:26
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Govt gets it completely wrong on FTIL-NSEL merger

Given how the individuals who lost money at NSEL were fully aware of the risks involved and that such products violated trading norms—they were essentially financing products offering substantially higher rates of interest than what was available in the market—it is not immediately clear why the government feels they need to be compensated. Indeed, apart from NSEL, the brokers who guaranteed high returns to clients who bought these contracts also need to bear some part of the responsibility. More important, since NSEL’s accounts don’t list them as liabilities—the money is owed by defaulting parties on the exchange—it is not clear how merging NSEL with its parent FTIL is going to resolve the problem, even if we were to assume FTIL managed to liquidate its assets; it had cash and balances of R120 crore at the end of March 2014 as compared to the dues of around R5,500 crore to around 13,000 investors.

What is a lot more worrying, however, is that the central government has, by merging the subsidiary with the parent, completely thrown to the winds the principle of limited liability. Under limited liability laws, a person’s liability in a company is limited to his/her equity contribution in the firm. It is this limited liability principle, the world over, that ensured people invested in firms to set up ventures which, sadly, also went bankrupt on occasion. If investors knew their personal assets could also be attached, many would cavil about investing in any ventures. Asking the parent FTIL to take over the liabilities—proven or unproven is not even the question—of the subsidiary NSEL is essentially making the point that FTIL’s liabilities extend beyond its investment in NSEL. Apart from the fact that it will have a very negative impact as far as corporate India is concerned—many other investors can theoretically have their liabilities extend beyond their equity investments in companies—it is not even clear what the ‘public interest’ is here. The merger is being done under Section 396, a section used only rarely, and in the public interest. If it is to be assumed NSEL’s 13,000 investors comprise the public, what of the 55,000 FTIL non-promoter shareholders? The sooner the government rescinds the merger order the better.



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