Merger with NSEL, superseding board a bad idea
Whether Jignesh Shah is guilty of abetting the NSEL fraud or innocent, as he claims, is something the courts will decide. While that could take a long time given India’s judicial system, instead of pursuing FTIL—NSEL’s parent and the company Shah founded—it is important to first focus on getting NSEL’s 13,000-odd trading clients back the R5,600 crore they are owed by 25 other trading clients. The Bombay High Court has set up a good process to do this—a committee headed by a retired judge has been set up with the power to receive and dispose off assets and settle dues; it has already attached properties worth over R5,000 crore of various debtors and even issued decrees for many of them. While this may take a while since all those involved will continue to approach the courts to try and delay matters, there could be no better solution than to set up a committee to examine and dispose off matters at the earliest—it helps that none of the people involved have denied that they owe the money. While the NSEL problem occurred because it operated in a grey area which wasn’t regulated, and the exchange and some brokers took advantage of this, cleaning it up quickly is just the kind of proof required to show India has the necessary resolve to fix issues—the kind of resolve, for instance, the government showed in ensuring Satyam wasn’t allowed to die for Ramalinga Raju’s mistakes.
It is unfortunate that, in the middle of all this, the government should be working overtime to merge NSEL with FTIL. Apart from the fact that the focus should be on getting the defaulting parties to pay their dues, it is not established that NSEL owed the money since it was not the counter-party for the transactions—the case is pending in court. Most important, this throws to the winds the principle of limited liability, the bedrock on how companies are run both in India and the world over. Any promoter’s liability is limited to the capital invested in the company. FTIL’s cash reserves of around R2,000 crore after it sold off its stakes in exchanges like MCX and MCX-SX—other assets like Dubai Gold and Commodity Exchange and Bourse Africa are in the process of being sold—are attractive, but under the principle of limited liability, the government cannot force a parent to take over the liability of a subsidiary. If such a merger, the first in independent India’s history, is pushed through under Section 396 of the Companies Act, it can be done in other cases as well—if an insurance subsidiary of a bank is not able to pay its dues, will the assets of the bank be attached? Worse, while the case against 396 is being fought in the court, the government has approached the Company Law Board to try and supersede FTIL’s Board under Section 397 since the Board is opposing the merger. It is worth keeping in mind that FTIL has over 63,000 shareholders other than Jignesh Shah who have seen their assets erode as the company was forced to sell off profitable businesses—there is no reason why they, or the bankers who have lend to FTIL, should find their wealth further diminished.