Contravention of Limited Liability Concept in FTIL-NSEL Merger

FTIL-NSEL merger is saddening for the markets and shareholders. As the ministry of corporate affairs (MCA) has decided to merge the dependent National Spot Exchange Limited (NSEL) with its parent, Financial Technologies (FTIL) there will be ill-effects of the Merger.

FTIL’s 64,000 shareholders are affected by ministry’s merger decision as it breaking the rule of Limited Liability Concept. It is also hammering the foreign portfolio investors in FTIL, including Government Pension Fund Global and Blackstone GPV Capital, who own almost 13 per cent of the shares of the company. In this case MCA did not considered the flawed use of Section 396 of the Companies Act to push through the merger violates the concept of limited liability, the foundation of modern entrepreneurship. The parent company FTIL should not be ideally responsible for the liabilities of NSEL. It reveals the irregularity in India’s regulatory system.

Ironically ministry has argued the move was in public interest without properly defining the term public and without explaining on whose behalf the merger was being affected. The fact of  the draft merger order, issued in October 2014, was also negligent. Then, the ministry had argued that the draft order was based on a view that there was a prima facie case for invoking the never-before  forced merger rule. In some parts, the ministry has argued that there have been forced mergers, like that of troubled Global Trust Bank with healthy publicly-owned banks and the NSEL-FTIL merger is in continuation with this context. But what the government deliberately ignored the willingness of the same bank in case of merger.

As the case processed ministry doesn’t seemed to be bothered as it has asked FTIL’s shareholders not to object to the merger being equity investment carries inherent investment risk. Merger is ill advised as it has multiple loopholes, apparently because the government has authorized the ongoing process, under supervision by the Bombay HC, to recover dues from the defaulting traders. Even the assets worth Rs.5,800 crore have already been frozen by the Economic Offences Wing of Maharashtra. When they should identify the traders for recovery process. It is also unlikely to stand the test in the courts.

In case of recovery of the investors funds only money came in is from the decrees of defaulters assets. The order resulted in little results and the rest of it will be unfolded with time.

 

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