The Bombay High Court passed a remarkably clear order, dismissing the plea by FTIL and permitting, as desired by the Central Government, the merger of scam-tainted NSEL with its parent, FTIL (now 63 Moons), which owns 99.9999 per cent of it. The bench headed by Chief Justice Manjula Chellur is a veritable Daniel come to judgment.

This government is taking action, which has been long overdue, against defaulters and scamsters who, after looting public money, hide behind high-priced lawyers and the slowness of the judicial system, to delay their day of reckoning. This government has taken several steps to bring them to task. Against bank defaulters, it has passed an insolvency law, fear of which has led to the largest-ever sale of corporate assets to repay bank dues, and is also chasing a high-profile defaulter to extradite him from London.

Not a ‘mere platform’

FTIL (or 63 Moons) has been trying to wriggle out of its obvious liability. It claims several things. It claims, for example, that NSEL was not liable for the losses because as per its bye laws only certain commodity trades were guaranteed, and since the commodities were unspecified, it was not liable! This is disingenuous! It also claims, equally disingenuously, that NSEL was ‘merely a platform’ on which people traded and so it was not responsible as a counter party.

This is wrong. Certain institutions, such as banks, exchanges, etc, where public money is involved, need clearance from regulators to be established. Regulators are expected to clear if they are satisfied of the financial strength of the promoter, because the institution (NSEL) has to become a counter party to the transaction. In other words, it guarantees that the other party will honour its obligations, else it will.

Without such a counter party guarantee no trade will take place. Both sides of the transaction do not know each other and will not trade.

Investors had another layer of safety, viz, the Settlement Guarantee Fund. The judgment says that ₹738 crore which was under the fund on August 1, 2013, dropped mysteriously, and inexplicably, to ₹62 crore on August 4, 2013. Where did the money go? No explanation given.

Corporate veil shield

FTIL also vehemently argues that the concept of limited liability will be vitiated if the corporate veil is lifted because of the merger to adverse future consequences. The exact opposite is, in fact, true. The consequences will be adverse if, in this exceptional case, the corporate veil is not lifted. That would mean that any person will be free to commit future frauds simply by floating a company and hiding behind a corporate veil.

It is a corporate veil, not an impenetrable corporate armour. Section 396 under which the merger was determined necessary in public interest, is to be used for ‘exceptional cases’ and there is no threat to the concept of limited liability if corporate behaviour is lawful. It will be rarely used.

For stock markets the decision to punish wrongdoers is a welcome one. With every improvement in governance the performance of the economy, and the confidence of investors, rises. This is as it should be.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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