Govt orders merger of scam-hit NSEL with parent firm Jignesh Shah-led Financial Technologies

Written by PTI | New Delhi | Updated: Oct 21 2014, 23:11pm hrs
NSELThe crisis-hit NSEL is promoted by Jignesh Shah-led Financial Technologies (India) Ltd.
To ensure speedy recovery of dues for investors and others hit by Rs 5,600-crore "fraud" at the National Spot Exchange Ltd (NSEL), the government today ordered merger of the scam-hit firm with its holding company Jignesh Shah-led Financial Technologies.

The decision, which comes over a year after the payment scam broke out at NSEL in July 2013, has been taken in "essential public interest" as the exchange is "not left with any viable, sustainable business while FTIL has necessary resources to facilitate speedy recovery of dues".

The move to merge NSEL with FTIL -- possibly the first major government intervention in a scam-hit private sector entity since the Satyam case in 2009 -- would take a final shape after taking into account submissions or objections made by the shareholders and creditors of the two companies.

However, the government has ordered merger of NSEL with its parent firm itself in the present case, unlike the Satyam matter where the scam-hit IT firm was sold to a third-party (Tech Mahindra) through a government-facilitated auction.

NSEL was set up as an electronic exchange for spot trading in agriculture and food commodities by Jignesh Shah- led FT Group. Financial Technologies (India) Ltd is the holding company of this group, which had also set up commodity bourse MCX and stock exchange MCX-SX, among other exchange ventures.

Following the NSEL fiasco, various FT group entities have already faced regulatory actions and they do not figure as promoter entities in ventures such as MCX and MCX-SX.

"The central government has decided on the merger of NSEL with its holding company FTIL, in public interest under Section 396 of the Companies Act, 1956," the Corporate Affairs Ministry said in a statement.

With regard to NSEL case, a charge-sheet has been filed by the Economic Offences Wing of the Mumbai Police against Jignesh Shah -- the founder and managing director of FTIL.

There were no immediate comments on the government decision from FTIL, which saw its shares tank by nearly 20 per cent to hit the lower circuit of Rs 169.65 on the BSE.

Post merger, NSEL's entire business, properties and liabilities, among others, will get transferred to FTIL. As on March 31, 2013, NSEL had a networth of Rs 175.76 crore.

"All due procedures in this regard shall be followed. The members of the two companies, its creditors may provide suggestions/objections within a period of 60 days," said the ministry, which has the responsibility of implementing the companies law.

According to the draft order, FTIL has not furnished any explanation as to what steps have been taken by NSEL or by FTIL itself as a parent company to honour the commitment of assuring safety and risk free trading to the members and clients of the exchange.

NSEL does not have the resources, financial or human, or the organisational capability to successfully recover the dues pending for over a year, the order said.

Forward Markets Commission (FMC) had also suggested to the government last week the merger of the spot exchange with its promoter FTIL for speedy recovery of dues from defaulters.

The ministry said findings of the inspections carried out on NSEL and FTIL's accounts were taken into consideration while reaching a decision on the merger.

"The said inspections bring out non compliances of the various provisions of the Companies Act, 1956. It is further observed that the management of the affairs of NSEL was being controlled and directed by FTIL and its key managerial persons," the draft order said.

On the rationale of merger, it said the government is of the considered opinion that the leverage combined assets, capital and reserves for efficient administration and satisfactory settlement of rights and liabilities of stakeholders and creditors of NSEL would be in "essential public interest".

"Subject to provisions of law relating to limitation, any suit, prosecution, appeal or other legal proceedings which may be required to be filed against the dissolved company (NSEL) will filed against the transferee company (FTIL)," the Corporate Affairs Ministry said in its draft order.

In its communication, FMC had told the ministry that "FTIL is conscious of its role as a parent company as by giving a loan of Rs 179.26 crore to NSEL which was distributed to the small investors of NSEL, has already owned up some responsibility for the NSEL payment crisis".

However, the ministry said that FTIL cannot be allowed to confine its responsibility and concern only for the small investors alone and it has to shoulder full responsibility for the outstanding dues at NSEL.

In the wake of NSEL fiasco, the Shah-led group and related entities have come under the scanner of multiple agencies, including CBI, apart from facing regulatory actions. for alleged irregularities in the grant of license to MCX-SX.

Last month, Sebi had granted conditional one-year renewal of licence for MCX-SX.

Against the backdrop of the NSEL crisis, the capital market watchdog had also asked the stock exchange to submit a long-term sustainable business plan and take other remedial actions.

Sebi, in March this year, ruled that FTIL was not "fit and proper" to own stakes in any stock exchange and directed it to divest existing holdings in MCX-SX and four other entities.

While FTIL group has challenged the Sebi order on their 'fit and proper status', they no more qualify as 'promoter' in MCX-SX and some other entities such as Multi Commodity Exchange (MCX).