SC sets aside NSEL merger with 63 Moons

MUMBAI: The Supreme Court on Tuesday set aside a Bombay High Court ruling that had approved a government move to merge the scam-hit National Spot Exchange Ltd (NSEL) with its parent company 63 Moons, giving relief to the latter that would have been saddled with the mothballed trading platform’s liabilities had the apex court agreed to the merger.

63 Moons, formerly known as FTIL, had approached the Supreme Court after the high court approved a 2016 order of the ministry of corporate affairs (MCA) to merge FTIL and its subsidiary NSEL after a Rs 5,600-crore scam made the exchange defunct in 2013. This was the maiden attempt by the Indian government to merge two private companies in public interest.

On Tuesday, a bench of Justice RF Nariman and Justice Vineet Saran ruled the MCA order “ultra vires”, or beyond its legal authority. “…..though other wide-ranging arguments were made with respect to the validity of the central government amalgamation order, we have not addressed the same as we have held that the order dated 12.02.2016 is ultra vires….The appeals are accordingly allowed, and the… judgement of the Bombay High Court is set aside,” the Supreme Court said in its order released on Tuesday. The 63 Moons stock surged after the Supreme Court verdict. It gained 10% to end at Rs 124.95 apiece on the BSE.

Jignesh Shah, chairman emeritus and mentor, 63 Moons, welcomed the verdict. “......We have always had full faith in the Indian judiciary and our courts. Finally, truth has prevailed.”

However, an association representing NSEL investors said it was seeking legal options on a possible review petition.

“We are deeply anguished by the uncharitable and disparaging remarks made against investors,” said a spokesperson for NSEL Aggrieved and Recovery Association (Naara). “We are seeking appropriate legal counsel for a review petition.”

The ruling might become a reference point in defining public interest in cases involving private companies and trading platforms.

“This is the first time that Section 396 of the Companies Act was invoked by the government to order compulsory merger of two private companies. This section permits it only if it is essential in public interest,” said Mahesh Agrawal of Agrawal Law Associates, which appeared for 63 Moons. “The court quashed the forced merger, explaining the concept of public interest.”

NSEL was hit by a settlement crisis of Rs 5,600 crore in July 2013 after two dozen counterparties defaulted in payment obligations to 13,000 investors. Defaulters could not pay as the commodities against which they raised money from investors didn’t exist physically. A merger of NSEL with its parent, then known as FTIL, was recommended by the erstwhile regulator, Forward Markets Commission (FMC), which was later merged with Sebi in 2015. The MCA order of amalgamation was based on the FMC order of August 2014.

“The ‘emergency situation’ of 2013 which, even according to the central government, required the emergent step of compulsory amalgamation has, by the time of the passing of the central government order, disappeared,” the Supreme Court said in its ruling.

The verdict further pointed to investor repayment decisions that didn’t require adjudicators to dip into the resources of the predecessor of 63 Moons.

“…As on today, decrees/awards worth Rs 3,365 crore have been obtained against the defaulters, with Rs 835.88 crore crystallised by the committee set up by the High Court…even without using the financial resources of FTIL as an amalgamated company,” said the apex court order. “What is, therefore, important to note is that what was emergent, and therefore, essential, even according to the FMC and the government in 2013-2014, has been largely redressed in 2016, by the time the amalgamation order was made.”