The Centre on Tuesday announced that the crisis-ridden National Spot Exchange Ltd (NSEL) would have to merge with its holding company, Financial Technologies (India) Ltd (FTIL).

The Ministry of Corporate Affairs issued a draft order invoking Section 396 of the Companies Act for the merger. This is the first time that a listed entity in the private sector is involved in a Section 396 order of the Central Government.

Public interest The Centre is said to have carefully considered the proposal by the Forward Markets Commission (FMC) and the Department of Economic Affairs. “…it (the Government) is of the considered opinion that to leverage the combined assets, capital and reserves for efficient administration and satisfactory settlement of rights and liabilities of stakeholders and creditors of NSEL, it will be essential in the public interest to amalgamate NSEL with FTIL,” the order said.

NSEL was embroiled in a ₹5,600-crore payment crisis.

FTIL response In a note to the stock exchanges, FTIL said it has received a communication from the Government on the merger. The company added that it is taking appropriate steps in consultation with its legal counsel.

Following this, FTIL’s shares went into a tailspin, slumping 20 per cent to ₹169.65 on the BSE. FTIL, along with its nominee, owns 99.99 per cent of NSEL.

The Ministry said all due procedures will be followed for the merger. It has written to all the members of the two companies and creditors and asked them for comments within the next two months. The decision will come into effect from the date of publication of the order in the official gazette, it said.

The Centre has also taken into account the findings and observations made in the inspection reports of NSEL’s and FTIL’s books of account.

Non-compliance The inspection showed non-compliance with various provisions of the Companies Act and that the management of the affairs of NSEL was being controlled by FTIL and its key managerial people.

The FMC’s order of December 17, 2013, declared Jignesh Shah, Joseph Massey and Shreekant Javalgekar as not fit and proper for any recognised exchange.

The Corporate Affairs Ministry’s draft order also said that FTIL has not furnished any explanation as to what steps have been taken by NSEL or by itself to honour the commitment of assuring safe and risk-free trading to members and clients of the exchange.

Role of parent firm It also said that FTIL cannot shy away from its role and duty as a parent company to take reasonable care and exercise prudence in management and governance of the subsidiary company.

“In the face of a fraud of such a magnitude involving settlement crises of ₹5,600 crore owed to over 13,000 investors on the trading platforms of NSEL, FTIL cannot seek to take refuge behind the corporate (sic) so as to unjustifiably isolate itself from the fraudulent actions that took place at NSEL resulting in such a huge payment crisis,” the order stated.

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