Robbing Peter

It is unfortunate that the ministry of corporate affairs has gone ahead with its proposal to merge National Spot Exchange Ltd with its parent, Financial Technologies. The move seeks to redress the grievance of the 13,000 investors of NSEL, who have lost around ₹5,600 crore through trades they put through on the exchange by shortchanging 64,000 shareholders of FTIL — a classic case of robbing Peter to pay Paul. It is true that NSEL was guilty on various counts, including facilitating trading in forwards (when it was allowed to trade only spot contracts), devising paired contracts (that allowed investors to make fixed returns while providing financing to commodity traders), giving margin exemptions to repeated defaulters, not supervising its warehousing facilities and not maintaining a Settlement Guarantee Fund. The erstwhile Forward Markets Commission had concluded that the exchange was hand in glove with the defaulters and that a fraud had been perpetrated.

But this merger is not the only solution available to compensate investors of NSEL. Various government agencies including the Economic Offence Wing of the Mumbai Police, the Enforcement Directorate, the Finance Intelligence Unit and the Central Bureau of Investigation are working towards recovering the amount lost by investors. It is also important to understand who makes up the ‘public’ and on whose behalf the merger is being effected. The investors who traded in paired derivative contracts on NSEL could not have been so naïve as to be unaware of the high levels of risk in derivative trading. The MCA’s draft order states that FTIL’s shareholders should not object to the merger since equity investment carries inherent investment risk. But if equity investment is risky, trading in commodity derivatives on a fledgling trading platform is ten-fold riskier. If investors of NSEL were unaware of the nature of the product they were dealing with, it is the brokers who sold them the product that need to be held accountable. There is no logic for saddling FTIL’s 64,000 shareholders with the liability. Foreign portfolio investors including Government Pension Fund Global and Blackstone GPV Capital own almost 13 per cent of the shares of the company.

The use of Section 396 of the Companies Act to push through the merger also sets a bad precedent. The Centre has used this tool four times in the past, but it was done sensibly, and in a manner that protected the interests of both the entities being merged. NSEL, which has no operations currently, will only saddle FTIL with additional liabilities; this is against the interest of the minority shareholders of the company. Ironically, this is being done to protect investors savvy enough to trade on a commodity exchange.

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