Of course they were in the know

The draft scheme of arrangement proposed by the Government that seeks to merge the National Spot Exchange Limited (NSEL) with Financial Technologies India Limited (FTIL) has been criticised on the ground that it is unfair to the minority shareholders of the latter company. At stake is roughly ₹5,000 crore owed to counterparties on trades executed at NSEL. A merger would thus potentially cast a financial burden on the resources of FTIL.

As the argument goes, if anybody is to be held accountable for the mess that NSEL had landed itself in, it could at best be promoters of FTIL (primarily Jignesh Shah) and not the company per se . The second argument is that NSEL is a company, which means that those who have claims against the company stand or fall by the assets of NSEL. The shareholders of NSEL are obliged to pay no more than the unpaid amounts, if any, on the shares that they have subscribed to.

In the instant case, they have paid up all that was due on the shares that they have subscribed to. Hence, no more claims can be made against them. Even if FTIL promoters had acted in a fraudulent manner they are liable for criminal prosecution and penalty in their personal capacity but otherwise, no sums can be charged against the resources of FTIL, a company which is an independent and juristic entity in its own right.

On the face of it, they appear to be fair and equitable. Yet, a more nuanced understanding of the situation would reveal that this is at best a simplistic view.

The relevant provisions of the company law only require that while framing a ‘scheme of arrangement’ the Government act in the larger public interest. Now, the concept of ‘public interest’ is not defined in the Companies Act. For that matter, it is not defined in any other statute. So we have to go by what has been understood by that expression in a very general sense.

Civil servants have often had to grapple with this in matters of administration. They would broadly use it to mean ‘any act’ which an official would undertake if he/she thought clearly, acted rationally and with complete disinterest, and the outcome of which would be beneficial to the general public or at least sections of it.

So the question that should be posed is this: Is the merger of FTIL and NSEL a fit case of public interest — a requirement under the company law?

The Government would be entitled to argue and with merit, let it be said, that the successful evolution of spot trading in commodities through exchanges set up for this purpose as an alternative to corrupt and inefficient state-regulated market yards is a beneficial outcome. The process of natural evolution of a parallel, electronically-operated market placed for spot trading in commodities is thus in the ‘public interest’.

As a corollary, the failure of NSEL would be seen as a setback to this development. It is evident that if people who traded in NSEL did not get their dues settled to their satisfaction, they would see it as a failure of efforts at finding better alternatives. Moreover, most new initiatives in the economy acquire the traction that they achieve only because of the reputational values of those behind it. While no doubt Jignesh Shah was identified with the venture, equally, people also associated FTIL as the company behind it. So allowing NSEL to fail would cause some damage in the public mind about the utility of ‘reputation’ as a criterion for backing new ventures.

This is by no means a frivolous argument. Decisions on financial investments are often based on the track record of those behind it. A Dhirubhai Ambani could consistently and successfully raise large sums of money even if the outlook for cash flows from a new project that was contemplated seemed somewhat uncertain. So, reputation matters.

Another point to remember is that in evaluating ‘public interest’, it is not necessary to judge it in terms of whether someone else could have come up with a better solution. All that is required to be satisfied is whether the rationale governing a particular decision stands the test of clarity of vision and reveals the absence of personal bias or prejudice.

That apart, the argument that it is grossly unfair to the minority shareholders of FTIL stands substantially demolished if one looks at the secondary market trading activity in the FTIL scrip.

The NSEL scam broke out in July 2013 or thereabouts. If one looks at the secondary market turnover data at the NSE, for FTIL, it is clear that these investors lifted the ‘veil’ on NSEL and saw in it the corporate persona of FTIL. How else does one explain the steady decline in the share price ever since the scam broke out?

Moreover, every day since the scam broke out, roughly 15 per cent of the shares of the company changed hands in the sense that legal ownership was altered, as that was the quantum that came up as physical delivery and hence actual settlement.

So, for every seller in the secondary market there was a willing buyer who discounted the value of the share for the scam loss and bought it at a cheaper price. So much so, the ownership character of the company has changed multiple times over in the last 15 months.

It doesn’t lie in the mouths of these secondary market investors that they didn’t know about the NSEL scam. Not only did they know about it, they sought to take advantage of it by factoring it in, in the price at which they were willing to buy.

They cannot now turn around and claim that they shouldn’t be called upon to bear the financial consequences of a forced merger between these two companies.

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