SC nixes NSEL merger, what next?

While the SEBI order in the NSE colocation issue has been stringent and has ensured that credibility of the market ecosystem is maintained, there is still no light at the end of the rather obscure and long-winded tunnel in the National Spot Exchange Limited (NSEL) case.

Even five years after the scam came to light, there is no closure for investors who have lost money. Brokers who were found negligent and, at times, unscrupulous have not been dealt with strongly and the defaulters are yet to pay the money that they owe.

The judgment of the highest court, delivered last week, has dealt another blow to the hopes of investors who hoped to recover their money by merging NSEL with 63 Moons technology.

The Supreme Court is however right in ruling against this merger as it goes against established rules and would have set a wrong precedent. The NSEL investors and the Centre should not have used this route to get back the money.

Trying to point fingers at brokers who mis-sold these products will also not help, as money cannot be recovered from the intermediaries. Instead, investors need to focus on getting back their funds from those who defaulted in the exchange settlement.

The judgment

The Supreme Court judgment last week pertained to the order dated April 12, 2016, passed by the Bombay High Court, supported by the Centre, that had given permission for the forced merger of NSEL and 63 Moons Technology (formerly Financial Technology India Limited).

The SC has held that the BHC order does not meet the criteria for Section 396 of the Companies Act, that allows merger of two companies in ‘public interest’.

The Bombay High Court had held that the merger should be allowed due to three reasons — a) to restore and safeguard public confidence, b) for giving effect to business reality of the case by consolidating the businesses of and preventing FTIL from distancing itself from NSEL, and c) for facilitating NSEL in recovering dues from defaulters by pooling human and financial resources of FTIL and NSEL.

The Supreme Court has not agreed with the argument that the merger was in public interest.

This tool (Section 396) has been used very selectively in the past, and it is good that it was not allowed in this instance, thus setting a wrong precedent. The SC has also said that the Bombay High Court order has completely ignored the rights of the shareholders and creditors of 63 Moons Technology.

What next for investors

With this judgment, one of the routes for recovering the money has been closed for NSEL’s investors. But it needs to be understood that the NSEL-63 Moons merger was not the right solution to their problems.

The investors are in a difficult situation as the NSEL was not regulated by any authority when the scam took place. SEBI is, therefore, unwilling to interfere in a scam in a commodity spot market, that occurred before it took over the reins as the commodity regulator. It is up to the Finance Ministry to find a viable solution, which is not harebrained like the NSEL-FTIL merger, to retrieve the money.

Focus should be on the trading members who defaulted payment on the NSEL. These were very large traders, who failed to maintain stocks in the warehouse and did not pay their dues as well.

According to media reports the economic offences wing (EOW) of Mumbai Police attached over 150 properties worth around ₹2,000 crore in 2013 in connection with this scam.

The additional commissioner of police (EOW) has gone on record to state that he has attached assets of some of NSEL borrowers including ₹601 crore of Mohan India Pvt. Ltd, NK Proteins Ltd at ₹455 crore, Yathuri Associates at ₹357 crore and PD Agroprocessors Pvt. Ltd ₹276 crore.

Surely, these assets could be liquidated to repay the investors in the scam.

The buck needs stop somewhere and the authorities in the country should make a serious effort to close this case and give back the money to investors.

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