In an important judgment, the Supreme Court has struck down the enforced merger of the National Spot Exchange Ltd (NSEL) with 63 Moons Technologies (the erstwhile Financial Technologies India, or FTIL). This has important implications for corporate governance and also articulates the apex court’s understanding of “public interest” in detail. The merger had been enforced by the Central government in February 2016, after a scam led to defaults, and closure of the NSEL in 2013. The NSEL is a subsidiary of 63 Moons, and the merger would have meant that the liabilities of the NSEL would impinge upon 63 Moons. The Centre had invoked Section 396 of the Companies Act, which allows for compulsory mergers in the “public interest”. But 63 Moons, founded and promoted by Jignesh Shah, appealed against the order. The merger was upheld by the Bombay High Court in December 2017, after which there was an appeal in the apex court. The decision has now been overturned on the grounds that the merger doesn’t satisfy the criteria of the public interest. The court also said the merger was done without application of mind and violated Article 14 of the Constitution, which guaranteed “equality before law”.
NSEL was incorporated in 2005 as an electronic trading platform for commodity trading, with compulsory delivery of goods traded. While trading started in 2008, there was a scandal when it was discovered that the NSEL had allowed trading of contracts that were not backed by real goods. It was also alleged that fake contracts with manipulated prices were used as a mechanism for generating loans. Trading was halted in July 2013, when the NSEL defaulted on payments worth Rs 5,600 crore to about 13,000 traders. So far, claims for Rs 620 crore by 4,697 entities have been cleared by a court-appointed panel that is investigating these defaults. Mr Shah was arrested and ordered to divest all holdings in financial exchanges, including in the NSEL and the MCX, which was also promoted by Mr Shah and FTIL. The scam also triggered a reorganisation of the regulatory system with the Forward Markets Commission (FMC) being merged into the Securities and Exchange Board of India (Sebi), which took over the FMC’s functions as a regulator of the commodity markets.
The Supreme Court judgment indicates, however, that 63 Moons cannot be forced to take over the NSEL’s liabilities. The judgment establishes a clear boundary with respect to the foundational concept of limited liability. Indeed, this merger could have set a dangerous precedent if it had been upheld as it would have made nonsense of the concept of limited liability, and make doing business in India extremely risky. It could have been cited by creditors in other cases to demand the merger of defaulting subsidiaries, with profitable parent companies. Given that 63 Moons is a listed company with over 60,000 minority shareholders, it would have been unfair to force them to bear the burden of NSEL defaults. This case and the judgment will also lend clarity to efforts to revive the spot trading of commodities. The NSEL was the only exchange that enabled this important market segment. Entrepreneurs looking to set up new exchanges for this purpose, or existing exchanges looking to enter this space, will have a clearer blueprint.