REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4476 OF 2019
(Arising out of Special Leave Petition (Civil) No. 4210 of 2018)
63 MOONS TECHNOLOGIES LTD.
(FORMERLY KNOWN AS FINANCIAL
TECHNOLOGIES INDIA LTD.) & ORS. … APPELLANT
VERSUS
UNION OF INDIA & ORS. … RESPONDENT
WITH
CIVIL APPEAL NO. 4478 OF 2019
(Arising out of Special Leave Petition (Civil) No.4652 of 2018)
WITH
CIVIL APPEAL NO. 4477 OF 2019
(Arising out of Special Leave Petition (Civil) No.4239 of 2018)
WITH
CIVIL APPEAL NO. 4479 OF 2019
(Arising out of Special Leave Petition (Civil) No.4659 of 2018)
WITH
CIVIL APPEAL NO. 4481 OF 2019
(Arising out of Special Leave Petition (Civil) No.4816 of 2018)
WITH
CIVIL APPEAL NO. 4480 OF 2019
(Arising out of Special Leave Petition (Civil) No. 4720 of 2018)
WITH
WRIT PETITION (CIVIL) NO.368 OF 2019
1
JUDGMENT
R.F. NARIMAN, J.
1. Leave granted.
2. This batch of appeals and writ petition raises questions as to the
applicability and construction of Section 396 of the Companies Act,
1956, which deals with compulsory amalgamation of companies by a
Central Government order when this becomes essential in the public
interest. The appellant, 63 Moons Technologies Ltd. (hereinafter
referred to as “FTIL”, which name was changed to 63 Moons
Technologies Ltd. on 27.05.2016), is a 99.99% shareholder of the
National Spot Exchange Ltd. (hereinafter referred to as “NSEL”), and
is a listed company. About 45% of the shareholding of FTIL is held by
Shri Jignesh Shah and family, and about 43% of the shareholding is
held by members of the Indian public. Approximately 5% of the
shareholding is held by institutional investors. FTIL is a profitable
company, having a positive net worth of over INR 2500 crore, and is in
the business of providing software which is used for trading by brokers
and exchanges across the country. FTIL has about 900 employees,
and a Board of Directors which is different from the Board of Directors
of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL
2
was incorporated in 2005 by Multi Commodities Exchanges [“MCX”]
and its nominees. NSEL provided an electronic platform for trading of
commodities between willing buyers and sellers through brokers
representing them. On 05.06.2007, the Union of India issued an
exemption notification under Section 27 of the Forward Contracts
(Regulation) Act, 1952 [“FCRA”] exempting forward contracts of oneday duration for sale and purchase of commodities traded on NSEL from operation of the provisions of the FCRA. NSEL commenced
operations in October 2008. On 27.04.2012, the Department of
Consumer Affairs [“DCA”] issued a show cause notice to NSEL as to
why action should not be initiated against it for permitting transactions
in alleged violation of the exemption granted to it under the FCRA.
NSEL replied to the show cause notice on 29.05.2012 stating that it
had not violated the exemption granted to it. Without adjudicating upon
the show cause notice, on 12.07.2013, the DCA directed NSEL to give
an undertaking that no further contracts shall be launched until further
instructions, and that all existing contracts will be settled on due dates.
This was effectively a “freezing” order. On 22.07.2013, NSEL gave an
undertaking to the DCA.
3. Earlier, in January 2013, representatives of MMTC Ltd., a
Government of India undertaking, which was one of the trading
3
members of NSEL, visited some of the warehouses which were at
different locations in order to verify stocks therein and reported
existence of full commodity stock in the said warehouses. Sometime in
July 2013, 13,000 persons who traded on the platform of NSEL
claimed to have been duped by other trading members (being 24 in
number), who defaulted in payment of obligations amounting to
approximately INR 5600 crore. Due to the sudden and abrupt
stoppage of fresh contracts, and media reports about the same,
market participation on NSEL’s platform reduced considerably, forcing
NSEL to suspend trading and close its spot exchange operations w.e.f.
31.07.2013. The Forward Markets Commission [“FMC”] recommended
to the DCA on 12.08.2013 that steps be taken to verify quantity and
quality of commodities at various warehouses; financial status of
buyers and trading members be ascertained, and the liability be fixed
on promoters of NSEL, i.e., FTIL. On 14.08.2013, NSEL issued a
press release in which Shri Sinha, its CEO/MD, made a statement that
he and his management team were responsible for all operations at
NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL by
Grant Thornton LLP, and the Union of India, on 30.09.2013, ordered
inspection of the books of accounts of NSEL and FTIL under Section
209A of the Companies Act. On the same day, the Economic Offences
4
Wing [“EOW”] registered cases against Directors and key
management personnel of the NSEL and FTIL, trading members of
NSEL, and brokers of NSEL under various provisions of the Indian
Penal Code and the Maharashtra Protection of Interest of Depositors
Act, 1999 [“MPID Act”]. Several suits were filed by the traders who
allegedly have been duped, the most important of which is Suit No.173
of 2014 pending in the Bombay High Court, which is a representative
suit filed under Order I Rule 8 of the Code of Civil Procedure, 1908
[“CPC”]. NSEL also filed third-party notices in the said suit for recovery
of INR 5600 crore against 24 defaulter traders. It has also filed various
arbitration proceedings against them, and is in the process of recovery
of INR 3365 crore out of INR 5600 crore, which are in the form of court
decrees and arbitration awards.
4. On 17.12.2013, based on the Grant Thornton report dated
21.09.2013, the FMC passed an order declaring that FTIL was not “fit
and proper” to hold equity in any commodity exchanges, and must
dilute its shareholding to not more than 2% of the paid-up equity
capital of MCX. The said order is under challenge in Writ Petition No.
337 of 2014 before the Bombay High Court. On 28.02.2014, the
Division Bench of the Bombay High Court refused a prayer for stay of
the aforesaid order, stating that findings of fact of a serious nature
5
have been recorded against the appellant, and the fraud perpetrated is
to the tune of INR 5500 crore.
5. On 06.01.2014, the Economic Offences Wing, Mumbai, filed
chargesheets against the Managing Director and CEO of NSEL, Shri
Sinha, the Head of Warehousing of NSEL, Shri Babu Kanvi, and two
other defaulters. In the chargesheet, it was revealed that the aforesaid
three employees of NSEL, in exchange for monetary kickbacks, had
colluded with the defaulters to enable them to trade on NSEL’s
platform without depositing adequate goods in the warehouses, in
breach of rules and byelaws of NSEL.
6. On 18.08.2014, the FMC, vide a letter to the Union of India,
suggested that FTIL and NSEL be merged. Meanwhile, in the
representative Suit No. 173 of 2014, vide order dated 02.09.2014, the
Bombay High Court appointed a three-member committee consisting
of Mr. Justice V.C. Daga, Mr. J. Solomon, and Mr. Yogesh Thar for
ascertaining and crystallising the liability of the defaulters and to assist
in recovery of debts from the defaulters. This committee continues to
function even on date. Thus, in addition to INR 3365 crore, i.e., the
total of decrees and arbitration awards against the defaulters, this
high-level committee has also crystallised a further sum of INR 835.88
6
crore to be recovered from the defaulters, which is pending before the
Bombay High Court.
7. On 19.09.2014, the Ministry of Finance, Government of India,
issued a notification withdrawing the exemption granted to NSEL vide
notification dated 05.06.2007. Exemptions granted to the National
Commodity and Derivatives Exchange Ltd. (NCDEX) Spot Exchange
and the National Agricultural Produce Market Committee (APMC) were
also withdrawn as the Government was of the view that ready delivery
or spot delivery contracts in commodities ought not to be traded on
commodities exchanges at all. On 15.10.2014, Dr. K.P Krishnan,
Additional Secretary, Department of Economic Affairs, wrote a letter to
the Ministry of Corporate Affairs stating that FTIL and NSEL appear to
be maintaining separate identities for a fraudulent purpose, i.e., to
deprive investors of their money. As a result, there is a need to lift the
corporate veil in order to unearth the fraud, as a result of which,
amalgamation of two companies, where one has defrauded market
participants and the other company is cash-rich and capable of
addressing the payment crisis more effectively. It was therefore
proposed to merge FTIL and NSEL under Section 396 of the
Companies Act. On 21.10.2014, a draft order of amalgamation, made
in accordance with Section 396(3) of the Companies Act, was
7
circulated to the relevant stakeholders. As a result, FTIL filed Writ
Petition No. 2743 of 2014 on 10.11.2014, in which it challenged the
impugned draft order. On 27.11.2014, the Bombay High Court directed
the parties to maintain status quo. On 16.12.2014, the Union of India
filed an affidavit in reply, categorically confirming that the impugned
draft order has been made by the Central Government on the basis of
the FMC’s proposal dated 18.08.2014. On 04.02.2015, the Bombay
High Court vacated the status quo order, and passed an order allowing
FTIL, NSEL, and their shareholders to file their objections to the draft
amalgamation order. Meanwhile, under Section 396(3), a
compensation order was made on 01.04.2015, which involved
compensation only to a particular shareholder of NSEL. On
28.08.2015, the Central Government issued a notification to merge the
functions of the FMC with the Securities and Exchange Board of India
[“SEBI”] w.e.f. 28.09.2015. On the same day, the FCRA was also
repealed. Thus, SEBI was now vested with the powers of the FMC
which is to be governed by the Securities and Exchange Board of India
Act, 1992 [“SEBI Act”].
8. FTIL and NSEL were granted a hearing on their objections to the
impugned draft amalgamation order by a committee consisting of Shri
Pritam Singh, Additional Secretary to the Government of India, and
8
Shri H.P. Chaturvedi, Joint Secretary and Legal Advisor, Ministry of
Law and Justice in October 2015, pursuant to a Bombay High Court
order in the Writ Petition 2743 of 2014 pending before it.
9. On 12.02.2016, a final amalgamation order was passed in terms
of Section 396(3), thereby merging FTIL and NSEL, wherein all assets
and liabilities of NSEL would become assets and liabilities of FTIL. The
writ petition already filed was amended on 28.03.2016 to include a
challenge to this order. On 04.12.2017, the impugned judgment of the
Bombay High Court was passed in which the said writ petition was
dismissed.
10. We have heard Shri Mukul Rohatgi, Shri Vikas Singh, Dr. A.M.
Singhvi, and Shri Kavin Gulati, learned Senior Advocates, and Shri
Arvind Lakhawat, learned Advocate, on behalf of the appellants.
According to learned counsel, the first important point to be noted is
that in company law, the holding company, viz. FTIL, is distinct and
separate from its subsidiary, viz., NSEL. It was pointed out to us that
there are separate and independent Boards of Directors for managing
the day-to-day affairs of both companies, which deal in completely
different businesses. It was pointed out that FTIL has never
participated in the profits of NSEL, and except for receiving annual
9
maintenance charges for providing technology-related services by way
of fees, FTIL has not derived any revenue from NSEL. In fact, over a
long period of nine years, FTIL has received only a sum of INR 84
crore from NSEL which, in any case, is deposited by FTIL in the
Bombay High Court pursuant to an order dated 12.06.2015 in Writ
Petition No. 2187 of 2015. Learned counsel were also at pains to point
out that NSEL has not defrauded anybody since it is only a platform.
Currently, the business of NSEL is closed, whereas, on the other hand,
the business of FTIL is flourishing. A compulsory amalgamation order
would be ultra vires Section 396 if the only object is to foist
unadjudicated liability of NSEL on FTIL. It was also pointed out that the
basis of the amalgamation order was a letter by the FMC, which in turn
was based on a “forensic” audit report of 2013 by Grant Thornton. The
so-called report itself stated that there is no independent verification of
information provided, and consequently, would not constitute an audit,
let alone a forensic audit. It also stated that should additional
information become available, which impacts upon conclusions
reached in the report, Grant Thornton reserved the right to amend their
findings, which are not intended to be interpreted to be either legal
advice or opinion; in short, that the findings themselves were
inconclusive.
10
11. Learned counsel have argued that the impugned order is ultra
vires Section 396 for many reasons. First and foremost, the condition
precedent to passing an amalgamation order is that compensation be
assessed under Section 396(3) of the Act. Compensation has to be
assessed qua both the transferor and transferee company. In the
present case, compensation has been assessed only for NSEL or its
shareholders, without any compensation being awarded to FTIL or its
shareholders. Secondly, a member or creditor is required to be placed
in the same position “as nearly as possible”. In the present case, the
amalgamated company would become a company of negative net
worth upon amalgamation, having had a positive net worth of almost
INR 2800 crore pre-amalgamation. This being so, the very basis for
application of Section 396 would disappear as the amalgamated
company, i.e., the transferee company would have to pay the
compensation that is assessed. This obviously cannot be done when
the amalgamated company itself becomes a negative net worth
company. It was then argued that the amalgamation order interfered
with the judicial process in that decrees and arbitral awards obtained
by NSEL against defaulters are wholly ignored. Further, the process of
adjudication, which will determine whether there are defaults and
whether they need to be paid back, has been short-circuited by
11
amalgamating NSEL with FTIL. Thus, the learned counsel have all
argued that various conditions precedent for applicability of Section
396 are wholly absent. Also, in the present case, the Central
Government has not applied its mind to whether such an order is, first
of all, “essential”. Secondly, unadjudicated so-called liabilities to
persons who are members of one particular exchange can hardly be
said to be something which requires the Central Government to
amalgamate both companies in the “public interest”. The public
interest consists of the interests of the general public which would
include, inter alia, the interest of the 63,000 shareholders of FTIL, who
are now going to be mulcted with a huge liability which would reduce
the market value of their shares to nil. They have cited several
judgments to buttress these submissions.
12. Thus, the amalgamation order oversteps recognised separation
of powers’ limits, and is therefore, ultra vires both Section 396 of the
Companies Act and the Constitution of India. It was then argued that
there are three grounds in support of the order of amalgamation, which
are to be found in the impugned judgment, namely:
A. Restoring / safeguarding public confidence in forward
contracts and exchanges which are an integral and essential part
12
of the Indian economy and financial system, by consolidating the
businesses of NSEL and FTIL;
B. Giving effect to the business realities of the case by
consolidating the businesses of FTIL and NSEL and preventing
FTIL from distancing itself from NSEL, which is even otherwise
its alter ego; and
C. Facilitating NSEL in recovering dues from the defaulters by
pooling human and financial resources of FTIL and NSEL
Admittedly, reasons A and B are not in the draft order. This being so,
obviously, no objections or suggestions could be made qua reasons A
and B, as a result of which the final order would, therefore, be ultra
vires Section 396(3) of the Companies Act.
13. All the stated objectives at page 1 of the amalgamation order
itself – (a) to leverage combined assets, capital and reserves; (b) to
achieve economy of scale; (c) efficient administration; (d) gainful
settlement of rights and liabilities of stakeholders and creditors; (e) to
consolidate businesses; and (f) to ensure coordination and policy – are
totally vague and do not lead to any application of mind to such
amalgamation order being essential in public interest. Article 31A of
the Constitution of India was relied upon, and it was argued that
13
amalgamation under Article 31A(1)(c) of two or more corporations can
only be made in public interest or in order to secure proper
management of any of the corporations, which is wholly missing in the
present case. It was also argued that only Shri Pritam Singh had
signed the order which dismissed the objections, even though the
objections were heard by a two-member committee. They also made
submissions that even otherwise, the impugned order was violative of
natural justice and of Articles 14, 19, and 300A of the Constitution of
India. Also, since the amalgamation order is based upon an order of
the FMC, which in turn is based upon the Grant Thornton report, which
was delivered in a great hurry, and with such disclaimers that it could
never be relied upon to render final findings, as has been done by the
amalgamation order, the amalgamation order itself would be without
application of mind, excessive and arbitrary, and violative of Article 14
of the Constitution of India on this score alone.
14. When it came to the impugned judgment, the learned counsel for
the appellants were at pains to point out that when the impugned
judgment held that no compensation need be paid to FTIL as the
number of shares in the amalgamated company of shareholders
remain the same, economic value or market value of the shares was
totally ignored. Thus, in ignoring economic value, a totally artificial,
14
formal, and non-substantial test has been applied by the Bombay High
Court, which says that there is no necessity to compensate the
shareholders of FTIL, even though once they become members of the
amalgamated company, their shares would be worth nil on the date of
amalgamation. And, in the event of winding up, they would get back
nothing. It was also pointed out that the three grounds of the
amalgamation order, being reasons for the amalgamation order, which
were accepted by the Bombay High Court, are grounds which do not
exist. In ground A, for example, restoring / safeguarding public
confidence in forward contracts and exchanges which are an integral
and essential part of the Indian economy, does not obtain as there
were only three commodity exchanges in the country, all of which were
shut down w.e.f. September 2014. No similar exchanges have been
created subsequently. In any case, the business done at such
exchanges cannot be said to be an integral and essential part of the
Indian economy. Reason B, which is that NSEL is an alter ego of FTIL,
is pending adjudication in the suits filed in the Bombay High Court. To
come to a conclusion that one is the alter ego of the other is not only
contrary to the facts pointed out hereinabove, namely, that the
businesses of the two companies are entirely different and the
management of both companies is by completely different and distinct
15
Boards of Directors. Thus, to arrive at the conclusion that one
company is the alter ego of the other, without adjudication, would itself
be arbitrary and violative of Article 14 of the Constitution of India. The
only reason which would remain, therefore, would be reason C, which
is that the real object of the entire exercise to recover alleged dues
from alleged defaulters pre-adjudication and pending adjudication,
which would be looking at the problem in a wholly one-sided way, and
would be an excessive invasion of the rights of the shareholders and
creditors of FTIL, all of whom have overwhelmingly voted against
amalgamation. In fact, it is pointed out that there is no question of
“public interest” and Section 396 is actually used in order to penalise
“Ram”, namely, NSEL and FTIL, for the default of “Shyam”, namely, the
24 alleged defaulters, when not even a single default or any civil or
criminal wrong can be attributed either to FTIL or to NSEL. The
impugned order would therefore also fail on the ground of
proportionality, which is a facet of Article 14. For all these reasons, in
addition, the impugned order ought to be struck down as ultra vires
Article 31A of the Constitution of India and Section 396 of the
Companies Act, and be declared to be violative of Article 14, Article 19
and Article 300A of the Constitution of India.
16
15. Shri Shyam Divan, learned Senior Advocate appearing on behalf
of Respondent No. 4, NSEL Investors Action Group, supported the
impugned judgment in its entirety. According to the learned Senior
Advocate, it must never be forgotten that FTIL held 99.9998% of
NSEL’s shares, and that NSEL was promoted by and is part of the
FTIL group. The Board of Directors of NSEL is entirely under the
control of FTIL. NSEL’s exchange was treated, held out, and
represented by FTIL to be its own, and was part of its “exchange
verticals”. Shri Jignesh Shah is the common linchpin of both the
companies. He holds 45% shares of FTIL and is its Chairman-cumManaging Director. He is also Vice Chairman on the Board of NSEL,
being one of the “key managerial personnel” of the aforesaid company.
He also was a member of the Audit Committee of NSEL. All the
minutes of the Board meetings of NSEL were regularly tabled at the
Board meetings of FTIL, showing therefore, that FTIL has full
knowledge of the goings-on in NSEL. NSEL’s outward emails were
routed through an outbox called “FT outbox” through which all emails
of all FTIL-group companies were routed. What is clear, therefore, is
that on a reading of the Grant Thornton report, NSEL has, at least from
2009, promoted what are called “paired contracts” in commodities
which were, in fact, financing transactions, which were totally distinct
17
from sale and purchase transactions in commodities. In fact, by April to
July, 2013, 99% of the turnover of NSEL was made up of such paired
contracts. This mechanism was in breach of the conditions of
exemption granted to NSEL dated 05.06.2007, and in breach of the
provisions of the FCRA. Contrary to what was actually going on in
NSEL, NSEL kept inducing persons to come to its platform by
reiterating that they deal only with commodities and spot delivery of
the same. It is only in 2012 that the FMC, being apprised of the real
activities of NSEL, wrote to the DCA, indicating that its business was in
complete breach of the FCRA. What is extremely important is that Shri
Jignesh Shah made representations to the DCA and the FMC on
10.07.2013, in which he stated that NSEL had full stock of
commodities as collateral and had 10-20% of open position as margin
money. He also stated that the stock currently held in NSEL’s 120
warehouses was valued at around INR 6000 crore. It is in July, 2013
that the payment crisis of INR 5600 crore arose on NSEL, FTIL
admitting that this was the result of a fraud. On 14.08.2013, NSEL
wrote to the FMC, setting out a detailed settlement plan. The plan
indicated the period within which the entire dues would be paid, with
simple interest at 8% to 16% per annum. This plan was an abject
failure. As a result, a forensic audit was conducted by Grant Thornton,
18
which in its report dated 21.09.2013, came out with damning facts and
figures as to the real operations of NSEL, namely, that they are not a
commodity exchange, but a finance exchange, and that no
commodities were really in stock. As a result, the FMC issued show
cause notices and then passed its order dated 17.12.2013 based on
the aforesaid report, in which it found NSEL guilty of severe
malpractice. Based on this order, the draft order and final order of
amalgamation were then made. Shri Divan was at pains to point out
that as early as on 18.08.2014, the FMC had written a detailed letter to
the Secretary, Ministry of Corporate Affairs, in which it indicated that as
NSEL was financially incapable of repaying all those investors/traders
who allegedly got duped, it would be expedient in public interest to
amalgamate NSEL with its parent, FTIL, so that its parent’s resources
could be used to repay these debts. He then argued that the reason
for the amalgamation order was not merely the repayment of debts of
the allegedly duped investors/traders, but to instil confidence in
commodity markets, for it is only when their debts are immediately
paid would persons come forward to platforms like NSEL to trade in
commodities. According to the learned Senior Advocate, there was no
breach of natural justice in passing the final amalgamation order as
FTIL and NSEL were both heard pursuant to a Bombay High Court
19
order, even though Section 396 of the Companies Act does not require
any hearing. He also argued that the order of amalgamation is of the
nature of delegated legislation and is not an administrative order, as a
result of which, the immunity granted by Article 31A to “all laws”
dealing with such amalgamation from challenge on the ground of
Articles 14 and 19 would come into full play. This being so, none of the
grounds taken up by the appellants could be gone into as they all
pertained to infractions of Articles 14 and 19 of the Constitution of
India. According to the learned Senior Advocate, the order was passed
after being satisfied on the objective facts set out hereinabove that it
was essential in public interest to pass such order and could not,
therefore, be held to be ultra vires. He also supported the judgment of
the High Court when it stated that the economic value of shares of
FTIL is not the subject matter of Section 396, and that, therefore, it
was not necessary to provide FTIL’s shareholders any compensation
under Section 396(3).
16. Shri Rakesh Dwivedi, learned Senior Advocate also appearing
on behalf of Respondent No.4, supplemented the submissions of Shri
Divan. According to him, nowhere does the Central Government order
direct any payment to be made by the amalgamated company. The
amalgamation is only so that the finances of FTIL can be used to
20
pursue on-going litigation as NSEL does not have the wherewithal to
do so. Thus, it is wholly incorrect for the appellants to say that FTIL will
become mulcted with the liabilities of NSEL, as a result of which the
shareholders of FTIL will suffer. He added that the overwhelming
majority of shares in FTIL are owned by Shri Jignesh Shah and his
family (45%) and by Shri Ravi Sheth and Shri Bharat Sheth (8%).
Thus, the majority shares held in FTIL are by two masterminds of the
scam. That apart, after the scam, 24% of the shares have been
purchased by speculators, taking advantage of the low price at which
such shares were offered. Such persons, therefore, are purely
speculative investors who do not need to be compensated under
Section 396 of the Act. Also, the economic value of shares, if at all it is
to be taken into account, is an uncertain and fluctuating phenomenon.
As examples, he stated that the book value of a share of FTIL, after
the scam broke out, was only INR 2/-, whereas the listed value actually
went up after the FMC order of 17.12.2013. All this, therefore, is
dependent on market forces, and share price varies according to
market forces and not as a result of any amalgamation that is effected.
He also added that it is incorrect to state that one of the conditions
precedent for applicability of Section 396 was absent. Even if a
compensation order was made awarding nil compensation to
21
shareholders and creditors of FTIL, they could have appealed against
the same. Not having done so, it cannot be said that the Central
Government order was passed without adhering to the provisions of
Section 396(3) and (4) of the Act. When it came to the three grounds
of public interest stated by the High Court, the learned Senior
Advocate argued that grounds (a) and (b) are only inferences to be
drawn from facts which are all stated in the order, and therefore, need
not have been in the draft order. There is thus no infirmity or breach of
principles of natural justice as provided in Section 396(3) and (4). He
was at pains to analyse Article 31A, and stated that the expression
“public interest” contained in Article 31A will have to be construed
broadly. Equally, the word “essential” in Section 396 is essentiality
according to the Central Government, and thus, very wide latitude
needs to be extended to the Government when it exercises its
discretion, stating that it is essential in public interest to amalgamate
two companies. He laid great emphasis on the judgment in Ganesh
Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645
[“Ganesh Bank”], stressing that amalgamations that are made under
Section 45 of the Banking Regulation Act, like amalgamations made
under Section 396, can be made so that a weak entity merge with a
strong entity in the interest of the depositors of the weak entity. He also
22
cited various judgments to show that stock exchanges are intimately
linked with the economy of the country, and therefore, if anything goes
wrong with them, there is a direct link with public interest. He
emphasized the fact that in Section 396(3), the shareholders of FTIL
only need to be compensated “as nearly as may be” and that
mathematical precision is not necessary. He then distinguished the
judgment in Mohinder Singh Gill v. Chief Election Commissioner,
(1978) 1 SCC 405 [“Mohinder Singh Gill”], cited by the appellants,
stating that where larger public interest is involved, the ratio of that
judgment will not apply. He cited two judgments in support of this
proposition. He also went on to cite certain judgments which
distinguished K.I. Shephard v. Union of India, (1987) 4 SCC 431
[“K.I. Shephard”], and therefore, argued that the Central Government
order passed under Section 396 is really in the nature of delegated
legislation and need not conform to any natural justice outside what is
provided for in the Section itself. He then cited certain judgments on
lifting of the corporate veil, and ended by saying that as was held in
J.K. (Bombay) (P) Ltd. v. New Kaiser-i-Hind Spinning and Weaving
Co. Ltd., [1969] 2 SCR 866 [“J.K. (Bombay) (P) Ltd.”], the Central
Government order would have statutory force, and therefore, cannot
be said to be a mere administrative order.
23
17. Shri Arvind Datar, learned Senior Advocate appearing on behalf
of SEBI, fully supported the impugned judgment and took us through
various portions of it. He was at pains to point out that the Grant
Thornton report was a report of a forensic auditor chosen by NSEL
itself, though required to do so by the FMC. He took us through the
FMC order dated 17.12.2013 meticulously, and said that none of the
findings therein could be assailed by either FTIL or NSEL. He then
referred to the Central Government order and supported the High
Court judgment’s upholding of it. He then relied upon the Director’s
Report of NSEL dated 20.07.2015, and balance sheet as on
31.03.2015 to show that no potential liability of INR 5600 crore is at all
referred to in the Director’s Report or in the balance sheet. He was at
pains to point out, therefore, that NSEL itself was an exchange which
made it clear that it would not be responsible for any liabilities incurred
by its members except to the extent of the SG fund created out of the
members’ contribution. He then argued that given the magnitude of the
scam that broke out in July 2013, the Government had to act. It could
have chosen one of many ways in which to act, but since it had bona
fide chosen the amalgamation route provided by Section 396 of the
Companies Act, it is obvious that in dealing with a scam of this
magnitude, the Government has acted in public interest.
24
18. Ms. Pinky Anand, learned Additional Solicitor General appearing
on behalf of the Union of India, meticulously took us through a long list
of dates and events which showed that NSEL had flouted the
conditions of its exemption order and had never really carried out
ready delivery or spot delivery contracts in goods. Indeed, according to
her, NSEL never had a single registered warehouse in its name as the
Warehousing Development and Regulatory Authority had rejected
NSEL’s application for registration of its warehouses as far back as on
16.05.2011. Therefore, NSEL stating that it had 120 warehouses
owned by itself was a misrepresentation made to the public from the
very beginning. It is also clear, that when the scam broke out, Grant
Thornton, as forensic auditor, went into the affairs of NSEL and came
out with a number of key findings, which she referred to and took us
through portions of the Grant Thornton report. The FMC order dated
17.12.2013 was also referred to and relied upon by her. She also
referred to the fact that the exemption order dated 05.06.2007 granted
to NSEL was withdrawn on 19.09.2014 as commodities markets which
were supposed to be markets where spot delivery of goods took place,
had never in fact taken place and therefore, exemption granted to all
spot exchanges dealing in commodities, including two other spot
exchanges that existed, were withdrawn. However, the Bombay Stock
25
Exchange Ltd. (BSE), the National Stock Exchange of India Ltd.
(NSE), and MCX continued with commodity trading, but not on a spot
basis. She also referred us to a subsequent event, that is an event
subsequent even to the impugned judgment, namely, to a serious
fraud investigation report dated 31.08.2018 which, according to her,
corroborated all the findings made by Grant Thornton, the FMC, and
the Central Government by its final order. She then argued that
Section 396 of the Companies Act is a special, self-contained,
standalone code by itself and must be read as such, and that all
procedural aspects of Section 396 have been complied with on the
facts of the present case. The satisfaction of the Central Government
that it is essential in public interest to act under Section 396 is purely
subjective satisfaction. She referred to and relied upon Bacha F.
Guzdar v. Commissioner of Income Tax, [1955] 1 SCR 876 [“Bacha
F. Guzdar”], to support the reasoning of the High Court on the
compensation order. She also referred to and relied upon the share
market prices to show that market fluctuations took place on their own,
and that share prices plummeted only as a result of the scam which
came to light in July, 2013. She also stated that since neither FTIL nor
its shareholders and creditors filed any appeal against the
compensation order, they waived their right to do so. She then
26
supported the final amalgamation order and stated that it was manifest
that it was made in “public interest”. For this, she relied upon a number
of judgments to support her contention that “public interest” has to be
given a broad connotation. She also countered the submission of Shri
Rohatgi that of the two persons who heard the objections, only one
person signed, and therefore, their report would be non-est. She
stated that this technical objection cannot stand in the way of the final
government order which took into account all objections and
suggestions made, and answered all of them. She also referred to the
role of stock markets in the national economy and stated that to prop
up stock and commodities exchanges is certainly in public interest.
The three distinct grounds on public interest, found by the High Court,
are more than sufficient to sustain the impugned Central Government
order. Finally, in her last written argument, she relied upon two
judgments of this Court, namely, Union of India v. G. Ganayutham,
(1997) 7 SCC 463 and Om Kumar v. Union of India, (2001) 2 SCC
386, stating the current position of the doctrine of proportionality in
administrative law.
19. Shri Tushar Mehta, learned Solicitor General for India, who also
appeared on behalf of the Union of India, re-emphasised the facts
which led to the final amalgamation order. According to him, the
27
impugned order dated 12.02.2016 is based on public interest as it
reflects the Government’s reaction to a large scam which broke in the
year 2013, and which effected the commodities market generally. He
dwelt at some length on subjective satisfaction and judicial review, and
referred to Barium Chemicals Ltd. v. Company Law Board, [1966]
Supp SCR 311 [“Barium Chemicals”], Rohtas Industries Ltd. v. S.D.
Agarwal, [1969] 3 SCR 108 [“Rohtas Industries”], and other
judgments to emphasise that it was not for the Court to sit in judgment
over the sufficiency of the reasons for which the Central Government
passed its order in public interest. He also stated that the right to
choose between different courses of action is a right inherent in a
responsive government, and it is only when such choice is so unfair or
unreasonable that no reasonable person would have taken such
action, that the Court can intervene. For this purpose, he cited
Haryana Financial Corporation v. Jagdamba Oil Mills, (2002) 3
SCC 496. According to him, essentiality is not reviewable except by
the Wednesbury test, and the Court should ask itself the question as to
whether no reasonable person could have concluded that the
impugned order was essential in the public interest. He reiterated that
the order dated 12.02.2016 is not ultra vires Section 396 as several
findings which show that amalgamation is essential in public interest
28
has been arrived at on the basis of undisputed facts, and that
therefore, the said order should be upheld. He also argued that such
order, if passed, is in the nature of delegated legislation, and therefore,
does not have to satisfy any rules of natural justice outside what is
prescribed by Section 396 itself which, according to him, has been
procedurally and substantively complied with, as reflected in the order
dated 12.02.2016.
20. Shri Neeraj Kishan Kaul, learned Senior Advocate, also
appearing on behalf of some of the alleged duped investors/traders,
referred to the Maharashtra Protection of Interest of Depositors (in
Financial Establishments) Act, 1999, and stated that the persons who
had invested monies in the commodities exchange of NSEL have been
held to be “depositors” by a judgment dated 01.10.2015 of the High
Court of Bombay, from which an SLP has been dismissed by this
Court. He also brought to our notice another judgment dated
01.11.2018, also of the Bombay High Court, in which NSEL and FTIL
had breached an injunction order, and had to apologise and pay back
monies in order to avoid being held guilty of contempt of court. He also
stressed that “economic value” of shares is a stranger to Section
396(3) of the Companies Act. He then relied upon two reports of the
RBI, both of which say that the modern trend in corporate law
29
worldwide is that if losses are borne by a corporation, it is the
shareholders who should bear the brunt.
21. Having heard learned counsel for all the parties, it is necessary
at this juncture to first set out Article 31A of the Constitution of India,
which states:
“31A. Saving of laws providing for acquisition of
estates, etc.—(1) Notwithstanding anything contained in
Article 13, no law providing for—
xxx xxx xxx
(c) the amalgamation of two or more
corporations either in the public interest or in
order to secure the proper management of any
of the corporations, or
xxx xxx xxx
shall be deemed to be void on the ground that it is
inconsistent with, or takes away or abridges any of the
rights conferred by article 14 or article 19.
xxx xxx xxx”
“Law” has been defined in Article 13(3) as follows:
“13. Laws inconsistent with or in derogation of the
fundamental rights.—
xxx xxx xxx
(3) In this article, unless the context otherwise requires,
—
(a) “law” includes any Ordinance, order, byelaw, rule, regulation, notification, custom or
usage having in the territory of India the force
of law;
30
xxx xxx xxx”
It will thus be seen that any “law” providing for the amalgamation of
two or more corporations in public interest is immune from challenge
on grounds relatable to Article 14 or Article 19 of the Constitution of
India. It is not disputed that Section 396 of the Companies Act is such
a law.
22. Section 396 of the Companies Act, 1956, reads as under:
“396. Power of Central Government to provide for
amalgamation of companies in public interest.—(1)
Where the Central Government is satisfied that it is
essential in the public interest that two or more
companies should amalgamate, then, notwithstanding
anything contained in Sections 394 and 395 but subject
to the provisions of this section, the Central Government
may, by order notified in the Official Gazette, provide for
the amalgamation of those companies into a single
company with such constitution; with such property,
powers, rights, interests, authorities and privileges; and
with such liabilities, duties, and obligations; as may be
specified in the order.
(2) The order aforesaid may provide for the continuation
by or against the transferee company of any legal
proceedings pending by or against any transferor
company and may also contain such consequential,
incidental and supplemental provisions as may, in the
opinion of the Central Government, be necessary to give
effect to the amalgamation.
(3) Every member or creditor (including a debenture
holder) of each of the companies before the
amalgamation shall have, as nearly as may be, the
same interest in or rights against the company resulting
from the amalgamation as he had in the company of
which he was originally a member or creditor; and to the
31
extent to which the interest or rights of such member or
creditor in or against the company resulting from the
amalgamation are less than his interest in or rights
against the original company, he shall be entitled to
compensation which shall be assessed by such authority
as may be prescribed and every such assessment shall
be published in the Official Gazette.
The compensation so assessed shall be paid to the
member or creditor concerned by the company resulting
from the amalgamation.
(3A) Any person aggrieved by any assessment of
compensation made by the prescribed authority under
sub-section (3) may, within thirty days from the date of
publication of such assessment in the Official Gazette,
prefer an appeal to the Tribunal and thereupon the
assessment of the compensation shall be made by the
Tribunal.
(4) No order shall be made under this section, unless:
(a) a copy of the proposed order has been sent
in draft to each of the companies concerned;
(aa) the time for preferring an appeal under
sub-section (3A) has expired, or where any
such appeal has been preferred, the appeal
has been finally disposed of; and
(b) the Central Government has considered,
and made such modifications, if any, in the draft
order as may seem to it desirable in the light of
any suggestions and objections which may be
received by it from any such company within
such period as the Central Government may fix
in that behalf, not being less than two months
from the date on which the copy aforesaid is
received by that company, or from any class of
shareholders therein, or from any creditors or
any class of creditors thereof.
(5) Copies of every order made under this section shall,
as soon as may be after it has been made, be laid
before both Houses of Parliament.”
32
It will be seen that Section 396 provides for compulsory amalgamation
of companies in public interest. The said Section occurs in Chapter V
of the Companies Act which reads, “arbitrations, compromises,
arrangements and reconstructions”. Sections 391 to 394 deal with
voluntary compromises and arrangements, including amalgamation of
two or more companies. By way of contrast, Section 396 deals with
compulsory amalgamation of companies.
INTERPRETATION OF SECTION 396
23. There is no doubt whatsoever that Section 396 cannot be
challenged on the ground of Article 14 or Article 19, given Article 31A
of the Constitution of India. However, this does not mean that Section
396 must be construed in such a fashion that it would lead to arbitrary
or unreasonable results. In Prem Nath Raina v. State of Jammu &
Kashmir and Ors., (1983) 4 SCC 616, this Court, in dealing with a
challenge to the J&K Agrarian Reforms Act, 1976, which was protected
by Article 31A, held:
“9. ……The exclusion of a constitutional challenge under
Articles 14, 19 and 31 which is provided for by Article
31A does not justify in equity the irrational violation of
these articles. This Court did observe in Waman
Rao [Waman Rao v. Union of India, (1981) 2 SCC 362 :
AIR 1981 SC 271 : (1981) 2 SCR 1] that: “It may happen
that while existing inequalities are being removed, new
inequalities may arise marginally and incidentally” but
33
the legislature has to take care to see that even marginal
and incidental inequalities are not created without rhyme
or reason. The Government of J&K would do well to give
fresh consideration to the provisions contained in
Section 7(2) and modify the provisions regarding
residence in order that they may accord with reason and
commonsense. Article 31A does not frown upon reason
and commonsense.”
Equally, in Budhan Singh and Anr. v. Nabi Bux and Anr., [1970] 2
SCR 10, this Court, while construing Section 90 of the U.P. Zamindari
Abolition and Land Reforms Act, 1950, held:
“Before considering the meaning of the word “held”
in Section 9, it is necessary to mention that it is proper to
assume that the law-makers who are the representatives
of the people enact laws which the society considers as
honest, fair and equitable. The object of every legislation
is to advance public welfare. In other words as observed
by Crawford in his book on Statutory Constructions that
the entire legislative process is influenced by
considerations of justice and reason. Justice and reason
constitute the great general legislative intent in every
piece of legislation. Consequently where the suggested
construction operates harshly, ridiculously or in any other
manner contrary to prevailing conceptions of justice and
reason, in most instances, it would seem that the
apparent or suggested meaning of the statute, was not
the one intended by the law-makers. In the absence of
some other indication that the harsh or ridiculous effect
was actually intended by the legislature, there is little
reason to believe that it represents the legislative intent.”
(at pp. 15-16)
DERIVATIVE IMMUNITY OF THE CENTRAL GOVERNMENT ORDER
34
24. The next question is whether the Central Government’s order
made under Section 396 would also receive the protective umbrella of
Article 31A, given the fact that Section 396 is undoubtedly protected by
Article 31A.
25. A similar question was raised and considered with respect to an
order passed under the Essential Commodities Act, 1955. In Prag Ice
& Oil Mills v. Union of India, (1978) 3 SCC 459 [“Prag Ice & Oil
Mills”], by a majority judgment, it was held that the Mustard Oil (Price
Control) Order, 1977, passed under Section 3 of the Essential
Commodities Act, 1955 did not receive the immunity of Article 31B.
This Court held:
“46. Article 31A of the Constitution saves laws which
provide for matters mentioned in clauses (a) to (e)
thereof from a challenge under Articles 14, 19 or 31
notwithstanding anything contained in Article 13 of the
Constitution. Article 31B which was introduced by the
Constitution (First Amendment) Act, 1951, validates
certain Acts and Regulations by providing that without
prejudice to the generality of the provisions contained in
Article 31A, “none of the Acts and Regulations specified
in the Ninth Schedule nor any of the provisions thereof”
shall be deemed to be void, or ever to have become
void, on the ground that such Act, Regulation or
provision is inconsistent with, or takes away or abridges
any of the rights conferred by, any provisions of Part III.
On a plain reading of this article it seems to us
impossible to accept that the protective umbrella of the
Ninth Schedule takes in its everwidening wings not only
the Acts and Regulations specified therein but also
Orders and Notifications issued under those Acts and
35
Regulations. Article 31B constitutes a grave
encroachment on fundamental rights and doubtless as it
may seem that it is inspired by a radiant social
philosophy, it must be construed as strictly as one may,
for the simple reason that the guarantee of fundamental
rights cannot be permitted to be diluted by implications
and inferences. An express provision of the Constitution
which prescribes the extent to which a challenge to the
constitutionality of a law is excluded, must be construed
as demarcating the farthest limit of exclusion.
Considering the nature of the subject-matter which
Article 31B deals with, there is, in our opinion, no
justification for contending by judicial interpretation the
provisions of the field which is declared by that article to
be immune from challenge on the ground of violation or
abridgement of fundamental rights. The article affords
protection to Acts and Regulations specified in the Ninth
Schedule. Therefore, whenever a challenge to the
constitutionality of a provision of law on the ground that it
violates any of the fundamental rights conferred by Part
III is sought to be repelled by the State on the plea that
the law is placed in the Ninth Schedule, the narrow
question to which one must address oneself is whether
the impugned law is specified in that Schedule. If it is,
the provisions of Article 31B would be attracted and the
challenge would fail without any further inquiry. On the
other hand, if the law is not specified in the Ninth
Schedule, the validity of the challenge has to be
examined in order to determine whether the provisions
thereof invade in any manner any of the fundamental
rights conferred by Part III. It is thus no answer to say
that though the particular law, as for example a Control
Order, is not specified in the Ninth Schedule, the parent
Act under which the Order is issued is specified in that
Schedule.”
26. In the present case, this judgment has no direct application
except to say that Article 31A also constitutes a grave encroachment
on fundamental rights, and must be construed strictly. The expression
36
used in Article 31A is “law”, for which, one is to see the definition
contained in Article 13(3). “Law” in Article 13(3) certainly includes
“order”. The only question is whether this would include an
administrative order as well.
27. It is clear, on a reading of Article 13(3), that the expression “law”,
as defined in Article 13(3)(a), includes an Ordinance, rule, regulation,
notification, and custom or usage having in the territory of India the
force of law. Obviously, therefore, when the expression “order” is used,
it would take colour from Ordinance, rule, regulation, notification, which
are all legislative in nature, and not administrative. Even custom or
usage having the force of law refers to general rules of conduct, as
opposed to administrative orders passed on the facts of a given case.
Construing Article 31A in the light of Article 13(3)(a), it is clear that the
“order” referred to, can therefore, only be a legislative order.
Examples of legislative orders are of the kind dealt with in Prag Ice &
Oil Mills (supra) and Union of India and Anr. v. Cynamide India Ltd.
and Anr., (1987) 2 SCC 720 [“Cynamide India”], namely, orders
passed under statutes which are in the nature of subordinate
legislation, which deal generally with a whole class of persons who are
governed by the same in which general rules of conduct are laid down.
37
WHETHER THE CENTRAL GOVERNMENT ORDER IS ADMINISTRATIVE IN
NATURE
28. This brings us to what is the nature of the order of the Central
Government that is passed under Section 396. It has been argued on
behalf of the Union of India, relying upon a number of judgments, that
the nature of the order passed under Section 396 is that of delegated
legislation. This being the case, it would, therefore, get immunity from
challenge on the ground of Articles 14 and 19 of the Constitution of
India, as it would then amount to a “law” within the meaning of Article
31A read with Article 13(3)(b).
29. The difference between an order which is legislative in nature
and that which is administrative in nature has been discussed in some
of our judgments. Thus, in Cynamide India (supra), this Court drew a
distinction between administrative and legislative orders thus:
“7. …… Any attempt to draw a distinct line between
legislative and administrative functions, it has been said,
is ‘difficult in theory and impossible in practice’. Though
difficult, it is necessary that the line must sometimes be
drawn as different legal rights and consequences may
ensue. The distinction between the two has usually been
expressed as ‘one between the general and the
particular’. ‘A legislative act is the creation and
promulgation of a general rule of conduct without
reference to particular cases; an administrative act is the
38
making and issue of a specific direction or the
application of a general rule to a particular case in
accordance with the requirements of policy’. ‘Legislation
is the process of formulating a general rule of conduct
without reference to particular cases and usually
operating in future; administration is the process of
performing particular acts, of issuing particular orders or
of making decisions which apply general rules to
particular cases.’ It has also been said: ‘Rule-making is
normally directed toward the formulation of requirements
having a general application to all members of a broadly
identifiable class’ while, ‘an adjudication, on the other
hand, applies to specific individuals or situations’. But,
this is only a broad distinction, not necessarily always
true. Administration and administrative adjudication may
also be of general application and there may be
legislation of particular application only. That is not ruled
out. Again, adjudication determines past and present
facts and declares rights and liabilities while legislation
indicates the future course of action. Adjudication is
determinative of the past and the present while
legislation is indicative of the future.……”
In K.I. Shephard (supra), this Court dealt with a scheme for
amalgamation of three private banks with Punjab National Bank,
Canara Bank, and State Bank of India, in terms of separate schemes
drawn, merging each private bank with state banks under Section 45
of the Banking Regulation Act. It was urged that the order passed by
the Reserve Bank of India amalgamating these banks was legislative
in nature, as a result of which the principle of natural justice will not
apply. In turning down this contention, this Court held:
“9. …… Learned counsel for RBI and the transferee
banks have taken the stand that the scheme-making
39
process under Section 45 is legislative in character and,
therefore, outside the purview of the ambit of natural
justice under the protective umbrella whereof the need to
put the excluded employees to notice or enquiry arose. It
is well settled that natural justice will not be employed in
the exercise of legislative power and Mr Salve has rightly
relied upon a recent decision of this Court being Union
of India v. Cynamide India Ltd. [(1987) 2 SCC 720] in
support of such a position. But is the scheme-making
process legislative? Power has been conferred on the
RBI in certain situations to take steps for applying to the
Central Government for an order of moratorium and
during the period of moratorium to propose either
reconstruction or amalgamation of the banking company.
A scheme for the purposes contemplated has to be
framed by RBI and placed before the Central
Government for sanction. Power has been vested in the
Central Government in terms of what is ordinarily known
as a Henry VIII clause for making orders for removal of
difficulties. Section 45(11) requires that copies of the
schemes as also such orders made by the Central
Government are to be placed before both Houses of
Parliament. We do not think this requirement makes the
exercise in regard to schemes a legislative process. It is
not necessary to go to any other authority as the very
decision relied upon by Mr Salve in the case of
Cynamide India Ltd. [(1987) 2 SCC 720] lays down the
test. In para 7 of the judgment it has been indicated:
(SCC pp. 735-36)
“Any attempt to draw a distinct line between
legislative and administrative functions, it has
been said, is ‘difficult in theory and impossible
in practice’. Though difficult, it is necessary that
the line must sometimes be drawn as different
legal rights and consequences may ensue. The
distinction between the two has usually been
expressed as ‘one between the general and the
particular’. ‘A legislative act is the creation and
promulgation of a general rule of conduct
without reference to particular cases; an
administrative act is the making and issue of a
40
specific direction or the application of a general
rule to a particular case in accordance with the
requirements of policy’. ‘Legislation is the
process of formulating a general rule of conduct
without reference to particular cases and
usually operating in future; administration is the
process of performing particular acts, of issuing
particular orders or of making decisions which
apply general rules to particular cases.’ It has
also been said: ‘Rule-making is normally
directed towards the formulation of
requirements having a general application to all
members of a broadly identifiable class’ while,
‘an adjudication, on the other hand, applies to
specific individuals or situations’. But, this is
only a broad distinction, not necessarily always
true.”
Applying these tests it is difficult to accept Mr Salve’s
contention that the framing of the scheme under Section
45 involves a legislative process. There are similar
statutory provisions which require placing of material
before the two Houses of Parliament yet not involving
any legislative activity. The fact that orders made by the
Central Government for removing difficulties as
contemplated under sub-clause (10) are also to be
placed before the two Houses of Parliament makes it
abundantly clear that the placing of the scheme before
the two Houses is not a relevant test for making the
scheme-framing process legislative. We accordingly hold
that there is no force in the contention of Mr Salve that
the process being legislative, rules of natural justice
were not applicable.”
The fact that, under Section 396(5), the Central Government order has
to be laid before the Houses of Parliament also does not detract from
the fact that this order is administrative and not legislative in character.
Applying these judgments to the Central Government’s order passed
41
under Section 396, it is clear that the order directly impacts the rights
and liabilities of the companies, their shareholders and creditors,
sought to be amalgamated under the order. Such order is not an order
in general which applies to all such companies, but only to the
particular companies sought to be amalgamated. There is no general
rule of conduct, without reference to the particular case that is laid
down by such an order. The Central Government order, ultimately,
makes a specific direction qua two specific companies which are to be
amalgamated. It is clear that such an order is not in the nature of
legislation or delegated legislation.
30. Learned counsel appearing on behalf of the respondents have
cited New Bank of India Employees’ Union and Anr. v. Union of
India and Ors., (1996) 8 SCC 407 [“New Bank of India Employees’
Union”], which is a judgment which has distinguished K.I. Shephard
(supra). This judgment was concerned with Section 9 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980
[“Acquisition Act”], which requires schemes that have been framed
under the said Act to be laid before each House of Parliament for a
total period of thirty days, in which, Parliament is then given the power
to make any modification therein. Given the difference in language
between the provisions, namely, Section 45 of the Banking Regulation
42
Act and Section 9 of the Acquisition Act, this Court distinguished the
judgment of K.I. Shephard (supra) thus:
“32. The only other question which remains for
consideration is whether the conclusion of the High
Court that the scheme-making process under Section 9
of the Acquisition Act is not legislative is correct in law. In
view of our conclusions on the four questions
formulated, this question is not of much relevance but
since the High Court has recorded a conclusion and the
learned Additional Solicitor General and Shri Salve
advanced the argument we think it appropriate to answer
this question also. The High Court relied upon the
decision in Shephard case [(1987) 4 SCC 431 : 1987
SCC (L&S) 438 : (1988) 1 SCR 188] and came to hold
that the provisions of Section 45 of the Banking
Regulation Act being in pari materia with Section 9 of the
Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980, and the scheme framed under
Section 45 of the Banking Regulation Act, 1949 having
been held by this Court to be not legislative, the scheme
framed under the Acquisition Act as in the present case,
must also be held to be not a legislative one. It is
undisputed that in Shephard case [(1987) 4 SCC 431 :
1987 SCC (L&S) 438 : (1988) 1 SCR 188] the
amalgamation was of a private bank with a nationalised
bank and the provisions of the Banking Regulation Act,
1949 applied. This Court in Shephard case [(1987) 4
SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] on
examining Section 45(11) of the Banking Regulation Act,
1949 came to hold that merely because a scheme
framed is required to be laid before both the Houses of
Parliament after the same has been sanctioned by the
Central Government the scheme cannot be held to be
legislative in nature. But in our considered opinion the
High Court has failed to notice the fundamental
distinction between the provisions of Section 45 of the
Banking Regulation Act, 1949 and Section 9 of the
Acquisition Act. Under Section 9 of the Acquisition Act
under which Act the impugned scheme has been
43
framed, every scheme framed by the Central
Government has to be laid before each House of
Parliament for a total period of 30 days and Parliament
has the power to agree to the scheme and making any
modification or in giving to a decision that the scheme
should not be made and it is only thereafter the scheme
has the effect either in the modified form or does not
agree (sic). The essential distinction between the two
provisions therefore, is that whereas under the Banking
Regulation Act, 1949 the scheme framed has merely to
be placed before Parliament and nothing further but
under the Acquisition Act the scheme becomes effective
only after the same is placed before both the Houses of
Parliament and after Parliament makes such
modification and agrees to the scheme. In this view of
the matter the decision of this Court in Shephard case
[(1987) 4 SCC 431 : 1987 SCC (L&S) 438 : (1988) 1
SCR 188] has no application to a scheme framed under
the provisions of the Acquisition Act and in our
considered opinion, a scheme framed under Section 9 of
the Banking Companies Acquisition and Transfer of
Undertakings Act, 1980, is a legislative one. The High
Court was in error in holding the scheme not to be a
legislative one.”
Since Section 396(5) of the Companies Act is a provision akin to the
provision considered in the case of K.I. Shephard (supra), the ratio of
K.I. Shephard (supra) squarely applies. The judgment in New Bank of
India Employees’ Union (supra), therefore, is of no assistance, given
the statutory provision in the present case.
31. Learned Senior Advocates on behalf of the respondents then
cited the judgment in Quarry Owners’ Association v. State of Bihar
and Ors., (2000) 8 SCC 655. This judgment, in paragraphs 45 and 55,
44
held that even a simple laying of an order before Parliament is a
mandatory condition to be observed, and ordered that the particular
order in that case be laid before the legislature as it had not so been
laid earlier. This judgment again has nothing to do with whether, on
account of laying before the legislature, an order is administrative or
legislative in nature. This judgment also, therefore, does not carry us
very much further.
32. Learned Senior Advocates on behalf of the respondents then
cited a passage from J.K. (Bombay) (P) Ltd. (supra), and paragraph
23 in particular, in which this Court observed that an order made under
Section 391 of the Companies Act has statutory force. The fact that a
similar order made under Section 396 may also have statutory force
again does not answer the precise question before us, namely, as to
whether such orders having statutory force are administrative or
legislative in nature. This observation again does not carry the matter
very much further.
33. The order passed under Section 396 is qua particular companies
and does not lay down any general rule of conduct by itself, but in fact,
follows the general rule of conduct laid down by Section 396. Thus, the
Central Government order, made under Section 396, must conform to
45
the fundamental rights guaranteed by Articles 14 and 19(1)(g) of the
Constitution of India. This Court has held in a catena of decisions that
it is the substance of what is effected that counts when it comes to
infraction of a fundamental right, and not the form. Thus, in Thomas
Dana v. State of Punjab, [1959] Supp (1) SCR 274, Subba Rao, J., in
his dissenting opinion, stated:
“A fundamental right is transcendental in nature and
it controls both the legislative and the executive acts.
Article 13 explicitly prohibits the State from making any
law which takes away or abridges any fundamental right
and declares the law to the extent of the contravention
as void. The law therefore must be carefully scrutinized
to ascertain whether a fundamental right is infringed. It is
not the form but the substance that matters. If the
legislature in effect constitutes a judicial tribunal, but
calls it an authority, the tribunal does not become any
the less a judicial tribunal. Therefore, the correct
approach is first to ascertain with exactitude the content
and scope of the fundamental right and then to scrutinize
the provisions of the Act to decide whether in effect and
substance, though not in form, the said right is violated
or curtailed. Otherwise the fundamental right will be lost
or unduly restricted in our adherence to the form to the
exclusion of the content.”
(at p. 303)
Likewise, in Hamdard Dawakhana (Wakf) Lal Kuan, Delhi and Anr.
v. Union of India and Ors., [1960] 2 SCR 671, it was held as under:
“In the present case therefore (1) the
advertisements affected by the Act do not fall within the
words freedom of speech within Article 19(1)(a); (2) the
scope and object of the Act, its true nature and character
is not interference with the right of freedom of speech
46
but it deals with trade or business; and (3) there is no
direct abridgement of the right of free speech and a
mere incidental interference with such right would not
alter the character of the law; Ram Singh v. State of
Delhi [(1951) SCR 451-455]; Express Newspapers
(Private) Ltd. v. Union of India [(1959) SCR 12, 123-133]
It is not the form or incidental infringement that
determines the constitutionality of a statute in reference
to the rights guaranteed in Art. 19(1), but the reality and
substance. The Act read as a whole does not merely
prohibit advertisements relating to drugs and medicines
connected with diseases expressly mentioned in s. 3 of
the Act but they cover all advertisements which are
objectionable or unethical and are used to promote selfmedication or self-treatment. This is the content of the
Act. Viewed in this way, it does not select any of the
elements or attributes of freedom of speech falling within
Art. 19(1)(a) of the Constitution.”
(at pp. 690-691)
Likewise, in Sakal Papers (P) Ltd. and Ors. v. Union of India, [1962]
3 SCR 842, this Court held:
“It must be borne in mind that the Constitution must
be interpreted in a broad way and not in a narrow and
pedantic sense. Certain rights have been enshrined in
our Constitution as fundamental and, therefore, while
considering the nature and content of those rights the
Court must not be too astute to interpret the language of
the Constitution in so literal a sense as to whittle them
down. On the other hand the Court must interpret the
Constitution in a manner which would enable the citizen
to enjoy the rights guaranteed by it in the fullest measure
subject, of course, to permissible restrictions. Bearing
this principle in mind it would be clear that the right to
freedom of speech and expression carries with it the
right to publish and circulate one’s ideas, opinions and
views with complete freedom and by resorting to any
available means of publication, subject again to such
restrictions as could be legitimately imposed under
47
clause (2) of Article 19. ……… In Dwarkadas Shrinivas
v. Sholapur Spinning & Weaving Co. Ltd. [(1954) SCR
674] this Court has pointed out that in construing the
Constitution it is the substance and the practical result of
the act of the State that should be considered rather
than its purely legal aspect. The correct approach in
such cases should be to enquire as to what in substance
is the loss or injury caused to the citizen and not merely
what manner and method has been adopted by the
State in placing the restriction.”
(at pp. 857-858)
A Constitution Bench in Ajay Hasia and Ors. v. Khalid Mujib
Sehravardi and Ors., (1981) 1 SCC 722 also stated:
“7. While considering this question it is necessary to
bear in mind that an authority falling within the
expression “other authorities” is, by reason of its
inclusion within the definition of ‘State’ in Article 12,
subject to the same constitutional limitations as the
government and is equally bound by the basic obligation
to obey the constitutional mandate of the Fundamental
Rights enshrined in Part III of the Constitution. We must
therefore give such an interpretation to the expression
“other authorities” as will not stultify the operation and
reach of the fundamental rights by enabling the
government to its obligation in relation to the
Fundamental Rights by setting up an authority to act as
its instrumentality or agency for carrying out its functions.
Where constitutional fundamentals vital to the
maintenance of human rights are at stake, functional
realism and not facial cosmetics must be the diagnostic
tool, for constitutional law must seek the substance and
not the form. Now it is obvious that the Government may
act through the instrumentality or agency of natural
persons or it may employ the instrumentality or agency
of juridical persons to carry out its functions. In the early
days when the Government had limited functions, it
could operate effectively through natural persons
constituting its civil service and they were found
48
adequate to discharge governmental functions which
were of traditional vintage. But as the tasks of the
government multiplied with the advent of the welfare
State, it began to be increasingly felt that the framework
of civil service was not sufficient to handle the new tasks
which were often specialised and highly technical in
character and which called for flexibility of approach and
quick decision making. The inadequacy of the civil
service to deal with these new problems came to be
realised and it became necessary to forge a new
instrumentality or administrative device for handling
these new problems. It was in these circumstances and
with a view to supplying this administrative need that the
corporation came into being as the third arm of the
government and over the years it has been increasingly
utilised by the government for setting up and running
public enterprises and carrying out other public
functions. ……”
Also, in M.C. Mehta and Anr. v. Union of India and Ors. (Shriram –
Oleum Gas), (1987) 1 SCC 395, this Court held:
“2. Mr Divan, learned counsel appearing on behalf of
Shriram raised a preliminary objection that the court
should not proceed to decide these constitutional issues
since there was no claim for compensation originally
made in the writ petition and these issues could not be
said to arise on the writ petition. Mr Divan conceded that
the escape of oleum gas took place subsequent to the
filing of the writ petition but his argument was that the
petitioner could have applied for amendment of the writ
petition so as to include a claim for compensation for the
victims of oleum gas but no such application for
amendment was made and hence on the writ petition as
it stood, these constitutional issues did not arise for
consideration. We do not think this preliminary objection
raised by Mr Divan is sustainable. It is undoubtedly true
that the petitioner could have applied for amendment of
the writ petition so as to include a claim for
compensation but merely because he did not do so, the
49
applications for compensation made by the Delhi Legal
Aid and Advice Board and the Delhi Bar Association
cannot be thrown out. These applications for
compensation are for enforcement of the fundamental
right to life enshrined in Article 21 of the Constitution and
while dealing with such applications, we cannot adopt a
hyper-technical approach which would defeat the ends
of justice. This Court has on numerous occasions
pointed out that where there is a violation of a
fundamental or other legal right of a person or class of
persons who by reason of poverty or disability or socially
or economically disadvantaged position cannot approach
a court of law for justice, it would be open to any public
spirited individual or social action group to bring an
action for vindication of the fundamental or other legal
right of such individual or class of individuals and this
can be done not only by filing a regular writ petition but
also by addressing a letter to the court. If this Court is
prepared to accept a letter complaining of violation of the
fundamental right of an individual or a class of
individuals who cannot approach the court for justice,
there is no reason why these applications for
compensation which have been made for enforcement of
the fundamental right of the persons affected by the
oleum gas leak under Article 21 should not be
entertained. The court while dealing with an application
for enforcement of a fundamental right must look at the
substance and not the form. We cannot therefore sustain
the preliminary objection raised by Mr Divan.”
34. Various pre-requisites contained in the said Section must first be
satisfied before the Section can be said to operate. First and foremost,
the Central Government has to be “satisfied”, meaning thereby, that it
must, on certain objective facts, come to a conclusion that
amalgamation between two or more companies is necessary. This can
only be done if the Central Government finds it “essential”, i.e.,
50
necessary to do so. Also, this can only be done in “public interest” (the
Section originally contained the expression “national interest”. By
Amendment Act 65 of 1960, “national interest” was substituted by
“public interest”).
35. The Notes on Clauses relating to the original Section 396 reads
as follows:
“Clause 366—This is a new provision and it is intended
to provide, at the instance of the Government, for the
amalgamation of two or more companies in the national
interest. Occasionally, cases arise where such an
amalgamation in the national interest is clearly a
necessity. The observance of the usual procedure
prescribed by the existing Act in such cases will lead to
prolonged delays which will be detrimental to the
national interest. It has been made clear that any order
made by the Government should provide for the old
shareholders, and the old debenture holders and other
creditors, having the same interest in the company
resulting from the amalgamation as they had in the
original companies. Any order made by the Government
under this clause will be laid on the table of both Houses
of Parliament and will therefore be subject to the
Parliamentary scrutiny.”
What is important from the Notes on Clauses is the fact that it is only
“occasionally” that cases arise where an amalgamation in national
interest is “clearly a necessity”. It is made clear that the reason for
Section 396 is that the observance of the usual procedure prescribed
by the existing Act (namely, that contained in Sections 391 to 394) in
51
such cases will lead to prolonged delays, which will be detrimental to
national interest. The fact that the procedure contained in Sections 394
and 395 need not be carried out is made clear in the non-obstante
clause contained in Section 396(1).
36. Section 396(3), (3A), and (4) are also important. A condition
precedent to the passing of an order by the Central Government under
this Section is that every member or creditor of each of the companies
before amalgamation shall have, as nearly as may be, the same
interest in or rights against the company resulting from the
amalgamation as he had in the erstwhile company either as a member
or a creditor, and if this is not so, such member or creditor shall be
entitled to compensation which is to be assessed by such authority as
may be prescribed. From the order of such assessment, an appeal is
provided by sub-section (3A). What is important is the mandatory
language contained in sub-section (4), which states that no order shall
be made under the Section unless the time for preferring an appeal
under sub-section (3A) has expired, or where any such appeal has
been preferred, the appeal has been finally disposed of. This makes it
clear that unless an order of compensation is first made under subsection (3), and an appeal therefrom has either not been filed or has
been disposed of, no order of amalgamation can be made. Another
52
condition precedent is an inbuilt provision for natural justice, namely,
that a proposed draft order has first been sent to each of the
companies concerned. The companies may then send suggestions or
objections to the Central Government, which the Central Government
must first consider before passing the final order. Such objections and
suggestions can also be sent from any class of shareholders of either
of the companies, or from any creditors or class of creditors of either of
the companies.
“ WHERE THE CENTRAL GOVERNMENT IS SATISFIED”
37. With regard to similar language that is contained in Section
237(b) of the Companies Act, 1956, this Court, in Barium Chemicals
(supra), contained separate opinions as to what the phrase “in the
opinion of” contained in Section 237(b) meant. In Rohtas Industries
(supra), this Court adopted the test laid down by Hidayatullah, J. (as
he then was) and Shelat, J. as follows:
“Before taking action under Section 237(b)(i) and (ii),
the Central Government has to form an opinion that
there are circumstances suggesting that the business of
the company is being conducted with intent to defraud its
creditors, members or any other persons, or otherwise
for a fraudulent or unlawful purpose or in a manner
oppressive to any member or that the company was
formed for any fraudulent or unlawful purpose or that the
persons concerned in the formation or the management
of its affairs have in connection therewith been guilty of
53
fraud, misfeasance or other misconduct towards the
company or towards any of its members.
From the facts placed before us, it is clear that the
Government had not bestowed sufficient attention to the
material before it before passing the impugned order. It
seems to have been oppressed by the opinion that it had
formed about Shri S.P. Jain. From the arguments
advanced by Mr Attorney, it is clear that but for the
association of Mr S.P. Jain with the appellant-company,
the investigation in question, in all probabilities would not
have been ordered. Hence, it is clear that in making the
impugned order irrelevant considerations have played an
important part.
The power under Sections 235 to 237 has been
conferred on the Central Government on the faith that it
will be exercised in a reasonable manner. The
department of the Central Government which deals with
companies is presumed to be an expert body in
company law matters. Therefore, the standard that is
prescribed under Section 237(b) is not the standard
required of an ordinary citizen but that of an expert. The
learned Attorney did not dispute the position that if we
come to the conclusion that no reasonable authority
would have passed the impugned order on the material
before it, then the same is liable to be struck down. This
position is also clear from the decision of this Court in
Barium Chemicals and Anr. v. Company Law Board and
Anr. [(1966) Supp SCR 311].
(at p. 119)
xxx xxx xxx
The decision of this Court in Barium Chemicals case
which considered the scope of Section 237(b) illustrates
that difficulty. In that case Hidayatullah, J. (our present
Chief Justice) and Shelat, J. came to the conclusion that
though the power under Section 237(b) is a discretionary
power the first requirement for its exercise is the honest
formation of an opinion that the investigation is
necessary and the further requirement is that “there are
circumstances suggesting” the inference set out in the
section; an action not based on circumstances
suggesting an inference of the enumerated kind will not
54
be valid; the formation of the opinion is subjective but the
existence of the circumstances relevant to the inference
as the sine qua non for action must be demonstratable; if
their existence is questioned, it has to be proved at least
prime facie; it is not sufficient to assert that those
circumstances exist and give no clue to what they are,
because the circumstances must be such as to lead to
conclusions of certain definiteness; the conclusions must
relate to an intent to defraud, a fraudulent or unlawful
purpose, fraud or misconduct. In other words they held
that although the formation of opinion by the Central
Government is a purely subjective process and such an
opinion cannot be challenged in a court on the ground of
propriety, reasonableness or sufficiency, the authority
concerned is nevertheless required to arrive at such an
opinion from circumstances suggesting the conclusion
set out in sub-clauses (i), (ii) and (iii) of Section 237(b)
and the expression “circumstances suggesting” cannot
support the construction that even the existence of
circumstances is a matter of subjective opinion. Shelat,
J. further observed that it is hard to contemplate that the
Legislature could have left to the subjective process both
the formation of opinion and also the existence of
circumstances on which it is to be founded; it is also not
reasonable to say that the clause permitted the Authority
to say that it has formed the opinion on circumstances
which in its opinion exist and which in its opinion suggest
an intent to defraud or a fraudulent or unlawful purpose.
On the other hand Sarkar, C.J. and Mudholkar, J. held
that the power conferred on the Central Government
under Section 237(b) is a discretionary power and no
facet of that power is open to judicial review. Our Brother
Bachawat, J., the other learned Judge in that Bench did
not express any opinion on this aspect of the case.
Under these circumstances it has become necessary for
us to sort out the requirements of Section 237(b) and to
see which of the two contradictory conclusions reached
in Barium Chemicals case is in our judgment, according
to law. But before proceeding to analyse Section 237(b)
we should like to refer to certain decisions cited at the
bar bearing on the question under consideration.
55
(at pp. 120-121)
xxx xxx xxx
“Coming back to Section 237(b), in finding out its true
scope we have to bear in mind that that section is a part
of the scheme referred to earlier and therefore the said
provision takes its colour from Sections 235 and 236. In
finding out the legislative intent we cannot ignore the
requirements of those sections. In interpreting Section
237(b) we cannot ignore the adverse effect of the
investigation on the company. Finally we must also
remember that the section in question is an inroad on
the powers of the company to carry on its trade or
business and thereby an infraction of the fundamental
right guaranteed to its shareholders under Article 19(1)
(g) and its validity cannot be upheld unless it is
considered that the power in question is a reasonable
restriction in the interest of the general public. In fact the
vires of that provision was upheld by majority of the
Judges constituting the Bench in Barium Chemicals case
principally on the ground that the power conferred on the
Central Government is not an arbitrary power and the
same has to be exercised in accordance with the
restraints imposed by law. For the reasons stated earlier
we agree with the conclusion reached by Hidayatullah, J.
and Shelat, JJ. in Barium Chemicals case that the
existence of circumstances suggesting that the
company’s business was being conducted as laid down
in sub-clause(1) or the persons mentioned in sub-clause
(2) were guilty of fraud or misfeasance or other
misconduct towards the company or towards any of its
members is a condition precedent for the Government to
form the required opinion and if the existence of those
conditions is challenged, the courts are entitled to
examine whether those circumstances were existing
when the order was made. In other words, the existence
of the circumstances in question are open to judicial
review though the opinion formed by the Government is
not amenable to review by the courts. As held earlier the
required circumstances did not exist in this case.”
(at pp. 128-129)
56
38. In Western U.P. Electric Power & Supply Co. Ltd. v. State of
U.P. and Anr., (1969) 1 SCC 817, this Court dealt with a situation
where the Indian Electricity Act, 1910 was amended by the U.P. Act 30
of 1961, by which, Section 3(2)(e)(ii) provided that the grant of a
licence shall not, in any way, hinder or restrict the supply of energy by
the State Government or the State Electricity Board within the same
area where the State Government deems such supply “necessary in
public interest”. In that case, the High Court had observed that the
State Government was the sole judge of whether the direct supply of
energy was or was not in public interest, the nature of the power being
subjective. This Court, in upsetting the High Court’s view, held:
“11. We are unable to agree with that view. By Section
3(2)(e) as amended by the U.P. Act 30 of 1961, the
Government is authorised to supply energy to
consumers within the area of the licensee in certain
conditions: exercise of the power is conditioned by the
Government deeming it necessary in public interest to
make such supply. If challenged, the Government must
show that exercise of the power was necessary in public
interest. The Court is thereby not intended to sit in
appeal over the satisfaction of the Government. If there
be prima facie evidence on which a reasonable body of
persons may hold that it is in the public interest to supply
energy directly to the consumers, the requirements of
the statute are fulfilled. Normally a licensee of electrical
energy, though he has no monopoly, is the person
through whom electrical energy would be distributed
within the area of supply, since the licensee has to lay
down electric supply-lines for transmission of energy and
to maintain its establishment. An inroad may be made in
57
that right in the conditions which are statutorily
prescribed. In our judgment, the satisfaction of the
Government that the supply is necessary in the public
interest is in appropriate cases not excluded from judicial
review.”
39. Close upon the heels of these judgments, this Court, after
considering Barium Chemicals (supra) and Rohtas Industries
(supra), restated the test as to judicial review of administrative action
in Rampur Distillery Co. Ltd. v. Company Law Board, [1970] 2 SCR
177 as follows:
“The scheme of the section implies investigation and
a decision on the matters set out therein. Section 326
lays down conditions by sub-section (1)(a) in which the
Central Government may override the resolution of the
general body of share-holders in certain specified
conditions. Upon the Central Government is imposed a
duty not to accord approval to the appointment or reappointment of a proposed managing agent in the light
of clauses (a), (b) and (c) of sub-section (2). Though the
sub-section is enacted in form negative, in substance it
confers power upon the Government subject to the
restrictions imposed by clauses (a), (b) and (c), to refuse
to accord approval. Sub-section (2) imposes upon the
Central Government the duty not to accord approval to
appointment or re-appointment of a proposed managing
agent unless the Government is satisfied that the
managing agent is a fit and proper person to be
appointed, that the conditions of the managing agency
agreement are fair and reasonable and that the
managing agent has fulfilled the conditions which the
Central Government required him to fulfil. Thereby the
Central Government is not made the final arbiter of the
existence of the grounds on which the satisfaction may
be founded. The satisfaction of the Government which is
determinative is satisfaction as to the existence of
58
certain objective facts. The recital about satisfaction may
be displaced by showing that the conditions did not exist,
or that no reasonable body of persons properly versed in
law could have reached the decision that they did.
The Courts, however, are not concerned with the
sufficiency of the grounds on which the satisfaction is
reached. What is relevant is the satisfaction of the
Central Government about the existence of the
conditions in clauses (a), (b) and (c) of sub-section (2) of
Section 326. The enquiry before the Court, therefore, is
whether the Central Government was satisfied as to the
existence of the conditions. The existence of the
satisfaction cannot be challenged except probably on the
ground that the authority acted mala fide. But if in
reaching its satisfaction the Central Government
misapprehended the nature of the conditions, or
proceeded upon irrelevant materials, or ignores relevant
materials, the jurisdiction of the Courts to examine the
satisfaction is not excluded. ……”
(at p. 183)
In M.A. Rasheed and Ors. v. State of Kerala, [1975] 2 SCR 93, after
following Rohtas Industries (supra), the test for judicial review of
administrative decisions was stated most felicitously by Ray, C.J. thus:
“Administrative decisions in exercise of powers even
if conferred in subjective terms are to be made in good
faith on relevant consideration. The courts inquire
whether a reasonable man could have come to the
decision in question without misdirecting himself on the
law or the facts in a material respect. The standard of
reasonableness to which the administrative body is
required to conform may range from the courts’ own
opinion of what is reasonable to the criterion of what a
reasonable body might have decided. The courts will find
out whether conditions precedent to the formation of the
opinion have a factual basis.”
(at p. 99)
59
In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81, this
Court exhaustively set out parameters for judicial review of the
subjective satisfaction of the detaining authority in a preventive
detention case. This Court held:
“9. But that does not mean that the subjective
satisfaction of the detaining authority is wholly immune
from judicial reviewability. The courts have by judicial
decisions carved out an area, limited though it be, within
which the validity of the subjective satisfaction can yet
be subjected to judicial scrutiny. The basic postulate on
which the courts have proceeded is that the subjective
satisfaction being a condition precedent for the exercise
of the power conferred on the Executive, the Court can
always examine whether the requisite satisfaction is
arrived at by the authority : if it is not, the condition
precedent to the exercise of the power would not be
fulfilled and the exercise of the power would be bad.
There are several grounds evolved by judicial decisions
for saying that no subjective satisfaction is arrived at by
the authority as required under the statute. The simplest
case is whether the authority has not applied its mind at
all; in such a case the authority could not possibly be
satisfied as regards the fact in respect of which it is
required to be satisfied. Emperor v. Shibnath Bannerji
[AIR 1943 FC 75 : 1944 FCR 1 : 45 Cri LJ 341] is a case
in point. Then there may be a case where the power is
exercised dishonestly or for an improper purpose : such
a case would also negative the existence of satisfaction
on the part of the authority. The existence of “improper
purpose”, that is, a purpose not contemplated by the
statute, has been recognised as an independent ground
of control in several decided cases. The satisfaction,
moreover, must be a satisfaction of the authority itself,
and therefore, if, in exercising the power, the authority
has acted under the dictation of another body as the
Commissioner of Police did in Commissioner of Police v.
Gordhandas Bhanji [AIR 1952 SC 16 : 1952 SCR 135]
60
and the officer of the Ministry of Labour and National
Service did in Simms Motor Units Ltd. v. Minister of
Labour and National Service [(1946) 2 All ER 201] the
exercise of the power would be bad and so also would
the exercise of the power be vitiated where the authority
has disabled itself from applying its mind to the facts of
each individual case by self-created rules of policy or in
any other manner. The satisfaction said to have been
arrived at by the authority would also be bad where it is
based on the application of a wrong test or the
misconstruction of a statute. Where this happens, the
satisfaction of the authority would not be in respect of
the thing in regard to which it is required to be satisfied.
Then again, the satisfaction must be grounded “on
materials which are of rationally probative value”.
Machindar v. King [AIR 1950 FC 129 : 51 Cri LJ 1480 :
1949 FCR 827]. The grounds on which the satisfaction is
based must be such as a rational human being can
consider connected with the fact in respect of which the
satisfaction is to be reached. They must be relevant to
the subject-matter of the inquiry and must not be
extraneous to the scope and purpose of the statute. If
the authority has taken into account, it may even be with
the best of intention, as a relevant factor something
which it could not properly take into account in deciding
whether or not to exercise the power or the manner or
extent to which it should be exercised, the exercise of
the power would be bad. Pratap Singh v. State of Punjab
[AIR 1964 SC 72 : (1964) 4 SCR 733]. If there are to be
found in the statute expressly or by implication matters
which the authority ought to have regard to, then, in
exercising the power, the authority must have regard to
those matters. The authority must call its attention to the
matters which it is bound to consider.”
In Tata Cellular v. Union of India (1994) 6 SCC 651, after an
exhaustive review of the latest English judgments, this Court held:
“77. The duty of the court is to confine itself to the
question of legality. Its concern should be:
61
1. Whether a decision-making authority
exceeded its powers?
2. committed an error of law,
3. committed a breach of the rules of natural
justice,
4. reached a decision which no reasonable
tribunal would have reached or,
5. abused its powers.
Therefore, it is not for the court to determine whether a
particular policy or particular decision taken in the
fulfilment of that policy is fair. It is only concerned with
the manner in which those decisions have been taken.
The extent of the duty to act fairly will vary from case to
case. Shortly put, the grounds upon which an
administrative action is subject to control by judicial
review can be classified as under:
(i) Illegality: This means the decision-maker
must understand correctly the law that
regulates his decision-making power and
must give effect to it.
(ii) Irrationality, namely, Wednesbury
unreasonableness.
(iii) Procedural impropriety.
The above are only the broad grounds but it does not
rule out addition of further grounds in course of time.
As a matter of fact, in R. v. Secretary of State for the
Home Department, ex Brind [(1991) 1 AC 696], Lord
Diplock refers specifically to one development, namely,
the possible recognition of the principle of
proportionality. In all these cases the test to be adopted
is that the court should, “consider whether something
has gone wrong of a nature and degree which requires
its intervention”.”
40. In Bhikhubhai Vithlabhai Patel v. State of Gujarat, (2008) 4
SCC 144, this Court, in an elaborate judgment, referred to and
followed several judgments, including Barium Chemicals (supra), in
the context of Section 17 of the Gujarat Town Planning and Urban
62
Development Act, 1976, by which, if the State Government is of
opinion that substantial modifications in the draft development plan are
necessary, it may publish such modifications. This Court held:
“20. The State Government is entitled to publish the
modifications provided it is of opinion that substantial
modifications in the draft development plan are
necessary. The expression “‘is of opinion’ that
substantial modifications in the draft development plan
are necessary” is of crucial importance. Is there any
material available on record which enabled the State
Government to form its opinion that substantial
modifications in the draft development plan were
necessary? The State Government’s jurisdiction to make
substantial modifications in the draft development plan is
intertwined with the formation of its opinion that such
substantial modifications are necessary in the draft
development plan. The State Government without
forming any such opinion cannot publish the
modifications considered necessary along with notice
inviting suggestions or objections. We have already
noticed that as on the day when the Minister concerned
took the decision proposing to designate the land for
educational use the material available on record were:
(a) the opinion of the Chief Town Planner;
(b) note dated 23-4-2004 prepared on the basis
of the record providing the entire background of
the previous litigation together with the
suggestion that the land should no more be
reserved for the purpose of South Gujarat
University and after releasing the lands from
reservation, the same should be placed under
the residential zone.
21. It is true that the State Government is not bound by
such opinion and is entitled to take its own decision in
the matter provided there is material available on record
to form opinion that substantial modifications in the draft
development plan were necessary. Formation of opinion
is a condition precedent for setting the law in motion
63
proposing substantial modifications in the draft
development plan.
22. Any opinion of the Government to be formed is not
subject to objective test. The language leaves no room
for the relevance of a judicial examination as to the
sufficiency of the grounds on which the Government
acted in forming its opinion. But there must be material
based on which alone the State Government could form
its opinion that it has become necessary to make
substantial modification in the draft development plan.
23. The power conferred by Section 17(1)(a)(ii) read with
proviso is a conditional power. It is not an absolute
power to be exercised in the discretion of the State
Government. The condition is formation of opinion—
subjective, no doubt—that it had become necessary to
make substantial modifications in the draft development
plan. This opinion may be formed on the basis of
material sent along with the draft development plan or on
the basis of relevant information that may be available
with the State Government. The existence of relevant
material is a precondition to the formation of opinion.
The use of word “may” indicates not only a discretion but
an obligation to consider that a necessity has arisen to
make substantial modifications in the draft development
plan. It also involves an obligation to consider which of
the several steps specified in sub-clauses (i), (ii) and (iii)
should be taken.
24. The proviso opens with the words “where the State
Government is of opinion that substantial modifications
in the draft development plan and regulations are
necessary, …”. These words are indicative of the
satisfaction being subjective one but there must exist
circumstances stated in the proviso which are conditions
precedent for the formation of the opinion. Opinion to be
formed by the State Government cannot be on imaginary
grounds, wishful thinking, however laudable that may be.
Such a course is impermissible in law. The formation of
the opinion, though subjective, must be based on the
material disclosing that a necessity had arisen to make
substantial modifications in the draft development plan.
64
25. The formation of the opinion by the State
Government is with reference to the necessity that may
have had arisen to make substantial modifications in the
draft development plan. The expression: “as considered
necessary” is again of crucial importance. The term
“consider” means to think over; it connotes that there
should be active application of the mind. In other words,
the term “consider” postulates consideration of all the
relevant aspects of the matter. A plain reading of the
relevant provision suggests that the State Government
may publish the modifications only after consideration
that such modifications have become necessary. The
word “necessary” means indispensable, requisite,
indispensably requisite, useful, incidental or conducive,
essential, unavoidable, impossible to be otherwise, not
to be avoided, inevitable. The word “necessary” must be
construed in the connection in which it is used. (See
Advanced Law Lexicon, P. Ramanatha Aiyar, 3rd Edn.,
2005.)
26. The formation of the opinion by the State
Government should reflect intense application of mind
with reference to the material available on record that it
had become necessary to propose substantial
modifications to the draft development plan.”
41. However, Shri Tushar Mehta, learned Solicitor General for India,
relied upon M. Jhangir Bhatusha and Ors. v. Union of India and
Ors., 1989 Supp (2) SCC 201, in particular, the passage at page 208
which reads as follows:
“13. …… Now it is the Central Government which has to
be satisfied, as the authority appointed by Parliament
under Section 25(2), that it is necessary in the public
interest to make the special orders of exemption. It has
set out the reasons which prompted it to pass the orders.
In our opinion, the circumstances mentioned in those
notifications cannot be said to be irrelevant or
unreasonable. It is not for this Court to sit in judgment on
65
the sufficiency of those reasons. The limitations on the
jurisdiction of the court in cases where the satisfaction
has been entrusted to executive authority to judge the
necessity for passing orders is well defined and has
been long accepted.”
These observations were made in the context of an argument that
differential treatment was accorded to the State Trading Corporation
vis-à-vis private importers in that the customs duty for the State
Trading Corporation had been reduced by notification under Section
25(2) of the Customs Act, 1962. What is important to note is that
judicial review consisted of examining whether the reasons which
prompted the Government to pass the exemption orders could be said
to be irrelevant or unreasonable. If so, the orders would be struck
down in exercise of judicial review.
42. Thus, at the very least, it is clear that the Central Government’s
satisfaction must be as to the conditions precedent mentioned in the
Section as correctly understood in law, and must be based on facts
that have been gathered by the Central Government to show that the
conditions precedent exist when the order of the Central Government
is made. There must be facts on which a reasonable body of persons
properly instructed in law may hold that it is essential in public interest
to amalgamate two or more companies. The formation of satisfaction
66
cannot be on irrelevant or imaginary grounds, as that would vitiate the
exercise of power.
“ ESSENTIAL”
43. The expression “essential” has been defined in P. Ramanath
Aiyer’s Law Lexicon (4th Edn.) as follows:
“Essential. Indispensably necessary; important in the
highest degree: requisite that which is required for the
continued existence of a thing.”
Black’s Law Dictionary (10th Edn.) defines “essential” as follows:
“essential, adj. (14c) 1. Of, relating to, or involving the
essence or intrinsic nature of something. 2. Of the
utmost importance; basic and necessary. 3. Having real
existence; actual.”
44. In J. Jayalalitha v. Union of India, (1999) 5 SCC 138, this Court
dealt with an argument that there is no guideline contained in Section
3(1) of the Prevention of Corruption Act, 1988, when the Section
empowers the Government to appoint as many Special Judges “as
may be necessary”. It was stated that this word has a precise meaning
and means “what is indispensable, needful or essential” [see
paragraph 14]. It is thus clear that the Central Government’s mind has
to be applied to whether a compulsory amalgamation under Section
67
396 is indispensably necessary, important in the highest degree, and
whether such amalgamation is both basic and necessary.
“ PUBLIC INTEREST”
45. The third pre-requisite of Section 396 is that the Central
Government must apply its mind when compulsorily amalgamating two
or more companies in the public interest. “Public interest” is an
expression which is wide and amorphous and takes colour from the
context in which it is used. However, like the expression “public
purpose”, what is important to be noted is that public interest is the
general interest of the community, as distinguished from the private
interest of an individual [see State of Bihar v. Maharajadhiraja Sir
Kameshwar Singh of Darbhanga and Ors., [1952] 3 SCR 889 at pp.
1073-1075].
46. This is echoed in Manimegalai v. Special Tehsildar (Land
Acquisition Officer) Adi Dravidar Welfare, (2018) 13 SCC 491 as
follows:
“14. Similarly, public purpose is not capable of precise
definition. Each case has to be considered in the light of
the purpose for which acquisition is sought for. It is to
serve the general interest of the community as opposed
to the particular interest of the individual. Public purpose
broadly speaking would include the purpose in which the
general interest of the society as opposed to the
68
particular interest of the individual is directly and vitally
concerned. Generally, the executive would be the best
judge to determine whether or not the impugned purpose
is a public purpose. Yet it is not beyond the purview of
judicial scrutiny. The interest of a section of the society
may be public purpose when it is benefitted by the
acquisition. The acquisition in question must indicate
that it was towards the welfare of the people and not to
benefit a private individual or group of individuals joined
collectively. Therefore, acquisition for anything which is
not for a public purpose cannot be done compulsorily.”
(emphasis supplied)
47. In the context of the Motor Vehicles Act, 1939, in Rameshwar
Prasad and Ors. v. State of U.P. and Ors., (1983) 2 SCC 195, this
Court held:
“19. ……… What does Section 43-A(1) after all say? It
says that the State Government may issue such
directions of a general character as it may consider
necessary in the public interest. What is the meaning of
the term “public interest”? In the context of the Act, it
takes within its fold several factors such as, the
maximum number of permits that may be issued on a
route or in any area having regard to the needs and
convenience of the travelling public, the non-availability
of sufficient number of stage carriage services in other
routes or areas which may be in need of running of
additional services, the problems of law and order,
availability of fuel, problems arising out of atmospheric
pollution caused by a large number of motor vehicles
operating in any route or area, the condition of roads and
bridges on the routes, uneconomic running of stage
carriage services leading to elimination of small
operators and employment of more capital than
necessary in any sector leading to starvation of capital
investment in other sectors etc. Public interest under the
Act does not mean the interest of the operators or of the
passengers only. We have to bear in mind that like every
69
other economic activity the running of stage carriage
service is an activity which involves use of scarce or
limited productive resources. Motor transport involves a
huge capital investment on motor vehicles, training of
competent drivers and mechanics, establishment of
workshops, construction of safe roads and bridges,
deployment of sufficient number of policemen to
preserve law and order and several other matters. To
say that larger the number of stage carriages in any
route or area more convenient it would be to the
members of the public is an oversimplification of a
problem with myriad facets affecting the general public.
If we run through the various provisions of the Act it
becomes clear how much attention is given by it to
various matters affecting public interest. There are
provisions relating to licensing of drivers on the basis of
their competence, licensing of conductors, specifications
to which the motor vehicles should conform, coordination
of road and rail transport, prevention of deterioration of
the road system, prevention of uneconomic competition
among motor vehicles, fixation of reasonable fare,
compliance by motor vehicles with the prescribed
timetable, construction of bus stands with necessary
amenities, maintenance of standards of comfort and
cleanliness in the vehicles, development of inter-state
tourist traffic and several other matters with the object of
making available adequate and efficient transport
facilities to all parts of the country. Any direction given by
the State Government under Section 43-A of the Act
should, therefore, be in conformity with all matters
regarding which the statute has made provision. In this
situation to say that any number of permits can be
issued to any eligible operator without any upper limit is
to overstep the limits of delegation of statutory power
and to make a mockery of an important economic
activity like the motor transport.”
(emphasis supplied)
70
48. In Janata Dal v. H.S. Chowdhary and Ors., (1992) 4 SCC 305,
this Court referred to Stroud’s Judicial Dictionary, which defines “public
interest” thus:
“51. In Stroud’s Judicial Dictionary, Vol. IV (4th edn.)
‘public interest’ is defined thus:
“Public interest — 1. A matter of public or
general interest does not mean that which is
interesting as gratifying curiosity or a love of
information or amusement; but that in which a
class of the community have a pecuniary
interest, or some interest by which their legal
rights or liabilities are affected.” (Per Cambel
C.J., in R. v. Bedfordshire [24 LJ QB 84] ).
52. In Black’s Law Dictionary (6th edn.), ‘public interest’ is
defined as follows:
“Public Interest — Something in which the
public, the community at large, has some
pecuniary interest, or some interest by which
their legal rights or liabilities are affected. It
does not mean anything so narrow as mere
curiosity, or as the interests of the particular
localities, which may be affected by the matters
in question. Interest shared by citizens
generally in affairs of local, state or national
government ……”
49. In Municipal Corporation of the City of Ahmedabad and Ors.
v. Jan Mohd. Usmanbhai and Anr., (1986) 3 SCC 20, this Court
stated that the expression “in the interest of the general public” is of
wide import comprehending public order, public health, public security,
morals, economic welfare of the community, and the objects
mentioned in Part IV of the Constitution of India [see paragraph 19].
71
50. Likewise, in B.P. Sharma v. Union of India and Ors., (2003) 7
SCC 309, this Court held:
“15. …… The phrase “in the interest of the general
public” has come to be considered in several decisions
and it has been held that it would comprise within its
ambit interests like public health and morals (refer to
State of Maharashtra v. Himmatbhai Narbheram Rao
[AIR 1970 SC 1157 : (1969) 2 SCR 392]), economic
stability (State of Assam v. Sristikar Dowerah [AIR 1957
SC 414]), stability of the country, equitable distribution of
essential commodities at fair prices (Union of India v.
Bhanamal Gulzarimal Ltd. [AIR 1960 SC 475 : 1960 Cri
LJ 664]) for maintenance of purity in public life,
prevention of fraud and similar considerations. ……”
51. Coming nearer home, Hindustan Lever Employees’ Union v.
Hindustan Lever Ltd. and Ors., 1995 Supp (1) SCC 499, Sahai, J., in
a concurring judgment, referred to “public interest” in Section 394 of
the Companies Act as follows:
“5. What requires, however, a thoughtful consideration is
whether the company court has applied its mind to the
public interest involved in the merger. In this regard the
Indian law is a departure from the English law and it
enjoins a duty on the court to examine objectively and
carefully if the merger was not violative of public interest.
No such provision exists in the English law. What would
be public interest cannot be put in a strait-jacket. It is a
dynamic concept which keeps on changing. It has been
explained in Black’s Law Dictionary as:
“Something in which the public, the community
at large, has some pecuniary interest, or some
interest by which their legal rights or liabilities
are affected. It does not mean anything so
narrow as mere curiosity, or as the interests of
72
the particular locality which may be affected by
the matters in question. Interest shared by
citizens generally in affairs of local, State or
national Government.”
It is an expression of wide amplitude. It may have
different connotation and understanding when used in
service law and a yet different meaning in criminal law
than civil law and its shade may be entirely different in
company law. Its perspective may change when merger
is of two Indian companies. But when it is with subsidiary
of foreign company the consideration may be entirely
different. It is not the interest of shareholders or the
employees only but the interest of society which may
have to be examined. And a scheme valid and good may
yet be bad if it is against public interest.
6. Section 394 casts an obligation on the court to be
satisfied that the scheme for amalgamation or merger
was not contrary to public interest. The basic principle of
such satisfaction is none other than the broad and
general principles inherent in any compromise or
settlement entered between parties that it should not be
unfair or contrary to public policy or unconscionable. In
amalgamation of companies, the courts have evolved,
the principle of “prudent business management test” or
that the scheme should not be a device to evade law.
But when the court is concerned with a scheme of
merger with a subsidiary of a foreign company then the
test is not only whether the scheme shall result in
maximising profits of the shareholders or whether the
interest of employees was protected but it has to ensure
that merger shall not result in impeding promotion of
industry or shall obstruct growth of national economy.
Liberalised economic policy is to achieve this goal. The
merger, therefore, should not be contrary to this
objective. Reliance on English decisions Hoare & Co.
Ltd., Re [1933 All ER Rep 105, Ch D] and Bugle Press
Ltd., Re [1961 Ch 270 : (1960) 1 All ER 768 : (1960) 2
WLR 658] that the power of the court is to be satisfied
only whether the provisions of the Act have been
complied with or that the class or classes were fully
represented and the arrangement was such as a man of
73
business would reasonably approve between two private
companies may be correct and may normally be
adhered to but when the merger is with a subsidiary of a
foreign company then economic interest of the country
may have to be given precedence. The jurisdiction of the
court in this regard is comprehensive.”
(emphasis supplied)
52. In Bihar Public Service Commission v. Saiyed Hussain
Abbas Rizwi and Anr., (2012) 13 SCC 61, this Court referred to
“public interest” in the context of service law as follows:
“22. The expression “public interest” has to be
understood in its true connotation so as to give complete
meaning to the relevant provisions of the Act. The
expression “public interest” must be viewed in its strict
sense with all its exceptions so as to justify denial of a
statutory exemption in terms of the Act. In its common
parlance, the expression “public interest”, like “public
purpose”, is not capable of any precise definition. It does
not have a rigid meaning, is elastic and takes its colour
from the statute in which it occurs, the concept varying
with time and state of society and its needs (State of
Bihar v. Kameshwar Singh [AIR 1952 SC 252]). It also
means the general welfare of the public that warrants
recognition and protection; something in which the public
as a whole has a stake [Black’s Law Dictionary (8th
Edn.)].”
53. In R.R. Tripathi v. Union of India, (2010) 1 Bom CR 513, the
Bombay High Court referred to the Business Dictionary, which defines
“public interest” as follows:
“welfare of the general public (in contrast to the selfish
interest of a person, group, or firm) in which the whole
society has a stake and which warrants recognition,
promotion, and protection by the government and its
74
agencies. Despite the vagueness of the term, public
interest is claimed generally by governments in matters
of state secrecy and confidentiality. It is approximated by
comparing expected gains and potential costs or losses
associated with a decision, policy, program, or project.”
(emphasis supplied)
54. In the context of compulsory amalgamation of two or more
companies, the expression “public interest” would mean the welfare of
the public or the interest of society as a whole, as contrasted with the
“selfish” interest of a group of private individuals. Thus, “public interest”
may have regard to the interest of production of goods or services
essential to the nation so that they may contribute to the nation’s
welfare and progress, and in so doing, may also provide much needed
employment. “Public interest” in this context would, therefore, mean
the combining of resources of two or more companies so as to impact
production and consumption of goods and services and employment of
persons relatable thereto for the general benefit of the community.
Conversely, any action that impedes promotion of industry or obstructs
growth which is in national or public interest would run counter to
public interest as mentioned in this Section.
55. At this juncture, we must first see whether each of the conditions
precedent to the applicability of Section 396 applies to the facts of the
present case. Insofar as the Central Government being “satisfied” is
75
concerned, the following facts which the Central Government has
taken into account, based upon the Grant Thornton report and the
FMC order dated 17.12.2013, are as follows:
55.1. The Grant Thornton report does indeed begin with a disclaimer,
which reads as follows:
“4. Limitations
4.1. Our findings are based upon the information made
available to us and we have not independently verified or
validated the information.
4.2. Our work did not constitute an audit under any
accounting standards and the scope of our work was
significantly different from that of a statutory audit.
Hence it cannot be relied upon to provide the same level
of assurance as a statutory audit.
4.3. Work done by us was as considered necessary at
that point of time to reflect the scope of work and rigour
required.
5. Restrictions
5.1. Our reports and comments are confidential in nature
and not intended for general circulation or publication,
nor are they to be quoted or referred to in whole or in
part, without our prior consent in each specific instance.
Such consent shall not be unreasonably withheld. NSEL
and FMC shall have no authority or ability to modify our
findings in any manner. We disclaim all responsibility or
liability for any costs, damages, losses, liabilities,
expenses incurred by anyone as a result of circulation,
publication, reproduction or use of our reports contrary to
the provisions of this paragraph. Should additional
information or documentation become available which
impacts upon conclusions reached in our reports, we
reserve the right to amend our findings and reporting
accordingly. Further, comments in our reports are not
intended, nor should they be interpreted to be, legal
advice or opinion.”
76
However, the said report in the executive summary states:
“B. Executive Summary
This executive summary is to be read in conjunction with
the whole report and should not be treated as a
standalone document.
Financing Business
1.1 The NSEL exchange platform was being used to
conduct a financing business.
Indian Bullion Market Association (‘IBMA’) enabled large
volumes of trading by a related party on FTIL group
exchanges (NSEL and Multi-Commodity Exchange of
India Limited (‘MCX’).)
This is illustrated as per the diagram below:—
1.2 Grant Thornton observed that a large volume of
NSEL exchange trades were carried out with paired
back-to-back contracts. Investors simultaneously
entered into a short term buy contract (e.g. T+2 – i.e. 2-
day settlement) and a long-term sell contract (e.g. T+25-
i.e. 25 day settlement). The contracts were taken by the
77
same parties at a pre-determined price and always
registering a profit on the long-term positions as illustrated
below:
Trad
e
Date
Dea
l
No
Buy
/Sell
Membe
r ID
Name of Member Contract
Code
Sub
Broker
No.
Termin
al ID
Trade
Price
Trade
Value
02
April
2012
87 S 13790 PD
AGROPROCESSOR
S PVT. LTD.
DLF002 PDY1121
HR2
474 13791 2400.00 360,000
02
April
2012
87 B 10570 ANAND RATHI
COMMODITIES
LTD.
HNR320 PDY1121
HR2
232 10575 2400.00 360,000
02
April
2012
88 S 10570 ANAND RATHI
COMMODITIES
LTD.
HNR320 PY1121H
R25
232 10575 2450.70 367,605
02
April
2012
88 B 13790 PD
AGROPROCESSOR
S PVT. LTD.
DLC001 PY1121H
R25
474 13791 2450.70 367,605
1.3 These long-term contracts (e.g. T+25) were first
traded on the NSEL exchange in September 2009. The
Board of NSEL ratified the circulars introducing such
long-term contracts over a period beginning November
2009.
1.4 Further evidence was obtained with regards the
existence of a financing business, such as presentations
which stated that a fixed rate of return was guaranteed
on investing in certain products on the NSEL exchange.
Several internal (NSEL) presentations were found, upon
a review of e-mail databases, setting out a yield (e.g.
16%) as an opportunity for investors for trading in certain
products on the NSEL exchange.
An external presentation was also obtained which had
been made by a brokerage house (Geojit Comtrade Ltd.)
for their clients claiming a fixed return on investments
made on the NSEL exchange. Further, this presentation,
declared that actual delivery of stocks in such
transactions would not be required.
1.5 Grant Thornton also obtained evidence of repeated
contraventions of NSEL exchange rules and bye-laws
which facilitated such financing transactions to continue
and grow in size as below:
78
Repeated Defaults: As per the NSEL exchange rules a
member who does not have sufficient collateral/monies
etc. to discharge his obligations would not be allowed to
trade further. This rule was overridden on a recurring
basis. Further despite repeated defaults members were
allowed to trade and increase their expenses. For
example, Lotus Refineries had defaulted, as per the
Rules of the Exchange, on 198 days between the fifteenmonth period of 1 April 2012 and 30 July 2013.
Exemptions from Margin Requirements: Members who
were in a default position or whom had exhausted their
margin limits on trading were granted an exemption from
margin requirements and thus allowed them to increase
their exposure by engaging in new trades. More than
1,800 margin limit exemptions were granted between
2009 through to 2013.
Inadequate monitoring of member collateral: NSEL did
not carry out any diligence to establish the existence of
stock at member managed warehouses, upon which
trades were being executed. Grant Thornton carried out
a stock verification exercise and found significant
shortages vis-à-vis expected collateral.
Related Party Transactions
1.6 IBMA is registered as a client with Karvy Comtrade
limited for executing trades on futures commodity
exchange like MCX and NCDEX.
SNP Designs Private Limited (SNP) is a client of IBMA
and the managing director of SNP is Mrs. Shalini Sinha,
the wife of Mr. Anjani Sinha (CEO and MD of NSEL as
well as IBMA).
Grant Thornton found evidence of a large volume of
trades executed on the MCX exchange on behalf of
SNP, through Karvy Comtrade Limited. Since April 2012
the total nominal value/volume traded on MCX is
approximately Rs. 40,000 crore.
In spite of heavy losses over the period, trading on
behalf of SNP was allowed to continue. No margin
money was ever taken from SNP. As at 20 September
2013, IBMA is due to receive Rs. 77 crore on account of
losses arising from trades executed on behalf of SNP.
79
No monies have been received from SNP despite
substantial amounts due.
Further, evidence was obtained that Rs. 10 crore was
received from Mohan India which was credited to an
IBMA Bank account. This was to be adjusted against the
SNP receivable balance as per an instruction made by
Mr. Anjani Sinha.
1.7. IBMA is a subsidiary of NSEL and has received
funding for operational needs on several occasions
(including a loan of Rs. 5 crore on 5 August 2013). IBMA
is also a member on the NSEL exchange and executes
trades on behalf of clients. Margin limit exemptions have
been granted to IBMA on a daily basis since February
2010.
Corporate Governance & Risk Management
1.8 While the Bye-laws and Rules of the Exchange
mandated the formation of various Committees to
effectively manage the operations of the Exchange; the
Board failed to constitute 9 out of the 10 such
committees. Further, there is no documentary evidence
to demonstrate whether the only committee formed
(Membership Committee) was ever convened and
hence, met its objectives.
1.9 The Board Meeting minutes regularly (eg. 11 June
2008, 15 June 2009, 25 May 2011) stated that the Audit
Committee had detailed discussions on the Annual
Financial Statements, the Internal Control Systems,
reviewing the scope of Internal Audit functions, the
performance of the statutory and internal auditors, the
scope of work for the internal auditors, the planning of
the statutory audit for the current financial year, the
payment of audit fees, the observations by the auditors
in the draft Auditor Report etc.
Upon review of the corresponding Audit Committee
minutes we noted no reference to discussions on
Internal Control Systems, reviewing the scope of Internal
Audit functions, performance of internal auditors and
scope of work for the internal auditors.
Common members of the Board and the Audit
Committee were:
80
Mr. Jignesh Shah
Mr. Joseph Massey
Mr. V. Hariharan
Mr. Shreekant Javalgekar
1.10 The Board Meeting minutes of 31 March 2010 and
11 August 2010 stated that the Company (NSEL)
approached Karvy Financial Services Limited (KFSL) to
extend credit facilities to a member, specifically N.K.
Proteins. Further the Board granted and approved for
issue of a guarantee to KFSL, to the extent of Rs. 14
crores, in respect of credit facilities extended to N.K.
Proteins.
1.11 Our review of the Information technology identified
several independent standalone systems wherein the
flow of business transactions and related information
between different systems required manual intervention.
Given the complexity and nature of trading transaction
such systems including warehouse (eWDMS), CNS,
Delivery System (EMI) and trading should have been
integrated.
Further, these systems did not produce/have any form of
MIS operational. All reporting and analysis was done on
manual worksheets. Our review of the Board minutes did
not indicate any form of MIS reporting or review.
These points collectively indicate significant gaps in IT,
Risk & Corporate Governance.
Misutilisation of client monies
1.12 Misutilisation of client monies/settlement fund: As
per the rules and bye-laws of the NSEL exchange
“Margin deposits received by clearing members from
their constituent members and clients in any forms shall
be accounted for and maintained separately in
segregated accounts and shall be used solely for the
benefit of the respective constituent members’ and client
position.”
Grant Thornton found evidence (including e-mails) that
client monies/settlement fund, was used regularly for
fulfilling the obligations of defaulting members.
Further, NSEL utilised client monies/settlement fund for
its own business purposes on a regular basis. For
81
example, on 28 March, 2013, Rs. 236.5 crore was
withdrawn from the Settlement Fund in order to fund
NSEL’s own business overdraft account.
There was a running deficit in the client
monies/settlement fund balance from April 2012 to June
2013. The finance team of FTIL had raised this as an
area of concern on several occasions.
Misrepresentations to the Regulator
1.13 Regulatory Contraventions:
As per a Gazette Notification issued on 5 June 2007 by
the Ministry of Consumer Affairs, the Government of
India under Section 27 of the Forward Contracts
(Regulation) Act, 1952 (“FCRA”) exempted all forward
contracts of one day duration for the sale and purchase
of commodities traded on NSEL from the operations of
the said Act. Grant Thornton’s review of the type of
trades executed on the NSEL exchange indicates
contravention to the exemption conditions granted.
During the period January 2011 to July 2013, FMC
sought several clarifications from NSEL on a number of
complaints received from the public alleging forward
trading and running a financing scheme. All these
allegations were refuted by NSEL. Our analysis of such
trades indicates misrepresentation by NSEL to FMC on
several occasions.”
The report then goes on to say that there was no documentation in
relation to warehouse activities for long term trades indicating that
such contracts were not secured by warehouse stocks. The
warehouses were customer managed warehouses and the underlying
collateral were not in custody of NSEL. NSEL did not have control over
these warehouses and Grant Thornton was denied access to number
of warehouses. The Warehouse Development and Regulatory
82
Authority had in fact rejected NSEL’s application for registration of its
warehouses way back on 16.05.2011. Notwithstanding such rejection,
NSEL’s website represented that its warehouses were registered with
the Authority. No verification or due diligence was ever undertaken by
NSEL to ensure compliance by its members of the conditions outlined
in its rules and byelaws even though in terms of NSEL byelaws,
warehouse receipt issued by NSEL were meant to evidence a
commodity being held in an approved warehouse. NSEL did not insist
upon deposit of commodities in the warehouses prior to executing sale
transactions. Instead NSEL resorted to issuing Delivery Allocation
Reports (DAR) representing to genuine investors that each transaction
was delivery based and backed at the time of sale by the required
quantity of commodities in its warehouses.
55.2. The observations and conclusions of the FMC order dated
17.12.2013, based largely on this expert report, read as follows:
“15. Summary Observations and Conclusion:- After
having accorded due consideration to all the objections
and arguments raised by the noticees vide their written
submission as well as oral presentations through their
counsel, we now proceed to conclude our observations
by taking a final view on the status of the four noticees
as ‘fit and proper persons’ in the succeeding paragraphs.
15.1. Noticee No. 1:- Financial Technologies (India)
Limited (FTIL): We have discussed the equity structure
of NSEL, which is wholly owned by FTIL. We have also
83
pointed out that Shri Jignesh Shah, Chairman-cumManaging Director of FTIL has been a Director on the
Board and also functioning as Vice-Chairman and a key
management person of NSEL since its inception.
Similarly, Shri Joseph Massey and Shri Shreekant
Javalgekar have been Directors of the said company
from its very beginning till the settlement crisis at NSEL
first came to light in July, 2013. The facts establishing
the fraud involving a settlement default over Rs. 5,500
crores at NSEL have been discussed at length in the
SCNs issued to the noticees as well as reiterated, albeit
illustratively by us at Para No. 14.7 of this Order. The
responsibility of FTIL as the holding company
possessing absolute control over the governance of
NSEL has also been highlighted. The control of FTIL
over NSEL becomes further crystallized from the
responses given by M/s. Grant Thornton before the
Commission on 03.12.2013 stating that Shri Jignesh
Shah, Mr. Joseph Massey and a host of other officials of
FTIL reviewed the forensic audit report and it was only
after obtaining their clearance, the forensic auditor
finalised its report.
15.1.1. The violation of conditions prescribed in the
exemption notification, trading in paired contracts to
generate assured financial returns under the garb of
commodity trading, admission of members who were
thinly capitalised having poor net worth and giving
margin exemptions to those who were repeatedly
defaulting in settling their dues, poor warehousing
facilities with no or inadequate stocks, no risk
management practices followed, non-provision of funds
in SGF, consciously appointing Shri Mukesh P. Shah as
statutory auditors for F.Y. 2012-13 who was related to
Shri Jignesh Shah, and apparent complicity with the
defaulters to defraud the investors, etc., lead to an
inescapable conclusion that a huge fraud was
perpetrated by NSEL while having the presence of two
Board members of FTIL on the Board of NSEL, one of
whom was the Vice-Chairman of the company.
15.1.2. The facts of the case and the manner in which
the business affairs of NSEL were conducted leaves no
84
doubt in our minds that FTIL, notwithstanding its
contentions that it was ignorant of the affairs and
conduct of NSEL, exerted a dominant influence on the
management, and directed, controlled and supervised
the governance of NSEL. In the face of a fraud of such a
magnitude involving settlement crises of Rs. 5,500
crores owed to over 13,000 sellers/investors on the
trading platform of NSEL, FTIL, cannot seek to take
refuge behind the corporate veil so as to unjustifiably
isolate itself from the fraudulent actions that took place
at NSEL resulting in such a huge payment crisis.
15.1.3. FTIL has its principal business of development
of software which has become the technology platform
for almost the entire industry engaged in broking in
shares and securities, commodities, foreign exchange
etc. As has been demonstrated by FTIL in their written
submission, FTIL has floated a number of regulated
exchanges – both for securities and commodities
derivatives – in India as well as abroad. NSEL was
incorporated to provide a trading platform of commodity
spot exchange on a pan-India basis for the purpose of
which apparently it sought and was granted exemption
from the operation of the FCRA, 1952. Since the
objective of the NSEL was promoting spot trading in
commodities on an electronic platform, its business
model did not contemplate venturing into trading in
forward contracts. FTIL had already promoted MCX, a
regulated exchange under FCRA, 1952, for the purpose
of trading in forward contracts. Therefore, having
secured an exemption from the purview of FCRA, 1952
on the ground that it was intended to promote spot
trading, NSEL was not authorised to allow trading in
forward contracts through the scheme of paired
contracts, thereby defying conditions stipulated in the
exemption notification granted to it. The motive behind
allowing trading in forward contracts on the NSEL
platform in a circuitous manner on NSEL which was
neither recognized nor registered under FCRA, 1952
indicates mala fide intention on the part of the promoter
of FTIL to use the trading platform of its subsidiary
company for illicit gains away from the eyes of
85
Regulator. The fact that FTIL promoted NSEL sought
exemption from FCRA, 1952 provisions even before they
had started any trading or operation, points to their
intention from the outset. In this manner, it
misinterpreted the conditions stipulated in the exemption
notification in collusion with a handful of members, which
ultimately culminated in a massive fraud involving Rs.
5,500 crores, which has the potential effect of eroding
trust and confidence in exchanges and financial markets.
15.1.4. Keeping in view the foregoing observations and
the facts which reveal misconduct, lack of integrity and
unfair practices on the part of FTIL in planning, directing
and controlling the activities of its subsidiary company,
NSEL, we conclude that FTIL, as the anchor investor in
the Multi-Commodity Exchange Ltd. (MCX) does not
carry a good reputation and character, record of fairness,
integrity or honesty to continue to be a shareholder of
the aforesaid regulated exchange. Therefore, in the
public interest and in the interest of the
Commodities Derivatives Market which is regulated
under FCRA, 1952, the Commission holds that
Financial Technologies (India) Ltd. (FTIL) is not a ‘fit
and proper person’ to continue to be a shareholder
of 2% or more of the paid-up equity capital of MCX
as prescribed under the guidelines issued by the
Government of India for capital structure of
commodity exchanges post 5-years of operation. It is
further ordered that neither FTIL, nor any company/entity
controlled by it, either directly or indirectly, shall hold any
shares in any association/Exchange recognised by the
Government or registered by the FMC in excess of the
threshold limit of the total paid-up equity capital of such
Association/Exchange as prescribed under the
commodity exchange guidelines and post 5-year
guidelines.”
(emphasis in original)
Based on the Grant Thornton report and the FMC order, the draft
amalgamation order dated 21.10.2014 then relied on the same facts,
86
as did the final assessment order. The final amalgamation order also
refers to an investigation under Section 209A into the affairs of NSEL
which led to infractions of Sections 211, 217 and 292A of the
Companies Act. These are compoundable offences which have, in
fact, been compounded by orders dated 03.03.2016 and 31.05.2016
by the concerned authority.
55.3. We have seen that neither FTIL nor NSEL has denied the fact
that paired contracts in commodities were going on, and by April to
July, 2013, 99% (and excluding E-series contracts), at least 46% of the
turnover of NSEL was made up of such paired contracts. There is no
doubt that such paired contracts were, in fact, financing transactions
which were distinct from sale and purchase transactions in
commodities and were, thus, in breach of both the exemptions granted
to NSEL, and the FCRA. We have also seen that NSEL throughout
kept representing that it was, in fact, a commodity exchange dealing
with spot deliveries. Apart from the Grant Thornton report and the FMC
order, we have also seen that Shri Jignesh Shah, on 10.07.2013,
made representations to the DCA and the FMC, in which he stated that
NSEL had full stock as collateral; 10-20% of open position as margin
money; and that the stock currently held in NSEL’s 120 warehouses
was valued at INR 6000 crore, all of which turned out to be incorrect.
87
Further, there is no doubt whatsoever that in July, 2013, as a result of
NSEL stopping trading on its exchange, a payment crisis of
approximately INR 5600 crore arose. The further question that remains
is whether, given these facts, the conditions precedent for the
applicability of Section 396 were followed.
56. When it comes to whether the Central Government’s satisfaction
as to whether it was “essential” to amalgamate the aforesaid
companies, what must be borne in mind is that NSEL had itself offered
a settlement scheme to pay back the persons who have allegedly
been duped. It was found that this scheme could not really take off, as
a result of which, large amounts continued to be owed to such
persons. That this was the real concern of the FMC is clear from a
letter dated 18.08.2014 addressed by the FMC to the Secretary,
Ministry of Corporate Affairs. This letter states:
“xxx xxx xxx
2. As apprised earlier, consequent to the suspension
of trading and a huge settlement default that took place
at NSEL on 31.07.2007, the Government of India,
Ministry of Consumer Affairs, Food & Public Distribution,
Department of Consumer Affairs (DCA) vide its
notification dated 6th August, 2013 (copy enclosed as
Annexure II) inter-alia provided that settlement of all
outstanding one day forward contract at NSEL shall be
done under the supervision of FMC. In exercise of this
supervisory role, the Commission has been continuously
taking all possible steps and has been regularly pursuing
88
with NSEL to expedite the recovery proceedings against
the defaulters at its platform. To ensure better monitoring
of NSEL’s compliance the Commission had vide No.
8/1/2013 (1)-MD-1(1)(C)/Settlement (Vol.-IV) dated 29th
November, 2013 (copy enclosed as Annexure III)
constituted a Monitoring & Auction Committee (MAC)
comprising the representatives of various members
associations and investors bodies to assist and advise
the Commission on matters pertaining to the
Commission’s supervisory role over the settlement of
outstanding contracts at NSEL.
3. It is observed that even after one year’s incessant
efforts and in spite of FMC’s active role in supervising
the settlement of contracts, the settlement plan could not
result in making any substantial payment to the investors
as the process of recovery of dues by NSEL from the
defaulting members is very slow. It is submitted that, it is
only the NSEL, which has the responsibility to take all
possible coercive measures as per their rules/bye-laws
and other laws of the land, to ensure that the
outstanding dues of all investors are settled. However as
on date, NSEL has been able to make a payment of only
Rs. 538.56 crores to its members as against the
payment dues of approximately Rs. 5500 crores. This
amount also includes an amount of Rs. 179.26 crores
borrowed by NSEL from its holding company, FTIL which
was distributed to small participants. The representatives
of members associations and investor bodies on the
MAC in their meeting with the Commission have
represented the NSEL has lost its credibility as an
institution. Further the employee attrition in NSEL in the
recent months has been extremely high and it is learnt
that the staff strength of NSEL has come down
considerably, adversely affecting the recovery process.
As per the information received from NSEL, the total
employee count on NSEL rolls was 193 as on
31.07.2013 (when NSEL had suspended trading in one
day forward contracts) which came down to 33 on
31.07.2014. The morale of the employees at NSEL is
also very low. NSEL is also confronted with a number of
cases against it, which are pending in the High Courts
89
and MPID Court relating to its failure to make payment to
the investors. The company is hardly left with any
financial resources to meet even legal expenses apart
from meeting staff salaries and other expenses related
to recovery process. The members of the Monitoring &
Auction Committee have expressed their views that with
the loss of credibility, weak Organizational structure,
depletion of man-power strength and lack of financial
resources, NSEL has become totally ineffective in
pursuing the recovery of the defaulted amounts from the
defaulter members.
4. It may be noted that NSEL is a subsidiary of
Financial Technologies India Ltd. (FTIL) which holds
99.99% of the shares of NSEL. Hence, for all practical
purposes NSEL is a wholly owned subsidiary of FTIL
and therefore it is the primary responsibility of the parent
company, i.e. FTIL to own complete responsibility for the
affairs of its subsidiary company. In this regard attention
is drawn to the order of the Commission No. 4/5/2013-
MKT-I/B dated 17th December, 2013 (copy enclosed as
Annexure IV) in the matter of “Fit and Proper Person”
status of M/s FTIL (another shareholder and promoter of
MCX) and in the matter of Shri Jignesh Shah & Shri
Joseph Massey ex-Directors & Shri Shreekant
Javalgekar ex-MD and CEO of MCX. Some of the
important highlights of the said order pertaining to FTIL
are as below:
(i) In para 14.2.1 of the order it is inter-alia
mentioned that NSEL by virtue of being a
separate legal entity cannot be said to be
independent from the control of the
holding/parent company i.e. FTIL which holds
99.99% of its share capital.
(ii) In para 14.5.2 it is inter-alia mentioned
that since FTIL is effectively the only
shareholder of NSEL, the constitution of the
Board of Directors of NSEL is entirely under its
control. FTIL through the Board of Directors of
NSEL constituted by it possesses effectual and
absolute control over its subsidiary company
i.e. NSEL. Such control is further amplified and
90
accomplished by the fact that Shri Jignesh
Shah, the promoter and Chairman-cumManaging Director of FTIL has been on the
Board of NSEL and functioning as ViceChairman of the Company since its inception.
Shri Joseph Massey was also a common
Director both on the Board of FTIL and NSEL,
while Shri Shreekant Javalgekar continued to
be a Director of NSEL till he resigned from the
post in July 2013;
(iii) In para 14.5.3 of the order it is inter-alia
mentioned that it is on record that all the
minutes of Board meetings of NSEL were
regularly tabled at the Board meetings of FTIL.
FTIL kept itself apprised about the affairs of
NSEL and also approved/ratified the actions of
NSEL in its Board meetings on a regular basis;
(iv) In para 14.9.1 of the order it is inter-alia
mentioned that it is undisputed that NSEL was
an Exchange in which FTIL had ownership
interest to the extent of 99.9998% leaving a
negligible 0.0002% stake to NAFED. The
Articles of Association of NSEL confers
authority to its shareholders to appoint
Directors. As the single largest shareholder, it is
FTIL which has nominated all the directors on
the NSEL board. As a wholly-owned subsidiary,
NSEL is completely under the control of FTIL,
including financial control over the affairs of
NSEL. FTIL, which had the responsibility of
managing the affairs of NSEL, cannot claim to
be unaware of the wrong-doing and fraud
committed by the management of NSEL.
(v) In para 14.10.06 of the order it is interalia mentioned 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.
(vi) In para 14.10.8 of the order it is inter-alia
mentioned that FTIL has not furnished any
91
explanation as to what steps have been taken
by NSEL or by it as a parent company to
honour the commitment of assuring safety and
risk-free trading to the members and clients
who have traded on their platform purely on the
basis of an explicit assurance that the
Exchange shall step into the shoes of counter
parties should there be any default by any
participant.
(vii) In para 15.1.3 of the order it is inter-alia
mentioned that FTIL has its principal business
of development of software which has become
the technology platform for almost the entire
industry engaged in broking in shares and
securities, commodities, foreign exchange etc.
The motive behind allowing trading in forward
contracts on the NSEL platform in a circuitous
manner on NSEL which was neither recognized
nor registered under FCRA, 1952 indicates
mala fide intention on the part of the promoter
of FTIL to use the trading platform of its
subsidiary company for illicit gains away from
the eyes of Regulator.
5. The aforesaid facts would clearly establish that the
Board of FTIL and its promoters under the leadership of
Shri Jignesh Shah have been actively controlling and
directing the affairs of NSEL and it is due to the poor
governance and irregularities perpetrated in to the affairs
of NSEL by FTIL and its promoters that the defaulting
members defrauded the exchange to the extent of Rs.
5,500 crores thereby causing huge financial loss to more
than 13,000 investors. It is submitted that the aforesaid
order dated 17th December, 2013 passed by the
Commission is based on tangible facts on the role of
FTIL in the affairs of NSEL, mustered by the
Commission on its own and also the facts revealed by
the forensic auditor M/s. Grant Thornton who were
engaged by NSEL to conduct a forensic audit into the
affairs of NSEL post the settlement crisis. It may be
noted the Hon’ble Bombay High Court has also refused
to grant any interim relief to FTIL and three other
92
individuals in respect of the aforesaid order dated 17th
December, 2013 passed by the Commission declaring
FTIL, Shri Jignesh Shah, Shri Joseph Massey and Shri
Shreekant Javalgekar as not fit and proper persons to be
shareholders or a Director in any of the recognized
commodity exchanges. FTIL and other three individuals
have so far not challenged the above interim order of the
Hon’ble High Court.
6. It is also submitted that the Working Group
constituted by the Central Government under the
Chairmanship of Deputy Governor, Reserve Bank of
India to examine into the systematic risk arising in
consequence of the NSEL settlement debacle, have inter
alia recommended that the ownership, governance and
management structure at FTIL and the exchanges
promoted by FTIL need to be assessed and the
possibility of bringing in an institutionalized framework
and approach to these aspects explored.
7. It may also be noted here that pursuant to the
criminal proceedings and arrest of Shri Jignesh Shah,
Chairman-cum-Managing Director of FTIL who was also
the Vice-Chairman of NSEL, the EOW of Mumbai Police,
has since filed a chargesheet against Shri Jignesh Shah
under various sections of Indian Penal Code and also
the Maharashtra Protection of Interest of Depositors
(MPID) Act, 1999, before the Hon’ble Sessions Judge,
Special Court under MPID Act, Mumbai which vindicates
the stand already taken by the Commission in its order
dated 17th December, 2013 pertaining to the role and
responsibility of FTIL as a parent company in the affairs
of its wholly owned subsidiary i.e. NSEL.
8. The aforesaid submissions would make it clear that
NSEL as a corporate entity has now been rendered
bereft of any credibility and now seems financially and
physically incapable of effecting any substantial recovery
from the defaulting members, notwithstanding all the
legal and other measures taken by it against them under
the instructions/supervision of the Commission. Similarly,
the Board and management of FTIL, by their very
conduct in managing the affairs of NSEL and continuous
effort to distance themselves from their responsibility
93
towards NSEL after the settlement default, have lost
their credibility as a responsive and responsible holding
company.
9. Keeping the aforesaid emergency situation in view,
the Commission is of the view that time has come for the
Ministry of Corporate Affairs to consider:
(i) merging/amalgamating NSEL with FTIL in
public interest so that the human/financial
resources of FTIL are also directed towards
facilitating speedy recovery of dues from the
defaulters at NSEL and FTIL takes
responsibility to resolve the payment crisis at
NSEL at the earliest.
(ii) Further, it is suggested that together with
merger/amalgamation of NSEL with FTIL,
taking over of the management of FTIL may
also be considered so that the affairs of FTIL
can be managed in a professional way by
bringing in an institutionalized framework as
recommended by Working Group appointed by
Government of India.
xxx xxx xxx”
(emphasis supplied)
This letter would show that the immediate reason for amalgamation,
according to the FMC, and which was faithfully carried out by
Government, is that NSEL, as a corporate entity, seems financially and
physically incapable of effecting any substantial recovery from
defaulting members. This was the “emergency situation” according to
the FMC, which should lead to an order of amalgamation of the
holding and subsidiary companies so that the holding company’s
financial resources could be used to pursue proceedings by which
94
monies owed to the alleged duped investors/traders could be
recovered.
56.1. What is important to note is that by the time the final order of
amalgamation was passed, i.e., on 12.02.2016, the final order itself
records:
“8.1.Economic Offences Wing, Mumbai:
Total amount due and recoverable from 24
defaulters is Rs. 5689.95 crores.
Injunctions against assets of defaulters worth
Rs. 4400.10 crore have been obtained.
Decrees worth Rs. 1233.02 crore have been
obtained against 5 defaulters.
Assets worth Rs. 5444.31 crore belonging to
the defaulters have been attached of which
assets worth Rs. 4654.62 crore have been
published in Gazette under the MPID Act for
liquidation under the supervision of MPID
Court and balance assets worth Rs. 789.69
crore have been attached/secured for
attachment by the EOW:
Assets worth Rs. 885.32 crore belonging to
the directors and employees of NSEL have
been attached out of which assets worth Rs.
882.32 crores have already been published
in Gazette under MPID Act for liquidation
under the supervision of MPID Court and
balance assets worth Rs. 3 crore have been
attached/secured for attachment by the
EOW;
MPID Court has already issued notices u/s 4
& 5 of the MPID Act to the persons whose
assets have been attached as above. Thus,
the process of liquidation of the attached
assets has started.
Bombay High Court has appointed a 3-
95
member committee headed by Mr. Justice
(Retd.) V.C. Daga and 2 experts in finance
and law to recover and monetize the assets
of the defaulters.
Rs.558.83 crores have been recovered so
far, out of which Rs. 379.83 crore have been
received/recovered from the defaulters and
Rs. 179 crore were disbursed by NSEL to
small traders/investors.
8.2. Enforcement Directorate:
ED has traced proceeds of crime amounting to
Rs. 3973.83 crore to the 25 defaulters;
ED has attached assets worth Rs. 837.01 crore
belonging to 12 defaulters;
As per the recent amendment in the PMLA, the
assets attached by ED can be used for restitution
to the victims.
8.3. The above status indicates that the said
enforcement agencies are working as per their
mandate…….”
56.2. What concerned the FMC in August 2014 has, by the date of the
final amalgamation order, been largely redressed without
amalgamation. The “emergency situation” of 2013 which, even
according to the Central Government, required the emergent step of
compulsory amalgamation has, by the time of the passing of the
Central Government order, disappeared. Thus, the raison d’être for
applying Section 396 of the Companies Act has, by the passage of
time, itself disappeared. In fact, as on today, decrees/awards worth
INR 3365 crore have been obtained against the defaulters, with INR
835.88 crore crystallised by the committee set up by the High Court,
96
pending acceptance by the High Court, even without using the
financial resources of FTIL as an amalgamated company. What is,
therefore, important to note is that what was emergent, and therefore,
essential, even according to the FMC and the Government in 2013-
2014, has been largely redressed in 2016, by the time the
amalgamation order was made. Also, the Central Government order
does not apply its mind to the essentiality aspect of Section 396 at all.
In fact, in several places, it refers to “essential public interest” as if
“essential” goes with “public interest” instead of being a separate and
distinct condition precedent to the exercise of power under Section
396. On facts, therefore, it is clear that the essentiality test, which is
the condition precedent to the applicable to Section 396, cannot be
said to have been satisfied.
57. During the course of proceedings before the Division Bench of
the Bombay High Court, FTIL tendered an affidavit dated 04.07.2017,
to place on record its resolution dated 28.03.2016 to infuse a sum of
upto INR 50 crore for each of the financial years 2016-2017 to 2018-
2019 to support NSEL to recover dues from defaulters, defend various
cases, and continue taking necessary legal action against various
parties to recover amounts from defaulters. The Division Bench refers
to this affidavit as follows:
97
“293] At the stage, when the final hearing in these
petitions had considerably advanced, FTIL, tendered an
affidavit dated 4th July 2017 to place on record its
resolution dated 28th March 2016 to infuse a sum up to
Rs. 50 crores for each of the financial years, i.e., FY
2016-17 to FY 2018-19, to support NSEL to recover
dues from defaulters; to defend various legal cases; to
continue taking necessary legal actions against various
parties to recover amounts from defaulters; and for
working capital. The affidavit states that such resolution
was passed and such finances are proposed to be
infused at the request of NSEL.
294] The affidavit dated 4th July 2017 also confirms that
the activities of NSEL have come to a grinding halt,
though, the affidavit purports to blame the FMC for such
a situation. The affidavit also states that up to now FTIL
has infused approximately Rs. 109 crores with NSEL,
mainly to prosecute and defend legal proceedings.
There is reference to NSEL having obtained decrees
worth more than Rs. 1200 crores and injunctions against
assets of defaulters valued at Rs. 5444.31 crores. The
affidavit further states that FTIL is committed to funding
NSEL for purposes of recovery from defaulters since the
occurrence of payment crisis on the exchange platform
of NSEL.
295] If the contention of Mr. Chinoy to the effect that
there is absolutely no problem in the functioning of NSEL
or that NSEL has the necessary wherewithal, both
financial as well as infrastructural, to effect recoveries
from the defaulters, is to be accepted, then, there was
no reason to rely upon contribution from FTIL, made or
proposed to be made at a belated stage. The FTIL
resolution dated 28th March 2016, far from affording any
cause to interfere with the impugned order, in fact, lends
support to the reasoning in the impugned order that the
NSEL, on its own, lacks financial as well as
infrastructural capacity to affect any recoveries from the
defaulters. The affidavit dated 4th July 2017 and the
resolution dated 28th March 2016 is also indicative of
the business realities of the situation, which is
incidentally yet another ground in the impugned order.”
98
(emphasis in original)
58. The High Court comment on the aforesaid affidavit is not correct.
The affidavit proceeds on the footing that since the activities of NSEL
have come to a grinding halt, FTIL would help NSEL to effect
recoveries from defaulters. The affidavit nowhere states that there is
no problem in the functioning of NSEL, or that NSEL has or does not
have the necessary wherewithal to effect recovery from defaulters.
Even in the hearing before us, FTIL has submitted an affidavit-cumundertaking dated 11.04.2019, stating that it will continue to infuse
funds into NSEL so that recovery of dues from defaulters does not, in
any manner, get stymied. We take this affidavit and undertaking on
record, and hold FTIL to this undertaking made before this Court.
59. When it comes to “public interest” as opposed to the “private
interest” of investors/traders, who have not been paid, the
amalgamation order dated 12.02.2016 makes interesting reading. The
satisfaction as to public interest is stated in the very beginning of the
order as follows:
“Whereas the Central Government is satisfied that to
leverage combined assets, capital and reserves, achieve
economy of scale, efficient administration, gainful
settlement of rights and liabilities of stakeholders and
creditors and to consolidate businesses, ensure
coordination in policy, it is essential in the public
interest…….”
99
What is stated in the opening is repeated in paragraph 2.14.2 as
follows:
“2.14.2 The Central Government also carefully
considered the proposal received from FMC and
DEA and was of the considered opinion that to
leverage combined assets, capital and reserves for
efficient administration and satisfactory settlement of
rights and liabilities of stakeholders and creditors of
NSEL, it would be in essential public interest to
amalgamate NSEL with FTIL.”
It will be seen that all the expressions used in relation to “public
interest” have relation only to the businesses of the two companies
that are sought to be amalgamated. What is important to note is that
there is no interest of the general public as opposed to the businesses
of the two companies that are referred to. It is important to notice that
the leveraging of combined assets, capital, and reserves is only to
settle liabilities of certain stakeholders and creditors when the order is
read as a whole, and given the fact that the businesses of the two
companies were completely different. So far as achieving economy of
scale and efficient administration is concerned, it is difficult to see how
this would apply to the fact situation in this case where NSEL is
admittedly a company which has stopped functioning as a
commodities exchange at least with effect from July, 2013 with no
hope of any revival. Thus, the consolidation of businesses spoken
100
about does not exist as a matter of fact, as NSEL’s business has come
to a grinding halt, as has been observed by the FMC and the Central
Government itself. Each one of these expressions, when read with the
rest of the order, therefore, only shows that the sole object of the
amalgamation order is very far from the high-sounding phrases used in
the opening, and is really only to effect speedy recovery of dues of INR
5600 crore, which has been referred to in the letter of the FMC to the
Secretary, Ministry of Corporate Affairs, dated 18.08.2014. This would
be clear from a reading, in particular, of two paragraphs of the order,
namely, paragraphs 2.13.2 and 2.13.3, which read as follows:
“2.13.2. Thus, it would be observed from above that
NSEL is not having the resources, financial or
human, or the organizational capability to
successfully recover the dues to the investors
pending for over a year. Further, NSEL is not left with
any viable, sustainable business while FTIL has the
necessary resources to facilitate speedy recovery of
dues.
2.13.3. In the above background, a proposal had
been received from FMC, vide letter dated 18-08-
2014, proposing the merger of NSEL with FTIL by the
Central Government under the provisions of Section
396 of the Companies Act, 1956. The proposal has
been supported by the Department of Economic
Affairs (DEA), Ministry of Finance, FMC has proposed
the merger/amalgamation of NSEL with FTIL in
essential public interest so that the human/financial
resources of FTIL are also directed towards
facilitating speedy recovery of dues from the
defaulters at NSEL and the FTIL takes responsibility
to resolve the payment crisis at NSEL at the earliest.”
101
59.1. However, the Central Government supported this order on the
ground that it is made in public interest essentially on three grounds,
which are repeatedly referred to by the impugned judgment. The three
grounds as stated by the impugned judgment are as follows:
“269. …… (a) Restoring/safeguarding public confidence
in forward contracts and exchanges which are an
integral and essential part of Indian economy and
financial system, by consolidating the businesses of
NSEL and FTIL; (b) Giving effect to business realities of
the case by consolidating the businesses of FTIL and
NSEL and preventing FTIL from distancing itself from
NSEL, which is, even otherwise, its alter ego; and (c)
Facilitating NSEL in recovering dues from defaulters by
pooling human and financial resources of FTIL and
NSEL. Further, we are also satisfied that each of these
three grounds constitute a facet of public interest in the
context of the provisions in Section 396. ……”
59.2. It is important to note that the first and second grounds
mentioned by the High Court are not contained in the draft order of
amalgamation. Had they been so contained, objections and
suggestions would have been made by all stakeholders, which the
Central Government would then have been bound to consider before
passing the final order. However, it was argued on behalf of the
respondents that the first and second grounds are, in reality,
inferences drawn from facts which are already stated in the order and
these inferences do not need to be stated in the draft order. We are
102
afraid that this argument is incorrect inasmuch as grounds contained in
reasons (a) and (b) are important grounds which have a vital bearing
on the amalgamation in question. If these grounds were contained in
the draft order, there is no doubt that the shareholders and creditors of
FTIL, and FTIL itself would have had an opportunity to comment on the
same. For example, the “business realities” of the case are facts
known to FTIL; and NSEL, being FTIL’s alter ego, is the subject matter
of dispute in various suits that have been filed and are pending
adjudication. FTIL could have responded giving reasons as to why
NSEL is not its alter ego. Also, whether the amalgamation is, in fact, to
restore or safeguard public confidence in forward contracts and
exchanges is a subject matter on which FTIL, its shareholders and
creditors, could have commented. Equally, whether NSEL’s exchange
was an essential and integral part of the Indian economy and financial
system, and whether this defunct business could be consolidated so
as to impact the economy are all matters for comment by FTIL and its
shareholders and creditors. For all these reasons, we cannot accede
to the respondents’ arguments on this score. On this ground alone,
even assuming that these two grounds obtained and can be culled out
from the final order, not being contained in the draft order, the said
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grounds would be in breach of Section 396(3) and (4), and therefore,
cannot be looked at to support the order.
59.3. It is important to note that grounds (a) and (b) are both culled out
in answer to objections raised by FTIL. The precise objection raised
and the answer given are quoted hereinbelow:
“7.2.1. FTIL has challenged the background and
reasons for the amalgamation as the power under
section 396 of the Act has been used only in case of
Government companies alone. This argument does
not derogate from the scope of the statutory
provisions. The statutory provisions of section 396 of
the Act are being invoked in essential public interest
to safeguard the interest of all stakeholders in the
captioned company. The present status and
composition of the Boards of FTIL and NSEL have
been noted. However, the fact that the Boards had
not acted with an independent mind to collect
information and put the system under a robust
technology is borne out of the simple fact that the
Show Cause Notice dated 27-04-2012 issued by the
Department of Consumer Affairs based on analysis of
trade data by the then Forward Market Commission
had given an alarming picture of the state of affairs of
NSEL. The public interest driving the merger are set
out in the business realities of the case, it is noted
from the facts of the case and the recommendations
of FMC as well as its order dated 17-12-2013 which
throw ample light to the grave shattering of the public
confidence and the purpose of establishing
commodity exchange has been defeated.”
xxx xxx xxx
“7.2.6. FTIL and NSEL have distinct and separate
objects and nature of operations and completely
disparate and unconnected objects, and hence there
is no synergy, efficient administration, consolidation
104
of business or co-ordination in policy to be gained
by the forced amalgamation; the argument runs
contrary to the concept of merger which essentially
means that two or more separate entities are getting
merged to achieve the objectives of amalgamation. In
the instant case, amalgamation is targeted to achieve its
stated objects, essentially in public interest. By all
intents and purposes, the way both the companies were
being managed, owned and controlled, NSEL is the alter
ego of FTIL and thus, the two companies have been
practically one entity. All stakeholders were also looking
at them as one entity. The amalgamation u/s. 396 of the
Act only formalizes this practical reality in essential
public interest.”
xxx xxx xxx
“7.2.8. The FTIL has questioned the jurisdiction of
the Central Government to decide on the question of
fraud and claimed that it has to be proved beyond
reasonable doubt by adducing necessary
particulars; the Central Government is invoking section
396 of the Act in essential public interest for the merger
of NSEL, which is an almost wholly-owned subsidiary of
FTIL. The merger is not an adjudication on the alleged
fraud. The merger is targeted to achieve its stated
objectives for long term sustainability in the best interest
of the stakeholders.”
(emphasis in original)
It will be noticed that the objection raised in paragraph 7.2.1 is that
Section 396 can be used in the case of Government companies alone,
whereas the answer given is that this cannot be so, given the business
realities of the case and the FMC order of 17.12.2013 “which throw
ample light to the grave shattering of public confidence and the
purpose of establishing Commodity Exchange has been defeated”.
First and foremost, what is important to notice is that the “business
105
realities” of the case are what is contained in “the recommendations of
the FMC”. We have seen that these recommendations are in the form
of a letter dated 18.08.2014, in which the “business reality” is the fact
that dues of INR 5600 crore have to be paid, and that NSEL does not
have the wherewithal to do so. Thus, its parent company’s financial
resources ought to be used to effect such payment. This “business
reality”, therefore, speaks only of the private interest of the
investors/traders who have been allegedly duped (which fact will only
be established in suits filed by them in 2014), and nothing beyond
(which would show some vestige of public interest). Equally, the grave
shattering of public confidence and purpose of establishing commodity
exchanges having been defeated, according to the Central
Government, is a gloss on the FMC order dated 17.12.2013. If this
were so, one would have expected a resuscitation or revival of the
commodities exchange of NSEL, which could have been achieved by
takeover of its management. It is difficult to imagine that grave
shattering of public confidence by the permanent shutting down of the
commodities exchange of the NSEL would be remedied only by
facilitating the paying of dues to certain allegedly duped
investors/traders, which fact will be proved or disproved in suits filed
by them which are pending adjudication in the Bombay High Court. In
106
any case, this reason is wholly irrelevant as an answer to the objection
raised by FTIL which, as we have seen, is an objection stating that the
Section applies to Government companies alone. Also, had FTIL made
no such objection, no such answer would have been forthcoming. As
far as paragraphs 7.2.6 and 7.2.8 of the order are concerned, what is
admitted in the order itself, is that there is no “adjudication” on the
“fraud” in the facts of the present case, and thus, not an exercise of
lifting of the corporate veil of the pre-amalgamation companies. The
amalgamation order contradicts itself by then stating that NSEL is the
alter ego of FTIL, and thus, the two companies are practically one
entity. In any event, these paragraphs do not indicate as to how the
‘alter ego’ argument impacts public interest. For all these reasons,
therefore, neither reason (a) nor reason (b) ought to detain us any
further. Reason (c) is, therefore, the only reason that really remains, as
is contained in the letter of 18.08.2014 by the FMC to the Central
Government. We have already seen that this reason, by itself, is the
protection of the private interest of a group of investors/traders, as
distinct from public interest.
59.4. It is important to note that under Section 396(4)(b), the Central
Government may, after considering suggestions and objections from
the stakeholders mentioned, make modifications in the draft order as
107
may seem to it desirable in the light of such suggestions and
objections. No modification has been made in the body of the Central
Government order as finally made. If the Central Government had
actually considered that each of these three reasons impact public
interest, it would have explicitly said so after suggestions and
objections were made by the various stakeholders. The fact that the
Central Government has not amended the body of the final order is of
great significance – it is only the original reasons given in the draft
order that continue as such in the final order which, as we have seen,
are not in furtherance of public interest at all. Reasons (a) and (b), part
of which is culled out from answers to objections and suggestions
given in the final order, is only given separately by the Central
Government after the amalgamation order to show that the principles
of natural justice as laid down by sub-section (4) of Section 396 have,
in fact, been followed. This becomes clear from paragraphs 6.3 and 7
of the final order, which read as follows:
“6.3. The Central Government received in writing and
through email various objections / suggestions from
various classes of stakeholders including the
shareholders, creditors, and all other interested parties
claiming that monies are recoverable from the
proceedings arising out of the business of the dissolved
company.
7. Dealing with objections, suggestions and
submissions of FTIL, NSEL and other parties – The
108
Parties herein have made various objections,
suggestions and submissions on the proposed
amalgamation u/s. 396 of the Act on the order dated 21-
10-2014 in Draft form issued by the Central Government.
The said objections, suggestions and submissions were
made during the course of hearing and written
submissions (physically and electronically) received by
the Central Government on various dates. The said
objections, suggestions and submissions made by each
of the parties are dealt in the manner herein under.”
59.5. So far, we have gone by the Central Government order as it
stands. The Bombay High Court, in stating reasons (a), (b), and (c) as
grounds of public interest, has gone much further than even the
answer given to the objections that are contained in the order itself.
“Restoring/safeguarding public confidence in forward contracts and
exchanges, which are an integral and essential part of the Indian
economy and financial system, by consolidating the businesses of
NSEL and FTIL,” is not contained in the answer given to objections in
the order. First and foremost, restoring public confidence is no part of
the order. What is mentioned is only the fact that public confidence has
been shattered, as is reflected by the FMC order dated 17.12.2013.
Secondly, the entire expression, “which are an integral and essential
part of Indian economy and financial system, by consolidating the
businesses of NSEL and FTIL” is no part even of this answer given,
but a gloss given by the High Court itself relatable to this answer.
109
Similarly, when it comes to reason (b), “giving effect to business
realities of the case” contained in the answer to objections does not
contain “by consolidating the businesses of FTIL and NSEL”, nor does
it contain “and preventing FTIL from distancing itself from NSEL, which
is, even otherwise, its alter ego”. On the contrary, the High Court itself
mentions, in paragraph 355, that “this is also not a case where the
Central Government has, in fact, lifted the corporate veil, despite the
alleged non-existence of the circumstances justifying lifting of such
corporate veil”, and further, “this is not a case where the Central
Government has lifted the corporate veil and sought to apportion any
liability upon either NSEL or FTIL”. For all these reasons, we find that
no reasonable body of persons properly instructed in law could
possibly arrive at the conclusion that the impugned order has been
made in public interest.
60. The learned Senior Advocates appearing on behalf of the
respondents has placed great reliance on the judgment in Ganesh
Bank (supra). In this judgment, the Appellant Bank was amalgamated
with Federal Bank under Section 45 of the Banking Regulation Act,
1949. Federal Bank was selected from out of several other banks by
the Reserve Bank of India as its offer to amalgamate with the
110
Appellant Bank was unconditional, Federal Bank undertaking to make
full payment to depositors.
61. The judgment in Ganesh Bank (supra) was faced with the
amalgamation of the Appellant Bank after a moratorium had been
imposed on it as it was found that its position was very weak, having
incurred huge losses in the financial year 2004-05. Section 45 of the
Banking Regulation Act reads as follows:
“45. Power of Reserve Bank to apply to Central
Government for suspension of business by a
banking company and to prepare scheme of
reconstitution or amalgamation.—(1) Notwithstanding
anything contained in the foregoing provisions of this
Part or in any other law or any agreement or other
instrument, for the time being in force, where it appears
to the Reserve Bank that there is good reason so to do,
the Reserve Bank may apply to the Central Government
for an order of moratorium in respect of a banking
company.
xxx xxx xxx
(4) During the period of moratorium, if the Reserve Bank
is satisfied that—
(a) in the public interest; or
(b) in the interests of the depositors; or
(c) in order to secure the proper management
of the banking company; or
(d) in the interests of the banking system of the
country as a whole,—
it is necessary so to do, the Reserve Bank may prepare
a scheme—
(i) for the reconstruction of the banking
company, or
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(ii) for the amalgamation of the banking
company with any other banking institution (in
this section referred to as “the transferee
bank”).
xxx xxx xxx”
It is important to note that unlike Section 396 of the Companies Act,
the satisfaction of the Reserve Bank of India can be on any one of four
grounds. Such satisfaction may be in the public interest or in the
interest of depositors. This point is, in fact, highlighted in paragraph 34
of the judgment as follows:
“34. The phrase “good reasons” in sub-section (1) of
Section 45 is a term of wide amplitude and it will not be
correct to restrict it only to the actions mentioned under
sub-section (2) of Section 45 of the Act as is contended
by the appellants. The provision is concerned with
preparing a scheme of reconstruction or amalgamation
which would become necessary where RBI is satisfied
about the existence of any of the four grounds
mentioned in Section 45(4). Apart from public interest
and the interest of the banking system, which are
provided in clauses (a) and (d) thereof, Section 45(4)
provides for the necessary action in the interest of the
depositors or with a view to secure proper management
of the Bank which are clauses (b) and (c) in that subsection. Precursor to the framing of the scheme is the
imposition of the moratorium which is provided in subsections (1) and (2) of Section 45. Existence of court
proceedings, mentioned in Section 45(2), would certainly
be one of the good reasons to impose moratorium, but
that certainly cannot be the only one. Considering that
object of the Act is protection of the interest of the
depositors, such an interpretation of the concept of
“good reasons” will have to be adopted, and not a
narrow one.”
112
The judgment then goes on to state:
“39. Now, as far as the first two questions of nonconsideration of reconstruction and proposing merger
with Federal Bank are concerned, RBI has noted that the
Bank was in difficulties from 1990 and particularly from
December 2003 when it was placed under monthly
monitoring. RBI in its application for moratorium to the
Central Government dated 4-1-2006 had clearly stated
that during the discussion with the appellant Bank, major
shareholders and Directors had shown total reluctance
to merge into the stronger bank. In view thereof, it was
imperative that immediate arrangement to protect the
interest of the depositors was to be made through its
merger with a bank under Section 45 of the Act. RBI
had, therefore, made an effort and called upon the
appellant Bank, that if possible, to explore the possibility
of merger with another stronger bank. It had also made
an effort to impress that there should be infusion of fresh
capital. That was not coming. There could be a
reconstruction by bringing in more money or by
narrowing the size of the appellant Bank which did not
appear to be feasible. The only option left was that of
amalgamation.”
Thus, two features of Ganesh Bank (supra) distinguish the said case
from the facts of the present case. First, that under Section 45 of the
Banking Regulation Act, the interest of the depositors is to be looked
at; and it was this reason that led to the amalgamation. Secondly, this
Court found that after exploring other options, the only option left was
that of amalgamation.
62. In point of fact, the contrast between Section 45(4) of the
Banking Regulation Act and Section 396 of the Companies Act
113
becomes important. Under Section 45(4)(b) and (c) of the Banking
Regulation Act, the satisfaction of the Reserve Bank of India for
preparing a scheme of amalgamation can be in the interest of the
depositors of a particular bank or in order to secure the proper
management of a particular banking company. This must be
contrasted with clauses (a) and (d) of Section 45(4), which speak of
public interest and the interest of the banking system of the country as
a whole. This judgment, on facts, merged a financially weak bank with
a financially strong bank in the interest of the depositors of the
financially weak bank. It is important to note that the business of the
two merged entities is the same, as also Federal Bank’s (i.e., the
strong bank’s) willingness to merge, being an unconditional offer to
merge because it felt that post merger, it could have a significant
presence in western Maharashtra and the Belgaum area of Karnataka,
and could augment its credit disbursal to the agricultural sector. Also,
since the interest of depositors is a separate head, based upon which
the Reserve Bank of India may amalgamate two banking companies, it
is clear that this reason alone will not go to public interest, which is a
separate head contained in Section 45(4). It is in this context that the
observation contained in paragraph 44 is made, namely:
114
“44. Under Section 45 of the Act, the primary
consideration is public interest. There is an underlying
object of acting swiftly and decisively to protect the
interests of depositors and ensure public confidence in
the banking system. The emergent situation which
warrants action with expedition cannot be lost sight of
while deciding the legality of the action.”
As we have already seen, the “emergent situation” which obtained in
2013 was no longer there in 2016 when the final order of
amalgamation was passed in the present case.
63. Valiant attempts have been made by counsel in the High Court
as well as counsel in this Court to support the order on grounds which
are outside the order, stating that such grounds make it clear that in
any case, the Government order has been made in public interest. The
celebrated passage in Mohinder Singh Gill (supra) states that:
“8. The second equally relevant matter is that when a
statutory functionary makes an order based on certain
grounds, its validity must be judged by the reasons so
mentioned and cannot be supplemented by fresh
reasons in the shape of affidavit or otherwise. Otherwise,
an order bad in the beginning may, by the time it comes
to Court on account of a challenge, get validated by
additional grounds later brought out. We may here draw
attention to the observations of Bose, J. in Gordhandas
Bhanji [Commr. of Police, Bombay v. Gordhandas
Bhanji, AIR 1952 SC 16] :
“Public orders, publicly made, in exercise of a
statutory authority cannot be construed in the
light of explanations subsequently given by the
officer making the order of what he meant, or of
what was in his mind, or what he intended to
115
do. Public orders made by public authorities are
meant to have public effect and are intended to
affect the actings and conduct of those to
whom they are addressed and must be
construed objectively with reference to the
language used in the order itself.”
Orders are not like old wine becoming better as they
grow older.”
We are of the view that it is the Central Government that has to be
“satisfied” that its order is in public interest and such “satisfaction”
must, therefore, be of the Central Government itself and must,
therefore, appear from the order itself. All these valiant attempts made
to sustain such order must be rejected.
64. However, learned Senior Advocates on behalf of the respondents
have cited Chairman, All India Railway Recruitment Board and
Anr. v. K. Shyam Kumar and Ors., (2010) 6 SCC 614, which,
according to them, renders the judgment in Mohinder Singh Gill
(supra) inapplicable where larger public interest is involved. In this
judgment, Mohinder Singh Gill (supra) was distinguished thus:
“44. We are also of the view that the High Court has
committed a grave error in taking the view that the order
of the Board could be judged only on the basis of the
reasons stated in the impugned order based on the
report of Vigilance and not on the subsequent materials
furnished by CBI. Possibly, the High Court had in mind
the Constitution Bench judgment of this Court in
Mohinder Singh Gill v. Chief Election Commr. [(1978) 1
SCC 405]
116
45. We are of the view that the decision-maker can
always rely upon subsequent materials to support the
decision already taken when larger public interest is
involved. This Court in Madhyamic Shiksha Mandal,
M.P. v. Abhilash Shiksha Prasar Samiti [(1998) 9 SCC
236] found no irregularity in placing reliance on a
subsequent report to sustain the cancellation of the
examination conducted where there were serious
allegations of mass copying. The principle laid down
in Mohinder Singh Gill case [(1978) 1 SCC 405] is not
applicable where larger public interest is involved and in
such situations, additional grounds can be looked into to
examine the validity of an order. The finding recorded by
the High Court that the report of CBI cannot be looked
into to examine the validity of the order dated 4-6-2004,
cannot be sustained.”
It will be seen that there is no broad proposition that the case of
Mohinder Singh Gill (supra) will not apply where larger public interest
is involved. It is only subsequent materials, i.e., materials in the form of
facts that have taken place after the order in question is passed, that
can be looked at in the larger public interest, in order to support an
administrative order. To the same effect is the judgment in PRP
Exports and Ors. v. Chief Secretary, Government of Tamil Nadu
and Ors., (2014) 13 SCC 692 [at paragraph 8]. It is nobody’s case that
there are any materials or facts subsequent to the passing of the final
order of the Central Government that have impacted the public
interest, and which, therefore, need to be looked at. On facts,
therefore, the two judgments cited on behalf of the respondents have
117
no application. Thus, it is clear that no reasonable body of persons
properly instructed in law could possibly hold, on the facts of this case,
that compulsory amalgamation between FTIL and NSEL would be in
public interest.
65. Section 396(3) speaks of a shareholder’s or a creditor’s interest
in or rights against the company resulting from an amalgamation order.
Such “interest in” or “rights against” obviously refers to real and
substantive rights, as opposed to rights that are only in form. A
shareholder or creditor gets effected by an amalgamation order if the
value of his share gets depleted as a result of the amalgamation and if
dividends that have been paid to him are likely to come down as a
result of the amalgamation. Likewise, a creditor of a solvent company
is directly effected by an amalgamation by which the amount loaned by
such creditor becomes, as a result of the amalgamation, less likely to
be paid back in time, than if the amalgamation did not take place. Such
rights and interests of members and creditors are substantive rights
which, when effected by the amalgamation, lead to compensation
having to be paid. Every shareholder of a company and indeed, every
creditor of a company, is concerned only with the “economic value” of
his share or the loan granted to a company, as the case may be. The
moment the share value, in real terms, is likely to dip, and/or loans
118
granted are likely not to be repaid in time or at all as a result of an
amalgamation, such members or creditors of the amalgamating
company are equally entitled to be compensated for this economic
loss as are the members and creditors of the amalgamated company,
depending on the facts of each case. A reasonable construction must
be given to Section 396. Also, the suggested construction by the
respondents, as has been accepted by the impugned judgment,
operates harshly and ridiculously, and being opposed to justice and
reason, cannot possibly be adopted by this Court. It is clear that
Section 396(3) refers to the economic loss that is to be borne by
shareholders and members of both companies.
66. Thus, it is clear from a reading of Section 396(3), (3A), and (4)
(aa) that every member or creditor of each of the companies before
amalgamation shall have, as nearly as may be, the same interest in or
rights against the company resulting from the amalgamation as he had
in the original company. To the extent to which the interest or rights of
such member or creditor are less than his interest or rights against the
original company, post amalgamation, he shall be entitled to
compensation which is to be assessed. Post assessment, if such
member or creditor is aggrieved, he may prefer an appeal to the
appellate authority under sub-section (3A). Under sub-section (4)(aa),
119
no order of amalgamation can be made unless the time for preferring
an appeal under sub-section (3A) has expired, or where any such
appeal has been preferred, the appeal has been finally disposed of.
67. The learned counsel on behalf of the appellant has argued that
the assessment order dated 01.04.2015, passed by the Joint Director
(Accounts), does not reflect any compensation in favour of the
shareholders or creditors of FTIL. According to the learned counsel, it
is clear that if a company with low net worth (NSEL) is amalgamated
with a company with high positive net worth (FTIL), both the
shareholders and the creditors of FTIL will be directly impacted as the
economic value of the shares will plummet, and the creditors of FTIL,
which is a positive net worth company, may have to wait for a long time
before recovery of debts owed to them once the company is
amalgamated with the negative net worth company. In short, the
creditors of FTIL will be put on par with the creditors of NSEL, which
will result in the creditors of FTIL either being paid back their debts
much later in point of time, or not at all. To this argument, the answer
of the Union of India, which has found favour with the Division Bench
of the Bombay High Court, is that “economic value” forms no part of
Section 396. So long as the shareholders of FTIL continued to have
120
the same number of shares, it matters not whether their share values
plummet post amalgamation.
68. In Bacha F. Guzdar (supra), this Court held that though a
shareholder acquires no right in the assets of a company as the
company itself is the owner of such assets, yet a shareholder certainly
has the right to dividends and the right to participate in the assets of
the company which would be left over after winding up. The Court
held:
“The true position of a shareholder is that on
buying shares an investor becomes entitled to
participate in the profits of the company in which he
holds the shares if and when the company declares,
subject to the Articles of Association, that the profits or
any portion thereof should be distributed by way of
dividends among the shareholders. He has
undoubtedly a further right to participate in the assets
of the company which would be left over after winding
up but not in the assets as a whole as Lord Anderson
puts it.”
(at p. 882)
(emphasis in original)
69. In Life Insurance Corporation of India v. Escorts Ltd. and
Ors., (1986) 1 SCC 264, this Court dealt generally with the rights of
shareholders as follows:
“84. On an overall view of the several statutory
provisions and judicial precedents to which we have
referred we find that a shareholder has an undoubted
interest in a company, an interest which is represented
by his shareholding. Share is movable property, with all
121
the attributes of such property. The rights of a
shareholder are (i) to elect directors and thus to
participate in the management through them; (ii) to vote
on resolutions at meetings of the company; (iii) to enjoy
the profits of the company in the shape of dividends; (iv)
to apply to the court for relief in the case of oppression;
(v) to apply to the court for relief in the case of
mismanagement; (vi) to apply to the court for winding up
of the company; (vii) to share in the surplus on winding
up. ……”
On the facts of the present case, we are directly concerned with points
(iii) and (vii). It has been argued that the profits of the company postamalgamation will obviously come down, and dividends payable to
shareholders will consequently either come down or be wiped out if the
low net worth of NSEL is taken into account post amalgamation,
together with potential liabilities of the amalgamated company, which
may have to be paid in the near future. Secondly, if the amalgamated
company is wound up, the amount that is payable to the shareholders
post-amalgamation will be much less, if at all anything is to be paid,
than pre-amalgamation.
70. In fact, in Commissioner of Income Tax (Central) Calcutta v.
Standard Vacuum Oil Co., [1966] 2 SCR 367, this Court held:
“ …… A share is not a sum of money: it represents an
interest measured by a sum of money and made up of
diverse rights contained in the contract evidenced by the
articles of association of the Company. ……”
(at p. 374)
122
71. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC
579, in the context of a voluntary amalgamation made under Sections
391 to 394 of the Companies Act, this Court went into share valuation.
This Court held:
“40. …… It must at once be stated that valuation of
shares is a technical and complex problem which can be
appropriately left to the consideration of experts in the
field of accountancy. Pennington in his Principles of
Company Law mentions four factors which had to be
kept in mind in the valuation of shares:
“(1) Capital Cover,
(2) Yield,
(3) Earning Capacity, and
(4) Marketability.
For arriving at the fair value of share, three well-known
methods are applied:
(1) The manageable profit-basis method (the
Earning Per Share Method)
(2) The networth method or the break value
method, and
(3) The market value method.”
What is clear from the various methods of valuation of shares, when it
comes to such valuation qua the transferor and transferee company, is
that the market value method is one method in which shares can be
valued so that their equivalent can then be provided for in the
amalgamated company. This would be nothing other than what those
shares were worth in the market on a particular day or an average
taken within a certain period. What is important to note is that the
123
market value of shares is market value of shares reflective of their
economic value, being an interest measured by a sum of money, is not
something that is completely alien to determining the rights of or
interest of a shareholder in the transferor or transferee company, as
the case may be.
72. In fact, the Government order dated 12.02.2016 itself reflects the
net worth of NSEL as INR 8.86 crore from its balance sheet dated
31.03.2015, despite its capital being INR 60 crore, inasmuch as the
total reserve and surplus is a negative figure of INR 51.54 crore. As
against this, FTIL’s balance sheet, as on 31.03.2015, discloses that for
the same year, FTIL’s net worth is INR 2779.94 crore. Also, FTIL has
been paying dividends to its shareholders ranging from 1000% to
250% for the years 2007-2008 till 2015-2016. On the other hand,
NSEL has never paid a single dividend ever since its inception. Post
amalgamation, therefore, dividend payable to the shareholders of FTIL
is bound to come down. Correspondingly, the ‘marketable value’ of
such shares will also fall.
73. The impugned Division Bench judgment has incorrectly held that
the economic value of shares cannot be taken into account. In fact,
from the Director’s Report of NSEL dated 20.07.2015, it is specifically
124
stated under the caption, “(vi) civil suits / complaints / writs / public
interest litigation” that:
“xxx xxx xxx
c) The Company received a legal opinion to the
effect that the Company is not liable for payment under
the provisions of SGF in the bye-laws. Further in case
of e-Series contract related transactions, no major
infirmity in underlying physical stock was observed.
Therefore, at this stage and in the opinion of the
Management of the Company, relying upon the legal
advices, and as per the provisions of bye-laws of the
exchange there are no direct ascertainable financial
claims against the company. The Company may be
exposed to liabilities in case of any adverse outcome of
these investigations / enquiries or legal cases or any
other investigations / enquires or suits which may arise
at a later date.”
This is further clarified in the consolidated financial statement made for
the financial year 2014-2015 as follows:
“Risk of un-identified financial irregularities
In view of the specific scope of the forensic audits and
the limitations in the forensic audits and investigations,
there is inherent a risk that material errors, fraud and
other illegal acts may exist that could remain
undetected.
Risk of adverse outcome of investigation/enquiry by
law enforcement agencies
Several agencies such as the Police (EOW), Ministry
of Corporate Affairs (MCrA), Enforcement Directorate
(ED), CBI and the Income Tax Department etc. are
currently investigating / enquiring the extent of alleged
irregularities and any breach of law. The matters are
also sub judice before various forums including the
Hon’ble Mumbai High Court. The Company may be
exposed to liabilities in case of any adverse outcome of
these investigations or any other investigations which
may arise at a later date.”
125
From the Director’s Report and consolidated financial statements of
NSEL, it becomes clear that the company may be exposed to liabilities
in case of any adverse outcome in any of the proceedings that may be
pending, as a result of which, it may have to pay back the whole or
some part of the INR 5600 crore owed to the alleged investors/traders
by the 24 defaulters who are members of NSEL. This would certainly
impact the ‘economic value’ of shares held in FTIL as this is one factor
that would, post amalgamation, depress the market value of shares
held by such shareholder, and would also impact the dividend payable
on such shares post amalgamation.
74. The impugned judgment has also held that no material was
produced before the Court to show that share prices would in fact
plummet post-amalgamation. This is despite the fact that the
impugned judgment itself refers to the fact that since the publication of
the draft order on 21.10.2014, the share value which was INR 211.10,
dropped to INR 174.55 ten days later. The Division Bench then goes
on to state that it is not possible to hold that any case of serious
erosion in economic value has at all been made out, inasmuch as by
21.10.2014, when the draft order of amalgamation was made available
to companies, the news of collapse of NSEL’s exchange was already
126
in public domain. This is wholly incorrect for the reason that the news
of collapse took place in July, 2014, i.e., over two months before the
publication of the draft order. It is well known that the stock market is
extremely sensitive to the slightest event that may render a company
less profitable. Over two months is too long a period to relate a share
value of INR 211.10 drastically falling to INR 174.55. On the other
hand, it is obvious that the publication of the draft order on 21.10.2014
had the impact of the share price reducing by a substantial amount,
ten days later. In fact, a reference to the share prices of NSEL
furnished by the learned Additional Solicitor General makes it clear
that the moment the final amalgamation order dated 12.02.2016 was
publicised, the share price fell from INR 89.90 on 12.02.2016 to INR
73.90 on 24.02.2016 and further to INR 73.10 on 29.02.2016.
Incidentally, the High Court realised this, and finally incorrectly
concludes, “there is thus substantial compliance with the provisions of
Section 396(3).” Given the fact that the assessment order dated
01.04.2015 did not provide any compensation to either the
shareholders or creditors of FTIL for the economic loss caused by the
amalgamation in breach of Section 396(3), it is clear that an important
condition precedent to the passing of the final amalgamation order was
not met. On this ground also, therefore, the final amalgamation order
127
has to be held to be ultra vires Section 396 of the Companies Act, and,
being arbitrary and unreasonable, violative of Article 14 of the
Constitution of India.
75. However, the learned Senior Advocates for the respondents
have argued that an order of nil compensation is equally an order that
is passed under Section 396(3) which could have been appealed
against but was not appealed against. For this reason, therefore, it is
not correct to state that the condition precedent mentioned in Section
396(4)(aa) has not been fulfilled. It will be noticed that the language
used in the appeal provision, i.e. Section 396(3A), is “any person
aggrieved by any assessment of compensation made by the
prescribed authority under sub-section (3) may…… appeal to the
Tribunal, and thereupon the assessment of the compensation shall be
made by the Tribunal.” The pre-requisites for the application of subsection (3A) are that a person first be aggrieved by an “assessment of
compensation” “made” by the prescribed authority. Where no
assessment of compensation whatsoever is made by the prescribed
authority (and on the facts here, the prescribed authority has not, in
fact, stated that for the reasons given by it, compensation awarded to
FTIL, its shareholders and creditors is nil), no person can be aggrieved
by an order which does not assess any compensation, which may be
128
interfered with by the Appellate Tribunal which must then assess the
compensation for itself. The statute clearly entitles such shareholders
and creditors to have compensation assessed first by the prescribed
authority and then by the appellate authority. This Court, in Institute of
Chartered Accountants of India v. L.K. Ratna and Ors., [1986] 3
SCR 1049, held that the defect in observing the rules of natural justice
in the trial administrative body cannot be cured by observing such
rules of natural justice in the appellate body. It was held:
“It is then urged by learned counsel for the
appellant that the provision of an appeal under Section
22-A of the Act is a complete safeguard against any
insufficiency in the original proceeding before the
Council, and it is not mandatory that the member
should be heard by the Council before it proceeds to
record its finding. Section 22-A of the Act entitles a
member to prefer an appeal to the High Court against
an order of the Council imposing a penalty under
Section 21(4) of the Act. It is pointed out that no
limitation has been imposed on the scope of the
appeal, and that an appellant is entitled to urge before
the High Court every ground which was available to
him before the Council. Any insufficiency, it is said, can
be cured by resort to such appeal. Learned counsel
apparently has in mind the view taken in some cases
that an appeal provides an adequate remedy for a
defect in procedure during the original proceeding.
Some of those cases as mentioned in Sir William
Wade’s erudite and classic work on “Administrative
Law” (5th Edn.). But as that learned author observes (at
p. 487), “in principle there ought to be an observance
of natural justice equally at both stages”, and
“if natural justice is violated at the first stage,
the right of appeal is not so much a true right
129
of appeal as a corrected initial hearing:
instead of fair trial followed by appeal, the
procedure is reduced to unfair trial followed
by fair trial.”
And he makes reference to the observations of
Megarry, J. in Leary v. National Union of Vehicle
Builders [(1971) 1 Ch. 34, 49]. Treating with another
aspect of the point, that learned Judge said:
“If one accepts the contention that a defect of
natural justice in the trial body can be cured
by the presence of natural justice in the
appellate body, this has the result of depriving
the member of his right of appeal from the
expelling body. If the rules and the law
combine to give the member the right to a fair
trial and the right of appeal, why should he be
told that he ought to be satisfied with an
unjust trial and a fair appeal? Even if the
appeal is treated as a hearing de novo, the
member is being stripped of his right to
appeal to another body from the effective
decision to expel him. I cannot think that
natural justice is satisfied by a process
whereby an unfair trial, though not resulting in
a valid expulsion, will nevertheless have the
effect of depriving the member of his right of
appeal when a valid decision to expel him is
subsequently made. Such a deprivation would
be a powerful result to be achieved by what in
law is a mere nullity; and it is no mere triviality
that might be justified on the ground that
natural justice does not mean perfect justice.
As a general rule, at all events, I hold that a
failure of natural justice in the trial body
cannot be cured by a sufficiency of natural
justice in an appellate body.”
The view taken by Megarry, J. was followed by the
Ontario High Court in Canada in Re Cardinal and
Board of Commissioners of Police of City of Cornwall,
[(1974) 42 D.L.R. (3d) 323]. The Supreme Court of
New Zealand was similarly inclined in Wislang v.
130
Medical Practitioners Disciplinary Committee, [(1974) 1
N.Z.L.R. 29] and so was the Court of Appeal of New
Zealand in Reid v. Rowley [(1977) 2 N.Z.L.R. 472].”
(at pp. 1065-1066)
This judgment was the subject matter of comment in Union Carbide
Corporation v. Union of India, [1991] Supp (1) SCR 251, where this
Court held, following the judgment in Charan Lal Sahu v. Union of
India, (1990) 1 SCC 613, that non-compliance with the obligation to
issue notices to persons effected by the Bhopal gas leak did not, for
this reason alone, vitiate the settlement that was entered into with
Union Carbide by the Government on their behalf. This Court, in
passing, commented that the principle laid down in Leary v. National
Union of Vehicle Builders, [1971] Ch. 34 might perhaps be too broad
a generalisation, except in cases involving public interest. This was an
observation made in answer to an argument by Shri Shanti Bhushan,
stating that a defect of natural justice always goes to the root of the
matter. Ultimately, given the fact that the settlement fund was held to
be sufficient to meet the needs of just compensation to the victims of
the Bhopal gas leak tragedy, it was held that the grievance on the
score of not hearing the victims first would not really survive. However,
what is of fundamental importance is the fact that in the present
situation, a clear statutory right is given to every member or creditor
131
who shall be entitled to an assessment of compensation, first by the
prescribed authority and then, a right of appeal to the Appellate
Tribunal. In such cases, therefore, the orders of “non-assessment” by
the prescribed authority can more appropriately be challenged in
judicial review proceedings, in which the High Court, acting under
Article 226 of the Constitution of India can, if an infraction of Section
396(3) is found, send the matter back to the prescribed authority to
determine compensation after which the right of appeal under subsection (3A) of Section 396 would then follow. In fact, in Writ Petition
2743 of 2014, which challenged both the draft order and the final order
of amalgamation, the appellant took out a chamber summons for
amendment of its writ petition to challenge the order of assessment of
compensation, dated 01.04.2015, which amendment was allowed vide
order dated 16.02.2016. The order of “non-assessment” of
compensation has thus been challenged by FTIL in proceedings under
Article 226 of the Constitution of India. Even otherwise, this is a case
where there is complete non-application of mind by the authority
assessing compensation to the rights and interests which the
shareholders and creditors of FTIL have and which are referred to in
Section 396(3) of the Act. This being the case, it is clear that Section
396(3) has not been followed either in letter or in spirit.
132
76. In conclusion, though other wide-ranging arguments were made
with respect to the validity of the Central Government amalgamation
order, we have not addressed the same as we have held that the order
dated 12.02.2016 is ultra vires Section 396 of the Companies Act, and
violative of Article 14 of the Constitution of India for the reasons stated
by us hereinabove. The appeals are accordingly allowed, and the
impugned judgment of the Bombay High Court is set aside. The writ
petition is disposed of in light of this judgment.
…………………………J.
(R.F. Nariman)
…………………………J.
New Delhi (Vineet Saran)
April 30, 2019.
133
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4476 OF 2019
(Arising out of Special Leave Petition (Civil) No. 4210 of 2018)
63 MOONS TECHNOLOGIES LTD.
(FORMERLY KNOWN AS FINANCIAL
TECHNOLOGIES INDIA LTD.) & ORS. … APPELLANT
VERSUS
UNION OF INDIA & ORS. … RESPONDENT
WITH
CIVIL APPEAL NO. 4478 OF 2019
(Arising out of Special Leave Petition (Civil) No.4652 of 2018)
WITH
CIVIL APPEAL NO. 4477 OF 2019
(Arising out of Special Leave Petition (Civil) No.4239 of 2018)
WITH
CIVIL APPEAL NO. 4479 OF 2019
(Arising out of Special Leave Petition (Civil) No.4659 of 2018)
WITH
CIVIL APPEAL NO. 4481 OF 2019
(Arising out of Special Leave Petition (Civil) No.4816 of 2018)
WITH
CIVIL APPEAL NO. 4480 OF 2019
(Arising out of Special Leave Petition (Civil) No. 4720 of 2018)
WITH
WRIT PETITION (CIVIL) NO.368 OF 2019
1
JUDGMENT
R.F. NARIMAN, J.
1. Leave granted.
2. This batch of appeals and writ petition raises questions as to the
applicability and construction of Section 396 of the Companies Act,
1956, which deals with compulsory amalgamation of companies by a
Central Government order when this becomes essential in the public
interest. The appellant, 63 Moons Technologies Ltd. (hereinafter
referred to as “FTIL”, which name was changed to 63 Moons
Technologies Ltd. on 27.05.2016), is a 99.99% shareholder of the
National Spot Exchange Ltd. (hereinafter referred to as “NSEL”), and
is a listed company. About 45% of the shareholding of FTIL is held by
Shri Jignesh Shah and family, and about 43% of the shareholding is
held by members of the Indian public. Approximately 5% of the
shareholding is held by institutional investors. FTIL is a profitable
company, having a positive net worth of over INR 2500 crore, and is in
the business of providing software which is used for trading by brokers
and exchanges across the country. FTIL has about 900 employees,
and a Board of Directors which is different from the Board of Directors
of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL
2
was incorporated in 2005 by Multi Commodities Exchanges [“MCX”]
and its nominees. NSEL provided an electronic platform for trading of
commodities between willing buyers and sellers through brokers
representing them. On 05.06.2007, the Union of India issued an
exemption notification under Section 27 of the Forward Contracts
(Regulation) Act, 1952 [“FCRA”] exempting forward contracts of oneday duration for sale and purchase of commodities traded on NSEL from operation of the provisions of the FCRA. NSEL commenced
operations in October 2008. On 27.04.2012, the Department of
Consumer Affairs [“DCA”] issued a show cause notice to NSEL as to
why action should not be initiated against it for permitting transactions
in alleged violation of the exemption granted to it under the FCRA.
NSEL replied to the show cause notice on 29.05.2012 stating that it
had not violated the exemption granted to it. Without adjudicating upon
the show cause notice, on 12.07.2013, the DCA directed NSEL to give
an undertaking that no further contracts shall be launched until further
instructions, and that all existing contracts will be settled on due dates.
This was effectively a “freezing” order. On 22.07.2013, NSEL gave an
undertaking to the DCA.
3. Earlier, in January 2013, representatives of MMTC Ltd., a
Government of India undertaking, which was one of the trading
3
members of NSEL, visited some of the warehouses which were at
different locations in order to verify stocks therein and reported
existence of full commodity stock in the said warehouses. Sometime in
July 2013, 13,000 persons who traded on the platform of NSEL
claimed to have been duped by other trading members (being 24 in
number), who defaulted in payment of obligations amounting to
approximately INR 5600 crore. Due to the sudden and abrupt
stoppage of fresh contracts, and media reports about the same,
market participation on NSEL’s platform reduced considerably, forcing
NSEL to suspend trading and close its spot exchange operations w.e.f.
31.07.2013. The Forward Markets Commission [“FMC”] recommended
to the DCA on 12.08.2013 that steps be taken to verify quantity and
quality of commodities at various warehouses; financial status of
buyers and trading members be ascertained, and the liability be fixed
on promoters of NSEL, i.e., FTIL. On 14.08.2013, NSEL issued a
press release in which Shri Sinha, its CEO/MD, made a statement that
he and his management team were responsible for all operations at
NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL by
Grant Thornton LLP, and the Union of India, on 30.09.2013, ordered
inspection of the books of accounts of NSEL and FTIL under Section
209A of the Companies Act. On the same day, the Economic Offences
4
Wing [“EOW”] registered cases against Directors and key
management personnel of the NSEL and FTIL, trading members of
NSEL, and brokers of NSEL under various provisions of the Indian
Penal Code and the Maharashtra Protection of Interest of Depositors
Act, 1999 [“MPID Act”]. Several suits were filed by the traders who
allegedly have been duped, the most important of which is Suit No.173
of 2014 pending in the Bombay High Court, which is a representative
suit filed under Order I Rule 8 of the Code of Civil Procedure, 1908
[“CPC”]. NSEL also filed third-party notices in the said suit for recovery
of INR 5600 crore against 24 defaulter traders. It has also filed various
arbitration proceedings against them, and is in the process of recovery
of INR 3365 crore out of INR 5600 crore, which are in the form of court
decrees and arbitration awards.
4. On 17.12.2013, based on the Grant Thornton report dated
21.09.2013, the FMC passed an order declaring that FTIL was not “fit
and proper” to hold equity in any commodity exchanges, and must
dilute its shareholding to not more than 2% of the paid-up equity
capital of MCX. The said order is under challenge in Writ Petition No.
337 of 2014 before the Bombay High Court. On 28.02.2014, the
Division Bench of the Bombay High Court refused a prayer for stay of
the aforesaid order, stating that findings of fact of a serious nature
5
have been recorded against the appellant, and the fraud perpetrated is
to the tune of INR 5500 crore.
5. On 06.01.2014, the Economic Offences Wing, Mumbai, filed
chargesheets against the Managing Director and CEO of NSEL, Shri
Sinha, the Head of Warehousing of NSEL, Shri Babu Kanvi, and two
other defaulters. In the chargesheet, it was revealed that the aforesaid
three employees of NSEL, in exchange for monetary kickbacks, had
colluded with the defaulters to enable them to trade on NSEL’s
platform without depositing adequate goods in the warehouses, in
breach of rules and byelaws of NSEL.
6. On 18.08.2014, the FMC, vide a letter to the Union of India,
suggested that FTIL and NSEL be merged. Meanwhile, in the
representative Suit No. 173 of 2014, vide order dated 02.09.2014, the
Bombay High Court appointed a three-member committee consisting
of Mr. Justice V.C. Daga, Mr. J. Solomon, and Mr. Yogesh Thar for
ascertaining and crystallising the liability of the defaulters and to assist
in recovery of debts from the defaulters. This committee continues to
function even on date. Thus, in addition to INR 3365 crore, i.e., the
total of decrees and arbitration awards against the defaulters, this
high-level committee has also crystallised a further sum of INR 835.88
6
crore to be recovered from the defaulters, which is pending before the
Bombay High Court.
7. On 19.09.2014, the Ministry of Finance, Government of India,
issued a notification withdrawing the exemption granted to NSEL vide
notification dated 05.06.2007. Exemptions granted to the National
Commodity and Derivatives Exchange Ltd. (NCDEX) Spot Exchange
and the National Agricultural Produce Market Committee (APMC) were
also withdrawn as the Government was of the view that ready delivery
or spot delivery contracts in commodities ought not to be traded on
commodities exchanges at all. On 15.10.2014, Dr. K.P Krishnan,
Additional Secretary, Department of Economic Affairs, wrote a letter to
the Ministry of Corporate Affairs stating that FTIL and NSEL appear to
be maintaining separate identities for a fraudulent purpose, i.e., to
deprive investors of their money. As a result, there is a need to lift the
corporate veil in order to unearth the fraud, as a result of which,
amalgamation of two companies, where one has defrauded market
participants and the other company is cash-rich and capable of
addressing the payment crisis more effectively. It was therefore
proposed to merge FTIL and NSEL under Section 396 of the
Companies Act. On 21.10.2014, a draft order of amalgamation, made
in accordance with Section 396(3) of the Companies Act, was
7
circulated to the relevant stakeholders. As a result, FTIL filed Writ
Petition No. 2743 of 2014 on 10.11.2014, in which it challenged the
impugned draft order. On 27.11.2014, the Bombay High Court directed
the parties to maintain status quo. On 16.12.2014, the Union of India
filed an affidavit in reply, categorically confirming that the impugned
draft order has been made by the Central Government on the basis of
the FMC’s proposal dated 18.08.2014. On 04.02.2015, the Bombay
High Court vacated the status quo order, and passed an order allowing
FTIL, NSEL, and their shareholders to file their objections to the draft
amalgamation order. Meanwhile, under Section 396(3), a
compensation order was made on 01.04.2015, which involved
compensation only to a particular shareholder of NSEL. On
28.08.2015, the Central Government issued a notification to merge the
functions of the FMC with the Securities and Exchange Board of India
[“SEBI”] w.e.f. 28.09.2015. On the same day, the FCRA was also
repealed. Thus, SEBI was now vested with the powers of the FMC
which is to be governed by the Securities and Exchange Board of India
Act, 1992 [“SEBI Act”].
8. FTIL and NSEL were granted a hearing on their objections to the
impugned draft amalgamation order by a committee consisting of Shri
Pritam Singh, Additional Secretary to the Government of India, and
8
Shri H.P. Chaturvedi, Joint Secretary and Legal Advisor, Ministry of
Law and Justice in October 2015, pursuant to a Bombay High Court
order in the Writ Petition 2743 of 2014 pending before it.
9. On 12.02.2016, a final amalgamation order was passed in terms
of Section 396(3), thereby merging FTIL and NSEL, wherein all assets
and liabilities of NSEL would become assets and liabilities of FTIL. The
writ petition already filed was amended on 28.03.2016 to include a
challenge to this order. On 04.12.2017, the impugned judgment of the
Bombay High Court was passed in which the said writ petition was
dismissed.
10. We have heard Shri Mukul Rohatgi, Shri Vikas Singh, Dr. A.M.
Singhvi, and Shri Kavin Gulati, learned Senior Advocates, and Shri
Arvind Lakhawat, learned Advocate, on behalf of the appellants.
According to learned counsel, the first important point to be noted is
that in company law, the holding company, viz. FTIL, is distinct and
separate from its subsidiary, viz., NSEL. It was pointed out to us that
there are separate and independent Boards of Directors for managing
the day-to-day affairs of both companies, which deal in completely
different businesses. It was pointed out that FTIL has never
participated in the profits of NSEL, and except for receiving annual
9
maintenance charges for providing technology-related services by way
of fees, FTIL has not derived any revenue from NSEL. In fact, over a
long period of nine years, FTIL has received only a sum of INR 84
crore from NSEL which, in any case, is deposited by FTIL in the
Bombay High Court pursuant to an order dated 12.06.2015 in Writ
Petition No. 2187 of 2015. Learned counsel were also at pains to point
out that NSEL has not defrauded anybody since it is only a platform.
Currently, the business of NSEL is closed, whereas, on the other hand,
the business of FTIL is flourishing. A compulsory amalgamation order
would be ultra vires Section 396 if the only object is to foist
unadjudicated liability of NSEL on FTIL. It was also pointed out that the
basis of the amalgamation order was a letter by the FMC, which in turn
was based on a “forensic” audit report of 2013 by Grant Thornton. The
so-called report itself stated that there is no independent verification of
information provided, and consequently, would not constitute an audit,
let alone a forensic audit. It also stated that should additional
information become available, which impacts upon conclusions
reached in the report, Grant Thornton reserved the right to amend their
findings, which are not intended to be interpreted to be either legal
advice or opinion; in short, that the findings themselves were
inconclusive.
10
11. Learned counsel have argued that the impugned order is ultra
vires Section 396 for many reasons. First and foremost, the condition
precedent to passing an amalgamation order is that compensation be
assessed under Section 396(3) of the Act. Compensation has to be
assessed qua both the transferor and transferee company. In the
present case, compensation has been assessed only for NSEL or its
shareholders, without any compensation being awarded to FTIL or its
shareholders. Secondly, a member or creditor is required to be placed
in the same position “as nearly as possible”. In the present case, the
amalgamated company would become a company of negative net
worth upon amalgamation, having had a positive net worth of almost
INR 2800 crore pre-amalgamation. This being so, the very basis for
application of Section 396 would disappear as the amalgamated
company, i.e., the transferee company would have to pay the
compensation that is assessed. This obviously cannot be done when
the amalgamated company itself becomes a negative net worth
company. It was then argued that the amalgamation order interfered
with the judicial process in that decrees and arbitral awards obtained
by NSEL against defaulters are wholly ignored. Further, the process of
adjudication, which will determine whether there are defaults and
whether they need to be paid back, has been short-circuited by
11
amalgamating NSEL with FTIL. Thus, the learned counsel have all
argued that various conditions precedent for applicability of Section
396 are wholly absent. Also, in the present case, the Central
Government has not applied its mind to whether such an order is, first
of all, “essential”. Secondly, unadjudicated so-called liabilities to
persons who are members of one particular exchange can hardly be
said to be something which requires the Central Government to
amalgamate both companies in the “public interest”. The public
interest consists of the interests of the general public which would
include, inter alia, the interest of the 63,000 shareholders of FTIL, who
are now going to be mulcted with a huge liability which would reduce
the market value of their shares to nil. They have cited several
judgments to buttress these submissions.
12. Thus, the amalgamation order oversteps recognised separation
of powers’ limits, and is therefore, ultra vires both Section 396 of the
Companies Act and the Constitution of India. It was then argued that
there are three grounds in support of the order of amalgamation, which
are to be found in the impugned judgment, namely:
A. Restoring / safeguarding public confidence in forward
contracts and exchanges which are an integral and essential part
12
of the Indian economy and financial system, by consolidating the
businesses of NSEL and FTIL;
B. Giving effect to the business realities of the case by
consolidating the businesses of FTIL and NSEL and preventing
FTIL from distancing itself from NSEL, which is even otherwise
its alter ego; and
C. Facilitating NSEL in recovering dues from the defaulters by
pooling human and financial resources of FTIL and NSEL
Admittedly, reasons A and B are not in the draft order. This being so,
obviously, no objections or suggestions could be made qua reasons A
and B, as a result of which the final order would, therefore, be ultra
vires Section 396(3) of the Companies Act.
13. All the stated objectives at page 1 of the amalgamation order
itself – (a) to leverage combined assets, capital and reserves; (b) to
achieve economy of scale; (c) efficient administration; (d) gainful
settlement of rights and liabilities of stakeholders and creditors; (e) to
consolidate businesses; and (f) to ensure coordination and policy – are
totally vague and do not lead to any application of mind to such
amalgamation order being essential in public interest. Article 31A of
the Constitution of India was relied upon, and it was argued that
13
amalgamation under Article 31A(1)(c) of two or more corporations can
only be made in public interest or in order to secure proper
management of any of the corporations, which is wholly missing in the
present case. It was also argued that only Shri Pritam Singh had
signed the order which dismissed the objections, even though the
objections were heard by a two-member committee. They also made
submissions that even otherwise, the impugned order was violative of
natural justice and of Articles 14, 19, and 300A of the Constitution of
India. Also, since the amalgamation order is based upon an order of
the FMC, which in turn is based upon the Grant Thornton report, which
was delivered in a great hurry, and with such disclaimers that it could
never be relied upon to render final findings, as has been done by the
amalgamation order, the amalgamation order itself would be without
application of mind, excessive and arbitrary, and violative of Article 14
of the Constitution of India on this score alone.
14. When it came to the impugned judgment, the learned counsel for
the appellants were at pains to point out that when the impugned
judgment held that no compensation need be paid to FTIL as the
number of shares in the amalgamated company of shareholders
remain the same, economic value or market value of the shares was
totally ignored. Thus, in ignoring economic value, a totally artificial,
14
formal, and non-substantial test has been applied by the Bombay High
Court, which says that there is no necessity to compensate the
shareholders of FTIL, even though once they become members of the
amalgamated company, their shares would be worth nil on the date of
amalgamation. And, in the event of winding up, they would get back
nothing. It was also pointed out that the three grounds of the
amalgamation order, being reasons for the amalgamation order, which
were accepted by the Bombay High Court, are grounds which do not
exist. In ground A, for example, restoring / safeguarding public
confidence in forward contracts and exchanges which are an integral
and essential part of the Indian economy, does not obtain as there
were only three commodity exchanges in the country, all of which were
shut down w.e.f. September 2014. No similar exchanges have been
created subsequently. In any case, the business done at such
exchanges cannot be said to be an integral and essential part of the
Indian economy. Reason B, which is that NSEL is an alter ego of FTIL,
is pending adjudication in the suits filed in the Bombay High Court. To
come to a conclusion that one is the alter ego of the other is not only
contrary to the facts pointed out hereinabove, namely, that the
businesses of the two companies are entirely different and the
management of both companies is by completely different and distinct
15
Boards of Directors. Thus, to arrive at the conclusion that one
company is the alter ego of the other, without adjudication, would itself
be arbitrary and violative of Article 14 of the Constitution of India. The
only reason which would remain, therefore, would be reason C, which
is that the real object of the entire exercise to recover alleged dues
from alleged defaulters pre-adjudication and pending adjudication,
which would be looking at the problem in a wholly one-sided way, and
would be an excessive invasion of the rights of the shareholders and
creditors of FTIL, all of whom have overwhelmingly voted against
amalgamation. In fact, it is pointed out that there is no question of
“public interest” and Section 396 is actually used in order to penalise
“Ram”, namely, NSEL and FTIL, for the default of “Shyam”, namely, the
24 alleged defaulters, when not even a single default or any civil or
criminal wrong can be attributed either to FTIL or to NSEL. The
impugned order would therefore also fail on the ground of
proportionality, which is a facet of Article 14. For all these reasons, in
addition, the impugned order ought to be struck down as ultra vires
Article 31A of the Constitution of India and Section 396 of the
Companies Act, and be declared to be violative of Article 14, Article 19
and Article 300A of the Constitution of India.
16
15. Shri Shyam Divan, learned Senior Advocate appearing on behalf
of Respondent No. 4, NSEL Investors Action Group, supported the
impugned judgment in its entirety. According to the learned Senior
Advocate, it must never be forgotten that FTIL held 99.9998% of
NSEL’s shares, and that NSEL was promoted by and is part of the
FTIL group. The Board of Directors of NSEL is entirely under the
control of FTIL. NSEL’s exchange was treated, held out, and
represented by FTIL to be its own, and was part of its “exchange
verticals”. Shri Jignesh Shah is the common linchpin of both the
companies. He holds 45% shares of FTIL and is its Chairman-cumManaging Director. He is also Vice Chairman on the Board of NSEL,
being one of the “key managerial personnel” of the aforesaid company.
He also was a member of the Audit Committee of NSEL. All the
minutes of the Board meetings of NSEL were regularly tabled at the
Board meetings of FTIL, showing therefore, that FTIL has full
knowledge of the goings-on in NSEL. NSEL’s outward emails were
routed through an outbox called “FT outbox” through which all emails
of all FTIL-group companies were routed. What is clear, therefore, is
that on a reading of the Grant Thornton report, NSEL has, at least from
2009, promoted what are called “paired contracts” in commodities
which were, in fact, financing transactions, which were totally distinct
17
from sale and purchase transactions in commodities. In fact, by April to
July, 2013, 99% of the turnover of NSEL was made up of such paired
contracts. This mechanism was in breach of the conditions of
exemption granted to NSEL dated 05.06.2007, and in breach of the
provisions of the FCRA. Contrary to what was actually going on in
NSEL, NSEL kept inducing persons to come to its platform by
reiterating that they deal only with commodities and spot delivery of
the same. It is only in 2012 that the FMC, being apprised of the real
activities of NSEL, wrote to the DCA, indicating that its business was in
complete breach of the FCRA. What is extremely important is that Shri
Jignesh Shah made representations to the DCA and the FMC on
10.07.2013, in which he stated that NSEL had full stock of
commodities as collateral and had 10-20% of open position as margin
money. He also stated that the stock currently held in NSEL’s 120
warehouses was valued at around INR 6000 crore. It is in July, 2013
that the payment crisis of INR 5600 crore arose on NSEL, FTIL
admitting that this was the result of a fraud. On 14.08.2013, NSEL
wrote to the FMC, setting out a detailed settlement plan. The plan
indicated the period within which the entire dues would be paid, with
simple interest at 8% to 16% per annum. This plan was an abject
failure. As a result, a forensic audit was conducted by Grant Thornton,
18
which in its report dated 21.09.2013, came out with damning facts and
figures as to the real operations of NSEL, namely, that they are not a
commodity exchange, but a finance exchange, and that no
commodities were really in stock. As a result, the FMC issued show
cause notices and then passed its order dated 17.12.2013 based on
the aforesaid report, in which it found NSEL guilty of severe
malpractice. Based on this order, the draft order and final order of
amalgamation were then made. Shri Divan was at pains to point out
that as early as on 18.08.2014, the FMC had written a detailed letter to
the Secretary, Ministry of Corporate Affairs, in which it indicated that as
NSEL was financially incapable of repaying all those investors/traders
who allegedly got duped, it would be expedient in public interest to
amalgamate NSEL with its parent, FTIL, so that its parent’s resources
could be used to repay these debts. He then argued that the reason
for the amalgamation order was not merely the repayment of debts of
the allegedly duped investors/traders, but to instil confidence in
commodity markets, for it is only when their debts are immediately
paid would persons come forward to platforms like NSEL to trade in
commodities. According to the learned Senior Advocate, there was no
breach of natural justice in passing the final amalgamation order as
FTIL and NSEL were both heard pursuant to a Bombay High Court
19
order, even though Section 396 of the Companies Act does not require
any hearing. He also argued that the order of amalgamation is of the
nature of delegated legislation and is not an administrative order, as a
result of which, the immunity granted by Article 31A to “all laws”
dealing with such amalgamation from challenge on the ground of
Articles 14 and 19 would come into full play. This being so, none of the
grounds taken up by the appellants could be gone into as they all
pertained to infractions of Articles 14 and 19 of the Constitution of
India. According to the learned Senior Advocate, the order was passed
after being satisfied on the objective facts set out hereinabove that it
was essential in public interest to pass such order and could not,
therefore, be held to be ultra vires. He also supported the judgment of
the High Court when it stated that the economic value of shares of
FTIL is not the subject matter of Section 396, and that, therefore, it
was not necessary to provide FTIL’s shareholders any compensation
under Section 396(3).
16. Shri Rakesh Dwivedi, learned Senior Advocate also appearing
on behalf of Respondent No.4, supplemented the submissions of Shri
Divan. According to him, nowhere does the Central Government order
direct any payment to be made by the amalgamated company. The
amalgamation is only so that the finances of FTIL can be used to
20
pursue on-going litigation as NSEL does not have the wherewithal to
do so. Thus, it is wholly incorrect for the appellants to say that FTIL will
become mulcted with the liabilities of NSEL, as a result of which the
shareholders of FTIL will suffer. He added that the overwhelming
majority of shares in FTIL are owned by Shri Jignesh Shah and his
family (45%) and by Shri Ravi Sheth and Shri Bharat Sheth (8%).
Thus, the majority shares held in FTIL are by two masterminds of the
scam. That apart, after the scam, 24% of the shares have been
purchased by speculators, taking advantage of the low price at which
such shares were offered. Such persons, therefore, are purely
speculative investors who do not need to be compensated under
Section 396 of the Act. Also, the economic value of shares, if at all it is
to be taken into account, is an uncertain and fluctuating phenomenon.
As examples, he stated that the book value of a share of FTIL, after
the scam broke out, was only INR 2/-, whereas the listed value actually
went up after the FMC order of 17.12.2013. All this, therefore, is
dependent on market forces, and share price varies according to
market forces and not as a result of any amalgamation that is effected.
He also added that it is incorrect to state that one of the conditions
precedent for applicability of Section 396 was absent. Even if a
compensation order was made awarding nil compensation to
21
shareholders and creditors of FTIL, they could have appealed against
the same. Not having done so, it cannot be said that the Central
Government order was passed without adhering to the provisions of
Section 396(3) and (4) of the Act. When it came to the three grounds
of public interest stated by the High Court, the learned Senior
Advocate argued that grounds (a) and (b) are only inferences to be
drawn from facts which are all stated in the order, and therefore, need
not have been in the draft order. There is thus no infirmity or breach of
principles of natural justice as provided in Section 396(3) and (4). He
was at pains to analyse Article 31A, and stated that the expression
“public interest” contained in Article 31A will have to be construed
broadly. Equally, the word “essential” in Section 396 is essentiality
according to the Central Government, and thus, very wide latitude
needs to be extended to the Government when it exercises its
discretion, stating that it is essential in public interest to amalgamate
two companies. He laid great emphasis on the judgment in Ganesh
Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645
[“Ganesh Bank”], stressing that amalgamations that are made under
Section 45 of the Banking Regulation Act, like amalgamations made
under Section 396, can be made so that a weak entity merge with a
strong entity in the interest of the depositors of the weak entity. He also
22
cited various judgments to show that stock exchanges are intimately
linked with the economy of the country, and therefore, if anything goes
wrong with them, there is a direct link with public interest. He
emphasized the fact that in Section 396(3), the shareholders of FTIL
only need to be compensated “as nearly as may be” and that
mathematical precision is not necessary. He then distinguished the
judgment in Mohinder Singh Gill v. Chief Election Commissioner,
(1978) 1 SCC 405 [“Mohinder Singh Gill”], cited by the appellants,
stating that where larger public interest is involved, the ratio of that
judgment will not apply. He cited two judgments in support of this
proposition. He also went on to cite certain judgments which
distinguished K.I. Shephard v. Union of India, (1987) 4 SCC 431
[“K.I. Shephard”], and therefore, argued that the Central Government
order passed under Section 396 is really in the nature of delegated
legislation and need not conform to any natural justice outside what is
provided for in the Section itself. He then cited certain judgments on
lifting of the corporate veil, and ended by saying that as was held in
J.K. (Bombay) (P) Ltd. v. New Kaiser-i-Hind Spinning and Weaving
Co. Ltd., [1969] 2 SCR 866 [“J.K. (Bombay) (P) Ltd.”], the Central
Government order would have statutory force, and therefore, cannot
be said to be a mere administrative order.
23
17. Shri Arvind Datar, learned Senior Advocate appearing on behalf
of SEBI, fully supported the impugned judgment and took us through
various portions of it. He was at pains to point out that the Grant
Thornton report was a report of a forensic auditor chosen by NSEL
itself, though required to do so by the FMC. He took us through the
FMC order dated 17.12.2013 meticulously, and said that none of the
findings therein could be assailed by either FTIL or NSEL. He then
referred to the Central Government order and supported the High
Court judgment’s upholding of it. He then relied upon the Director’s
Report of NSEL dated 20.07.2015, and balance sheet as on
31.03.2015 to show that no potential liability of INR 5600 crore is at all
referred to in the Director’s Report or in the balance sheet. He was at
pains to point out, therefore, that NSEL itself was an exchange which
made it clear that it would not be responsible for any liabilities incurred
by its members except to the extent of the SG fund created out of the
members’ contribution. He then argued that given the magnitude of the
scam that broke out in July 2013, the Government had to act. It could
have chosen one of many ways in which to act, but since it had bona
fide chosen the amalgamation route provided by Section 396 of the
Companies Act, it is obvious that in dealing with a scam of this
magnitude, the Government has acted in public interest.
24
18. Ms. Pinky Anand, learned Additional Solicitor General appearing
on behalf of the Union of India, meticulously took us through a long list
of dates and events which showed that NSEL had flouted the
conditions of its exemption order and had never really carried out
ready delivery or spot delivery contracts in goods. Indeed, according to
her, NSEL never had a single registered warehouse in its name as the
Warehousing Development and Regulatory Authority had rejected
NSEL’s application for registration of its warehouses as far back as on
16.05.2011. Therefore, NSEL stating that it had 120 warehouses
owned by itself was a misrepresentation made to the public from the
very beginning. It is also clear, that when the scam broke out, Grant
Thornton, as forensic auditor, went into the affairs of NSEL and came
out with a number of key findings, which she referred to and took us
through portions of the Grant Thornton report. The FMC order dated
17.12.2013 was also referred to and relied upon by her. She also
referred to the fact that the exemption order dated 05.06.2007 granted
to NSEL was withdrawn on 19.09.2014 as commodities markets which
were supposed to be markets where spot delivery of goods took place,
had never in fact taken place and therefore, exemption granted to all
spot exchanges dealing in commodities, including two other spot
exchanges that existed, were withdrawn. However, the Bombay Stock
25
Exchange Ltd. (BSE), the National Stock Exchange of India Ltd.
(NSE), and MCX continued with commodity trading, but not on a spot
basis. She also referred us to a subsequent event, that is an event
subsequent even to the impugned judgment, namely, to a serious
fraud investigation report dated 31.08.2018 which, according to her,
corroborated all the findings made by Grant Thornton, the FMC, and
the Central Government by its final order. She then argued that
Section 396 of the Companies Act is a special, self-contained,
standalone code by itself and must be read as such, and that all
procedural aspects of Section 396 have been complied with on the
facts of the present case. The satisfaction of the Central Government
that it is essential in public interest to act under Section 396 is purely
subjective satisfaction. She referred to and relied upon Bacha F.
Guzdar v. Commissioner of Income Tax, [1955] 1 SCR 876 [“Bacha
F. Guzdar”], to support the reasoning of the High Court on the
compensation order. She also referred to and relied upon the share
market prices to show that market fluctuations took place on their own,
and that share prices plummeted only as a result of the scam which
came to light in July, 2013. She also stated that since neither FTIL nor
its shareholders and creditors filed any appeal against the
compensation order, they waived their right to do so. She then
26
supported the final amalgamation order and stated that it was manifest
that it was made in “public interest”. For this, she relied upon a number
of judgments to support her contention that “public interest” has to be
given a broad connotation. She also countered the submission of Shri
Rohatgi that of the two persons who heard the objections, only one
person signed, and therefore, their report would be non-est. She
stated that this technical objection cannot stand in the way of the final
government order which took into account all objections and
suggestions made, and answered all of them. She also referred to the
role of stock markets in the national economy and stated that to prop
up stock and commodities exchanges is certainly in public interest.
The three distinct grounds on public interest, found by the High Court,
are more than sufficient to sustain the impugned Central Government
order. Finally, in her last written argument, she relied upon two
judgments of this Court, namely, Union of India v. G. Ganayutham,
(1997) 7 SCC 463 and Om Kumar v. Union of India, (2001) 2 SCC
386, stating the current position of the doctrine of proportionality in
administrative law.
19. Shri Tushar Mehta, learned Solicitor General for India, who also
appeared on behalf of the Union of India, re-emphasised the facts
which led to the final amalgamation order. According to him, the
27
impugned order dated 12.02.2016 is based on public interest as it
reflects the Government’s reaction to a large scam which broke in the
year 2013, and which effected the commodities market generally. He
dwelt at some length on subjective satisfaction and judicial review, and
referred to Barium Chemicals Ltd. v. Company Law Board, [1966]
Supp SCR 311 [“Barium Chemicals”], Rohtas Industries Ltd. v. S.D.
Agarwal, [1969] 3 SCR 108 [“Rohtas Industries”], and other
judgments to emphasise that it was not for the Court to sit in judgment
over the sufficiency of the reasons for which the Central Government
passed its order in public interest. He also stated that the right to
choose between different courses of action is a right inherent in a
responsive government, and it is only when such choice is so unfair or
unreasonable that no reasonable person would have taken such
action, that the Court can intervene. For this purpose, he cited
Haryana Financial Corporation v. Jagdamba Oil Mills, (2002) 3
SCC 496. According to him, essentiality is not reviewable except by
the Wednesbury test, and the Court should ask itself the question as to
whether no reasonable person could have concluded that the
impugned order was essential in the public interest. He reiterated that
the order dated 12.02.2016 is not ultra vires Section 396 as several
findings which show that amalgamation is essential in public interest
28
has been arrived at on the basis of undisputed facts, and that
therefore, the said order should be upheld. He also argued that such
order, if passed, is in the nature of delegated legislation, and therefore,
does not have to satisfy any rules of natural justice outside what is
prescribed by Section 396 itself which, according to him, has been
procedurally and substantively complied with, as reflected in the order
dated 12.02.2016.
20. Shri Neeraj Kishan Kaul, learned Senior Advocate, also
appearing on behalf of some of the alleged duped investors/traders,
referred to the Maharashtra Protection of Interest of Depositors (in
Financial Establishments) Act, 1999, and stated that the persons who
had invested monies in the commodities exchange of NSEL have been
held to be “depositors” by a judgment dated 01.10.2015 of the High
Court of Bombay, from which an SLP has been dismissed by this
Court. He also brought to our notice another judgment dated
01.11.2018, also of the Bombay High Court, in which NSEL and FTIL
had breached an injunction order, and had to apologise and pay back
monies in order to avoid being held guilty of contempt of court. He also
stressed that “economic value” of shares is a stranger to Section
396(3) of the Companies Act. He then relied upon two reports of the
RBI, both of which say that the modern trend in corporate law
29
worldwide is that if losses are borne by a corporation, it is the
shareholders who should bear the brunt.
21. Having heard learned counsel for all the parties, it is necessary
at this juncture to first set out Article 31A of the Constitution of India,
which states:
“31A. Saving of laws providing for acquisition of
estates, etc.—(1) Notwithstanding anything contained in
Article 13, no law providing for—
xxx xxx xxx
(c) the amalgamation of two or more
corporations either in the public interest or in
order to secure the proper management of any
of the corporations, or
xxx xxx xxx
shall be deemed to be void on the ground that it is
inconsistent with, or takes away or abridges any of the
rights conferred by article 14 or article 19.
xxx xxx xxx”
“Law” has been defined in Article 13(3) as follows:
“13. Laws inconsistent with or in derogation of the
fundamental rights.—
xxx xxx xxx
(3) In this article, unless the context otherwise requires,
—
(a) “law” includes any Ordinance, order, byelaw, rule, regulation, notification, custom or
usage having in the territory of India the force
of law;
30
xxx xxx xxx”
It will thus be seen that any “law” providing for the amalgamation of
two or more corporations in public interest is immune from challenge
on grounds relatable to Article 14 or Article 19 of the Constitution of
India. It is not disputed that Section 396 of the Companies Act is such
a law.
22. Section 396 of the Companies Act, 1956, reads as under:
“396. Power of Central Government to provide for
amalgamation of companies in public interest.—(1)
Where the Central Government is satisfied that it is
essential in the public interest that two or more
companies should amalgamate, then, notwithstanding
anything contained in Sections 394 and 395 but subject
to the provisions of this section, the Central Government
may, by order notified in the Official Gazette, provide for
the amalgamation of those companies into a single
company with such constitution; with such property,
powers, rights, interests, authorities and privileges; and
with such liabilities, duties, and obligations; as may be
specified in the order.
(2) The order aforesaid may provide for the continuation
by or against the transferee company of any legal
proceedings pending by or against any transferor
company and may also contain such consequential,
incidental and supplemental provisions as may, in the
opinion of the Central Government, be necessary to give
effect to the amalgamation.
(3) Every member or creditor (including a debenture
holder) of each of the companies before the
amalgamation shall have, as nearly as may be, the
same interest in or rights against the company resulting
from the amalgamation as he had in the company of
which he was originally a member or creditor; and to the
31
extent to which the interest or rights of such member or
creditor in or against the company resulting from the
amalgamation are less than his interest in or rights
against the original company, he shall be entitled to
compensation which shall be assessed by such authority
as may be prescribed and every such assessment shall
be published in the Official Gazette.
The compensation so assessed shall be paid to the
member or creditor concerned by the company resulting
from the amalgamation.
(3A) Any person aggrieved by any assessment of
compensation made by the prescribed authority under
sub-section (3) may, within thirty days from the date of
publication of such assessment in the Official Gazette,
prefer an appeal to the Tribunal and thereupon the
assessment of the compensation shall be made by the
Tribunal.
(4) No order shall be made under this section, unless:
(a) a copy of the proposed order has been sent
in draft to each of the companies concerned;
(aa) the time for preferring an appeal under
sub-section (3A) has expired, or where any
such appeal has been preferred, the appeal
has been finally disposed of; and
(b) the Central Government has considered,
and made such modifications, if any, in the draft
order as may seem to it desirable in the light of
any suggestions and objections which may be
received by it from any such company within
such period as the Central Government may fix
in that behalf, not being less than two months
from the date on which the copy aforesaid is
received by that company, or from any class of
shareholders therein, or from any creditors or
any class of creditors thereof.
(5) Copies of every order made under this section shall,
as soon as may be after it has been made, be laid
before both Houses of Parliament.”
32
It will be seen that Section 396 provides for compulsory amalgamation
of companies in public interest. The said Section occurs in Chapter V
of the Companies Act which reads, “arbitrations, compromises,
arrangements and reconstructions”. Sections 391 to 394 deal with
voluntary compromises and arrangements, including amalgamation of
two or more companies. By way of contrast, Section 396 deals with
compulsory amalgamation of companies.
INTERPRETATION OF SECTION 396
23. There is no doubt whatsoever that Section 396 cannot be
challenged on the ground of Article 14 or Article 19, given Article 31A
of the Constitution of India. However, this does not mean that Section
396 must be construed in such a fashion that it would lead to arbitrary
or unreasonable results. In Prem Nath Raina v. State of Jammu &
Kashmir and Ors., (1983) 4 SCC 616, this Court, in dealing with a
challenge to the J&K Agrarian Reforms Act, 1976, which was protected
by Article 31A, held:
“9. ……The exclusion of a constitutional challenge under
Articles 14, 19 and 31 which is provided for by Article
31A does not justify in equity the irrational violation of
these articles. This Court did observe in Waman
Rao [Waman Rao v. Union of India, (1981) 2 SCC 362 :
AIR 1981 SC 271 : (1981) 2 SCR 1] that: “It may happen
that while existing inequalities are being removed, new
inequalities may arise marginally and incidentally” but
33
the legislature has to take care to see that even marginal
and incidental inequalities are not created without rhyme
or reason. The Government of J&K would do well to give
fresh consideration to the provisions contained in
Section 7(2) and modify the provisions regarding
residence in order that they may accord with reason and
commonsense. Article 31A does not frown upon reason
and commonsense.”
Equally, in Budhan Singh and Anr. v. Nabi Bux and Anr., [1970] 2
SCR 10, this Court, while construing Section 90 of the U.P. Zamindari
Abolition and Land Reforms Act, 1950, held:
“Before considering the meaning of the word “held”
in Section 9, it is necessary to mention that it is proper to
assume that the law-makers who are the representatives
of the people enact laws which the society considers as
honest, fair and equitable. The object of every legislation
is to advance public welfare. In other words as observed
by Crawford in his book on Statutory Constructions that
the entire legislative process is influenced by
considerations of justice and reason. Justice and reason
constitute the great general legislative intent in every
piece of legislation. Consequently where the suggested
construction operates harshly, ridiculously or in any other
manner contrary to prevailing conceptions of justice and
reason, in most instances, it would seem that the
apparent or suggested meaning of the statute, was not
the one intended by the law-makers. In the absence of
some other indication that the harsh or ridiculous effect
was actually intended by the legislature, there is little
reason to believe that it represents the legislative intent.”
(at pp. 15-16)
DERIVATIVE IMMUNITY OF THE CENTRAL GOVERNMENT ORDER
34
24. The next question is whether the Central Government’s order
made under Section 396 would also receive the protective umbrella of
Article 31A, given the fact that Section 396 is undoubtedly protected by
Article 31A.
25. A similar question was raised and considered with respect to an
order passed under the Essential Commodities Act, 1955. In Prag Ice
& Oil Mills v. Union of India, (1978) 3 SCC 459 [“Prag Ice & Oil
Mills”], by a majority judgment, it was held that the Mustard Oil (Price
Control) Order, 1977, passed under Section 3 of the Essential
Commodities Act, 1955 did not receive the immunity of Article 31B.
This Court held:
“46. Article 31A of the Constitution saves laws which
provide for matters mentioned in clauses (a) to (e)
thereof from a challenge under Articles 14, 19 or 31
notwithstanding anything contained in Article 13 of the
Constitution. Article 31B which was introduced by the
Constitution (First Amendment) Act, 1951, validates
certain Acts and Regulations by providing that without
prejudice to the generality of the provisions contained in
Article 31A, “none of the Acts and Regulations specified
in the Ninth Schedule nor any of the provisions thereof”
shall be deemed to be void, or ever to have become
void, on the ground that such Act, Regulation or
provision is inconsistent with, or takes away or abridges
any of the rights conferred by, any provisions of Part III.
On a plain reading of this article it seems to us
impossible to accept that the protective umbrella of the
Ninth Schedule takes in its everwidening wings not only
the Acts and Regulations specified therein but also
Orders and Notifications issued under those Acts and
35
Regulations. Article 31B constitutes a grave
encroachment on fundamental rights and doubtless as it
may seem that it is inspired by a radiant social
philosophy, it must be construed as strictly as one may,
for the simple reason that the guarantee of fundamental
rights cannot be permitted to be diluted by implications
and inferences. An express provision of the Constitution
which prescribes the extent to which a challenge to the
constitutionality of a law is excluded, must be construed
as demarcating the farthest limit of exclusion.
Considering the nature of the subject-matter which
Article 31B deals with, there is, in our opinion, no
justification for contending by judicial interpretation the
provisions of the field which is declared by that article to
be immune from challenge on the ground of violation or
abridgement of fundamental rights. The article affords
protection to Acts and Regulations specified in the Ninth
Schedule. Therefore, whenever a challenge to the
constitutionality of a provision of law on the ground that it
violates any of the fundamental rights conferred by Part
III is sought to be repelled by the State on the plea that
the law is placed in the Ninth Schedule, the narrow
question to which one must address oneself is whether
the impugned law is specified in that Schedule. If it is,
the provisions of Article 31B would be attracted and the
challenge would fail without any further inquiry. On the
other hand, if the law is not specified in the Ninth
Schedule, the validity of the challenge has to be
examined in order to determine whether the provisions
thereof invade in any manner any of the fundamental
rights conferred by Part III. It is thus no answer to say
that though the particular law, as for example a Control
Order, is not specified in the Ninth Schedule, the parent
Act under which the Order is issued is specified in that
Schedule.”
26. In the present case, this judgment has no direct application
except to say that Article 31A also constitutes a grave encroachment
on fundamental rights, and must be construed strictly. The expression
36
used in Article 31A is “law”, for which, one is to see the definition
contained in Article 13(3). “Law” in Article 13(3) certainly includes
“order”. The only question is whether this would include an
administrative order as well.
27. It is clear, on a reading of Article 13(3), that the expression “law”,
as defined in Article 13(3)(a), includes an Ordinance, rule, regulation,
notification, and custom or usage having in the territory of India the
force of law. Obviously, therefore, when the expression “order” is used,
it would take colour from Ordinance, rule, regulation, notification, which
are all legislative in nature, and not administrative. Even custom or
usage having the force of law refers to general rules of conduct, as
opposed to administrative orders passed on the facts of a given case.
Construing Article 31A in the light of Article 13(3)(a), it is clear that the
“order” referred to, can therefore, only be a legislative order.
Examples of legislative orders are of the kind dealt with in Prag Ice &
Oil Mills (supra) and Union of India and Anr. v. Cynamide India Ltd.
and Anr., (1987) 2 SCC 720 [“Cynamide India”], namely, orders
passed under statutes which are in the nature of subordinate
legislation, which deal generally with a whole class of persons who are
governed by the same in which general rules of conduct are laid down.
37
WHETHER THE CENTRAL GOVERNMENT ORDER IS ADMINISTRATIVE IN
NATURE
28. This brings us to what is the nature of the order of the Central
Government that is passed under Section 396. It has been argued on
behalf of the Union of India, relying upon a number of judgments, that
the nature of the order passed under Section 396 is that of delegated
legislation. This being the case, it would, therefore, get immunity from
challenge on the ground of Articles 14 and 19 of the Constitution of
India, as it would then amount to a “law” within the meaning of Article
31A read with Article 13(3)(b).
29. The difference between an order which is legislative in nature
and that which is administrative in nature has been discussed in some
of our judgments. Thus, in Cynamide India (supra), this Court drew a
distinction between administrative and legislative orders thus:
“7. …… Any attempt to draw a distinct line between
legislative and administrative functions, it has been said,
is ‘difficult in theory and impossible in practice’. Though
difficult, it is necessary that the line must sometimes be
drawn as different legal rights and consequences may
ensue. The distinction between the two has usually been
expressed as ‘one between the general and the
particular’. ‘A legislative act is the creation and
promulgation of a general rule of conduct without
reference to particular cases; an administrative act is the
38
making and issue of a specific direction or the
application of a general rule to a particular case in
accordance with the requirements of policy’. ‘Legislation
is the process of formulating a general rule of conduct
without reference to particular cases and usually
operating in future; administration is the process of
performing particular acts, of issuing particular orders or
of making decisions which apply general rules to
particular cases.’ It has also been said: ‘Rule-making is
normally directed toward the formulation of requirements
having a general application to all members of a broadly
identifiable class’ while, ‘an adjudication, on the other
hand, applies to specific individuals or situations’. But,
this is only a broad distinction, not necessarily always
true. Administration and administrative adjudication may
also be of general application and there may be
legislation of particular application only. That is not ruled
out. Again, adjudication determines past and present
facts and declares rights and liabilities while legislation
indicates the future course of action. Adjudication is
determinative of the past and the present while
legislation is indicative of the future.……”
In K.I. Shephard (supra), this Court dealt with a scheme for
amalgamation of three private banks with Punjab National Bank,
Canara Bank, and State Bank of India, in terms of separate schemes
drawn, merging each private bank with state banks under Section 45
of the Banking Regulation Act. It was urged that the order passed by
the Reserve Bank of India amalgamating these banks was legislative
in nature, as a result of which the principle of natural justice will not
apply. In turning down this contention, this Court held:
“9. …… Learned counsel for RBI and the transferee
banks have taken the stand that the scheme-making
39
process under Section 45 is legislative in character and,
therefore, outside the purview of the ambit of natural
justice under the protective umbrella whereof the need to
put the excluded employees to notice or enquiry arose. It
is well settled that natural justice will not be employed in
the exercise of legislative power and Mr Salve has rightly
relied upon a recent decision of this Court being Union
of India v. Cynamide India Ltd. [(1987) 2 SCC 720] in
support of such a position. But is the scheme-making
process legislative? Power has been conferred on the
RBI in certain situations to take steps for applying to the
Central Government for an order of moratorium and
during the period of moratorium to propose either
reconstruction or amalgamation of the banking company.
A scheme for the purposes contemplated has to be
framed by RBI and placed before the Central
Government for sanction. Power has been vested in the
Central Government in terms of what is ordinarily known
as a Henry VIII clause for making orders for removal of
difficulties. Section 45(11) requires that copies of the
schemes as also such orders made by the Central
Government are to be placed before both Houses of
Parliament. We do not think this requirement makes the
exercise in regard to schemes a legislative process. It is
not necessary to go to any other authority as the very
decision relied upon by Mr Salve in the case of
Cynamide India Ltd. [(1987) 2 SCC 720] lays down the
test. In para 7 of the judgment it has been indicated:
(SCC pp. 735-36)
“Any attempt to draw a distinct line between
legislative and administrative functions, it has
been said, is ‘difficult in theory and impossible
in practice’. Though difficult, it is necessary that
the line must sometimes be drawn as different
legal rights and consequences may ensue. The
distinction between the two has usually been
expressed as ‘one between the general and the
particular’. ‘A legislative act is the creation and
promulgation of a general rule of conduct
without reference to particular cases; an
administrative act is the making and issue of a
40
specific direction or the application of a general
rule to a particular case in accordance with the
requirements of policy’. ‘Legislation is the
process of formulating a general rule of conduct
without reference to particular cases and
usually operating in future; administration is the
process of performing particular acts, of issuing
particular orders or of making decisions which
apply general rules to particular cases.’ It has
also been said: ‘Rule-making is normally
directed towards the formulation of
requirements having a general application to all
members of a broadly identifiable class’ while,
‘an adjudication, on the other hand, applies to
specific individuals or situations’. But, this is
only a broad distinction, not necessarily always
true.”
Applying these tests it is difficult to accept Mr Salve’s
contention that the framing of the scheme under Section
45 involves a legislative process. There are similar
statutory provisions which require placing of material
before the two Houses of Parliament yet not involving
any legislative activity. The fact that orders made by the
Central Government for removing difficulties as
contemplated under sub-clause (10) are also to be
placed before the two Houses of Parliament makes it
abundantly clear that the placing of the scheme before
the two Houses is not a relevant test for making the
scheme-framing process legislative. We accordingly hold
that there is no force in the contention of Mr Salve that
the process being legislative, rules of natural justice
were not applicable.”
The fact that, under Section 396(5), the Central Government order has
to be laid before the Houses of Parliament also does not detract from
the fact that this order is administrative and not legislative in character.
Applying these judgments to the Central Government’s order passed
41
under Section 396, it is clear that the order directly impacts the rights
and liabilities of the companies, their shareholders and creditors,
sought to be amalgamated under the order. Such order is not an order
in general which applies to all such companies, but only to the
particular companies sought to be amalgamated. There is no general
rule of conduct, without reference to the particular case that is laid
down by such an order. The Central Government order, ultimately,
makes a specific direction qua two specific companies which are to be
amalgamated. It is clear that such an order is not in the nature of
legislation or delegated legislation.
30. Learned counsel appearing on behalf of the respondents have
cited New Bank of India Employees’ Union and Anr. v. Union of
India and Ors., (1996) 8 SCC 407 [“New Bank of India Employees’
Union”], which is a judgment which has distinguished K.I. Shephard
(supra). This judgment was concerned with Section 9 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980
[“Acquisition Act”], which requires schemes that have been framed
under the said Act to be laid before each House of Parliament for a
total period of thirty days, in which, Parliament is then given the power
to make any modification therein. Given the difference in language
between the provisions, namely, Section 45 of the Banking Regulation
42
Act and Section 9 of the Acquisition Act, this Court distinguished the
judgment of K.I. Shephard (supra) thus:
“32. The only other question which remains for
consideration is whether the conclusion of the High
Court that the scheme-making process under Section 9
of the Acquisition Act is not legislative is correct in law. In
view of our conclusions on the four questions
formulated, this question is not of much relevance but
since the High Court has recorded a conclusion and the
learned Additional Solicitor General and Shri Salve
advanced the argument we think it appropriate to answer
this question also. The High Court relied upon the
decision in Shephard case [(1987) 4 SCC 431 : 1987
SCC (L&S) 438 : (1988) 1 SCR 188] and came to hold
that the provisions of Section 45 of the Banking
Regulation Act being in pari materia with Section 9 of the
Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980, and the scheme framed under
Section 45 of the Banking Regulation Act, 1949 having
been held by this Court to be not legislative, the scheme
framed under the Acquisition Act as in the present case,
must also be held to be not a legislative one. It is
undisputed that in Shephard case [(1987) 4 SCC 431 :
1987 SCC (L&S) 438 : (1988) 1 SCR 188] the
amalgamation was of a private bank with a nationalised
bank and the provisions of the Banking Regulation Act,
1949 applied. This Court in Shephard case [(1987) 4
SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] on
examining Section 45(11) of the Banking Regulation Act,
1949 came to hold that merely because a scheme
framed is required to be laid before both the Houses of
Parliament after the same has been sanctioned by the
Central Government the scheme cannot be held to be
legislative in nature. But in our considered opinion the
High Court has failed to notice the fundamental
distinction between the provisions of Section 45 of the
Banking Regulation Act, 1949 and Section 9 of the
Acquisition Act. Under Section 9 of the Acquisition Act
under which Act the impugned scheme has been
43
framed, every scheme framed by the Central
Government has to be laid before each House of
Parliament for a total period of 30 days and Parliament
has the power to agree to the scheme and making any
modification or in giving to a decision that the scheme
should not be made and it is only thereafter the scheme
has the effect either in the modified form or does not
agree (sic). The essential distinction between the two
provisions therefore, is that whereas under the Banking
Regulation Act, 1949 the scheme framed has merely to
be placed before Parliament and nothing further but
under the Acquisition Act the scheme becomes effective
only after the same is placed before both the Houses of
Parliament and after Parliament makes such
modification and agrees to the scheme. In this view of
the matter the decision of this Court in Shephard case
[(1987) 4 SCC 431 : 1987 SCC (L&S) 438 : (1988) 1
SCR 188] has no application to a scheme framed under
the provisions of the Acquisition Act and in our
considered opinion, a scheme framed under Section 9 of
the Banking Companies Acquisition and Transfer of
Undertakings Act, 1980, is a legislative one. The High
Court was in error in holding the scheme not to be a
legislative one.”
Since Section 396(5) of the Companies Act is a provision akin to the
provision considered in the case of K.I. Shephard (supra), the ratio of
K.I. Shephard (supra) squarely applies. The judgment in New Bank of
India Employees’ Union (supra), therefore, is of no assistance, given
the statutory provision in the present case.
31. Learned Senior Advocates on behalf of the respondents then
cited the judgment in Quarry Owners’ Association v. State of Bihar
and Ors., (2000) 8 SCC 655. This judgment, in paragraphs 45 and 55,
44
held that even a simple laying of an order before Parliament is a
mandatory condition to be observed, and ordered that the particular
order in that case be laid before the legislature as it had not so been
laid earlier. This judgment again has nothing to do with whether, on
account of laying before the legislature, an order is administrative or
legislative in nature. This judgment also, therefore, does not carry us
very much further.
32. Learned Senior Advocates on behalf of the respondents then
cited a passage from J.K. (Bombay) (P) Ltd. (supra), and paragraph
23 in particular, in which this Court observed that an order made under
Section 391 of the Companies Act has statutory force. The fact that a
similar order made under Section 396 may also have statutory force
again does not answer the precise question before us, namely, as to
whether such orders having statutory force are administrative or
legislative in nature. This observation again does not carry the matter
very much further.
33. The order passed under Section 396 is qua particular companies
and does not lay down any general rule of conduct by itself, but in fact,
follows the general rule of conduct laid down by Section 396. Thus, the
Central Government order, made under Section 396, must conform to
45
the fundamental rights guaranteed by Articles 14 and 19(1)(g) of the
Constitution of India. This Court has held in a catena of decisions that
it is the substance of what is effected that counts when it comes to
infraction of a fundamental right, and not the form. Thus, in Thomas
Dana v. State of Punjab, [1959] Supp (1) SCR 274, Subba Rao, J., in
his dissenting opinion, stated:
“A fundamental right is transcendental in nature and
it controls both the legislative and the executive acts.
Article 13 explicitly prohibits the State from making any
law which takes away or abridges any fundamental right
and declares the law to the extent of the contravention
as void. The law therefore must be carefully scrutinized
to ascertain whether a fundamental right is infringed. It is
not the form but the substance that matters. If the
legislature in effect constitutes a judicial tribunal, but
calls it an authority, the tribunal does not become any
the less a judicial tribunal. Therefore, the correct
approach is first to ascertain with exactitude the content
and scope of the fundamental right and then to scrutinize
the provisions of the Act to decide whether in effect and
substance, though not in form, the said right is violated
or curtailed. Otherwise the fundamental right will be lost
or unduly restricted in our adherence to the form to the
exclusion of the content.”
(at p. 303)
Likewise, in Hamdard Dawakhana (Wakf) Lal Kuan, Delhi and Anr.
v. Union of India and Ors., [1960] 2 SCR 671, it was held as under:
“In the present case therefore (1) the
advertisements affected by the Act do not fall within the
words freedom of speech within Article 19(1)(a); (2) the
scope and object of the Act, its true nature and character
is not interference with the right of freedom of speech
46
but it deals with trade or business; and (3) there is no
direct abridgement of the right of free speech and a
mere incidental interference with such right would not
alter the character of the law; Ram Singh v. State of
Delhi [(1951) SCR 451-455]; Express Newspapers
(Private) Ltd. v. Union of India [(1959) SCR 12, 123-133]
It is not the form or incidental infringement that
determines the constitutionality of a statute in reference
to the rights guaranteed in Art. 19(1), but the reality and
substance. The Act read as a whole does not merely
prohibit advertisements relating to drugs and medicines
connected with diseases expressly mentioned in s. 3 of
the Act but they cover all advertisements which are
objectionable or unethical and are used to promote selfmedication or self-treatment. This is the content of the
Act. Viewed in this way, it does not select any of the
elements or attributes of freedom of speech falling within
Art. 19(1)(a) of the Constitution.”
(at pp. 690-691)
Likewise, in Sakal Papers (P) Ltd. and Ors. v. Union of India, [1962]
3 SCR 842, this Court held:
“It must be borne in mind that the Constitution must
be interpreted in a broad way and not in a narrow and
pedantic sense. Certain rights have been enshrined in
our Constitution as fundamental and, therefore, while
considering the nature and content of those rights the
Court must not be too astute to interpret the language of
the Constitution in so literal a sense as to whittle them
down. On the other hand the Court must interpret the
Constitution in a manner which would enable the citizen
to enjoy the rights guaranteed by it in the fullest measure
subject, of course, to permissible restrictions. Bearing
this principle in mind it would be clear that the right to
freedom of speech and expression carries with it the
right to publish and circulate one’s ideas, opinions and
views with complete freedom and by resorting to any
available means of publication, subject again to such
restrictions as could be legitimately imposed under
47
clause (2) of Article 19. ……… In Dwarkadas Shrinivas
v. Sholapur Spinning & Weaving Co. Ltd. [(1954) SCR
674] this Court has pointed out that in construing the
Constitution it is the substance and the practical result of
the act of the State that should be considered rather
than its purely legal aspect. The correct approach in
such cases should be to enquire as to what in substance
is the loss or injury caused to the citizen and not merely
what manner and method has been adopted by the
State in placing the restriction.”
(at pp. 857-858)
A Constitution Bench in Ajay Hasia and Ors. v. Khalid Mujib
Sehravardi and Ors., (1981) 1 SCC 722 also stated:
“7. While considering this question it is necessary to
bear in mind that an authority falling within the
expression “other authorities” is, by reason of its
inclusion within the definition of ‘State’ in Article 12,
subject to the same constitutional limitations as the
government and is equally bound by the basic obligation
to obey the constitutional mandate of the Fundamental
Rights enshrined in Part III of the Constitution. We must
therefore give such an interpretation to the expression
“other authorities” as will not stultify the operation and
reach of the fundamental rights by enabling the
government to its obligation in relation to the
Fundamental Rights by setting up an authority to act as
its instrumentality or agency for carrying out its functions.
Where constitutional fundamentals vital to the
maintenance of human rights are at stake, functional
realism and not facial cosmetics must be the diagnostic
tool, for constitutional law must seek the substance and
not the form. Now it is obvious that the Government may
act through the instrumentality or agency of natural
persons or it may employ the instrumentality or agency
of juridical persons to carry out its functions. In the early
days when the Government had limited functions, it
could operate effectively through natural persons
constituting its civil service and they were found
48
adequate to discharge governmental functions which
were of traditional vintage. But as the tasks of the
government multiplied with the advent of the welfare
State, it began to be increasingly felt that the framework
of civil service was not sufficient to handle the new tasks
which were often specialised and highly technical in
character and which called for flexibility of approach and
quick decision making. The inadequacy of the civil
service to deal with these new problems came to be
realised and it became necessary to forge a new
instrumentality or administrative device for handling
these new problems. It was in these circumstances and
with a view to supplying this administrative need that the
corporation came into being as the third arm of the
government and over the years it has been increasingly
utilised by the government for setting up and running
public enterprises and carrying out other public
functions. ……”
Also, in M.C. Mehta and Anr. v. Union of India and Ors. (Shriram –
Oleum Gas), (1987) 1 SCC 395, this Court held:
“2. Mr Divan, learned counsel appearing on behalf of
Shriram raised a preliminary objection that the court
should not proceed to decide these constitutional issues
since there was no claim for compensation originally
made in the writ petition and these issues could not be
said to arise on the writ petition. Mr Divan conceded that
the escape of oleum gas took place subsequent to the
filing of the writ petition but his argument was that the
petitioner could have applied for amendment of the writ
petition so as to include a claim for compensation for the
victims of oleum gas but no such application for
amendment was made and hence on the writ petition as
it stood, these constitutional issues did not arise for
consideration. We do not think this preliminary objection
raised by Mr Divan is sustainable. It is undoubtedly true
that the petitioner could have applied for amendment of
the writ petition so as to include a claim for
compensation but merely because he did not do so, the
49
applications for compensation made by the Delhi Legal
Aid and Advice Board and the Delhi Bar Association
cannot be thrown out. These applications for
compensation are for enforcement of the fundamental
right to life enshrined in Article 21 of the Constitution and
while dealing with such applications, we cannot adopt a
hyper-technical approach which would defeat the ends
of justice. This Court has on numerous occasions
pointed out that where there is a violation of a
fundamental or other legal right of a person or class of
persons who by reason of poverty or disability or socially
or economically disadvantaged position cannot approach
a court of law for justice, it would be open to any public
spirited individual or social action group to bring an
action for vindication of the fundamental or other legal
right of such individual or class of individuals and this
can be done not only by filing a regular writ petition but
also by addressing a letter to the court. If this Court is
prepared to accept a letter complaining of violation of the
fundamental right of an individual or a class of
individuals who cannot approach the court for justice,
there is no reason why these applications for
compensation which have been made for enforcement of
the fundamental right of the persons affected by the
oleum gas leak under Article 21 should not be
entertained. The court while dealing with an application
for enforcement of a fundamental right must look at the
substance and not the form. We cannot therefore sustain
the preliminary objection raised by Mr Divan.”
34. Various pre-requisites contained in the said Section must first be
satisfied before the Section can be said to operate. First and foremost,
the Central Government has to be “satisfied”, meaning thereby, that it
must, on certain objective facts, come to a conclusion that
amalgamation between two or more companies is necessary. This can
only be done if the Central Government finds it “essential”, i.e.,
50
necessary to do so. Also, this can only be done in “public interest” (the
Section originally contained the expression “national interest”. By
Amendment Act 65 of 1960, “national interest” was substituted by
“public interest”).
35. The Notes on Clauses relating to the original Section 396 reads
as follows:
“Clause 366—This is a new provision and it is intended
to provide, at the instance of the Government, for the
amalgamation of two or more companies in the national
interest. Occasionally, cases arise where such an
amalgamation in the national interest is clearly a
necessity. The observance of the usual procedure
prescribed by the existing Act in such cases will lead to
prolonged delays which will be detrimental to the
national interest. It has been made clear that any order
made by the Government should provide for the old
shareholders, and the old debenture holders and other
creditors, having the same interest in the company
resulting from the amalgamation as they had in the
original companies. Any order made by the Government
under this clause will be laid on the table of both Houses
of Parliament and will therefore be subject to the
Parliamentary scrutiny.”
What is important from the Notes on Clauses is the fact that it is only
“occasionally” that cases arise where an amalgamation in national
interest is “clearly a necessity”. It is made clear that the reason for
Section 396 is that the observance of the usual procedure prescribed
by the existing Act (namely, that contained in Sections 391 to 394) in
51
such cases will lead to prolonged delays, which will be detrimental to
national interest. The fact that the procedure contained in Sections 394
and 395 need not be carried out is made clear in the non-obstante
clause contained in Section 396(1).
36. Section 396(3), (3A), and (4) are also important. A condition
precedent to the passing of an order by the Central Government under
this Section is that every member or creditor of each of the companies
before amalgamation shall have, as nearly as may be, the same
interest in or rights against the company resulting from the
amalgamation as he had in the erstwhile company either as a member
or a creditor, and if this is not so, such member or creditor shall be
entitled to compensation which is to be assessed by such authority as
may be prescribed. From the order of such assessment, an appeal is
provided by sub-section (3A). What is important is the mandatory
language contained in sub-section (4), which states that no order shall
be made under the Section unless the time for preferring an appeal
under sub-section (3A) has expired, or where any such appeal has
been preferred, the appeal has been finally disposed of. This makes it
clear that unless an order of compensation is first made under subsection (3), and an appeal therefrom has either not been filed or has
been disposed of, no order of amalgamation can be made. Another
52
condition precedent is an inbuilt provision for natural justice, namely,
that a proposed draft order has first been sent to each of the
companies concerned. The companies may then send suggestions or
objections to the Central Government, which the Central Government
must first consider before passing the final order. Such objections and
suggestions can also be sent from any class of shareholders of either
of the companies, or from any creditors or class of creditors of either of
the companies.
“ WHERE THE CENTRAL GOVERNMENT IS SATISFIED”
37. With regard to similar language that is contained in Section
237(b) of the Companies Act, 1956, this Court, in Barium Chemicals
(supra), contained separate opinions as to what the phrase “in the
opinion of” contained in Section 237(b) meant. In Rohtas Industries
(supra), this Court adopted the test laid down by Hidayatullah, J. (as
he then was) and Shelat, J. as follows:
“Before taking action under Section 237(b)(i) and (ii),
the Central Government has to form an opinion that
there are circumstances suggesting that the business of
the company is being conducted with intent to defraud its
creditors, members or any other persons, or otherwise
for a fraudulent or unlawful purpose or in a manner
oppressive to any member or that the company was
formed for any fraudulent or unlawful purpose or that the
persons concerned in the formation or the management
of its affairs have in connection therewith been guilty of
53
fraud, misfeasance or other misconduct towards the
company or towards any of its members.
From the facts placed before us, it is clear that the
Government had not bestowed sufficient attention to the
material before it before passing the impugned order. It
seems to have been oppressed by the opinion that it had
formed about Shri S.P. Jain. From the arguments
advanced by Mr Attorney, it is clear that but for the
association of Mr S.P. Jain with the appellant-company,
the investigation in question, in all probabilities would not
have been ordered. Hence, it is clear that in making the
impugned order irrelevant considerations have played an
important part.
The power under Sections 235 to 237 has been
conferred on the Central Government on the faith that it
will be exercised in a reasonable manner. The
department of the Central Government which deals with
companies is presumed to be an expert body in
company law matters. Therefore, the standard that is
prescribed under Section 237(b) is not the standard
required of an ordinary citizen but that of an expert. The
learned Attorney did not dispute the position that if we
come to the conclusion that no reasonable authority
would have passed the impugned order on the material
before it, then the same is liable to be struck down. This
position is also clear from the decision of this Court in
Barium Chemicals and Anr. v. Company Law Board and
Anr. [(1966) Supp SCR 311].
(at p. 119)
xxx xxx xxx
The decision of this Court in Barium Chemicals case
which considered the scope of Section 237(b) illustrates
that difficulty. In that case Hidayatullah, J. (our present
Chief Justice) and Shelat, J. came to the conclusion that
though the power under Section 237(b) is a discretionary
power the first requirement for its exercise is the honest
formation of an opinion that the investigation is
necessary and the further requirement is that “there are
circumstances suggesting” the inference set out in the
section; an action not based on circumstances
suggesting an inference of the enumerated kind will not
54
be valid; the formation of the opinion is subjective but the
existence of the circumstances relevant to the inference
as the sine qua non for action must be demonstratable; if
their existence is questioned, it has to be proved at least
prime facie; it is not sufficient to assert that those
circumstances exist and give no clue to what they are,
because the circumstances must be such as to lead to
conclusions of certain definiteness; the conclusions must
relate to an intent to defraud, a fraudulent or unlawful
purpose, fraud or misconduct. In other words they held
that although the formation of opinion by the Central
Government is a purely subjective process and such an
opinion cannot be challenged in a court on the ground of
propriety, reasonableness or sufficiency, the authority
concerned is nevertheless required to arrive at such an
opinion from circumstances suggesting the conclusion
set out in sub-clauses (i), (ii) and (iii) of Section 237(b)
and the expression “circumstances suggesting” cannot
support the construction that even the existence of
circumstances is a matter of subjective opinion. Shelat,
J. further observed that it is hard to contemplate that the
Legislature could have left to the subjective process both
the formation of opinion and also the existence of
circumstances on which it is to be founded; it is also not
reasonable to say that the clause permitted the Authority
to say that it has formed the opinion on circumstances
which in its opinion exist and which in its opinion suggest
an intent to defraud or a fraudulent or unlawful purpose.
On the other hand Sarkar, C.J. and Mudholkar, J. held
that the power conferred on the Central Government
under Section 237(b) is a discretionary power and no
facet of that power is open to judicial review. Our Brother
Bachawat, J., the other learned Judge in that Bench did
not express any opinion on this aspect of the case.
Under these circumstances it has become necessary for
us to sort out the requirements of Section 237(b) and to
see which of the two contradictory conclusions reached
in Barium Chemicals case is in our judgment, according
to law. But before proceeding to analyse Section 237(b)
we should like to refer to certain decisions cited at the
bar bearing on the question under consideration.
55
(at pp. 120-121)
xxx xxx xxx
“Coming back to Section 237(b), in finding out its true
scope we have to bear in mind that that section is a part
of the scheme referred to earlier and therefore the said
provision takes its colour from Sections 235 and 236. In
finding out the legislative intent we cannot ignore the
requirements of those sections. In interpreting Section
237(b) we cannot ignore the adverse effect of the
investigation on the company. Finally we must also
remember that the section in question is an inroad on
the powers of the company to carry on its trade or
business and thereby an infraction of the fundamental
right guaranteed to its shareholders under Article 19(1)
(g) and its validity cannot be upheld unless it is
considered that the power in question is a reasonable
restriction in the interest of the general public. In fact the
vires of that provision was upheld by majority of the
Judges constituting the Bench in Barium Chemicals case
principally on the ground that the power conferred on the
Central Government is not an arbitrary power and the
same has to be exercised in accordance with the
restraints imposed by law. For the reasons stated earlier
we agree with the conclusion reached by Hidayatullah, J.
and Shelat, JJ. in Barium Chemicals case that the
existence of circumstances suggesting that the
company’s business was being conducted as laid down
in sub-clause(1) or the persons mentioned in sub-clause
(2) were guilty of fraud or misfeasance or other
misconduct towards the company or towards any of its
members is a condition precedent for the Government to
form the required opinion and if the existence of those
conditions is challenged, the courts are entitled to
examine whether those circumstances were existing
when the order was made. In other words, the existence
of the circumstances in question are open to judicial
review though the opinion formed by the Government is
not amenable to review by the courts. As held earlier the
required circumstances did not exist in this case.”
(at pp. 128-129)
56
38. In Western U.P. Electric Power & Supply Co. Ltd. v. State of
U.P. and Anr., (1969) 1 SCC 817, this Court dealt with a situation
where the Indian Electricity Act, 1910 was amended by the U.P. Act 30
of 1961, by which, Section 3(2)(e)(ii) provided that the grant of a
licence shall not, in any way, hinder or restrict the supply of energy by
the State Government or the State Electricity Board within the same
area where the State Government deems such supply “necessary in
public interest”. In that case, the High Court had observed that the
State Government was the sole judge of whether the direct supply of
energy was or was not in public interest, the nature of the power being
subjective. This Court, in upsetting the High Court’s view, held:
“11. We are unable to agree with that view. By Section
3(2)(e) as amended by the U.P. Act 30 of 1961, the
Government is authorised to supply energy to
consumers within the area of the licensee in certain
conditions: exercise of the power is conditioned by the
Government deeming it necessary in public interest to
make such supply. If challenged, the Government must
show that exercise of the power was necessary in public
interest. The Court is thereby not intended to sit in
appeal over the satisfaction of the Government. If there
be prima facie evidence on which a reasonable body of
persons may hold that it is in the public interest to supply
energy directly to the consumers, the requirements of
the statute are fulfilled. Normally a licensee of electrical
energy, though he has no monopoly, is the person
through whom electrical energy would be distributed
within the area of supply, since the licensee has to lay
down electric supply-lines for transmission of energy and
to maintain its establishment. An inroad may be made in
57
that right in the conditions which are statutorily
prescribed. In our judgment, the satisfaction of the
Government that the supply is necessary in the public
interest is in appropriate cases not excluded from judicial
review.”
39. Close upon the heels of these judgments, this Court, after
considering Barium Chemicals (supra) and Rohtas Industries
(supra), restated the test as to judicial review of administrative action
in Rampur Distillery Co. Ltd. v. Company Law Board, [1970] 2 SCR
177 as follows:
“The scheme of the section implies investigation and
a decision on the matters set out therein. Section 326
lays down conditions by sub-section (1)(a) in which the
Central Government may override the resolution of the
general body of share-holders in certain specified
conditions. Upon the Central Government is imposed a
duty not to accord approval to the appointment or reappointment of a proposed managing agent in the light
of clauses (a), (b) and (c) of sub-section (2). Though the
sub-section is enacted in form negative, in substance it
confers power upon the Government subject to the
restrictions imposed by clauses (a), (b) and (c), to refuse
to accord approval. Sub-section (2) imposes upon the
Central Government the duty not to accord approval to
appointment or re-appointment of a proposed managing
agent unless the Government is satisfied that the
managing agent is a fit and proper person to be
appointed, that the conditions of the managing agency
agreement are fair and reasonable and that the
managing agent has fulfilled the conditions which the
Central Government required him to fulfil. Thereby the
Central Government is not made the final arbiter of the
existence of the grounds on which the satisfaction may
be founded. The satisfaction of the Government which is
determinative is satisfaction as to the existence of
58
certain objective facts. The recital about satisfaction may
be displaced by showing that the conditions did not exist,
or that no reasonable body of persons properly versed in
law could have reached the decision that they did.
The Courts, however, are not concerned with the
sufficiency of the grounds on which the satisfaction is
reached. What is relevant is the satisfaction of the
Central Government about the existence of the
conditions in clauses (a), (b) and (c) of sub-section (2) of
Section 326. The enquiry before the Court, therefore, is
whether the Central Government was satisfied as to the
existence of the conditions. The existence of the
satisfaction cannot be challenged except probably on the
ground that the authority acted mala fide. But if in
reaching its satisfaction the Central Government
misapprehended the nature of the conditions, or
proceeded upon irrelevant materials, or ignores relevant
materials, the jurisdiction of the Courts to examine the
satisfaction is not excluded. ……”
(at p. 183)
In M.A. Rasheed and Ors. v. State of Kerala, [1975] 2 SCR 93, after
following Rohtas Industries (supra), the test for judicial review of
administrative decisions was stated most felicitously by Ray, C.J. thus:
“Administrative decisions in exercise of powers even
if conferred in subjective terms are to be made in good
faith on relevant consideration. The courts inquire
whether a reasonable man could have come to the
decision in question without misdirecting himself on the
law or the facts in a material respect. The standard of
reasonableness to which the administrative body is
required to conform may range from the courts’ own
opinion of what is reasonable to the criterion of what a
reasonable body might have decided. The courts will find
out whether conditions precedent to the formation of the
opinion have a factual basis.”
(at p. 99)
59
In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81, this
Court exhaustively set out parameters for judicial review of the
subjective satisfaction of the detaining authority in a preventive
detention case. This Court held:
“9. But that does not mean that the subjective
satisfaction of the detaining authority is wholly immune
from judicial reviewability. The courts have by judicial
decisions carved out an area, limited though it be, within
which the validity of the subjective satisfaction can yet
be subjected to judicial scrutiny. The basic postulate on
which the courts have proceeded is that the subjective
satisfaction being a condition precedent for the exercise
of the power conferred on the Executive, the Court can
always examine whether the requisite satisfaction is
arrived at by the authority : if it is not, the condition
precedent to the exercise of the power would not be
fulfilled and the exercise of the power would be bad.
There are several grounds evolved by judicial decisions
for saying that no subjective satisfaction is arrived at by
the authority as required under the statute. The simplest
case is whether the authority has not applied its mind at
all; in such a case the authority could not possibly be
satisfied as regards the fact in respect of which it is
required to be satisfied. Emperor v. Shibnath Bannerji
[AIR 1943 FC 75 : 1944 FCR 1 : 45 Cri LJ 341] is a case
in point. Then there may be a case where the power is
exercised dishonestly or for an improper purpose : such
a case would also negative the existence of satisfaction
on the part of the authority. The existence of “improper
purpose”, that is, a purpose not contemplated by the
statute, has been recognised as an independent ground
of control in several decided cases. The satisfaction,
moreover, must be a satisfaction of the authority itself,
and therefore, if, in exercising the power, the authority
has acted under the dictation of another body as the
Commissioner of Police did in Commissioner of Police v.
Gordhandas Bhanji [AIR 1952 SC 16 : 1952 SCR 135]
60
and the officer of the Ministry of Labour and National
Service did in Simms Motor Units Ltd. v. Minister of
Labour and National Service [(1946) 2 All ER 201] the
exercise of the power would be bad and so also would
the exercise of the power be vitiated where the authority
has disabled itself from applying its mind to the facts of
each individual case by self-created rules of policy or in
any other manner. The satisfaction said to have been
arrived at by the authority would also be bad where it is
based on the application of a wrong test or the
misconstruction of a statute. Where this happens, the
satisfaction of the authority would not be in respect of
the thing in regard to which it is required to be satisfied.
Then again, the satisfaction must be grounded “on
materials which are of rationally probative value”.
Machindar v. King [AIR 1950 FC 129 : 51 Cri LJ 1480 :
1949 FCR 827]. The grounds on which the satisfaction is
based must be such as a rational human being can
consider connected with the fact in respect of which the
satisfaction is to be reached. They must be relevant to
the subject-matter of the inquiry and must not be
extraneous to the scope and purpose of the statute. If
the authority has taken into account, it may even be with
the best of intention, as a relevant factor something
which it could not properly take into account in deciding
whether or not to exercise the power or the manner or
extent to which it should be exercised, the exercise of
the power would be bad. Pratap Singh v. State of Punjab
[AIR 1964 SC 72 : (1964) 4 SCR 733]. If there are to be
found in the statute expressly or by implication matters
which the authority ought to have regard to, then, in
exercising the power, the authority must have regard to
those matters. The authority must call its attention to the
matters which it is bound to consider.”
In Tata Cellular v. Union of India (1994) 6 SCC 651, after an
exhaustive review of the latest English judgments, this Court held:
“77. The duty of the court is to confine itself to the
question of legality. Its concern should be:
61
1. Whether a decision-making authority
exceeded its powers?
2. committed an error of law,
3. committed a breach of the rules of natural
justice,
4. reached a decision which no reasonable
tribunal would have reached or,
5. abused its powers.
Therefore, it is not for the court to determine whether a
particular policy or particular decision taken in the
fulfilment of that policy is fair. It is only concerned with
the manner in which those decisions have been taken.
The extent of the duty to act fairly will vary from case to
case. Shortly put, the grounds upon which an
administrative action is subject to control by judicial
review can be classified as under:
(i) Illegality: This means the decision-maker
must understand correctly the law that
regulates his decision-making power and
must give effect to it.
(ii) Irrationality, namely, Wednesbury
unreasonableness.
(iii) Procedural impropriety.
The above are only the broad grounds but it does not
rule out addition of further grounds in course of time.
As a matter of fact, in R. v. Secretary of State for the
Home Department, ex Brind [(1991) 1 AC 696], Lord
Diplock refers specifically to one development, namely,
the possible recognition of the principle of
proportionality. In all these cases the test to be adopted
is that the court should, “consider whether something
has gone wrong of a nature and degree which requires
its intervention”.”
40. In Bhikhubhai Vithlabhai Patel v. State of Gujarat, (2008) 4
SCC 144, this Court, in an elaborate judgment, referred to and
followed several judgments, including Barium Chemicals (supra), in
the context of Section 17 of the Gujarat Town Planning and Urban
62
Development Act, 1976, by which, if the State Government is of
opinion that substantial modifications in the draft development plan are
necessary, it may publish such modifications. This Court held:
“20. The State Government is entitled to publish the
modifications provided it is of opinion that substantial
modifications in the draft development plan are
necessary. The expression “‘is of opinion’ that
substantial modifications in the draft development plan
are necessary” is of crucial importance. Is there any
material available on record which enabled the State
Government to form its opinion that substantial
modifications in the draft development plan were
necessary? The State Government’s jurisdiction to make
substantial modifications in the draft development plan is
intertwined with the formation of its opinion that such
substantial modifications are necessary in the draft
development plan. The State Government without
forming any such opinion cannot publish the
modifications considered necessary along with notice
inviting suggestions or objections. We have already
noticed that as on the day when the Minister concerned
took the decision proposing to designate the land for
educational use the material available on record were:
(a) the opinion of the Chief Town Planner;
(b) note dated 23-4-2004 prepared on the basis
of the record providing the entire background of
the previous litigation together with the
suggestion that the land should no more be
reserved for the purpose of South Gujarat
University and after releasing the lands from
reservation, the same should be placed under
the residential zone.
21. It is true that the State Government is not bound by
such opinion and is entitled to take its own decision in
the matter provided there is material available on record
to form opinion that substantial modifications in the draft
development plan were necessary. Formation of opinion
is a condition precedent for setting the law in motion
63
proposing substantial modifications in the draft
development plan.
22. Any opinion of the Government to be formed is not
subject to objective test. The language leaves no room
for the relevance of a judicial examination as to the
sufficiency of the grounds on which the Government
acted in forming its opinion. But there must be material
based on which alone the State Government could form
its opinion that it has become necessary to make
substantial modification in the draft development plan.
23. The power conferred by Section 17(1)(a)(ii) read with
proviso is a conditional power. It is not an absolute
power to be exercised in the discretion of the State
Government. The condition is formation of opinion—
subjective, no doubt—that it had become necessary to
make substantial modifications in the draft development
plan. This opinion may be formed on the basis of
material sent along with the draft development plan or on
the basis of relevant information that may be available
with the State Government. The existence of relevant
material is a precondition to the formation of opinion.
The use of word “may” indicates not only a discretion but
an obligation to consider that a necessity has arisen to
make substantial modifications in the draft development
plan. It also involves an obligation to consider which of
the several steps specified in sub-clauses (i), (ii) and (iii)
should be taken.
24. The proviso opens with the words “where the State
Government is of opinion that substantial modifications
in the draft development plan and regulations are
necessary, …”. These words are indicative of the
satisfaction being subjective one but there must exist
circumstances stated in the proviso which are conditions
precedent for the formation of the opinion. Opinion to be
formed by the State Government cannot be on imaginary
grounds, wishful thinking, however laudable that may be.
Such a course is impermissible in law. The formation of
the opinion, though subjective, must be based on the
material disclosing that a necessity had arisen to make
substantial modifications in the draft development plan.
64
25. The formation of the opinion by the State
Government is with reference to the necessity that may
have had arisen to make substantial modifications in the
draft development plan. The expression: “as considered
necessary” is again of crucial importance. The term
“consider” means to think over; it connotes that there
should be active application of the mind. In other words,
the term “consider” postulates consideration of all the
relevant aspects of the matter. A plain reading of the
relevant provision suggests that the State Government
may publish the modifications only after consideration
that such modifications have become necessary. The
word “necessary” means indispensable, requisite,
indispensably requisite, useful, incidental or conducive,
essential, unavoidable, impossible to be otherwise, not
to be avoided, inevitable. The word “necessary” must be
construed in the connection in which it is used. (See
Advanced Law Lexicon, P. Ramanatha Aiyar, 3rd Edn.,
2005.)
26. The formation of the opinion by the State
Government should reflect intense application of mind
with reference to the material available on record that it
had become necessary to propose substantial
modifications to the draft development plan.”
41. However, Shri Tushar Mehta, learned Solicitor General for India,
relied upon M. Jhangir Bhatusha and Ors. v. Union of India and
Ors., 1989 Supp (2) SCC 201, in particular, the passage at page 208
which reads as follows:
“13. …… Now it is the Central Government which has to
be satisfied, as the authority appointed by Parliament
under Section 25(2), that it is necessary in the public
interest to make the special orders of exemption. It has
set out the reasons which prompted it to pass the orders.
In our opinion, the circumstances mentioned in those
notifications cannot be said to be irrelevant or
unreasonable. It is not for this Court to sit in judgment on
65
the sufficiency of those reasons. The limitations on the
jurisdiction of the court in cases where the satisfaction
has been entrusted to executive authority to judge the
necessity for passing orders is well defined and has
been long accepted.”
These observations were made in the context of an argument that
differential treatment was accorded to the State Trading Corporation
vis-à-vis private importers in that the customs duty for the State
Trading Corporation had been reduced by notification under Section
25(2) of the Customs Act, 1962. What is important to note is that
judicial review consisted of examining whether the reasons which
prompted the Government to pass the exemption orders could be said
to be irrelevant or unreasonable. If so, the orders would be struck
down in exercise of judicial review.
42. Thus, at the very least, it is clear that the Central Government’s
satisfaction must be as to the conditions precedent mentioned in the
Section as correctly understood in law, and must be based on facts
that have been gathered by the Central Government to show that the
conditions precedent exist when the order of the Central Government
is made. There must be facts on which a reasonable body of persons
properly instructed in law may hold that it is essential in public interest
to amalgamate two or more companies. The formation of satisfaction
66
cannot be on irrelevant or imaginary grounds, as that would vitiate the
exercise of power.
“ ESSENTIAL”
43. The expression “essential” has been defined in P. Ramanath
Aiyer’s Law Lexicon (4th Edn.) as follows:
“Essential. Indispensably necessary; important in the
highest degree: requisite that which is required for the
continued existence of a thing.”
Black’s Law Dictionary (10th Edn.) defines “essential” as follows:
“essential, adj. (14c) 1. Of, relating to, or involving the
essence or intrinsic nature of something. 2. Of the
utmost importance; basic and necessary. 3. Having real
existence; actual.”
44. In J. Jayalalitha v. Union of India, (1999) 5 SCC 138, this Court
dealt with an argument that there is no guideline contained in Section
3(1) of the Prevention of Corruption Act, 1988, when the Section
empowers the Government to appoint as many Special Judges “as
may be necessary”. It was stated that this word has a precise meaning
and means “what is indispensable, needful or essential” [see
paragraph 14]. It is thus clear that the Central Government’s mind has
to be applied to whether a compulsory amalgamation under Section
67
396 is indispensably necessary, important in the highest degree, and
whether such amalgamation is both basic and necessary.
“ PUBLIC INTEREST”
45. The third pre-requisite of Section 396 is that the Central
Government must apply its mind when compulsorily amalgamating two
or more companies in the public interest. “Public interest” is an
expression which is wide and amorphous and takes colour from the
context in which it is used. However, like the expression “public
purpose”, what is important to be noted is that public interest is the
general interest of the community, as distinguished from the private
interest of an individual [see State of Bihar v. Maharajadhiraja Sir
Kameshwar Singh of Darbhanga and Ors., [1952] 3 SCR 889 at pp.
1073-1075].
46. This is echoed in Manimegalai v. Special Tehsildar (Land
Acquisition Officer) Adi Dravidar Welfare, (2018) 13 SCC 491 as
follows:
“14. Similarly, public purpose is not capable of precise
definition. Each case has to be considered in the light of
the purpose for which acquisition is sought for. It is to
serve the general interest of the community as opposed
to the particular interest of the individual. Public purpose
broadly speaking would include the purpose in which the
general interest of the society as opposed to the
68
particular interest of the individual is directly and vitally
concerned. Generally, the executive would be the best
judge to determine whether or not the impugned purpose
is a public purpose. Yet it is not beyond the purview of
judicial scrutiny. The interest of a section of the society
may be public purpose when it is benefitted by the
acquisition. The acquisition in question must indicate
that it was towards the welfare of the people and not to
benefit a private individual or group of individuals joined
collectively. Therefore, acquisition for anything which is
not for a public purpose cannot be done compulsorily.”
(emphasis supplied)
47. In the context of the Motor Vehicles Act, 1939, in Rameshwar
Prasad and Ors. v. State of U.P. and Ors., (1983) 2 SCC 195, this
Court held:
“19. ……… What does Section 43-A(1) after all say? It
says that the State Government may issue such
directions of a general character as it may consider
necessary in the public interest. What is the meaning of
the term “public interest”? In the context of the Act, it
takes within its fold several factors such as, the
maximum number of permits that may be issued on a
route or in any area having regard to the needs and
convenience of the travelling public, the non-availability
of sufficient number of stage carriage services in other
routes or areas which may be in need of running of
additional services, the problems of law and order,
availability of fuel, problems arising out of atmospheric
pollution caused by a large number of motor vehicles
operating in any route or area, the condition of roads and
bridges on the routes, uneconomic running of stage
carriage services leading to elimination of small
operators and employment of more capital than
necessary in any sector leading to starvation of capital
investment in other sectors etc. Public interest under the
Act does not mean the interest of the operators or of the
passengers only. We have to bear in mind that like every
69
other economic activity the running of stage carriage
service is an activity which involves use of scarce or
limited productive resources. Motor transport involves a
huge capital investment on motor vehicles, training of
competent drivers and mechanics, establishment of
workshops, construction of safe roads and bridges,
deployment of sufficient number of policemen to
preserve law and order and several other matters. To
say that larger the number of stage carriages in any
route or area more convenient it would be to the
members of the public is an oversimplification of a
problem with myriad facets affecting the general public.
If we run through the various provisions of the Act it
becomes clear how much attention is given by it to
various matters affecting public interest. There are
provisions relating to licensing of drivers on the basis of
their competence, licensing of conductors, specifications
to which the motor vehicles should conform, coordination
of road and rail transport, prevention of deterioration of
the road system, prevention of uneconomic competition
among motor vehicles, fixation of reasonable fare,
compliance by motor vehicles with the prescribed
timetable, construction of bus stands with necessary
amenities, maintenance of standards of comfort and
cleanliness in the vehicles, development of inter-state
tourist traffic and several other matters with the object of
making available adequate and efficient transport
facilities to all parts of the country. Any direction given by
the State Government under Section 43-A of the Act
should, therefore, be in conformity with all matters
regarding which the statute has made provision. In this
situation to say that any number of permits can be
issued to any eligible operator without any upper limit is
to overstep the limits of delegation of statutory power
and to make a mockery of an important economic
activity like the motor transport.”
(emphasis supplied)
70
48. In Janata Dal v. H.S. Chowdhary and Ors., (1992) 4 SCC 305,
this Court referred to Stroud’s Judicial Dictionary, which defines “public
interest” thus:
“51. In Stroud’s Judicial Dictionary, Vol. IV (4th edn.)
‘public interest’ is defined thus:
“Public interest — 1. A matter of public or
general interest does not mean that which is
interesting as gratifying curiosity or a love of
information or amusement; but that in which a
class of the community have a pecuniary
interest, or some interest by which their legal
rights or liabilities are affected.” (Per Cambel
C.J., in R. v. Bedfordshire [24 LJ QB 84] ).
52. In Black’s Law Dictionary (6th edn.), ‘public interest’ is
defined as follows:
“Public Interest — Something in which the
public, the community at large, has some
pecuniary interest, or some interest by which
their legal rights or liabilities are affected. It
does not mean anything so narrow as mere
curiosity, or as the interests of the particular
localities, which may be affected by the matters
in question. Interest shared by citizens
generally in affairs of local, state or national
government ……”
49. In Municipal Corporation of the City of Ahmedabad and Ors.
v. Jan Mohd. Usmanbhai and Anr., (1986) 3 SCC 20, this Court
stated that the expression “in the interest of the general public” is of
wide import comprehending public order, public health, public security,
morals, economic welfare of the community, and the objects
mentioned in Part IV of the Constitution of India [see paragraph 19].
71
50. Likewise, in B.P. Sharma v. Union of India and Ors., (2003) 7
SCC 309, this Court held:
“15. …… The phrase “in the interest of the general
public” has come to be considered in several decisions
and it has been held that it would comprise within its
ambit interests like public health and morals (refer to
State of Maharashtra v. Himmatbhai Narbheram Rao
[AIR 1970 SC 1157 : (1969) 2 SCR 392]), economic
stability (State of Assam v. Sristikar Dowerah [AIR 1957
SC 414]), stability of the country, equitable distribution of
essential commodities at fair prices (Union of India v.
Bhanamal Gulzarimal Ltd. [AIR 1960 SC 475 : 1960 Cri
LJ 664]) for maintenance of purity in public life,
prevention of fraud and similar considerations. ……”
51. Coming nearer home, Hindustan Lever Employees’ Union v.
Hindustan Lever Ltd. and Ors., 1995 Supp (1) SCC 499, Sahai, J., in
a concurring judgment, referred to “public interest” in Section 394 of
the Companies Act as follows:
“5. What requires, however, a thoughtful consideration is
whether the company court has applied its mind to the
public interest involved in the merger. In this regard the
Indian law is a departure from the English law and it
enjoins a duty on the court to examine objectively and
carefully if the merger was not violative of public interest.
No such provision exists in the English law. What would
be public interest cannot be put in a strait-jacket. It is a
dynamic concept which keeps on changing. It has been
explained in Black’s Law Dictionary as:
“Something in which the public, the community
at large, has some pecuniary interest, or some
interest by which their legal rights or liabilities
are affected. It does not mean anything so
narrow as mere curiosity, or as the interests of
72
the particular locality which may be affected by
the matters in question. Interest shared by
citizens generally in affairs of local, State or
national Government.”
It is an expression of wide amplitude. It may have
different connotation and understanding when used in
service law and a yet different meaning in criminal law
than civil law and its shade may be entirely different in
company law. Its perspective may change when merger
is of two Indian companies. But when it is with subsidiary
of foreign company the consideration may be entirely
different. It is not the interest of shareholders or the
employees only but the interest of society which may
have to be examined. And a scheme valid and good may
yet be bad if it is against public interest.
6. Section 394 casts an obligation on the court to be
satisfied that the scheme for amalgamation or merger
was not contrary to public interest. The basic principle of
such satisfaction is none other than the broad and
general principles inherent in any compromise or
settlement entered between parties that it should not be
unfair or contrary to public policy or unconscionable. In
amalgamation of companies, the courts have evolved,
the principle of “prudent business management test” or
that the scheme should not be a device to evade law.
But when the court is concerned with a scheme of
merger with a subsidiary of a foreign company then the
test is not only whether the scheme shall result in
maximising profits of the shareholders or whether the
interest of employees was protected but it has to ensure
that merger shall not result in impeding promotion of
industry or shall obstruct growth of national economy.
Liberalised economic policy is to achieve this goal. The
merger, therefore, should not be contrary to this
objective. Reliance on English decisions Hoare & Co.
Ltd., Re [1933 All ER Rep 105, Ch D] and Bugle Press
Ltd., Re [1961 Ch 270 : (1960) 1 All ER 768 : (1960) 2
WLR 658] that the power of the court is to be satisfied
only whether the provisions of the Act have been
complied with or that the class or classes were fully
represented and the arrangement was such as a man of
73
business would reasonably approve between two private
companies may be correct and may normally be
adhered to but when the merger is with a subsidiary of a
foreign company then economic interest of the country
may have to be given precedence. The jurisdiction of the
court in this regard is comprehensive.”
(emphasis supplied)
52. In Bihar Public Service Commission v. Saiyed Hussain
Abbas Rizwi and Anr., (2012) 13 SCC 61, this Court referred to
“public interest” in the context of service law as follows:
“22. The expression “public interest” has to be
understood in its true connotation so as to give complete
meaning to the relevant provisions of the Act. The
expression “public interest” must be viewed in its strict
sense with all its exceptions so as to justify denial of a
statutory exemption in terms of the Act. In its common
parlance, the expression “public interest”, like “public
purpose”, is not capable of any precise definition. It does
not have a rigid meaning, is elastic and takes its colour
from the statute in which it occurs, the concept varying
with time and state of society and its needs (State of
Bihar v. Kameshwar Singh [AIR 1952 SC 252]). It also
means the general welfare of the public that warrants
recognition and protection; something in which the public
as a whole has a stake [Black’s Law Dictionary (8th
Edn.)].”
53. In R.R. Tripathi v. Union of India, (2010) 1 Bom CR 513, the
Bombay High Court referred to the Business Dictionary, which defines
“public interest” as follows:
“welfare of the general public (in contrast to the selfish
interest of a person, group, or firm) in which the whole
society has a stake and which warrants recognition,
promotion, and protection by the government and its
74
agencies. Despite the vagueness of the term, public
interest is claimed generally by governments in matters
of state secrecy and confidentiality. It is approximated by
comparing expected gains and potential costs or losses
associated with a decision, policy, program, or project.”
(emphasis supplied)
54. In the context of compulsory amalgamation of two or more
companies, the expression “public interest” would mean the welfare of
the public or the interest of society as a whole, as contrasted with the
“selfish” interest of a group of private individuals. Thus, “public interest”
may have regard to the interest of production of goods or services
essential to the nation so that they may contribute to the nation’s
welfare and progress, and in so doing, may also provide much needed
employment. “Public interest” in this context would, therefore, mean
the combining of resources of two or more companies so as to impact
production and consumption of goods and services and employment of
persons relatable thereto for the general benefit of the community.
Conversely, any action that impedes promotion of industry or obstructs
growth which is in national or public interest would run counter to
public interest as mentioned in this Section.
55. At this juncture, we must first see whether each of the conditions
precedent to the applicability of Section 396 applies to the facts of the
present case. Insofar as the Central Government being “satisfied” is
75
concerned, the following facts which the Central Government has
taken into account, based upon the Grant Thornton report and the
FMC order dated 17.12.2013, are as follows:
55.1. The Grant Thornton report does indeed begin with a disclaimer,
which reads as follows:
“4. Limitations
4.1. Our findings are based upon the information made
available to us and we have not independently verified or
validated the information.
4.2. Our work did not constitute an audit under any
accounting standards and the scope of our work was
significantly different from that of a statutory audit.
Hence it cannot be relied upon to provide the same level
of assurance as a statutory audit.
4.3. Work done by us was as considered necessary at
that point of time to reflect the scope of work and rigour
required.
5. Restrictions
5.1. Our reports and comments are confidential in nature
and not intended for general circulation or publication,
nor are they to be quoted or referred to in whole or in
part, without our prior consent in each specific instance.
Such consent shall not be unreasonably withheld. NSEL
and FMC shall have no authority or ability to modify our
findings in any manner. We disclaim all responsibility or
liability for any costs, damages, losses, liabilities,
expenses incurred by anyone as a result of circulation,
publication, reproduction or use of our reports contrary to
the provisions of this paragraph. Should additional
information or documentation become available which
impacts upon conclusions reached in our reports, we
reserve the right to amend our findings and reporting
accordingly. Further, comments in our reports are not
intended, nor should they be interpreted to be, legal
advice or opinion.”
76
However, the said report in the executive summary states:
“B. Executive Summary
This executive summary is to be read in conjunction with
the whole report and should not be treated as a
standalone document.
Financing Business
1.1 The NSEL exchange platform was being used to
conduct a financing business.
Indian Bullion Market Association (‘IBMA’) enabled large
volumes of trading by a related party on FTIL group
exchanges (NSEL and Multi-Commodity Exchange of
India Limited (‘MCX’).)
This is illustrated as per the diagram below:—
1.2 Grant Thornton observed that a large volume of
NSEL exchange trades were carried out with paired
back-to-back contracts. Investors simultaneously
entered into a short term buy contract (e.g. T+2 – i.e. 2-
day settlement) and a long-term sell contract (e.g. T+25-
i.e. 25 day settlement). The contracts were taken by the
77
same parties at a pre-determined price and always
registering a profit on the long-term positions as illustrated
below:
Trad
e
Date
Dea
l
No
Buy
/Sell
Membe
r ID
Name of Member Contract
Code
Sub
Broker
No.
Termin
al ID
Trade
Price
Trade
Value
02
April
2012
87 S 13790 PD
AGROPROCESSOR
S PVT. LTD.
DLF002 PDY1121
HR2
474 13791 2400.00 360,000
02
April
2012
87 B 10570 ANAND RATHI
COMMODITIES
LTD.
HNR320 PDY1121
HR2
232 10575 2400.00 360,000
02
April
2012
88 S 10570 ANAND RATHI
COMMODITIES
LTD.
HNR320 PY1121H
R25
232 10575 2450.70 367,605
02
April
2012
88 B 13790 PD
AGROPROCESSOR
S PVT. LTD.
DLC001 PY1121H
R25
474 13791 2450.70 367,605
1.3 These long-term contracts (e.g. T+25) were first
traded on the NSEL exchange in September 2009. The
Board of NSEL ratified the circulars introducing such
long-term contracts over a period beginning November
2009.
1.4 Further evidence was obtained with regards the
existence of a financing business, such as presentations
which stated that a fixed rate of return was guaranteed
on investing in certain products on the NSEL exchange.
Several internal (NSEL) presentations were found, upon
a review of e-mail databases, setting out a yield (e.g.
16%) as an opportunity for investors for trading in certain
products on the NSEL exchange.
An external presentation was also obtained which had
been made by a brokerage house (Geojit Comtrade Ltd.)
for their clients claiming a fixed return on investments
made on the NSEL exchange. Further, this presentation,
declared that actual delivery of stocks in such
transactions would not be required.
1.5 Grant Thornton also obtained evidence of repeated
contraventions of NSEL exchange rules and bye-laws
which facilitated such financing transactions to continue
and grow in size as below:
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Repeated Defaults: As per the NSEL exchange rules a
member who does not have sufficient collateral/monies
etc. to discharge his obligations would not be allowed to
trade further. This rule was overridden on a recurring
basis. Further despite repeated defaults members were
allowed to trade and increase their expenses. For
example, Lotus Refineries had defaulted, as per the
Rules of the Exchange, on 198 days between the fifteenmonth period of 1 April 2012 and 30 July 2013.
Exemptions from Margin Requirements: Members who
were in a default position or whom had exhausted their
margin limits on trading were granted an exemption from
margin requirements and thus allowed them to increase
their exposure by engaging in new trades. More than
1,800 margin limit exemptions were granted between
2009 through to 2013.
Inadequate monitoring of member collateral: NSEL did
not carry out any diligence to establish the existence of
stock at member managed warehouses, upon which
trades were being executed. Grant Thornton carried out
a stock verification exercise and found significant
shortages vis-à-vis expected collateral.
Related Party Transactions
1.6 IBMA is registered as a client with Karvy Comtrade
limited for executing trades on futures commodity
exchange like MCX and NCDEX.
SNP Designs Private Limited (SNP) is a client of IBMA
and the managing director of SNP is Mrs. Shalini Sinha,
the wife of Mr. Anjani Sinha (CEO and MD of NSEL as
well as IBMA).
Grant Thornton found evidence of a large volume of
trades executed on the MCX exchange on behalf of
SNP, through Karvy Comtrade Limited. Since April 2012
the total nominal value/volume traded on MCX is
approximately Rs. 40,000 crore.
In spite of heavy losses over the period, trading on
behalf of SNP was allowed to continue. No margin
money was ever taken from SNP. As at 20 September
2013, IBMA is due to receive Rs. 77 crore on account of
losses arising from trades executed on behalf of SNP.
79
No monies have been received from SNP despite
substantial amounts due.
Further, evidence was obtained that Rs. 10 crore was
received from Mohan India which was credited to an
IBMA Bank account. This was to be adjusted against the
SNP receivable balance as per an instruction made by
Mr. Anjani Sinha.
1.7. IBMA is a subsidiary of NSEL and has received
funding for operational needs on several occasions
(including a loan of Rs. 5 crore on 5 August 2013). IBMA
is also a member on the NSEL exchange and executes
trades on behalf of clients. Margin limit exemptions have
been granted to IBMA on a daily basis since February
2010.
Corporate Governance & Risk Management
1.8 While the Bye-laws and Rules of the Exchange
mandated the formation of various Committees to
effectively manage the operations of the Exchange; the
Board failed to constitute 9 out of the 10 such
committees. Further, there is no documentary evidence
to demonstrate whether the only committee formed
(Membership Committee) was ever convened and
hence, met its objectives.
1.9 The Board Meeting minutes regularly (eg. 11 June
2008, 15 June 2009, 25 May 2011) stated that the Audit
Committee had detailed discussions on the Annual
Financial Statements, the Internal Control Systems,
reviewing the scope of Internal Audit functions, the
performance of the statutory and internal auditors, the
scope of work for the internal auditors, the planning of
the statutory audit for the current financial year, the
payment of audit fees, the observations by the auditors
in the draft Auditor Report etc.
Upon review of the corresponding Audit Committee
minutes we noted no reference to discussions on
Internal Control Systems, reviewing the scope of Internal
Audit functions, performance of internal auditors and
scope of work for the internal auditors.
Common members of the Board and the Audit
Committee were:
80
Mr. Jignesh Shah
Mr. Joseph Massey
Mr. V. Hariharan
Mr. Shreekant Javalgekar
1.10 The Board Meeting minutes of 31 March 2010 and
11 August 2010 stated that the Company (NSEL)
approached Karvy Financial Services Limited (KFSL) to
extend credit facilities to a member, specifically N.K.
Proteins. Further the Board granted and approved for
issue of a guarantee to KFSL, to the extent of Rs. 14
crores, in respect of credit facilities extended to N.K.
Proteins.
1.11 Our review of the Information technology identified
several independent standalone systems wherein the
flow of business transactions and related information
between different systems required manual intervention.
Given the complexity and nature of trading transaction
such systems including warehouse (eWDMS), CNS,
Delivery System (EMI) and trading should have been
integrated.
Further, these systems did not produce/have any form of
MIS operational. All reporting and analysis was done on
manual worksheets. Our review of the Board minutes did
not indicate any form of MIS reporting or review.
These points collectively indicate significant gaps in IT,
Risk & Corporate Governance.
Misutilisation of client monies
1.12 Misutilisation of client monies/settlement fund: As
per the rules and bye-laws of the NSEL exchange
“Margin deposits received by clearing members from
their constituent members and clients in any forms shall
be accounted for and maintained separately in
segregated accounts and shall be used solely for the
benefit of the respective constituent members’ and client
position.”
Grant Thornton found evidence (including e-mails) that
client monies/settlement fund, was used regularly for
fulfilling the obligations of defaulting members.
Further, NSEL utilised client monies/settlement fund for
its own business purposes on a regular basis. For
81
example, on 28 March, 2013, Rs. 236.5 crore was
withdrawn from the Settlement Fund in order to fund
NSEL’s own business overdraft account.
There was a running deficit in the client
monies/settlement fund balance from April 2012 to June
2013. The finance team of FTIL had raised this as an
area of concern on several occasions.
Misrepresentations to the Regulator
1.13 Regulatory Contraventions:
As per a Gazette Notification issued on 5 June 2007 by
the Ministry of Consumer Affairs, the Government of
India under Section 27 of the Forward Contracts
(Regulation) Act, 1952 (“FCRA”) exempted all forward
contracts of one day duration for the sale and purchase
of commodities traded on NSEL from the operations of
the said Act. Grant Thornton’s review of the type of
trades executed on the NSEL exchange indicates
contravention to the exemption conditions granted.
During the period January 2011 to July 2013, FMC
sought several clarifications from NSEL on a number of
complaints received from the public alleging forward
trading and running a financing scheme. All these
allegations were refuted by NSEL. Our analysis of such
trades indicates misrepresentation by NSEL to FMC on
several occasions.”
The report then goes on to say that there was no documentation in
relation to warehouse activities for long term trades indicating that
such contracts were not secured by warehouse stocks. The
warehouses were customer managed warehouses and the underlying
collateral were not in custody of NSEL. NSEL did not have control over
these warehouses and Grant Thornton was denied access to number
of warehouses. The Warehouse Development and Regulatory
82
Authority had in fact rejected NSEL’s application for registration of its
warehouses way back on 16.05.2011. Notwithstanding such rejection,
NSEL’s website represented that its warehouses were registered with
the Authority. No verification or due diligence was ever undertaken by
NSEL to ensure compliance by its members of the conditions outlined
in its rules and byelaws even though in terms of NSEL byelaws,
warehouse receipt issued by NSEL were meant to evidence a
commodity being held in an approved warehouse. NSEL did not insist
upon deposit of commodities in the warehouses prior to executing sale
transactions. Instead NSEL resorted to issuing Delivery Allocation
Reports (DAR) representing to genuine investors that each transaction
was delivery based and backed at the time of sale by the required
quantity of commodities in its warehouses.
55.2. The observations and conclusions of the FMC order dated
17.12.2013, based largely on this expert report, read as follows:
“15. Summary Observations and Conclusion:- After
having accorded due consideration to all the objections
and arguments raised by the noticees vide their written
submission as well as oral presentations through their
counsel, we now proceed to conclude our observations
by taking a final view on the status of the four noticees
as ‘fit and proper persons’ in the succeeding paragraphs.
15.1. Noticee No. 1:- Financial Technologies (India)
Limited (FTIL): We have discussed the equity structure
of NSEL, which is wholly owned by FTIL. We have also
83
pointed out that Shri Jignesh Shah, Chairman-cumManaging Director of FTIL has been a Director on the
Board and also functioning as Vice-Chairman and a key
management person of NSEL since its inception.
Similarly, Shri Joseph Massey and Shri Shreekant
Javalgekar have been Directors of the said company
from its very beginning till the settlement crisis at NSEL
first came to light in July, 2013. The facts establishing
the fraud involving a settlement default over Rs. 5,500
crores at NSEL have been discussed at length in the
SCNs issued to the noticees as well as reiterated, albeit
illustratively by us at Para No. 14.7 of this Order. The
responsibility of FTIL as the holding company
possessing absolute control over the governance of
NSEL has also been highlighted. The control of FTIL
over NSEL becomes further crystallized from the
responses given by M/s. Grant Thornton before the
Commission on 03.12.2013 stating that Shri Jignesh
Shah, Mr. Joseph Massey and a host of other officials of
FTIL reviewed the forensic audit report and it was only
after obtaining their clearance, the forensic auditor
finalised its report.
15.1.1. The violation of conditions prescribed in the
exemption notification, trading in paired contracts to
generate assured financial returns under the garb of
commodity trading, admission of members who were
thinly capitalised having poor net worth and giving
margin exemptions to those who were repeatedly
defaulting in settling their dues, poor warehousing
facilities with no or inadequate stocks, no risk
management practices followed, non-provision of funds
in SGF, consciously appointing Shri Mukesh P. Shah as
statutory auditors for F.Y. 2012-13 who was related to
Shri Jignesh Shah, and apparent complicity with the
defaulters to defraud the investors, etc., lead to an
inescapable conclusion that a huge fraud was
perpetrated by NSEL while having the presence of two
Board members of FTIL on the Board of NSEL, one of
whom was the Vice-Chairman of the company.
15.1.2. The facts of the case and the manner in which
the business affairs of NSEL were conducted leaves no
84
doubt in our minds that FTIL, notwithstanding its
contentions that it was ignorant of the affairs and
conduct of NSEL, exerted a dominant influence on the
management, and directed, controlled and supervised
the governance of NSEL. In the face of a fraud of such a
magnitude involving settlement crises of Rs. 5,500
crores owed to over 13,000 sellers/investors on the
trading platform of NSEL, FTIL, cannot seek to take
refuge behind the corporate veil so as to unjustifiably
isolate itself from the fraudulent actions that took place
at NSEL resulting in such a huge payment crisis.
15.1.3. FTIL has its principal business of development
of software which has become the technology platform
for almost the entire industry engaged in broking in
shares and securities, commodities, foreign exchange
etc. As has been demonstrated by FTIL in their written
submission, FTIL has floated a number of regulated
exchanges – both for securities and commodities
derivatives – in India as well as abroad. NSEL was
incorporated to provide a trading platform of commodity
spot exchange on a pan-India basis for the purpose of
which apparently it sought and was granted exemption
from the operation of the FCRA, 1952. Since the
objective of the NSEL was promoting spot trading in
commodities on an electronic platform, its business
model did not contemplate venturing into trading in
forward contracts. FTIL had already promoted MCX, a
regulated exchange under FCRA, 1952, for the purpose
of trading in forward contracts. Therefore, having
secured an exemption from the purview of FCRA, 1952
on the ground that it was intended to promote spot
trading, NSEL was not authorised to allow trading in
forward contracts through the scheme of paired
contracts, thereby defying conditions stipulated in the
exemption notification granted to it. The motive behind
allowing trading in forward contracts on the NSEL
platform in a circuitous manner on NSEL which was
neither recognized nor registered under FCRA, 1952
indicates mala fide intention on the part of the promoter
of FTIL to use the trading platform of its subsidiary
company for illicit gains away from the eyes of
85
Regulator. The fact that FTIL promoted NSEL sought
exemption from FCRA, 1952 provisions even before they
had started any trading or operation, points to their
intention from the outset. In this manner, it
misinterpreted the conditions stipulated in the exemption
notification in collusion with a handful of members, which
ultimately culminated in a massive fraud involving Rs.
5,500 crores, which has the potential effect of eroding
trust and confidence in exchanges and financial markets.
15.1.4. Keeping in view the foregoing observations and
the facts which reveal misconduct, lack of integrity and
unfair practices on the part of FTIL in planning, directing
and controlling the activities of its subsidiary company,
NSEL, we conclude that FTIL, as the anchor investor in
the Multi-Commodity Exchange Ltd. (MCX) does not
carry a good reputation and character, record of fairness,
integrity or honesty to continue to be a shareholder of
the aforesaid regulated exchange. Therefore, in the
public interest and in the interest of the
Commodities Derivatives Market which is regulated
under FCRA, 1952, the Commission holds that
Financial Technologies (India) Ltd. (FTIL) is not a ‘fit
and proper person’ to continue to be a shareholder
of 2% or more of the paid-up equity capital of MCX
as prescribed under the guidelines issued by the
Government of India for capital structure of
commodity exchanges post 5-years of operation. It is
further ordered that neither FTIL, nor any company/entity
controlled by it, either directly or indirectly, shall hold any
shares in any association/Exchange recognised by the
Government or registered by the FMC in excess of the
threshold limit of the total paid-up equity capital of such
Association/Exchange as prescribed under the
commodity exchange guidelines and post 5-year
guidelines.”
(emphasis in original)
Based on the Grant Thornton report and the FMC order, the draft
amalgamation order dated 21.10.2014 then relied on the same facts,
86
as did the final assessment order. The final amalgamation order also
refers to an investigation under Section 209A into the affairs of NSEL
which led to infractions of Sections 211, 217 and 292A of the
Companies Act. These are compoundable offences which have, in
fact, been compounded by orders dated 03.03.2016 and 31.05.2016
by the concerned authority.
55.3. We have seen that neither FTIL nor NSEL has denied the fact
that paired contracts in commodities were going on, and by April to
July, 2013, 99% (and excluding E-series contracts), at least 46% of the
turnover of NSEL was made up of such paired contracts. There is no
doubt that such paired contracts were, in fact, financing transactions
which were distinct from sale and purchase transactions in
commodities and were, thus, in breach of both the exemptions granted
to NSEL, and the FCRA. We have also seen that NSEL throughout
kept representing that it was, in fact, a commodity exchange dealing
with spot deliveries. Apart from the Grant Thornton report and the FMC
order, we have also seen that Shri Jignesh Shah, on 10.07.2013,
made representations to the DCA and the FMC, in which he stated that
NSEL had full stock as collateral; 10-20% of open position as margin
money; and that the stock currently held in NSEL’s 120 warehouses
was valued at INR 6000 crore, all of which turned out to be incorrect.
87
Further, there is no doubt whatsoever that in July, 2013, as a result of
NSEL stopping trading on its exchange, a payment crisis of
approximately INR 5600 crore arose. The further question that remains
is whether, given these facts, the conditions precedent for the
applicability of Section 396 were followed.
56. When it comes to whether the Central Government’s satisfaction
as to whether it was “essential” to amalgamate the aforesaid
companies, what must be borne in mind is that NSEL had itself offered
a settlement scheme to pay back the persons who have allegedly
been duped. It was found that this scheme could not really take off, as
a result of which, large amounts continued to be owed to such
persons. That this was the real concern of the FMC is clear from a
letter dated 18.08.2014 addressed by the FMC to the Secretary,
Ministry of Corporate Affairs. This letter states:
“xxx xxx xxx
2. As apprised earlier, consequent to the suspension
of trading and a huge settlement default that took place
at NSEL on 31.07.2007, the Government of India,
Ministry of Consumer Affairs, Food & Public Distribution,
Department of Consumer Affairs (DCA) vide its
notification dated 6th August, 2013 (copy enclosed as
Annexure II) inter-alia provided that settlement of all
outstanding one day forward contract at NSEL shall be
done under the supervision of FMC. In exercise of this
supervisory role, the Commission has been continuously
taking all possible steps and has been regularly pursuing
88
with NSEL to expedite the recovery proceedings against
the defaulters at its platform. To ensure better monitoring
of NSEL’s compliance the Commission had vide No.
8/1/2013 (1)-MD-1(1)(C)/Settlement (Vol.-IV) dated 29th
November, 2013 (copy enclosed as Annexure III)
constituted a Monitoring & Auction Committee (MAC)
comprising the representatives of various members
associations and investors bodies to assist and advise
the Commission on matters pertaining to the
Commission’s supervisory role over the settlement of
outstanding contracts at NSEL.
3. It is observed that even after one year’s incessant
efforts and in spite of FMC’s active role in supervising
the settlement of contracts, the settlement plan could not
result in making any substantial payment to the investors
as the process of recovery of dues by NSEL from the
defaulting members is very slow. It is submitted that, it is
only the NSEL, which has the responsibility to take all
possible coercive measures as per their rules/bye-laws
and other laws of the land, to ensure that the
outstanding dues of all investors are settled. However as
on date, NSEL has been able to make a payment of only
Rs. 538.56 crores to its members as against the
payment dues of approximately Rs. 5500 crores. This
amount also includes an amount of Rs. 179.26 crores
borrowed by NSEL from its holding company, FTIL which
was distributed to small participants. The representatives
of members associations and investor bodies on the
MAC in their meeting with the Commission have
represented the NSEL has lost its credibility as an
institution. Further the employee attrition in NSEL in the
recent months has been extremely high and it is learnt
that the staff strength of NSEL has come down
considerably, adversely affecting the recovery process.
As per the information received from NSEL, the total
employee count on NSEL rolls was 193 as on
31.07.2013 (when NSEL had suspended trading in one
day forward contracts) which came down to 33 on
31.07.2014. The morale of the employees at NSEL is
also very low. NSEL is also confronted with a number of
cases against it, which are pending in the High Courts
89
and MPID Court relating to its failure to make payment to
the investors. The company is hardly left with any
financial resources to meet even legal expenses apart
from meeting staff salaries and other expenses related
to recovery process. The members of the Monitoring &
Auction Committee have expressed their views that with
the loss of credibility, weak Organizational structure,
depletion of man-power strength and lack of financial
resources, NSEL has become totally ineffective in
pursuing the recovery of the defaulted amounts from the
defaulter members.
4. It may be noted that NSEL is a subsidiary of
Financial Technologies India Ltd. (FTIL) which holds
99.99% of the shares of NSEL. Hence, for all practical
purposes NSEL is a wholly owned subsidiary of FTIL
and therefore it is the primary responsibility of the parent
company, i.e. FTIL to own complete responsibility for the
affairs of its subsidiary company. In this regard attention
is drawn to the order of the Commission No. 4/5/2013-
MKT-I/B dated 17th December, 2013 (copy enclosed as
Annexure IV) in the matter of “Fit and Proper Person”
status of M/s FTIL (another shareholder and promoter of
MCX) and in the matter of Shri Jignesh Shah & Shri
Joseph Massey ex-Directors & Shri Shreekant
Javalgekar ex-MD and CEO of MCX. Some of the
important highlights of the said order pertaining to FTIL
are as below:
(i) In para 14.2.1 of the order it is inter-alia
mentioned that NSEL by virtue of being a
separate legal entity cannot be said to be
independent from the control of the
holding/parent company i.e. FTIL which holds
99.99% of its share capital.
(ii) In para 14.5.2 it is inter-alia mentioned
that since FTIL is effectively the only
shareholder of NSEL, the constitution of the
Board of Directors of NSEL is entirely under its
control. FTIL through the Board of Directors of
NSEL constituted by it possesses effectual and
absolute control over its subsidiary company
i.e. NSEL. Such control is further amplified and
90
accomplished by the fact that Shri Jignesh
Shah, the promoter and Chairman-cumManaging Director of FTIL has been on the
Board of NSEL and functioning as ViceChairman of the Company since its inception.
Shri Joseph Massey was also a common
Director both on the Board of FTIL and NSEL,
while Shri Shreekant Javalgekar continued to
be a Director of NSEL till he resigned from the
post in July 2013;
(iii) In para 14.5.3 of the order it is inter-alia
mentioned that it is on record that all the
minutes of Board meetings of NSEL were
regularly tabled at the Board meetings of FTIL.
FTIL kept itself apprised about the affairs of
NSEL and also approved/ratified the actions of
NSEL in its Board meetings on a regular basis;
(iv) In para 14.9.1 of the order it is inter-alia
mentioned that it is undisputed that NSEL was
an Exchange in which FTIL had ownership
interest to the extent of 99.9998% leaving a
negligible 0.0002% stake to NAFED. The
Articles of Association of NSEL confers
authority to its shareholders to appoint
Directors. As the single largest shareholder, it is
FTIL which has nominated all the directors on
the NSEL board. As a wholly-owned subsidiary,
NSEL is completely under the control of FTIL,
including financial control over the affairs of
NSEL. FTIL, which had the responsibility of
managing the affairs of NSEL, cannot claim to
be unaware of the wrong-doing and fraud
committed by the management of NSEL.
(v) In para 14.10.06 of the order it is interalia mentioned 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.
(vi) In para 14.10.8 of the order it is inter-alia
mentioned that FTIL has not furnished any
91
explanation as to what steps have been taken
by NSEL or by it as a parent company to
honour the commitment of assuring safety and
risk-free trading to the members and clients
who have traded on their platform purely on the
basis of an explicit assurance that the
Exchange shall step into the shoes of counter
parties should there be any default by any
participant.
(vii) In para 15.1.3 of the order it is inter-alia
mentioned that FTIL has its principal business
of development of software which has become
the technology platform for almost the entire
industry engaged in broking in shares and
securities, commodities, foreign exchange etc.
The motive behind allowing trading in forward
contracts on the NSEL platform in a circuitous
manner on NSEL which was neither recognized
nor registered under FCRA, 1952 indicates
mala fide intention on the part of the promoter
of FTIL to use the trading platform of its
subsidiary company for illicit gains away from
the eyes of Regulator.
5. The aforesaid facts would clearly establish that the
Board of FTIL and its promoters under the leadership of
Shri Jignesh Shah have been actively controlling and
directing the affairs of NSEL and it is due to the poor
governance and irregularities perpetrated in to the affairs
of NSEL by FTIL and its promoters that the defaulting
members defrauded the exchange to the extent of Rs.
5,500 crores thereby causing huge financial loss to more
than 13,000 investors. It is submitted that the aforesaid
order dated 17th December, 2013 passed by the
Commission is based on tangible facts on the role of
FTIL in the affairs of NSEL, mustered by the
Commission on its own and also the facts revealed by
the forensic auditor M/s. Grant Thornton who were
engaged by NSEL to conduct a forensic audit into the
affairs of NSEL post the settlement crisis. It may be
noted the Hon’ble Bombay High Court has also refused
to grant any interim relief to FTIL and three other
92
individuals in respect of the aforesaid order dated 17th
December, 2013 passed by the Commission declaring
FTIL, Shri Jignesh Shah, Shri Joseph Massey and Shri
Shreekant Javalgekar as not fit and proper persons to be
shareholders or a Director in any of the recognized
commodity exchanges. FTIL and other three individuals
have so far not challenged the above interim order of the
Hon’ble High Court.
6. It is also submitted that the Working Group
constituted by the Central Government under the
Chairmanship of Deputy Governor, Reserve Bank of
India to examine into the systematic risk arising in
consequence of the NSEL settlement debacle, have inter
alia recommended that the ownership, governance and
management structure at FTIL and the exchanges
promoted by FTIL need to be assessed and the
possibility of bringing in an institutionalized framework
and approach to these aspects explored.
7. It may also be noted here that pursuant to the
criminal proceedings and arrest of Shri Jignesh Shah,
Chairman-cum-Managing Director of FTIL who was also
the Vice-Chairman of NSEL, the EOW of Mumbai Police,
has since filed a chargesheet against Shri Jignesh Shah
under various sections of Indian Penal Code and also
the Maharashtra Protection of Interest of Depositors
(MPID) Act, 1999, before the Hon’ble Sessions Judge,
Special Court under MPID Act, Mumbai which vindicates
the stand already taken by the Commission in its order
dated 17th December, 2013 pertaining to the role and
responsibility of FTIL as a parent company in the affairs
of its wholly owned subsidiary i.e. NSEL.
8. The aforesaid submissions would make it clear that
NSEL as a corporate entity has now been rendered
bereft of any credibility and now seems financially and
physically incapable of effecting any substantial recovery
from the defaulting members, notwithstanding all the
legal and other measures taken by it against them under
the instructions/supervision of the Commission. Similarly,
the Board and management of FTIL, by their very
conduct in managing the affairs of NSEL and continuous
effort to distance themselves from their responsibility
93
towards NSEL after the settlement default, have lost
their credibility as a responsive and responsible holding
company.
9. Keeping the aforesaid emergency situation in view,
the Commission is of the view that time has come for the
Ministry of Corporate Affairs to consider:
(i) merging/amalgamating NSEL with FTIL in
public interest so that the human/financial
resources of FTIL are also directed towards
facilitating speedy recovery of dues from the
defaulters at NSEL and FTIL takes
responsibility to resolve the payment crisis at
NSEL at the earliest.
(ii) Further, it is suggested that together with
merger/amalgamation of NSEL with FTIL,
taking over of the management of FTIL may
also be considered so that the affairs of FTIL
can be managed in a professional way by
bringing in an institutionalized framework as
recommended by Working Group appointed by
Government of India.
xxx xxx xxx”
(emphasis supplied)
This letter would show that the immediate reason for amalgamation,
according to the FMC, and which was faithfully carried out by
Government, is that NSEL, as a corporate entity, seems financially and
physically incapable of effecting any substantial recovery from
defaulting members. This was the “emergency situation” according to
the FMC, which should lead to an order of amalgamation of the
holding and subsidiary companies so that the holding company’s
financial resources could be used to pursue proceedings by which
94
monies owed to the alleged duped investors/traders could be
recovered.
56.1. What is important to note is that by the time the final order of
amalgamation was passed, i.e., on 12.02.2016, the final order itself
records:
“8.1.Economic Offences Wing, Mumbai:
Total amount due and recoverable from 24
defaulters is Rs. 5689.95 crores.
Injunctions against assets of defaulters worth
Rs. 4400.10 crore have been obtained.
Decrees worth Rs. 1233.02 crore have been
obtained against 5 defaulters.
Assets worth Rs. 5444.31 crore belonging to
the defaulters have been attached of which
assets worth Rs. 4654.62 crore have been
published in Gazette under the MPID Act for
liquidation under the supervision of MPID
Court and balance assets worth Rs. 789.69
crore have been attached/secured for
attachment by the EOW:
Assets worth Rs. 885.32 crore belonging to
the directors and employees of NSEL have
been attached out of which assets worth Rs.
882.32 crores have already been published
in Gazette under MPID Act for liquidation
under the supervision of MPID Court and
balance assets worth Rs. 3 crore have been
attached/secured for attachment by the
EOW;
MPID Court has already issued notices u/s 4
& 5 of the MPID Act to the persons whose
assets have been attached as above. Thus,
the process of liquidation of the attached
assets has started.
Bombay High Court has appointed a 3-
95
member committee headed by Mr. Justice
(Retd.) V.C. Daga and 2 experts in finance
and law to recover and monetize the assets
of the defaulters.
Rs.558.83 crores have been recovered so
far, out of which Rs. 379.83 crore have been
received/recovered from the defaulters and
Rs. 179 crore were disbursed by NSEL to
small traders/investors.
8.2. Enforcement Directorate:
ED has traced proceeds of crime amounting to
Rs. 3973.83 crore to the 25 defaulters;
ED has attached assets worth Rs. 837.01 crore
belonging to 12 defaulters;
As per the recent amendment in the PMLA, the
assets attached by ED can be used for restitution
to the victims.
8.3. The above status indicates that the said
enforcement agencies are working as per their
mandate…….”
56.2. What concerned the FMC in August 2014 has, by the date of the
final amalgamation order, been largely redressed without
amalgamation. The “emergency situation” of 2013 which, even
according to the Central Government, required the emergent step of
compulsory amalgamation has, by the time of the passing of the
Central Government order, disappeared. Thus, the raison d’être for
applying Section 396 of the Companies Act has, by the passage of
time, itself disappeared. In fact, as on today, decrees/awards worth
INR 3365 crore have been obtained against the defaulters, with INR
835.88 crore crystallised by the committee set up by the High Court,
96
pending acceptance by the High Court, even without using the
financial resources of FTIL as an amalgamated company. What is,
therefore, important to note is that what was emergent, and therefore,
essential, even according to the FMC and the Government in 2013-
2014, has been largely redressed in 2016, by the time the
amalgamation order was made. Also, the Central Government order
does not apply its mind to the essentiality aspect of Section 396 at all.
In fact, in several places, it refers to “essential public interest” as if
“essential” goes with “public interest” instead of being a separate and
distinct condition precedent to the exercise of power under Section
396. On facts, therefore, it is clear that the essentiality test, which is
the condition precedent to the applicable to Section 396, cannot be
said to have been satisfied.
57. During the course of proceedings before the Division Bench of
the Bombay High Court, FTIL tendered an affidavit dated 04.07.2017,
to place on record its resolution dated 28.03.2016 to infuse a sum of
upto INR 50 crore for each of the financial years 2016-2017 to 2018-
2019 to support NSEL to recover dues from defaulters, defend various
cases, and continue taking necessary legal action against various
parties to recover amounts from defaulters. The Division Bench refers
to this affidavit as follows:
97
“293] At the stage, when the final hearing in these
petitions had considerably advanced, FTIL, tendered an
affidavit dated 4th July 2017 to place on record its
resolution dated 28th March 2016 to infuse a sum up to
Rs. 50 crores for each of the financial years, i.e., FY
2016-17 to FY 2018-19, to support NSEL to recover
dues from defaulters; to defend various legal cases; to
continue taking necessary legal actions against various
parties to recover amounts from defaulters; and for
working capital. The affidavit states that such resolution
was passed and such finances are proposed to be
infused at the request of NSEL.
294] The affidavit dated 4th July 2017 also confirms that
the activities of NSEL have come to a grinding halt,
though, the affidavit purports to blame the FMC for such
a situation. The affidavit also states that up to now FTIL
has infused approximately Rs. 109 crores with NSEL,
mainly to prosecute and defend legal proceedings.
There is reference to NSEL having obtained decrees
worth more than Rs. 1200 crores and injunctions against
assets of defaulters valued at Rs. 5444.31 crores. The
affidavit further states that FTIL is committed to funding
NSEL for purposes of recovery from defaulters since the
occurrence of payment crisis on the exchange platform
of NSEL.
295] If the contention of Mr. Chinoy to the effect that
there is absolutely no problem in the functioning of NSEL
or that NSEL has the necessary wherewithal, both
financial as well as infrastructural, to effect recoveries
from the defaulters, is to be accepted, then, there was
no reason to rely upon contribution from FTIL, made or
proposed to be made at a belated stage. The FTIL
resolution dated 28th March 2016, far from affording any
cause to interfere with the impugned order, in fact, lends
support to the reasoning in the impugned order that the
NSEL, on its own, lacks financial as well as
infrastructural capacity to affect any recoveries from the
defaulters. The affidavit dated 4th July 2017 and the
resolution dated 28th March 2016 is also indicative of
the business realities of the situation, which is
incidentally yet another ground in the impugned order.”
98
(emphasis in original)
58. The High Court comment on the aforesaid affidavit is not correct.
The affidavit proceeds on the footing that since the activities of NSEL
have come to a grinding halt, FTIL would help NSEL to effect
recoveries from defaulters. The affidavit nowhere states that there is
no problem in the functioning of NSEL, or that NSEL has or does not
have the necessary wherewithal to effect recovery from defaulters.
Even in the hearing before us, FTIL has submitted an affidavit-cumundertaking dated 11.04.2019, stating that it will continue to infuse
funds into NSEL so that recovery of dues from defaulters does not, in
any manner, get stymied. We take this affidavit and undertaking on
record, and hold FTIL to this undertaking made before this Court.
59. When it comes to “public interest” as opposed to the “private
interest” of investors/traders, who have not been paid, the
amalgamation order dated 12.02.2016 makes interesting reading. The
satisfaction as to public interest is stated in the very beginning of the
order as follows:
“Whereas the Central Government is satisfied that to
leverage combined assets, capital and reserves, achieve
economy of scale, efficient administration, gainful
settlement of rights and liabilities of stakeholders and
creditors and to consolidate businesses, ensure
coordination in policy, it is essential in the public
interest…….”
99
What is stated in the opening is repeated in paragraph 2.14.2 as
follows:
“2.14.2 The Central Government also carefully
considered the proposal received from FMC and
DEA and was of the considered opinion that to
leverage combined assets, capital and reserves for
efficient administration and satisfactory settlement of
rights and liabilities of stakeholders and creditors of
NSEL, it would be in essential public interest to
amalgamate NSEL with FTIL.”
It will be seen that all the expressions used in relation to “public
interest” have relation only to the businesses of the two companies
that are sought to be amalgamated. What is important to note is that
there is no interest of the general public as opposed to the businesses
of the two companies that are referred to. It is important to notice that
the leveraging of combined assets, capital, and reserves is only to
settle liabilities of certain stakeholders and creditors when the order is
read as a whole, and given the fact that the businesses of the two
companies were completely different. So far as achieving economy of
scale and efficient administration is concerned, it is difficult to see how
this would apply to the fact situation in this case where NSEL is
admittedly a company which has stopped functioning as a
commodities exchange at least with effect from July, 2013 with no
hope of any revival. Thus, the consolidation of businesses spoken
100
about does not exist as a matter of fact, as NSEL’s business has come
to a grinding halt, as has been observed by the FMC and the Central
Government itself. Each one of these expressions, when read with the
rest of the order, therefore, only shows that the sole object of the
amalgamation order is very far from the high-sounding phrases used in
the opening, and is really only to effect speedy recovery of dues of INR
5600 crore, which has been referred to in the letter of the FMC to the
Secretary, Ministry of Corporate Affairs, dated 18.08.2014. This would
be clear from a reading, in particular, of two paragraphs of the order,
namely, paragraphs 2.13.2 and 2.13.3, which read as follows:
“2.13.2. Thus, it would be observed from above that
NSEL is not having the resources, financial or
human, or the organizational capability to
successfully recover the dues to the investors
pending for over a year. Further, NSEL is not left with
any viable, sustainable business while FTIL has the
necessary resources to facilitate speedy recovery of
dues.
2.13.3. In the above background, a proposal had
been received from FMC, vide letter dated 18-08-
2014, proposing the merger of NSEL with FTIL by the
Central Government under the provisions of Section
396 of the Companies Act, 1956. The proposal has
been supported by the Department of Economic
Affairs (DEA), Ministry of Finance, FMC has proposed
the merger/amalgamation of NSEL with FTIL in
essential public interest so that the human/financial
resources of FTIL are also directed towards
facilitating speedy recovery of dues from the
defaulters at NSEL and the FTIL takes responsibility
to resolve the payment crisis at NSEL at the earliest.”
101
59.1. However, the Central Government supported this order on the
ground that it is made in public interest essentially on three grounds,
which are repeatedly referred to by the impugned judgment. The three
grounds as stated by the impugned judgment are as follows:
“269. …… (a) Restoring/safeguarding public confidence
in forward contracts and exchanges which are an
integral and essential part of Indian economy and
financial system, by consolidating the businesses of
NSEL and FTIL; (b) Giving effect to business realities of
the case by consolidating the businesses of FTIL and
NSEL and preventing FTIL from distancing itself from
NSEL, which is, even otherwise, its alter ego; and (c)
Facilitating NSEL in recovering dues from defaulters by
pooling human and financial resources of FTIL and
NSEL. Further, we are also satisfied that each of these
three grounds constitute a facet of public interest in the
context of the provisions in Section 396. ……”
59.2. It is important to note that the first and second grounds
mentioned by the High Court are not contained in the draft order of
amalgamation. Had they been so contained, objections and
suggestions would have been made by all stakeholders, which the
Central Government would then have been bound to consider before
passing the final order. However, it was argued on behalf of the
respondents that the first and second grounds are, in reality,
inferences drawn from facts which are already stated in the order and
these inferences do not need to be stated in the draft order. We are
102
afraid that this argument is incorrect inasmuch as grounds contained in
reasons (a) and (b) are important grounds which have a vital bearing
on the amalgamation in question. If these grounds were contained in
the draft order, there is no doubt that the shareholders and creditors of
FTIL, and FTIL itself would have had an opportunity to comment on the
same. For example, the “business realities” of the case are facts
known to FTIL; and NSEL, being FTIL’s alter ego, is the subject matter
of dispute in various suits that have been filed and are pending
adjudication. FTIL could have responded giving reasons as to why
NSEL is not its alter ego. Also, whether the amalgamation is, in fact, to
restore or safeguard public confidence in forward contracts and
exchanges is a subject matter on which FTIL, its shareholders and
creditors, could have commented. Equally, whether NSEL’s exchange
was an essential and integral part of the Indian economy and financial
system, and whether this defunct business could be consolidated so
as to impact the economy are all matters for comment by FTIL and its
shareholders and creditors. For all these reasons, we cannot accede
to the respondents’ arguments on this score. On this ground alone,
even assuming that these two grounds obtained and can be culled out
from the final order, not being contained in the draft order, the said
103
grounds would be in breach of Section 396(3) and (4), and therefore,
cannot be looked at to support the order.
59.3. It is important to note that grounds (a) and (b) are both culled out
in answer to objections raised by FTIL. The precise objection raised
and the answer given are quoted hereinbelow:
“7.2.1. FTIL has challenged the background and
reasons for the amalgamation as the power under
section 396 of the Act has been used only in case of
Government companies alone. This argument does
not derogate from the scope of the statutory
provisions. The statutory provisions of section 396 of
the Act are being invoked in essential public interest
to safeguard the interest of all stakeholders in the
captioned company. The present status and
composition of the Boards of FTIL and NSEL have
been noted. However, the fact that the Boards had
not acted with an independent mind to collect
information and put the system under a robust
technology is borne out of the simple fact that the
Show Cause Notice dated 27-04-2012 issued by the
Department of Consumer Affairs based on analysis of
trade data by the then Forward Market Commission
had given an alarming picture of the state of affairs of
NSEL. The public interest driving the merger are set
out in the business realities of the case, it is noted
from the facts of the case and the recommendations
of FMC as well as its order dated 17-12-2013 which
throw ample light to the grave shattering of the public
confidence and the purpose of establishing
commodity exchange has been defeated.”
xxx xxx xxx
“7.2.6. FTIL and NSEL have distinct and separate
objects and nature of operations and completely
disparate and unconnected objects, and hence there
is no synergy, efficient administration, consolidation
104
of business or co-ordination in policy to be gained
by the forced amalgamation; the argument runs
contrary to the concept of merger which essentially
means that two or more separate entities are getting
merged to achieve the objectives of amalgamation. In
the instant case, amalgamation is targeted to achieve its
stated objects, essentially in public interest. By all
intents and purposes, the way both the companies were
being managed, owned and controlled, NSEL is the alter
ego of FTIL and thus, the two companies have been
practically one entity. All stakeholders were also looking
at them as one entity. The amalgamation u/s. 396 of the
Act only formalizes this practical reality in essential
public interest.”
xxx xxx xxx
“7.2.8. The FTIL has questioned the jurisdiction of
the Central Government to decide on the question of
fraud and claimed that it has to be proved beyond
reasonable doubt by adducing necessary
particulars; the Central Government is invoking section
396 of the Act in essential public interest for the merger
of NSEL, which is an almost wholly-owned subsidiary of
FTIL. The merger is not an adjudication on the alleged
fraud. The merger is targeted to achieve its stated
objectives for long term sustainability in the best interest
of the stakeholders.”
(emphasis in original)
It will be noticed that the objection raised in paragraph 7.2.1 is that
Section 396 can be used in the case of Government companies alone,
whereas the answer given is that this cannot be so, given the business
realities of the case and the FMC order of 17.12.2013 “which throw
ample light to the grave shattering of public confidence and the
purpose of establishing Commodity Exchange has been defeated”.
First and foremost, what is important to notice is that the “business
105
realities” of the case are what is contained in “the recommendations of
the FMC”. We have seen that these recommendations are in the form
of a letter dated 18.08.2014, in which the “business reality” is the fact
that dues of INR 5600 crore have to be paid, and that NSEL does not
have the wherewithal to do so. Thus, its parent company’s financial
resources ought to be used to effect such payment. This “business
reality”, therefore, speaks only of the private interest of the
investors/traders who have been allegedly duped (which fact will only
be established in suits filed by them in 2014), and nothing beyond
(which would show some vestige of public interest). Equally, the grave
shattering of public confidence and purpose of establishing commodity
exchanges having been defeated, according to the Central
Government, is a gloss on the FMC order dated 17.12.2013. If this
were so, one would have expected a resuscitation or revival of the
commodities exchange of NSEL, which could have been achieved by
takeover of its management. It is difficult to imagine that grave
shattering of public confidence by the permanent shutting down of the
commodities exchange of the NSEL would be remedied only by
facilitating the paying of dues to certain allegedly duped
investors/traders, which fact will be proved or disproved in suits filed
by them which are pending adjudication in the Bombay High Court. In
106
any case, this reason is wholly irrelevant as an answer to the objection
raised by FTIL which, as we have seen, is an objection stating that the
Section applies to Government companies alone. Also, had FTIL made
no such objection, no such answer would have been forthcoming. As
far as paragraphs 7.2.6 and 7.2.8 of the order are concerned, what is
admitted in the order itself, is that there is no “adjudication” on the
“fraud” in the facts of the present case, and thus, not an exercise of
lifting of the corporate veil of the pre-amalgamation companies. The
amalgamation order contradicts itself by then stating that NSEL is the
alter ego of FTIL, and thus, the two companies are practically one
entity. In any event, these paragraphs do not indicate as to how the
‘alter ego’ argument impacts public interest. For all these reasons,
therefore, neither reason (a) nor reason (b) ought to detain us any
further. Reason (c) is, therefore, the only reason that really remains, as
is contained in the letter of 18.08.2014 by the FMC to the Central
Government. We have already seen that this reason, by itself, is the
protection of the private interest of a group of investors/traders, as
distinct from public interest.
59.4. It is important to note that under Section 396(4)(b), the Central
Government may, after considering suggestions and objections from
the stakeholders mentioned, make modifications in the draft order as
107
may seem to it desirable in the light of such suggestions and
objections. No modification has been made in the body of the Central
Government order as finally made. If the Central Government had
actually considered that each of these three reasons impact public
interest, it would have explicitly said so after suggestions and
objections were made by the various stakeholders. The fact that the
Central Government has not amended the body of the final order is of
great significance – it is only the original reasons given in the draft
order that continue as such in the final order which, as we have seen,
are not in furtherance of public interest at all. Reasons (a) and (b), part
of which is culled out from answers to objections and suggestions
given in the final order, is only given separately by the Central
Government after the amalgamation order to show that the principles
of natural justice as laid down by sub-section (4) of Section 396 have,
in fact, been followed. This becomes clear from paragraphs 6.3 and 7
of the final order, which read as follows:
“6.3. The Central Government received in writing and
through email various objections / suggestions from
various classes of stakeholders including the
shareholders, creditors, and all other interested parties
claiming that monies are recoverable from the
proceedings arising out of the business of the dissolved
company.
7. Dealing with objections, suggestions and
submissions of FTIL, NSEL and other parties – The
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Parties herein have made various objections,
suggestions and submissions on the proposed
amalgamation u/s. 396 of the Act on the order dated 21-
10-2014 in Draft form issued by the Central Government.
The said objections, suggestions and submissions were
made during the course of hearing and written
submissions (physically and electronically) received by
the Central Government on various dates. The said
objections, suggestions and submissions made by each
of the parties are dealt in the manner herein under.”
59.5. So far, we have gone by the Central Government order as it
stands. The Bombay High Court, in stating reasons (a), (b), and (c) as
grounds of public interest, has gone much further than even the
answer given to the objections that are contained in the order itself.
“Restoring/safeguarding public confidence in forward contracts and
exchanges, which are an integral and essential part of the Indian
economy and financial system, by consolidating the businesses of
NSEL and FTIL,” is not contained in the answer given to objections in
the order. First and foremost, restoring public confidence is no part of
the order. What is mentioned is only the fact that public confidence has
been shattered, as is reflected by the FMC order dated 17.12.2013.
Secondly, the entire expression, “which are an integral and essential
part of Indian economy and financial system, by consolidating the
businesses of NSEL and FTIL” is no part even of this answer given,
but a gloss given by the High Court itself relatable to this answer.
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Similarly, when it comes to reason (b), “giving effect to business
realities of the case” contained in the answer to objections does not
contain “by consolidating the businesses of FTIL and NSEL”, nor does
it contain “and preventing FTIL from distancing itself from NSEL, which
is, even otherwise, its alter ego”. On the contrary, the High Court itself
mentions, in paragraph 355, that “this is also not a case where the
Central Government has, in fact, lifted the corporate veil, despite the
alleged non-existence of the circumstances justifying lifting of such
corporate veil”, and further, “this is not a case where the Central
Government has lifted the corporate veil and sought to apportion any
liability upon either NSEL or FTIL”. For all these reasons, we find that
no reasonable body of persons properly instructed in law could
possibly arrive at the conclusion that the impugned order has been
made in public interest.
60. The learned Senior Advocates appearing on behalf of the
respondents has placed great reliance on the judgment in Ganesh
Bank (supra). In this judgment, the Appellant Bank was amalgamated
with Federal Bank under Section 45 of the Banking Regulation Act,
1949. Federal Bank was selected from out of several other banks by
the Reserve Bank of India as its offer to amalgamate with the
110
Appellant Bank was unconditional, Federal Bank undertaking to make
full payment to depositors.
61. The judgment in Ganesh Bank (supra) was faced with the
amalgamation of the Appellant Bank after a moratorium had been
imposed on it as it was found that its position was very weak, having
incurred huge losses in the financial year 2004-05. Section 45 of the
Banking Regulation Act reads as follows:
“45. Power of Reserve Bank to apply to Central
Government for suspension of business by a
banking company and to prepare scheme of
reconstitution or amalgamation.—(1) Notwithstanding
anything contained in the foregoing provisions of this
Part or in any other law or any agreement or other
instrument, for the time being in force, where it appears
to the Reserve Bank that there is good reason so to do,
the Reserve Bank may apply to the Central Government
for an order of moratorium in respect of a banking
company.
xxx xxx xxx
(4) During the period of moratorium, if the Reserve Bank
is satisfied that—
(a) in the public interest; or
(b) in the interests of the depositors; or
(c) in order to secure the proper management
of the banking company; or
(d) in the interests of the banking system of the
country as a whole,—
it is necessary so to do, the Reserve Bank may prepare
a scheme—
(i) for the reconstruction of the banking
company, or
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(ii) for the amalgamation of the banking
company with any other banking institution (in
this section referred to as “the transferee
bank”).
xxx xxx xxx”
It is important to note that unlike Section 396 of the Companies Act,
the satisfaction of the Reserve Bank of India can be on any one of four
grounds. Such satisfaction may be in the public interest or in the
interest of depositors. This point is, in fact, highlighted in paragraph 34
of the judgment as follows:
“34. The phrase “good reasons” in sub-section (1) of
Section 45 is a term of wide amplitude and it will not be
correct to restrict it only to the actions mentioned under
sub-section (2) of Section 45 of the Act as is contended
by the appellants. The provision is concerned with
preparing a scheme of reconstruction or amalgamation
which would become necessary where RBI is satisfied
about the existence of any of the four grounds
mentioned in Section 45(4). Apart from public interest
and the interest of the banking system, which are
provided in clauses (a) and (d) thereof, Section 45(4)
provides for the necessary action in the interest of the
depositors or with a view to secure proper management
of the Bank which are clauses (b) and (c) in that subsection. Precursor to the framing of the scheme is the
imposition of the moratorium which is provided in subsections (1) and (2) of Section 45. Existence of court
proceedings, mentioned in Section 45(2), would certainly
be one of the good reasons to impose moratorium, but
that certainly cannot be the only one. Considering that
object of the Act is protection of the interest of the
depositors, such an interpretation of the concept of
“good reasons” will have to be adopted, and not a
narrow one.”
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The judgment then goes on to state:
“39. Now, as far as the first two questions of nonconsideration of reconstruction and proposing merger
with Federal Bank are concerned, RBI has noted that the
Bank was in difficulties from 1990 and particularly from
December 2003 when it was placed under monthly
monitoring. RBI in its application for moratorium to the
Central Government dated 4-1-2006 had clearly stated
that during the discussion with the appellant Bank, major
shareholders and Directors had shown total reluctance
to merge into the stronger bank. In view thereof, it was
imperative that immediate arrangement to protect the
interest of the depositors was to be made through its
merger with a bank under Section 45 of the Act. RBI
had, therefore, made an effort and called upon the
appellant Bank, that if possible, to explore the possibility
of merger with another stronger bank. It had also made
an effort to impress that there should be infusion of fresh
capital. That was not coming. There could be a
reconstruction by bringing in more money or by
narrowing the size of the appellant Bank which did not
appear to be feasible. The only option left was that of
amalgamation.”
Thus, two features of Ganesh Bank (supra) distinguish the said case
from the facts of the present case. First, that under Section 45 of the
Banking Regulation Act, the interest of the depositors is to be looked
at; and it was this reason that led to the amalgamation. Secondly, this
Court found that after exploring other options, the only option left was
that of amalgamation.
62. In point of fact, the contrast between Section 45(4) of the
Banking Regulation Act and Section 396 of the Companies Act
113
becomes important. Under Section 45(4)(b) and (c) of the Banking
Regulation Act, the satisfaction of the Reserve Bank of India for
preparing a scheme of amalgamation can be in the interest of the
depositors of a particular bank or in order to secure the proper
management of a particular banking company. This must be
contrasted with clauses (a) and (d) of Section 45(4), which speak of
public interest and the interest of the banking system of the country as
a whole. This judgment, on facts, merged a financially weak bank with
a financially strong bank in the interest of the depositors of the
financially weak bank. It is important to note that the business of the
two merged entities is the same, as also Federal Bank’s (i.e., the
strong bank’s) willingness to merge, being an unconditional offer to
merge because it felt that post merger, it could have a significant
presence in western Maharashtra and the Belgaum area of Karnataka,
and could augment its credit disbursal to the agricultural sector. Also,
since the interest of depositors is a separate head, based upon which
the Reserve Bank of India may amalgamate two banking companies, it
is clear that this reason alone will not go to public interest, which is a
separate head contained in Section 45(4). It is in this context that the
observation contained in paragraph 44 is made, namely:
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“44. Under Section 45 of the Act, the primary
consideration is public interest. There is an underlying
object of acting swiftly and decisively to protect the
interests of depositors and ensure public confidence in
the banking system. The emergent situation which
warrants action with expedition cannot be lost sight of
while deciding the legality of the action.”
As we have already seen, the “emergent situation” which obtained in
2013 was no longer there in 2016 when the final order of
amalgamation was passed in the present case.
63. Valiant attempts have been made by counsel in the High Court
as well as counsel in this Court to support the order on grounds which
are outside the order, stating that such grounds make it clear that in
any case, the Government order has been made in public interest. The
celebrated passage in Mohinder Singh Gill (supra) states that:
“8. The second equally relevant matter is that when a
statutory functionary makes an order based on certain
grounds, its validity must be judged by the reasons so
mentioned and cannot be supplemented by fresh
reasons in the shape of affidavit or otherwise. Otherwise,
an order bad in the beginning may, by the time it comes
to Court on account of a challenge, get validated by
additional grounds later brought out. We may here draw
attention to the observations of Bose, J. in Gordhandas
Bhanji [Commr. of Police, Bombay v. Gordhandas
Bhanji, AIR 1952 SC 16] :
“Public orders, publicly made, in exercise of a
statutory authority cannot be construed in the
light of explanations subsequently given by the
officer making the order of what he meant, or of
what was in his mind, or what he intended to
115
do. Public orders made by public authorities are
meant to have public effect and are intended to
affect the actings and conduct of those to
whom they are addressed and must be
construed objectively with reference to the
language used in the order itself.”
Orders are not like old wine becoming better as they
grow older.”
We are of the view that it is the Central Government that has to be
“satisfied” that its order is in public interest and such “satisfaction”
must, therefore, be of the Central Government itself and must,
therefore, appear from the order itself. All these valiant attempts made
to sustain such order must be rejected.
64. However, learned Senior Advocates on behalf of the respondents
have cited Chairman, All India Railway Recruitment Board and
Anr. v. K. Shyam Kumar and Ors., (2010) 6 SCC 614, which,
according to them, renders the judgment in Mohinder Singh Gill
(supra) inapplicable where larger public interest is involved. In this
judgment, Mohinder Singh Gill (supra) was distinguished thus:
“44. We are also of the view that the High Court has
committed a grave error in taking the view that the order
of the Board could be judged only on the basis of the
reasons stated in the impugned order based on the
report of Vigilance and not on the subsequent materials
furnished by CBI. Possibly, the High Court had in mind
the Constitution Bench judgment of this Court in
Mohinder Singh Gill v. Chief Election Commr. [(1978) 1
SCC 405]
116
45. We are of the view that the decision-maker can
always rely upon subsequent materials to support the
decision already taken when larger public interest is
involved. This Court in Madhyamic Shiksha Mandal,
M.P. v. Abhilash Shiksha Prasar Samiti [(1998) 9 SCC
236] found no irregularity in placing reliance on a
subsequent report to sustain the cancellation of the
examination conducted where there were serious
allegations of mass copying. The principle laid down
in Mohinder Singh Gill case [(1978) 1 SCC 405] is not
applicable where larger public interest is involved and in
such situations, additional grounds can be looked into to
examine the validity of an order. The finding recorded by
the High Court that the report of CBI cannot be looked
into to examine the validity of the order dated 4-6-2004,
cannot be sustained.”
It will be seen that there is no broad proposition that the case of
Mohinder Singh Gill (supra) will not apply where larger public interest
is involved. It is only subsequent materials, i.e., materials in the form of
facts that have taken place after the order in question is passed, that
can be looked at in the larger public interest, in order to support an
administrative order. To the same effect is the judgment in PRP
Exports and Ors. v. Chief Secretary, Government of Tamil Nadu
and Ors., (2014) 13 SCC 692 [at paragraph 8]. It is nobody’s case that
there are any materials or facts subsequent to the passing of the final
order of the Central Government that have impacted the public
interest, and which, therefore, need to be looked at. On facts,
therefore, the two judgments cited on behalf of the respondents have
117
no application. Thus, it is clear that no reasonable body of persons
properly instructed in law could possibly hold, on the facts of this case,
that compulsory amalgamation between FTIL and NSEL would be in
public interest.
65. Section 396(3) speaks of a shareholder’s or a creditor’s interest
in or rights against the company resulting from an amalgamation order.
Such “interest in” or “rights against” obviously refers to real and
substantive rights, as opposed to rights that are only in form. A
shareholder or creditor gets effected by an amalgamation order if the
value of his share gets depleted as a result of the amalgamation and if
dividends that have been paid to him are likely to come down as a
result of the amalgamation. Likewise, a creditor of a solvent company
is directly effected by an amalgamation by which the amount loaned by
such creditor becomes, as a result of the amalgamation, less likely to
be paid back in time, than if the amalgamation did not take place. Such
rights and interests of members and creditors are substantive rights
which, when effected by the amalgamation, lead to compensation
having to be paid. Every shareholder of a company and indeed, every
creditor of a company, is concerned only with the “economic value” of
his share or the loan granted to a company, as the case may be. The
moment the share value, in real terms, is likely to dip, and/or loans
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granted are likely not to be repaid in time or at all as a result of an
amalgamation, such members or creditors of the amalgamating
company are equally entitled to be compensated for this economic
loss as are the members and creditors of the amalgamated company,
depending on the facts of each case. A reasonable construction must
be given to Section 396. Also, the suggested construction by the
respondents, as has been accepted by the impugned judgment,
operates harshly and ridiculously, and being opposed to justice and
reason, cannot possibly be adopted by this Court. It is clear that
Section 396(3) refers to the economic loss that is to be borne by
shareholders and members of both companies.
66. Thus, it is clear from a reading of Section 396(3), (3A), and (4)
(aa) that every member or creditor of each of the companies before
amalgamation shall have, as nearly as may be, the same interest in or
rights against the company resulting from the amalgamation as he had
in the original company. To the extent to which the interest or rights of
such member or creditor are less than his interest or rights against the
original company, post amalgamation, he shall be entitled to
compensation which is to be assessed. Post assessment, if such
member or creditor is aggrieved, he may prefer an appeal to the
appellate authority under sub-section (3A). Under sub-section (4)(aa),
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no order of amalgamation can be made unless the time for preferring
an appeal under sub-section (3A) has expired, or where any such
appeal has been preferred, the appeal has been finally disposed of.
67. The learned counsel on behalf of the appellant has argued that
the assessment order dated 01.04.2015, passed by the Joint Director
(Accounts), does not reflect any compensation in favour of the
shareholders or creditors of FTIL. According to the learned counsel, it
is clear that if a company with low net worth (NSEL) is amalgamated
with a company with high positive net worth (FTIL), both the
shareholders and the creditors of FTIL will be directly impacted as the
economic value of the shares will plummet, and the creditors of FTIL,
which is a positive net worth company, may have to wait for a long time
before recovery of debts owed to them once the company is
amalgamated with the negative net worth company. In short, the
creditors of FTIL will be put on par with the creditors of NSEL, which
will result in the creditors of FTIL either being paid back their debts
much later in point of time, or not at all. To this argument, the answer
of the Union of India, which has found favour with the Division Bench
of the Bombay High Court, is that “economic value” forms no part of
Section 396. So long as the shareholders of FTIL continued to have
120
the same number of shares, it matters not whether their share values
plummet post amalgamation.
68. In Bacha F. Guzdar (supra), this Court held that though a
shareholder acquires no right in the assets of a company as the
company itself is the owner of such assets, yet a shareholder certainly
has the right to dividends and the right to participate in the assets of
the company which would be left over after winding up. The Court
held:
“The true position of a shareholder is that on
buying shares an investor becomes entitled to
participate in the profits of the company in which he
holds the shares if and when the company declares,
subject to the Articles of Association, that the profits or
any portion thereof should be distributed by way of
dividends among the shareholders. He has
undoubtedly a further right to participate in the assets
of the company which would be left over after winding
up but not in the assets as a whole as Lord Anderson
puts it.”
(at p. 882)
(emphasis in original)
69. In Life Insurance Corporation of India v. Escorts Ltd. and
Ors., (1986) 1 SCC 264, this Court dealt generally with the rights of
shareholders as follows:
“84. On an overall view of the several statutory
provisions and judicial precedents to which we have
referred we find that a shareholder has an undoubted
interest in a company, an interest which is represented
by his shareholding. Share is movable property, with all
121
the attributes of such property. The rights of a
shareholder are (i) to elect directors and thus to
participate in the management through them; (ii) to vote
on resolutions at meetings of the company; (iii) to enjoy
the profits of the company in the shape of dividends; (iv)
to apply to the court for relief in the case of oppression;
(v) to apply to the court for relief in the case of
mismanagement; (vi) to apply to the court for winding up
of the company; (vii) to share in the surplus on winding
up. ……”
On the facts of the present case, we are directly concerned with points
(iii) and (vii). It has been argued that the profits of the company postamalgamation will obviously come down, and dividends payable to
shareholders will consequently either come down or be wiped out if the
low net worth of NSEL is taken into account post amalgamation,
together with potential liabilities of the amalgamated company, which
may have to be paid in the near future. Secondly, if the amalgamated
company is wound up, the amount that is payable to the shareholders
post-amalgamation will be much less, if at all anything is to be paid,
than pre-amalgamation.
70. In fact, in Commissioner of Income Tax (Central) Calcutta v.
Standard Vacuum Oil Co., [1966] 2 SCR 367, this Court held:
“ …… A share is not a sum of money: it represents an
interest measured by a sum of money and made up of
diverse rights contained in the contract evidenced by the
articles of association of the Company. ……”
(at p. 374)
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71. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC
579, in the context of a voluntary amalgamation made under Sections
391 to 394 of the Companies Act, this Court went into share valuation.
This Court held:
“40. …… It must at once be stated that valuation of
shares is a technical and complex problem which can be
appropriately left to the consideration of experts in the
field of accountancy. Pennington in his Principles of
Company Law mentions four factors which had to be
kept in mind in the valuation of shares:
“(1) Capital Cover,
(2) Yield,
(3) Earning Capacity, and
(4) Marketability.
For arriving at the fair value of share, three well-known
methods are applied:
(1) The manageable profit-basis method (the
Earning Per Share Method)
(2) The networth method or the break value
method, and
(3) The market value method.”
What is clear from the various methods of valuation of shares, when it
comes to such valuation qua the transferor and transferee company, is
that the market value method is one method in which shares can be
valued so that their equivalent can then be provided for in the
amalgamated company. This would be nothing other than what those
shares were worth in the market on a particular day or an average
taken within a certain period. What is important to note is that the
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market value of shares is market value of shares reflective of their
economic value, being an interest measured by a sum of money, is not
something that is completely alien to determining the rights of or
interest of a shareholder in the transferor or transferee company, as
the case may be.
72. In fact, the Government order dated 12.02.2016 itself reflects the
net worth of NSEL as INR 8.86 crore from its balance sheet dated
31.03.2015, despite its capital being INR 60 crore, inasmuch as the
total reserve and surplus is a negative figure of INR 51.54 crore. As
against this, FTIL’s balance sheet, as on 31.03.2015, discloses that for
the same year, FTIL’s net worth is INR 2779.94 crore. Also, FTIL has
been paying dividends to its shareholders ranging from 1000% to
250% for the years 2007-2008 till 2015-2016. On the other hand,
NSEL has never paid a single dividend ever since its inception. Post
amalgamation, therefore, dividend payable to the shareholders of FTIL
is bound to come down. Correspondingly, the ‘marketable value’ of
such shares will also fall.
73. The impugned Division Bench judgment has incorrectly held that
the economic value of shares cannot be taken into account. In fact,
from the Director’s Report of NSEL dated 20.07.2015, it is specifically
124
stated under the caption, “(vi) civil suits / complaints / writs / public
interest litigation” that:
“xxx xxx xxx
c) The Company received a legal opinion to the
effect that the Company is not liable for payment under
the provisions of SGF in the bye-laws. Further in case
of e-Series contract related transactions, no major
infirmity in underlying physical stock was observed.
Therefore, at this stage and in the opinion of the
Management of the Company, relying upon the legal
advices, and as per the provisions of bye-laws of the
exchange there are no direct ascertainable financial
claims against the company. The Company may be
exposed to liabilities in case of any adverse outcome of
these investigations / enquiries or legal cases or any
other investigations / enquires or suits which may arise
at a later date.”
This is further clarified in the consolidated financial statement made for
the financial year 2014-2015 as follows:
“Risk of un-identified financial irregularities
In view of the specific scope of the forensic audits and
the limitations in the forensic audits and investigations,
there is inherent a risk that material errors, fraud and
other illegal acts may exist that could remain
undetected.
Risk of adverse outcome of investigation/enquiry by
law enforcement agencies
Several agencies such as the Police (EOW), Ministry
of Corporate Affairs (MCrA), Enforcement Directorate
(ED), CBI and the Income Tax Department etc. are
currently investigating / enquiring the extent of alleged
irregularities and any breach of law. The matters are
also sub judice before various forums including the
Hon’ble Mumbai High Court. The Company may be
exposed to liabilities in case of any adverse outcome of
these investigations or any other investigations which
may arise at a later date.”
125
From the Director’s Report and consolidated financial statements of
NSEL, it becomes clear that the company may be exposed to liabilities
in case of any adverse outcome in any of the proceedings that may be
pending, as a result of which, it may have to pay back the whole or
some part of the INR 5600 crore owed to the alleged investors/traders
by the 24 defaulters who are members of NSEL. This would certainly
impact the ‘economic value’ of shares held in FTIL as this is one factor
that would, post amalgamation, depress the market value of shares
held by such shareholder, and would also impact the dividend payable
on such shares post amalgamation.
74. The impugned judgment has also held that no material was
produced before the Court to show that share prices would in fact
plummet post-amalgamation. This is despite the fact that the
impugned judgment itself refers to the fact that since the publication of
the draft order on 21.10.2014, the share value which was INR 211.10,
dropped to INR 174.55 ten days later. The Division Bench then goes
on to state that it is not possible to hold that any case of serious
erosion in economic value has at all been made out, inasmuch as by
21.10.2014, when the draft order of amalgamation was made available
to companies, the news of collapse of NSEL’s exchange was already
126
in public domain. This is wholly incorrect for the reason that the news
of collapse took place in July, 2014, i.e., over two months before the
publication of the draft order. It is well known that the stock market is
extremely sensitive to the slightest event that may render a company
less profitable. Over two months is too long a period to relate a share
value of INR 211.10 drastically falling to INR 174.55. On the other
hand, it is obvious that the publication of the draft order on 21.10.2014
had the impact of the share price reducing by a substantial amount,
ten days later. In fact, a reference to the share prices of NSEL
furnished by the learned Additional Solicitor General makes it clear
that the moment the final amalgamation order dated 12.02.2016 was
publicised, the share price fell from INR 89.90 on 12.02.2016 to INR
73.90 on 24.02.2016 and further to INR 73.10 on 29.02.2016.
Incidentally, the High Court realised this, and finally incorrectly
concludes, “there is thus substantial compliance with the provisions of
Section 396(3).” Given the fact that the assessment order dated
01.04.2015 did not provide any compensation to either the
shareholders or creditors of FTIL for the economic loss caused by the
amalgamation in breach of Section 396(3), it is clear that an important
condition precedent to the passing of the final amalgamation order was
not met. On this ground also, therefore, the final amalgamation order
127
has to be held to be ultra vires Section 396 of the Companies Act, and,
being arbitrary and unreasonable, violative of Article 14 of the
Constitution of India.
75. However, the learned Senior Advocates for the respondents
have argued that an order of nil compensation is equally an order that
is passed under Section 396(3) which could have been appealed
against but was not appealed against. For this reason, therefore, it is
not correct to state that the condition precedent mentioned in Section
396(4)(aa) has not been fulfilled. It will be noticed that the language
used in the appeal provision, i.e. Section 396(3A), is “any person
aggrieved by any assessment of compensation made by the
prescribed authority under sub-section (3) may…… appeal to the
Tribunal, and thereupon the assessment of the compensation shall be
made by the Tribunal.” The pre-requisites for the application of subsection (3A) are that a person first be aggrieved by an “assessment of
compensation” “made” by the prescribed authority. Where no
assessment of compensation whatsoever is made by the prescribed
authority (and on the facts here, the prescribed authority has not, in
fact, stated that for the reasons given by it, compensation awarded to
FTIL, its shareholders and creditors is nil), no person can be aggrieved
by an order which does not assess any compensation, which may be
128
interfered with by the Appellate Tribunal which must then assess the
compensation for itself. The statute clearly entitles such shareholders
and creditors to have compensation assessed first by the prescribed
authority and then by the appellate authority. This Court, in Institute of
Chartered Accountants of India v. L.K. Ratna and Ors., [1986] 3
SCR 1049, held that the defect in observing the rules of natural justice
in the trial administrative body cannot be cured by observing such
rules of natural justice in the appellate body. It was held:
“It is then urged by learned counsel for the
appellant that the provision of an appeal under Section
22-A of the Act is a complete safeguard against any
insufficiency in the original proceeding before the
Council, and it is not mandatory that the member
should be heard by the Council before it proceeds to
record its finding. Section 22-A of the Act entitles a
member to prefer an appeal to the High Court against
an order of the Council imposing a penalty under
Section 21(4) of the Act. It is pointed out that no
limitation has been imposed on the scope of the
appeal, and that an appellant is entitled to urge before
the High Court every ground which was available to
him before the Council. Any insufficiency, it is said, can
be cured by resort to such appeal. Learned counsel
apparently has in mind the view taken in some cases
that an appeal provides an adequate remedy for a
defect in procedure during the original proceeding.
Some of those cases as mentioned in Sir William
Wade’s erudite and classic work on “Administrative
Law” (5th Edn.). But as that learned author observes (at
p. 487), “in principle there ought to be an observance
of natural justice equally at both stages”, and
“if natural justice is violated at the first stage,
the right of appeal is not so much a true right
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of appeal as a corrected initial hearing:
instead of fair trial followed by appeal, the
procedure is reduced to unfair trial followed
by fair trial.”
And he makes reference to the observations of
Megarry, J. in Leary v. National Union of Vehicle
Builders [(1971) 1 Ch. 34, 49]. Treating with another
aspect of the point, that learned Judge said:
“If one accepts the contention that a defect of
natural justice in the trial body can be cured
by the presence of natural justice in the
appellate body, this has the result of depriving
the member of his right of appeal from the
expelling body. If the rules and the law
combine to give the member the right to a fair
trial and the right of appeal, why should he be
told that he ought to be satisfied with an
unjust trial and a fair appeal? Even if the
appeal is treated as a hearing de novo, the
member is being stripped of his right to
appeal to another body from the effective
decision to expel him. I cannot think that
natural justice is satisfied by a process
whereby an unfair trial, though not resulting in
a valid expulsion, will nevertheless have the
effect of depriving the member of his right of
appeal when a valid decision to expel him is
subsequently made. Such a deprivation would
be a powerful result to be achieved by what in
law is a mere nullity; and it is no mere triviality
that might be justified on the ground that
natural justice does not mean perfect justice.
As a general rule, at all events, I hold that a
failure of natural justice in the trial body
cannot be cured by a sufficiency of natural
justice in an appellate body.”
The view taken by Megarry, J. was followed by the
Ontario High Court in Canada in Re Cardinal and
Board of Commissioners of Police of City of Cornwall,
[(1974) 42 D.L.R. (3d) 323]. The Supreme Court of
New Zealand was similarly inclined in Wislang v.
130
Medical Practitioners Disciplinary Committee, [(1974) 1
N.Z.L.R. 29] and so was the Court of Appeal of New
Zealand in Reid v. Rowley [(1977) 2 N.Z.L.R. 472].”
(at pp. 1065-1066)
This judgment was the subject matter of comment in Union Carbide
Corporation v. Union of India, [1991] Supp (1) SCR 251, where this
Court held, following the judgment in Charan Lal Sahu v. Union of
India, (1990) 1 SCC 613, that non-compliance with the obligation to
issue notices to persons effected by the Bhopal gas leak did not, for
this reason alone, vitiate the settlement that was entered into with
Union Carbide by the Government on their behalf. This Court, in
passing, commented that the principle laid down in Leary v. National
Union of Vehicle Builders, [1971] Ch. 34 might perhaps be too broad
a generalisation, except in cases involving public interest. This was an
observation made in answer to an argument by Shri Shanti Bhushan,
stating that a defect of natural justice always goes to the root of the
matter. Ultimately, given the fact that the settlement fund was held to
be sufficient to meet the needs of just compensation to the victims of
the Bhopal gas leak tragedy, it was held that the grievance on the
score of not hearing the victims first would not really survive. However,
what is of fundamental importance is the fact that in the present
situation, a clear statutory right is given to every member or creditor
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who shall be entitled to an assessment of compensation, first by the
prescribed authority and then, a right of appeal to the Appellate
Tribunal. In such cases, therefore, the orders of “non-assessment” by
the prescribed authority can more appropriately be challenged in
judicial review proceedings, in which the High Court, acting under
Article 226 of the Constitution of India can, if an infraction of Section
396(3) is found, send the matter back to the prescribed authority to
determine compensation after which the right of appeal under subsection (3A) of Section 396 would then follow. In fact, in Writ Petition
2743 of 2014, which challenged both the draft order and the final order
of amalgamation, the appellant took out a chamber summons for
amendment of its writ petition to challenge the order of assessment of
compensation, dated 01.04.2015, which amendment was allowed vide
order dated 16.02.2016. The order of “non-assessment” of
compensation has thus been challenged by FTIL in proceedings under
Article 226 of the Constitution of India. Even otherwise, this is a case
where there is complete non-application of mind by the authority
assessing compensation to the rights and interests which the
shareholders and creditors of FTIL have and which are referred to in
Section 396(3) of the Act. This being the case, it is clear that Section
396(3) has not been followed either in letter or in spirit.
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76. In conclusion, though other wide-ranging arguments were made
with respect to the validity of the Central Government amalgamation
order, we have not addressed the same as we have held that the order
dated 12.02.2016 is ultra vires Section 396 of the Companies Act, and
violative of Article 14 of the Constitution of India for the reasons stated
by us hereinabove. The appeals are accordingly allowed, and the
impugned judgment of the Bombay High Court is set aside. The writ
petition is disposed of in light of this judgment.
…………………………J.
(R.F. Nariman)
…………………………J.
New Delhi (Vineet Saran)
April 30, 2019.
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