TaxTMI 
TaxTMI 
2017 (12) TMI 338
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....ani Iyer - Senior Advocate and Mr. Subhrata Chakraborty i/b. Juris Corp for Petitioner in WP 1785 of 2016 and for Respondent Nos. 7, 8, 9, 10 and 11 in WP No. 2743 of 2014. Mr. D. J. Khambata - Senior Advocate with Mr. J. P. Sen - Senior Advocate, Mr. Aditya Mehta, Mr. Pheroze Mehta, Ms Devika Deshmukh Ms Rashna Dastur, Ms Sharmila S. Deshmukh, Ms Yugandhara Khanwilkar, Ms Namrata Jani, Mr. Parag Vyas, Mr. G. R. Sharma and D. P. Singh i/b Mr. Jay Bhatia and Mr. Dushyant Kumar for Respondent No.1 - Union of India in all the matters. Mr. Iqbal Chagla and Mr. Shiraz Rustomjee - Senior Advocates with Mr. Mihir Mody, Mr. Nishant Upadhyay, Mr. Nirav Parmar and Mr. Jayesh Ashar i/b. M/s. K. Ashar & Co. for SEBI. Mr. Aspi Chinoy and Mr. S. U. Kamdar - Senior Advocates with Mr. Ameet Naik and Mr. Abhishek Kale i/b. M/s. Naik Naik & Associates for Respondent No. 3 in WP No. 2743 of 2014 and for Respondent No. 2 in WP No. 1785 of 2016 and for Respondent No. 2 in WP No. 1922 of 2016. Mr. Zubin Behramkamdin with Mr. Murari Madekar i/b. Madekar & Co. for the intervening employees in WP 2743 of 2014. Ms Namrata Vinod i/b. M/s. Federal & Rashmikant for Intervenors (Modern India Ltd. & Ors....
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....gulation) Act, 1952 (FCRA). The exemption was in respect of contracts of one day's duration for sale and purchase of commodities traded on the spot exchange established by NSEL. The conditions, inter alia, placed an absolute bar on short sales and stipulated that all outstanding positions at the end of the day, must result in delivery of commodities. 5] In 2009 or thereabouts, NSEL offered contracts with long term settlement periods including T+18, T+25 and T+36, where, "T" represents the trade day and the numbers 18, 25 and 36 represent the period within which the deliveries of commodities will be completed and the transactions squared off. Further, in 2009 itself, NSEL offered paired contracts, comprising short term buy contract and a long term sell contract, i.e., T+2 and T+25. In some instances assured interest returns were offered. By the year 2013, 99% of the turnover of the spot exchange comprised paired contracts, almost unconnected with genuine spot transactions in commodities. All this was, at least prima facie, in breach of the conditions subject to which NSEL had been granted exemption from the applicability of FCRA. 6] In 2012, the Regulatory Authorities, inc....
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....tself, to undertake audit. The audit reports, indicated serious breaches in operations. The Central Government ordered inspection of books and accounts of both NSEL and FTIL under Section 209A. The Economic Offences Wing (EOW) registered cases against the directors, key personnel of NSEL, FTIL and some of the defaulters under the Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999 (MPID Act). 9] The FMC, after issuance of show cause notice, made an order dated 17th December 2013 declaring FTIL and certain key personnel to be not fit and proper to hold more than 2% of the paid up equity capital of Multi Commodities Exchanges (MCXS) and other exchanges. This was challenged by instituting Writ Petition No. 337 of 2014, which came to be admitted. However, by order dated 28th February 2014, interim relief was declined. The special leave petition against the order dated 28th February 2014, was dismissed as withdrawn. 10] Section 396 of the Companies Act empowers the Central Government to order compulsory amalgamation of two or more companies where it is satisfied that it is essential in public interest to do so. No order can be made under this ....
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.... to make the impugned order amalgamating NSEL and FTIL. The petitioners, in all these petitions, have challenged this impugned order on various grounds. SUBMISSIONS ON BEHALF OF FTIL, JIGNESH SHAH, RAVI SHETH, SHAFT, STANDARD CHARTERED BANK, AND INTERVENOR 13] Mr. Harish Salve, the learned Senior Advocate for the FTIL and most of the other learned counsel for the petitioners and intervenors, submit that the impugned order is in gross breach of the principles of natural justice and fair play for at least four reasons. Firstly, no opportunity of personal hearing was granted to any of the affected parties except FTIL and NSEL, despite specific directions issued by this Court in its order dated 4th February 2015. Secondly, the Central Government has not even properly considered the objections and suggestions made by the affected parties and such non-consideration constitutes breach of the principles of natural justice and fair play. Thirdly, the Central Government has relied upon adverse material in the form of proposals inter alia from FMC, without granting the affected parties any opportunity to explain why such proposals were flawed. Fourthly, they submit that there is a varia....
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....r is ultra vires Section 396. They rely on Prag Ice and Oil Mills vs. Union of India (1978) 3 SCC 459, Balmadies Plantations vs. State of Tamil Nadu(1972) 2 SCC 133 , Express News Papers vs. Union of India 1986 (1) SCC 133, State of Punjab vs. Gurudial Singh 1980 (2) SCC 471 and Collector vs. Rajaram Jaiswal 1985 (3) SCC 1, in support of these propositions. 15] Mr. Salve and most of the other learned counsel for the petitioners and intervenors, submit that the Central Government has misconstrued the scope of the expression 'interests of member' in Section 396 so as to altogether exclude the economic value of the shareholding. They submit that the expression, in the context of listed companies like FTIL would include the entire package of rights and interests associated with such shares. They submit that the compulsory amalgamation of FTIL having net worth of Rs. 2800 crores with NSEL having putative liabilities of Rs. 5600 crores is bound to drastically reduce the book value of FTIL's shares. The resultant company will never be in a position to compensate shareholders of FTIL for such losses. Therefore, the only reasonable construction of Section 396 is to permit com....
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....on State of Orissa vs. Brundaban Sharma & Anr. 1995 Supp (3) SCC 249 and A.V. Venkateswaran vs. Ramchand Wadhwani & Anr. (1962)2 SCR 753, in support of the proposition that even the availability of alternate remedy by way of appeal is no bar to assail an appealable order in writ jurisdiction. 18] Mr. Seervai, Mr. Shah and Mr. Zubin Behramkamdin submit that there is violation of Article 14 of the Constitution since the Central Government has practised hostile and invidious discrimination in the matter. They submit that this is for the first time that the provisions of Section 396 have been invoked to compulsorily amalgamate two non-government companies. They rely on a list of instances where the provisions of Section 396 came to be invoked in the past. They point out that each and every instance concerns Government companies. They rely on Circular dated 20th April 2011 issued by the Ministry of Corporate Affairs to suggest that the Section 396 applies only to amalgamation of Government companies. They also rely upon the very same circular to submit that even in matters of amalgamation of Government companies by resort to Section 396, the procedure prescribed in Section 391 is req....
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....mpugned order, has not even adverted to the aspect of national interest, the impugned order, is vitiated and liable to be struck down. They rely mainly on the legislative history, the statement of objects and reasons to the Bill which preceded the Constitution (Fourth Amendment) Act, 1955 and the Companies (Amendment) Bill 1959. They also make reference to Notes on Clauses mainly to submit that amendment to substitute the expression national interest with public interest in Section 396, was an amendment of merely "drafting nature". They rely on Uttam Das vs. Shiromani Gurdwara Prabhandak Committee, Amritsar AIR 1996 SC 2133, Chagan Bhujbal vs. Union of India Writ Petition No. 3931 of 2016 decided on 14th December 2016, Wood Polymer Limited vs. Bengal Hotels Pvt. Ltd. 1977 (109) ITR 177 and Union of India vs. Ambalal Sarabhai Enterprises Ltd. 1984 (55) Company Cases 623, in support of their submissions. 21] Mr. Salve and most of the other counsel for the petitioners and intervenors submit that there was no public interest involved in the matter without which the power under Section 396 can never be legitimately exercised. They submit that in this case, the interests of 781 high n....
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....th these vices are sufficient to vitiate the exercise of subjective satisfaction. They rely on Anirudhsinhji K. Jadega & Anr. Vs. State of Gujarat(1995) 5 SCC 302, Commissioner of Income Tax, Shimla vs. Greenworld Corporation, Parwanoo (2009) 7 SCC 69 and Tarlochan Dev Sharma vs. State of Punjab & Ors (2001) 6 SCC 260, in support of these propositions. 24] Mr. Salve and most of other counsel for the petitioners and intervenors submit that the impugned order, tacitly proceeds on the basis that NSEL, FTIL, its directors and key personnel have indulged into fraud or are liable to make good any amounts to the alleged investors. They submit that up to now, not a single adjudicatory authority has determined the issue of fraud or liability of NSEL, much less FTIL or its directors. They submit that the powers under Section 396 could never have been exercised merely on suspicion of fraud as against proven fraud. They point out that even in civil proceedings, allegations of fraud are required to be proved beyond reasonable doubt and not merely by applying the test of preponderance of probabilities. They submit that the Central Government is aware of this legal position, but has sidelined ....
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....ss the Central Government is satisfied that there is no other option to salvage the situation other than to order compulsory amalgamation of two or more companies. They submit that in the present case, no such exercise has been undertaken by the Central Government to determine whether other less drastic options were available. They submit that there is a difference between cases where the Government or the statutory authorities are merely required to form an opinion and cases where the exercise of power is predicated upon record of essentiality and satisfaction. They rely on Peerless General Finance and Investment Co. Ltd. vs. Union of India (1991) 71 Company Cases 300, in support of these propositions. 27] Initially, Mr. Salve and most of the other counsel for the petitioners and intervenors, submitted that the impugned order must be judicially reviewed applying the test in Associated Provincial Picture Houses Limited vs. Wednesbury Corporation 1947 (2) ALL E.R. 682. They submitted that the Central Government has ignored the relevant considerations but taken into account the irrelevant considerations. They submitted that the impugned order proceeds on basis of certain assumptio....
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....laims of almost 7000 out of 13000 investors stand substantially settled. They point out that the investors have themselves obtained decrees against defaulters to the extent of Rs. 1233.02 crores. They point out that the investors have also obtained injunctions or attachment orders against the defaulters' assets conservatively quantified at Rs. 4,400 crores. They point out that even the EOW has attached the assets of the defaulters to the extent of Rs. 6,330 crores. They submit that all these are vital and relevant considerations, which have been totally ignored by the Central Government in making the impugned order. 29] Ms Rajani Iyer, appearing for Standard Chartered Bank, an unsecured creditor of FTIL submits that the interests of the Bank as well as other similarly placed creditors have been completely ignored by the Central Government in making the impugned order. She submits that as a result of the impugned order, the capacity of FTIL to service the loans extended by the bank might be severely affected. This is a relevant consideration which ought to have been addressed by the Central Government. Failure, to do so vitiates subjective satisfaction and consequently the im....
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....d order is in the nature of delegated or subordinate legislation and therefore, the principles of natural justice can have no application, except to the extent indicated in the parent statute. They submit that the impugned order in the present case, answers all the indicia of a delegated or sub-ordinate legislation. They submit that this is evident from the fact that the impugned order of amalgamation operates in rem; looks to the future by creating new rights and liabilities; is conceived in public interest; is required to be and is published in the Official Gazette; and is required to be laid before the Parliament for exercise of Parliamentary scrutiny. They submit that all these factors make it clear that the impugned order is nothing but a delegated legislation / subordinate legislation. They rely on Prentis vs. Atlantic Coast Line Co. Ltd. 211 US 210, Page 226, Australian Boot Trade Employee's Federation vs. Whybrow & Co., (1910) 10 CLR 266, Page 318 Express Newspaper (Private) Ltd. vs. Union of India AIR 1958 SC 578, Paras 96, 103, 105 and 111, Union of India vs. Cynamide India Ltd. (1987) 2 SCC 720, Para 7 and Dhariwal Industries Ltd. vs. State of Maharashtra 2013 (1) Mh....
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.... in the first place, the petitioners must make up their mind as to whether NSEL is indeed an unhealthy company or not. He submits that the petitioners have repeatedly pointed out that NSEL or FTIL are not at all liable to the investors. In any case, investors have already obtained decrees in excess of Rs. 1200 crores against the defaulters and assets of the defaulters, in excess of Rs. 6000 crores stand attached or injuncted from alienation. Secondly, there is absolutely nothing in the text of Section 396 to suggest that it applies only to the amalgamation of two or more healthy companies. He submits that when the provisions of a Statute are clear and unambiguous, the effect of such provision cannot be avoided on basis of actual or perceived consequences. He submits that the provisions of Section 396 constitute a complete Code empowering the Central Government to amalgamate two or more companies where it is satisfied that it is essential in public interest to do so. He submits that Section 396 is a social welfare legislation. He refers to legislative history and relies on Nelson Motis vs. Union of India (1992) 4 SCC 711 and Hutti Gold Mines Co.Ltd. vs. H.G.M.L. Copper Units Officer....
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....eadings in the petition. 37] Mr. Khambata submits that there are no pleadings or grounds complaining of denial of opportunity to institute appeal under Section 396 (3A). Even factually, no such denial is demonstrated. Section 396 (3A) entitles "any person aggrieved by any assessment of compensation ..........." to institute an appeal. Relying on Babua Ram vs. State of U.P. 1995 (2) SCC 689, he submits that the expression is a wide import and would mean a person who has suffered legal injury or one who has been unjustly deprived or denied of some benefit, advantage or compensation, which he would be interested to obtain in the usual course. 38] Mr. Khambata submits that since this was an extra-ordinary case and the Central Government was satisfied that it was essential in public interest to do so, the provisions of Section 396 were invoked. He submits that there is no question of any hostile or invidious discrimination involved merely because the power may have been exercised perhaps for the first time to compulsorily amalgamate two non-government companies. He submits that there is no comparison between the instances cited by the petitioners and the present case. He submits t....
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....ces of FTIL and NSEL. He submits that none of the petitioners have read or understood the impugned order to mean that the same is based on the solitary ground as aforesaid. He points out that even FTIL, in paragraph 82 of its petition , has listed the several grounds upon which the impugned order is based, though, no doubt, FTIL, has contested the validity of such grounds. 43] Without prejudice, Mr. Khambata submits that where public interest is involved, the Mohinder Singh Gill principle is inapplicable. He submits that there is ample material on record in support of the ground, which, NSEL concedes, the order is premised on. He submits that even the solitary ground was sufficient in public interest to make the impugned order. He however, reiterates that the impugned order is based on at least three distinct grounds which are discernible from the impugned order. He relies on Chairman, All India Railway Recruitment Board (supra), and PRP Exports vs. State of Tamil Nadu 2014 (13) SCC 692, in support of his submissions. 44] Mr. Khambata submits that the impugned order does not adjudicate on the issue of fraud or liability. He submits that the impugned order, no doubt, refers to....
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....to in the impugned order were not even disputed by FTIL and NSEL. Rather, there is sufficient material on record to suggest that these findings were admitted by FTIL and NSEL. In such circumstances, the Grant Thornton Report was valid and relevant material taken into consideration by the Central Government for making the impugned order. 47] Mr. Khambata submits that there is contradiction in the submissions of FTIL and some of its major shareholders on one hand and other shareholders of FTIL. He submits that on one hand, FTIL and its major shareholders including Jignesh Shah contend that decrees for amounts in excess of Rs. 1,200 crores have already been obtained against defaulters, assets to the extent of Rs. 4,000 to Rs. 5,000 crores have already been attached and the financial position of NSEL is such as would enable it to satisfy any decrees, if made against it. No doubt, they submit that NSEL is not at all liable and therefore there is no possibility of any decrees being made against NSEL. On the other hand, some shareholders of FTIL represented by Mr. Seervai contend that the amalgamation of FTIL which has net worth of Rs. 2,800 crores with NSEL which has putative liabilit....
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.... facts could have ever made the impugned order. Mr. Khambata submits that the impugned order clearly passes the Wednesbury's muster and warrants no interference. Mr.Khambata relies on Barium Chemicals vs. CLB (supra), Rohtas Industries (supra), M. Jhangir Bhatushah vs. Union of India 1989 Supp (2) SCC 201, Re: Jayantilal N. Parekh ILR 1949 Bom 508, Vinod Kumar vs. State of Haryana 2013 (16) SCC 293, G.B. Mahajan vs. Jalgaon Municipal Council 1991 (3) SCC 91 and Ganga Bhishnu Swaika vs. Calcutta Pinjrapole Society 1968 (2) SCR 117. 51] Mr. Rustomjee, learned counsel for SEBI (formerly FMC), submits that the promoters of NSEL held out several representations and made several commitments in order to secure permissions to set up a spot exchange. Based upon the same, DCA issued exemption notification dated 5th June 2007, which was conditional. The condition stipulated that no short sale would be permitted and all outstanding position at the end of the day must result in delivery. 52] Mr. Rustomjee submits that after securing exemption from the applicability of FCRA, however, the NSEL, undertook operations in breach of conditions subject to which exemption was secured. He submi....
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....y secured. Mr.Rustomjee, made reference to presentation made by Jignesh Shah to DCA and FMC, in which, it was asserted by Mr.Jignesh Shah that there was no breach and in any case, there were 120 warehouses holding inventory valued at Rs. 6000 crores, which is more than sufficient for effecting deliveries for the next 12 to 18 months. 55] Mr. Rustomjee points out that NSEL on 22nd July 2013 furnished undertakings that no further/fresh contracts would be launched till further orders, and further, all existing contracts would be settled on the due dates. However, NSEL, on 31st July 2013, suspended trading in all contracts, (except E-series) until further orders. On 14th August 2013, NSEL presented a settlement plan extending over 30 weeks, within, which, NSEL proposed to settle all pending obligation, assessed conservatively at Rs. 5600 crores. Even a payment/settlement schedule was proposed. However, NSEL, defaulted from the stage of first week itself. 56] Mr. Rustomjee submits that Grant Thornton and SGS India (Limited), both agencies, proposed by NSEL itself were appointed to audit the affairs of NSEL and FTIL, in the context of operations on the exchange. Based upon report s....
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.... despite repeated default on their part, no action was taken against them. Instead, NSEL, not only awarded arbitrary waivers, but also, guaranteed the loans taken by such defaulters. 60] For all these reasons, the respondents submit that there is no legal infirmity in the impugned order and all these petitions may be dismissed. ISSUES FOR DETERMINATION 61] Based upon the submissions made by learned counsel for the parties, the following issues, broadly arise for determination in all these matters : (A) Whether the impugned order was made in violation of the principles of natural justice and fair play? (B) Whether, taking into consideration the provisions in Section 396(3) of the Companies Act, the Central Government was at all empowered to order compulsory amalgamation of loss making wholly owned subsidiary (NSEL) with its profit making holding company (FTIL) under Section 396 of the Companies Act? (C) Whether the impugned order is ultra vires Section 396 (3) and Section 396(4) of the Companies Act, since, according to the petitioners in Writ Petition No.1922 of 2016 and Writ Petition No. 387 of 2015, the Central Government has failed to make any order assessing c....
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....d therefore, the issue of natural justice and judicial review be addressed on the said basis. Mr. Khambata also submitted that the compensation assessment order dated 1st April 2015 has attained finality for want of appeal and therefore, challenge to the same as raised by only some of the shareholders of FTIL may not be entertained. 64] Since, most of the issues referred to in the preceding two paragraphs are proposed to be dealt with in the course of consideration of the aforesaid broad based issues, there is no separate reference made to them. We also make it clear that the aforesaid were the only issues argued before us by the learned counsel for the parties. This clarification is necessary because in some cases the written submissions submitted later travel beyond the arguments made before us. OBJECTIVE FACTS & CIRCUMSTANCES, FCRA REGIME 65] FTIL, which was incorporated in 1988 is a Public Limited and Listed Company. It carries on business of developing technology products to facilitate trading on exchanges, such as stock exchanges or commodity exchanges. Jignesh Shah, the petitioner in Writ Petition No. 387 of 2015, either directly or indirectly holds and controls alm....
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....body of recognized associations for specified period. The FCRA constitutes the FMC and defines its duties and functions. 69] The FCRA was amended in 1960. The Statement of Objects and Reasons to the Amendment Act 62 of 1960 makes reference to experience gained in the last six years which revealed that the provisions were inadequate to deal with excessive speculation and other malpractices prevalent in some forward markets. It was noted that persons indulging in illegal forward trading could not be prosecuted for want of adequate documentary evidence and even persons found guilty, often got away with light punishment. There were no provisions to stop trading beyond official hours. The object of the Amendment Act was therefore stated to be the removal of these and other difficulties and to enable the Central Government and the FMC to exercise a stricter control over forward trading activities. 70] The FCRA was once again amended in 1971. The Statement of Objects and Reasons to Amendment Act 53 of 1971 is very important for the present matters and is therefore reproduced verbatim for reference of convenience: "Amendment Act 53 of 1971-Statement of objects and Reasons.- The Fo....
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....e definitions of the expressions, "forward contract" and "ready delivery contract" contained in the Act. Since immediate action has to be taken in this behalf, the Forward Contracts (Regulation) Amendment Ordinance, 1971 was promulgated by the President on 11th October, 1971. (4) The present Bill is intended to replace the Ordinance." [Emphasis supplied] 71] In furtherance of Objects and Reasons, FCRA provides for establishment and constitution of FMC, which is now substituted by Securities and Exchange Board of India (SEBI). The powers and functions of FMC have been defined. Chapter III is concerned with grant and withdrawal of recognition to recognized associations, which have to operate within the regime of FCRA. There are provisions empowering the Central Government to call for returns, annual reports and direct enquiries, framing of rules, byelaws, suspension of members or prohibiting them from trading, supercede governing bodies of associations or even to suspend businesses of recognized associations. Chapter III-A is concerned with registered associations and matters connected therewith. Chapter IV of the FCRA is concerned with forward contracts and options in goods. S....
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....means a contract which provides for the delivery of goods and the payment of a price therefor, either immediately or within such period not exceeding eleven days after the date of the contract and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in respect of any goods, the period under such contract not being capable of extension by the mutual consent of the parties thereto or otherwise." [Provided that where any such contract is performed either wholly or in part,- (1) by tendering of the documents of title to the goods covered by the contract by any party thereto (not being a commission agent or a bank) who has acquired ownership of the said documents by purchase, exchange or otherwise, to any other person (including a commission agent but not including a bank); or (2) by the realisation of any sum of money, being the difference between the contract rate and the settlement rate or clearing rate or the rate of any offsetting contract; or (3) by any other means whatsoever," and as a result of which the actual tendering of the goods covered by the contract or the payment of the full price therefor is dispensed with,....
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....cuna in the unamended definitions of expressions 'forward contract' and 'ready delivery contract'. The Government was therefore advised that the fact that there was no actual delivery of goods within the stipulated period of eleven days but there was a settlement, by payment of differences or set off does not convert a ready delivery contract into a forward contract. Since, the Government was unable to check the misuse of the ready delivery contracts under the unamended Act, by Amendment Act 53 of 1971 the definitions came to be amended in the aforesaid terms. 79] In terms of the amended definitions of the expressions 'ready delivery contract' in Section 2(i) of the FCRA, even a contract which complies with the main ingredients of a ready delivery contract as specified in Section 2(i) but if the performance of such contract involves realization of any sum of money, being the difference between the contract rate and the settlement rate or the clearing rate or the rate of any offsetting contract, then, such contract shall not be deemed to be a ready delivery contract. Since the module proposed by NSEL was to involve netting or setting of transactions at the....
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.... iii. 'T' day i.e. Trade day in the contracts launched by NSEL implied the day on which the trade takes place, i.e. the Commodity Seller sells the commodity and the Purchaser buys the commodity at the market price on that day; iv. On 'T' day, the Commodity Seller would place an order for sale of specified commodities on the Exchange through the Commodity Seller's Broker; v. This sell order would be matched / consummated against a buy order placed by a Trading Client through the Trading Client's Broker; vi. The '+2 / +25' refers to the days after the Trade day ('T'), at which time the transaction was required to be settled by payment against delivery of documents of title to the commodities traded; vii. When the commodities were sold on the Exchange, a Delivery Allocation Report was issued to the Trading Client's Broker for the benefit of the Trading Client which represented the allocation of commodities to the Trading Client. These Delivery Allocation Reports also referred to the Warehouse Receipts and were conclusive proof of ownership of Trading Client's goods; viii. The Trading Client....
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....hased commodities from a Commodity Seller under a T+2 contract, and then sold the same commodities to the same Commodity Seller under a T+25 contract at a higher price; ii. Though both T+2 and T+25 contracts were independent contracts offered by NSEL through separate circulars, it seems that the Commodity Sellers, Commodity Seller's Brokers, Trading Clients and Trading Client's Brokers, paired the contracts, so that : a) both the T+2 and the T+25 contracts were entered into at the same time, on the same day, between the same Trading Client and Commodity Seller; b) upon settlement of the T+2 Contract, the Trading Client received a Delivery Allocation Report from NSEL, indicating that the commodities were deposited in the warehouse (under a Warehouse Receipt), and the Commodity Seller received the purchase consideration; c) the T+25 Contract (i.e. where the Commodity Seller bought back the commodities earlier purchased by the Trading Client), was thereafter settled by the Trading Client delivering the Delivery Allocation Report to NSEL so that the Warehouse Receipt representing the underlying commodities, could be handed over to the Commodi....
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....h of the condition that the exemption from applicability of FCRA was only in respect of contracts of one day's duration. There is really no dispute, either in facts or in law on this aspect because even FTIL in its list of dates and events at entry 4 against date 05.06.2007, accepts this position. The entry and the note read as follows: "Notification No. S.O. 906(E) (the "Exemption Notification"), was issued by the Department of Consumer Affairs ("DCA"), which exempted all forward contracts of one day's duration for the sale and purchase of commodities on NSEL from the provisions of the Forward Contracts (Regulation) Act, 1952 ("FCRA"), subject to certain conditions. "Note: The effect of this Exemption Notification according to NSEL is that although buy and sale orders in respect of commodities traded on the exchange could take place in the course of the day, the settlement of the transactions by delivery of goods or documents of title against payment could not take place beyond 11 days, which period i.e. 11 days was regarded as 'ready delivery' or 'spot delivery'. 86] Further, apart from the note against entry 8 (November 2011 onwards) in the li....
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....he record indicates and it has not been disputed that by the year 2013, the volumes of paired contracts constituted almost 99% of the turnover of the NSEL Exchange. In monetary terms, this turnover of paired contracts was in the region of Rs. 1,34,000 crores between the years 2009 to 2013. This means that the entire operations at the NSEL Exchange, which was meant to be a commodities stock exchange, were entirely subverted in gross disregard of the conditions of the exemption notification dated 5^th June 2007 and consequently, the FCRA itself. 90] The FTIL in its pleadings as well as the list of dates, is really in no position to factually dispute the manner in which the operations were held at the NSEL Exchange. The NSEL itself has not even instituted any petition to question the impugned order, which takes cognizance of such facts. The learned counsel for NSEL when requested to comment on the operations at NSEL Exchange simply chose to submit that since the impugned order is based only on one ground or reason, namely, facilitating NSEL in recovering dues from the defaulters, there is no point in offering any comments or explanations about the operations at the NSEL Exchange. E....
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....le transactions. Since the contracts offered at NSEL were totally linked with delivery, buyers could be 100% sure that they would get delivery. A person could not avoid delivery by squaring of its position through an offsetting contract the next day. 95] The italicized portions in the preceding paragraph represent the precise expressions used by NSEL in its response dated 29^th May 2012 to DCA's show cause notice dated 27th April 2012. This is important, because, later on, it turned out that most of such assertions or assurances were found to be false. 96] On 10th July 2013, Jignesh Shah made a detailed and comprehensive presentation to DCA and FMC, in terms, holding out the following : "(i) NSEL has 120 warehouses, holding inventory valued at Rs. 6,000 crores approximately which are good for delivery for processors' consumption upto next 1 to 1.5 years. (ii) NSEL strictly prohibits short sales through its circulars, notifications, practices in letter and spirit. (iii) In agricultural commodities, more than 99% trades result into delivery on daily basis. (iv) As per empirical data, short delivery has not happened even in 0.0001% cases during last 5 years. ....
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....9.9999% of outstanding position at end of the day resulting into delivery, still we are converting all these contracts into "Trade for Trade", which will also eliminate any element of interpretation issue on short sale, thereby ensuring that every sale order results into 100% delivery only. The objective is to ensure that market equilibrium is not disturbed, which we are sure that you will appreciate." (emphasis supplied) 100] This means that even as on 22nd July 2013, NSEL held out to the regulatory authorities that there was no serious problem regards the operations at the NSEL Exchange, that short sales may have resulted from misinterpretation, that amends will be made to ensure that contracts shall be T+10 or less and most importantly NSEL will ensure that every sale order results into 100% delivery only. To back this, NSEL once again asserted that as per its empirical data, 99.9999% of outstanding position at end of the day has resulted into delivery. 101] On 31st July 2013, without there being any order or direction from any of the regulatory authorities either withdrawing the exemption notification dated 5th June 2007 or otherwise directing NSEL to suspend operation....
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....y 2013. Jignesh Shah, and FTIL have instituted petitions to challenge the impugned order and NSEL has filed an affidavit to support the petitioners in their challenge to the impugned order. There is no credible explanation as to the circumstances in which Jignesh Shah held out such representations to FMC and DCA on 10th July 2013. If, the representations held out on 10th July 2013 had any iota of truth on the date when they were made by Jignesh Shah, then, some credible explanation was necessary as to what transpired between 10th July 2013 and 31st July 2013, to prompt the NSEL to suspend operations on its exchange, when, hardly 20 days earlier, there was no serious problem regards the functioning of the exchange, the position of inventory in the warehouses, the position of margin monies and the position of settlement guarantee fund. No such explanation was forthcoming. 105] The only explanation attempted by FTIL was to state that some trading clients abused the trading mechanism at the exchange and entered into paired contracts and some of the trading clients, in collusion with the warehouse keepers stopped depositing the physical stocks in the warehouses either fully or partia....
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....and short deliveries had not taken place even in 0.0001% cases. In fact, hardly 8 days earlier, NSEL had assured the FMC and DCA that it will ensure that every sale order results into 100% delivery only. Despite all this, on 31st July 2013, no stocks of commodities were to be found in the warehouses, to effect deliveries to the trading clients; (iv) Hardly, 20 days earlier, Jignesh Shah had solemnly informed FMC and DCA that NSEL has a full proof risk management system compared to any other financial market structure and that NSEL model has full stock as collateral and 10-20% of open position as margin fee. However, on 31st July 2013, there was no significant margin fee available with NSEL in order to make at least partial payments to the trading clients; (v) The settlement guarantee fund maintained by NSEL, which was supposed to have Rs. 700/- to Rs. 800 cores , was again, found to have no significant amounts, for payment to the trading clients; (vi) Thus, trading clients with dues of approximately s.5600 crores or thereabouts were left in a complete lurch. They neither received the amounts due to them nor were they given deliveries of the commodities. 108] On th....
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....een made only keeping in mind the interests of such 781 high net worth trading clients, ignoring thereby, almost entirely the dues of 6445 trading clients, whose dues, even according to FTIL, have been settled only to the extent of 50%. 112] On 14th August 2013 NSEL wrote to FMC stating that it had proposed a settlement plan to pay investors through equated weekly disbursements of Rs. 174.72 crores extending over 30 weeks within which the dues to the trading clients (investors) would be settled. Even a payment schedule was indicated. However, this was to be subject to realization of funds from the payable members. In reality, NSEL defaulted from the first week itself, no doubt on the specious plea that funds could not be recovered from the payable members. 113] Faced with such an unprecedented payment crisis and the manner in which a National Level Commodities Exchange just collapsed, FMC directed forensic audit and approved the names of Grant Thornton and SGS India Pvt. Ltd. as proposed by NSEL itself. FTIL, in its petition and list of dates seeks to down play the Grant Thornton Forensic Audit Report by stating that 'The report found various lapses. There is no suggestio....
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.... 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 : Repeated Defaults : As per the NSEL exchange rules a member who does not have sufficient collateral/monies etc to discharge his obligations would 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 fifteen month period of 1 April 2012 and 30 July 2013. Exemptions from Margin Requirements: Members who were in a default position or whom had ....
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....vened 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 : Mr.Jignesh Shah Mr.Joseph Massey Mr.V. Hariharan Mr.Shreekant Javalekar 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 grant....
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....xemption 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." 115] The Grant Thornton Report makes observations on the position of commodities in the warehouses. These observations are important, since, Jignesh Shah, in his detailed presentation dated 10th July 2013 to FMC and DCA had stated that NSEL has 120 warehouses, holding inventory valued at Rs. 6,000 crores approximately which are good for delivery for processors' consumption upto next 1 to 1.5 years. The key observations in this regard read as follows: (i) 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 wareho....
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....aws in the context of maintenance of adequate margin by members who wish to trade at the exchange. Thereafter, the report points out 1800 waiver notes between April 2009 to July 2013 condoning the requirement for maintenance of adequate margins. Maximum waiver notes were favouring five of the 24 identified defaulters, who are due and payable amounts in excess of Rs. 5600 crores to the trading clients. This includes N.K. Proteins Limited, which is due and payable an amount of Rs. 950 crores. In the past, N.K. Proteins Limited committed several defaults. However, in breach of its own bye-laws and rules, NSEL permitted such repeated defaulter to continue trading and retain membership. Similarly, Lotus Refinery Private Limited is stated to have committed no less than 198 defaults and still, was permitted to continue trading and retain membership. Lotus Refinery Private Limited was also granted margin waivers and unlimited trade limit waiver notes. Mr. Joshi pointed out that Lotus Refinery Privae Limited was controlled by the son-in-law of the Chairman of NSEL Mr. Anjani Sinha. 119] On 4th October 2013, FMC issued notice to Jignesh Shah and FTIL and certain other key personnel ....
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....res. As regards the grievance of the Petitioners regarding failure to grant opportunity to cross-examine the auditors, the said aspect has been dealt with by the Commission in the impugned order. In paragraphs 14.6 and its subparagraphs, this aspect has been dealt with. After discussing the manner in which the enquiry before the Commissioner proceeded, a finding of fact has been recorded by the Tribunal in paragraphs 14.6.9 that despite the Commission granting opportunity to the Petitioners in the present Petitions to question the auditors in the manner they liked, except for Shri Joseph Massey, no other notice remained present when entire team of auditors was available for questioning. After having perused the impugned order, we find that elaborate enquiry has been made by the Commission. Findings of fact of serious nature have been recorded against the Petitioners. The fraud perpetrated is to the tune of Rs. 5,500 Crores. Criminal investigations are in progress. Considering the gravity of the allegations which have been found to be established against the Petitioners, this is not a fit case where prayer for stay can be granted in exercise of writ jurisdiction under Article ....
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....rovisions of Section 396. 126] In November 2014, FTIL filed the present petition challenging the draft order dated 21st October 2014 itself. Initially, status quo order was granted by this Court. However, by order dated 4th February 2015, the status quo was lifted and the Central Government was permitted to take further proceedings in the matter. Certain directions were also issued in the matter of hearing the affected parties. NSEL and FTIL were granted personal hearing. Objections, no less than 50389 made by shareholders of the companies, creditors and employees were considered. On 1st April 2015, an order assessing compensation as contemplated by Section 396(3) of the Companies Act was made and published in the official gazette. After the time limit for institution of appeals expired and since, no appeals had been instituted by any parties against the assessment order, the Central Government, proceeded to make the impugned order dated 12^th February 2016 ordering the amalgamation of NSEL with FTIL in public interest. 127] In March 2016, FTIL amended its writ petition so as to incorporate challenge to the impugned order dated 12th February 2016. 128] On 8th March 2017, w....
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....s with the procedure to be adopted by the Central Government in making an order under Section 396. The extent to which the principles of natural justice apply, have been set out in the provision itself. 133] Section 396 of the Companies Act reads as follows: 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 o....
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....t to each of the companies concerned. The draft order is naturally expected to contain the gist of the objective facts and the prima facie reasons or grounds on which the final order is proposed to be made. The Central Government is then required to consider and make such modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions or objections which may be received by it from such company, or any class of shareholders therein or any creditors or class of creditors thereof. The period of not less than two months is required to be offered for making suggestions and objections. This is the extent to which the principles of natural justice have been incorporated in Section 396. 135] There is no statutory exclusion of the principles of natural justice and fair play when it comes to the exercise of powers under Section 396. However, the scope and extent to which such principles shall apply have also been set out in the provision itself. The principles would stand complied with, where the companies which are proposed to be amalgamated are furnished copies of the proposed order in draft, so that the said companies as well as other parties likel....
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....ified that all contentions raised by the Petitioners - Financial Technologies ((India) Limited in this Petition and by the shareholders of NSEL and all other parties regarding jurisdiction of the Central Government to issue the said order as also regarding challenge to the validity of the said sections are kept open and, therefore, we propose to keep these Petitions pending. It is further clarified that if any adverse order is passed, the same shall not be notified for a period of two weeks after the order is communicated to the Petitioner. It is clarified that Central Government may give brief hearing to the parties mentioned in section 396 of the Companies Act." 138] No doubt, the aforesaid order, did permit shareholders, creditors and employees to file their objections and the Central Government was then permitted to pass appropriate order after giving brief hearing to all interested parties. However, such direction, has to be construed in the light of statutory scheme of as well as circumstantial flexibility, which is well accepted in dealing with challenges based upon failure of natural justice. The principles of natural justice, though universal have to be realistically an....
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....fledged oral hearing but even cross-examination of witnesses is treated as a necessary concomitant of the principles of natural justice. In some cases, even affording post decisional hearing is held to be sufficient compliance with principles of natural justice. 141] In Board of Mining Examination vs. Ramjee (1977) 2 SCC 256, the Supreme Court has observed that natural justice is not an unruly horse, no lurking landmine, nor a judicial cure-all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamentals of such essential processual propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice, without reference to the administrative realities and other factors of a given case, can be exasperating. The Courts cannot look at law in the abstract or natural justice as mere artefact. Nor can they fit into a rigid mould the concept of reasonable opportunity. If the totality of circumstances satisfies the Court that the party visited with adverse order has not suffered from denial of reasonable opportunity, the Court will declin....
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.... order dated 4th February 2015. 144] The petitioners seem to allege some technical breach in compliance with principles of natural justice. On such basis, the impugned order cannot be set aside, particularly when none of the petitioners before us have pointed out that any particular or significant objection of theirs, escaped consideration. None of the petitioners even attempted to point out any significant prejudice because no personal hearing was afforded to the 50389 objectors. None of the petitioners have pleaded and established any prejudice because the 50389 objectors were not afforded opportunity of personal hearing. Merely, submitting that the impugned order has occasioned prejudice, is not sufficient in such matters. We are unable to accept Mr.Seervai's submission that any action in violation of principles of natural justice is invariably void. 145] The Constitution Bench of the Supreme Court in Managing Director, ECIL, Hyderabad & Ors. vs. B. Karunakar & Ors. (supra) has held that the theory of reasonable opportunity and the principles of natural justice have been evolved to uphold the rule of law and to assist the individual to vindicate his just rights. They a....
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....en some real prejudice to the complainant; there is no such thing as merely technical infringement of natural justice. The requirements of natural justice must depend on the facts and circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject matter to be dealt with, and so forth. 148] From the nature of the objections and suggestions, it is apparent that the same were not significantly different from those made by NSEL and FTIL. No prejudice has been pleaded or demonstrated. The petitioners, it appears, allege technical breach in compliance with directions in the order dated 4th February 2015. The directions have been quite correctly construed by the Central Government. In matters of compliance with principles of natural justice, circumstantial flexibility, is permissible. In fact, the principles have to be realistically and pragmatically employed. The entire process leading to the making of the impugned order cannot be said to have occasioned any miscarriage of justice. Therefore, taking into consideration the totality of the circumstances, we are unable to fault the impugned order on the ground of failure of natural justice....
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....bjections were from the employees of FTIL. Again, the same were repetitive and the impugned order records that prima facie even these objections were "orchestrated and concerted". 81 representations were received from the creditors of FTIL opposing the proposed amalgamation. 484 suggestions were received from investors of NSEL, out of which, 479 supported the proposed amalgamation and 5 opposed the same. Similarly, 40 suggestions were received from the creditors of NSEL, out of which 39 supported the proposal for amalgamation and only one opposed the same. About 141 representations were received from others, out of which about 66 supported the proposal for amalgamation, 69 opposed. There were 9 representations from investors forum supporting the proposal for amalgamation. This is in addition to the objections from NSEL and FTIL. 152] The impugned order, records and considers in substantial details, the objections and suggestions received from various parties. In paragraph 7.2 and 7.3 of the impugned order, the Central Government, considered and dealt with the various objections and suggestions raised by and on behalf of FTIL and NSEL. As noted earlier, both FTIL and NSEL were ev....
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....les of natural justice cannot be placed in some straitjacket formula. Upon consideration of totality of circumstances, it is quite clear that the affected parties were treated fairly and consistent with the principles of natural justice. 155] This is also not a case of there being any variation between the grounds set out in the proposed order and in the impugned order. Such a ground was therefore rightly not raised in the pleadings or argued in the first instance. The petitioners themselves contend that the impugned order is quasi judicial in nature. The impugned order does address objections and suggestions made by the petitioners themselves. Section 396(4) (b), itself contemplates that the Central Government, upon consideration of suggestions and objections as received, makes such modifications, if any, in the draft order as may seem to it desirable in the light of such suggestions and objections. The fact that exhaustive suggestions and objections were made by the petitioners upon virtually all facets of the draft order, itself suggests that full opportunity was afforded to the parties to put forth their suggestions and objections. There is no case of failure of natural j....
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....Article 31A of the Constitution of India was introduced so as to confer immunity upon such laws. 160] Article 31A of the Constitution, as originally introduced by the Constitution (First Amendment) Act, 1951 conferred immunity on law providing for acquisition by the State of any estate or any rights therein or for the extinguishment of modification of any such rights from challenge on the ground that such law may be inconsistent with, or takes away or abridges any of the rights conferred by Part-III of the Constitution. 161] Thereafter, by the Constitution (Fourth Amendment) Act, 1955, Article 31A of the Constitution was amended by substitution of its clause (1). Article 31A (1) (c) conferred immunity upon law to provide for 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 from challenge on the ground that such law may be inconsistent with or takes away or abridges any of the rights conferred by Articles 14, 19 or 31 of the Constitution. 162] The Statement of Objects and Reasons to the Constitution (Fourth Amendment) Act, 1955, insofar as it relates to Article 31A (1)(c) of the....
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....hallenge to the constitutional validity of Section 396, we made a specific query as to whether such challenge was being pressed, since, no oral submissions were ever made on this aspect. 166] Mr. Rohan Shah, the learned counsel for the petitioners then clarified that no such challenge was being pressed and further, on 21st March 2017, tendered a praecipe specifically omitting the contents of paragraph 21(ii) of the written submissions dated 8^th March 2017, which contained some challenges to the constitutional validity. Similarly, by the same praecipe dated 21st March 2017, it was clarified that Chamber Summons No.204 of 2016 was not being pressed and all references to the chamber summons in the written submissions dated 8th March 2017 were being omitted. 167] The determination of the issue raised will necessarily involve the examination of the scope and content of the expression ".... the same interest in or the rights against the company resulting from amalgamation ...." in Section 396 (3). This is because the main contention of the petitioners is that the "interest" of a shareholder in a company necessarily means the package of rights associated with shares which includes ....
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....nto the impugned Final Order dated 12.02.2016 has also seen that the listed share value of the shares of FTIL has decreased by 75% from Rs. 211.10 per share on 21.10.2014 to Rs. 79.29 per share as today. Given the very significant changes in the economic strength and potential of the company it would be fallacious to say that if you have the same numbers of shares in a company with a net worth of Rs. 2,800/- Crores and in a company with a net worth of Zero the interest that you have as a shareholder, is the same interest." 170] In so far as the first part of the written submission (excluding the portion iii) is concerned, there is no difficulty in accepting the same. This means that the expression "interest" will include entire package of rights and interests associated with the shares including voting rights, right to enjoy profits in form of dividends, right to elect directors and thus participate in management, right to apply for appropriate relief in case of operation or mismanagement, right to apply to the court for winding up and the right to share the surplus on winding up. However, the later part of the written submission which suggests that even the economic value of th....
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....the company which may result in a distribution of the net assets among the shareholders. All these observations were made in the context of a petition by Charanjit Lal Chowdhury, holder of one ordinary share in Sholapur Spinning and Weaving Co. Ltd. To challenge the constitutional validity of an Ordinance which purported to make special provisions for the proper management and administration of the said company. 174] The Supreme Court, after explaining the nature of a share in a company and the consequent interests of a shareholder in a company and rights against a company observed that the impugned Ordinance had not dispossessed in any sense of the term, the shares held by the petitioner. The Court noted: "nobody has taken the shares away from him. His legal and beneficial interest in respect of the shares he holds is left intact. If the company declares dividends, he would be entitled to the same. He can sell or otherwise dispose of the shares at any time at his option. ..... The State has not usurped the shareholders right to vote or vested it in any other authority. The State appoints directors of its own choice but that it does not by the impugned act. Thus there has been n....
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.... The Supreme Court held that a company registered under the Companies Act is a legal person, separate and distinct from its individual members. Property of the Company is not the property of the shareholders. A shareholder has merely an interest in the Company arising under its Articles of Association measured by a sum of money for the purpose of liability, and by a share in the profit. 177] Most of the petitioners have correctly relied upon LIC vs. Escorts Ltd. (supra), where in paragraph 84, the Supreme Court has spelt out the rights and interests of a shareholder in a company, in the following terms: "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 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) ....
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....a share, for the profit. A shareholder may not even be entitled to move a petition for infringement of rights of the company, unless by the action impugned by him, his rights are also infringed. The precedents, do not therefore support the contention of the petitioners. 180] Mr. Salve, in his rejoinder, did rely upon the Accounting Standard (AS) 23 which concerns accounting for investments in associates in consolidated financial statements, to submit that the aforesaid expression will also include the economic value of the shares held by a shareholder in the companies proposed to be amalgamated. He made reference to clauses (4) and (7) of the Accounting Standard. 181] Clause (4) of AS 23 reads as follows: "4. For the purpose of this Standard significant influence does not extend to power to govern the financial and/or operating policies of an enterprise. Significant influence may be gained by share ownership, statute or agreement. As regards share ownership, if an investor holds, directly or indirectly through subsidiary(ies), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstr....
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....ds directly or indirectly through subsidiary (ies), 20% or more of the voting power of the investee, it is to be presumed that such investors had significant influence unless it can be clearly demonstrated that this is not the case. Clause (7), again, is concerned with accounting for investments (equity method). In the first place, it is not at all clear as to how these accounting standards lead to any inference that the interests of a shareholder in a company or his rights against a company will extend to the economic value of such shareholding. Secondly, the Companies Act itself determines the interests and rights of a shareholder in or against a company. The Supreme Court in its decisions referred to earlier, has also explained the scope and import of such interests and rights of a shareholder in or against the company. Therefore, based upon the aforesaid accounting standards, which are clearly in the context of maintenance of accounts, it is not possible to accept the petitioners contention that economic value of the shareholding or some right to earn profits through any capital appreciation of listed value of shares is also required to be taken into consideration for purposes ....
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....areholder in or rights of a shareholder against a company. The provision also suggests no statutory prohibition to the amalgamation of a wholly owned loss making subsidiary with its profit making holding company, provided of course, the test of public interest is satisfied. If, as suggested by the petitioners, Section 396 were to contemplate only the amalgamation of two or more healthy companies, the legislature, could have said so in clear terms. Further, if this is what was in contemplation, then, there was perhaps no necessity for the immunity in Article 31A(1)(c) of the Constitution to any law providing for amalgamation of two or more companies in public interest. Therefore, it is not possible to rewrite the provision in Section 396 so as to restrict its scope to the compulsory amalgamation of two or more healthy companies as is suggested by the petitioners. 188] The contention based on the so-called draconian consequences of compulsory amalgamation cannot impact statutory interpretation particularly where the statute is clear, plain and unambiguous. Normally, in such a situation, the courts are bound to give effect to the meaning, irrespective of the consequences. This is n....
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....s not put undue strain on the words used and does not require recasting of the Act or any part of it. 191] Not that it would seriously matter, but the learned counsel for the petitioners are not right in submitting that there is no instance where Section 396 has been invoked to amalgamate loss making companies with profit making companies or unhealthy companies with healthy companies. The Hutti Gold Mines Co. Ltd. (supra), is an instance where the Central Government by invoking the provisions of Section 396 ordered the amalgamation of Chitradurga Copper Co. Ltd. and Karnataka Copper Consortium Limited, loss making companies heading towards closure with the profit making company Hutti Gold Mines Co. Ltd.. The circumstance that Section 396 is a social welfare or essential welfare legislation is also not an irrelevant circumstance, in this context. 192] Apart from the issue of construction, it is necessary to note that none of the petitioners have placed any substantial material on record, either in their pleadings or otherwise to suggest that there is any serious diminution of the interests of the shareholders in or their rights against the company, as a result of the impugned ....
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....l and therefore, we do not propose to proceed on the said basis. However, as regards the second contention, reference may be appropriate to the pleadings in paragraph 83 of Writ Petition No. 387 of 2015 instituted by none other than Jignesh Shah, in which he has stated that the bulk of shareholders i.e. 63,300 from out of the total of 63,873 are small investors holding shares valued at less than Rs. 5,000/- per shareholder. 196] There are no pleadings in any petitions to demonstrate the diminution of economic value of shares as a result of the impugned order or even the draft order. All that is stated in paragraph 83 of Writ Petition No. 387 of 2015 instituted by Jignesh Shah is that since the publication of the draft order on 21st October 2014, the share value which was Rs. 211.10 (opening price) reduced to Rs. 174.55 on 31st October 2014. Then it is stated that upon the news of the impugned order becoming available in the public domain, the price of FTIL shares in the long run will be adversely affected. On basis of such material or such pleadings, it is not possible to even hold that any case of serious erosion in economic value of the shares, has at all been made out. It is ....
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....none of the creditors have even bothered to appeal against the assessment order, which has not awarded any compensation to them. 200] In this case, since FTIL, NSEL and in particular their shareholders have failed to demonstrate that they have been deprived of their property, there is no question of any infringement of Article 300A of the Constitution. The shareholders cannot confuse between the property of the companies and the interest which they hold by virtue of their shareholding. Further, none of the petitioners have demonstrated any infringement of their rights under Articles 14 and 19 of the Constitution. Accordingly, there is no necessity to go into the issue of any derivative immunity, which might or might not attach to the impugned order made under Section 396. Only if the petitioners had made out a case that the impugned order infringes the rights guaranteed to them under Articles 14, 19 or 300A of the Constitution, could the issue of derivative immunity have assumed importance. Since, this is not the case, we do not deem it necessary to go into the issue of derivative immunity. 201] Therefore, upon cumulative consideration of the aforesaid, we are unable to ac....
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....he assessment order constituted contempt of this Court's order dated 4th February 2015. It was pleaded that assessment order can never precede final order of amalgamation since this would amount to prejudging the issue. The assessment order was even challenged on merits. In any case, liberty was applied to challenge the assessment order on merits in case the challenge to the impugned order of amalgamation fails. Significantly, there are neither any pleadings nor any ground to suggest that there was no assessment order ever made or that the assessment order dated 1st April 2015 is not some assessment order as contemplated by Section 396(3). 205] In Writ Petition No. 2985 of 2014 instituted by Ravi Sheth and another, together holding 8.10% shareholding of FTIL, there are no pleadings as regards the assessment order dated 1st April 2015. However, in the written submissions filed on 8th March 2017 at paragraphs 2,3,4,6, 20(b), 20(c), 21(ii) and 35, quite surprisingly, challenges were raised to the assessment order dated 1st April 2015 on merits and even a prayer was made in the written submissions that the assessment order dated 1st April 2015 be set aside or in the alternative,....
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....he settled law and judgments wherein if a procedure is stipulated the same must be followed strictly and any action done without following the same would be void-abinitio." 209] Even the most liberal construction of the aforesaid pleadings cannot lead to the inference that no assessment order as contemplated by Section 396(3) was made and in the absence of the same the Central Government could not have proceeded to make the impugned order. Rather, the pleadings seem to object to the assessment order made on the ground that 'same was passed even prior to the impugned order being passed'. In paragraph 13 the assessment order is actually challenged because it was passed 'in a mechanical manner and without application of mind' by mere reference to the reports of experts on valuation. 210] From all this, it is quite clear that there are no pleadings in the petitions instituted by the shareholders in support of the ground now projected. The pleadings in the petition tacitly acknowledge that assessment order dated 1st April 2015 has been made by the prescribed authority. Further, in the pleadings, such assessment order dated 1st April 2015 has been challenged by at l....
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....ect, purpose of the statute and host of other factors. It is in this context that the Supreme Court, at paragraph 192 clarified that there is a difference between "no compensation" and "nil compensation". A law seeking to acquire private property for a public purpose cannot say that "no compensation shall be paid". However, there could be a law awarding "nil compensation" in cases where the State undertakes to discharge the liabilities charged on the property under acquisition and the onus is on the Government to establish the validity of such a law. In later case, the Court in exercise of judicial review will test such a law keeping in mind the above parameters. 213] The observations of the Supreme Court are required to be considered in the context in which they are made. In the present case, we are not concerned with any law or for that matter executive order providing for acquisition of any property of the shareholders. In the context of Issue - B, we have already attempted to define the scope of the expression "interest of a shareholder in or rights against of a company". In Charanjit Lal Chowdhury (supra) the Supreme Court, after explaining the nature of a share and the con....
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....y of instituting an appeal under Section 396 (3A), because the assessment order dated 1st April 2015 makes no reference to the shareholders of FTIL and therefore, they could not have been held to be covered under the expression "any person aggrieved" in Section 396(3A), in the facts of the present case, is untenable. The circumstance that the assessment order dated 1st April 2015 made no specific reference to the shareholders of FTIL did not preclude or deter the petitioners from attacking the assessment order dated 1st April 2015 inter alia on merits. Besides, Section 396 (3A) is quite widely worded, in the sense that it uses the expressions "any person aggrieved" and "any assessment of compensation made". 216] In Babua Ram (supra) , the Supreme Court has interpreted the expression "person aggrieved" to mean a person who has suffered legal injury or who has been unjustly deprived or denied of some benefits, advantage or compensation, which he would be interested to obtain in the usual course. Nothing therefore, prevented the petitioners from instituting appeals under Section 396(3A) within the period of limitation as prescribed therein. 217] The matter can be viewed from yet....
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.... under Section 396(3A) and therefore there is any breach of the procedure prescribed in Section 396(4) in making the impugned order. Accordingly, we see no merit in the contention that the impugned order is ultra vires Section 396. ISSUE - D (D) Whether the Central Government, in making the impugned order, has practised hostile and invidious discrimination, thereby infringing Article 14 of the Constitution of India ? 220] Mr. Seervai, Mr. Shah and Mr. Behramkamdin forcefully contended that the Central Government, by first time invoking Section 396 to amalgamate two non government companies has practiced hostile or invidious discrimination. They have referred to several instances in the past where the Central Government invoked the provisions of Section 396, but pointed out that all these are instances involving Government Companies or Public Sector Undertakings, where, the amalgamation was consensual. 221] Further, by citing the instance of Unit Trust of India (UTI), they submit that the payment crisis in the context of US 64 Scheme, was handled by the Central Government quite differently i.e. the scam ridden unit was hived off or quarantined, so that the other units of....
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....of arguments or notes of arguments, it is not possible to accept the challenge based upon any hostile or invidious discrimination infringing Article 14 of the Constitution. The challenge, it appears, has been raised in quite a casual and cavalier manner. 225] The challenge, in any case, seems to proceed on the basis that the Central Government, in invoking the provisions of Section 396 in this particular situation has acted quite sternly but the very same Central Government failed to take stern measures to deal with 'scam ridden unit' of UTI or the group of companies which have borrowed heavily from banks and financial institutions but failed to repay the loans. Such a contention does not appeal to us, in the least. In fact, such a contention sounds in the arena of insistence upon some sort of equality in illegalities. It is trite that the equality contemplated by Article 14 of the Constitution is not such negative equality. 226] In Union of India and anr. vs. International Trading Co. and anr. (2003) 5 SCC 437, similar contention was rejected by the Supreme Court. In the said case, the contention was that permissions had been granted to thirty two vessels and denial ....
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....bitrarily, there is infringement of Article 14 of the Constitution. They rely on E. P. Royappa (supra), Maneka Gandhi (supra) and Cipla Ltd. (supra) in support of all these contentions. 228] There is nothing either in the text or in the context of Section 396 to suggest that the same is restricted in its applicability only to government companies. The circular dated 20th April 2011 cannot, obviously, add or detract from the statutory provision in Section 396. Besides, the circular itself states that the same is 'without prejudice to the generality of section 396.....' . Therefore, on the basis of circular dated 20th April 2011, we are unable to accept the contention that Section 396 can be invoked only to amalgamate two or more government companies or to put it conversely, Section 396 is inapplicable for amalgamation of two or more non government companies. 229] The circular dated 20th April 2011, which is applicable only to amalgamation of government companies by resort to Section 396, no doubt, makes reference to securing resolutions of shareholders and creditors in support of the amalgamation. However, on the basis of such circular, there is no question of any o....
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....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 share holders, 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." [emphasis supplied] 234] The circular dated 20th April 2011 cannot be stated to be or construed as policy of the Central Government in matters of amalgamation of companies by resort to Section 396. In Cipla Limited (supra) , the Supreme Court was dealing with the Drug Policy document issued by the Central Government with regard to price fixation under the Drugs (Prices) Co....
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....alled for the purposes of ascertaining their wishes. Action under Section 396, admittedly, does not contemplate any involvement of the Court or the Tribunal. Even the circular dated 20th April 2011, does not contemplate any involvement of the Court or the Tribunal. Besides, as noted earlier, circulars can obviously not operate to amend or vary the statutory provisions and the statutory scheme in Section 396. 237] Section 396 provides that where the Central Government is satisfied that it is essential in public interest that two or more companies should amalgamate, then, notwithstanding anything contained in sections 394 and 395 but subject to the provision of this section, the Central Government may provide for amalgamation of the two or more companies. Section 394, which stands expressly excluded from the scheme of Section 396, inter alia provides for the parameters to be considered by a court or a tribunal when an application is made to such Court or Tribunal under Section 391 for sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section. 238] Since, Section 396 contemplates no application to the Court or Tri....
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.... was amended and the expression 'national interest' was substituted with the expression 'public interest'. In such a situation, it would be too far fetched to urge that the Parliament, nevertheless intended to retain "national interest" as the only ground on which the Central Government could order compulsory amalgamation of two or more companies. When an Amending Act alters the language of the principal statute, the alteration must be taken to have been made deliberately. Despite the conscious alteration, it is not open to interpret the statute in its original form. This would virtually amount to rendering the statutory amendment redundant or otiose. This is clearly not the accepted manner for the interpretation of the statutes. 244] In D.R. Fraser & Co. Ltd. (supra), the Privy Council speaking through Lord Macmillan has held that when an amending Act alters the language of the principal Statute, the alteration must be taken to have been made deliberately. 245] Mr. Mookherjee and Mr. Dwarkadas however rely on Notes on Clauses to the Companies (Amendment) Bill 1959 and to the Statements of Objects and Reasons to the Constitution (Fourth Amendment) Act 1955 to ....
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....ses incorporated in Statement of Objects and Reasons to the Companies Bill, 1953. However, Companies (Amendment) Bill, 1959, which preceded the Companies (Amendment) Act, 1960 provided for the following : "150. Amendment of section 396 :- In section 396, in sub section (1), for the words "national interest", the words "public interest" shall be substituted." 251] The Notes on Clauses to the Companies (Amendment) Bill, 1959, with reference to the aforesaid proposed amendment, provided as follows : "Clause 150--- The amendment is of a drafting nature. Compare clause 66 (c)." 252] From the aforesaid legislative history, it does appear that the expressions "national interest" and "public interest" have been used interchangeably or in the same sense in the context of Article 31A(1)(c) of the Constitution of India and Section 396. 253] Significantly, neither Mr. Mookherjee nor Mr. Dwarkadas chose to elaborate upon the distinction, if any, between "national interest" and "public interest" in the context of Section 396. They merely suggested that some test more stringent than what might apply to "public interest" will have to be applied, in determining "national intere....
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.... the national economy and the unprecedented situation which the Central Government was required to deal with in the wake of collapse of the entire commodities exchange, we are unable to hold that the impugned order was not made in "national interest". 256] The decisions in MCX Stock Exchange (supra) and Coimbatore Stock exchange (supra), highlight on the importance of stock and commodity exchanges to the national economy. These decisions hold that the perception of the Indian economy, both locally and abroad, depends, to a large extent, on the functioning and health of its stock and commodity exchanges. The Central Government, in this case, having taken measures to deal with an unprecedented situation arising out of the failure of a national level commodity exchange leaving investors with claims of over Rs. 5600 crores, in a lurch, is certainly a matter involving "national interest". 257] For all the aforesaid reasons, we are unable to fault the impugned order on the ground that it makes no specific reference to "national interest" but focuses merely on "public interest". ISSUE -F (F) Whether the impugned order is ultra vires section 396 of the Companies Act because the....
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.... have different connotation and understanding when used in service law and yet a 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 the 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. 262] Wood Polymer (supra), relied on by Mr. Mookherjee, holds that in determining "public interest", sole attention cannot be confined to the interest of creditors and members of the Companies in question. The interests of other important consumers of the industry-cum-commercial service cannot be ignored since, "public interest", is a positive check on unhindered exercise of private right whether by management or stock holders. In the fields where "public interest" is recognized as a relevant consideration, such consideration, must override other considerations like freedom of management or rights of stock holders to carry on the busines....
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....equire examination in the context of satisfaction of the Court as to whether its affairs have or have not been carried out in a manner prejudicial to "public interest". There is really no reason to construe the expression "public interest" in any different manner when it comes to Section 396. 265] Union of India and ors. vs. Ambalal Sarabhai Enterprises Ltd. (supra), again relied on by Mr. Mookherjee, the Division Bench of the Gujarat High Court has held that the Central Government has to be satisfied that it is essential in the "public interest" that two or more companies should amalgamate and only then such amalgamation can be directed or sanctioned. The amalgamation must accordingly fulfill some felt need, some purpose, some object and that must have some co-relation with the "public interest". If the only purpose discernible behind amalgamation is defeating certain tax and prior to the amalgamation a situation is brought about by creating a paper company and transferring an asset to such company which can, without further consequence, be amalgamated with another company to whom the capital asset was to be transferred so that, on amalgamation, it can pass on to the amalgamate....
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....mpugned order has been made looking only to the interest of the investors or 781 high net worth individuals as claimed by the petitioners. We are satisfied from the material on record that the impugned order has been made on at least three distinct and discernible grounds or reasons namely; (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. Therefore, we are unable to accept the petitioners contention that the impugned order is vitiated by legal mala fide because the Central Government has exercised powers under Section 396 for purposes alien to which Sect....
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....ng or ready delivery contracts. Representations were held out that secure warehousing facility will be maintained by NSEL in which commodities will be checked, verified and stored so that the transactions at the spot exchange will invariably result in delivery of goods or payment of price therefor. Representations were held out that transactions would be counter guaranteed by NSEL and a settlement guarantee fund will be in place. On basis of such representations NSEL secured exemptions from application of FCRA and regulatory regime under FCRA. In practice however, NSEL reneged on most of its representations and in fact undertook operations in breach of condition subject to which the exemption came to be granted. 272] NSEL offered contracts in excess of one day's duration, although one of the conditions subject to which exemption was secured by NSEL was that this is barred. Then NSEL offered paired contracts with assured returns so as to virtually subvert the commodities exchange into a scheme for financing free of all statutory safeguards. By the year 2013, almost 99% of the transactions on NSEL spot exchange comprised such paired contracts, which, in practise, had no signif....
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....therefore, the Central Government by consolidating the businesses of NSEL and FTIL to restore confidence in commodity exchanges by sending a clear signal to all investors, current or potential, that in case of defaults of such magnitude at exchanges operated by subsidiaries, holding companies may have to take responsibility for the exchange or at least not take shelter behind its wholly owned subsidiaries, we can, in the exercise of judicial review see no reason to upset such a decision or hold that such a decision is not in public interest. 276] This is not a case of compulsory amalgamation of two unrelated companies. NSEL, is admittedly a wholly owned subsidiary of FTIL in which FTIL holds 99.9998% stake. Since FTIL is effectively the only shareholder of NSEL, the constitution of the Board of Directors of NSEL is naturally controlled by FTIL. There is material on record to suggest that minutes of board meetings of NSEL were regularly tabled at the board meetings of FTIL. Jignesh Shah, directly or indirectly has a stake of 46% in FTIL. At the relevant time, Jignesh Shah was described as Founder Chairman and Group CEO of FTIL, apart from being of Managing Director of FTIL. Jigne....
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....mmodity exchanges. If the Central Government, were not to act in a situation of this nature, investor confidence would certainly be a casualty. Such a situation then, has a cascading effect, which is by no means conducive to the national economy. 279] The Central Government, in making the impugned order has balanced the interests of the two companies, its shareholders, creditors and employees on one hand and the interests, not only of the investors who may have claims, but also, of the investing public, which is required to be given the confidence that the Central Government will act to see that a holding company does not take shelter behind its wholly owned subsidiary and thereby shirk responsibility in the wake of such an unprecedented payment crisis. The three grounds or reasons stated in the impugned order, in our opinion, were sufficient to arrive at the subjective satisfaction that it was essential in public interest to order the amalgamation of the two companies. This is not a case of exercise of powers for any extraneous considerations or alien purposes. ISSUE -G (G)(i) Whether the impugned order is based on only one ground or reason, i.e., facilitating NSEL in rec....
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....istinct grounds or reasons as aforesaid. 282] At this stage, it is necessary to note that none of the petitioners, including, in particular the FTIL , in whose petition NSEL is but one of the respondents, choose to read the impugned order in the manner in which Mr. Chinoy does. In fact, even Mr.Santosh Dhuri who has sworn the affidavit on behalf of NSEL does not choose to read the impugned order to mean that the same is based on a solitary ground or reason as urged by Mr. Chinoy . The affidavit proceeds on the basis that the impugned order is based on several grounds or reasons but urges that such grounds or reasons are untenable. This is far cry from saying that the impugned order is based on a solitary ground or reason. Even FTIL, in paragraph 82 of its petition, has listed as many as 11 grounds or reasons, which, in its opinion, the draft order and thereafter the impugned order discloses. No doubt, FTIL, has vehemently contested the veracity or the relevance of such grounds. But the fact remains that even FTIL does not regard the impugned order as being based on solitary ground or reason as urged by Mr. Chinoy on behalf of the NSEL. 283] Mr. Chinoy, at the stage of rejoind....
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....ble where action is taken in larger public interest, as in the present case. In support, of this propositions, he had placed reliance upon Chairman, All India Railway Recruitment Board and anr (supra) and PRP Exports vs. State of Tamil Nadu (supra). Since, in this case we are quite satisfied that the impugned order is not based on the solitary ground as stated by Mr. Chinoy, but rather, is based upon three grounds /reasons referred to by Mr. Khambata, there is no need to go into the issue as to whether the Mohinder Singh Gill principle is at all attracted in a matter of this nature, where action has been taken upon record of satisfaction by the Central Government that it is essential in public interest to do so. 287] Again, we are satisfied that there is ample material on record, on basis of which, the Central Government could have and has arrived at the satisfaction that the NSEL lacked necessary financial and infrastructural wherewithal to make recoveries from the defaulters, who may have traded on the spot exchange platform of NSEL. Therefore, it is not possible to accept Mr.Chinoy's contention that there exist no objective facts on which the Central Government could have....
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....aries and legal costs. FMC has also stated that it has received feed back from representative of investors/member bodies on the erstwhile monitoring and auction committees constituted by it reporting loss of credibility, weak organisational structure, depletion of man power strength and lack of financial resources. 291] There is material on record, which indicates that post 31^st July 2013, there is hardly any activity undertaken by NSEL, from which, it can earn any substantial income so as to facilitate the recovery of dues. There is material on record that NSEL had hardly 33 employees and considering the rate of attrition, NSEL cannot be said to have the necessary wherewithal to effect any recoveries from the defaulters. 292] NSEL, in its affidavit in reply to the petition instituted by FTIL has merely stated that the position reflected in the FMC proposal or for that matter in the impugned order is not acceptable or that the same is factually incorrect. However, NSEL has not specifically disputed the position in relation to drastic reduction in the strength of employees, virtual closure of any business activity and the fact that NSEL has to mainly rely upon contributions f....
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.... the report has been relied upon by the FMC in its order dated 17th December 2013 and in the proposals the FMC submitted to the Central Government recommending action under Section 396. This report makes scathing observations on the functioning of NSEL. 297] The Grant Thornton report states that the NSEL exchange platform was used for conducting financing transactions, as opposed to a genuine commodity exchange. In fact, by the year 2013, almost 99% of the turn over at the NSEL exchange comprised paired contracts , which were nothing but financing transactions undertaken in breach of the conditions set out in exemption notification dated 5th June 2007. The report makes reference to related party transactions, misutilisation of settlement guarantee fund, waivers from margin requirements to key defaulters, failure to ensure existence of stocks in the designated warehouses. The report also records failure at corporate governance and risk management. The report states that 9 out of the 10 committees mandated under the bye-laws and rules of the NSEL exchange were either not constituted or not functioning. It is pertinent to mention that the FMC, before it made its not fit and prop....
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.... financial resources. This consideration particularly in a case where the two Transferor Companies are wholly owned subsidiaries cannot be regarded as extraneous or irrelevant. This Court, taking into consideration the business reality noted that the holding company seeks to emerge from the economic difficulty which face its subsidiaries which have become loss making entities. The effort is to pool together human, financial and material resources and to deploy them, upon amalgamation in a manner that would enhance profitability. This is a permissible object and nothing in the proposed scheme in the present case militates against commercial morality, the public interest or a view which a reasonable body or shareholders or creditors would adopt. The impugned order cannot, in such circumstances, be held to be irrational or based on any extraneous or irrelevant considerations. 301] For all the aforesaid reasons, we are unable to accept Mr.Chinoy's contention that the impugned order is based on only one ground or reason. We are also unable to accept Mr. Chinoy's contention that there was no material on record in support of such ground or reason and further, such ground or rea....
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....) has held that the construction placed on the expression 'reason to believe' will equally apply to the expression 'is of the opinion'. Even Peerless General Finance and Investment Co. Ltd. (supra) does not state anything substantially different than what is stated in Barium Chemicals Ltd. (supra) or Bhikubhai Patel (supra). All that it states is that in any subjective satisfaction cases, there must be some evidence on the basis of which the authorities concerned can make a positive finding that they were indeed satisfied. 305] The second contention regards difference in phraseology of Section 237(b) and Section 396 is no doubt required to be borne in mind while exercising judicial review. However, it is also necessary to note that Section 237(b) requires the Central Government to form opinion as to the existence of certain specific circumstances set out in Clauses (i),(ii) and (iii) of Section 237(b). In contrast, Section 396 does not restrict the exercise of powers only to any specific circumstances but permits exercise of power upon satisfaction that the same is essential in public interest. There is accordingly, no difficulty in proceeding on the basis that t....
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....SEL's shares were held by NAFED [Petition -Vol I - Ex. A/Pg.97S] NSEL, was promoted by and is part of the FTIL Group. [FTIL Affidavit in Rejoinder to Respondent No.4 dated 23^rd September, 2016 - Vol. 30, Paras 35 and 38/Pg.3030-3031] Since FTIL is effectively the only shareholder of NSEL, the constitution of the Board of Directors of NSEL is entirely under FTIL's control [Petition - Para 2.11(iii)/Pg.97R] FTIL, through the Board of Directors of NSEL constituted by it, possesses effective and absolute control over its subsidiary i.e. NSEL. [Petition - Para 2.11 (iv)/Pg. 97S] In fact, FTIL held out and represented that it controlled NSEL. (FTIL Annual Report 2013-14 - Petition - Vol.II - Ex.F/Pg. 203 at Pg.306] NSEL's exchange was treated and held out and represented by FTIL to be its own and part of its "Exchange Verticals". (FTIL Annual Report 2013 - 14 - Petition - Vol.II - Ex. F/Pg.203 at Pgs. 211 and 239] Jignesh Shah, the founder and promoter of FTIL, directly/indirectly owns over 45% of its shares. (FTIL Annual Report 2013-14-Petition - Vol.II- Ex. F/Pg. 203 at Pg. 260/Para 11.11] He served as Vice Chairman on the Board of NSEL, as Chairman-cum-Mana....
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....resentation)/Pgs. 120-122] By April - July 2013, 99% of NSEL's turnover was made up of such paired contracts. (GT Report - R1 Comp. - Part III - Para 1.5/Pg.14] Sometime in 2013 NSEL instructed its Business Development Team not to officially commit to fixed returns but to communicate the daily trade rates and returns telephonically or from their personal email ids and with utmost caution. [GT Report - R1 Comp. - Part III - Ex.14/Pg.118] In spite of being aware that there was no condition requiring the deposit of goods in the warehouse prior to execution of a sale transaction on its exchange, NSEL made several misrepresentations to the FMC and others that the contracts were totally linked with delivery and that it was 100% sure that a person who bought a commodity on its exchange would get delivery.[R1 Comp - Part I - Pg. 37 at Pgs.40,41, and 44; R1 Comp- Part I - Pg. 61 at Pg.106] Similarly, Jignesh Shah made representations to the DCA and FMC in July 2013 when he stated NSEL had full stock as collateral and had 10-20% of open position as margin money. He also stated that the stock currently held in NSEL's warehouses was valued at around Rs. 6,000 crores. [R1 Co....
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....nce to the Grant Thornton Audit Report. All this material was available before the Central Government and from the impugned order, there is nothing to infer that the Central Government has not independently applied its mind to all such material which was very much available on record. Above all, it is most important to note that there was no serious dispute raised as regards most of the objective facts referred to in the impugned order, whether directly or indirectly. 313] For example, the petitioners submit that the circumstance that NSEL was promoted by and is a part of the FTIL group, finds no reference in the draft order or the impugned order or even the FMC order. Apart from such contention being incorrect, it is pertinent to note that the FTIL in its affidavit in rejoinder has itself admitted this position. Even otherwise, there is voluminous material, in the form of annual reports of the FTIL itself, which establishes this position. The petitioners submit that the objective fact that FTIL is the only shareholder of NSEL and the constitution of the Board of Directors of the NSEL is entirely controlled by FTIL, finds no reflection in the draft order or the impugned order bu....
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....ence on the management of NSEL and and directed, controlled and supervised its governance. 316] In the presentations made on behalf of NSEL, including the presentations made by Jignesh Shah on behalf of NSEL on 10^th July 2013 hardly three weeks before the collapse of operations at the NSEL exchange, it was held out that NSEL had 120 warehouses with inventory valued at Rs. 6000 crores sufficient to effect deliveries for 1 to 1.5 years. It was also stated that NSEL strictly prohibits short sales, both in letter as well as spirit and that more than 99% of the trades in agricultural commodities result in deliveries on daily basis. It was also stated that NSEL model has full stock as collateral and 10 to 20% of open position as margin fee. It was held out that this is full proof of risk management system. As noted earlier, neither is there any serious dispute that such presentation was indeed made to the FMC and DCA nor is any explanation forthcoming as to the circumstances in which such a presentation was made because post 31st July 2013, it was very clear that the statements made in the presentation were completely contrary to the actual position at NSEL. 317] There is other ma....
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....rehouses to make deliveries with. The stock or inventory which was stated to be valued at Rs. 6000 crores spread over 120 warehouses, was simply not to be found. The 10- 20% margin fees, were not to be found. The settlement guarantee fund, which was stated to be Rs. 738.55 crores on 1st August 2013 quite inexplicably reduced to Rs. 62 crores on 4th August 2013. Despite all this, FTIL, NSEL, Jignesh Shah and shareholders and employees of FTIL maintain that there are no objective facts whatsoever, on basis of which, the Central Government could have arrived at the subjective satisfaction for exercise of powers under Section 396. 321] As noted earlier, neither FTIL nor NSEL dispute or can dispute the payment crisis at the NSEL exchange, which, in monetary terms amounts to Rs. 5600 crores. Most of the objective facts referred to in the impugned order and form a part of material on record have not been seriously disputed. To merely state that all this is a result of abuse by some traders or to state that there was a fraud at the warehouse level which went undetected until the date of default, are hardly, explanations or defences that deserve any serious credence. Therefore, keeping i....
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....ne that powers must be exercised reasonably has to be reconciled with no less important doctrine that the Court must not usurp the discretion of the public authority which Parliament appointed to take the decision. Within the bounds of legal reasonableness is the area in which the deciding authority has genuinely free discretion. If it passes those bounds, it acts ultra vires. The Court must therefore resist the temptation to draw the bounds too tightly, merely according to its own opinion. 326] In R. vs. Boundary Commission ex p. Foot (1983) QB 600, it was held that the Court must strive to apply an objective standard which leaves to the deciding authority the full range of choices which the legislature is presumed to have intended. Decisions which are extravagant or capricious cannot be legitimate. But if the decision is within the confines of reasonableness, it is no part of the Court's function to look further into its merits. As Lord Hailsham LC has said, two reasonable persons can perfectly reasonably come to opposite conclusions on the same set of facts without forfeiting their title to be regarded as reasonable [Re W. (an infant) (1971) AC 682 at 700]. 327] The ru....
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....e Central Government has also taken into consideration the circumstance that decrees to the extent of Rs. 1233 crores or thereabouts have already been obtained against the defaulters or that the assets of the defaulters to the extent of Rs. 6000 crores or thereabouts may have been attached or injuncted from alienation. The Central Government has also taken into consideration the numerical strength of the shareholders as well as numerical strength of the investors. However, even after taking into consideration all such factors, the Central Government has made the impugned order broadly on the three earlier indicated reasons or grounds each of which constitute facet of public interest. 330] Again, there is no question of accepting the petitioners contentions that several relevant considerations have been excluded and several irrelevant considerations have been taken into account by the Central Government in making the impugned order. The petitioners have to demonstrate that the consideration, which they claim has been omitted, was indeed relevant consideration and further, if such relevant consideration were taken into account, the decision maker might have, reasonably reached a d....
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.... exchange. The impugned order, by reference to FMC's order accepts that the probity and competence of the board officials of a nationwide commodity exchange are quite critical to achievement of the objectives of FCRA. The impugned order, quite correctly notes that this is not matter of mere recoveries and the aspect of public interest is much wider than the aspect of mere recoveries. The impugned order then refers to the objective factors that FTIL, as per its own submissions, has floated number of regulated exchanges both for securities and commodity derivatives in India as well as abroad. NSEL, 99.9998% of whose shareholding is held by FTIL was incorporated to provide a trading platform of commodity spot exchange on Pan Indian basis and exemptions was applied for and obtained from the application of FCRA on such basis. Very clearly, it was held out that the business model did not contemplate venturing into trading in forward contracts. 333] NSEL, after securing such exemption, in fact, traded in forward contracts through the mechanism of paired contracts thereby breaching the conditions stipulated in the exemption notification. The impugned order notes that NSEL platform w....
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.... assaying facilities and so on. They pointed out that bank finance could be availed easily by farmers against goods in warehouses. They pointed out that all these factors will have a significant bearing on the nation's financial and economic system. All this was substantially repeated by NSEL in its presentations to FMC and DCA in response to show cause notices issued by the regulators. Now that the objective facts on record establish that there were hardly any genuine spot transactions in commodities but by 2013 99% of the business at the exchange was in paired contracts, which were nothing but financing transactions, it is hardly open to the petitioners to contend that the collapse of NSEL exchange has nothing to do with shattering of public confidence in the commodities exchanges. The measure taken by the Central Government in the impugned order, in such circumstances, is certainly a measure in public interest intended to restore and safeguard public confidence for forward contracts and exchanges, which are integral and essential part of the Indian economy and financial system. 336] The second reason or the ground set out in the impugned order is that the amalgamation is ....
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....so on behalf of NSEL. In fact, on 10th July 2013, it was Jignesh Shah, who made a very detailed representation to the FMC and DCA on behalf of NSEL. On basis of such objective facts, the Central Government, cannot be faulted for treating Jignesh Shah as the face of both FTIL as well as NSEL. On basis of the objective facts on record, the Central Government was quite justified in referring to the business realities of the case. On basis of objective facts on record, the Central Government was justified in treating the NSEL as the alter ego of FTIL. On basis of the objective facts on record, the Central Government, quite justified in treating Jignesh Shah as alter ego for the two companies. On basis of such objective facts, the Central Government, was justified in recording the satisfaction that it was essential in public interest to amalgamate the two companies, so that, FTIL, at this crucial juncture does not disassociate itself from its fully owned subsidiary, by taking the shelter of corporate veil. 339] In Sunil Mittal (supra), the Supreme Court has discussed the principle of alter ego in the context of companies. The Supreme Court has quoted MacNagthen, J. in Director of Pub....
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....orporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.' 342] In Sunil Mittal (supra), the Supreme Court has held that the corporation is in the same position as any individual and may ....
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....ase". The issues involved were whether the appellants were in control of the affairs of the respective companies alleged to be involved in the scam; whether because of their controlling position, they represent the directing mind and will of each company; and whether the state of mind of these persons is the state of mind of the companies, so as to describe them as 'alter ego' of their respective companies. The decision, is not irrelevant to the present case, particularly in the context of the role played by Mr. Jignesh Shah. The decision is also not irrelevant, in the context of the relative positions of FTIL and NSEL and the second reason in the impugned order in the context of business realities and alter ego. 346] The petitioners contend that the impugned order has been made to only favour the investors or to deprive FTIL and NSEL the defences which they have already raised in the civil suits instituted by the investors. There is nothing in the impugned order or the circumstances in which it was made to suggest that it was made only to favour the investors or to deprive the FTIL and NSEL of any of the defences raised by it in the suits instituted by the investors. Ev....
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.... Revenue Talathis on the ground of illegalities and malpractices in connection with the examination. The Supreme Court noted that there were allegations of large scale tampering with the examination process. The scrutiny of answersheet revealed that there were glaring aberrations which provide prima facie proof of large scale tampering of examination process. The Supreme Court, in such circumstances observed as follows: "Denying power to the State to take appropriate remedial action in such circumstances on the ground that the State did not establish the truth of those allegations in accordance with the rule of evidence relevant for the proof of facts in a Court of law (either in criminal or civil proceeding), would neither be consistent with the demand of larger public interest nor would be conducive to the efficiency of administration. The No binding precedent is brought to our notice which compels us to hold otherwise. Therefore, the 1^st submission is rejected". 350] In Council of Civil Service Union vs. Minister of Civil Service 1984 (3) ALL ER 935 (HL), Lord Diplock summarised the principles of judicial review by conveniently classifying under three heads the grounds up....
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....ty involved in the making of the impugned order. So also, we are satisfied that there is no procedural impropriety since the impugned order was made after due compliance with principles of natural justice and fair play. The procedural element in Section 396 was also followed by the Central Government in making the impugned order. There is no irrationality involved because in the facts of the present case there is no basis to even suggest that the decision is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it. There is material in this case to hold that the subjective satisfaction recorded by the Central Government is based on objective facts its stand more than prima facie established. This is also not a case where relevant considerations have been ignored or irrelevant considerations taken into account by the Central Government in making the impugned order. 355] This is also not a case where the Central Government has in fact lifted corporate veil despite the alleged non-existence of the circumstances justifying the lifting of such corporate veil. The provi....
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....ister was alleged to have procured the taking over by the State of the business belonging to his political opponent. (Rowjee vs. Andhra Pradesh AIR 1964 SC 962). If the Minister's intervention is in fact the effective cause, the action taken is invalid on the ground of external dictation as well as on the obvious grounds of bad faith and abuse of power. 358] Wade, however proceeds to point out that the aforesaid rule ought not to be carried to the length of preventing one government department from consulting another, or from preventing government agencies from acting in accordance with government policy. There must always be a difference between seeking advice and then genuinely exercising one's own discretion, on the one hand, and, on the other hand, acting obediently or automatically under someone's else advice or directions. A licensing authority, for instance, may quite properly take account of government policy in its decisions, provided that it genuinely decides each case itself. The majority of the High Court of Australia held that the Director General of Civil Aviation might refuse import licenses for air crafts following the government policy of not allowin....
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....well as the Central Government have referred to Grant Thornton report and the objective facts which emanate from the audit report. Merely because some of the inferences flowing from the common objective facts are similar, that by itself, does not suggest surrender, abdication or dictation. FMC, in making its order dated 17th December 2013 was concerned with the issue of declaring FTIL, Jignesh Shah and others as not fit and proper persons in the context of operations at the exchanges considering inter alia the objective facts as borne out by the Grant Thornton report and other relevant material before it. The Central Government, in making the impugned order was concerned with the issue of amalgamation of NSEL with FTIL in public interest, again, on the basis of objective facts, inter alia in the Grant Thornton report and the other material before it. The overlap of some material, is by no means sufficient to vitiate the exercise of subjective satisfaction. 362] Once we are satisfied that the Central Government has not made the impugned order solely relying upon FMC's order or by surrendering, abdicating or acting to the dictates of FMC, the circumstance that challenge to the....
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....ust 2013, was, on 4th August 2013 found to be only Rs. 62 crores. Even though the transactions at the spot exchange were to be backed by commodities supposedly checked and stored in warehouses owned and controlled by NSEL, SGS India Limited, which was appointed to inspect and audit the position, reported that stock worth only Rs. 358 crores was available, even though, NSEL, had solemnly stated that it has stocked valued at Rs. 2389.36 crores. This means that there was hardly any stock in the warehouses with which deliveries could be effected. All this, left the Trading Clients in a lurch. The impugned order details the nexus between NSEL and FTIL, in the context of the crisis, which led to the collapse of the spot exchange. 364] For all these reasons, we are unable to fault the impugned order applying the test of Wednesbury unreasonableness. ISSUE -I (I) Whether the impugned order defies the doctrine of proportionality ? 365] The doctrine of proportionality has been explained by the Supreme Court in several decided cases referred to by the petitioners in the course of their rejoinder. 366] In Om Kumar (supra), the Supreme Court clarified that by 'proportionality&....
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.... and proportionality and pointed out that though the current trend seems to favour proportionality test, Wednesbury has not met with its judicial burial and the State burial, with full honours is surely not to happen in near future. 370] The Supreme Court further pointed out that Wednesbury applies to a decision which is so reprehensible in its defiance of logic or of accepted moral or ethical standards that no sensible person who had applied his mind to the issue to be decided could have arrived at it. Proportionality as a legal test is capable of being more precise and fastidious than a reasonableness test as well as requiring a more intrusive review of a decision made by a public authority which requires the courts to "assess the balance or equation" struck by the decision-maker. Proportionality test in some jurisdictions is also described as the "least injurious means" or "minimal impairment" test so as to safeguard the fundamental rights of citizens and to ensure a fair balance between individual rights and public interest. 371] In Maharashtra Land Development Corporation & Ors. (supra), the Supreme Court explained that the principle of proportionality envisages that a p....
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....amining reasonableness, the Court has to keep in mind factors like the directive principles of State policy, prevailing social values and social needs which are intended to be satisfied by the restrictions, the excessiveness of the restrictions. However, no abstract or general pattern or fixed principles of universal application can be applied in such matters. The court will have to examine the matter from case to case basis as also with regard to changing conditions, values of human lives, social philosophy of the Constitution, prevailing conditions and surrounding circumstances. Ultimately, a just balance has to be struck between the restrictions imposed and the social control envisaged. 374] Even applying the proportionality test, we are quite satisfied that the impugned order warrants no interference in the facts and circumstances of the present case. The impugned order amalgamates NSEL with FTIL for the three broad reasons set out in the impugned order. In the context of the three reasons, we have already held that neither of them could be regarded as extraneous or irrelevant to the purpose for enactment of Section 396. Thus, it is clear that the action taken was in further....
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....rder, no such option was exercised by the Central Government. 377] In this case, the Central Government, amongst other factors was required to consider the competing interests of investors, who, even according to NSEL and FTIL are due and payable an amount of over Rs. 5,600 crores by the defaulters and the interests of NSEL, FTIL, its shareholders, creditors and employees. Now the later class, repeatedly maintains that they are themselves not liable for such payments; that the rules and byelaws of the exchange rule out any liability being foisted upon them; that in any case decrees have already been secured against defaulters and substantial assets of the defaulters have already been attached or injuncted from alienation. This means that the petitioners themselves regard the possibility of any liability being foisted upon them as quite remote. 378] The Central Government therefore, has assessed the competing interests between the two classes. Besides, in the facts of the present case, the issue was not restricted only to the two classes. In terms of the scheme of Section 396, the Central Government was required to, and has focused upon the larger public interest involved in t....
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....al Government, in the present case, has balanced the interests of all the stakeholders and there is nothing disproportionate in the exercise undertaken. 380] The petitioners, who now urge review on basis of doctrine of proportionality also owe some responsibility to at least suggest the range of options, which according to them, were available to the Central Government to deal with an unprecedented situation of this nature. The petitioners, including in particular, FTIL, NSEL and the shareholders of FTIL have operated in a denial mode, even when it comes to acknowledging the undeniable fact that the crisis of very serious proportion has arisen at the NSEL's exchange. The regulators, in the present case, have exhibited substantial restraint. In response to the show cause notices issued, Jignesh Shah, whose position vis-a-vis FTIL as well as NSEL has been discussed earlier, rather than admitting that there was a problem at the NSEL exchange and suggesting options to deal with such problem, proceeded to inform the regulators like FMC and DCA that there was no problem at the exchange and in any case, NSEL had 120 warehouses with stocks /inventory valued at Rs. 6000 crores to tak....
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....on 31st July 2013, NSEL, suspended the operations at the exchange. At this stage, the commodities sellers defaulted on their outstanding payments obligations to the Trading Clients to the extent of almost Rs. 5600 crores. The NSEL also sought to wriggle itself out of its obligations by contending that the counter guarantee was to apply only in relation to specified commodities and since none had been specified, the counter guarantee was in effective. The settlement guarantee fund to be maintained by NSEL and which was stated to be Rs. 738.55 crores as on 1st August 2013, was, on 4th August 2013 found to be only Rs. 62 crores. 384] Even though the transactions at the spot exchange were to be backed by commodities supposedly checked and stored in warehouses owned and controlled by NSEL, SGS India Limited, which was appointed to inspect and audit the position, reported that stock worth only Rs. 358 crores was available, even though, NSEL, had solemnly stated that it has stocked valued at Rs. 2389.36 crores. This means that there was hardly any stock in the warehouses with which deliveries could be effected. All this, left the Trading Clients in a lurch. The impugned order details t....
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....rs and the orderly development of the securities market. Ensuring the proper management of stock exchanges is a matter which falls within the regulatory framework which SEBI directs. Where the affairs of a recognized stock exchange are conducted in a manner detrimental to the interest of the investors or the securities market, it has consequences not just for the stock holders in the market, but for the financial stability of the nation. Stock exchanges are the first frontiers of regulation, for it is their duty to ensure, in the first instance, that transactions are conducted in a transparent manner and in accordance with the rules and regulations and bye laws that have been approved. Their duty to report to SEBI is an adjunct of the power conferred upon SEBI to regulate. 387] In Coimbatore Stock Exchange Limited (supra) , the Madras High Court has observed that as is known, the National Stock Exchange, the Bombay Stock Exchange and the Regional Stock Exchanges in India play the role of a Barometer in the development of Indian economy and in such view of the matter, any action which is detrimental to the interest of the investing public at large and contrary to the provisions o....