63 Moons Merger : A Matter of huge Concern

The merger order of Ministry of Corporate Affairs to merge two private corporate entities—NSEL and 63 moons, forcefully is an unwarranted recourse to the infamous NSEL case.

The areas of concerns involving this case are multiple-- from legislative and fiscal purview—to public interest. The claim by MCA that the move aims to alleviate the 13,000 trading clients of NSEL is based on untenable grounds. 

Based on MCA’s own circular dated April 20, 2011, it is a known fact that for any merger to materialize permission of 100% shareholders and 90% creditors needs to be obtained. By forcing the merger on 63,000 shareholders without so much as giving them a chance to consent/object to the amalgamation, MCA has not only goes against its own circular but also article 14 of the constitution.

The two companies are autonomous bodies with 63 moons showing cash reserve of Rs. 2000 crore, on the other hand, other, owning a liability of Rs. 5600 crore. The merger is likely to erode the net worth of 63 moons and may render it unviable. Such merger cannot be considered as the best recourse in any case.  

What is even more baffling is that at a time when we are projecting ‘Make in India’, how would we rationalize such executive high-handedness. Such a step will affect investor sentiments thereby hurting the nation’s interests as well.

It is completely unfair to make shareholders of FTIL pay for the sins of defaulters. What is the hurry and rationality behind the merger when we should clearly be chasing the actual defaulters?

Reference - Shantanu Guha Ray:(2016): ‘The Target Book’: New Delhi: Publisher: AuthorsUpfront

MAYHEM OF FORCED MERGER

There have been reports about the Ministry of Corporate Affairs (MCA) actively considering merger of the National Spot Exchange Ltd (NSEL) with its listed parent 63 moons technologies limited (formerly FTIL). MCA had issued the draft order of merger on October 21, 2014, based on the recommendations made by the Forward Markets Commission (FMC). This order has challenged the constitutional validity of Section 396 of the Companies Act, 1956. Moreover, 63 moons have challenged this order before the Hon. Bombay High Court.

While considering the pros and cons of this forced merger, it is evident that the merger will destroy the concept of “limited liability”. It may also lead to global and local investors losing confidence in investing, given that 63 moons have FDI and FII investments. It will further set a precedent to an array of PILs seeking a merger of companies facing financial problems with their solvent parent companies.

The forced merger will also have an adverse impact on 63 moons’ market capitalization. It may erode its net-worth by buckling the unproven and sub-judice liabilities of more than Rs. 5,000 CR of NSEL onto 63 moons. This will directly harm thousands of 63 moons shareholders along with hundreds of its employees, creditors, vendors and other stakeholders, which is against the spirit and purpose of Section 396. It can hardly be said that Section 396 was meant to fasten third-party unproven liabilities on a healthy company with a view to adversely affect the stakeholders of such healthy company, its creditor, and employees.

This is not the first instance when biased decisions by the government have affected corporate houses in India. An earlier instance on ban of Maggi is still fresh. The Food Safety and Standards Authority of India (FSSAI) had banned Maggi noodles in June 2015 alleging unfair trade practices, false labelling, and misleading advertisements by Nestle India. The ban was in accordance to tests and results depicting that Maggi noodles contained lead and Monosodium glutamate (MSG) in excess of permitted levels, which allegedly harmed consumers. While the ban was later lifted by the Hon. Bombay High Court saying the national food regulator had acted in an “arbitrary” manner and not followed the “principles of natural justice” while banning the product. Nestle India had, too, argued that the government was biased and had “singled out” the Swiss food maker by banning their popular snack while no action was being taken against manufacturers of similar products.

We can only hope for an unbiased and beneficial resort to the NSEL-FTIL crisis, a resort that would be globally favourable and fortunate for other corporate houses too.