The Ministry of Corporate Affairs (MCA) initiated a move in October 2014 on the recommendation of the Forwards Market Commission (FMC), for a merger of NSEL with its parent company, 63 moons. The speed at which the draft merger order was processed after the FMC’s recommendation raises eyebrows behind the ill-brained motives.
FORCED ORDER
This order has challenged the constitutional validity of Section 396 of the Companies Act, 1956. Under the Section 396 of the Companies Act – “The Central Government holds power to provide for amalgamation of companies in public interest, whereas every member or creditor (including a debenture holder) of each of the companies shall have the same interest in the company.”
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 creditors, and employees. This is clear from Section 396(3), which mandates that if the rights and interests of shareholders of both the companies are adversely affected, then they are to be compensated by the resulting company. Hence, any use of Section 396 which is against the interest of its shareholders, creditors, employees, and which (if proved) not to be in the essential public interest may defeat the shareholders and creditors of a company, thereby affecting the government’s focus on ease of doing business.
MCA’s own circular dated April 20, 2011, for the compulsory merger of government companies under Section 396 requires that the companies concerned and an overwhelming majority of their shareholders and creditors must be consenting to the merger. In this case, 63 moons, NSEL, and thousands of shareholders of 63 moons (constituting 80% of its capital) have opposed the merger. In view thereof, to go ahead with the merger will clearly be discriminatory vis-a-vis government companies.
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