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Is It Time For A New Chapter In Company Liability?

In an exclusive interview with 63 Moons chairman Venkat Chary, Paramita Chatterjee finds out how he sees the ruling

Photo Credit : Umesh Goswami,

It was in 2013, when a mammoth Rs 5,600-crore payments fraud surfaced at the National Spot Exchange (NSEL), a subsidiary of the Jignesh Shah-owned Financial Technologies India (now known as 63 Moons Technologies), following which trading was suspended on the exchange. In a landmark judgment recently, the Bombay High Court paved the way for the merger of NSEL with 63 Moons allowing two private companies to be merged in public interest. Does that come as a breather to the investors at the receiving end?

In an exclusive interview with 63 Moons chairman Venkat Chary, Paramita Chatterjee finds out how he sees the ruling.

Edited excerpts:

The Bombay High Court has come up with a landmark judgment. So what is your next move?
As you are aware that while upholding the Ministry of Corporate Affairs’ (MCA) merger order, the Bombay High Court has granted a 12-week stay on the operation of the merger order. We will be moving the Supreme Court during this 12-week period as we believe truth will prevail.

But somewhere, aren’t parent companies liable and responsible for their subsidiaries? Shouldn’t 63 Moons be responsible with NSEL’s liabilities?
Well, I think those who are projecting this are interpreting the court order in a manner convenient to them. They are intentionally misleading and spreading misinformation among people at large to spread false message that liability of NSEL will now be shifted to 63 Moons. This is an attempt to dampen the sentiments and create panic among stakeholders of the company. As per the merger order dated 12 February 2016, MCA itself says, ‘the entire amount of Rs 5,600 crore is due and recoverable from the 24 defaulters’. A company has an independent corporate personality, and that the corporate veil between two corporate entities can be lifted only in very exigent circumstances, is a fundamental and basic premise of corporate law world over. To destroy the veil through an administrative order confirmed in writ proceeding without a proper trial, is contrary to the basic tenets of natural justice. Secondly, to make and confirm such an order of forced amalgamation on the basis, if one reads the order closely, that NSEL is liable and therefore FTIL must take on such liability, is also contrary to the intention of Section 396 and the power vested in the Central Government, and again in violation of natural justice.

So according to you, what does the merger order mean for the company? The ruling goes on to show that parent companies cannot shy away from the responsibilities of subsidiary companies.

What I observe is that the Bombay High Court Order is largely based on a Grant Thornton report and the Forward Markets Commission’s (FMC) report on ‘Not Fit & Proper’ and character assassination of Jignesh Shah (Grant Thornton had conducted a forensic audit of NSEL).

Lifting of the corporate veil and piercing the concept of limited liability through this merger, just by an executive order, on the basis of various unproven allegations will set a dangerous precedent, contrary to basic corporate principles. The companies concerned, should first be given the opportunity to have all such allegations and issues heard in an evidentiary trial in a competent court. In the current environment, there could be negative sentiment that in turn could set off alarm bells in the investor community at a time when the government is keen on attracting foreign investment into the country.

What’s interesting is, this has been done solely to kill one corporate (63 Moons), and in the process, it may strike at the very foundation of the limited liability concept in corporate India. I would like to mention that the entire money trail has been established to the 24 defaulters, as already stated by the Economic Offences Wing (EOW) and the Enforcement Directorate (ED). So, in case of NSEL, there is no money trail, no adjudication, no essential public interest and also none of the claimants of the NSEL crisis are creditors of NSEL.

If you compare this case with that of banks and all their loan defaulting non-performing asset companies, then there is no doubt that the entire money trail has been traced to these defaulting companies, as banks are creditors of these companies. Also, bank money is indisputably ‘Public Interest’ unlike the case of NSEL, which in government’s own words, is a private dispute.

Once this precedence of forced merger is set, all these defaulting companies should also be merged with either their respective parent companies or any other group company to safeguard the public interest. The aftermath of this will be the end of the era of the concept of limited liability in India. Despite this harsh reality, the court has upheld the merger. Hence, this precedent will 100 per cent lead to the merger of these defaulting companies with their respective parents and group companies for recovery, just by an executive order without any adjudication of any irregularities. As a result, it would invariably affect the investment climate, its impact will be as minimum as Vodafone, and retrospective GAAR combined.

Q. But how does a parent company isolate itself from a crisis like this? Stakeholders’ money is stuck. It’s a huge crisis situation. Your thoughts.
I sincerely feel the government must ensure that its agencies pursue the 24 defaulters who hold the entire default amount as pay-in obligation. As far as I know, the EOW has attached the defaulters’ properties worth over Rs 6000 crore.

I think the government should take stringent action against the 24 defaulters for recovery of the amount. Unfortunately, the focus so far has only been to target 63 Moons and its founder.

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