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63, Moons Technologies Limited (formerly Financial Technologies (India) Ltd. & Ors. Versus The Union of India & Ors.

2017 (12) TMI 338 - BOMBAY HIGH COURT

Compulsory amalgamation of allegedly loss making wholly owned subsidiary (NSEL) with its profit making holding company (FTIL) in public interest - Whether the impugned order was made in violation of the principles of natural justice and fair play? - Held that:- In this case, proceeding on the basis that the impugned order is an administrative or at the highest a quasi judicial order as urged by the petitioners, we find that there was no breach in compliance with the principles of natural justice .....

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we are unable to fault the impugned order on the ground of non compliance with the principles of natural justice and fair play or on the ground of any breach of our directions in order dated 4th February 2015. - 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 co .....

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9 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. - Therefore, upon cumulative consideration of the aforesaid, we are unable to accept the contention that the Central Government was dis-entitled in law or on facts to order the compulsory amalgamation of allegedly loss making wholly owned subsidiary (NSEL) with its profit making holding company (FT .....

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veral shareholders, including perhaps the petitioners, did in fact, raise objections. If the shareholders were aggrieved by the assessment order dated 1st April 2015 because it awarded them no compensation, nothing prevented them from instituting appeal under Section 396(3A) within period of 30 days from the date of publication of the assessment in the Official Gazette. At best, the contention now raised by the petitioners, which again, is not at all backed by any pleadings, is some hyper techni .....

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eprived of opportunity of appeal 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. - If the provision in Section 396 is analyzed, it is apparent it represents a complete Code in so far as amalgamation of two or more companies by the Central Government in public interest, is concerned. Therefore, on the basis of ci .....

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the petitioners been able to establish that the impugned order was in violation of Articles 14 of 19 of the Constitution. Since, the petitioners have failed to establish any violation of Article 14 or 19 of the Constitution, there is no necessity to go into the issue of immunity, whether derivative or otherwise.Accordingly, we are unable to fault the impugned order on the ground of violation of Article 14 of the Constitution or on the basis of the petitioners' reading of the Central Government' .....

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y on “public interest”. - 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 .....

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₹ 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 ₹ 738.55 crores as on 1st August 2013, was, on 4th August 2013 found to be only ₹ 62 crores. Even though the transactions at the spot exchange were to .....

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etails the nexus between NSEL and FTIL, in the context of the crisis, which led to the collapse of the spot exchange. For all these reasons, we are unable to fault the impugned order applying the test of Wednesbury unreasonableness. - The conduct of the affairs of stock and commodity exchanges is of vital importance to the national economy. Stock and commodity exchanges provide vital hubs for investors and traders to trade in share and commodities. Commerce in modern economy is inconceivable .....

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which were in breach of the conditions of exemption notification, alone accounted for a turn over of ₹ 1,34,000 crores between the years 2009 to 2013. - If exchanges such as these are permitted to be subverted or fail without honouring their obligations and commitments, the confidence in national economic institutions is bound to suffer and the repercussion to the national economy will be severe. In such situations, a negative perception about the business environment of the country i .....

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OF 2016, - Dated:- 4-12-2017 - DR. MANJULA CHELLUR, CJ. & M.S. SONAK, JJ. Mr. Harish Salve and Mr. Janak Dwarkadas - Senior Advocates with Mr. Sharan Jagtiani, Mr. Nooruddin Dhilla, Mr. Kunal Dwarkadas, Ms. Shaneen Parikh, Ms Namita Shetty and Mr. Mohit Advani i/b. M/s. Cyril Amarchand Mangaldas for Petitioners in WP No. 2743 of 2014. Mr. Rohan Shah with Mr. Naresh Thacker, Mr. Dinesh Pednekar, Ms A. A. Mujawar and Mr. Srisabari Rajan i/b. M/s. Economic Laws Practice for Petitioners in WP N .....

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d 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 .....

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deral & Rashmikant for Intervenors (Modern India Ltd. & Ors.) Mr. M. P. S. Rao - Senior Advocate with Mr. Sandeep Parikh, Ms Bijal Mehta i/b. Deven Dwarkadas & Partners for Respondent No. 6 (NAARA) in WP No. 2743 of 2014.4 of 222 Mr. Gaurav Joshi - Senior Advocate with Mr. Piyush Raheja, Ms Tanvi Gandhi and Mr. Nupur Desai i/b. M/s. Markand Gandhi & Co. for Respondent No.4 in WP No. 2743 of 2014. JUDGMENT: (PER M.S. SONAK, J.) ABOUT THE PETITIONS AND THE PARTIES: 1] The main chal .....

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irectly has stake of almost 46% in FTIL and who is also the Vice Chairman of NSEL and some other promoters/shareholders of FTIL have instituted Writ Petition Nos. 387 of 2015 and 2985 of 2014. The shareholders' association of FTIL (SHAFT) purporting to represent the retail shareholders of FTIL has instituted Writ Petition No. 1922 of 2016. The Standard Chartered Bank, an unsecured creditor to FTIL has instituted Writ Petition No. 1785 of 2016. The Syndicate Bank, the Union Bank of India and .....

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rest of investors, who claim to have lost an amount of ₹ 5600 crores by trading on the platform provided by NSEL, have defended the impugned order. BRIEF INTRODUCTION TO SUBJECT MATTER 4] FTIL is a Public Limited and listed company which holds 99.9998% shareholding in NSEL. Based upon certain representations held out, NSEL, vide notification dated 5th June 2007, secured conditional exemption from the applicability of the Forward Contracts (Regulation) Act, 1952 (FCRA). The exemption was in .....

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e 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 breac .....

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on 22nd July 2013, though not in the precise terms in which they were sought. On 31st July 2013, however, NSEL, notified its members that trading in all contracts (except E-series) stood suspended until further notice. As a result, all the trading/activities at the NSEL exchange, came to a grinding halt on 31st July 2013. 7] As on the said date, around 24 identified commodity sellers who were due and payable an amount estimated at ₹ 5600 crores to around 13000 commodity purchasers (invest .....

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all, though, transactions on the exchange were to result in actual deliveries of commodities, it was found that there were no commodities or in any case, there were no adequate commodities in the warehouses owned and controlled by NSEL, for effecting such deliveries. This was despite the fact that NSEL had repeatedly held out that all the transactions were duly backed by the commodities duly checked, verified and deposited in such warehouses. As a result of all this, over 13000 investors, with .....

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ton and M/s. SGS India Pvt. Ltd. as proposed by NSEL itself, 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, .....

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ed 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 section unless a copy of the proposed order has been sent in draft to each of the companies concerned; the Central Government or the prescribed authority has determined whether every member or creditor (including the debenture holder) of each of the co .....

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here any such appeal has been preferred, has been finally disposed of; and the Central Government has considered and made such modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders t .....

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ated 21st October 2014 and status quo was made order therein. On 4th February 2015, the status quo order was vacated and the Central Government was permitted to make such orders in accordance with law as it deems fit. Some directions were also issued to afford opportunity of hearing to the affected parties and it was clarified that if any adverse order is made, the same was not to be given effect for a period of two weeks from the date of communication. 12] The Central Government, on 1st April 2 .....

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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- .....

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, particularly to NSEL whose corporate existence stands wiped out and to the shareholders of FTIL the economic value of whose shares, stands drastically diminished. They submit that any action which visits the parties with such serious civil consequences, if taken in violation of principle of natural justice and fair play, is a nullity and must be declared as such. They rely on Swadeshi Cotton Mills vs. Union of India (1981) 1 SCC 664, Nawabkhan Abbaskhan vs. State of Gujarat 1974 (2) SCC 121, Y .....

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tes the retention of shareholders and creditors interest in or rights against the resultant company as held in or against the original companies. This is possible only if the amalgamation involves two or more healthy companies. Mr. Salve submits that if power to amalgamate under Section 396 is to be used to mulct the members or creditors of FTIL having net worth of ₹ 2800 crores with NSEL having putative liability of ₹ 5600 crores, then the resultant company will never be in a positi .....

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t does not mean that the impugned order, which is based upon a clear misconstruction of the provisions of Section 396 can be saved under some derivative immunity. They submit that there is no derivative immunity, particularly where the impugned order 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. Gurudia .....

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e of rights and interests associated with such shares. They submit that the compulsory amalgamation of FTIL having net worth of ₹ 2800 crores with NSEL having putative liabilities of ₹ 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 compulsory amalgamation of two or more healthy co .....

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r creditors of FTIL. He submits that this constitutes non-compliance of a mandatory pre-condition to the making of an order of compulsory amalgamation under Section 396. He submits that the Central Government by misconstruing Section 396(3) has proceeded on the basis that no compensation is payable to shareholders of FTIL. He submits that even in such a case, the Central Government was obliged to make 'nil compensation order'. He relies on K.T. Plantations (P) Ltd. vs. State of Karnataka .....

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not at all. He relies on Nazir Ahmed Vs. King Emperor 63 I.A. 372. For all these reasons, Mr. Seervai submits that the impugned order is ultra vires Section 396(3)(a) and 396(4)(a). 17] Mr. Rohan Shah for the petitioners in Writ Petition No. 387 of 2015 adopted the submissions of Mr. Seervai, but submitted in the alternate that this Court should examine the validity of the assessment order dated 1st April 2015 and award compensation to the shareholders of FTIL. He submits that the bar of alterna .....

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, 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 n .....

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o Section 396, the procedure prescribed in Section 391 is required to be followed and is invariably followed. They point out that this procedure, ensures that amalgamation is by and large consensual and not compulsory or forced. They submit that the Central Government, by not following its own Circular dated 20th April 2011 when it comes to amalgamation oftwo or more non-government companies, is arbitrarily deviating from its own policy and in any case, practising hostile and invidious discrimin .....

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whenever there has been a payment crisis, the Central Government, has ensured that the healthy unit is kept secure and the unhealthy unit is quarantined. They cite the example of Unit Trust of India - UTI, where according to them, even though, millions of genuine investors in US - 64 Scheme were duped, the Central Government, hived off the scam ridden unit into a separate entity, so that other units of UTI, remained healthy. They also made reference to some other groups of companies (without na .....

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4 of the Constitution. 20] Mr. Mookherjee and Mr. Dwarkadas submit that mere public interest is not sufficient and the Central Government must be satisfied that it is essential in national interest to compulsorily amalgamate two or more companies in order to exercise the draconian powers under Section 396. They submit that the national interest is different and distinct from mere public interest and since, the Central Government, in making the impugned order, has not even adverted to the aspect .....

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ttam 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 .....

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lymer Limited (supra) and Ambalal Sarabhai Enterprises Ltd. (supra) to explain the concept of public interest in such matters. 22] Mr. Chinoy, both at the stage of reply as well as rejoinder, submits that the only reason discernible from the impugned order is that such forced amalgamation will facilitate the speedy recovery of dues from the defaulters at NSEL. He submits that this is upon the premise that NSEL lacks necessary finances and wherewithal to effect recoveries from the defaulters. He .....

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relies on Mohinder Singh Gill vs. Chief Election Commissioner (1978) 1 SCC 405, State of Punjab vs. Bandeep Singh & Ors. (2016) 1 SCC 724 , T.P. Senkumar vs. Union of India (2017) 6 SCC 801, Barium Chemicals vs. CLB AIR 1967 SC 295 , Rohtas Industries vs. S.D. Agarwal (1969) 1 SCC 325,C.I.T. vs. Mahindra and Mahindra Limited (1983) 4 SCC 392 and Bhikubhai Patel vs. State of Gujarat (2008) 4 SCC 144. 23] Mr. Salve and most of the other counsel for the petitioners and intervenors submit that .....

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acting under dictation. They submit that both 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 im .....

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l 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 the issue by merely observing in the impugned order that the allegations of fraud or liability are not being gone into. They submit that this is a clear instance of legal mala fides. They rely on ALN Narayanan Chettyar Vs. Official Assignee AIR 1941 PC .....

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isite for lifting the corporate veil even remotely exist in the facts and circumstances of the present case. They submit that a parent company can never be held liable for any alleged liabilities of its subsidiary. They submit that even the Grant Thornton forensic audit report very clearly states that no significant amounts have travelled from NSEL to FTIL. They submit that the circumstance that FTIL holds over 99% shareholding of NSEL, is not a circumstance enough for lifting of corporate veil. .....

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Ltd. vs. Evelomon Corporation & Anr. 1993 ZA SCA 167, Adams vs. Cape Industries PLC. 1990 (1) ChD 433, Life Insurance Corporation of India vs. Escorts Limited & Ors. (1986) 1 SCC 364, Vodafone International Holdings B.V. vs. Union of India 2012(6) SCC 613, Balwant Rai Saluja & Anr. vs. Air India & Ors. (2014) 9 SCC 407 and Needle Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd. & Os. AIR 1981 SC 1298, in support of these propositions. 26] Mr. Mookherje .....

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hey 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 impugn .....

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NSEL is liable to make good the alleged losses incurred by the alleged investors who may have traded on the NSEL exchange. They however, pointed out that in terms of bye-laws of the exchange, no liability can ever be foisted on NSEL. They submitted that the impugned order proceeds on the basis of legal misconception that the liabilities of a subsidiary attach to a holding company by vicarious liability. They submitted that the impugned order has relied on FMC's order dated 17th December 2013 .....

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natural justice and fair play. They submitted that there are no objective facts to sustain the so called subjective satisfaction. They submitted that the impugned order is irrational because no person instructed in law could have ever proposed such a drastic action under Section 396. They submitted that these are sufficient grounds to strike down the impugned order even by applying the Wednesbury test. 28] Mr. Salve and most of other counsel for the petitioners and intervenors submit that the C .....

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st 608 investors having claims up to ₹ 2 lakhs have already been settled. They point out that almost 6445 investors with claims between ₹ 2 lakhs to ₹ 10 lakhs have also been settled to the extent of fifty percent. They point out that this implies that claims 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 ₹ 1233.02 crores. They point out that the inve .....

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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 impugned order itself .....

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the struck down as unreasonable. 30] In the course of the rejoinder, Mr. Salve and most of other counsel for the petitioners however, sought to rely on the doctrine of proportionality to attack the impugned order. They submitted that the Wednesbury test is now substantially replaced by the proportionality test. This test of judicial review is substantially wider than the Wednesbury test and requires the Court to judge whether the action was proportionate, balanced, least injurious, caused minim .....

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itors of FTIL and the interests of so called investors. They rely on Om Kumar & Ors. vs. Union of India (2001) 2 SCC 386, Chairman, All India Railway Recruitment Board vs. K. Shyam Kumar (2010) 6 SCC 614, Maharashtra Land Development Corporation & Ors. vs. State of Maharashtra & Anr. (2011) 15 SCC 616 Modern Dental College and Research Centre & Ors. vs. State of Madhya Pradesh & Ors. (2016) 7 SCC 353, and Gohil Vishvaraj Hanubhai & Ors vs. State of Gujarat & Ors.. 201 .....

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al 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 b .....

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India Ltd. (1987) 2 SCC 720, Para 7 and Dhariwal Industries Ltd. vs. State of Maharashtra 2013 (1) Mh.L.J. 461, Para 48 in support of their submission that the impugned order partakes the character of delegated legislation / subordinate legislation. 33] Mr. Khambata and Mr. Sen submit that in the present case, both NSEL and FTIL were furnished with the copy of proposed order of amalgamation, the objections and suggestions made by NSEL, FTIL, their shareholders, creditors, employees were duly con .....

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ons were duly considered and there is no variation as such between the draft order and the impugned order. They submit that the directions in order dated 4th February 2015 have to be construed consistent with the statutory provisions. Grant of personal hearing to 50389 objectors would have unreasonably delayed or even frustrated the proposed action. The objections were stereotype and almost 96% had originated from FTIL e-mail id. The objections were not significantly different from the objection .....

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6, State Bank of Patiala & Ors vs. S.K. Sharma (1996) 3 SCC 364, City Montessori School vs. State of Uttar Pradesh (2009) 14 SCC, Haryana Financial Corporation & Anr. vs. Kailash Chandra Ahuja (2008) 9 SCC 31 and Managing Director, ECIL vs. B. Karunakar (1993) 4 SCC 727, in support of these propositions. 34] Mr. Khambata joins issue with the interpretation suggested by the petitioners that Section 396 permits only the compulsory amalgamation of two or more healthy companies. He submits t .....

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e 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 submi .....

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gainst' in Section 396(3) should be construed in the light of the statutory provisions in the Companies Act as explained by the Supreme Court in several cases. He submits that the expression does not include the economic value of the shares. He submits that in the present case, neither the interest of the shareholders of FTIL in or their rights against the company resulting from amalgamation were to be affected, there was no question of payment of any compensation to such shareholders. He su .....

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ses 1 (SC) and In Re Nebula Motors Ltd. 2003 SCC Online AP 451. 36] Mr. Khambata submits that in the present case, the Central Government has scrupulously followed the procedure prescribed in Section 396. He submits that as provided in Section 396 (3), the Central Government did make an assessment order dated 1st April 2015. The mere circumstance that the assessment order makes no specific reference to the shareholders or creditors of FTIL does not mean that there is no assessment order made or .....

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ssment order as contemplated by Section 396(3) is in the nature of an afterthought and contrary to the pleadings 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 .....

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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 that the example in case of UTI is also misconceived and in any case, no party can claim negative equality. 39] Mr. Khambata submits that the circular dated 20th April 2011 neither spells out any pol .....

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the petitioners. 40] Mr. Khambata submits that that there is no difference between public interest and national interest in the context of Section 396. He submits, however, that assuming there is any difference, then, after the substitution of the expression national interest with public interest by the Companies (Amendment) Bill 1959, what is relevant is public interest and not national interest. He submits that marginal notes or notes on clauses are not useful guides to interpretation when th .....

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hanges 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; (c) Facilitating NSEL in recovering dues from defaulters by pooling human and financial resources of FTIL and NSEL. 42] Mr. Khambata submits that there is absolutely .....

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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 t .....

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2014 and 17th October 2014. However, this does not mean that the impugned order is entirely based only upon the said material or that the Central Government has abdicated its functions to the dictates of FMC or any other authority. He submits that in the present case circumstances justifying the lifting of corporate veil very much exist. However, the Central Government, far from lifting the corporate veil has, in deference to the corporate veil amalgamated the two companies. 45] Mr. Khambata sub .....

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nancial Corp. vs. Jagdamba Oil Mills 2002 (3) SCC 496, in support of his submissions. 46] Mr. Khambata submits that the Central Government, in making the impugned order, has no doubt, considered the FMC's order dated 17th December 2013 or the Inspection Reports under Section 209A. However, it is entirely wrong to urge that the impugned order is based entirely on such material alone or that, there is no independent application of mind on the part of the Central Government in making the impugn .....

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oss-examining the makers of Grant Thornton Audit Report before FMC made its order dated 17th December 2013. However, FTIL and NSEL chose not to avail such opportunity. Mr. Khambata further submits that certain findings from the Grant Thornton Report which have been adverted 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 .....

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7; 4,000 to ₹ 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 ₹ 2,800 crores with NSEL which has putative liabilities of ͅ .....

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irrelevant and in any case, lack legal basis. Mr. Khambata submits that in such a situation, FTIL, cannot be permitted to distance itself from NSEL. 48] Mr. Khambata submits that in the present case, the Central Government has rightly, not gone into the issue of liability of either NSEL or FTIL or adjudicated on the issue of fraud. Mr. Khambata submits that had the Central Government attempted to do this, both, FTIL and NSEL would contend such an exercise is ultra vires the powers of the Centra .....

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at it guarantees the payments, inter alia through a settlement guarantee fund specially created for the purposes. Further, there is ample material on record which establishes that the transactions at the spot exchange established by NSEL were to be backed by the physical commodities, which were supposed to have been verified, tested and stored by NSEL in warehouses owned or controlled by it. There is ample material on record which establishes that in fact, no such commodities were found in wareh .....

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ednesbury'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 .....

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erations in breach of conditions subject to which exemption was secured. He submits that NSEL offered T+18, T+25 and T+36 contracts, which were in clear breach of the conditions. Further, from 2009 onwards NSEL launched paired contracts comprising short term buy and long term sell contracts. By adoption of such modus operandi, the entire complexion of the exchange was converted from a spot exchange, which it was meant to be, to a platform for undertaking financing transactions, unconnected with .....

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ssly approved and ratified by the Management of FTIL, which, in any case, has a stake of 99.9998% in NSEL. Mr. Rustomjee pointed out that Jignesh Shah and his family members directly or indirectly held about 46% shares holding in FTIL. He pointed out that Jignesh Shah always held himself to be out the Founder-Chairman and Group CEO of FTIL. Jignesh Shah also held himself out as Vice Chairman of the NSEL. Mr. Rustomjee points out that feeble attempt on the part of NSEL and FTIL to state that they .....

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algamation of NSEL and FTIL. 54] Mr. Rustomjee submits that when the defaults came to the notice of regulatory authorities, show cause notices were issued to NSEL. In response, NSEL, including in particular, Mr. Jignesh Shah representing NSEL stated that there was no problem whatsoever in the functioning of spot exchange and transactions undertaken, were not only consistent with the conditions imposed in the exemption notification, but further, the transactions were fully secured. Mr.Rustomjee, .....

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s 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 ₹ 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 SG .....

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of FTIL and NSEL, so that, the investors, are not left in a total lurch. Mr. Rustomjee submits that the Central Government, upon due compliance with the procedure prescribed under Section 396 and upon taking into consideration the overwhelming material on record has made the impugned order. He submits that there is absolutely no unreasonableness or arbitrariness or dis-proportionality involved. 57] Mr. Rustomjee also relies on MCX Stock Exchange Ltd. vs. Securities and Exchange Board of India (2 .....

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and 6 in Writ Petition No. 2743 of 2014 instituted by FTIL, representing the investors, who have claims in excess of ₹ 5600 crores, submit that the impugned order is the very minimum that the Central Government and other regulatory authorities could do, considering unprecedented crisis resulting from acts of omission and commission on the part of NSEL and FTIL and its promoters and key personnel. 59] Mr. Joshi and Mr. Rao submit that several assurances were held out by NSEL its promoters a .....

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lters were in fact controlled by or related to key personnel of NSEL and 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, t .....

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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 compensation to shareholders of FTIL? (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? (E) Whether the impugned order .....

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, applying Mohinder Singh Gill principle, the Central Government is barred from adding or supplementing reasons by way of affidavits ? (G)(ii) Whether, as contended by Mr. Chinoy, the impugned order stands vitiated because there is no material whatsoever on record in support of the aforesaid solitary ground or reason ? (H) Whether the impugned order can be said to be unreasonable , applying Wednesbury principles ? (I) Whether the impugned order defies the doctrine of proportionality ? 62] In add .....

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ii) The impugned order tacitly proceeds on the basis that FTIL and NSEL have committed some fraud or in any case, are themselves liable to the investors. They submit that such assumptions are baseless and vitiate subjective satisfaction; (iv) That none of the purposes referred to in the impugned order can at all be achieved by making the impugned order. Thus, the entire exercise is futile and therefore, liable to be struck down. 63] Mr. Khambata and Mr. Sen, learned senior counsel for Central Go .....

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receding 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 incorpo .....

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17.90% of its shareholding. The balance shareholding is held by retail shareholders. 66] In May 2005, Multi Commodities Exchange (MCX) promoted and founded by FTIL, incorporated NSEL for carrying on, inter alia, the business of a spot trading exchange for commodities. Jignesh Shah was one of the promoters. Initially FTIL held 26% stake. By September 2005, 99.9998% of the shareholding of NSEL was transferred by MCX to FTIL. Accordingly, there is no dispute that FTIL holds 99.9998% shareholding of .....

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. This term is usually used in contradistinction to forward contract, now statutorily defined in Section 2(c) of FCRA. The FCRA entered into force in 1952 and was enacted to provide for regulation of forward trading and prohibition of options in goods and for matters connected therewith. Initially, the transactions on stock exchanges were excluded, since, the problem of regulating stock exchanges have some special features of their own which can be best treated separately. 68] The main principle .....

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ergencies, the Central Government will also have the powers to suspend the business of recognized associations and in certain extreme cases, to withdraw recognition or to supercede the governing 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 th .....

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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 Forward Contracts (Regulation) Act, 1952 was enacted with a view to regulate matters relating to forward contracts, t .....

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ded to result in actual delivery of goods and payment of full price therefor within a period of eleven days. The method employed by the parties is to enter into an apparently ready delivery contract for a week or ten days thus keeping themselves strictly within the law and then to square it up by entering into an opposite contract. The next day or a day thereafter a seemingly new contract for the same quantity and variety of goods and with the same party is entered into afresh and so squared up .....

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misuse of ready delivery contracts has been indulged in by the parties because of certain lacuna in the definitions of the expressions forward contract and ready delivery contract in section 2(c) and section 2(i) respectively of the Forward Contracts (Regulation) Act, 1952. Government have been advised to the effect that the fact that there was no actual delivery of goods within the stipulated period of eleven days but there was settlement, by payment of differences or set off does not convert .....

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ulgated 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. Ther .....

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ard contracts in notified goods shall be illegal or void in notified cases shall be illegal or void in certain circumstances. Section 16 provides for the consequences of notification under Section 15. Section 17 empowers the Central Government to prohibit forward contracts in certain cases. Section 18 is concerned with special provisions respecting certain kinds of forward contracts and Section 19 prohibits options in goods. Chapter V of the FCRA provides for penalties and procedures. 72] Chapte .....

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lish a commodity exchange, several representations, including the following were held out by NSEL and Jignesh Shah : (i) No short sales would be permitted and all outstanding positions at the end of the day would result in delivery of the commodities; (ii) In order to ensure delivery of commodities, the NSEL would establish designated warehouses, in which the commodities would be verified, checked and stored; (iii) NSEL would counter guarantee performance of the contracts at the spot exchange; ( .....

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75] Section 2 (c) of FCRA defines 'forward contract' in the following terms : 2(c) forward contract means a contract for the delivery of goods and which is not a ready delivery contract; 76] Section 2 (i) of FCRA defines 'ready delivery contract' in the following terms : 2(i) ready delivery contract 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 th .....

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uired 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 dispense .....

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of 1970); (ii) commission agent means a person who, in the ordinary course of business, makes contract for the sale or purchase of goods for others for a remuneration (whether known as commissioner or otherwise) which is determined in the contract itself or determinable from the terms of the contract, in either case, only with reference to the quantity of goods or to the price therefor as stipulated in the contract. 77] As noted earlier, the aforesaid definitions were amended by Amendment Act 5 .....

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ek or ten days thus keeping themselves strictly within the law and then to square it up by entering into an opposite contract. The next day or the day thereafter a seemingly new contract for the same quantity and variety of goods and with the same party is entered into afresh and so squared up at the end of the next period of seven or ten days by an opposite contract and so on. Thus, a contract is carried on with the same party for the same quantity and quality of goods for so long as both parti .....

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;. 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 d .....

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the module proposed by NSEL was to involve netting or setting of transactions at the end of the trading day, and in order that the transactions, as per the amended definition are not classified as 'forward contract' as per amended definitions, as matter of abundant caution, exemption from the very applicability of FCRA and consequently, the regulatory regime of FCRA, was applied for. 80] The Central Government, taking into consideration the representations held out by NSEL and in exerci .....

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ort trading subject to regulation by the authorities regulating spot trade in the areas where such trading takes place. (iv) all information or returns relating to the trade and when asked for shall be provided to the Central Government of its designated agency. (v) the Central Government reserve the right to impose additional conditions from time to time as it may deem necessary; and (vi) in case of exigencies the exemption will be withdrawn without assigning any reason to public interest. 81] .....

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r: i. When a Commodity Seller wished to sell commodities, NSEL would launch contracts by way of circulars specifying the commodities intended to be sold on the exchange. The Commodity Seller was required to deposit the requisite commodities at a designated warehouse, for which NSEL would issue a Warehouse Receipt; ii. These contracts enabled trading on the Exchange. Various contracts like T+2 and T+25 were offered by NSEL; iii. 'T' day i.e. Trade day in the contracts launched by NSEL imp .....

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ays 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 conclus .....

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s of one day's duration and therefore the spot delivery contracts or the ready delivery contracts at the NSEL exchange ought to have resulted in actual delivery of commodities and payment of full price thereof within a period of 11 days from the 'T' day. On this basis, the respondents submit that even the practice described in Note 2 by FTIL may not be consistent with the conditions of exemption notification dated 5th June 2007 and consequently the FCRA itself. 83] For the present, w .....

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dates and events submitted by FTIL, which sets out the actual mechanism of operations at the NSEL exchange. The two notes read as follows: : Note 3 : In actual fact however, certain Trading Clients abused the aforesaid trading mechanism and platform provided by the Exchange in the manner more particularly explained below; and this resulted in a payment fraud to the extent of approximately ₹ 5,600 crores. Note : As stated earlier, in actual fact, a default owing to fraud, to the extent of .....

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ntract, 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 an .....

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L so that the Warehouse Receipt representing the underlying commodities, could be handed over to the Commodity Seller, and the Commodity Seller paid the T+25 purchase consideration for the commodities purchased. iii. The entering into the paired contracts / structured trades as aforesaid, was a breach by certain Trading Clients, Commodity Sellers and their Brokers, of the conditions of NSEL's bye-laws and circulars (including NSEL's Circular of February 7, 2012), which prohibited paired .....

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ly or partially and nevertheless obtained Warehouse Receipts suggesting that physical quantity of commodities traded were available in the warehouses; v. Later (i.e. on 12.7.2013), when DCA directed NSEL to submit an undertaking to stop fresh contracts and settle all outstanding contracts and the Trading Clients sought payment of the purchase price for the commodities sold by them (in the T+25 sale contract), to the Commodity Sellers, that the Commodity Sellers not only defaulted in making the p .....

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stated to have abused the mechanism and even 'in collusion with the warehouse keeper stopped depositing physical stocks in warehouse', then, at least as a matter of fact, it is more than apparent that the operations at the NSEL Exchange were in gross violation of the conditions of the exemption notification dated 5th June 2007 and consequently in gross violation of the FCRA. 85] The very offer of T+18, T+25 or T+36 contracts by NSEL prima facie constituted breach of the condition that t .....

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or 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. .....

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monetary terms, this turn over from 2009 to 2013 was in the region of ₹ 1,34,000/- crores. Therefore, to say that all this was without the involvement or even knowledge of FTIL and NSEL and to attempt to blame 'certain trading clients, commodities sellers or brokers' is just not prima facie acceptable. 87] The mechanism of paired contracts adopted at the NSEL exchange between 2009 and until the collapse of operations in 2013 was very similar to the abuse referred to in Statement of .....

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39;s duration, in sales and purchases of commodities. Rather, the transactions assumed the character of pure and simple financing transactions, which was never the purpose for which NSEL was exempted from the application of the FCRA. 88] The material on record, including in particular the presentations made by and on behalf of NSEL and the Grant Thornton Report establish that this modus operandi of paired contracts, was in reality, nothing but financing transactions. These contracts were invaria .....

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ed 5th June 2007 have applied to such operations. 89] The 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 ₹ 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 disre .....

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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. Even otherwise, there is extensive material on record in the form of Grant Thornton Report etc. which establishes that the operations at the NSEL Exchange were inconsistent with the conditions of the exemption notification dated 5th June 2007 and .....

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ing paired contracts states that certain trading clients (who) abused the aforesaid trading mechanism and platform...... At another place, in the context of commodities in the warehouses, FTIL states that the Trading Clients, in collusion with the warehouse keepers, stopped depositing physical stocks in the warehouse either fully or partially and nevertheless obtained Warehouse Receipts suggesting that physical quantity of commodities traded were available in the warehouses . 92] On 10th April 2 .....

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e 2007. 94] By responses dated 29th May 2012 and 11th August 2012, NSEL denied the allegations. NSEL stated that their staff invariably carries out weighing and quality grading of the commodities when they are deposited in the warehouses. The commodities are mostly stored with NSEL warehouses where proper upkeep and safety is guaranteed by NSEL. All contracts traded at NSEL are compulsory delivery contracts. In all contracts traded as NSEL, seller is forced to give delivery. NSEL does not allow .....

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its response dated 29th 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 ₹ 6,000 crores approximately which are good for delivery for processors' consumption upto .....

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ent system compared to any other financial market structure. (vii) The value of stocks held by NSEL is around ₹ 6,000 crores. 97] On 12th July 2013, the DCA, not totally satisfied with the NSEL's response, directed NSEL to furnish undertakings to the following effect: (i) No further or fresh contracts will be launched by NSEL until further instructions from the concerned authorities; (ii) All existing contracts will be settled on their due dates; 98] On 22nd July 2013, NSEL did furnish .....

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] The aforesaid undertakings were contained in letter dated 22nd July 2013, addressed by NSEL to DCA. In addition, reference is necessary to clause 4.1 of the letter dated 22nd July 2013, in which NSEL once again made a commitment that every sale order shall result in 100% delivery. Clause 4.1 reads as follows : 4.1 Though we are of the bonafide view that we have not violated provisions of FCRA or the said notificaiton, we have now for the first time received a direction in this regard, that is, .....

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led trade for trade . Even though short sale is completely prevented on NSEL through its risk, management and settlement system as per empirical data of turnover and delivery showing 99.9999% 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 ensur .....

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y. 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 operations at its exchange, the NSEL issued a circular by which it suspended trading in all contracts (except E series contracts) and me .....

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the media. At this stage, the regulatory authorities had merely issued show cause notices or required the NSEL to furnish undertakings so that the operations proceed in accordance with the conditions of the exemption notification. To suggest that the regulatory authorities by seeking information and explanation or by requiring NSEL to undertake operations consistent with the conditions of the exemption notification dated 5th June 2007, had either directed or forced the NSEL to suspend the operat .....

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to 20% of open positions as margin money to complete purchase commitment of the processors. If this was the correct position on 10th July 2013 and further even on 22nd July 2013, when undertakings were furnished on behalf of the NSEL, though, in slightly twisted terms, then, certainly, there was no reason for NSEL to take the precipitate action of suspending the action at its exchange in such an abrupt manner. Jignesh Shah in his presentation to FMC and DCA on 10th July 2013, had himself stated .....

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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 posi .....

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ouse receipts. At another stage, FTIL casually states that there was some fraud at the warehouse level. The material on record establishes that it was NSEL, with full knowledge of FTIL which offered the paired contracts on its exchange. In any case, in 2013, almost 99% of the turn over of the exchange comprised such paired contracts. In monetary terms, the turn over of the paired contracts between 2009 and 2013, was not some negligible figure, which might have legitimately escaped the attention .....

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ccounts of NSEL each year were being approved by the Board of FTIL, which holds 99.9998% of the shareholding of NSEL. In such circumstances at least, a better and the more credible explanation was expected , as against the vague and casual apportion of blame upon certain trading clients. The explanations offered, are hardly credible explanations considering the impact of suspension of operations on 31st July 2013. 107] On 31st July 2013, when NSEL suspended operations at its exchange, this is wh .....

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ates and events admits that there were no stocks of commodities in NSEL's accredited warehouses, with which deliveries of commodities could have been effected; (iii) Hardly, 20 days earlier, Jignesh Shah had solemnly informed FMC and DCA that over the past five years, 99.9999% of the trades in agricultural commodities had resulted in deliveries on daily basis 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 .....

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ly 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 ₹ 700/- to ₹ 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 w .....

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n to state that the amount available in the settlement guarantee fund is only ₹ 62 crores. 109] The FTIL in its petition as well as the list of dates and events merely states that 'the fraud at the warehouse level went undetected until the default occurred' . FTIL relies on order dated 22nd August 2014 by which bail was granted by this Court to Jignesh Shah in which it is observed that though the case has been projected as scam of ₹ 5,600 crores, it needs to be kept in mind t .....

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at the warehouse level went undetected until the defaults occurred, FTIL and NSEL were expected to come up with some better explanation. This is because, hardly three weeks earlier, Jignesh Shah, in his detailed presentation to FMC and DCA had solemnly asserted that there were 120 warehouses holding inventory valued at ₹ 6,000 crores, which was good for deliveries upto 1 to 1.5 years. 111] FTIL then advanced a loan of ₹ 179 crores to NSEL without prejudice to its rights and liabilit .....

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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 ₹ 174.72 crores extending over 30 weeks within which the dues to the trading clients (investors) would be settled. Even a pa .....

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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 suggestion in the report that any part of the funds that were mislaid found their way either to FTIL or its shareholders.' 114] On 21st September 2013, Grant Thornton, the Forensic Auditor proposed by NSEL itself submitted its report. The executive summary reads as follows : B. Executive Summary This executive summary i .....

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ades were carried out with paired back-to-back contracts. Investors simultaneously entered into a short term buy contract (e.g. T+2-i.e 2 day settlement) and a longterm sell contract (e.g. T+25 - i.e. 25 day settlement). The contracts were taken by the same parties at a predetermined price and always registering a profit on the long term positions as illustrated below : Trade Date Deal No Buy/Sell Member ID Name of Member Contract Code Sub Broker No. Terminal ID Trade Price Trade Value 02 April .....

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ed the circulars introducing such long term contracts over a period beginning November 2009. 1.4 Further evidence was obtained with regards the existence of a financing business, such as presentations which stated that a fixed rate of return was guaranteed on investing in certain products on the NSEL exchange. Several internal (NSEL) presentations were found, upon a review of e-mail databases, setting out a yield (e.g. 16%) as an opportunity for investors for trading in certain products on the N .....

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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 Mar .....

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uted. Grant Thornton carried out a stock verification exercise and found significant shortages vis-avis expected collateral. Related Party Transactions 1.6 IBMA is registered as a client with Karvy Comtrade limited for executing trades on futures commodity exchange like MCX and NCDEX. SNP Designs Private Limited (SNP) is a client of IBMA and the manging director of SNP is Mrs.Shalini Sinha, the wife of Mr.Anjani Sinha (CEO and MD of NSEL as well as IBMA). Grant Thornton found evidence of a large .....

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spite substantial amounts due. Further, evidence was obtained that ₹ 10 crore was received from Mohan India which was credited to an IBMA Bank account. This was to be adjusted against the SNP receivable balance as per an instruction made by Mr.Anjani Sinha. IBMA is a subsidiary of NSEL and has received funding for operational needs on several occasions (including a loan of ₹ 5 crore on 5 August 2013). IBMA is also a member on the NSEL exchange and executes trades on behalf of clients .....

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ctives. 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 th .....

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(NSEL) approached Karvy Financial Services Limited (KFSL) to extend credit facilities to a member, specifically N.K. Proteins. Further the Board granted and approved for issue of a guarantee to KFSL, to the extent of ₹ 14 crores, in respect of credit facilities extended to N.K. Proteins. 1.11 Our review of the Information technology identified several independent standalone systems wherein the flow of business transactions and related information between different systems required manual i .....

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on of client monies : 1.12 Misutilisation of client monies/settlement fund : As per the rules and bye-laws of the NSEL exchange Margin deposits received by clearing members from their constituent members and clients in any forms shall be accounted for and maintained separately in segregated accounts and shall be used solely for the benefit of the respective constituent member's and client position. Grant Thornton found evidence (including e-mails) that client monies/settlement fund, was used .....

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sions. Misrepresentations to the Regulator 1.13 Regulatory Contraventions: As per a Gazette Notification issued on 5 June 2007 by the Ministry of Consumer Affairs, the Government of India under Section 27 of the Forward Contracts (Regulation) Act, 1951( FCRA ) exempted all forward contracts of one day duration for the sale and purchase of commodities traded on NSEL from the operations of the said Act. Grant Thornton's review of the type of trades executed on the NSEL, exchange indicates cont .....

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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 ₹ 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. .....

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iii) No verification or due diligence was ever undertaken by NSEL to ensure compliance by its members of the conditions outlined in its rules and byelaws even though in terms of NSEL byelaws, warehouse receipt issued by NSEL were meant to evidence a commodity being held in an approved warehouse. (iv) NSEL did not insist upon deposit of commodities inthe warehouses prior to executing sale transactions. Instead NSEL resorted to issuing Delivery Allocation Reports (DAR) representing to genuine inve .....

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2 warehouses although they had been engaged by NSEL to inspect its own stock supposed to have been lying in its own warehouses. 117] The Grant Thornton report makes reference to related party transactions, margin exemptions to certain members and condonation of repeated defaults on the part of certain members at the NSEL's exchange. IBMA executes trades on futures commodities exchange like MCX and NCDEX. SNP Designs Private Limited (SNP) was a client of IBMA. The Managing Director of SNP was .....

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ptions on daily basis since February 2010. 118] Grant Thornton quotes the NSEL Rules and Bye-laws 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 ₹ 5600 crores to the trading client .....

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nted 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 to show cause as to why they should not be declared as fit and proper persons to be shareholders or directors of MCX in view of the events that had transpired at NSEL. In the proceedings that ensued, FTIL an .....

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association / exchange. The order, makes reference to internal audit reports, Grant Thornton Report, SGS Report, minutes of board's meetings and correspondence. This order also holds that on the basis of the material on record, Jignesh Shah and FTIL were effectively controlling and directing the affairs of NSEL. 120] FTIL, Jignesh Shah and Srikant Javalgekar instituted writ petition nos. 337, 363 and 370 of 2014 to impugn FMC's fit and proper order dated 17th December 2013, which came t .....

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ssion has recorded elaborate and detailed findings of fact after considering the evidence on record. A finding of fact has been recorded by the Commission that M/s.Grant Thornton finalised its forensic audit report after Shri Jignesh Shah, Shri Joseph Massey and other officers of FTIL reviewed forensic audit report. One of the findings recorded is that the FTIL which has promoted NSEL, sought exemption from the said Act of 1952 even before it had not started any trading or operation. It is held .....

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nquiry 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 .....

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e challenge to FMC's fit and proper order is pending. However, learned counsel for the respondents are right in their submissions that the aforesaid observations are not altogether irrelevant particularly when the petitioners insist upon relying upon observations in some bail orders to urge that they are in no manner responsible for the unprecedented crisis at NSEL Exchange. In the written submissions at the stage of rejoinder, FTIL has submitted that since Rule has been issued in the writ p .....

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leave petitions were dismissed as withdrawn. In yet another writ petition (l) No. 1516 of 2014 instituted by FTIL against the FMC, this Court, by order dated 13th June 2014, once again declined interim relief to FTIL restraining voting on a resolution to amend Articles of Association by noting that stay on FMC's order dated 17th December 2013 had been declined and therefore, the Court must proceed on the basis that the order dated 17th December 2013 is as on date valid. In any case, there c .....

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ation of NSEL with FTIL. Along with this communication, FMC forwarded representations received from the investors groups. 125] On 21st October 2014, the Central Government, issued draft order proposing amalgamation of NSEL with FTIL in public interest by invoking the provisions 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 Februar .....

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l 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 12th 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, when the final hearing of the petitions wa .....

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utes more than prima facie evidence in support of the aforesaid objective facts upon which the subjective satisfaction of the Central Government was based. In regard to several instances, we have, referred to the pleadings of the petitioners or the list of dates and events submitted on their behalf. Several facts are backed by documents emanating from the petitioners. Several facts emerge from the Audit Report of Grant Thornton, which again, is backed by documentary evidence. Besides, we find th .....

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which arise in these petitions. ISSUE -A (A) Whether the impugned order is in violation of the principles of natural justice and fair play ? 131] The contention that the impugned order is made in violation of principles of natural justice and fair play has to be examined keeping in mind the statutory scheme of Section 396, the directions in our order dated 4th February 2015 and the very nature of the principles upon which reliance is placed. 132] Section 396 enables the Central Government to am .....

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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 .....

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upplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation. (3) Every member or creditor (including a debenture holder) of each of the companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or creditor; and to the extent to which the interest or rights of such member or creditor in .....

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cribed authority under subsection (3) may, within thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon the assessment of the compensation shall be made by the Tribunal. (4) No order shall be made under this section, unless- (a) a copy of the proposed order has been sent in draft to each of the companies concerned; (aa) the time for preferring an appeal under subsection (3A) has expired, or where any such appeal has be .....

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from any creditors or any class of creditors thereof. (5) Copies of every order made under this section shall, as soon as may be after it has been made, be laid before both Houses of Parliament. 134] From the analysis of the provision in Section 396 it is clear that the Central Government is not empowered to make an order of compulsory amalgamation unless a copy of the proposed order in draft has been sent to each of the companies concerned. The draft order is naturally expected to contain the g .....

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king 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 f .....

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ral requirements set out in Section 396 have been complied with. Copy of the proposed order in draft was sent to the concerned companies. The companies, their shareholders, creditors and even employees have made suggestions and raised objections. Such suggestions and objections have been duly considered by the Central Government before making the impugned order. There is an assessment order made on 1st April 2015 and since no appeals were preferred against the same, the impugned order has been m .....

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there is breach in compliance with principles of natural justice and fair play. None of the petitioners contended that the statutory scheme of Section 396 contemplates any such personal hearing. However, the petitioners rely on the directions in paragraph 5 of our order dated 4th February 2015, which read as follows: 5. In our view, taking into consideration the submissions made by the learned Solicitor General appearing on behalf of the Respondent - Union of India and Mr. Chagla, the learned S .....

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at 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 or .....

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antial 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 and pragmatically employed. Manohar Lal Sharma vs. Principal Secretary & Ors. (2014) 9 SCC 614 As held by the House of Lords in Lloyd vs. Mc Mahon, (1987) All ER 1118 (HL) the rules of natural justice are not engraved on tablets of stone. The scope and extent of principles of natural justice depends upon the .....

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e of power by any authority, irrespective of whether the exercise is administrative or quasi judicial. The aim of the natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These principles can never be put in a straitjacket formula. In such matters, regard must be had to the expressed language of the statute, the basic scheme of the provision conferring the power, the nature of power conferred, the final effect of the exercise of that power on the rights .....

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upreme Court has held that principles of natural justice are very flexible principles. They cannot be applied in any straitjacket formula. It all depends upon the kind of functions performed and to the extent to which a person is likely to be affected. For this reason, certain exceptions to the aforesaid principles have been invoked under certain circumstances. For example, the courts have held that it would be sufficient to allow a person to make a representation and oral hearing may not be nec .....

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, 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 th .....

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rtunity of personal hearing, sounds more in the arena of unnatural expansion of the principles of natural justice. The aim of principles of natural justice is not to create undue or uncontemplated obstacles in the discharge of statutory powers, particularly when public interest is involved in the exercise of such powers. Acceptance of such a contention might have rendered the entire exercise extremely cumbersome and time consuming, if not impossible. In Nidhi Kaim vs. State of Madhya Pradesh &am .....

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been correctly construed by the Central Government. The import of such directions was neither to re-write the provisions of Section 396 nor to boggle down the Central Government in discharge of its statutory powers under Section 396. FTIL and NSEL were personally heard. The objections and suggestions made by 50389 parties, comprising shareholders, creditors and employees of the companies, have also been duly considered by the Central Government before making the impugned order. There is no sign .....

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bjections stand suitably addressed in the impugned order. All this constitutes not only substantial compliance with the principles of natural justice and fair play but also of our directions in the 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 obje .....

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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 are not incantations to be invoked nor rites to be performed on all and sundry occasions. Whether in f .....

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d exasperating limits. It amounts to an unnatural expansion of natural justice which in itself antithetical to justice. 146] In State Bank of Patiala vs. S. K. Sharma (supra), the Supreme Court, restricted its earlier rulings in Chintapalli Agency Taluk Sales Coop. Society Ltd. vs. Secy. (Food and Agriculture) Govt. of A.P. (1977) 4 SCC 337 and S. L. Kapoor vs. Jagmohan (1980) 4 SCC 379 to the facts of the said cases and, of course, subject to the dicta of the Constitution Bench in Managing Dire .....

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justice and arrive at an appropriate decision. The same principle is reiterated in Dharampal Satyapal Limited (supra). 147] In K. L. Tripathi vs. State Bank of India & Ors (1984) 1 SCC 43, the Supreme Court has quoted with approval Wade in his Administrative Law, Fifth Edition (at pages 472 to 475), when he says that it is not possible to lay down rigid rules as to when the principles of natural justice are to apply, nor as to their scope and extent. Everything depends on the subject matter, .....

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e 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 constru .....

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ir play. 149] This is also not a case where there is failure of natural justice because the objections and suggestions made by FTIL, NSEL, and several other interested parties have not at all been considered by the Central Government before making the impugned order. The record indicates that the Central Government, in this case, constituted a Committee headed by the Additional Secretary assisted by the Legal Adviser to facilitate the consideration of such objections and suggestions. This Commit .....

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raph 7.1 of the impugned order, the Central Government, has analysed the nature of objections and suggestions received from various categories of stakeholders numbering 50389. The objections, it appears, were collated and tabulated withthe assistance of specially designed computer software. The profiles of objectors together with their dispositions in respect of proposal for amalgamation is spelt out in a chart at paragraph 7.1.1 (ii). The objections, it appears, were further analysed on the bas .....

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holder@ftindia.com. The impugned order records that the e-mails were sent in bulk resulting in bouncing back of few e-mail. Later the physical copies have received and the same were also considered. The impugned order, quite rightly records at least prima facie most of such bulk objections were orchestrated and concerted . About 1203 objections, i.e., about 2.38% of the objections were from the employees of FTIL. Again, the same were repetitive and the impugned order records that prima facie eve .....

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h 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 .....

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idered. Therefore, it is not possible to accept the contention that there has been failure of natural justice on account of any non-consideration of objections and suggestions made by FTIL, NSEL, its shareholders, creditors and other interested persons. 153] From the record, we are also satisfied that this is not a case where the Central Government has placed reliance upon certain adverse material in the impugned order, without afford of opportunity to FTIL, NSEL and other interested party to re .....

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No specific case has been made out in the context of the contention of any alleged failure of natural justice for taking into consideration adverse material, not made known to the parties. On basis of vague allegations and oral submissions, it is not possible to fault the impugned order on the ground of failure of natural justice. 154] There was a complaint that principles of natural justice were not followed before FMC or other regulatory agencies recommended action under Section 396. This com .....

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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 judi .....

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tself suggests that full opportunity was afforded to the parties to put forth their suggestions and objections. There is no case of failure of natural justice or fair play, therefore made out by the petitioners in the facts and circumstances of the present case. 156] Extensive submissions were made to urge that the impugned order in the present case was in the nature of delegated or subordinate legislation. On this basis, it was urged that the principles of natural justice were inapplicable, exc .....

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n such issue, in the facts and circumstances of the present case, we are satisfied that no case has been made out to interfere with the impugned order on the ground of any failure in compliance with the principles of natural justice and fair play. 157] Accordingly, for all the aforesaid reasons, we are unable to fault the impugned order on the ground of non compliance with the principles of natural justice and fair play or on the ground of any breach of our directions in order dated 4th February .....

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to Section 396 of the Companies Act, 1956. Similarly, in the Constitution of India as originally enacted there was no provision for saving of laws providing for acquisition by the State of any estate or of any rights therein or for the extinguishment or modification of any such rights on the ground that such laws may be inconsistent with or take away or abridge any of the rights conferred by the provisions of Part - III of the Constitution of India (fundamental rights). However, by the Constitu .....

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ny 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 .....

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an end to the dilatory and wasteful litigation and place these laws above challenge in the courts, articles 31A and 31B and the Ninth Schedule were enacted by the Constitution (First Amendment) Act. Subsequent judicial decision interpreting articles 14,19 and 31 have raised serious difficulties in the way of the Union and the States putting through other and equally important social welfare legislation on the desired lines, e.g., the following: (i) ... (ii) .. (iii) .. (iv) ... (v) The reforms .....

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In the Companies Act, 1956 for the first time, Section 396 was introduced to empower the Central Government to provide for amalgamation of companies in national interest. By Companies (Amendment) Act, 1960 the expression national interest was substituted with public interest possibly because this is the expression used in Article 31A (1)(c) of the Constitution. 164] The legislative history therefore indicates that the legal provision in Section 396 to provide for amalgamation of two or more comp .....

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ons on behalf of the petitioners in Writ Petition No. 2985 of 2014 contained reference to challenge 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(i .....

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erest 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 the economic value of the shareholding. 168] In the written submissions tendered by the petitioners in Writ Petition No. 2985 of 2014, the expression interest in section 396 was sought to be explained in the following ma .....

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ply for appropriate relief in case of oppression; e. The right to apply for relief in the case of mismanagement; f. The right to apply to the Court for winding up and the right to share the surplus on winding up. In support of this submission, the petitioners rely upon inter alia the ratio in Life Insurance Corporation of India vs. Escorts and Ors. (1986) 1 SCC 264 and Hindustan Level Employees' Union v. Hindustan Lever Ltd. and Ors. 1995 Supp. (1) SCC 499) iii. In addition as regards shares .....

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and in listed companies also includes the interest co-related to the profit or loss that a shareholder would suffer based on the listed value of the shares. It is submitted that in the facts of the present case, the amalgamation that has been made to facilitate the payment of liability of ₹ 5,600/- Crores would effectively (a) wipe out the cash reserves of FTIL of ₹ 2,800/- Crores; (b) the book value of the shares which was at ₹ 600/- per share would also as a result of the co .....

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ame numbers of shares in a company with a net worth of ₹ 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 .....

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supports any such construction. The precedents cited by the petitioners did not support such construction. Mr.Salve did make reference to accounting standard (AS 23), in support of such construction. However, upon due consideration of the same, we find that the accounting standards cited are of no assistance in interpretation of the Statute in question. 171] In order to evaluate the contention, reference is necessarily required to be made to the very nature of a share and the 'interests of a .....

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the company, measured, for the purposes of liability and dividend, by a sum of money, but consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s. 16 of the Companies Act, 1862, and made up of various rights and liabilities contained in the contract, including the right to a certain sum of money. 173] In Charanjit Lal Chowdhury (supra), the Supreme Court held that the petitioner shareholder undoubtedly has an interest in the company. His int .....

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art, though indirectly, in the management of the company's affairs. If the majority of the shareholders side with him, he can have a resolution passed which would bind the company. Lastly, he can institute proceedings for winding up of 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 challen .....

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is 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 no dispossession of the shareholders from their right of vot .....

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holding that they do not amount to dispossession of the shareholders from these rights in the sense that the rights have been usurped by other people who are exercising them in place of displaced shareholders. 175] In Bacha Guzdar (supra), the Supreme Court, in no uncertain terms held that a shareholder has got no interests in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The Supreme Court held that th .....

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rest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in .....

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rty 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 p .....

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in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; (vii) to share in the surplus on winding up...... (emphasis supplied) 178] In the context of amalgamation itself, the Supreme Court in Hindustan Lever Employees' Union (supra) has held that the shareholder has no interest in the assets of the company while the company is in existence. It is only at the stage of liquidation of the company that .....

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(iii) to enjoy the profits of the company, if and when dividend is declared and distributed; and (iv) to share in the surplus, if any, on liquidation. 179] The precedents therefore explain the nature of a share and the interests and rights of a shareholder in or against a company. The shareholder undoubtedly has an interest in or rights against the company of which he is the shareholder. His interest is represented by the share he holds. The share is a moveable property which can be sold or tra .....

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no right in the property of the company which is a juristic person entirely distinct from its shareholders. The property of the company is not the property of the shareholders. A shareholder has merely an interest in the company arising out of the article of association measured by a sum of money for purpose of liability and by 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 r .....

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d. 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 c .....

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associate should be accounted for in consolidated financial statements under the equity method except when: (a) the investment is acquired and held exclusively with a view to its subsequent disposal in the near future; or (b) the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Investments in such associates should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments. The reason .....

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ied on the basis of facts and circumstances of the case. The intention with regard to disposal of the relevant investment is considered at the time of acquisition of the investment. Accordingly, if the relevant investment is acquired without an intention to its subsequent disposal in near future, and subsequently, it is decided to dispose off the investment, such an investment is not excluded form application of the equity method, until the investment is actually disposed off. Conversely, if the .....

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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 righ .....

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d value of shares is also required to be taken into consideration for purposes of Section 396(3). 184] In the rejoinder, it was submitted that since the Central Government has assessed compensation to shareholders of NSEL on the basis of economic value, the same yardstick has to be applied when it comes to assessing compensation payable to shareholders of FTIL. 185] In order to reach to the stage of assessment of compensation, the Central Government or the prescribed authority is required to det .....

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mpany which is to stand dissolved without being wound up. In contrast, the interest of the shareholders of FTIL in or against the resultant company are the same as held by them in the original company. The principle of equality or adoption of equal yardsticks can apply only amongst equals. Therefore, the Central Government, by assessment order dated 1st April 2015, has assessed the compensation payable to the shareholders of NSEL, which, in the present case are FTIL and NAFED. The FTIL as shareh .....

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lders in or the right against the resultant company to receive dividends or receive a share in the surplus on winding up. The petitioners were unable to point out any provision in the Companies Act or any precedent which entitles a shareholder to any specific quantum of dividend or surplus on winding up. 187] Section 396, neither makes any reference to the market value or the economic value of the shares when it comes to the determination of the interests of a shareholder in or rights of a share .....

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ty 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 sta .....

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ioners, expressed apprehensions of draconian consequences on the premise that liability may be foisted on NSEL for making good the amount of over ₹ 5600 crores to the investors. The statutory construction of a provision which is clear, plain and unambiguous cannot sway on the basis of such inconsistent apprehensions. 189] In Principles of Statutory Interpretations (Justice G. P. Singh, Thirteen Edition) there is reference made to the Sussex Peerage case (1844) 11 CL & F 85 in the follo .....

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of the sections of the Act. 190] The rule of statutory interpretation which states that regard must be had to the consequences applies where the language used in a statute is capable of bearing more than one construction. Even such a rule must be applied with great care and caution lest it degenerates into a mere judicial criticism of the propriety of the legal provisions. The inconvenience warranting departure should be absurd inconvenience. R. v. Townbridge Overseers (1884) 13 QBD 339 Even the .....

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21 The alternative construction must be such which does 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 wher .....

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tioners 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 order. Mere reference to putative liability of NSEL is hardly sufficient. Besides, this reference to putative liability has to be balanced with reference to the repeated assertion by FTIL, NSEL and even the major shareholders of FTIL like Jignesh Shah .....

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0.10 crores. In fact, Jignesh Shah, who holds the maximum stake in FTIL, in his written submissions, states that 'the claims of the 'investors' are more than adequately secured......' 193] This means that major shareholders holding almost 52% stake in FTIL see no reasonable possibility of FTIL being mulcted with NSEL's putative liabilities. The Foreign Institution Investors, which are stated to hold about 17.90% shareholding in FTIL are not before us and further, there is no .....

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the shareholders of FTIL, the date of purchase of the shares, the number of shares hel and such other relevant details. This was relevant for at least two reasons. Firstly, Mr. Gaurav Joshi and Mr. M. P. S. Rao, the learned senior counsel representing the investors contended that most of such shareholders have purchased shares even after the publication of draft order proposing amalgamation. Secondly, they contend that most of the retail shareholders of FTIL, whom SHAFT purports to represent ho .....

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investors holding shares valued at less than ₹ 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 ₹ 211.10 (opening price) reduced to ₹ 174.55 on 31st Oct .....

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L's Exchange was already in public domain. By that time, FMC's fit and proper order dated 17th December 2013, was also in the public domain. Therefore, to suggest that the fall in the price of the FTIL shares between 21st October 2014 to 31st October 2014 was solely attributable to the proposed action under Section 396 and to claim compensation on such basis, is unacceptable. 197] The impugned order does not take away rights or interests of FTIL. It also does not take away rights or inte .....

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prior to the impugned order of amalgamation. There is thus substantial compliance with the provisions of Section 396 (3). 198] In re Nebula Motors Ltd (supra), it is held that the scheme involving amalgamation of a subsidiary with its holding company does not involve any reorganization or restructuring of the shares of the members of the holding company and therefore does not affect or in any manner touch upon the rights of the members of the holding company. 199] None of the interests or rights .....

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ual. The impugned order takes care of such rights. There is in fact, nothing in the impugned order which suggests that any contractual or statutory rights available to the creditors have been taken away or extinguished. Quite rightly, therefore, 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 depri .....

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rder 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 accept the contention that the Central Government was dis-entitle .....

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shareholders of FTIL ? 202] The contention that the Central Government, in this case, has failed to even make an assessment order as contemplated by Section 396(3) was raised mainly by Mr. Seervai on behalf of SHAFT. In the rejoinder though, Mr. Salve and Mr. Mookherjee also made submissions to the similar effect. In the written submissions on behalf of FTIL and Jignesh Shah at the stage of rejoinder it was urged that there would be erosion in the value of shares of FTIL due to the impugned amal .....

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this position. But, this is quite different from the contention at the stage of rejoinder that in the present case there is no assessment order and consequently, there is no compliance with the provisions of Section 396 (3). FTIL may not even be the proper relator to raise the grievance that there is no assessment of compensation to its shareholders. 204] There is no material difference in the pleadings in FTIL petition and Writ Petition No. 387 of 2015 instituted by its shareholders Jignesh Sha .....

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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. 29 .....

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the alternative, the prescribed authority be directed to award appropriate compensation to the petitioners after granting them a hearing. There was reference to Chamber Summons No.204 of 2016, which was possibly a chamber summons seeking leave to amend the petition, at the stage when the final hearing in the matter had advanced substantially. 206] As noted earlier, Mr. Shah, the learned counsel for the petitioners however, handed in a preacipe on 21st March 2017 stating that Chamber Summons No. .....

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ed to be set aside because the Central Government or the prescribed authority has failed to make any order assessing compensation to the shareholders of FTIL. Rather, the pleadings in the petition suggest that the petitioners are aggrieved by the order of assessment dated 1st April 2015 because the said order of assessment does not suitably compensate the shareholders of FTIL. This is clear from paragraphs 12 and 13 of the petition, which read as follows : 12. The Petitioner further submit that .....

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208] Realising that the aforesaid pleadings fall woefully short in supporting the ground now projected, in the written submissions in rejoinder, reference is made to paragraph 10 in Writ Petition No. 1922 of 2016, which reads as follows: 10. The Petitioner further submits that section 396 provides for certain procedure which is not followed by the Respondent No. 1, which is also contrary to the settled law and judgments wherein if a procedure is stipulated the same must be followed strictly and .....

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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, .....

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t order is vitiated by non-application of mind because valuation reports of experts were mechanically accepted and so on. 211] In this case, there is no dispute that the prescribed authority has made an assessment order dated 1st April 2015 determining that the value of NSEL's shares is ₹ 77/- per share on the basis that may not be liable for the default taken place on its exchange. In the present case, FTIL holds 99.9998% shares of NSEL, the balance being held by NAFED. Upon amalgamat .....

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dering the constitutional validity of the Roerich and Devikarani Roerich Estate (Acquisition and Transfer) Act, 1996 and Section 110 of Karnataka Land Reforms Act, 1961 on the anvil of the scope and content of Article 300-A of the Constitution. In that regard, it was held that requirement of public purpose, for deprivation of a person of his property under Article 300-A is a pre-condition, but no compensation or nil compensation or its illusiveness has to be justified by the State on judicially .....

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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 .....

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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 consequent interest of a shareholder in a company had noted that the impugned Ordinance had not dispossessed the shareholder, in any sense of the term, of the shares held by him in the company. Nobody had taken away the shares from him. His legal and beneficial interest in respect of the shares he held was left intact. If th .....

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ompensation or nil compensation. The observations in K.T. Plantation Private Limited (supra) cannot be read out of context, particularly, when the pleadings clearly establish that SHAFT has construed the assessment order to mean that no compensation is payable to the shareholders of FTIL because their interest in or rights against the company have remained unaffected post amalgamation. 214] Some of the petitioners have urged that this Court examines the validity of the assessment order on merits .....

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ernment or the prescribed authority has not at all made any assessment order as contemplated by Section 396 (3). At least in the pleadings , this is not even the case of the petitioners. Their case, however, is that the assessment order dated 1st April 2015 is illegal or even void on the several grounds which they have pleaded in their petitions. In such circumstances, therefore, the principle in Nazir Ahmed (supra) cannot come to the aid of such petitioners. 215] The submission, again, backed b .....

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f 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 c .....

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earn profits through any capital appreciation of listed value of shares. Further, we have held that the question of assessment of compensation arises only where the shareholder's interest in or rights against the resultant company are not, as nearly as may be, the same as the shareholder's interest in or rights against the original company. We have also held that in so far as the shareholders of FTIL are concerned there is no diminution in their interest in or rights against the resulta .....

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rs from raising their objections in response to the draft order. Several shareholders, including perhaps the petitioners, did in fact, raise objections. If the shareholders were aggrieved by the assessment order dated 1st April 2015 because it awarded them no compensation, nothing prevented them from instituting appeal under Section 396(3A) within period of 30 days from the date of publication of the assessment in the Official Gazette. At best, the contention now raised by the petitioners, which .....

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ity has failed to make any order as contemplated by Section 396(3) or that the shareholders or creditors of FTIL were deprived of opportunity of appeal 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 discr .....

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blic 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 UTI remained healthy. They submit that since the Central Government has not adopted similar approach in the present situation, there is hostile and invidious di .....

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d. 222] We see no merit in any of the aforesaid contentions. There is nothing in either the text or the context of Section 396 to suggest that the same can be invoked only in respect of government companies. Even assuming that the provisions of Section 396 have been invoked for the first time to amalgamate two non government companies, such a circumstance neither vitiates the exercise of such power nor can the same be struck down as involving any hostile or invidious discrimination. 223] The arg .....

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is easier made than made out. In this case, there are no proper pleadings in any of the petitions in support of the plea that the UTI - Payment Crisis (this is the expression used by the petitioners) was similar to or comparable with the situation which has arisen at the NSEL Exchange. Similarly, there are no pleadings to draw a comparison between some group of companies who are said to have been let off by the Central Government or its agencies even though they are alleged to have defaulted in .....

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ge, 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 .....

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nted to breach of guarantee of equality in Article 14 of the Constitution of India. The Supreme Court, held that even if it is accepted that there were any permissions improperly granted, that might render those permissions vulnerable, but such improper permissions cannot come to the aid of the respondents. The Supreme Court held that two wrongs do not make one right. A party cannot claim that since some thing wrong has been done in another case directions should be given for doing another wrong .....

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d in some other case by introducing a concept of negative equality the respondents cannot strengthen their case. They have to establish the strength of their case on some other basis and not by claiming negative equality. 227] Mr. Seervai, Mr. Shah and Mr. Behramkamdin then placed strong reliance on circular dated 20th April 2011 issued by Ministry of Corporate Affairs, which deals with amalgamation of government companies by adoption of simplified procedure under Section 396. They, no doubt, he .....

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as never followed by the Central Government before it proposed amalgamation of NSEL and FTIL, issue of hostile and invidious discrimination was involved. They submit that the circular dated 20th April 2011 embodies a policy of the Central Government in such matters and since such policy has been deviated from, quite arbitrarily, 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 content .....

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on 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 questi .....

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instances referred to by the petitioners such procedures may have been followed, does not, denude the Central Government from exercising powers under Section 396, without being bogged down by the cumbersome procedures prescribed in Sections 391 or 394 of the Companies Act, 1956. 231] In fact, Section 396 contains a non obstante clause in the context of application of Sections 394 and 395. Section 396, it must be noted, is undoubtedly a legislation to provide for amalgamation of two or more corp .....

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ot, therefore, be whittled down on the basis of petitioners' interpretation of the circular dated 20th April 2011. 232] If the petitioners' contention based upon the circular dated 20th April 2011 is to be accepted, then, the same will perhaps frustrate the very purpose for enactment of Section 396, leave alone the immunity granted to the said provision by Article 31A (1) (c) of the Constitution of India. The notes on clauses to the Companies Bill 1953, which was a precursor to the Compa .....

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tional 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 ama .....

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issued by the Central Government with regard to price fixation under the Drugs (Prices) Control Order 1995 , which was a delegated legislation. In this context, the Supreme Court, held that though the contents of a policy document cannot be read and interpreted as statutory provisions, at the same time, the Central Government which combines the dual role of policy maker and the delegate of legislative power, cannot at its sweet will and pleasure give a go by to policy guideline evolved by itsel .....

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ioners have placed any material on record to even remotely suggest that the previous instances of amalgamations by resort to Section 396 where in circumstances even remotely comparable to the facts and circumstances of the present case. The circular dated 20th April 2011 cannot be said to embody any policy decision of the Central Government in such matters. The decision in Cipla Ltd. (supra) can therefore, afford no assistance to the petitioners in the present case. Further, since the petitioner .....

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f the provision in Section 396 is sufficient to reject this contention. Section 391, inter alia, provides that where a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the Court or the Tribunal may, on the application of the company or of any creditor or member of the company order a meeting of creditors, class of creditors or of members or class of members as the case may be called for the p .....

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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 .....

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prescribed to the courts or tribunals in Section 394, the legislature may have deemed it appropriate to provide for a non obstante clause to override the effect of Sections 394 and 395. 239] Besides, if the provision in Section 396 is analyzed, it is apparent it represents a complete Code in so far as amalgamation of two or more companies by the Central Government in public interest, is concerned. Therefore, on the basis of circular dated 20th April 2011, it is not possible to read into Section .....

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violation of Articles 14 of 19 of the Constitution. Since, the petitioners have failed to establish any violation of Article 14 or 19 of the Constitution, there is no necessity to go into the issue of immunity, whether derivative or otherwise. 241] Accordingly, we are unable to fault the impugned order on the ground of violation of Article 14 of the Constitution or on the basis of the petitioners' reading of the Central Government's circular dated 20th April 2011. ISSUE -E (E) Whether th .....

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arliament by Companies (Amendment) Bill, 1959, Section 396 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 alterat .....

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n 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 submit that in all such matters the guiding star must be national interest and not merely public interest . This submission cannot be accepted for several reasons. 246] Firstly, when the words of a statute are clear, plain and unambiguous the cou .....

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all that they state is that the amendment in Section 396 to substitute the expression national interest with public interest is of a drafting nature . Now if this is so, it is legitimate to proceed on the basis that at least the draftsman who prepared the notes on clauses noticed no difference or distinction between the two expressions. If Mr. Mookherjee and Mr. Dwarkadas subscribe to this line, then, obviously, the circumstance that the impugned order makes no specific reference to national in .....

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the proper management of any of the corporations from the challenge that such law is inconsistent with, or takes away or abridges any of the rights conferred by Article 14 and 19 of the Constitution. The expression used in the Article is 'public interest'. However, in the Statement of Objects and Reasons to the Constitution (Fourth Amendment) Act, 1955 by which Article 31A(1)(c) was introduced in the Constitution, the reference is to 'national interest'. 250] Similarly, Section 3 .....

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uses 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. Dw .....

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no reason to accept their contention that nevertheless there is some distinction between the two expressions in the context of Section 396. If at all, there is any distinction between the two expressions, then, the circumstance that the Parliament, in terms, has chosen to amend Section 396 so as to substitute the expression national interest with public interest , will have to be respected and not ignored. 254] In fact, even the decision of the Gujarat High Court in Wood Polymer Limited (supra) .....

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e connotation, and though the word public has a very wide connotation, the perspective in which it is used will determine its ambit. The expression interest of the general public came in for construction in Emperor v. Jesingbhai (1948) 50 Bom LR 544, wherein it was held that it is an expression of wide connotation and has got several implications. As the expression will take its colour from the context in which it is used, the object behind the legislative intendment within which it is used and .....

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raj Sir Kameshwar Singh of Darbhanga (1952) AIR1952 SC 252) . 255] In any case, taking into consideration the importance of stock and commodity exchanges to 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), highl .....

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h, 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 there was no public interest whatsoever involved in ordering amalgamation of NSEL with FTIL ? 258] In order to evaluate the petitioners contentions, we need to .....

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xemption in terms of the Act. In its common parlance, the expression public interest , like public purpose , is not capable of any precise definition. It does not have a rigid meaning, is elastic and takes colour from the Statute in which it occurs, the concept varying with time and state of society and its needs. Thus what is 'public interest' today, may not be so considered a decade later. In any case, the expression cannot be considered in vacuo but must be decided on the facts and ci .....

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ndustan Lever Employees Union (supra), the Supreme Court has held that concept of public interest in matters of amalgamation of companies, cannot be put in a straitjacket. It is a dynamic concept which keeps on changing. It has been explained in Black's Law Dictionary as, something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity whereas the .....

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iary 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 im .....

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roviding its own inherent yardstick by reference to the context in which it is used the expression is used, the Statute in which it is used and purpose sought to be achieved by the use of the expression. 263] Wood Polymer (supra) refers to the recommendations of Vivian Bose Commission (enquiry into affairs of companies controlled by Dalmia and Jains). It is in pursuance of these recommendations that Section 394 (1) was introduced in Companies Act, 1956 requiring the Court which is called upon to .....

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n, which could be taken to prevent such situation in future, so that, there is due and proper administration of funds and assets of the company and firms in the interest of investing public. Interest of the investing public is interest of general public which expression, would be covered by public interest . The Commission, in its report, recommended introduction of a provision by which the Court which is called upon to examine scheme or amalgamation, would have an opportunity to ascertain wheth .....

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the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it is now being dissolved by merging it with another company. All these aspects require 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 constru .....

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elt 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 amalgamated company, th .....

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and if proposed amalgamation is not in public interest , the Court has power to refuse to sanction the scheme. 266] In the Guide to Companies Act by A. Ramaiya, 17th Edition 2010, various facets of the expression public interest have been discussed. E.Pendleton Herring, in Public Administration and the Public Interest is quoted to define the expression as 'an elusive abstraction' meaning general social welfare or 'regard for social good' and predicating 'interest of the gener .....

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o be contributive to the general welfare rather than to the special privileges of a class, group or individual. It is essentially a majoritarian ethic measured rather in terms of results or consequences than of interest or motive. Any decision as to public interest should be based on the results or consequences that will follow. 268] In N.R. Murty v. Industrial Development Corporation of Orissa 1977 (47) Com. Cas. 389, it is held that in case of a company, the concept of public interest takes th .....

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tioners. 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 .....

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sed powers under Section 396 for purposes alien to which Section 396 came to be enacted. 270] The expression public interest means general welfare of the public that warrants recognition and protection; something in which the public as a whole has a stake. This expression has to take colour from the statute in which it occurs. In the precise context of amalgamation under the Companies Act, 1956, this expression would mean something in which the public, the community at large has some pecuniary i .....

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itors or members of the companies in question. The interest of other important consumers of industry-cum-commercial service can never be ignored. The expression public interest constitutes a positive check on unhindered exercise of private right whether by management or by stockholders. Where public interest is a relevant consideration, such consideration must override other considerations like freedom of management or right of stockholders to carry on the business of the company as they desire. .....

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271] In the facts of the present case, NSEL, on basis of certain representations secured exemption from application of FCRA. One of the representation was that the NSEL was a part of the FTIL group controlled by Jignesh Shah and the FTIL group operates and has experience in operating several exchanges at the national and international level. Representations were held out that NSEL would never engage in forward trading but restrict itself to spot trading or ready delivery contracts. Representatio .....

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CRA. 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 statuto .....

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ersonnel presented that there were 120 warehouses full of stocks valued at ₹ 6000 crores, margin amount and settlement guarantee fund is in place and that over the last four years 99% of the trade had resulted in delivery on daily basis. NSEL, however, failed to furnish the undertakings in terms demanded by FMC. Further, on 31st July 2013, despite presenting a picture hardly 21 days earlier that nothing was amiss, brought the operations on the exchange to a grinding halt. 274] As on 31st J .....

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plete lurch and the operations at the commodities exchange, which represented almost 99% of the operations at national level, completely collapsed. 275] In MSX Stock Exchange Ltd. (supra) and Coimbatore Stock Exchange Ltd. (supra), Courts have recognized that stock exchanges have a vital place in ensuring stability of financial and economic system of India. Conversely, loss of trust and confidence in exchanges and financial markets is bound to have a negative impact on the economy and financial .....

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and the functioning of NSEL and its spot exchange. If 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 .....

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arly 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. Jignesh Shah at the relevant time was described as a Vice Chairman of NSEL and also the Head of the Audit Committee of NSEL. As per the accounting standards, the balance sheets and other accounts of NSEL were required to be and were routinely placed bef .....

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of ₹ 109 Lakhs in NSEL towards working capital and to assist NSEL in recovery proceedings against defaulters. The affidavit states that FTIL has committed further amount of ₹ 50 crores per year for the next 3 years. There is material on record that from July 2013, at NSEL there is hardly any commercial activity or returns. NSEL is confronted with several litigations and the strength of its employees which was 193 in July 2013 has come down to 33 by July 2014. On basis of all such obj .....

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l Government has subjectively satisfied itself that the amalgamation is essential in public interest to facilitate recoveries of dues from defaulters from pooling human and financial resources of FTIL and NSEL. Despite claims by NSEL that it has the means to and it has been rigorously pursuing recoveries, the fact remains that the position of recoveries is not very promising and may further deteriorate if only NSEL has to fend for itself. In such matters, it is not sufficient that some decrees o .....

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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, .....

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reasons by way of affidavits ? (G)(ii) Whether the impugned order stands vitiated because there is no material whatsoever on record in support of the aforesaid solitary ground or reason ? 280] Upon careful perusal and analysis of the impugned order, we are unable to accept Mr. Chinoy's submission that the impugned order is based upon a solitary ground or reason. Rather, we agree with the submission of Mr. Khambatta that the same is based on at least three discernible grounds or reasons, name .....

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ncial resources of FTIL and NSEL. 281] It is true that the aforesaid three grounds or reasons may not have been stated in seriatum or artistically in the impugned order. However, that by itself, is not sufficient to ignore the three distinct grounds or reasons which are very much discernible in the impugned order. It is not possible to read the impugned order in the manner suggested by Mr. Chinoy. He seemed to suggest that large portions of impugned order which seek to answer or deal with the ob .....

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d order and then to urge that the same is based upon a solitary ground or reason. Upon careful and meaningful reading and analysis of the impugned order in its entirety, it is quite clear that the same is based upon at least three distinct 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. Ch .....

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tition, 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 rejoinder, however, contended that though the facts and circumstances recorded in .....

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L, is in direct conflict with the averment in NSEL's affidavit dated 15th April 2016 sworn by Santosh Dhuri, which reads thus: 10. It is submitted that the bedrock of the impugned draft order is a proposal dated 18 August 2014 sent by Forward Markets Commission ( FMC ), to the Central Government thereby asking Central Government to invoke section 396 for amalgamation of NSEL with FTIL. It is submitted that said FMC's proposal itself based on erroneous and nonappreciation of facts which w .....

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The contention raised by counsel for NSEL is directly contrary to even NSEL's understanding of the impugned order. None of the petitioners or the intervenors read the impugned order in the manner suggested by the counsel for NSEL. In any case, bare perusal of the impugned order indicates that the same is based upon three distinct and discernible grounds or reasons, each of which represents a facet of public interest which is sine qua non for exercise of powers under Section 396. 286] Mr. Kha .....

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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 essent .....

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uld have been subjectively satisfied. 288] There is material on record, which is in fact undisputed that NSEL was loaned an amount of ₹ 179.26 crores by FTIL for distribution to the small investors, who, suffered losses by trading the platform and spot exchange of NSEL. There is material on record that NSEL, after it closed the operations at the spot exchange on 31st July 2013 had assured the investors/traders that revised settlement calender would be announced after 15 days period. On 14t .....

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to the Central Government in 2014, had clearly stated that despite FMC support, NSEL, was unable to effect any significant recoveries from the defaulters. Even the settlement plan proposed by NSEL failed to take off and no substantial payments were made to the investors. The FMC stated that NSEL, despite having the responsibility to take all possible coercive measure as per their rules/bye-laws was able to make payments of only ₹ 362.43 crores to its members (investors), as against the du .....

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is learnt that the staff strength of NSEL has reduced considerably, thereby affecting the recovery process. FMC has stated that as per the information received from NSEL itself, the employee strength which was 193 as on 31st July 2013, has come down to 33 as on 31st July 2014. NSEL is also confronted with number of cases in several Courts and is therefore, left with hardly any financial resources to defray staff salaries and legal costs. FMC has also stated that it has received feed back from re .....

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3 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 em .....

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upport NSEL to recover dues from defaulters ; to defend various legal cases ; to continue taking necessary legal actions against various parties to recover amounts from defaulters; and for working capital. The affidavit states that such resolution was passed and such finances are proposed to be infused at the request of NSEL. 294] The affidavit dated 4th July 2017 also confirms that the activities of NSEL have come to a grinding halt, though, the affidavit purports to blame the FMC for such a si .....

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of NSEL. 295] If the contention of Mr. Chinoy to the effect that there is absolutely no problem in the functioning of NSEL or that NSEL has the necessary wherewithal, both financial as well as infrastructural, to effect recoveries from the defaulters, is to be accepted, then, there was no reason to rely upon contribution from FTIL, made or proposed to be made at a belated stage. The FTIL resolution dated 28th March 2016, far from affording any cause to interfere with the impugned order, in fact, .....

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This is because 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 e .....

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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 proper order dated 17th December 2013, had in fact, given an opportunity to the parties to cross examine Grant Thornton on its report. However, such opportunity, was not availed. 298] In the present case, we are unable to accept Mr. Chinoy's contention that the impugned order could never h .....

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ing wholly owned subsidiary cannot be regarded as an extraneous or an irrelevant factor in their amalgamation. Viewed in the context of business realities, this is a permissible object and nothing militates against public interest or commercial morality. No doubt, that was a case involving consensual amalgamation between a holding company and its loss making wholly owned subsidiary. However, the observations therein answer the contention that pooling of human material and financial resources bet .....

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pany that the that the health and the well being of its wholly owned subsidiaries was a matter which was legitimately entitled to be taken into account by the Transferee Company in coming out with the decision to amalgamate its wholly owned subsidiaries with itself. In the circumstances, the plea that the scheme of Amalgamation is an attempt to reduce the business and operational losses, inclusive of manpower and machinery costs ought to be accepted. Similarly the foundation of the scheme for Am .....

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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 a .....

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ing Wednesbury principles ? 302] Initially, almost all the learned counsel for the parties relied on Barium Chemicals Ltd. (supra) accepting that the tests set out therein are the most appropriate when it comes to review of administrative action based upon subjective satisfaction. However, at the stage of rejoinder they sought to make a distinction between 'opinion cases' and 'satisfaction cases', by suggesting that the test in the later is more intense. They submit that in ' .....

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), the Supreme Court was concerned with Section 237(b), which merely required the Central Government for form an 'opinion' that there existed circumstances 'suggesting' the predicates prescribed in clauses (i), (ii) and (iii) of Section 237(b). They point out that the phraseology in Section 396 is quite different and the Central Government before it orders amalgamation of two or more companies in public interest, must be 'satisfied' that it is essential in public interest .....

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has itself clarified that the concepts are not substantially different. In fact, in Bhikubhai Patel (supra) the Supreme Court, after quoting paragraph 63 of Barium Chemicals Ltd. (supra) 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) .....

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pinion 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 the subjective satisfaction in such matters must be based upon objective facts, with regard to which there is at least .....

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or not the subjective satisfaction was based on any objective facts. This means that the existence of circumstances or the objective facts is open to judicial review though, sufficiency or propriety thereof may not be. Even if certain objective facts are found to exists, if on the basis of such facts, no sensible person could have legitimately formed or arrived at such a satisfaction, then, the Court will strike down such a decision in the exercise of judicial review. Further, the Courts exercis .....

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re are several objective facts on record, on basis of which the Central Government was quite justified in arriving at the satisfaction that it was essential in public interest to order the amalgamation of NSEL with FTIL. There is more than prima facie proof in support of such objective facts. In fact, most of such objective facts have not even been seriously disputed by FTIL or NSEL. At the highest, some dispute is attempted to be raised as to the interpretation of such objective facts or the in .....

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0-3031] 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] NSE .....

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Chairman and Group CEO of FTIL'. (FMC Order - Petition- Vol.III - Ex. J/ Pg. 804 at Pgs. 878-879] Jignesh Shah was a member of both, the Board, as well as the Audit Committee, of the NSEL and was shown as one of the key management personnel of NSEL for the period from Financial Year 2005-06 to 2011-12. (FMC Order - Petition - Vol. III - Ex.J/Pg. 804 at Pgs. 827, Pgs. 847-848 and 871] Each of the minutes of the Board meetings of NSEL were regularly tabled at the Board meetings of FTIL. Thus, .....

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Para 35/Pg.3030] Human Resources services were undertaken in common by the FTIL Group for FTIL, MCX and NSEL. (FTIL Affidavit in Rejoinder to Respondent No.4 dated 23rd September, 2016 -Vol. 30, Pg. 3031/Para 38] FTIL's finance team was running the finances of NSEL and members of FTIL's Finance and Accounts team undertook detailed consideration of the financial operations of NSEL on a regular basis. (GT Report - Part III - Para 1.12/Pgs. 9- 0 read with Email from Devendra Agarwal (of FTI .....

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presentations and return calculator worksheets for attracting investors to its platform. These presentations set out guaranteed fixed rates of return/yields of about 16% as an opportunity for investors for trading in the paired contracts. [GT Report - R1 Comp. - Part III - Paras 1.2-1.4/Pgs. 7-8, Paras 1.2-1.7/Pgs. 12-16, Ex.14A (NSEL Presentation)/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.1 .....

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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 aroun .....

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d at the Warehouse level which went undetected (Item 15 Note (a) - FTIL LoD] 309] In the course of rejoinder, Mr. Salve and Mr. Mookherjee submitted a counter chart, not to seriously dispute any of the objective facts stated by Mr. Khambata but to submit that at least some of the circumstances referred to by Mr. Khambata, find no reference in the impugned order. On this basis, the Mohinder Singh Gill principle was pressed into service to urge that such objective facts cannot be relied upon to su .....

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the counter chart, the learned counsel for the petitioners contend that the objective facts have not been directly referred to in the impugned order and the reference to such facts in the FMC order cannot be construed as reference in the impugned order. Learned counsel for the petitioners contend that the portion of the impugned order which deals with the objections raised by the objectors, is to be excluded from consideration and reference to any objective facts therein, is not required to be .....

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l 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 g .....

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of the NSEL is entirely controlled by FTIL, finds no reflection in the draft order or the impugned order but finds reflection in the FMC order, which in turn, is referred to in the impugned order. As noted earlier, this is not the appropriate manner to read the impugned order. In any case, this position is even otherwise borne out from the other material on record. 314] There is no dispute that FTIL owns 99.9998% of NSEL's shares. There is material in the form of FTIL Annual reports itself .....

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um-Managing Director of FTIL and as the Founder-Chairman and Group CEO of FTIL. There is material on record which establishes that Jignesh Shah was a member of both, the Board, as well as the Audit Committee, of the NSEL and was shown as one of the key management personnel of NSEL for the period from Financial Year 2005-06 to 2011-12. There is material on record which establishes that each of the minutes of the Board meetings of NSEL were regularly tabled at the Board meetings of FTIL. In such c .....

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IL's Finance and Accounts Team undertook detailed consideration of NSEL's finances and accounts on regular basis is borne out by the Grant Thornton report as also certain e-mails, which are part of the record. At a belated stage, to merely suggest some different interpretation to such material is not the same thing as seriously disputing the very existence of such material. In such circumstances, the Central Government cannot be faulted for observing that the FTIL exerted a dominant infl .....

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les, 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 su .....

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ed its own 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. Neither FTIL nor NSEL has really denied all this. No doubt, the facts are sought to interpreted differently. Suffice to note that such presentation or e-mails are a matter of record. 318] The Grant Thornton report points out that by April - July 2013, 99% of the turnover of NSEL was made up of such paired contracts. T .....

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sm of paired contracts, at least prima facie , was in breach of provisions of FCRA. 319] The NSEL, in answer to the charge that short sales were undertaken at the exchange , came up with its own peculiar interpretation as to the meaning of short sales. NSEL stated that there was no condition requiring that goods must be deposited in the warehouses prior to execution of sale transactions or prior to trade at the NSEL exchange. The interpretation runs counter to the definition provided by National .....

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on 31st July 2013, when the operations at NSEL collapsed, there were no commodities in the warehouses to make deliveries with. The stock or inventory which was stated to be valued at ₹ 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 ₹ 738.55 crores on 1st August 2013 quite inexplicably reduced to ₹ 62 crores on 4th August 2013. Despite all this, FTIL, NSEL, J .....

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ecord 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 in mind the difference in phraseology employed in Section 237 (b) and Section 396 and also, having due regard to the essentiality element in Section 396, we are quite satisfied that the impugned .....

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principle is a convenient legal shorthand used by lawyers to refer to the classical review by Lord Greene MR in the Wednesbury Corporation (supra), in which the Courts will intervene to quash as being illegal, exercise of administrative discretion. 324] Lord Greene MR, expounded the principle as follows: It is true that discretion must be exercised reasonably. Now what does that mean ? Lawyers familiar with the phraseology used in relation to exercise of statutory discretion often use the word & .....

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d often said, to be acting 'unreasonably'. Similarly, there may be something so abjured that no sensible person could ever dream that it lay within the powers of the authority. Warrington LJ in Short v. Poole Corporation gave the example of the red-haired teacher, dismissed because she had red hair. This is unreasonable in one sense. In another it is taking into consideration extraneous maters. It is so unreasonable that it might almost be described as being done in bad faith; and, in fa .....

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y 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. B .....

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true construction of the Act which distinguishes between what the statutory authority may or may not be authorised to do. It distinguishes between proper use and improper abuse of power. It is often expressed by saying that the decision is unlawful if it is one to which no reasonable authority could have come. This is essence of what is most commonly called 'Wednesbury unreasonableness'. 328] The principle is not understood in any different manner in India. In fact, G. B. Mahajan (supra) .....

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some latitude for the range of difference opinion which may fall within the bounds of reasonableness. The reasonableness as contemplated in administrative law must, therefore, distinguish between proper use and improper abuse of power. The test in such matters, is not the Courts own standard of reasonableness as it might have conceived in a given situation. The Supreme Court has held that this is in essence, the 'Wednesbury unreasonableness'. The point to note, therefore, is that a decis .....

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Central Government has considered various objections raised by no less than 50389 objectors. The Central Government has taken into consideration the circumstance that most of the objectors , most of the shareholders, most of the employees objected to the amalgamation. The Central Government has also taken into consideration the circumstance that decrees to the extent of ₹ 1233 crores or thereabouts have already been obtained against the defaulters or that the assets of the defaulters to th .....

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tion 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 different conclusion. In .....

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cial review and not exercising any appellate jurisdiction in the matter. In exercise of such a jurisdiction, we have to strike a critical balance between the vigilance expected of us when restrictions are imposed on fundamental rights or statutory rights and the restraint expected of us when the statutory authorities, having due regard to relevant considerations and disregarding irrelevancies, reach a subjective satisfaction on the basis of the objective facts before them in order to give effect .....

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ot second guess the satisfaction recorded by the the decision maker, we do not normally go into the issue of sufficiency of material. In this particular case, in the context of plea of proportionality, we have subjected the impugned order to intense review in order to examine whether the response of the Central Government to the situation it was dealing with, was proportionate or not. 332] The impugned order, on the basis of objective facts, states that the same is required to be made to safegua .....

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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 shar .....

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emption notification. The impugned order notes that NSEL platform was used to trade in forward contracts in a circuitous manner even though NSEL was neither recognized nor registered under FCRA. The impugned order notes that this indicates mala fide intention on the part of promoter FTIL to use the trading platform of its subsidiary for illicit gains, which were kept away from the eyes of regulator. The impugned order notes that by misinterpreting the conditions of exemption notification and in .....

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hrase, obviously refers to the undisputed fact that the trading client with dues of over ₹ 5500 crores remained to be paid by the defaulting commodity sellers and further, notwithstanding the positive assertions and representations held out by NSEL through Jignesh Shah that there was inventory valued at ₹ 6000 crores in the warehouses or that there was settlement guarantee fund of ₹ 738.55 crores, ultimately, there were neither any commodities to effect deliveries nor was there .....

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of FCRA had itself highlighted the importance of spot exchange to the national economy. They had pointed out that spot exchanges ensure better prices to farmers as well as consumers in agricultural commodities. They had pointed out that spot exchange would reduce cartelization, assist price discovery and price risk management. Spot exchanges could usher best practices in commodity trading such as system for grading for quality, creation of network of warehouses with assaying facilities and so o .....

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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 .....

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olled, NSEL was nothing but the alter ego of FTIL and the two companies were practically a single entity. It is pointed out that even all the stakeholders look to both as one entity. The amalgamation order only formalizes this practical reality in public interest. 337] In the aforesaid regard, the impugned order itself makes reference to several objective facts, whether directly or indirectly. The impugned order notes that FTIL owns 99.9998% of the shareholding of the NSEL and the constitution o .....

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reference to FTIL infusing ₹ 179.26 crores in NSEL to tide over minimum difficulties. The impugned order notes that NSEL's recovery efforts are presently depending upon ex gratia and without prejudice loans and payments from FTIL. Again, this is a case where the reason stated is not extraneous. The reason stated is backed by objective facts, in support of which there is more than prima facie evidence. 338] The inferences drawn by the Central Government from out of the objective facts .....

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Shah made representations not only on behalf of FTIL but also 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 .....

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lf 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 Public Prosecutions vs. Kent and Sussex Contractors Ltd. 1944 KB 146 : (1944) 1 All ER 119 (DC), in which it is held that : A body corporate is a person to whom, amongst the various attributes it may have, there should be imputed the attribute of .....

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WLR 804 : (1956) 3 All ER 624 (CA) in the following words : A company may in many ways be likened to a human body. They have a brain and a nerve centre which controls what they do. They also have hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are Directors and managers who represent the directing .....

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n cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the Directors or the managers will render the company themselves guilty. 341] In Sunil Mittal (supra), the Supreme Court has held that the aforesaid principle has been firmly established in England since the decision of the House of Lords in Tesco Supermarkets Ltd. v. Nattrass. 114(1971) 2 ALL ER 127 (HL) In stating the principle of corporate liability for criminal offences, Lord Reid made the f .....

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ind 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 asce .....

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e is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such circumstances, it would be necessary to ascertain that the degree and control of the person or body of persons is so intense that a corporation may be said to think and act through the person or the body of persons. The position of law on this issue in Canada is almost the same. Mens rea is attributed to corporations on the principle of alter ego of the company. 343] In .....

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fect that corporations cannot commit a crime, the generally accepted modern rule is that except for such crimes as a corporation is held incapable of committing by reason of the fact that they involve personal malicious intent, a corporation may be subject to indictment or other criminal process, although the criminal act is committed through its agents. 344] Finally, in Sunil Mittal (supra), the Supreme Court has held that it is abundantly clear from the above that the principle which is laid d .....

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ompany. 345] We are conscious that the observations in Sunil Mittal (supra) were in the context of the Special Judge summoning the two appellants, who were not named in the charge sheet concerning the 2G Spectrum Scam Case . 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 .....

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er 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. Even assuming that this might be one of the consequences of the impugned order, it can .....

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ds of restoring the confidence was to hold FTIL and NSEL to their representations repeatedly made and asserted. 347] The third reason or ground set out in the impugned order is that the same will facilitate NSEL in recovering dues from defaulters by using the human and financial resources of FTIL. In the context of discussion on issue 'G' and the contention of Mr. Chinoy for NSEL that the impugned order is based only on this ground or reason, we have pointed out that there is ample mater .....

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prima facie proof. The reason or ground is neither irrelevant nor extraneous so as to attract the Wednesbury principle. 348] There is no merit in the submission that the Central Government should have waited for adjudication of liability or fraud to make the impugned order. Time and again, the Central Government has clarified that it is not going into the issue of liability or fraud. The Central Government has addressed itself to the objective facts on record and may have drawn certain inference .....

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ation 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 crimi .....

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n which administrative action may be judicially reviewed. They are illegality, irrationality and procedural impropriety . Illegality means that the decision maker must correctly understand the law that regulates its decision making power and give effect to it. Whether he has or not is a justiciable question to be decided, in the event of dispute, by a court exercising powers of judicial review. Irrationality refers to Wednesbury unreasonableness . It applies to a decision which is so outrageous .....

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d. 351] In making the impugned order, the Central Government, has quite correctly appreciated the scope and import of the provisions of FCRA and the Companies Act. Thus, there is no question of any illegality involved in the making of the impugned order. 352] Applying the test of Wednesbury unreasonableness, there is no case made out to interfere with the impugned order. The Central Government, in this case, has taken into account relevant considerations, ignored irrelevant considerations. The v .....

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impugned order has not breached the principles of natural justice and fair play. The procedural requirements of Section 396 have been duly adhered to in making the impugned order. Thus, there is no case of any procedural impropriety made out. 354] Therefore, even applying the triple test formulated by Lord Diplock for judicial review, we are satisfied that there is no illegality involved in the making of the impugned order. So also, we are satisfied that there is no procedural impropriety since .....

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e 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 o .....

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NSEL upon FTIL. Rather, the Central Government, in public interest, has chosen to amalgamate the two companies, thereby acknowledging their corporate veil. Besides, Mr. Khambata may not be entirely incorrect in his submission that the facts and circumstances of the present case may have justified the lifting of corporate veil. Accordingly, we are unable to fault the impugned order on the ground that the same involves lifting of corporate veil without existence of any circumstances warranting suc .....

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particular, strong reliance was placed on Anirudhsinhji Jadega (supra). 357] There is and there can be no dispute in so far as the principle is concerned. Where power is conferred upon one authority and in substance such power is exercised by some other authority, then, the decision may be assailed as ultra vires. In Administrative Law (H.W.R. Wade & C. F. Forsyth, Tenth Edition) instances of surrender, abdication or dictation have been discussed. Clear cut cases of unlawful dictation take p .....

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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 .....

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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 allowing new operators to enter the inter State air freight business. (R. v. Anderson ex p. Ipec-Air Pty. Ltd. (1965) 113 CLR 177). Similarly, the Audit Commission did not abdicate its discretionary powers when, in assessing the performance of local authorities across the range of their functions, it accepted the rating accorded to co .....

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dictation. This is also not a case where the FMC's order is the sole basis for making the impugned order. In this regard, it is pertinent to note that there is no unity even amongst the petitioners like FTIL and Jignesh Shah on one hand and NSEL on the other as to the impact of FMC's order on the Central Government making the impugned order. Both, appear to have taken extreme positions, neither of which appear to us, to be correct. 360] FTIL and Jignesh Shah maintain that the Central Go .....

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such contradictory contentions urged by FTIL and Jignesh Shah on one hand and NSEL on the other. This is because, upon the perusal and analysis of the impugned order, we are satisfied that the Central Government in making the impugned order has neither laid any excessive emphasis on the FMC's order nor can it be said that the Central Government has surrendered or abdicated its discretion or acted under dictation. The reference to the FMC's order cannot lead to any such inference. 361] Be .....

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sons 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 exer .....

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was precluded from even referring to the FMC's order cannot be accepted. As noted earlier, this court, whilst issuing Rule in Writ Petition Nos. 337, 363 and 370 of 2014 challenging FMC's order, proceeded to reject interim relief by order dated 28th February 2014. The special leave petitions against the order dated 28th February 2014, were dismissed as withdrawn. In the order refusing interim relief, this court has noted that FMC has recorded elaborate and detailed findings of fact after .....

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363] The material on record, however, indicates that NSEL, offered and promoted contracts which were in breach of the conditions in exemption notification dated 5th June 2007. Further, NSEL offered and promoted paired contracts, which were found to be nothing but financing transactions distinct from genuine sale and purchase transactions in commodities. There is material on record which indicates that NSEL went to the extent of assuring fixed returns to the investors and by the year 2013, almost .....

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the counter guarantee was in effective. The settlement guarantee fund to be maintained by NSEL and which was stated to be ₹ 738.55 crores as on 1st August 2013, was, on 4th August 2013 found to be only ₹ 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 ₹ 35 .....

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sbury 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' it means the question whether, while regulating exercise of fundamental rights, the appropriate or least restrictive choice of measures has .....

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and the administrative authority, are, however, given an area of discretion or a range of choices but as to whether the choice made infringes the rights excessively or not is for the court. That is what meant by proportionality. 367] In the context of Article 14 of the Constitution and administrative action, Om Kumar (supra) explains the position by reference to the classification test and the arbitrariness test. If, under Article 14 of the Constitution, administrative action is to be struck dow .....

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a). 368] In the context of Issue - D, considering the reliance placed on E.P. Royappa (supra) and Maneka Gandhi (supra) what was alleged was arbitrariness and consequently the invitation was for exercise of secondary review. Therefore, applying Om Kumar (supra) and Gohil Vishvaraj Hanubhai & Ors. (supra), the Wednesbury test will apply. We have, already considered this aspect in details and held that the impugned order passes the muster of Wednesbury test. 369] The contention at the stage of .....

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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 .....

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tween particular goals and means employed to achieve those goals, so that administrative action impinges on the individual rights to the minimum extent to preserve public interest. This means that the court has to go into advantages and disadvantages of the administration action called in question. The administrative authority, while exercising discretionary power will have to necessarily establish that its decision is balanced and in proportion to the object of the power conferred. The test of .....

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o be satisfied to sustain the restriction imposed. They are as follows: (i) it is designated for a proper purpose; (ii) the measures undertaken to effectuate such a limitation are rationally connected to the fulfillment of that purpose; (iii) the measures undertaken are necessary in that there are no alternative measures that may similarly achieve that same purpose with a lesser degree of limitation; and finally (iv) there needs to be a proper relation ( proportionality stricto sensu or balancin .....

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ty i.e. balancing of different interests. At the same time, reasonableness of a restriction has to be determined in an objective manner and from the standpoint of the interests of the general public and not from the point of view of the persons upon whom the restrictions are imposed or upon abstract considerations. In examining 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 sa .....

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l 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 t .....

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onable if the regulatory authorities propose to tackle the situation by initiating series of actions. The combined effect of these actions may yield results even assuming that actions considered in isolation, may not. The measures taken, in the present case, were necessary and even the petitioners did not suggest any alternative measures that might have achieved the same purpose, with lesser degree of limitation. Mr. Zubin Behramkamdin, who appeared for the employees of FTIL came closest to sugg .....

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, then, surely, Mr. Khambata would add that the cause of public interest is further promoted, though, quite unwittingly. 376] In this case, we find that the Central Government has adopted quite a balanced approach in making the impugned order. The impugned order is certainly not comparable to using a sledge hammer to crack a nut, to borrow the phrase from Leyland and Anthony (Textbook on Administrative Law, 5th Edition). The Central Government in this case, advisedly refrained from making any de .....

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ntral 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 ₹ 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 de .....

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tion 396, the Central Government was required to, and has focused upon the larger public interest involved in the matter. This naturally includes the issue of investor confidence. This also includes the position and functioning of the financial or trading institutions like stock or commodities exchanges which assume a very significant role in the national economy. The impugned order also addresses the issue of holding the promoters of such exchanges liable to the legal regime under which they we .....

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79] The petitioners choose to assess the impact or the so-called restrictions, almost entirely from their own limited perspective and not from the perspective of public interest. No doubt, even the interests of the companies in question, their shareholders, creditors and employees are relevant. However, the petitioners, choose to regard such interests as the only interests which the Central Government was expected to focus on. This is obviously not the correct perspective expected of the Central .....

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e idea of a company functioning for the public good or general welfare and at any rate not in a manner, detrimental to the public good. The expression public interest constitutes a positive check on unhindered exercise of private right whether by management or by stockholders. Where therefore, public interest is a relevant consideration, the same must override other considerations like freedom of management or the right of stockholders to carry on the business of the company as they desire. The .....

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olders 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 su .....

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f disclosed, not only the falsities of the representations but also the manner in which the entire operations at a national level stock exchange came to be subverted. Even before this Court, none of the petitioners or shareholders even suggested any serious options or range of options, which were open to the Central Government to adopt in a situation of this nature. In such circumstances, it is really not possible to interfere with the impugned order, applying the test of proportionality. 381] I .....

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perations from the regulatory regime established by FCRA subject to the condition that no short sales would be permitted and all outstanding positions at the end of the day would result in delivery. Even the NSEL held out that all transactions at the spot exchange would be backed by commodities checked and stored at warehouses owned and controlled by NSEL. NSEL even held out that it would maintain a settlement guarantee fund, so as to eliminate any risk to the traders at the spot exchange. 382] .....

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2013, almost 99% of the turnover of the exchange comprised such paired contracts. 383] Ultimately, 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 ₹ 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 h .....

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k worth only ₹ 358 crores was available, even though, NSEL, had solemnly stated that it has stocked valued at ₹ 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. 385] In MCX Stock Exchange India Limited (supra), the Division Bench of t .....

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y regulator. Apart from the regulation of members, market surveillance carried on by stock exchanges in certain jurisdictions regulates issuers. They do so by ensuring that the stocks of issuers are reliably traded and that issuers meet standards of corporate governance. In exercising these powers, stock exchanges may face issues involving a conflict of interest. Such conflicts of interest have to be handled and addressed effectively within the regulatory framework. Stock exchanges as institutio .....

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m the stock market have an immediate and, often serious, impact on financial stability in the country. The orderly functioning of stock exchanges as institutions through which transactions in securities take place is a matter of public interest. The regulatory powers which have been conferred upon SEBI to recognise stock exchanges must be understood in the context of ensuring the protection of investors on one hand and the public interest that is involved on the other. SEBI is an expert regulato .....

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e 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 .....

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ry as a whole. 388] The distinction made by the petitioners in the course of rejoinder that the decisions in MCX (supra) or Coimbatore Stock Exchange (supra) are concerned with Stock Exchanges and not Commodity Exchanges is really, a distinction without any difference. The observations in the two decisions regards the importance of exchanges to the economic health of the country, apply with full vigor to commodities exchange, particularly, a national level commodities exchange having turnover of .....

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