TMI Blog2019 (5) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic interest may have regard to the interest of production of goods or services essential to the nation so that they may contribute to the nation s welfare and progress, and in so doing, may also provide much needed employment. Public interest in this context would, therefore, mean the combining of resources of two or more companies so as to impact production and consumption of goods and services and employment of persons relatable thereto for the general benefit of the community. Conversely, any action that impedes promotion of industry or obstructs growth which is in national or public interest would run counter to public interest as mentioned in this Section. It is the Central Government that has to be satisfied that its order is in public interest and such satisfaction must, therefore, be of the Central Government itself and must, therefore, appear from the order itself. All these valiant attempts made to sustain such order must be rejected. Reading of Section 396(3), (3A), and (4) (aa) that every member or creditor of each of the companies before amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orth of over INR 2500 crore, and is in the business of providing software which is used for trading by brokers and exchanges across the country. FTIL has about 900 employees, and a Board of Directors which is different from the Board of Directors of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL was incorporated in 2005 by Multi Commodities Exchanges [ MCX ] and its nominees. NSEL provided an electronic platform for trading of commodities between willing buyers and sellers through brokers representing them. On 05.06.2007, the Union of India issued an exemption notification under Section 27 of the Forward Contracts (Regulation) Act, 1952 [ FCRA ] exempting forward contracts of one- day duration for sale and purchase of commodities traded on NSEL from operation of the provisions of the FCRA. NSEL commenced operations in October 2008. On 27.04.2012, the Department of Consumer Affairs [ DCA ] issued a show cause notice to NSEL as to why action should not be initiated against it for permitting transactions in alleged violation of the exemption granted to it under the FCRA. NSEL replied to the show cause notice on 29.05.2012 stating that it had not violated the exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PC ]. NSEL also filed third-party notices in the said suit for recovery of INR 5600 crore against 24 defaulter traders. It has also filed various arbitration proceedings against them, and is in the process of recovery of INR 3365 crore out of INR 5600 crore, which are in the form of court decrees and arbitration awards. 4. On 17.12.2013, based on the Grant Thornton report dated 21.09.2013, the FMC passed an order declaring that FTIL was not fit and proper to hold equity in any commodity exchanges, and must dilute its shareholding to not more than 2% of the paid-up equity capital of MCX. The said order is under challenge in Writ Petition No. 337 of 2014 before the Bombay High Court. On 28.02.2014, the Division Bench of the Bombay High Court refused a prayer for stay of the aforesaid order, stating that findings of fact of a serious nature have been recorded against the appellant, and the fraud perpetrated is to the tune of INR 5500 crore. 5. On 06.01.2014, the Economic Offences Wing, Mumbai, filed chargesheets against the Managing Director and CEO of NSEL, Shri Sinha, the Head of Warehousing of NSEL, Shri Babu Kanvi, and two other defaulters. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it Petition No. 2743 of 2014 on 10.11.2014, in which it challenged the impugned draft order. On 27.11.2014, the Bombay High Court directed the parties to maintain status quo. On 16.12.2014, the Union of India filed an affidavit in reply, categorically confirming that the impugned draft order has been made by the Central Government on the basis of the FMC s proposal dated 18.08.2014. On 04.02.2015, the Bombay High Court vacated the status quo order, and passed an order allowing FTIL, NSEL, and their shareholders to file their objections to the draft amalgamation order. Meanwhile, under Section 396(3), a compensation order was made on 01.04.2015, which involved compensation only to a particular shareholder of NSEL. On 28.08.2015, the Central Government issued a notification to merge the functions of the FMC with the Securities and Exchange Board of India [ SEBI ] w.e.f. 28.09.2015. On the same day, the FCRA was also repealed. Thus, SEBI was now vested with the powers of the FMC which is to be governed by the Securities and Exchange Board of India Act, 1992 [ SEBI Act ]. 8. FTIL and NSEL were granted a hearing on their objections to the impugned draft amalgamation order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided, and consequently, would not constitute an audit, let alone a forensic audit. It also stated that should additional information become available, which impacts upon conclusions reached in the report, Grant Thornton reserved the right to amend their findings, which are not intended to be interpreted to be either legal advice or opinion; in short, that the findings themselves were inconclusive. 11. Learned counsel have argued that the impugned order is ultra vires Section 396 for many reasons. First and foremost, the condition precedent to passing an amalgamation order is that compensation be assessed under Section 396(3) of the Act. Compensation has to be assessed qua both the transferor and transferee company. In the present case, compensation has been assessed only for NSEL or its shareholders, without any compensation being awarded to FTIL or its shareholders. Secondly, a member or creditor is required to be placed in the same position as nearly as possible . In the present case, the amalgamated company would become a company of negative net worth upon amalgamation, having had a positive net worth of almost INR 2800 crore pre-amalgamation. This being so, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons A and B are not in the draft order. This being so, obviously, no objections or suggestions could be made qua reasons A and B, as a result of which the final order would, therefore, be ultra vires Section 396(3) of the Companies Act. 13. All the stated objectives at page 1 of the amalgamation order itself (a) to leverage combined assets, capital and reserves; (b) to achieve economy of scale; (c) efficient administration; (d) gainful settlement of rights and liabilities of stakeholders and creditors; (e) to consolidate businesses; and (f) to ensure coordination and policy are totally vague and do not lead to any application of mind to such amalgamation order being essential in public interest. Article 31A of the Constitution of India was relied upon, and it was argued that amalgamation under Article 31A(1)(c) of two or more corporations can only be made in public interest or in order to secure proper management of any of the corporations, which is wholly missing in the present case. It was also argued that only Shri Pritam Singh had signed the order which dismissed the objections, even though the objections were heard by a two-member committee. They also made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y different and distinct Boards of Directors. Thus, to arrive at the conclusion that one company is the alter ego of the other, without adjudication, would itself be arbitrary and violative of Article 14 of the Constitution of India. The only reason which would remain, therefore, would be reason C, which is that the real object of the entire exercise to recover alleged dues from alleged defaulters pre-adjudication and pending adjudication, which would be looking at the problem in a wholly one-sided way, and would be an excessive invasion of the rights of the shareholders and creditors of FTIL, all of whom have overwhelmingly voted against amalgamation. In fact, it is pointed out that there is no question of public interest and Section 396 is actually used in order to penalise Ram , namely, NSEL and FTIL, for the default of Shyam , namely, the 24 alleged defaulters, when not even a single default or any civil or criminal wrong can be attributed either to FTIL or to NSEL. The impugned order would therefore also fail on the ground of proportionality, which is a facet of Article 14. For all these reasons, in addition, the impugned order ought to be struck down as ultra vires Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had 10-20% of open position as margin money. He also stated that the stock currently held in NSEL s 120 warehouses was valued at around INR 6000 crore. It is in July, 2013 that the payment crisis of INR 5600 crore arose on NSEL, FTIL admitting that this was the result of a fraud. On 14.08.2013, NSEL wrote to the FMC, setting out a detailed settlement plan. The plan indicated the period within which the entire dues would be paid, with simple interest at 8% to 16% per annum. This plan was an abject failure. As a result, a forensic audit was conducted by Grant Thornton, which in its report dated 21.09.2013, came out with damning facts and figures as to the real operations of NSEL, namely, that they are not a commodity exchange, but a finance exchange, and that no commodities were really in stock. As a result, the FMC issued show cause notices and then passed its order dated 17.12.2013 based on the aforesaid report, in which it found NSEL guilty of severe malpractice. Based on this order, the draft order and final order of amalgamation were then made. Shri Divan was at pains to point out that as early as on 18.08.2014, the FMC had written a detailed letter to the Secretary, Ministry of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the shareholders of FTIL will suffer. He added that the overwhelming majority of shares in FTIL are owned by Shri Jignesh Shah and his family (45%) and by Shri Ravi Sheth and Shri Bharat Sheth (8%). Thus, the majority shares held in FTIL are by two masterminds of the scam. That apart, after the scam, 24% of the shares have been purchased by speculators, taking advantage of the low price at which such shares were offered. Such persons, therefore, are purely speculative investors who do not need to be compensated under Section 396 of the Act. Also, the economic value of shares, if at all it is to be taken into account, is an uncertain and fluctuating phenomenon. As examples, he stated that the book value of a share of FTIL, after the scam broke out, was only INR 2/-, whereas the listed value actually went up after the FMC order of 17.12.2013. All this, therefore, is dependent on market forces, and share price varies according to market forces and not as a result of any amalgamation that is effected. He also added that it is incorrect to state that one of the conditions precedent for applicability of Section 396 was absent. Even if a compensation order was made awarding nil compen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any natural justice outside what is provided for in the Section itself. He then cited certain judgments on lifting of the corporate veil, and ended by saying that as was held in J.K. (Bombay) (P) Ltd. v. New Kaiser-i-Hind Spinning and Weaving Co. Ltd., [1969] 2 SCR 866 [ J.K. (Bombay) (P) Ltd. ], the Central Government order would have statutory force, and therefore, cannot be said to be a mere administrative order. 17. Shri Arvind Datar, learned Senior Advocate appearing on behalf of SEBI, fully supported the impugned judgment and took us through various portions of it. He was at pains to point out that the Grant Thornton report was a report of a forensic auditor chosen by NSEL itself, though required to do so by the FMC. He took us through the FMC order dated 17.12.2013 meticulously, and said that none of the findings therein could be assailed by either FTIL or NSEL. He then referred to the Central Government order and supported the High Court judgment s upholding of it. He then relied upon the Director s Report of NSEL dated 20.07.2015, and balance sheet as on 31.03.2015 to show that no potential liability of INR 5600 crore is at all referred to in the Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, according to her, corroborated all the findings made by Grant Thornton, the FMC, and the Central Government by its final order. She then argued that Section 396 of the Companies Act is a special, self-contained, standalone code by itself and must be read as such, and that all procedural aspects of Section 396 have been complied with on the facts of the present case. The satisfaction of the Central Government that it is essential in public interest to act under Section 396 is purely subjective satisfaction. She referred to and relied upon Bacha F. Guzdar v. Commissioner of Income Tax, [1955] 1 SCR 876 [ Bacha F. Guzdar ], to support the reasoning of the High Court on the compensation order. She also referred to and relied upon the share market prices to show that market fluctuations took place on their own, and that share prices plummeted only as a result of the scam which came to light in July, 2013. She also stated that since neither FTIL nor its shareholders and creditors filed any appeal against the compensation order, they waived their right to do so. She then supported the final amalgamation order and stated that it was manifest that it was made in public interest . For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself the question as to whether no reasonable person could have concluded that the impugned order was essential in the public interest. He reiterated that the order dated 12.02.2016 is not ultra vires Section 396 as several findings which show that amalgamation is essential in public interest has been arrived at on the basis of undisputed facts, and that therefore, the said order should be upheld. He also argued that such order, if passed, is in the nature of delegated legislation, and therefore, does not have to satisfy any rules of natural justice outside what is prescribed by Section 396 itself which, according to him, has been procedurally and substantively complied with, as reflected in the order dated 12.02.2016. 20. Shri Neeraj Kishan Kaul, learned Senior Advocate, also appearing on behalf of some of the alleged duped investors/traders, referred to the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999, and stated that the persons who had invested monies in the commodities exchange of NSEL have been held to be depositors by a judgment dated 01.10.2015 of the High Court of Bombay, from which an SLP has been dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anything contained in Sections 394 and 395 but subject to the provisions of this section, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution; with such property, powers, rights, interests, authorities and privileges; and with such liabilities, duties, and obligations; as may be specified in the order. (2) The order aforesaid may provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and may also contain such consequential, incidental and supplemental provisions as may, in the 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 or against the company resulting fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Constitution of India. However, this does not mean that Section 396 must be construed in such a fashion that it would lead to arbitrary or unreasonable results. In Prem Nath Raina v. State of Jammu Kashmir and Ors., (1983) 4 SCC 616, this Court, in dealing with a challenge to the J K Agrarian Reforms Act, 1976, which was protected by Article 31A, held: 9. The exclusion of a constitutional challenge under Articles 14, 19 and 31 which is provided for by Article 31A does not justify in equity the irrational violation of these articles. This Court did observe in Waman Rao [Waman Rao v. Union of India, (1981) 2 SCC 362 : AIR 1981 SC 271 : (1981) 2 SCR 1] that: It may happen that while existing inequalities are being removed, new inequalities may arise marginally and incidentally but the legislature has to take care to see that even marginal and incidental inequalities are not created without rhyme or reason. The Government of J K would do well to give fresh consideration to the provisions contained in Section 7(2) and modify the provisions regarding residence in order that they may accord with reason and commonsense. Article 31A does not frown upon reason and comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulations by providing that without prejudice to the generality of the provisions contained in Article 31A, none of the Acts and Regulations specified in the Ninth Schedule nor any of the provisions thereof shall be deemed to be void, or ever to have become void, on the ground that such Act, Regulation or provision is inconsistent with, or takes away or abridges any of the rights conferred by, any provisions of Part III. On a plain reading of this article it seems to us impossible to accept that the protective umbrella of the Ninth Schedule takes in its everwidening wings not only the Acts and Regulations specified therein but also Orders and Notifications issued under those Acts and Regulations. Article 31B constitutes a grave encroachment on fundamental rights and doubtless as it may seem that it is inspired by a radiant social philosophy, it must be construed as strictly as one may, for the simple reason that the guarantee of fundamental rights cannot be permitted to be diluted by implications and inferences. An express provision of the Constitution which prescribes the extent to which a challenge to the constitutionality of a law is excluded, must be construed as demarcatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of a given case. Construing Article 31A in the light of Article 13(3)(a), it is clear that the order referred to, can therefore, only be a legislative order. Examples of legislative orders are of the kind dealt with in Prag Ice Oil Mills (supra) and Union of India and Anr. v. Cynamide India Ltd. and Anr., (1987) 2 SCC 720 [ Cynamide India ], namely, orders passed under statutes which are in the nature of subordinate legislation, which deal generally with a whole class of persons who are governed by the same in which general rules of conduct are laid down. WHETHER THE CENTRAL GOVERNMENT ORDER IS ADMINISTRATIVE IN NATURE 28. This brings us to what is the nature of the order of the Central Government that is passed under Section 396. It has been argued on behalf of the Union of India, relying upon a number of judgments, that the nature of the order passed under Section 396 is that of delegated legislation. This being the case, it would, therefore, get immunity from challenge on the ground of Articles 14 and 19 of the Constitution of India, as it would then amount to a law within the meaning of Article 31A read with Article 13(3)(b). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India amalgamating these banks was legislative in nature, as a result of which the principle of natural justice will not apply. In turning down this contention, this Court held: 9. Learned counsel for RBI and the transferee banks have taken the stand that the scheme-making process under Section 45 is legislative in character and, therefore, outside the purview of the ambit of natural justice under the protective umbrella whereof the need to put the excluded employees to notice or enquiry arose. It is well settled that natural justice will not be employed in the exercise of legislative power and Mr Salve has rightly relied upon a recent decision of this Court being Union of India v. Cynamide India Ltd. [(1987) 2 SCC 720] in support of such a position. But is the scheme-making process legislative? Power has been conferred on the RBI in certain situations to take steps for applying to the Central Government for an order of moratorium and during the period of moratorium to propose either reconstruction or amalgamation of the banking company. A scheme for the purposes contemplated has to be framed by RBI and placed before the Central Government for sanction. Power ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also to be placed before the two Houses of Parliament makes it abundantly clear that the placing of the scheme before the two Houses is not a relevant test for making the scheme-framing process legislative. We accordingly hold that there is no force in the contention of Mr Salve that the process being legislative, rules of natural justice were not applicable. The fact that, under Section 396(5), the Central Government order has to be laid before the Houses of Parliament also does not detract from the fact that this order is administrative and not legislative in character. Applying these judgments to the Central Government s order passed under Section 396, it is clear that the order directly impacts the rights and liabilities of the companies, their shareholders and creditors, sought to be amalgamated under the order. Such order is not an order in general which applies to all such companies, but only to the particular companies sought to be amalgamated. There is no general rule of conduct, without reference to the particular case that is laid down by such an order. The Central Government order, ultimately, makes a specific direction qua two specific companies which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation Act, 1949 came to hold that merely because a scheme framed is required to be laid before both the Houses of Parliament after the same has been sanctioned by the Central Government the scheme cannot be held to be legislative in nature. But in our considered opinion the High Court has failed to notice the fundamental distinction between the provisions of Section 45 of the Banking Regulation Act, 1949 and Section 9 of the Acquisition Act. Under Section 9 of the Acquisition Act under which Act the impugned scheme has been framed, every scheme framed by the Central Government has to be laid before each House of Parliament for a total period of 30 days and Parliament has the power to agree to the scheme and making any modification or in giving to a decision that the scheme should not be made and it is only thereafter the scheme has the effect either in the modified form or does not agree (sic). The essential distinction between the two provisions therefore, is that whereas under the Banking Regulation Act, 1949 the scheme framed has merely to be placed before Parliament and nothing further but under the Acquisition Act the scheme becomes effective only after the same is placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 396, must conform to the fundamental rights guaranteed by Articles 14 and 19(1)(g) of the Constitution of India. This Court has held in a catena of decisions that it is the substance of what is effected that counts when it comes to infraction of a fundamental right, and not the form. Thus, in Thomas Dana v. State of Punjab, [1959] Supp (1) SCR 274, Subba Rao, J., in his dissenting opinion, stated: A fundamental right is transcendental in nature and it controls both the legislative and the executive acts. Article 13 explicitly prohibits the State from making any law which takes away or abridges any fundamental right and declares the law to the extent of the contravention as void. The law therefore must be carefully scrutinized to ascertain whether a fundamental right is infringed. It is not the form but the substance that matters. If the legislature in effect constitutes a judicial tribunal, but calls it an authority, the tribunal does not become any the less a judicial tribunal. Therefore, the correct approach is first to ascertain with exactitude the content and scope of the fundamental right and then to scrutinize the provisions of the Act to decide whether in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rictions. Bearing this principle in mind it would be clear that the right to freedom of speech and expression carries with it the right to publish and circulate one s ideas, opinions and views with complete freedom and by resorting to any available means of publication, subject again to such restrictions as could be legitimately imposed under clause (2) of Article 19. In Dwarkadas Shrinivas v. Sholapur Spinning Weaving Co. Ltd. [(1954) SCR 674] this Court has pointed out that in construing the Constitution it is the substance and the practical result of the act of the State that should be considered rather than its purely legal aspect. The correct approach in such cases should be to enquire as to what in substance is the loss or injury caused to the citizen and not merely what manner and method has been adopted by the State in placing the restriction. (at pp. 857-858) A Constitution Bench in Ajay Hasia and Ors. v. Khalid Mujib Sehravardi and Ors., (1981) 1 SCC 722 also stated: 7. While considering this question it is necessary to bear in mind that an authority falling within the expression other authorities is, by reason of its inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cide these constitutional issues since there was no claim for compensation originally made in the writ petition and these issues could not be said to arise on the writ petition. Mr Divan conceded that the escape of oleum gas took place subsequent to the filing of the writ petition but his argument was that the petitioner could have applied for amendment of the writ petition so as to include a claim for compensation for the victims of oleum gas but no such application for amendment was made and hence on the writ petition as it stood, these constitutional issues did not arise for consideration. We do not think this preliminary objection raised by Mr Divan is sustainable. It is undoubtedly true that the petitioner could have applied for amendment of the writ petition so as to include a claim for compensation but merely because he did not do so, the applications for compensation made by the Delhi Legal Aid and Advice Board and the Delhi Bar Association cannot be thrown out. These applications for compensation are for enforcement of the fundamental right to life enshrined in Article 21 of the Constitution and while dealing with such applications, we cannot adopt a hyper-technical approa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the national interest. It has been made clear that any order made by the Government should provide for the old shareholders, and the old debenture holders and other creditors, having the same interest in the company resulting from the amalgamation as they had in the original companies. Any order made by the Government under this clause will be laid on the table of both Houses of Parliament and will therefore be subject to the Parliamentary scrutiny. What is important from the Notes on Clauses is the fact that it is only occasionally that cases arise where an amalgamation in national interest is clearly a necessity . It is made clear that the reason for Section 396 is that the observance of the usual procedure prescribed by the existing Act (namely, that contained in Sections 391 to 394) in such cases will lead to prolonged delays, which will be detrimental to national interest. The fact that the procedure contained in Sections 394 and 395 need not be carried out is made clear in the non-obstante clause contained in Section 396(1). 36. Section 396(3), (3A), and (4) are also important. A condition precedent to the passing of an order by the Central G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unlawful purpose or that the persons concerned in the formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members. From the facts placed before us, it is clear that the Government had not bestowed sufficient attention to the material before it before passing the impugned order. It seems to have been oppressed by the opinion that it had formed about Shri S.P. Jain. From the arguments advanced by Mr Attorney, it is clear that but for the association of Mr S.P. Jain with the appellant-company, the investigation in question, in all probabilities would not have been ordered. Hence, it is clear that in making the impugned order irrelevant considerations have played an important part. The power under Sections 235 to 237 has been conferred on the Central Government on the faith that it will be exercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under Section 237(b) is not the standard required of an or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be founded; it is also not reasonable to say that the clause permitted the Authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose. On the other hand Sarkar, C.J. and Mudholkar, J. held that the power conferred on the Central Government under Section 237(b) is a discretionary power and no facet of that power is open to judicial review. Our Brother Bachawat, J., the other learned Judge in that Bench did not express any opinion on this aspect of the case. Under these circumstances it has become necessary for us to sort out the requirements of Section 237(b) and to see which of the two contradictory conclusions reached in Barium Chemicals case is in our judgment, according to law. But before proceeding to analyse Section 237(b) we should like to refer to certain decisions cited at the bar bearing on the question under consideration. (at pp. 120-121) xxx xxx xxx Coming back to Section 237(b), in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat case, the High Court had observed that the State Government was the sole judge of whether the direct supply of energy was or was not in public interest, the nature of the power being subjective. This Court, in upsetting the High Court s view, held: 11. We are unable to agree with that view. By Section 3(2)(e) as amended by the U.P. Act 30 of 1961, the Government is authorised to supply energy to consumers within the area of the licensee in certain conditions: exercise of the power is conditioned by the Government deeming it necessary in public interest to make such supply. If challenged, the Government must show that exercise of the power was necessary in public interest. The Court is thereby not intended to sit in appeal over the satisfaction of the Government. If there be prima facie evidence on which a reasonable body of persons may hold that it is in the public interest to supply energy directly to the consumers, the requirements of the statute are fulfilled. Normally a licensee of electrical energy, though he has no monopoly, is the person through whom electrical energy would be distributed within the area of supply, since the licensee has to lay down electr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the existence of the conditions in clauses (a), (b) and (c) of sub-section (2) of Section 326. The enquiry before the Court, therefore, is whether the Central Government was satisfied as to the existence of the conditions. The existence of the satisfaction cannot be challenged except probably on the ground that the authority acted mala fide. But if in reaching its satisfaction the Central Government misapprehended the nature of the conditions, or proceeded upon irrelevant materials, or ignores relevant materials, the jurisdiction of the Courts to examine the satisfaction is not excluded. (at p. 183) In M.A. Rasheed and Ors. v. State of Kerala, [1975] 2 SCR 93, after following Rohtas Industries (supra), the test for judicial review of administrative decisions was stated most felicitously by Ray, C.J. thus: Administrative decisions in exercise of powers even if conferred in subjective terms are to be made in good faith on relevant consideration. The courts inquire whether a reasonable man could have come to the decision in question without misdirecting himself on the law or the facts in a material respect. The standard of reasonableness t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 135] and the officer of the Ministry of Labour and National Service did in Simms Motor Units Ltd. v. Minister of Labour and National Service [(1946) 2 All ER 201] the exercise of the power would be bad and so also would the exercise of the power be vitiated where the authority has disabled itself from applying its mind to the facts of each individual case by self-created rules of policy or in any other manner. The satisfaction said to have been arrived at by the authority would also be bad where it is based on the application of a wrong test or the misconstruction of a statute. Where this happens, the satisfaction of the authority would not be in respect of the thing in regard to which it is required to be satisfied. Then again, the satisfaction must be grounded on materials which are of rationally probative value . Machindar v. King [AIR 1950 FC 129 : 51 Cri LJ 1480 : 1949 FCR 827]. The grounds on which the satisfaction is based must be such as a rational human being can consider connected with the fact in respect of which the satisfaction is to be reached. They must be relevant to the subject-matter of the inquiry and must not be extraneous to the scope and purpose of the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a nature and degree which requires its intervention . 40. In Bhikhubhai Vithlabhai Patel v. State of Gujarat, (2008) 4 SCC 144, this Court, in an elaborate judgment, referred to and followed several judgments, including Barium Chemicals (supra), in the context of Section 17 of the Gujarat Town Planning and Urban Development Act, 1976, by which, if the State Government is of opinion that substantial modifications in the draft development plan are necessary, it may publish such modifications. This Court held: 20. The State Government is entitled to publish the modifications provided it is of opinion that substantial modifications in the draft development plan are necessary. The expression is of opinion that substantial modifications in the draft development plan are necessary is of crucial importance. Is there any material available on record which enabled the State Government to form its opinion that substantial modifications in the draft development plan were necessary? The State Government s jurisdiction to make substantial modifications in the draft development plan is intertwined with the formation of its opinion that such substantial modificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modifications in the draft development plan. It also involves an obligation to consider which of the several steps specified in sub-clauses (i), (ii) and (iii) should be taken. 24. The proviso opens with the words where the State Government is of opinion that substantial modifications in the draft development plan and regulations are necessary, . These words are indicative of the satisfaction being subjective one but there must exist circumstances stated in the proviso which are conditions precedent for the formation of the opinion. Opinion to be formed by the State Government cannot be on imaginary grounds, wishful thinking, however laudable that may be. Such a course is impermissible in law. The formation of the opinion, though subjective, must be based on the material disclosing that a necessity had arisen to make substantial modifications in the draft development plan. 25. The formation of the opinion by the State Government is with reference to the necessity that may have had arisen to make substantial modifications in the draft development plan. The expression: as considered necessary is again of crucial importance. The term consider means to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable. If so, the orders would be struck down in exercise of judicial review. 42. Thus, at the very least, it is clear that the Central Government s satisfaction must be as to the conditions precedent mentioned in the Section as correctly understood in law, and must be based on facts that have been gathered by the Central Government to show that the conditions precedent exist when the order of the Central Government is made. There must be facts on which a reasonable body of persons properly instructed in law may hold that it is essential in public interest to amalgamate two or more companies. The formation of satisfaction cannot be on irrelevant or imaginary grounds, as that would vitiate the exercise of power. ESSENTIAL 43. The expression essential has been defined in P. Ramanath Aiyer s Law Lexicon (4th Edn.) as follows: Essential. Indispensably necessary; important in the highest degree: requisite that which is required for the continued existence of a thing. Black s Law Dictionary (10th Edn.) defines essential as follows: essential, adj. (14c) 1. Of, relating to, or involving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion must indicate that it was towards the welfare of the people and not to benefit a private individual or group of individuals joined collectively. Therefore, acquisition for anything which is not for a public purpose cannot be done compulsorily. (emphasis supplied) 47. In the context of the Motor Vehicles Act, 1939, in Rameshwar Prasad and Ors. v. State of U.P. and Ors., (1983) 2 SCC 195, this Court held: 19. What does Section 43-A(1) after all say? It says that the State Government may issue such directions of a general character as it may consider necessary in the public interest. What is the meaning of the term public interest ? In the context of the Act, it takes within its fold several factors such as, the maximum number of permits that may be issued on a route or in any area having regard to the needs and convenience of the travelling public, the non-availability of sufficient number of stage carriage services in other routes or areas which may be in need of running of additional services, the problems of law and order, availability of fuel, problems arising out of atmospheric pollution caused by a large number of motor vehi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48. In Janata Dal v. H.S. Chowdhary and Ors., (1992) 4 SCC 305, this Court referred to Stroud s Judicial Dictionary, which defines public interest thus: 51. In Stroud s Judicial Dictionary, Vol. IV (4th edn.) public interest is defined thus: Public interest - 1. A matter of public or general interest does not mean that which is interesting as gratifying curiosity or a love of information or amusement; but that in which a class of the community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected. (Per Cambel C.J., in R. v. Bedfordshire [24 LJ QB 84] ). 52. In Black s Law Dictionary (6th edn.), public interest is defined as follows: Public Interest - 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, or as the interests of the particular localities, which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, state or national government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is an expression of wide amplitude. It may have different connotation and understanding when used in service law and a yet different meaning in criminal law than civil law and its shade may be entirely different in company law. Its perspective may change when merger is of two Indian companies. But when it is with subsidiary of foreign company the consideration may be entirely different. It is not the interest of 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. 6. Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle of prudent business management test or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general public (in contrast to the selfish interest of a person, group, or firm) in which the whole society has a stake and which warrants recognition, promotion, and protection by the government and its agencies. Despite the vagueness of the term, public interest is claimed generally by governments in matters of state secrecy and confidentiality. It is approximated by comparing expected gains and potential costs or losses associated with a decision, policy, program, or project. (emphasis supplied) 54. In the context of compulsory amalgamation of two or more companies, the expression public interest would mean the welfare of the public or the interest of society as a whole, as contrasted with the selfish interest of a group of private individuals. Thus, public interest may have regard to the interest of production of goods or services essential to the nation so that they may contribute to the nation s welfare and progress, and in so doing, may also provide much needed employment. Public interest in this context would, therefore, mean the combining of resources of two or more companies so as to impact production and consumption of goods and servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. Executive Summary This executive summary is to be read in conjunction with the whole report and should not be treated as a standalone document. Financing Business 1.1 The NSEL exchange platform was being used to conduct a financing business. Indian Bullion Market Association ( IBMA ) enabled large volumes of trading by a related party on FTIL group exchanges (NSEL and Multi-Commodity Exchange of India Limited ( MCX ).) This is illustrated as per the diagram below:- 1.2 Grant Thornton observed that a large volume of NSEL exchange trades 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 long-term sell contract (e.g. T+25- i.e. 25 day settlement). The contracts were taken by the same parties at a pre-determined 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their clients claiming a fixed return on investments made on the NSEL exchange. Further, this presentation, declared that actual delivery of stocks in such transactions would not be required. 1.5 Grant Thornton also obtained evidence of repeated contraventions of NSEL exchange rules and bye-laws which facilitated such financing transactions to continue and grow in size as below: Repeated Defaults: As per the NSEL exchange rules a member who does not have sufficient collateral/monies etc. to discharge his obligations would not be allowed to trade further. This rule was overridden on a recurring basis. Further despite repeated defaults members were allowed to trade and increase their expenses. For example, Lotus Refineries had defaulted, as per the Rules of the Exchange, on 198 days between the fifteen- month period of 1 April 2012 and 30 July 2013. Exemptions from Margin Requirements: Members who were in a default position or whom had exhausted their margin limits on trading were granted an exemption from margin requirements and thus allowed them to increase their exposure by engaging in new trades. More than 1,800 margin limit exemptions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board Meeting minutes regularly (eg. 11 June 2008, 15 June 2009, 25 May 2011) stated that the Audit Committee had detailed discussions on the Annual Financial Statements, the Internal Control Systems, reviewing the scope of Internal Audit functions, the performance of the statutory and internal auditors, the scope of work for the internal auditors, the planning of the statutory audit for the current financial year, the payment of audit fees, the observations by the auditors in the draft Auditor Report etc. Upon review of the corresponding Audit Committee minutes we noted no reference to discussions on Internal Control Systems, reviewing the scope of Internal Audit functions, performance of internal auditors and scope of work for the internal auditors. Common members of the Board and the Audit Committee were: Mr. Jignesh Shah Mr. Joseph Massey Mr. V. Hariharan Mr. Shreekant Javalgekar 1.10 The Board Meeting minutes of 31 March 2010 and 11 August 2010 stated that the Company (NSEL) approached Karvy Financial Services Limited (KFSL) to extend credit facilities to a member, specifically N.K. Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said Act. Grant Thornton s review of the type of trades executed on the NSEL exchange indicates contravention to the exemption conditions granted. During the period January 2011 to July 2013, FMC sought several clarifications from NSEL on a number of complaints received from the public alleging forward trading and running a financing scheme. All these allegations were refuted by NSEL. Our analysis of such trades indicates misrepresentation by NSEL to FMC on several occasions. The report then goes on to say that there was no documentation in relation to warehouse activities for long term trades indicating that such contracts were not secured by warehouse stocks. The warehouses were customer managed warehouses and the underlying collateral were not in custody of NSEL. NSEL did not have control over these warehouses and Grant Thornton was denied access to number of warehouses. The Warehouse Development and Regulatory Authority had in fact rejected NSEL s application for registration of its warehouses way back on 16.05.2011. Notwithstanding such rejection, NSEL s website represented that its warehouses were registered with the Authority. No verificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining their clearance, the forensic auditor finalised its report. 15.1.1. The violation of conditions prescribed in the exemption notification, trading in paired contracts to generate assured financial returns under the garb of commodity trading, admission of members who were thinly capitalised having poor net worth and giving margin exemptions to those who were repeatedly defaulting in settling their dues, poor warehousing facilities with no or inadequate stocks, no risk management practices followed, non-provision of funds in SGF, consciously appointing Shri Mukesh P. Shah as statutory auditors for F.Y. 2012-13 who was related to Shri Jignesh Shah, and apparent complicity with the defaulters to defraud the investors, etc., lead to an inescapable conclusion that a huge fraud was perpetrated by NSEL while having the presence of two Board members of FTIL on the Board of NSEL, one of whom was the Vice-Chairman of the company. 15.1.2. The facts of the case and the manner in which the business affairs of NSEL were conducted leaves no doubt in our minds that FTIL, notwithstanding its contentions that it was ignorant of the affairs and conduct of NSEL, exerted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aud involving ₹ 5,500 crores, which has the potential effect of eroding trust and confidence in exchanges and financial markets. 15.1.4. Keeping in view the foregoing observations and the facts which reveal misconduct, lack of integrity and unfair practices on the part of FTIL in planning, directing and controlling the activities of its subsidiary company, NSEL, we conclude that FTIL, as the anchor investor in the Multi-Commodity Exchange Ltd. (MCX) does not carry a good reputation and character, record of fairness, integrity or honesty to continue to be a shareholder of the aforesaid regulated exchange. Therefore, in the public interest and in the interest of the Commodities Derivatives Market which is regulated under FCRA, 1952, the Commission holds that Financial Technologies (India) Ltd. (FTIL) is not a fit and proper person to continue to be a shareholder of 2% or more of the paid-up equity capital of MCX as prescribed under the guidelines issued by the Government of India for capital structure of commodity exchanges post 5-years of operation. It is further ordered that neither FTIL, nor any company/entity controlled by it, either directly or indirectly, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back the persons who have allegedly been duped. It was found that this scheme could not really take off, as a result of which, large amounts continued to be owed to such persons. That this was the real concern of the FMC is clear from a letter dated 18.08.2014 addressed by the FMC to the Secretary, Ministry of Corporate Affairs. This letter states: xxx xxx xxx 2. As apprised earlier, consequent to the suspension of trading and a huge settlement default that took place at NSEL on 31.07.2007, the Government of India, Ministry of Consumer Affairs, Food Public Distribution, Department of Consumer Affairs (DCA) vide its notification dated 6th August, 2013 (copy enclosed as Annexure II) inter-alia provided that settlement of all outstanding one day forward contract at NSEL shall be done under the supervision of FMC. In exercise of this supervisory role, the Commission has been continuously taking all possible steps and has been regularly pursuing with NSEL to expedite the recovery proceedings against the defaulters at its platform. To ensure better monitoring of NSEL s compliance the Commission had vide No. 8/1/2013 (1)-MD-1(1)(C)/Settlement (Vol.-IV) dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces, NSEL has become totally ineffective in pursuing the recovery of the defaulted amounts from the defaulter members. 4. It may be noted that NSEL is a subsidiary of Financial Technologies India Ltd. (FTIL) which holds 99.99% of the shares of NSEL. Hence, for all practical purposes NSEL is a wholly owned subsidiary of FTIL and therefore it is the primary responsibility of the parent company, i.e. FTIL to own complete responsibility for the affairs of its subsidiary company. In this regard attention is drawn to the order of the Commission No. 4/5/2013- MKT-I/B dated 17th December, 2013 (copy enclosed as Annexure IV) in the matter of Fit and Proper Person status of M/s FTIL (another shareholder and promoter of MCX) and in the matter of Shri Jignesh Shah Shri Joseph Massey ex-Directors Shri Shreekant Javalgekar ex-MD and CEO of MCX. Some of the important highlights of the said order pertaining to FTIL are as below: (i) In para 14.2.1 of the order it is inter-alia mentioned that NSEL by virtue of being a separate legal entity cannot be said to be independent from the control of the holding/parent company i.e. FTIL which holds 99.99% of its share capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm purely on the basis of an explicit assurance that the Exchange shall step into the shoes of counter parties should there be any default by any participant. (vii) In para 15.1.3 of the order it is inter-alia mentioned that FTIL has its principal business of development of software which has become the technology platform for almost the entire industry engaged in broking in shares and securities, commodities, foreign exchange etc. The motive behind allowing trading in forward contracts on the NSEL platform in a circuitous manner on NSEL which was neither recognized nor registered under FCRA, 1952 indicates mala fide intention on the part of the promoter of FTIL to use the trading platform of its subsidiary company for illicit gains away from the eyes of Regulator. 5. The aforesaid facts would clearly establish that the Board of FTIL and its promoters under the leadership of Shri Jignesh Shah have been actively controlling and directing the affairs of NSEL and it is due to the poor governance and irregularities perpetrated in to the affairs of NSEL by FTIL and its promoters that the defaulting members defrauded the exchange to the extent of ₹ 5,500 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very from the defaulting members, notwithstanding all the legal and other measures taken by it against them under the instructions/supervision of the Commission. Similarly, the Board and management of FTIL, by their very conduct in managing the affairs of NSEL and continuous effort to distance themselves from their responsibility towards NSEL after the settlement default, have lost their credibility as a responsive and responsible holding company. 9. Keeping the aforesaid emergency situation in view, the Commission is of the view that time has come for the Ministry of Corporate Affairs to consider: (i) merging/amalgamating NSEL with FTIL in public interest so that the human/financial resources of FTIL are also directed towards facilitating speedy recovery of dues from the defaulters at NSEL and FTIL takes responsibility to resolve the payment crisis at NSEL at the earliest. (ii) Further, it is suggested that together with merger/amalgamation of NSEL with FTIL, taking over of the management of FTIL may also be considered so that the affairs of FTIL can be managed in a professional way by bringing in an institutionalized framework as recommended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 379.83 crore have been received/recovered from the defaulters and ₹ 179 crore were disbursed by NSEL to small traders/investors. 8.2. Enforcement Directorate: ED has traced proceeds of crime amounting to ₹ 3973.83 crore to the 25 defaulters; ED has attached assets worth ₹ 837.01 crore belonging to 12 defaulters; As per the recent amendment in the PMLA, the assets attached by ED can be used for restitution to the victims. 8.3. The above status indicates that the said enforcement agencies are working as per their mandate . 56.2. What concerned the FMC in August 2014 has, by the date of the final amalgamation order, been largely redressed without amalgamation. The emergency situation of 2013 which, even according to the Central Government, required the emergent step of compulsory amalgamation has, by the time of the passing of the Central Government order, disappeared. Thus, the raison d tre for applying Section 396 of the Companies Act has, by the passage of time, itself disappeared. In fact, as on today, decrees/awards worth INR 3365 crore have been obtained against the defaulter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecute and defend legal proceedings. There is reference to NSEL having obtained decrees worth more than ₹ 1200 crores and injunctions against assets of defaulters valued at ₹ 5444.31 crores. The affidavit further states that FTIL is committed to funding NSEL for purposes of recovery from defaulters since the occurrence of payment crisis on the exchange platform 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, lends support to the reasoning in the impugned order that the NSEL, on its own, lacks financial as well as infrastructural capacity to affect any recoveries from the defaulters. The affidavit dated 4th July 2017 and the resolution dated 28th March 2016 is also indicative of the business realities of the situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital, and reserves is only to settle liabilities of certain stakeholders and creditors when the order is read as a whole, and given the fact that the businesses of the two companies were completely different. So far as achieving economy of scale and efficient administration is concerned, it is difficult to see how this would apply to the fact situation in this case where NSEL is admittedly a company which has stopped functioning as a commodities exchange at least with effect from July, 2013 with no hope of any revival. Thus, the consolidation of businesses spoken about does not exist as a matter of fact, as NSEL s business has come to a grinding halt, as has been observed by the FMC and the Central Government itself. Each one of these expressions, when read with the rest of the order, therefore, only shows that the sole object of the amalgamation order is very far from the high-sounding phrases used in the opening, and is really only to effect speedy recovery of dues of INR 5600 crore, which has been referred to in the letter of the FMC to the Secretary, Ministry of Corporate Affairs, dated 18.08.2014. This would be clear from a reading, in particular, of two paragraphs of the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der before passing the final order. However, it was argued on behalf of the respondents that the first and second grounds are, in reality, inferences drawn from facts which are already stated in the order and these inferences do not need to be stated in the draft order. We are afraid that this argument is incorrect inasmuch as grounds contained in reasons (a) and (b) are important grounds which have a vital bearing on the amalgamation in question. If these grounds were contained in the draft order, there is no doubt that the shareholders and creditors of FTIL, and FTIL itself would have had an opportunity to comment on the same. For example, the business realities of the case are facts known to FTIL; and NSEL, being FTIL s alter ego, is the subject matter of dispute in various suits that have been filed and are pending adjudication. FTIL could have responded giving reasons as to why NSEL is not its alter ego. Also, whether the amalgamation is, in fact, to restore or safeguard public confidence in forward contracts and exchanges is a subject matter on which FTIL, its shareholders and creditors, could have commented. Equally, whether NSEL s exchange was an essential and integral pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssentially means that two or more separate entities are getting merged to achieve the objectives of amalgamation. In the instant case, amalgamation is targeted to achieve its stated objects, essentially in public interest. By all intents and purposes, the way both the companies were being managed, owned and controlled, NSEL is the alter ego of FTIL and thus, the two companies have been practically one entity. All stakeholders were also looking at them as one entity. The amalgamation u/s. 396 of the Act only formalizes this practical reality in essential public interest. xxx xxx xxx 7.2.8. The FTIL has questioned the jurisdiction of the Central Government to decide on the question of fraud and claimed that it has to be proved beyond reasonable doubt by adducing necessary particulars; the Central Government is invoking section 396 of the Act in essential public interest for the merger of NSEL, which is an almost wholly-owned subsidiary of FTIL. The merger is not an adjudication on the alleged fraud. The merger is targeted to achieve its stated objectives for long term sustainability in the best interest of the stakeholders. (emphasis in origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corporate veil of the pre-amalgamation companies. The amalgamation order contradicts itself by then stating that NSEL is the alter ego of FTIL, and thus, the two companies are practically one entity. In any event, these paragraphs do not indicate as to how the alter ego argument impacts public interest. For all these reasons, therefore, neither reason (a) nor reason (b) ought to detain us any further. Reason (c) is, therefore, the only reason that really remains, as is contained in the letter of 18.08.2014 by the FMC to the Central Government. We have already seen that this reason, by itself, is the protection of the private interest of a group of investors/traders, as distinct from public interest. 59.4. It is important to note that under Section 396(4)(b), the Central Government may, after considering suggestions and objections from the stakeholders mentioned, make modifications in the draft order as may seem to it desirable in the light of such suggestions and objections. No modification has been made in the body of the Central Government order as finally made. If the Central Government had actually considered that each of these three reasons impact public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is mentioned is only the fact that public confidence has been shattered, as is reflected by the FMC order dated 17.12.2013. Secondly, the entire expression, which are an integral and essential part of Indian economy and financial system, by consolidating the businesses of NSEL and FTIL is no part even of this answer given, but a gloss given by the High Court itself relatable to this answer. Similarly, when it comes to reason (b), giving effect to business realities of the case contained in the answer to objections does not contain by consolidating the businesses of FTIL and NSEL , nor does it contain and preventing FTIL from distancing itself from NSEL, which is, even otherwise, its alter ego . On the contrary, the High Court itself mentions, in paragraph 355, that this is also not a case where the Central Government has, in fact, lifted the corporate veil, despite the alleged non-existence of the circumstances justifying lifting of such corporate veil , and further, this is not a case where the Central Government has lifted the corporate veil and sought to apportion any liability upon either NSEL or FTIL . For all these reasons, we find that no reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest or in the interest of depositors. This point is, in fact, highlighted in paragraph 34 of the judgment as follows: 34. The phrase good reasons in sub-section (1) of Section 45 is a term of wide amplitude and it will not be correct to restrict it only to the actions mentioned under sub-section (2) of Section 45 of the Act as is contended by the appellants. The provision is concerned with preparing a scheme of reconstruction or amalgamation which would become necessary where RBI is satisfied about the existence of any of the four grounds mentioned in Section 45(4). Apart from public interest and the interest of the banking system, which are provided in clauses (a) and (d) thereof, Section 45(4) provides for the necessary action in the interest of the depositors or with a view to secure proper management of the Bank which are clauses (b) and (c) in that sub- section. Precursor to the framing of the scheme is the imposition of the moratorium which is provided in sub- sections (1) and (2) of Section 45. Existence of court proceedings, mentioned in Section 45(2), would certainly be one of the good reasons to impose moratorium, but that certainly cannot be the only o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole. This judgment, on facts, merged a financially weak bank with a financially strong bank in the interest of the depositors of the financially weak bank. It is important to note that the business of the two merged entities is the same, as also Federal Bank s (i.e., the strong bank s) willingness to merge, being an unconditional offer to merge because it felt that post merger, it could have a significant presence in western Maharashtra and the Belgaum area of Karnataka, and could augment its credit disbursal to the agricultural sector. Also, since the interest of depositors is a separate head, based upon which the Reserve Bank of India may amalgamate two banking companies, it is clear that this reason alone will not go to public interest, which is a separate head contained in Section 45(4). It is in this context that the observation contained in paragraph 44 is made, namely: 44. Under Section 45 of the Act, the primary consideration is public interest. There is an underlying object of acting swiftly and decisively to protect the interests of depositors and ensure public confidence in the banking system. The emergent situation which warrants action with expedition c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest is involved. In this judgment, Mohinder Singh Gill (supra) was distinguished thus: 44. We are also of the view that the High Court has committed a grave error in taking the view that the order of the Board could be judged only on the basis of the reasons stated in the impugned order based on the report of Vigilance and not on the subsequent materials furnished by CBI. Possibly, the High Court had in mind the Constitution Bench judgment of this Court in Mohinder Singh Gill v. Chief Election Commr. [(1978) 1 SCC 405] 45. We are of the view that the decision-maker can always rely upon subsequent materials to support the decision already taken when larger public interest is involved. This Court in Madhyamic Shiksha Mandal, M.P. v. Abhilash Shiksha Prasar Samiti [(1998) 9 SCC 236] found no irregularity in placing reliance on a subsequent report to sustain the cancellation of the examination conducted where there were serious allegations of mass copying. The principle laid down in Mohinder Singh Gill case [(1978) 1 SCC 405] is not applicable where larger public interest is involved and in such situations, additional grounds can be looked into to exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l terms, is likely to dip, and/or loans granted are likely not to be repaid in time or at all as a result of an amalgamation, such members or creditors of the amalgamating company are equally entitled to be compensated for this economic loss as are the members and creditors of the amalgamated company, depending on the facts of each case. A reasonable construction must be given to Section 396. Also, the suggested construction by the respondents, as has been accepted by the impugned judgment, operates harshly and ridiculously, and being opposed to justice and reason, cannot possibly be adopted by this Court. It is clear that Section 396(3) refers to the economic loss that is to be borne by shareholders and members of both companies. 66. Thus, it is clear from a reading of Section 396(3), (3A), and (4) (aa) that every member or creditor of each of the companies before 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 original company. To the extent to which the interest or rights of such member or creditor are less than his interest or rights against the original company, pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole as Lord Anderson puts it. (at p. 882) (emphasis in original) 69. In Life Insurance Corporation of India v. Escorts Ltd. and Ors., (1986) 1 SCC 264, this Court dealt generally with the rights of shareholders as follows: 84. On an overall view of the several statutory provisions and judicial precedents to which we have referred we find that a shareholder has an undoubted interest in a company, an interest which is represented by his shareholding. Share is movable property, with all the attributes of such property. The rights of a shareholder are (i) to elect directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief 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 shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those shares were worth in the market on a particular day or an average taken within a certain period. What is important to note is that the market value of shares is market value of shares reflective of their economic value, being an interest measured by a sum of money, is not something that is completely alien to determining the rights of or interest of a shareholder in the transferor or transferee company, as the case may be. 72. In fact, the Government order dated 12.02.2016 itself reflects the net worth of NSEL as INR 8.86 crore from its balance sheet dated 31.03.2015, despite its capital being INR 60 crore, inasmuch as the total reserve and surplus is a negative figure of INR 51.54 crore. As against this, FTIL s balance sheet, as on 31.03.2015, discloses that for the same year, FTIL s net worth is INR 2779.94 crore. Also, FTIL has been paying dividends to its shareholders ranging from 1000% to 250% for the years 2007-2008 till 2015-2016. On the other hand, NSEL has never paid a single dividend ever since its inception. Post amalgamation, therefore, dividend payable to the shareholders of FTIL is bound to come down. Correspondingly, the marketable value of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay back the whole or some part of the INR 5600 crore owed to the alleged investors/traders by the 24 defaulters who are members of NSEL. This would certainly impact the economic value of shares held in FTIL as this is one factor that would, post amalgamation, depress the market value of shares held by such shareholder, and would also impact the dividend payable on such shares post amalgamation. 74. The impugned judgment has also held that no material was produced before the Court to show that share prices would in fact plummet post-amalgamation. This is despite the fact that the impugned judgment itself refers to the fact that since the publication of the draft order on 21.10.2014, the share value which was INR 211.10, dropped to INR 174.55 ten days later. The Division Bench then goes on to state that it is not possible to hold that any case of serious erosion in economic value has at all been made out, inasmuch as by 21.10.2014, when the draft order of amalgamation was made available to companies, the news of collapse of NSEL s exchange was already in public domain. This is wholly incorrect for the reason that the news of collapse took place in July, 2014, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soever is made by the prescribed authority (and on the facts here, the prescribed authority has not, in fact, stated that for the reasons given by it, compensation awarded to FTIL, its shareholders and creditors is nil), no person can be aggrieved by an order which does not assess any compensation, which may be interfered with by the Appellate Tribunal which must then assess the compensation for itself. The statute clearly entitles such shareholders and creditors to have compensation assessed first by the prescribed authority and then by the appellate authority. This Court, in Institute of Chartered Accountants of India v. L.K. Ratna and Ors., [1986] 3 SCR 1049, held that the defect in observing the rules of natural justice in the trial administrative body cannot be cured by observing such rules of natural justice in the appellate body. It was held: It is then urged by learned counsel for the appellant that the provision of an appeal under Section 22-A of the Act is a complete safeguard against any insufficiency in the original proceeding before the Council, and it is not mandatory that the member should be heard by the Council before it proceeds to record its findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justice does not mean perfect justice. As a general rule, at all events, I hold that a failure of natural justice in the trial body cannot be cured by a sufficiency of natural justice in an appellate body. The view taken by Megarry, J. was followed by the Ontario High Court in Canada in Re Cardinal and Board of Commissioners of Police of City of Cornwall, [(1974) 42 D.L.R. (3d) 323]. The Supreme Court of New Zealand was similarly inclined in Wislang v. Medical Practitioners Disciplinary Committee, [(1974) 1 N.Z.L.R. 29] and so was the Court of Appeal of New Zealand in Reid v. Rowley [(1977) 2 N.Z.L.R. 472]. (at pp. 1065-1066) This judgment was the subject matter of comment in Union Carbide Corporation v. Union of India, [1991] Supp (1) SCR 251, where this Court held, following the judgment in Charan Lal Sahu v. Union of India, (1990) 1 SCC 613, that non-compliance with the obligation to issue notices to persons effected by the Bhopal gas leak did not, for this reason alone, vitiate the settlement that was entered into with Union Carbide by the Government on their behalf. This Court, in passing, commented that the principle laid down in Lear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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