Millennium Post

In wake of Rs 5,600-crore NSEL fraud, Govt mulls revamp of FTIL board

The Corporate Affairs Ministry, which last week ordered merger of National Spot Exchange (NSEL) with FTIL, will also soon begin an exercise to re-assess the compensation amounts due to be paid to over 13,000 investors at NSEL.

Sources said that the government is looking at the possibility of replacing the FTIL board, either fully or partially, to fast-track the recovery process and the subsequent repayment to the aggrieved investors. These proposals are being considered after taking into account suggestions made by the commodity sector regulator Forward Markets Commission (FMC) and other government departments, sources said, but did not share further details.

This is the first time that the Ministry has invoked a clause in the Companies Act for a forced merger in the private sector due to ‘public interest’, while a takeover of FTIL board, if it happens, would be the first such development since the Satyam case in 2009. The scandal-hit IT firm was later sold to Tech Mahindra through a government-monitored auction.

Post-merger, FTIL would take over all the liabilities of NSEL, including payments due to be paid to investors and others to help in repayment process. Soon after the government's amalgamation order on October 21, FTIL had said in a brief statement that it ‘is taking appropriate steps in the matter in consultation with the legal Counsel of the company’.

FTIL did not comment on the proposal for making changes to its board. The merger of NSEL with FTIL will itself fructify after taking into account submissions and objections, if any, by the shareholders and creditors of the two firms. For assessing the compensation amount to be given to affected investors, a chartered accountant entity might be appointed soon by the government.

Sources close to the FTIL group said that the present matter was different from the Satyam case on various counts. The erstwhile IT firm's promoter Ramalinga Raju had confessed to the regulator of his wrongdoings, while Jignesh Shah has been consistently denying any wrongdoing and the matter of his culpability was sub-judice. The Ministry's decision comes more than a year after the payment scam at NSEL came into light in July 2013. The move has been initiated taking into consideration "essential public interest" as the exchange is ‘not left with any viable, sustainable business while FTIL has necessary resources to facilitate speedy recovery of dues’.

So far, the crisis-hit spot exchange has managed to recover only little over Rs 360 crore dues from defaulters, a part of which has been disbursed and the rest is in an escrow account. Funds worth about Rs 5,300 crore are yet to be recovered for subsequent payment to affected investors.
In its draft order for the merger, the MCA said that the leveraged combined assets, capital and reserves for efficient administration and satisfactory settlement of rights and liabilities of stakeholders and creditors of NSEL would be in ‘essential public interest’. ‘Subject to provisions of law relating to limitation, any suit, prosecution, appeal or other legal proceedings which may be required to be filed against the dissolved company (NSEL) will be filed against the transferee company (FTIL),’ the order said.

A charge-sheet has been filed by the Economic Offences Wing of the Mumbai Police against Jignesh Shah - the founder and managing director of FTIL. Further, FTIL and related entities have come under the scanner of multiple agencies following the NSEL fiasco.

Shah also had to spend time in jail before he was granted bail, even as he and FTIL Group have denied any wrongdoing on their part in the NSEL case and have put the blame on former top executives of the spot exchange, including its then CEO Anjani Sinha.

Sources close to FTIL said it might be wrong to take Satyam-like steps in NSEL case and the question of FTIL being held liable does not arise. In Satyam, promoters had confessed to siphoning off funds, while money of clients in the NSEL case has been traced to 22 defaulters and not to NSEL, Shah or FTIL. They claimed that no major irregularities were found in Registrar of Companies inspection of FTIL books, neither the auditor found any discrepancies in FTIL accounts.

To further their argument against a government-initiated takeover or changes to FTIL board, they said a fraud was perpetrated at Satyam by the promoters and the only remedy was change in management, whereas NSEL's was a case of 'payment and settlement defaults' and the remedy lies in chasing the defaulters and ensuring recovery of clients' money from them.
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