In what would be only the second instance since the Satyam Computers scam broke out in 2009, the government is considering superseding the board of Financial Technologies India Limited (FTIL), the listed parent firm of scandal-tainted National Spot Exchange Limited (NSEL), according to a report in the Indian Express this morning which quoted sources.
FTIL is promoted by Jignesh Shah, who was arrested and later granted bail in the Rs 5,600 crore NSEL case, in which the spot exchange was, in August 2013, discovered to have violated regulations by facilitating forward trades without ensuring adequate underlying collateral. The trades initially fetched solid returns for investors but later turned out be a Ponzi scheme, according to the Mumbai police.
Shah owns 45.63 percent in FTIL, which in turn owns almost 100 percent stake in NSEL. However, Shah has denied wrongdoing, saying he was unaware of goings-on at the spot exchange and put the blame on its erstwhile management.
The regulator, Forward Markets Commission, has appointed its own nominees on the NSEL board and ordered FTIL to shed its stakes in any exchange it promoted: three major exchanges it anchored were commodity futures exchange MCX, stock exchange MCX-SX and the NSEL spot exchange. Before that, the Arvind Mayaram committee had recommended a management takeover of all three exchanges.
However, both the merger as well as supersession of the board could run into legal issues, considering FTIL is a listed entity and forcing it to essentially assume all of NSEL’s liabilities could be considered detrimental to their interests.
In a discussion with the CNBC-TV18’s Menaka Doshi in May this year, Shuva Mundal of AZB, laywer for the NSEL Investor Forum, said that the legal basis for supersession of FTIL’s board would depend on whether it is proved if FTIL was actively involved in perpetrating the fraud. “If you ask me at this stage there are not enough facts out there to demonstrate that,” he conceded.
While the above discussion took place several months ago, not much has moved in the case and while a criminal investigation is on by the CBI and Mumbai police as well as a court case is being heard, wrongdoing on Shah’s or FTIL’s part has not been proved.
A similar point was raised H Jayesh, another lawyer, who said such a takeover would hinge on proving the fact that FTIL set up NSEL with the sole intention of perpetrating fraud.
“That is the major intent out there we are talking about. If not so then on what basis are we talking about going after the assets of FTIL,” he said, adding that even if a few directors of FTIL, Shah for instance, were proved to have the intent of committing fraud, “attributing the intent to a corporate entity as a whole was a different thing.”
Shah’s legal defence team has also rubbished parallels between Satyam and FTIL. In the former case, its founder Ramalinga Raju had confessed to inflating cash and profits at the firm for years, while in the case of FTIL, “there is the strongest possible denial of any wrongdoing,” the defence laywers said. “You cannot penalise the holding company’s shareholders for a mishap at one of its subsidiaries.”
Some lawyers also insisted that there was a bit more needed to “lift the corporate veil”, where key shareholders, who are normally not held liable for misgivings on the part of illegal activities company, can be prosecuted.
“If there are sufficient assets available [to recover money lost in the NSEL fraud] there is no question of lifting the veil and going after the assets of FTIL,” said lawyer Akila Agarwal of Amarchand, who advised the government during the Satyam scam, pointing to the fact that the government has already attached assets worth thousands of crores of key NSEL borrowers to try and recover money. “The question of lifting the veil arises only when there are insufficient assets on the primary people concerned in NSEL.”