Why Impose Section 397 on FTIL?Ill-Motivated Suppression
It is unlawful to takeover and regulate the affairs of a Company based on erroneous assumptions after passing of almost 20 months without ascertaining ‘oppression’ and ‘mismanagement’ under Sec 397 & 398 of Companies Act, 1956. It also invoked Sections 401, 402 and 408 to approach the Company Law Board to take over or dissolve FTIL.
The Law Ministry in its opinion dated June 4, 2014, clarified that the said Sections are not applicable to FTIL.
The deputy legal advisor in the Ministry of Law and Justice shared his opinion on the matter by saying, “Section 397 might not apply as NSEL which is (almost) wholly owned subsidiary of FTIL and NSEL’s majority shareholders (i.e. FTIL) have never acted in any manner which could be termed as ‘oppressive’ against the minority shareholder of the company. Section 398 might also not be applicable as fraud and acts and mismanagements were allegedly done by the key officials and employees of NSEL and not FTIL and different statutory auditors have issued clearances to them.”
NSEL, which defaulted on the payments, also made necessary changes in its management and board after the crisis came to light. Attributing alleged irregularities at NSEL, the MCA seeks to replace the reconstituted Board of FTIL, especially when no wrongdoing is found. This is seen as a clear attempt to suppress / destroy the evidence against the brokers and the FMC.
Impact on Shareholders
The forced merger will also have an adverse impact on FTIL’s market capitalization. It may erode its net-worth by buckling the unproven and sub-judice liabilities of more than Rs.5,600crore of NSEL onto FTIL. This will directly harm thousands of FTIL shareholders along with hundreds of its employees, creditors, vendors and other stakeholders. Why should these shareholders be forced to pay Rs.5,600crore of NSEL’s defaulting brokers? In fact, even if this merger were to be executed, it would be nothing more than a farce, since FTIL cash reserves only amount to Rs.2000 crore.
The newly-formed NCLT rejected the Union corporate affairs ministry's plea to appoint two government nominees on the (FTIL) board of directors and instead gave a direction to constitute a five-member committee to oversee the regulatory sale and investments by FTIL.
The government had filed a petition seeking further interim relief by way of appointing government nominees on the FTIL board. FTIL opposed this.
The committee will comprise the managing director of FTIL, two independent directors of FTIL, a retired judge of the Supreme Court and a NCLT nominee.
NCLT said the committee shall have the power to decide on sale of investments held by FTIL in compliance with any order/direction passed by any regulatory or statutory authority in India or abroad, as and when such sale is proposed by the management of FTIL.
With this order, FTIL can invest surplus funds or alter the investment of surplus funds, in consultation with the committee. Working capital requirements of FTIL subsidiaries will also be coordinated through the committee. Any fund generated from the sale will be deposited in a fixed deposit account. FTIL will need NCLT's permission to use the funds.
It also directed that the ministry and FTIL to give nominations within two weeks. Both FTIL and the ministry may approach NCLT if they find decision of the committee not favorable.
In June 2015, the CLB had restricted FTIL from creating third party rights on its assets and investments. The NCLT order on 16 June, 2016, modified this.