MOONS TECHNOLOGIES LTD. (FORMERLY KNOWN AS FINANCIAL TECHNOLOGIES INDIA LTD.) & ORS. versus UNION OF INDIA
[2019] 8 S.C.R. 26, Supreme Court of India, 2019
Outcome: Disposed off
Segment: Facts
Court, pending acceptance by the
High Court, even without using the financial resources of FTIL as an
amalgamated company. What is, therefore, important to note is that what
was emergent, and therefore, essential, even according to the FMC and
the Government in 2013-2014, has been largely redressed in 2016, by
the time the amalgamation order was made. Also, the Central Government
order does not apply its mind to the essentiality aspect of Section 396 at
all. In fact, in several places, it refers to “essential public interest” as if
“essential” goes with “public interest” instead of being a separate and
distinct condition precedent to the exercise of power under Section 396.
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On facts, therefore, it is clear that the essentiality test, which is the
condition precedent to the applicable to Section 396, cannot be said to
have been satisfied.
57. During the course of proceedings before the Division Bench
of the Bombay High Court, FTIL tendered an affidavit dated 04.07.2017,
to place on record its resolution dated 28.03.2016 to infuse a sum of upto
INR 50 crore for each of the financial years 2016-2017 to 2018-2019 to
support NSEL to recover dues from defaulters, defend various cases,
and continue taking necessary legal action against various parties to
recover amounts from defaulters. The Division Bench refers to this
affidavit as follows:
“293] At the stage, when the final hearing in these petitions had
considerably advanced, FTIL, tendered an affidavit dated 4th July
2017 to place on record its resolution dated 28th March 2016 to
infuse a sum up to Rs. 50 crores for each of the financial years,
i.e., FY 2016-17 to FY 2018-19, to support 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 situation.
The
affidavit also states that up to now FTIL has infused approximately
Rs. 109 crores with NSEL, mainly to prosecute and defend legal
proceedings. There is reference to NSEL having obtained decrees
worth more than Rs. 1200 crores and injunctions against assets
of defaulters valued at Rs. 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
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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 situation, which is incidentally yet another ground
in the impugned order.”
            (emphasis in original)
58. The High Court comment on the aforesaid affidavit is not
correct.  The affidavit proceeds on the footing that since the activities of
NSEL have come to a grinding halt, FTIL would help NSEL to effect
recoveries from defaulters. The affidavit nowhere states that there is no
problem in the functioning of NSEL, or that NSEL has or does not have
the necessary wherewithal to effect recovery from defaulters. Even in
the hearing before us, FTIL has submitted an affidavit-cum-undertaking
dated 11.04.2019, stating that it will continue to infuse funds into NSEL
so that recovery of dues from defaulters does not, in any manner, get
stymied. We take this affidavit and undertaking on record, and hold FTIL
to this undertaking made before this Court.
59. When it comes to “public interest” as opposed to the “private
interest” of investors/traders, who
have not been paid, the amalgamation
order dated 12.02.2016 makes interesting reading. The satisfaction as to
public interest is stated in the very beginning of the order as follows:
“Whereas the Central Government is satisfied that to leverage
combined assets, capital and reserves, achieve economy of scale,
efficient administration, gainful settlement of rights and liabilities
of stakeholders and creditors and to consolidate businesses, ensure
coordination in policy, it is essential in the public interest…….”
What is stated in the opening is repeated in paragraph 2.14.2 as
follows:
“2.14.2 The Central Government also carefully considered the
proposal received from FMC and DEA and was of the considered
opinion that to leverage combined assets, capital and reserves for
efficient administration and satisfactory settlement of rights and
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liabilities of stakeholders and creditors of NSEL, it would be in
essential public interest to amalgamate NSEL with FTIL.”
It will be seen that all the expressions used in relation to “public
interest” have relation only to the businesses of the two companies that
are sought to be amalgamated. What is important to note is that there is
no interest of the general public as opposed to the businesses of the two
companies that are referred to. It is important to notice that the leveraging
of combined assets, capital, 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
order, namely, paragraphs 2.13.2 and 2.13.3, which read as follows:
“2.13.2. Thus, it would be observed from above that NSEL is not
having the resources, financial or human, or the organizational
capability to successfully recover the dues to the investors pending
for over a year. Further, NSEL is not left with any viable,
sustainable business while FTIL has the necessary resources to
facilitate speedy recovery of dues.
2.13.3. In the above background, a proposal had been received
from FMC, vide letter dated 18-08-2014, proposing the merger of
NSEL with FTIL by the Central Government under the provisions
of Section 396 of the Companies Act, 1956. The proposal has
been supported by the Department of Economic Affairs (DEA),
Ministry of Finance, FMC has proposed the merger/amalgamation
of NSEL with FTIL in essential public interest so that the human/
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financial resources of FTIL are also directed towards facilitating
speedy recovery of dues from the defaulters at NSEL and the
FTIL takes responsibility to resolve the payment crisis at NSEL
at the earliest.”
59.1. However, the Central Government supported this order on
the ground that it is made in public interest essentially on three grounds,
which are repeatedly referred to by the impugned judgment. The three
grounds as stated by the impugned judgment are as follows:
“269. …… (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 distancing itself from
NSEL, which is, even otherwise, its alter ego; and (c) Facilitating
NSEL in recovering dues from defaulters by pooling human and
financial resources of FTIL and NSEL. Further, we are also
satisfied that each of these three grounds constitute a facet of
public interest in the context of the provisions in Section 396.
……”
59.2. It is important to note that the first and second grounds
mentioned by the High Court are not contained in the draft order of
amalgamation. Had they been so contained, objections and suggestions
would have been made by all stakeholders, which the Central Government
would then have been bound to consider 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
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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 part of the Indian economy and financial
system, and whether this defunct business could be consolidated so as
to impact the economy are all matters for comment by FTIL and its
shareholders and creditors. For all these reasons, we cannot accede to
the respondents’ arguments on this score. On this ground alone, even
assuming that these two grounds obtained and can be culled out from
the final order, not being contained in the draft order, the said grounds
would be in breach of Section 396(3) and (4), and therefore, cannot be
looked at to support the order.
59.3. It is important to note that grounds (a) and (b) are both
culled out in answer to objections raised by FTIL. The precise objection
raised and the answer given are quoted hereinbelow:
“7.2.1. FTIL has challenged the background and reasons for
the amalgamation as the power under section 396 of the Act
has been used only in case of Government companies alone.
This argument does not derogate from the scope of the statutory
provisions. The statutory provisions of section 396 of the Act are
being invoked in essential public interest to safeguard the interest
of all stakeholders in the captioned company.
The present status
and composition of the Boards of FTIL and NSEL have been
noted. However, the fact that the Boards had not acted with an
independent mind to collect information and put the system under
a robust technology is borne out of the simple fact that the Show
Cause Notice dated 27-04-2012 issued by the Department of
Consumer Affairs based on analysis of trade data by the then
Forward Market Commission had given an alarming picture of
the state of affairs of NSEL. The public interest driving the merger
are set out in the business realities of the case, it is noted from the
facts of the case and the recommendations of FMC as well as its
order dated 17-12-2013 which throw ample light to the grave
shattering of the public  confidence and the purpose of establishing
commodity exchange has been defeated.”
xxx xxx xxx
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“7.2.6. FTIL and NSEL have distinct and separate objects
and nature of operations and completely disparate and
unconnected objects, and hence there is no synergy, efficient
administration, consolidation of business or co-ordination in
policy to be gained by the forced amalgamation; the argument
runs contrary to the concept of merger which essentially 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 original)
It will be noticed that the objection raised in paragraph 7.2.1 is
that Section 396 can be used in the case of Government companies
alone, whereas the answer given is that this cannot be so, given the
business realities of the case and the FMC order of 17.12.2013 “which
throw ample light to the grave shattering of public confidence and the
purpose of establishing Commodity Exchange has been defeated”. First
and foremost, what is important to notice is that the “business realities”
of the case are what is contained in “the recommendations of the FMC”.
We have seen that these recommendations are in the form of a letter
dated 18.08.2014, in which the “business reality” is the fact that dues of
INR 5600 crore have to be paid, and that NSEL does not have the
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wherewithal to do so. Thus, its parent company’s financial resources
ought to be used to effect such payment. This “business reality”, therefore,
speaks only of the private interest of the investors/traders who have
been allegedly duped (which fact will only be established in suits filed by
them in 2014), and nothing beyond (which would show some vestige of
public interest). Equally, the grave shattering of public confidence and
purpose of establishing commodity exchanges having been defeated,
according to the Central Government, is a gloss on the FMC order dated
17.12.2013. If this were so, one would have expected a resuscitation or
revival of the commodities exchange of NSEL, which could have been
achieved by takeover of its management. It is difficult to imagine that
grave shattering of public confidence by the permanent shutting down
of the commodities exchange of the NSEL would be remedied only by
facilitating the paying of dues to certain allegedly duped investors/traders,
which fact will be proved or disproved in suits filed by them which are
pending adjudication in the Bombay High Court. In any case, this reason
is wholly irrelevant as an answer to the objection raised by FTIL which,
as we have seen, is an objection stating that the Section applies to
Government companies alone. Also, had FTIL made no such objection,
no such answer would have been forthcoming. As far as paragraphs
7.2.6 and 7.2.8 of the order are concerned, what is admitted in the
order
itself, is that there is no “adjudication” on the “fraud” in the facts of the
present case, and thus, not an exercise of lifting of 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
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as finally made. If the Central Government had actually considered that
each of these three reasons impact public interest, it would have explicitly
said so after suggestions and objections were made by the various
stakeholders. The fact that the Central Government has not amended
the body of the final order is of great significance – it is only the original
reasons given in the draft order that continue as such in the final order
which, as we have seen, are not in furtherance of public interest at all.
Reasons (a) and (b), part of which is culled out from answers to objections
and suggestions given in the final order, is only given separately by the
Central Government after the amalgamation order to show that the
principles of natural justice as laid down by sub-section (4) of Section
396 have, in fact, been followed. This becomes clear from paragraphs
6.3 and 7 of the final order, which read as follows:
“6.3. The Central Government received in writing and through
email various objections / suggestions from various classes of
stakeholders including the shareholders, creditors, and all other
interested parties claiming that monies are recoverable from the
proceedings arising out of the business of the dissolved company.
7. Dealing with objections, suggestions and submissions of FTIL,
NSEL and other parties – The Parties herein have made various
objections, suggestions and submissions on the proposed
amalgamation u/s.
396 of the Act on the order dated 21-10-2014
in Draft form issued by the Central Government. The said
objections, suggestions and submissions were made during the
course of hearing and written submissions (physically and
electronically) received by the Central Government on various
dates. The said objections, suggestions and submissions made by
each of the parties are dealt in the manner herein under.”
59.5. So far, we have gone by the Central Government order as it
stands. The Bombay High Court, in stating reasons (a), (b), and (c) as
grounds of public interest, has gone much further than even the answer
given to the objections that are contained in the order itself. “Restoring/
safeguarding public confidence in forward contracts and exchanges,
which are an integral and essential part of the Indian economy and
financial system, by consolidating the businesses of NSEL and FTIL,” is
not contained in the answer given to objections in the order. First and
foremost, restoring public confidence is no part of the order. What is
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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 body of persons properly instructed in law could
possibly arrive at the conclusion that the impugned order has been made
in public interest.
60. The learned Senior Advocates appearing on behalf of the
respondents has placed great reliance on the judgment in Ganesh Bank
(supra). In this judgment,
the Appellant Bank was amalgamated with
Federal Bank under Section 45 of the Banking Regulation Act, 1949.
Federal Bank was selected from out of several other banks by the
Reserve Bank of India as its offer to amalgamate with the Appellant
Bank was unconditional, Federal Bank undertaking to make full payment
to depositors.
61. The judgment in Ganesh Bank (supra) was faced with the
amalgamation of the Appellant Bank after a moratorium had been
imposed on it as it was found that its position was very weak, having
incurred huge losses in the financial year 2004-05. Section 45 of the
Banking Regulation Act reads as follows:
“45. Power of Reserve Bank to apply to Central
Government for suspension of business by a banking
company and to prepare scheme of reconstitution or
amalgamation.—(1) Notwithstanding anything contained in the
foregoing provisions of this Part or in any other law or any
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agreement or other instrument, for the time being in force, where
it appears to the Reserve Bank that there is good reason so to do,
the Reserve Bank may apply to the Central Government for an
order of moratorium in respect of a banking company.
xxx xxx xxx
(4) During the period of moratorium, if the Reserve Bank is satisfied
that—
(a) in the public interest; or
(b) in the interests of the depositors; or
(c) in order to secure the proper management of the banking
company; or
(d) in the interests of the banking system of the country as a
whole,—
it is necessary so to do, the Reserve Bank may prepare a
scheme—
(i) for the reconstruction of the banking company, or
(ii) for the amalgamation of the banking company with any
other banking institution (in this section referred to as “the
transferee bank”).
     xxx xxx xxx”
It is important to note that unlike Section 396 of the Companies
Act, the satisfaction of the Reserve Bank of India can be on any one of
four grounds. Such satisfaction may be in the public interest 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
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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 one. Considering that object
of the Act is protection of the interest of the depositors, such an
interpretation of the concept of “good reasons” will have to be
adopted, and not a narrow one.”
The judgment then goes on to state:
“39. Now, as far as the first two questions of non-consideration
of reconstruction and proposing merger with Federal Bank are
concerned, RBI has noted that the Bank was in difficulties from
1990 and particularly from December 2003 when it was placed
under monthly monitoring. RBI in its application for moratorium
to the Central Government dated 4-1-2006 had clearly stated that
during the discussion with the appellant Bank, major shareholders
and Directors had shown total reluctance to merge into the stronger
bank. In view thereof, it was imperative that immediate
arrangement to protect the interest of the depositors was to be
made through its merger with a bank under Section 45 of the
Act.
RBI had, therefore, made an effort and called upon the appellant
Bank, that if possible, to explore the possibility of merger with
another stronger bank. It had also made an effort to impress that
there should be infusion of fresh capital. That was not coming.
There could be a reconstruction by bringing in more money or by
narrowing the size of the appellant Bank which did not appear to
be feasible. The only option left was that of amalgamation.”
Thus, two features of Ganesh Bank (supra) distinguish the said
case from the facts of the present case. First, that under Section 45 of
the Banking Regulation Act, the interest of the depositors is to be looked
at; and it was this reason that led to the amalgamation. Secondly, this
Court found that after exploring other options, the only option left was
that of amalgamation.
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62. In point of fact, the contrast between Section 45(4) of the
Banking Regulation Act and Section 396 of the Companies Act becomes
important. Under Section 45(4)(b) and (c) of the Banking Regulation
Act, the satisfaction of the Reserve Bank of India for preparing a scheme
of amalgamation can be in the interest of the depositors of a particular
bank or in order to secure the proper management of a particular banking
company. This must be contrasted with clauses (a) and (d) of Section
45(4), which speak of public interest and the interest of the banking
system of the country as a whole. 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 cannot be lost sight of while
deciding the legality of the action.”
As we have already seen, the “emergent situation” which obtained
in 2013 was no longer there in 2016 when the final order of amalgamation
was passed in the present case.
63. Valiant attempts have been made by counsel in the High Court
as well as counsel in this Court to support the order on grounds which
are outside the order, stating that such grounds make it clear that in any
case, the Government order has been made in public interest. The
celebrated passage in Mohinder Singh Gill (supra) states that:
“8. The second equally relevant matter is that when a statutory
functionary makes an order based on certain grounds, its validity
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must be judged by the reasons so mentioned and cannot be
supplemented by fresh reasons in the shape of affidavit or
otherwise. Otherwise, an order bad in the beginning may, by the
time it comes to Court on account of a challenge, get validated by
additional grounds later brought out. We may here draw attention
to the observations of Bose, J. in Gordhandas Bhanji [Commr.
of Police, Bombay v. Gordhandas Bhanji, AIR 1952 SC 16] :
“Public orders, publicly made, in exercise of a statutory
authority cannot be construed in the light of explanations
subsequently given by the officer making the order of what he
meant, or of what was in his mind, or what he intended to do.
Public orders made by public authorities are meant to have
public effect and are intended to affect the actings and conduct
of those to whom they are addressed and must be construed
objectively with reference to the language used in the order
itself.”
Orders are not like old wine becoming better as they grow
older.”
We are of the view that 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.
64. However, learned Senior Advocates on behalf of the
respondents have cited Chairman, All India Railway Recruitment
Board and Anr. v. K. Shyam Kumar and Ors., (2010) 6
SCC 614,
which, according to them, renders the judgment in Mohinder Singh
Gill (supra) inapplicable where larger public 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]
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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
examine the validity of an order. The finding recorded by the High
Court that the report of CBI cannot be looked into to examine the
validity of the order dated 4-6-2004, cannot be sustained.”
It will be seen that there is no broad proposition that the case of
Mohinder Singh Gill (supra) will not apply where larger public interest
is involved. It is only subsequent materials, i.e., materials in the form of
facts that have taken place after the order in question is passed, that can
be looked at in the larger public interest, in order to support an
administrative order. To the same effect is the judgment in PRP Exports
and Ors. v. Chief Secretary, Government of Tamil Nadu and Ors.,
(2014) 13 SCC 692 [at paragraph 8]. It is nobody’s case that there are
any materials or facts subsequent to the
passing of the final order of the
Central Government that have impacted the public interest, and which,
therefore, need to be looked at. On facts, therefore, the two judgments
cited on behalf of the respondents have no application. Thus, it is clear
that no reasonable body of persons properly instructed in law could
possibly hold, on the facts of this case, that compulsory amalgamation
between FTIL and NSEL would be in public interest.
65. Section 396(3) speaks of a shareholder’s or a creditor’s interest
in or rights against the company resulting from an amalgamation order.
Such “interest in” or “rights against” obviously refers to real and
substantive rights, as opposed to rights that are only in form. A shareholder
or creditor gets effected by an amalgamation order if the value of his
share gets depleted as a result of the amalgamation and if dividends that
have been paid to him are likely to come down as a result of the
amalgamation. Likewise, a creditor of a solvent company is directly
effected by an amalgamation by which the amount loaned by such
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creditor becomes, as a result of the amalgamation, less likely to be paid
back in time, than if the amalgamation did not take place. Such rights
and interests of members and creditors are substantive rights which,
when effected by the amalgamation, lead to compensation having to be
paid. Every shareholder of a company and indeed, every creditor of a
company, is concerned only with the “economic value” of his share or
the loan granted to a company, as the case may be. The moment the
share value, in real 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, post amalgamation, he shall be entitled to compensation
which is to be assessed. Post assessment, if such member or creditor is
aggrieved, he may prefer an appeal to the appellate authority under sub-
section (3A). Under sub-section (4)(aa), no order of amalgamation can
be made unless the time for preferring an appeal under sub-section (3A)
has expired, or where any such appeal has been preferred, the appeal
has been finally disposed of.
67. The learned counsel on behalf of the appellant has argued
that the assessment order dated 01.04.2015, passed by the Joint Director
(Accounts), does not reflect any compensation in favour of the
shareholders or creditors of FTIL. According to the learned counsel, it is
clear that if a company with low net worth (NSEL) is amalgamated with
a company with high positive net worth (FTIL), both the shareholders
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and the creditors of FTIL will be directly impacted as the economic
value of the shares will plummet, and the creditors of FTIL, which is a
positive net worth company, may have to wait for a long time before
recovery of debts owed to them once the company is amalgamated with
the negative net worth company. In short, the creditors of FTIL will be
put on par with the creditors of NSEL, which will result in the creditors
of FTIL either being paid back their debts much later in point of time, or
not at all. To this argument, the answer of the Union of India, which has
found favour with the Division Bench of the Bombay High Court, is that
“economic value” forms no part of Section 396. So long as the
shareholders of FTIL continued to have the same number of shares, it
matters not whether their share values plummet post amalgamation.
68. In Bacha F. Guzdar (supra), this Court held that though a
shareholder acquires no right in the assets of a company as the
company itself is the owner of such assets, yet a shareholder certainly
has the right to dividends and the right to participate in the assets of the
company which would be left over after winding up. The Court held:
“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 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
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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 share in the surplus on winding up. ……”
On the facts of the present case, we are directly concerned with
points (iii) and (vii). It has been argued that the profits of the company
post-amalgamation will obviously come down, and dividends payable to
shareholders will consequently either come down or be wiped out if the
low net worth of NSEL is taken into account post amalgamation, together
with potential liabilities of the amalgamated company, which may have
to be paid in the near future. Secondly, if the amalgamated company is
wound up, the amount that is payable to the shareholders
post-amalgamation will be much less, if at all anything is to be paid, than
pre-amalgamation.
70. In fact, in Commissioner of Income Tax (Central)
Calcutta v. Standard Vacuum Oil Co., [1966] 2 SCR 367, this Court
held:
“ …… A share is not a sum of money: it represents an interest
measured by a sum of money and made up of diverse rights
contained in the contract evidenced by the articles of association
of the Company. ……”
    (at p. 374)
71. In Miheer H. Mafatlal v.
Mafatlal Industries Ltd., (1997)
1 SCC 579, in the context of a voluntary amalgamation made under
Sections 391 to 394 of the Companies Act, this Court went into share
valuation. This Court held:
“40. …… It must at once be stated that valuation of shares is a
technical and complex problem which can be appropriately left to
the consideration of experts in the field of accountancy. Pennington
in his Principles of Company Law mentions four factors which
had to be kept in mind in the valuation of shares:
      “(1) Capital Cover,
        (2) Yield,
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        (3) Earning Capacity, and
        (4) Marketability.
For arriving at the fair value of share, three well-known methods
are applied:
(1) The manageable profit-basis method (the Earning Per Share
Method)
(2) The networth method or the break value method, and
(3) The market value method.”
What is clear from the various methods of valuation of shares,
when it comes to such valuation qua the transferor and transferee
company, is that the market value method is one method in which shares
can be valued so that their equivalent can then be provided for in the
amalgamated company. This would be nothing other than what 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 such shares will also fall.
73. The impugned Division Bench judgment has incorrectly held
that the economic value of shares cannot be taken into account. In fact,
from the Director’s Report of NSEL dated 20.07.2015, it is specifically
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stated under the caption, “(vi) civil suits / complaints / writs / public
interest litigation” that:
“xxx xxx xxx
c) The Company received a legal opinion to the effect that the
Company is not liable for payment under the provisions of SGF in
the bye-laws. Further in case of e-Series contract related
transactions, no major infirmity in underlying physical stock was
observed.  Therefore, at this stage and in the opinion of the
Management of the Company, relying upon the legal advices, and
as per the provisions of bye-laws of the exchange there are no
direct ascertainable financial claims against the company. The
Company may be exposed to liabilities in case of any adverse
outcome of these investigations / enquiries or legal cases or any
other investigations / enquires or suits which may arise at a later
date.”
This is further clarified in the consolidated financial statement
made for the financial year 2014-2015 as follows:
“Risk of un-identified financial irregularities
In view of the specific scope of the forensic audits and the
limitations in the forensic audits and investigations, there is
inherent a risk that material errors, fraud and other illegal acts
may exist that could remain undetected.
Risk of adverse outcome of investigation/enquiry by law
enforcement agencies
Several agencies such as the Police (EOW), Ministry of
Corporate Affairs (MCrA), Enforcement Directorate (ED), CBI
and the Income Tax Department etc. are currently investigating /
enquiring the extent of alleged irregularities and any breach of
law.  The matters are also sub judice before various forums
including the Hon’ble Mumbai High Court. The Company may be
exposed to liabilities in case of any adverse outcome of these
investigations or any other investigations which may arise at a
later date.”
From the Director’s Report and consolidated financial statements
of NSEL, it becomes clear that the company may be exposed to
liabilities in case of any adverse outcome in any of the proceedings that
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may be pending, as a result of which, it may have 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.e., over two months before the publication of the draft
order. It is well known that the stock market is extremely sensitive to the
slightest event that may render a company less profitable. Over two
months
is too long a period to relate a share value of INR 211.10
drastically falling to INR 174.55. On the other hand, it is obvious that the
publication of the draft order on 21.10.2014 had the impact of the share
price reducing by a substantial amount, ten days later. In fact, a
reference to the share prices of NSEL furnished by the learned
Additional Solicitor General makes it clear that the moment the final
amalgamation order dated 12.02.2016 was publicised, the share price
fell from INR 89.90 on 12.02.2016 to INR 73.90 on 24.02.2016 and
further to INR 73.10 on 29.02.2016. Incidentally, the High Court realised
this, and finally incorrectly concludes, “there is thus substantial
compliance with the provisions of Section 396(3).” Given the fact that
the assessment order dated 01.04.2015 did not provide any
compensation to either the shareholders or creditors of FTIL for the
economic loss caused by the amalgamation in breach of Section 396(3),
it is clear that an important condition precedent to the passing of the final
amalgamation order was not met. On this ground also, therefore, the
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final amalgamation order has to be held to be ultra vires Section 396 of
the Companies Act, and, being arbitrary and unreasonable, violative of
Article 14 of the Constitution of India.
75. However, the learned Senior Advocates for the respondents
have argued that an order of nil compensation is equally an order that is
passed under Section 396(3) which could have been appealed against
but was not appealed against. For this reason, therefore, it is not correct
to state that the condition precedent mentioned in Section 396(4)(aa)
has not been fulfilled. It will be noticed that the language used in the
appeal provision, i.e. Section 396(3A), is “any person aggrieved by any
assessment of compensation made by the prescribed authority under
sub-section (3) may…… appeal to the Tribunal, and thereupon the
assessment of the compensation shall be made by the Tribunal.” The
pre-requisites for the application of sub-section (3A) are that a person
first be aggrieved by an “assessment of compensation” “made” by the
prescribed authority. Where no assessment of compensation
whatsoever 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 finding.
Section 22-A of the Act entitles a member to prefer an appeal to
the High Court against an order of the Council imposing a penalty
under Section 21(4) of the Act. It is pointed out that no limitation
has been imposed on the scope of the appeal, and that an appellant
is entitled to urge before the High Court every ground which was
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available to him before the Council. Any insufficiency, it is said,
can be cured by resort to such appeal. Learned counsel apparently
has in mind the view taken in some cases that an appeal provides
an adequate remedy for a defect in procedure during the original
proceeding. Some of those cases as mentioned in Sir William
Wade’s erudite and classic work on “Administrative Law”
(5th Edn.). But as that learned author observes (at p. 487), “in
principle there ought to be an observance of natural justice equally
at both stages”, and
“if natural justice is violated at the first stage, the right of appeal
is not so much a true right of appeal as a corrected initial
hearing: instead of fair trial followed by appeal, the procedure
is reduced to unfair trial followed by fair trial.”
And he makes reference to the observations of Megarry, J. in
Leary v. National Union of Vehicle Builders [(1971) 1 Ch. 34,
49]. Treating with another aspect of the point, that learned Judge
said:
“If one accepts the contention that a defect of natural justice
in the trial body can be cured by the presence of natural justice
in the appellate body, this has the result of depriving the member
of his right of appeal from the expelling body. If the rules and
the law combine to give the member the right to a fair trial and
the right of appeal, why should he be told that he ought to be
satisfied with an unjust trial and a fair appeal? Even if the
appeal
is treated as a hearing de novo, the member is being
stripped of his right to appeal to another body from the effective
decision to expel him. I cannot think that natural justice is
satisfied by a process whereby an unfair trial, though not
resulting in a valid expulsion, will nevertheless have the effect
of depriving the member of his right of appeal when a valid
decision to expel him is subsequently made. Such a deprivation
would be a powerful result to be achieved by what in law is a
mere nullity; and it is no mere triviality that might be justified
on the ground that natural 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.”
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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 Leary v. National Union of
Vehicle Builders, [1971] Ch. 34 might perhaps be too broad a
generalisation, except in cases involving public interest. This was an
observation made in answer to an argument by Shri Shanti Bhushan,
stating that a defect of natural justice always goes to the root of the
matter.  Ultimately, given the fact that the settlement fund was held to
be sufficient to meet the needs of just compensation to the victims of the
Bhopal gas leak tragedy, it was held that the grievance on the score of
not
hearing the victims first would not really survive. However, what is
of fundamental importance is the fact that in the present situation, a
clear statutory right is given to every member or creditor who shall be
entitled to an assessment of compensation, first by the prescribed authority
and then, a right of appeal to the Appellate Tribunal. In such cases,
therefore, the orders of “non-assessment” by the prescribed authority
can more appropriately be challenged in judicial review proceedings, in
which the High Court, acting under Article 226 of the Constitution of
India can, if an infraction of Section 396(3) is found, send the matter
back to the prescribed authority to determine compensation after which
the right of appeal under sub-section (3A) of Section 396 would then
follow. In fact, in Writ Petition 2743 of 2014, which challenged both the
draft order and the final order of amalgamation, the appellant took out a
chamber summons for amendment of its writ petition to challenge the
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order of assessment of compensation, dated 01.04.2015, which
amendment was allowed vide order dated 16.02.2016. The order of
“non-assessment” of compensation has thus been challenged by FTIL
in proceedings under Article 226 of the Constitution of India. Even
otherwise, this is a case where there is complete non-application of mind
by the authority assessing compensation to the rights and interests which
the shareholders and creditors of FTIL have and which are referred to
in Section 396(3) of the Act. This being the case, it is clear that Section
396(3) has not been followed either in letter or in spirit.
76. In conclusion, though other wide-ranging arguments were made
with respect to the validity of the Central Government amalgamation
order, we have not addressed the same as we have held that the order
dated 12.02.2016 is ultra vires Section 396 of the Companies Act, and
violative of Article 14 of the Constitution of India for the reasons stated
by us hereinabove. The appeals are accordingly allowed, and the
impugned judgment of the Bombay High Court is set aside. The writ
petition is disposed of in light of this judgment.
Devika Gujral
          Matters disposed of.
.