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
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63 MOONS TECHNOLOGIES LTD.
(FORMERLY KNOWN AS FINANCIAL
         TECHNOLOGIES INDIA LTD.) & ORS.
v.
UNION OF INDIA
(Civil Appeal No. 4476 of 2019)
APRIL 30, 2019
    [R. F. NARIMAN AND VINEET SARAN, JJ.]
Companies Act, 1956: s.396 – Constitutionality of – Held:
s.396 provides for compulsory amalgamation of companies in public
interest – Art.31A of the Constitution envisages that any “law”
providing for the amalgamation of two or more corporations in public
interest is immune from challenge on grounds relatable to Art.14 or
Art.19 of the Constitution of India – s.396 of the Companies Act is
such a law – Constitution of India –  Arts.14, 19 and 31A.
Companies Act, 1956: s.396 – Derivative immunity of the
Central Government order – Whether the Central Government’s order
made under s.396 would also receive the protective umbrella of
Art.31A, given the fact that s.396 is undoubtedly protected by Art.31A
– Whether order of Central Government passed under s.396 is
administrative in nature – Held: The expression “law”, as defined
in Art.13(3)(a), includes an Ordinance, rule, regulation, notification,
and custom or usage having in the territory of India the force of
law – Obviously, therefore, when the expression “order” is used, it
would take colour from Ordinance, rule, regulation, notification,
which are all legislative in nature, and not administrative – Even
custom or usage having the force of law refers to general rules
of
conduct, as opposed to administrative orders passed on the facts of
a case –  However, the Central Government’s  order in question
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 and does not lay down any general rule of conduct
by itself, but in fact, follows the general rule of conduct laid down
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by s.396 –  Therefore, such an order is not in the nature of legislation
or delegated legislation –  The fact that, under s.396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that the order is administrative and
not legislative in character – Constitution of India – Art.13(3).
Companies Act, 1956: s.396 – Essentiality test – Held: The
Central Government has to be “satisfied”, meaning thereby, that it
must, on certain objective facts, come to a conclusion that
amalgamation between two or more companies is necessary – This
can only be done if the Central Government finds it “essential”,
i.e., necessary to do so.
Companies Act, 1956: s.396 – Public interest – Meaning of –
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 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 s.396 of the Act.
Companies Act, 1956: s.396(3) – Amalgamation order –
Compensation – Right of shareholder or a creditor –  s.396(3) speaks
of a shareholder’s or a creditor’s interest in or rights against the
company resulting from an amalgamation order – 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 –
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 – 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.
Companies Act, 1956: ss.396(3), 396(3A) – Compensation to
aggrieved person – The language used in the appeal provision, i.e.
s.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, 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
– 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 Art.226 of the Constitution
of India can, if an infraction of s.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 s.396 would
then follow.
Companies Act, 1956: s.396 – Applicability of – Compulsory
amalgamation of companies by a Central Government’s order in
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public interest – NSEL, a 99.99% subsidiary of FTIL, defaulted on
nearly 5,600 crore payments to its 13,000 investors – Trading was
suspended in NSEL after payments default – Order of compulsory
amalgamation of NSEL with appellant (FTIL) under s.396 – Whether
each of the conditions precedent for applicability of s.396 applied
to the facts of the instant case – Held: There is no doubt that in
July, 2013, as a result of NSEL stopping trading on its exchange, a
payment crisis of Rs.5600 crore arose – The letter addressed by
FMC to the   Ministry of Corporate Affairs show that immediate
reason for amalgamation, according to the FMC was that NSEL, as
a corporate entity, was financially and physically incapable of
effecting any substantial recovery from defaulting members – By
the time final amalgamation order was passed, emergent situation
of 2013 which required emergent step of compulsory amalgamation
by the passage of time, disappeared – Decrees/awards worth
Rs.3365 crore were obtained against the defaulters, with Rs. 88
crore crystallised by the committee set up by the High Court, pending
acceptance by the High Court, even without using the financial
resources of FTIL as an amalgamated company – What  was
emergent, and essential, even according to the FMC and the
Government in 2013-2014, was, therefore, largely redressed in 2016,
by the time the amalgamation order was made – Therefore, the
essentiality test, which is the condition precedent to the applicable
to s.396, was not satisfied – When it comes to public interest as
opposed to the private interest of investors/traders who have not
been paid, the amalgamation order at several places 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 s.396 –  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 – The
leveraging of combined assets, capital, and reserves is for the
purpose of only settling 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 with no hope
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of any revival – Government order itself reflects the net worth of
NSEL as INR 8.86 crore 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 paid high dividends to its
shareholders while NSEL never paid a single dividend ever since
its inception – This would show that Post amalgamation dividend
payable to the shareholders of FTIL is bound to come down –
Correspondingly, the ‘marketable value’ of such shares will also
fall –  The ‘economic value’ of shares held in FTIL may, post
amalgamation, depress the market value of shares held by such
shareholder, and would also impact the dividend payable on such
shares post amalgamation – Further no compensation is provided
either to the shareholders or creditors of FTIL for the economic
loss caused by the amalgamation which is breach of s.396(3) – 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 s.396(3) of the Act – This being the case, it is clear that s.396(3)
was not followed either in letter or in spirit – The amalgamation
order is, therefore, ultra vires s.396 and being arbitrary and
unreasonable,
violative of Art.14 of the Constitution of India.
Disposing of the matters,  the Court
HELD: 1.  INTERPRETATION OF SECTION 396: There
is no doubt whatsoever that Section 396 cannot be challenged on
the ground of Article 14 or Article 19, given Article 31A of the
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. [Para 23] [61-A-B]
Prem Nath Raina v. State of Jammu & Kashmir and Ors.
(1983) 4 SCC 616 : [1983] 3 SCR  536 ; Budhan Singh
and Anr. v. Nabi Bux and Anr.[1970] 2 SCR 10
– relied on.
2.  DERIVATIVE IMMUNITY OF THE CENTRAL
GOVERNMENT ORDER:  The expression used in Article 31A
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is “law”, for which, one is to see the definition contained in Article
13(3). “Law” in Article 13(3) certainly includes “order”. The only
question is whether this would include an administrative order
as well. It is clear, on a reading of Article 13(3), that the
expression “law”, as defined in Article 13(3)(a), includes an
Ordinance, rule, regulation, notification, and custom or usage
having in the territory of India the force of law. Obviously,
therefore, when the expression “order” is used, it would take
colour from Ordinance, rule, regulation, notification, which are
all legislative in nature, and not administrative. Even custom or
usage having the force of law refers to general rules of conduct,
as opposed to administrative orders passed on the facts 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. [Paras 24, 26, 27] [62-C; 63-G; 64-A-C]
Union of India and Anr. v. Cynamide India Ltd. and
Anr. (1987) 2 SCC 720 – relied on.
Prag Ice & Oil Mills v. Union of India (1978) 3 SCC
459 : [1978]  3 SCR 293 – Partly applicable.
3.  WHETHER THE CENTRAL GOVERNMENT ORDER IS
ADMINISTRATIVE IN  NATURE
3.1 The fact that, under Section 396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that this order is administrative
and not legislative in character.  The Central Government’s  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. Such an order is not in the nature of legislation
or delegated legislation. The order passed under Section 396 is
qua particular companies and does not lay down any general rule
of conduct by itself, but in fact, follows the general rule of conduct
laid down by Section 396. Thus, the Central Government order,
made under Section 396, must conform to the fundamental rights
guaranteed by Articles 14 and 19(1)(g) of the Constitution of India.
[Paras 29, 33] [67-D-E; 70-B]
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K.I. Shephard v. Union of India (1987) 4 SCC 431 :
[1988] 1 SCR 188; Thomas Dana v. State of Punjab
[1959] 1  Suppl. SCR 274 ; Hamdard Dawakhana
(Wakf) Lal Kuan, Delhi and Anr.  v. Union of India and
Ors. [1960] 2 SCR 671 ; Sakal Papers (P) Ltd. and
Ors. v. Union of India [1962] 3 SCR 842 ; Ajay Hasia
and Ors. v. Khalid Mujib Sehravardi and Ors.  (1981)
1 SCC 722 : [1981]  2 SCR 79 ; M.C. Mehta and Anr.
v. Union of India and Ors. (Shriram – Oleum Gas)
(1987) 1 SCC 395 : [1987] 1 SCR 819  – relied on.
New Bank of India Employees’ Union and Anr. v. Union
of India and Ors. (1996) 8 SCC 407 : [1996] 3 SCR
322; Quarry Owners’ Association v. State of Bihar and
Ors. (2000) 8 SCC 655 : [2000] 2 Suppl. SCR 211 ;
J.K. (Bombay) (P) Ltd. v. New Kaiser-i-Hind Spinning
and Weaving Co. Ltd. [1969] 2 SCR 866 –
held inapplicable.
3.2  Various pre-requisites contained in Section 396 must
first be satisfied before the Section can be said to operate. First
and foremost, the Central Government has to be “satisfied”,
meaning thereby, that it must, on certain objective facts, come to
a conclusion that amalgamation between two or more companies
is necessary. This can only be done if the Central Government
finds it “essential”, i.e., necessary to do so. Also, this can only
be done in “public interest”.   A condition precedent to the passing
of an order by the Central Government under this Section is 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 erstwhile company either as a member or a
creditor, and if this is not so, such member or creditor shall be
entitled to compensation which is to be assessed by such authority
as may be prescribed. Unless an order of compensation is first
made under sub-section (3), and an appeal therefrom has either
not been filed or has been disposed of, no order of amalgamation
can be made. Another condition precedent is an inbuilt provision
for natural justice, namely, that a proposed draft order has first
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been sent to each of the companies concerned. The companies
may then send suggestions or objections to the Central
Government, which the Central Government must first consider
before passing the final order. Such objections and suggestions
can also be sent from any class of shareholders of either of the
companies, or from any creditors or class of creditors of either of
the companies. [Paras 34, 36] [74-C-D; 75-C-F]
4. “WHERE THE CENTRAL GOVERNMENT IS
SATISFIED”:  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. [Para 42] [87-C-D]
Barium Chemicals Ltd. v. Company Law Board
[1967] 1 SCR 898 ;  Rohtas Industries Ltd. v. S.D.
Agarwal [1969] 3 SCR 108 ; Western U.P. Electric
Power & Supply Co. Ltd. v. State of U.P. and Anr. (1969)
1 SCC 817 : [1969] 3 SCR 865 ; Rampur Distillery Co.
Ltd. v. Company Law Board [1970] 2 SCR 177 ;
M .A. Rasheed and Ors. v. State of Kerala [1975] 2
SCR 93 ; Khudiram Das v. State of West Bengal (1975)
2 SCC 81 : [1975] 2 SCR 832 ; Tata Cellular v. Union
of India (1994) 6 SCC 651 : [1994] 2 Suppl.  SCR
122; Bhikhubhai Vithlabhai Patel v. State of Gujarat
(2008) 4 SCC 144 ;  M. Jhangir Bhatusha and Ors. v.
Union of India and Ors. (1989) 2 Suppl. SCC 201 :
[1989] 3 SCR  356  –
referred to.
Haryana Financial Corporation v. Jagdamba Oil Mills
(2002) 3 SCC  496 : [2002] 1 SCR  621 - cited.
5. “ESSENTIAL”: The Central Government’s mind has to
be applied to whether a compulsory amalgamation u/s 396 is
indispensably necessary, important in the highest degree, and
whether such amalgamation is both basic and necessary.
[Para 44] [88-B]
J. Jayalalitha v. Union of India (1999) 5 SCC 138 :
[1999] 3 SCR 653  –  referred to.
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P. Ramanath Aiyer’s Law Lexicon (4th Edn.);
Black’s Law Dictionary (10th Edn.)  –  referred to.
6.1 “PUBLIC INTEREST”: The third pre-requisite of
Section 396 is that the Central Government must apply its mind
when compulsorily amalgamating two or more companies in the
public interest. “Public interest” is an expression which is wide
and amorphous and takes colour from the context in which it is
used. Public interest is the general interest of the community, as
distinguished from the private interest of an individual.  “Public
interest” in the context of compulsory amalgamation of two or
more companies would 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.
[Paras 45, 54] [88-C; 94-D-E]
State of Bihar v. Maharajadhiraja Sir Kameshwar Singh
of Darbhanga and Ors. [1952] 1 SCR 889;
Manimegalai v. Special Tehsildar (Land Acquisition
Officer) Adi Dravidar Welfare (2018) 13 SCC 491:
[2018] 3 SCR 1086; Rameshwar Prasad and Ors. v.
State of U.P. and Ors. (1983) 2 SCC 195 : [1983] 2
SCR 418; Janata Dal v. H.S. Chowdhary and Ors.
(1992) 4 SCC 305:[1992] 1 Suppl. SCR 226; Municipal
Corporation of the City of Ahmedabad and Ors. v. Jan
Mohd. Usmanbhai and Anr. (1986) 3 SCC 20 : [1986]
2 SCR  700; B.P. Sharma v. Union of India and Ors.
(2003) 7 SCC 309: [2003] 2 Suppl. SCR 684;
Hindustan Lever Employees’ Union v. Hindustan Lever
Ltd. and Ors. (1995) 1 Suppl. SCC 499 : [1994] 4 Suppl.
SCR 723 ; Bihar Public Service Commission v. Saiyed
Hussain Abbas Rizwi and Anr. (2012) 13 SCC 61; R.R.
Tripathi v. Union of India (2010) 1 Bom CR 513  –
relied on.
6.2   Applicability of Section 396 to the facts of the instant
case. Neither FTIL nor NSEL has denied the fact that paired
contracts in commodities were going on, and by April to July,
2013, 99% (and excluding E-series contracts), at least 46% of
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the turnover of NSEL was made up of such paired contracts. There
is no doubt that such paired contracts were, in fact, financing
transactions which were distinct from sale and purchase
transactions in commodities and were, thus, in breach of both
the exemptions granted to NSEL, and the FCRA. NSEL
throughout kept representing that it was, in fact, a commodity
exchange dealing with spot deliveries. Apart from the Grant
Thornton report and the FMC order, Shri Jignesh Shah, on
10.07.2013, made representations to the DCA and the FMC, in
which he stated that NSEL had full stock as collateral; 10-20% of
open position as margin money; and that the stock currently held
in NSEL’s 120 warehouses was valued at INR 6000 crore, all of
which turned out to be incorrect. Further, there is no doubt
whatsoever that in July, 2013, as a result of NSEL stopping trading
on its exchange, a payment crisis of approximately INR 5600
crore arose. The further question that remains is whether, given
these facts, the conditions precedent for the applicability of
Section 396 were followed. When it comes to whether the Central
Government’s satisfaction as to whether it was “essential” to
amalgamate the two companies, what must be borne in mind is
that NSEL had itself offered a settlement scheme to pay 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.
[Paras 55
and 55.3, 56] [94-F; 105-C-G]
6.3 The raison d’être 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 defaulters, with INR 835.88 crore
crystallised by the committee set up by the High Court, pending
acceptance by the High Court, even without using the financial
resources of FTIL as an amalgamated company. 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,
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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. 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. [Para 56.2] [112-F-H; 113-A]
6.4 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. 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. There is no
interest of the general public as opposed to the businesses of
the two companies that are referred to. 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. The sole object
of the amalgamation order
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.
[Para 59] [114-E; 115-B-E]
7.1  The “recommendations of the FMC  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 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
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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  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. It is admitted in the order itself  that there is no
“adjudication” on the “fraud” in the facts of this 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.  [Para 59.3] [118-F-H;
119-A-F]
7.2 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 interest, it would have explicitly said so
after suggestions and objections were made by the various
stakeholders.   [Para 59.4] [119-G-H; 120-A]
Ganesh Bank of Kurundwad Ltd. v. Union of India
(2006) 10 SCC 645 : [2006] 5 Suppl. SCR 437 –
distinguished.
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Mohinder Singh Gill v. Chief Election Commissioner
(1978) 1 SCC 405 : [1978] 2  SCR  272; Chairman, All
India Railway Recruitment Board and Anr. v. K. Shyam
Kumar and Ors. (2010) 6 SCC 614  ; PRP Exports and
Ors. v. Chief Secretary, Government of Tamil Nadu and
Ors. (2014) 13 SCC 692   – referred to.
8.  Section 396(3) speaks of a shareholder’s or a creditor’s
interest in or rights against the company resulting from an
amalgamation order. 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 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. 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. [Paras 65, 66] [126-G-H;
127-A-C, E]
Bacha F. Guzdar v. Commissioner of Income Tax
[1955] 1 SCR 876 ; Life Insurance Corporation of India
v. Escorts Ltd. and Ors. (1986) 1 SCC 264 : [1985]  3
Suppl. SCR  909; Commissioner of Income Tax (Central)
Calcutta v. Standard Vacuum Oil Co.
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[1966] 2 SCR 367 ; Miheer H. Mafatlal v. Mafatlal
Industries Ltd. (1997) 1 SCC 579 : [1996] 6 Suppl.
SCR 1 –  referred to.
9.1 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.  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 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. [Paras 72, 73]
[130-E-G; 131-G-H; 132-A-B]
9.2 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.  It is well
known that the stock market is extremely sensitive to the
slightest event that may render a company less profitable. 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. The moment the final amalgamation order dated
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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.  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 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.
[Para 74] [132-C-E, H; 133-A]
9.3 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. [Para 75] [133-B-E]
Institute of Chartered Accountants of India v. L.K. Ratna
and Ors. [1986] 3 SCR 1049 ; Union Carbide
Corporation v. Union of India [1991] 1 Suppl. SCR
251 ; Charan Lal Sahu v. Union of India (1990) 1 SCC
613 : [1989] 2 Suppl. SCR 597 - referred to.
Union of India v. G. Ganayutham (1997) 7 SCC 463 :
[1997] 3 Suppl. SCR  549; Om Kumar v. Union of India
(2001) 2 SCC 386  – cited.
Leary v. National Union of Vehicle Builders
[1971] Ch. 34 – referred to.
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 Case Law Reference
[2006] 5  Suppl. SCR 437
distinguished
Para  16
[1978] 2 SCR 272
referred to
Para 16
[1988] 1 SCR 188
relied on
Para 16
[1969] 2 SCR 866
held inapplicable
Para 16
[1955] 1 SCR 876
referred to
Para 18
[1997] 3 Suppl. SCR 549
cited
Para 18
[2000] 4 Suppl. SCR 693
cited
Para 18
[1967] 1 SCR 898
referred to
Para 19
[1969] 3 SCR 108
referred to
Para 19
[2002] 1 SCR 621
cited
Para 19
[1983] 3 SCR 536
relied on
Para 23
[1970] 2 SCR 10
relied on
Para 23
[1978] 3 SCR 293
partly applicable
Para 25
(1987) 2 SCC 720
relied on
Para 27
[1996] 3 SCR 322
held inapplicable
Para 30
[2000] 2 Suppl. SCR 211
held inapplicable
Para 31
[1959] 1 Suppl. SCR 274
relied on
Para 33
[1960] 2 SCR 671
relied on
Para 33
[1962] 3 SCR 842
relied on
Para 33
[1981]  2 SCR 79
relied on
Para 33
[1987] 1 SCR 819
relied on
Para 33
[1969] 3 SCR 865
referred to
 Para 38
[1970] 2 SCR 177
referred to
 Para 39
[1975] 2 SCR 93
referred to
 Para 39
[1975] 2 SCR 832
referred to
 Para 39
[1994] 2 Suppl. SCR 122
referred to
 Para 39
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[2008] 4 SCC 144
referred to
Para 40
[1989] 3 SCR 356
referred to
Para 41
[1999] 3 SCR 653
referred to
Para 44
[1952] 1 SCR 889
relied on
Para 45
[2018] 13 SCC 491
relied on
Para 46
[1983] 2 SCR 418
relied on
Para 47
[1992] 1 Suppl. SCR 226
relied on
Para 48
[1986] 2 SCR 700
relied on
Para 49
[2003] 2 Suppl. SCR 684
relied on
Para 50
[1994] 4 Suppl. SCR 723
relied on
Para 51
(2012) 13 SCC 61
relied on
Para 52
(2010) 1 Bom CR 513
relied on
Para 53
[2010] 6 SCC 614
referred to
Para 64
[2014] 13 SCC 692
referred to
Para 64
[1985] 3 Suppl. SCR 909
referred to
Para 69
[1966] 2 SCR 367
referred to
Para 70
[1996] 6 Suppl. SCR 1
referred to
Para 71
[1986] 3 SCR 1049
referred to
Para 75
[1991] 1 Suppl. SCR 251
referred to
Para 75
[1989] 2 Suppl. SCR 597
referred to
Para 75
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4476
of 2019
From the Judgment and Order dated 04.12.2017 of the Division
Bench of High Court of Judicature at Bombay in Writ Petition No. 2743
of 2014
With
Civil Appeal Nos.4478 of 2019,  4477 of 2019, 4479 of 2019, 4481
of 2019, 4480 of 2019 and  Writ Petition (Civil) No. 368 of 2019
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Tushar Mehta, SG, Ms. Pinky Anand, ASG, Mukul Rohatgi, A.M.
Singhvi, R. Balasubramanian, Neeraj Kishan Kaul and Arvind P. Datar,
Sr. Advs., Mahesh Agarwal, Ankur Saigal, Ms. Misha Rohatgi,
Ms. Shaneen Parikh, Ms. Namita Shetty, Himanshu Satija, Ms. Tanvi
Manchanda, Ms. Priyanka Vora, E. C. Agrawala, Aviskar Singhvi,
Himanshu Satija, Ms. Tanvi Manchanda, Arvind Lakhawat,
Harshwardhan Reddy, Amit Agrawal, Ms. Diksha Rai, Ms. Palak
Mahajan, Ishan Bisht, Nakul Mohta, Ardhendumauli Kumar Prasad,
Saurabh Kirpal, Rahul G. Tanwani, V.C. Shukla, VNL Sindura, Nikhil
Goel, Arvind Lakhawat, Ms. Ranjeeta Rohatgi, Vikas Mehta,
Varun Singh, Ms. Anushree Menon, Ms. Nupur Desai, Ms. Samiksha
Godiyal, Ms. Sanam Tripathi, Shekhar Vyas, Rajesh Ranjan, Ms. Pratima
Gupta, Anup Dawan, Joel, Ms. Snidha Mehra, Sumit Teterwal, Chakitan
Vikram Shekher Papta, Ms. Kirti Dua, Ms. Saudamini Sharma, Hemant
Arya, Ms. Tanisha Samanta, Anmol Chandan, Ms. Shraddha Deshmukh,
Sai Krishna, A.K. Sharma, D.N. Ray, Chirag Manubhai Shah,
Ms. Sanjana Saddy, Lokesh K. Choudhary, Dillip Kumar Nayak,
Ms. Disha Ray, Sanjay Lodha, Devanshu Sajlan, Mrs. Sumita Ray, Pratap
Venugopal, Ms. Surekha Raman, Ms. Viddusshi, Akhil A. Roy, M/s K.J.
John & Co., Mukesh Kumar Maroria, Advs.  for the appearing parties.
The Judgment of the Court was delivered by
R. F. NARIMAN, J.  1. Leave granted.
2.  This batch of appeals and writ petition raises questions as to
the applicability and construction of Section 396 of the
Companies Act,
1956, which deals with compulsory amalgamation of companies by a
Central Government order when this becomes essential in the public
interest. The appellant, 63 Moons Technologies Ltd. (hereinafter referred
to as “FTIL”, which name was changed to 63 Moons Technologies Ltd.
on 27.05.2016), is a 99.99% shareholder of the National Spot Exchange
Ltd. (hereinafter referred to as “NSEL”), and is a listed company. About
45% of the shareholding of FTIL is held by Shri Jignesh Shah and family,
and about 43% of the shareholding is held by members of the Indian
public. Approximately 5% of the shareholding is held by institutional
investors. FTIL is a profitable company, having a positive net worth 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
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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 exemption granted to it. Without adjudicating upon the show
cause notice, on 12.07.2013, the DCA directed NSEL to give an
undertaking that no further contracts shall be launched until further
instructions, and that all existing contracts will be settled on due dates.
This was effectively a “freezing” order. On 22.07.2013, NSEL gave an
undertaking to the DCA.
3. Earlier, in January 2013, representatives of MMTC Ltd., a
Government of India undertaking, which was one
of the trading members
of NSEL, visited some of the warehouses which were at different locations
in order to verify stocks therein and reported existence of full commodity
stock in the said warehouses. Sometime in July 2013, 13,000 persons
who traded on the platform of NSEL claimed to have been duped by
other trading members (being 24 in number), who defaulted in payment
of obligations amounting to approximately INR 5600 crore. Due to the
sudden and abrupt stoppage of fresh contracts, and media reports about
the same, market participation on NSEL’s platform reduced considerably,
forcing NSEL to suspend trading and close its spot exchange operations
w.e.f. 31.07.2013. The Forward Markets Commission [“FMC”]
recommended to the DCA on 12.08.2013 that steps be taken to verify
quantity and quality of commodities at various warehouses; financial
status of buyers and trading members be ascertained, and the liability be
fixed on promoters of NSEL, i.e., FTIL. On 14.08.2013, NSEL issued a
press release in which Shri Sinha, its CEO/MD, made a statement that
he and his management team were responsible for all operations at
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NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL by
Grant Thornton LLP, and the Union of India, on 30.09.2013, ordered
inspection of the books of accounts of NSEL and FTIL under Section
209A of the Companies Act. On the same day, the Economic Offences
Wing [“EOW”] registered cases against Directors and key management
personnel of the NSEL and FTIL, trading members of NSEL, and brokers
of NSEL under various provisions of the Indian Penal Code and the
Maharashtra Protection of Interest of Depositors Act, 1999 [“MPID
Act”]. Several suits were filed by the traders who allegedly have been
duped, the most important of which is Suit No.173 of 2014 pending in the
Bombay High Court, which is a representative suit filed under Order I
Rule 8 of the Code of Civil Procedure, 1908 [“CPC”]. 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 chargesheet, it was revealed that the aforesaid
three employees of NSEL, in exchange for monetary kickbacks, had
colluded with the defaulters to enable them to trade on NSEL’s platform
without depositing adequate goods in the warehouses, in breach of rules
and byelaws of NSEL.
6. On 18.08.2014, the FMC, vide a letter to the Union of India,
suggested that FTIL and NSEL be merged. Meanwhile, in the
representative Suit No. 173 of 2014, vide order dated 02.09.2014, the
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Bombay High Court appointed a three-member committee consisting of
Mr. Justice V.C. Daga, Mr. J. Solomon, and Mr. Yogesh Thar for
ascertaining and crystallising the liability of the defaulters and to assist
in recovery of debts from the defaulters. This committee continues to
function even on date. Thus, in addition to INR 3365 crore, i.e., the total
of decrees and arbitration awards against the defaulters, this high-level
committee has also crystallised a further sum of INR 835.88 crore to be
recovered from the defaulters, which is pending before the Bombay
High Court.
7. On 19.09.2014, the Ministry of Finance, Government of India,
issued a notification withdrawing the exemption granted to NSEL vide
notification dated 05.06.2007. Exemptions granted to the National
Commodity and Derivatives Exchange Ltd. (NCDEX) Spot Exchange
and the National Agricultural Produce Market Committee (APMC) were
also withdrawn as the Government was of the view that ready delivery
or spot delivery contracts in commodities ought not to be traded on
commodities exchanges at all. On 15.10.2014, Dr. K.P Krishnan,
Additional Secretary, Department of Economic Affairs, wrote a letter to
the Ministry of Corporate Affairs stating that FTIL and NSEL appear to
be maintaining separate identities for a fraudulent purpose, i.e., to
deprive investors of their money. As a result, there is a need to lift the
corporate veil in order to unearth the fraud, as
a result of which,
amalgamation of two companies, where one has defrauded market
participants and the other company is cash-rich and capable of
addressing the payment crisis more effectively. It was therefore
proposed to merge FTIL and NSEL under Section 396 of the
Companies Act. On 21.10.2014, a draft order of amalgamation, made in
accordance with Section 396(3) of the Companies Act, was circulated
to the relevant stakeholders. As a result, FTIL filed Writ 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
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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 by a committee consisting of
Shri Pritam Singh, Additional Secretary to the Government of India, and
Shri H.P. Chaturvedi, Joint Secretary and Legal Advisor, Ministry of
Law and Justice in October 2015, pursuant to a Bombay High Court
order in the Writ Petition 2743 of 2014 pending before it.
9. On 12.02.2016, a final amalgamation order was passed in terms
of Section 396(3), thereby merging FTIL and NSEL, wherein all assets
and liabilities of NSEL would become assets and liabilities of FTIL. The
writ petition already filed was amended on 28.03.2016 to include a
challenge to this order. On 04.12.2017, the impugned judgment of the
Bombay High Court was passed in which the said writ petition was
dismissed.
10. We have heard Shri Mukul Rohatgi, Shri Vikas Singh, Dr.
A.M. Singhvi, and Shri Kavin Gulati, learned Senior Advocates, and Shri
Arvind Lakhawat, learned Advocate, on behalf of the appellants.
According to learned
counsel, the first important point to be noted is that
in company law, the holding company, viz. FTIL, is distinct and separate
from its subsidiary, viz., NSEL. It was pointed out to us that there are
separate and independent Boards of Directors for managing the day-to-
day affairs of both companies, which deal in completely different
businesses. It was pointed out that FTIL has never participated in the
profits of NSEL, and except for receiving annual maintenance charges
for providing technology-related services by way of fees, FTIL has not
derived any revenue from NSEL. In fact, over a long period of nine
years, FTIL has received only a sum of INR 84 crore from NSEL which,
in any case, is deposited by FTIL in the Bombay High Court pursuant to
an order dated 12.06.2015 in Writ Petition No. 2187 of 2015. Learned
counsel were also at pains to point out that NSEL has not defrauded
anybody since it is only a platform. Currently, the business of NSEL is
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closed, whereas, on the other hand, the business of FTIL is flourishing.
A compulsory amalgamation order would be ultra vires Section 396 if
the only object is to foist unadjudicated liability of NSEL on FTIL. It was
also pointed out that the basis of the amalgamation order was a letter by
the FMC, which in turn was based on a “forensic” audit report of 2013
by Grant Thornton. The so-called report itself stated that there is no
independent verification of information provided, 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 very basis for application of Section
396 would disappear as the amalgamated company, i.e., the transferee
company would have to pay the compensation that is assessed. This
obviously cannot be done when the amalgamated company itself becomes
a negative net worth company. It was then argued that the amalgamation
order interfered with the judicial process in that decrees and arbitral
awards obtained by NSEL against defaulters are wholly ignored. Further,
the process of adjudication, which will determine whether there are
defaults and whether they need to be paid back, has been short-circuited
by amalgamating NSEL with FTIL. Thus, the learned counsel have all
argued that various conditions precedent for applicability of Section 396
are wholly absent. Also, in the present case, the Central Government
has not applied its mind to whether such an order is, first of all, “essential”.
Secondly, unadjudicated so-called liabilities to persons who are members
of one particular exchange can hardly be said to be something which
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requires the Central Government to amalgamate both companies in the
“public interest”. The public interest consists of the interests of the general
public which would include, inter alia, the interest of the 63,000
shareholders of FTIL, who are now going to be mulcted with a huge
liability which would reduce the market value of their shares to nil. They
have cited several judgments to buttress these submissions.
12. Thus, the amalgamation order oversteps recognised separation
of powers’ limits, and is therefore, ultra vires both Section 396 of the
Companies Act and the Constitution of India. It was then argued that
there are three grounds in support of the order of amalgamation, which
are to be found in the impugned judgment, namely:
A. 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;
B. Giving effect to the 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 the defaulters by
pooling human and financial resources of FTIL and NSEL
Admittedly, reasons 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
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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 submissions that even otherwise, the
impugned order was violative of natural justice and of Articles 14, 19,
and 300A of the Constitution of India. Also, since the amalgamation
order is based upon an order of the FMC, which in turn is based upon
the Grant Thornton report, which was delivered in a great hurry, and
with such disclaimers that it could never be relied upon to render final
findings, as has been done by the amalgamation order, the amalgamation
order itself would be without application of mind, excessive and arbitrary,
and violative of Article 14 of the Constitution of India on this score alone.
14. When it came to the impugned judgment, the learned counsel
for the appellants were at pains to point out that when the impugned
judgment held that no compensation need be paid to FTIL as the number
of shares in the amalgamated company of shareholders remain the same,
economic value or market value of the shares was totally ignored. Thus,
in ignoring economic value, a totally artificial, formal, and non-substantial
test has been applied by the Bombay High Court, which says that there
is no necessity to compensate the shareholders of FTIL, even though
once they become members of the amalgamated company, their shares
would be worth nil on the date of
amalgamation. And, in the event of
winding up, they would get back nothing. It was also pointed out that the
three grounds of the amalgamation order, being reasons for the
amalgamation order, which were accepted by the Bombay High Court,
are grounds which do not exist. In ground A, for example, restoring /
safeguarding public confidence in forward contracts and exchanges which
are an integral and essential part of the Indian economy, does not obtain
as there were only three commodity exchanges in the country, all of
which were shut down w.e.f. September 2014. No similar exchanges
have been created subsequently. In any case, the business done at such
exchanges cannot be said to be an integral and essential part of the
Indian economy. Reason B, which is that NSEL is an alter ego of FTIL,
is pending adjudication in the suits filed in the Bombay High Court. To
come to a conclusion that one is the alter ego of the other is not only
contrary to the facts pointed out hereinabove, namely, that the businesses
of the two companies are entirely different and the management of both
companies is by completely different and distinct Boards of Directors.
Thus, to arrive at the conclusion that one company is the alter ego of the
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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
Article 31A of the Constitution of India and Section 396 of the Companies
Act, and be declared to be violative of Article 14, Article 19 and Article
300A of the Constitution of India.
15. Shri Shyam Divan, learned Senior Advocate appearing on behalf
of Respondent No. 4, NSEL Investors Action Group, supported the
impugned judgment in its entirety. According to the learned Senior
Advocate, it must never be
forgotten that FTIL held 99.9998% of NSEL’s
shares, and that NSEL was promoted by and is part of the FTIL group.
The Board of Directors of NSEL is entirely under the control of FTIL.
NSEL’s exchange was treated, held out, and represented by FTIL to be
its own, and was part of its “exchange verticals”. Shri Jignesh Shah is
the common linchpin of both the companies. He holds 45% shares of
FTIL and is its Chairman-cum-Managing Director. He is also Vice
Chairman on the Board of NSEL, being one of the “key managerial
personnel” of the aforesaid company. He also was a member of the
Audit Committee of NSEL. All the minutes of the Board meetings of
NSEL were regularly tabled at the Board meetings of FTIL, showing
therefore, that FTIL has full knowledge of the goings-on in NSEL.
NSEL’s outward emails were routed through an outbox called “FT
outbox” through which all emails of all FTIL-group companies were
routed. What is clear, therefore, is that on a reading of the Grant Thornton
report, NSEL has, at least from 2009, promoted what are called “paired
contracts” in commodities which were, in fact, financing transactions,
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which were totally distinct from sale and purchase transactions in
commodities. In fact, by April to July, 2013, 99% of the turnover of
NSEL was made up of such paired contracts. This mechanism was in
breach of the conditions of exemption granted to NSEL dated 05.06.2007,
and in breach of the provisions of the FCRA. Contrary to what was
actually going on in NSEL, NSEL kept inducing persons to come to its
platform by reiterating that they deal only with commodities and spot
delivery of the same. It is only in 2012 that the FMC, being apprised of
the real activities of NSEL, wrote to the DCA, indicating that its business
was in complete breach of the FCRA. What is extremely important is
that Shri Jignesh Shah made representations to the DCA and the FMC
on 10.07.2013, in which he stated that NSEL had full stock of commodities
as collateral and 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 Corporate Affairs, in which it indicated that as
NSEL was financially incapable of repaying all those investors/traders
who allegedly got duped, it would be expedient in public interest to
amalgamate NSEL with its parent, FTIL, so that its parent’s resources
could be used to repay these debts. He then argued that the reason for
the amalgamation order was not merely the repayment of debts of the
allegedly duped investors/traders, but to instil confidence in commodity
markets, for it is only when their debts are immediately paid would persons
come forward to platforms like NSEL to trade in commodities. According
to the learned Senior Advocate, there was no breach of natural justice in
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passing the final amalgamation order as FTIL and NSEL were both
heard pursuant to a Bombay High Court order, even though Section 396
of the Companies Act does not require any hearing. He also argued that
the order of amalgamation is of the nature of delegated legislation and is
not an administrative order, as a result of which, the immunity granted
by Article 31A to “all laws” dealing with such amalgamation from
challenge on the ground of Articles 14 and 19 would come into full play.
This being so, none of the grounds taken up by the appellants could be
gone into as they all pertained to infractions of Articles 14 and 19 of the
Constitution of India. According to the learned Senior Advocate, the
order was passed after being satisfied on the objective facts set out
hereinabove that it was essential in public interest to pass such order
and could not, therefore, be held to be ultra vires. He also supported the
judgment of the High Court when it stated that the economic value of
shares of FTIL is not the subject matter of Section 396, and that, therefore,
it was not necessary to provide FTIL’s shareholders any compensation
under Section 396(3).
16. Shri Rakesh Dwivedi, learned Senior Advocate also appearing
on behalf of Respondent No.4, supplemented the submissions of Shri
Divan. According to him, nowhere does the Central Government order
direct any payment to be made by the amalgamated company. The
amalgamation is only so that the finances of FTIL can be
used to pursue
on-going litigation as NSEL does not have the wherewithal to do so.
Thus, it is wholly incorrect for the appellants to say that FTIL will become
mulcted with the liabilities of NSEL, as a result of which 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
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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 compensation to
shareholders and creditors of FTIL, they could have appealed against
the same. Not having done so, it cannot be said that the Central
Government order was passed without adhering to the provisions of
Section 396(3) and (4) of the Act. When it came to the three grounds of
public interest stated by the High Court, the learned Senior Advocate
argued that grounds (a) and (b) are only inferences to be drawn from
facts which are all stated in the order, and therefore, need not have been
in the draft order. There is thus no infirmity or breach of principles of
natural justice as provided in Section 396(3) and (4). He was at pains to
analyse Article 31A, and stated that the expression “public interest”
contained in Article 31A will have to be construed broadly. Equally, the
word “essential” in Section 396 is essentiality according to the Central
Government, and thus, very wide latitude needs to be extended to the
Government when it exercises its discretion, stating that it is essential in
public interest to amalgamate two companies. He laid great emphasis
on the judgment in Ganesh Bank of Kurundwad Ltd. v. Union of
India, (2006) 10 SCC 645 [“Ganesh
Bank”], stressing that
amalgamations that are made under Section 45 of the Banking Regulation
Act, like amalgamations made under Section 396, can be made so that a
weak entity merge with a strong entity in the interest of the depositors of
the weak entity. He also cited various judgments to show that stock
exchanges are intimately linked with the economy of the country, and
therefore, if anything goes wrong with them, there is a direct link with
public interest. He emphasized the fact that in Section 396(3), the
shareholders of FTIL only need to be compensated “as nearly as may
be” and that mathematical precision is not necessary.   He then
distinguished the judgment in Mohinder Singh Gill v. Chief Election
Commissioner, (1978) 1 SCC 405 [“Mohinder Singh Gill”], cited by
the appellants, stating that where larger public interest is involved, the
ratio of that judgment will not apply. He cited two judgments in support
of this proposition. He also went on to cite certain judgments which
distinguished K.I. Shephard v. Union of India, (1987) 4 SCC 431
[“K.I. Shephard”], and therefore, argued that the Central Government
order passed under Section 396 is really in the nature of delegated
legislation and need not conform to any natural justice outside what is
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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’s Report or in the balance sheet. He was at pains to point out,
therefore, that NSEL itself was an exchange which made it clear that it
would not be responsible for any liabilities incurred by its members
except to the extent of the SG fund created out of the members’
contribution. He then argued that given the magnitude of the
scam that
broke out in July 2013, the Government had to act. It could have chosen
one of many ways in which to act, but since it had bona fide chosen the
amalgamation route provided by Section 396 of the Companies Act, it is
obvious that in    dealing with a scam of this magnitude, the Government
has acted in public interest.
18. Ms. Pinky Anand, learned Additional Solicitor General
appearing on behalf of the Union of India, meticulously took us through
a long list of dates and events which showed that NSEL had flouted the
conditions of its exemption order and had never really carried out ready
delivery or spot delivery contracts in goods. Indeed, according to her,
NSEL never had a single registered warehouse in its name as the
Warehousing Development and Regulatory Authority had rejected
NSEL’s application for registration of its warehouses as far back as on
16.05.2011. Therefore, NSEL stating that it had 120 warehouses owned
by itself was a misrepresentation made to the public from the very
beginning. It is also clear, that when the scam broke out, Grant Thornton,
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as forensic auditor, went into the affairs of NSEL and came out with a
number of key findings, which she referred to and took us through portions
of the Grant Thornton report. The FMC order dated 17.12.2013 was
also referred to and relied upon by her. She also referred to the fact that
the exemption order dated 05.06.2007 granted to NSEL was withdrawn
on 19.09.2014 as commodities markets which were supposed to be
markets where spot delivery of goods took place, had never in fact taken
place and therefore, exemption granted to all spot exchanges dealing in
commodities, including two other spot exchanges that existed, were
withdrawn. However, the Bombay Stock Exchange Ltd. (BSE), the
National Stock Exchange of India Ltd. (NSE), and MCX continued with
commodity trading, but not on a spot basis. She also referred us to a
subsequent event, that is an event subsequent even to the impugned
judgment, namely, to a serious fraud investigation report dated 31.08.2018
which, 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 this,
she relied upon a number of judgments to support her contention that
“public interest” has to be given a broad connotation. She also countered
the submission of Shri Rohatgi that of the two persons who heard the
objections, only one person signed, and therefore, their report would be
non-est. She stated that this technical objection cannot stand in the way
of the final government order which took into account all objections and
suggestions made, and answered all of them. She also referred to the
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role of stock markets in the national economy and stated that to prop up
stock and commodities exchanges is certainly in public interest. The
three distinct grounds on public interest, found by the High Court, are
more than sufficient to sustain the impugned Central Government order.
Finally, in her last written argument, she relied upon two judgments of
this Court, namely, Union of India v. G. Ganayutham, (1997) 7 SCC
463 and Om Kumar v. Union of India, (2001) 2 SCC 386, stating the
current position of the doctrine of proportionality in administrative law.
19. Shri Tushar Mehta, learned Solicitor General for India, who
also appeared on behalf of the Union of India, re-emphasised the facts
which led to the final amalgamation order. According to him, the impugned
order dated 12.02.2016 is based on public interest as it reflects the
Government’s reaction to a large scam which broke in the year 2013,
and which effected the commodities market generally. He dwelt at some
length on subjective satisfaction and judicial review, and referred to
Barium Chemicals Ltd. v. Company Law Board, [1966] Supp SCR
311 [“Barium Chemicals”], Rohtas Industries Ltd. v. S.D. Agarwal,
[1969] 3 SCR 108 [“Rohtas Industries”], and other judgments to
emphasise that it was not for the Court to sit in judgment over the
sufficiency of the reasons for which the Central Government passed its
order in public interest. He also stated that the right to choose between
different courses of
action is a right inherent in a responsive government,
and it is only when such choice is so unfair or unreasonable that no
reasonable person would have taken such action, that the Court can
intervene. For this purpose, he cited Haryana Financial Corporation
v. Jagdamba Oil Mills, (2002) 3 SCC 496. According to him, essentiality
is not reviewable except by the Wednesbury test, and the Court should
ask 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.
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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 by this Court.
He also brought to our notice another judgment dated 01.11.2018, also
of the Bombay High Court, in which NSEL and FTIL had breached an
injunction order, and had to apologise and pay back monies in order to
avoid being held guilty of contempt of court. He also stressed that
“economic value” of shares is a stranger to Section 396(3) of the
Companies Act. He then relied upon two reports of the RBI, both of
which say that the modern trend in corporate law worldwide is that if
losses are borne by a corporation, it is the shareholders who should bear
the brunt.
21. Having heard learned counsel for all the parties, it is necessary
at this juncture to first set out Article 31A of the Constitution of India,
which states:
“31A. Saving of laws providing for acquisition of estates,
etc.—(1) Notwithstanding anything contained in Article 13, no
law providing for—
xxx xxx xxx
(c) the amalgamation of two or more corporations either in the
public interest or in order to secure
the proper management of
any of the corporations, or
      xxx xxx xxx
shall be deemed to be void on the ground that it is inconsistent
with, or takes away or abridges any of the rights conferred by
article 14 or article 19.
xxx xxx xxx”
“Law” has been defined in Article 13(3) as follows:
“13. Laws inconsistent with or in derogation of the
fundamental rights.—
xxx xxx xxx
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(3) In this article, unless the context otherwise requires,—
(a) “law” includes any Ordinance, order, bye-law, rule,
regulation, notification, custom or usage having in the territory
of India the force of law;
xxx xxx xxx”
It will thus be seen that any “law” providing for the amalgamation
of two or more corporations in public interest is immune from challenge
on grounds relatable to Article 14 or Article 19 of the Constitution of
India.  It is not disputed that Section 396 of the Companies Act is such a
law.
22. Section 396 of the Companies Act, 1956, reads as under:
“396. Power of Central Government to provide for
amalgamation of companies in public interest.—(1) Where
the Central Government is satisfied that it is essential in the public
interest that two or more companies should amalgamate, then,
notwithstanding 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 from the amalgamation are less than his
interest in or rights against the original company, he shall be entitled
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to compensation which shall be assessed by such authority as
may be prescribed and every such assessment shall be published
in the Official Gazette.
      The compensation so assessed shall be paid to the member
or creditor concerned by the company resulting from the
amalgamation.
(3A) Any person aggrieved by any assessment of compensation
made by the prescribed authority under sub-section (3) may, within
thirty days from the date of publication of such assessment in the
Official Gazette, prefer an appeal to the Tribunal and thereupon
the assessment of the compensation shall be made by the Tribunal.
(4) No order shall be made under this section, unless:
(a) a copy of the proposed order has been sent in draft to each
of the companies concerned;
(aa) 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; and
(b) the Central Government has considered, and made such
modifications, if any, in the draft order as may seem to it
desirable in the light of any suggestions and objections which
may be received by it from any such company within such
period as the Central Government may fix in that behalf, not
being less than two months from the date on which the copy
aforesaid is received by that company, or from any class of
shareholders therein, or from any creditors or any class of
creditors thereof.
(5) Copies of every order
made under this section shall, as soon
as may be after it has been made, be laid before both Houses of
Parliament.”
It will be seen that Section 396 provides for compulsory
amalgamation of companies in public interest. The said Section occurs
in Chapter V of the Companies Act which reads, “arbitrations,
compromises, arrangements and reconstructions”. Sections 391 to 394
deal with voluntary compromises and arrangements, including
amalgamation of two or more companies. By way of contrast, Section
396 deals with compulsory amalgamation of companies.
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INTERPRETATION OF SECTION 396
23. There is no doubt whatsoever that Section 396 cannot be
challenged on the ground of Article 14 or Article 19, given Article 31A of
the 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
commonsense.”
Equally, in Budhan Singh and Anr. v. Nabi Bux and Anr., [1970]
2 SCR 10, this Court, while construing Section 90 of
the U.P. Zamindari
Abolition and Land Reforms Act, 1950, held:
       “Before considering the meaning of the word “held” in Section
9, it is necessary to mention that it is proper to assume that the
law-makers who are the representatives of the people enact laws
which the society considers as honest, fair and equitable. The
object of every legislation is to advance public welfare. In other
words as observed by Crawford in his book on Statutory
Constructions that the entire legislative process is influenced by
considerations of justice and reason. Justice and reason constitute
the great general legislative intent in every piece of legislation.
Consequently where the suggested construction operates harshly,
ridiculously or in any other manner contrary to prevailing
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conceptions of justice and reason, in most instances, it would seem
that the apparent or suggested meaning of the statute, was not
the one intended by the law-makers. In the absence of some other
indication that the harsh or ridiculous effect was actually intended
by the legislature, there is little reason to believe that it represents
the legislative intent.”
(at pp. 15-16)
DERIVATIVE 
IMMUNITY 
OF 
THE 
CENTRAL
GOVERNMENT ORDER
24. The next question is whether the Central Government’s order
made under Section 396 would also receive the protective umbrella of
Article 31A, given the fact that Section 396 is undoubtedly protected by
Article 31A.
25. A similar question was raised and considered with respect to
an order passed under the Essential Commodities Act, 1955. In Prag
Ice & Oil Mills v. Union of India, (1978) 3 SCC 459 [“Prag Ice &
Oil Mills”], by a majority judgment, it was held that the Mustard Oil
(Price Control) Order, 1977, passed under Section 3 of the Essential
Commodities Act, 1955 did not receive the immunity of Article 31B.
This Court held:
“46. Article 31A of the Constitution saves laws which provide for
matters mentioned in clauses (a) to (e) thereof from a challenge
under Articles 14, 19 or 31 notwithstanding anything contained in
Article 13 of the Constitution. Article 31B which was introduced
by the Constitution (First Amendment) Act, 1951, validates certain
Acts and 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
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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 demarcating the farthest limit of exclusion.
Considering the nature of the subject-matter which Article 31B
deals with, there is, in our opinion, no justification for contending
by judicial interpretation the provisions of the field which is declared
by that article to be immune from challenge on the ground of
violation or abridgement of fundamental rights. The article affords
protection to Acts and Regulations specified in the Ninth Schedule.
Therefore, whenever a challenge to the constitutionality of a
provision of law on the ground that it violates any of the fundamental
rights conferred by Part III is sought to be repelled by the State
on the plea that the law is placed in the Ninth Schedule, the narrow
question to which one must address oneself is whether the
impugned law is specified in that Schedule. If it is, the provisions
of Article 31B would be attracted and the challenge would fail
without any further
inquiry. On the other hand, if the law is not
specified in the Ninth Schedule, the validity of the challenge has
to be examined in order to determine whether the provisions thereof
invade in any manner any of the fundamental rights conferred by
Part III. It is thus no answer to say that though the particular law,
as for example a Control Order, is not specified in the Ninth
Schedule, the parent Act under which the Order is issued is
specified in that Schedule.”
26. In the present case, this judgment has no direct application
except to say that Article 31A also constitutes a grave encroachment on
fundamental rights, and must be construed strictly. The expression used
in Article 31A is “law”, for which, one is to see the definition contained
in Article 13(3). “Law” in Article 13(3) certainly includes “order”. The
only question is whether this would include an administrative order as
well.
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27. It is clear, on a reading of Article 13(3), that the expression
“law”, as defined in Article 13(3)(a), includes an Ordinance, rule,
regulation, notification, and custom or usage having in the territory of
India the force of law. Obviously, therefore, when the expression “order”
is used, it would take colour from Ordinance, rule, regulation, notification,
which are all legislative in nature, and not administrative. Even custom
or usage having the force of law refers to general rules of conduct, as
opposed to administrative orders passed on the facts 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).
29. The difference between an order which is legislative in nature
and that which is administrative in nature has been discussed in some of
our judgments. Thus, in Cynamide India (supra), this Court drew a
distinction between administrative and legislative orders thus:
“7. …… Any attempt to draw a distinct line between legislative
and administrative functions, it has been said, is ‘difficult in theory
and impossible in practice’. Though difficult, it is necessary that
the line must sometimes be drawn as different legal rights and
consequences may ensue. The distinction between the two has
usually been expressed as ‘one between the general and the
particular’. ‘A legislative act is the creation and promulgation of a
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general rule of conduct without reference to particular cases; an
administrative act is the making and issue of a specific direction
or the application of a general rule to a particular case in
accordance with the requirements of policy’. ‘Legislation is the
process of formulating a general rule of conduct without reference
to particular cases and usually operating in future; administration
is the process of performing particular acts, of issuing particular
orders or of making decisions which apply general rules to
particular cases.’ It has also been said: ‘Rule-making is normally
directed toward the formulation of requirements having a general
application to all members of a broadly identifiable class’ while,
‘an adjudication, on the other hand, applies to specific individuals
or situations’. But, this is only a broad distinction, not necessarily
always true. Administration and administrative adjudication may
also be of general application and there may be legislation of
particular application only. That is not ruled out. Again, adjudication
determines past and present facts and declares rights and liabilities
while legislation indicates the future course of action. Adjudication
is determinative of the past and the present while legislation is
indicative of the future.……”
In K.I. Shephard (supra), this Court dealt with a scheme for
amalgamation of three private banks with Punjab National Bank, Canara
Bank, and State Bank of India, in terms of separate
schemes drawn,
merging each private bank with state banks under Section 45 of the
Banking Regulation Act. It was urged that the order passed by the Reserve
Bank of 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?
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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 has been
vested in the Central Government in terms of what is ordinarily
known as a Henry VIII clause for making orders for removal of
difficulties. Section 45(11) requires that copies of the schemes as
also such orders made by the Central Government are to be placed
before both Houses of Parliament. We do not think this requirement
makes the exercise in regard to schemes a legislative process. It
is not necessary to go to any other authority as the very decision
relied upon by Mr Salve in the case of Cynamide India Ltd.
[(1987) 2 SCC 720] lays down the test. In para 7 of the judgment
it has been indicated: (SCC pp. 735-36)
“Any attempt to draw a distinct line between legislative and
administrative functions, it has been said, is ‘difficult in theory
and impossible in practice’. Though difficult, it is necessary
that the line must sometimes be drawn as different legal rights
and consequences may ensue. The distinction between the two
has usually been expressed as ‘one between the general and
the particular’. ‘A legislative act is the creation and
promulga-
tion of a general rule of conduct without reference to particu-
lar cases; an administrative act is the making and issue of a
specific direction or the application of a general rule to a par-
ticular case in accordance with the requirements of policy’.
‘Legislation is the process of formulating a general rule of con-
duct without reference to particular cases and usually operat-
ing in future; administration is the process of performing par-
ticular acts, of issuing particular orders or of making decisions
which apply general rules to particular cases.’ It has also been
said: ‘Rule-making is normally directed towards the formula-
tion of requirements having a general application to all mem-
bers of a broadly identifiable class’ while, ‘an adjudication, on
the other hand, applies to specific individuals or situations’.
But, this is only a broad distinction, not necessarily always true.”
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Applying these tests it is difficult to accept Mr Salve’s contention
that the framing of the scheme under Section 45 involves a
legislative process. There are similar statutory provisions which
require placing of material before the two Houses of Parliament
yet not involving any legislative activity. The fact that orders made
by the Central Government for removing difficulties as
contemplated under sub-clause (10) are 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 are to be amalgamated. It
is clear that such an order is not in the nature of legislation or delegated
legislation.
30. Learned counsel appearing on behalf of the respondents have
cited New Bank of India Employees’ Union and Anr. v. Union of
India and Ors., (1996) 8 SCC 407 [“New Bank of India Employees’
Union”], which is a judgment which has distinguished K.I. Shephard
(supra). This judgment was concerned with Section 9 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980
[“Acquisition Act”], which requires schemes that have been framed
under the said Act to be laid before each House of Parliament for a total
period of thirty days, in which, Parliament is then given the power to
make any modification therein. Given the difference in language between
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the provisions, namely, Section 45 of the Banking Regulation Act and
Section 9 of the Acquisition Act, this Court distinguished the judgment of
K.I. Shephard (supra) thus:
“32. The only other question which remains for consideration is
whether the conclusion of the High Court that the scheme-making
process under Section 9 of the Acquisition Act is not legislative is
correct in law. In view of our conclusions on the four questions
formulated, this question is not of much relevance but since the
High Court has recorded a conclusion and the learned Additional
Solicitor General and Shri Salve advanced the argument we think
it appropriate to answer this question also. The High Court relied
upon the decision in Shephard case [(1987) 4 SCC 431 : 1987
SCC (L&S) 438 : (1988) 1 SCR 188] and came to hold that the
provisions of Section 45 of the Banking Regulation Act being in
pari materia with Section 9 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980, and the scheme framed
under Section 45 of the Banking Regulation Act, 1949 having been
held by this Court to be not legislative, the scheme framed under
the Acquisition Act as in the present case, must also be held to be
not a legislative one. It is undisputed that in Shephard case [(1987)
4 SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] the
amalgamation was of a private bank with a nationalised bank and
the provisions of the Banking Regulation Act,
1949 applied. This
Court in Shephard case [(1987) 4 SCC 431 : 1987 SCC (L&S)
438 : (1988) 1 SCR 188] on examining Section 45(11) of the Banking
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
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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
before both the Houses of Parliament and after Parliament makes
such modification and agrees to the scheme. In this view of the
matter the decision of this Court in Shephard case [(1987) 4
SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] has no
application to a scheme framed under the provisions of the
Acquisition Act and in our considered opinion, a scheme framed
under Section 9 of the Banking Companies Acquisition and
Transfer of Undertakings Act, 1980, is a legislative one. The High
Court was in error in holding the scheme not to be a legislative
one.”
Since Section 396(5) of the Companies Act is a provision akin to
the provision considered in the case of K.I. Shephard (supra), the ratio
of K.I. Shephard (supra) squarely applies. The judgment in New Bank
of India Employees’ Union (supra), therefore, is of no assistance,
given the statutory provision in the present case.
31. Learned Senior Advocates on behalf of the respondents then
cited the judgment in Quarry Owners’ Association v. State of Bihar
and Ors., (2000) 8 SCC 655. This judgment, in paragraphs 45 and 55,
held that
even a simple laying of an order before Parliament is a mandatory
condition to be observed, and ordered that the particular order in that
case be laid before the legislature as it had not so been laid earlier. This
judgment again has nothing to do with whether, on account of laying
before the legislature, an order is administrative or legislative in nature.
This judgment also, therefore, does not carry us very much further.
32. Learned Senior Advocates on behalf of the respondents then
cited a passage from J.K. (Bombay) (P) Ltd. (supra), and paragraph
23 in particular, in which this Court observed that an order made under
Section 391 of the Companies Act has statutory force. The fact that a
similar order made under Section 396 may also have statutory force
again does not answer the precise question before us, namely, as to
whether such orders having statutory force are administrative or
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legislative in nature. This observation again does not carry the matter
very much further.
33. The order passed under Section 396 is qua particular companies
and does not lay down any general rule of conduct by itself, but in fact,
follows the general rule of conduct laid down by Section 396. Thus, the
Central Government order, made under Section 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 effect and substance,
though not in form, the said right is violated or curtailed. Otherwise
the fundamental right will be lost or unduly restricted in our
adherence to the form to the exclusion of the content.”
   (at p. 303)
Likewise, in Hamdard Dawakhana (Wakf) Lal Kuan, Delhi
and Anr.  v. Union of India and Ors., [1960] 2 SCR 671, it was held
as under:
“In the present case therefore (1) the advertisements affected by
the Act do not fall within the words freedom of speech within
Article 19(1)(a); (2) the scope and object of the Act, its true
nature and character is not interference with the right of freedom
of speech but it deals with trade or business; and (3) there is no
direct abridgement of the right of free speech and a mere incidental
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interference with such right would not alter the character of the
law; Ram Singh v. State of Delhi [(1951) SCR 451-455]; Express
Newspapers (Private) Ltd. v. Union of India [(1959) SCR 12,
123-133]
       It is not the form or incidental infringement that determines
the constitutionality of a statute in reference to the rights
guaranteed in Art. 19(1), but the reality and substance. The Act
read as a whole does not merely prohibit advertisements relating
to drugs and medicines connected with diseases expressly
mentioned in s. 3 of the Act but they cover all advertisements
which are objectionable or unethical and are used to promote self-
medication or self-treatment. This is the content of the Act. Viewed
in this way, it does not select any of the elements or attributes of
freedom of speech falling within Art. 19(1)(a) of the Constitution.”
       (at pp. 690-691)
Likewise, in Sakal Papers (P) Ltd. and Ors. v. Union of India,
[1962] 3 SCR 842, this Court held:
“It must be borne in mind that the Constitution must be interpreted
in a broad way and not in a narrow and pedantic sense. Certain
rights have been enshrined in our Constitution as fundamental
and, therefore, while considering the nature and content of those
rights the Court must not be too astute to interpret the language of
the Constitution in so literal a sense as to whittle them down. On
the other hand the Court must interpret the Constitution in a manner
which would enable the citizen to enjoy
the rights guaranteed by it
in the fullest measure subject, of course, to permissible restrictions.
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
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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 inclusion within the definition of ‘State’ in Article
12, subject to the same constitutional limitations as the government
and is equally bound by the basic obligation to obey the
constitutional mandate of the Fundamental Rights enshrined in
Part III of the Constitution. We must therefore give such an
interpretation to the expression “other authorities” as will not
stultify the operation and reach of the fundamental rights by
enabling the government to its obligation in relation to the
Fundamental Rights by setting up an authority to act as its
instrumentality or agency for carrying out its functions. Where
constitutional fundamentals vital to the maintenance of human
rights are at stake, functional realism and not facial cosmetics
must be the diagnostic tool, for constitutional law must seek the
substance and not the form. Now it is obvious that the Government
may act through the instrumentality or agency of natural persons
or it may employ the instrumentality or agency of juridical
persons
to carry out its functions. In the early days when the Government
had limited functions, it could operate effectively through natural
persons constituting its civil service and they were found adequate
to discharge governmental functions which were of traditional
vintage. But as the tasks of the government multiplied with the
advent of the welfare State, it began to be increasingly felt that
the framework of civil service was not sufficient to handle the
new tasks which were often specialised and highly technical in
character and which called for flexibility of approach and quick
decision making. The inadequacy of the civil service to deal with
these new problems came to be realised and it became necessary
to forge a new instrumentality or administrative device for handling
these new problems. It was in these circumstances and with a
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view to supplying this administrative need that the corporation
came into being as the third arm of the government and over the
years it has been increasingly utilised by the government for setting
up and running public enterprises and carrying out other public
functions. ……”
Also, in M.C. Mehta and Anr. v. Union of India and Ors.
(Shriram – Oleum Gas), (1987) 1 SCC 395, this Court held:
“2. Mr Divan, learned counsel appearing on behalf of Shriram
raised a preliminary objection that the court should not proceed to
decide 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 approach which would defeat the ends of
justice. This Court has on numerous occasions pointed out that
where there is a violation of a fundamental or other legal right of
a person or class of persons who by reason of poverty or disability
or socially or economically disadvantaged position cannot approach
a court of law for justice, it would be open to any public spirited
individual or social action group to bring an action for vindication
of the fundamental or other legal right of such individual or class
of individuals and this can be done not only by filing a regular writ
petition but also by addressing a letter to the court. If this Court is
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prepared to accept a letter complaining of violation of the
fundamental right of an individual or a class of individuals who
cannot approach the court for justice, there is no reason why
these applications for compensation which have been made for
enforcement of the fundamental right of the persons affected by
the oleum gas leak under Article 21 should not be entertained.
The court while dealing with an application for enforcement of a
fundamental right must look at the substance and not the form.
We cannot therefore sustain the preliminary objection raised by
Mr Divan.”
34. Various pre-requisites contained in the said Section must first
be satisfied before the Section can be said to operate. First and foremost,
the Central Government has to be “satisfied”, meaning thereby, that it
must, on certain objective facts, come to a conclusion that amalgamation
between two or more companies is necessary. This can only be done if
the Central Government finds it “essential”, i.e., necessary to do so.
Also, this can only be done in “public interest” (the Section originally
contained the expression “national interest”. By Amendment Act 65 of
1960, “national interest” was substituted by “public interest”).
35. The Notes on Clauses relating to the original Section 396 reads
as follows:
“Clause 366—This is a new provision and it is intended to provide,
at the instance of the Government, for the amalgamation of two
or more companies
in the national interest. Occasionally, cases
arise where such an amalgamation in the national interest is clearly
a necessity. The observance of the usual procedure prescribed
by the existing Act in such cases will lead to prolonged delays
which will be detrimental to 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
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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 Government under
this Section is 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 erstwhile company either as a member or a creditor, and if
this is not so, such member or creditor shall be entitled to compensation
which is to be assessed by such authority as may be prescribed. From
the order of such assessment, an appeal is provided by sub-section (3A).
What is important is the mandatory language contained in sub-section
(4), which states that no order shall be made under the Section 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. This makes it clear that unless an order of compensation is
first made under sub-section
(3), and an appeal therefrom has either not
been filed or has been disposed of, no order of amalgamation can be
made. Another condition precedent is an inbuilt provision for natural
justice, namely, that a proposed draft order has first been sent to each of
the companies concerned. The companies may then send suggestions
or objections to the Central Government, which the Central Government
must first consider before passing the final order. Such objections and
suggestions can also be sent from any class of shareholders of either of
the companies, or from any creditors or class of creditors of either of
the companies.
“WHERE THE CENTRAL GOVERNMENT IS SATISFIED”
37. With regard to similar language that is contained in Section
237(b) of the Companies Act, 1956, this Court, in Barium Chemicals
(supra), contained separate opinions as to what the phrase “in the opinion
of” contained in Section 237(b) meant. In Rohtas Industries (supra),
this Court adopted the test laid down by Hidayatullah, J. (as he then
was) and Shelat, J. as follows:
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    “Before taking action under Section 237(b)(i) and (ii), the
Central Government has to form an opinion that there are
circumstances suggesting that the business of the company is being
conducted with intent to defraud its creditors, members or any
other persons, or otherwise for a fraudulent or unlawful purpose
or in a manner oppressive to any member or that the company
was formed for any fraudulent or 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 ordinary
citizen but that of an expert. The learned Attorney did not dispute
the position that if we come to the conclusion that no reasonable
authority would have passed the impugned order on the material
before it, then the same is liable to be struck down. This position
is also clear from the decision of this Court in Barium Chemicals
and Anr. v. Company Law Board and Anr. [(1966) Supp SCR
311].
    (at p. 119)
xxx xxx xxx
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The decision of this Court in Barium Chemicals case which
considered the scope of Section 237(b) illustrates that difficulty.
In that case Hidayatullah, J. (our present Chief Justice) and Shelat,
J. came to the conclusion that though the power under Section
237(b) is a discretionary power the first requirement for its exercise
is the honest formation of an opinion that the investigation is
necessary and the further requirement is that “there are
circumstances suggesting” the inference set out in the section; an
action not based on circumstances suggesting an inference of the
enumerated kind will not be valid; the formation of the opinion is
subjective but the existence of the circumstances relevant to the
inference as the sine qua non for action must be demonstratable;
if their existence is questioned, it has to be proved at least prime
facie; it is not sufficient to assert that those circumstances exist
and give no clue to what they are, because the circumstances
must be such as to lead to conclusions of certain definiteness; the
conclusions must relate to an intent to defraud, a fraudulent or
unlawful purpose, fraud or misconduct. In other words they held
that although the formation of opinion by the Central Government
is a purely subjective process and such an opinion cannot be
challenged in a court on the ground of propriety, reasonableness
or sufficiency, the authority concerned is nevertheless required to
arrive at such an opinion from circumstances
suggesting the
conclusion set out in sub-clauses (i), (ii) and (iii) of Section 237(b)
and the expression “circumstances suggesting” cannot support
the construction that even the existence of circumstances is a
matter of subjective opinion. Shelat, J. further observed that it is
hard to contemplate that the Legislature could have left to the
subjective process both the formation of opinion and also the
existence of circumstances on which it 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
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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 earlier and therefore the said provision takes its colour
from Sections 235 and 236. In finding out the legislative intent we
cannot ignore the requirements of those sections. In interpreting
Section 237(b) we cannot ignore the adverse effect of the
investigation on the company. Finally we must also remember
that the section in question is an inroad on the powers of the
company to carry on its trade or business and thereby an infraction
of the fundamental right guaranteed to its shareholders under
Article 19(1)(g) and its validity cannot be upheld unless it is
considered that the power in question is a reasonable restriction
in the interest of the general public. In fact the vires of that provision
was upheld by majority of
the Judges constituting the Bench in
Barium Chemicals case principally on the ground that the power
conferred on the Central Government is not an arbitrary power
and the same has to be exercised in accordance with the restraints
imposed by law. For the reasons stated earlier we agree with the
conclusion reached by Hidayatullah, J. and Shelat, JJ. in Barium
Chemicals case that the existence of circumstances suggesting
that the company’s business was being conducted as laid down in
sub-clause(1) or the persons mentioned in sub-clause (2) were
guilty of fraud or misfeasance or other misconduct towards the
company or towards any of its members is a condition precedent
for the Government to form the required opinion and if the existence
of those conditions is challenged, the courts are entitled to examine
whether those circumstances were existing when the order was
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made. In other words, the existence of the circumstances in
question are open to judicial review though the opinion formed by
the Government is not amenable to review by the courts. As held
earlier the required circumstances did not exist in this case.”
                    (at pp. 128-129)
38. In Western U.P. Electric Power & Supply Co. Ltd. v.
State of U.P. and Anr., (1969) 1 SCC 817, this Court dealt with a
situation where the Indian Electricity Act, 1910 was amended by the
U.P. Act 30 of 1961, by which, Section 3(2)(e)(ii) provided that the grant
of a licence shall not, in any way, hinder or restrict the supply of energy
by the State Government or the State Electricity Board within the same
area where the State Government deems such supply “necessary in
public interest”. In that 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 electric supply-lines for transmission of energy and to
maintain its establishment. An inroad may be made in that right in
the conditions which are statutorily prescribed. In our judgment,
the satisfaction of the Government that the supply is necessary in
the public interest is in appropriate cases not excluded from judicial
review.”
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39. Close upon the heels of these judgments, this Court, after
considering Barium Chemicals (supra) and Rohtas Industries (supra),
restated the test as to judicial review of administrative action in Rampur
Distillery Co. Ltd. v. Company Law Board, [1970] 2 SCR 177 as
follows:
“The scheme of the section implies investigation and a decision
on the matters set out therein. Section 326 lays down conditions
by sub-section (1)(a) in which the Central Government may
override the resolution of the general body of share-holders in
certain specified conditions. Upon the Central Government is
imposed a duty not to accord approval to the appointment or re-
appointment of a proposed managing agent in the light of clauses
(a), (b) and (c) of sub-section (2). Though the sub-section is
enacted in form negative, in substance it confers power upon the
Government subject to the restrictions imposed by clauses (a),
(b) and (c), to refuse to accord approval. Sub-section (2) imposes
upon the Central Government the duty not to accord approval to
appointment or re-appointment of a proposed managing agent
unless the Government is satisfied that the managing agent is a fit
and proper person to be appointed, that the conditions of the
managing agency agreement are fair and reasonable and that the
managing agent has fulfilled the conditions which the Central
Government required him to fulfil. Thereby the Central
Government is not made the final
arbiter of the existence of the
grounds on which the satisfaction may be founded. The satisfaction
of the Government which is determinative is satisfaction as to the
existence of certain objective facts. The recital about satisfaction
may be displaced by showing that the conditions did not exist, or
that no reasonable body of persons properly versed in law could
have reached the decision that they did.
The Courts, however, are not concerned with the sufficiency of
the grounds on which the satisfaction is reached. What is relevant
is the satisfaction of the Central Government about 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.
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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 to which the administrative body is required to
conform may range from the courts’ own opinion of what is
reasonable to the criterion of what a reasonable body might have
decided. The courts will find out whether conditions precedent to
the formation of the opinion have a factual basis.”
                  (at p. 99)
In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81,
this Court exhaustively set out parameters for judicial review of the
subjective satisfaction of the detaining authority in a preventive detention
case. This Court held:
“9. But that does not mean that the subjective satisfaction of the
detaining authority is wholly immune from
judicial reviewability.
The courts have by judicial decisions carved out an area, limited
though it be, within which the validity of the subjective satisfaction
can yet be subjected to judicial scrutiny. The basic postulate on
which the courts have proceeded is that the subjective satisfaction
being a condition precedent for the exercise of the power
conferred on the Executive, the Court can always examine
whether the requisite satisfaction is arrived at by the authority : if
it is not, the condition precedent to the exercise of the power
would not be fulfilled and the exercise of the power would be
bad. There are several grounds evolved by judicial decisions for
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saying that no subjective satisfaction is arrived at by the authority
as required under the statute. The simplest case is whether the
authority has not applied its mind at all; in such a case the authority
could not possibly be satisfied as regards the fact in respect of
which it is required to be satisfied. Emperor v. Shibnath Bannerji
[AIR 1943 FC 75 : 1944 FCR 1 : 45 Cri LJ 341] is a case in point.
Then there may be a case where the power is exercised dishonestly
or for an improper purpose : such a case would also negative the
existence of satisfaction on the part of the authority. The existence
of “improper purpose”, that is, a purpose not contemplated by the
statute, has been recognised as an independent ground of control
in several decided cases. The satisfaction, moreover, must be a
satisfaction of the authority itself, and therefore, if, in exercising
the power, the authority has acted under the dictation of another
body as the Commissioner of Police did in Commissioner of
Police v. Gordhandas Bhanji [AIR 1952 SC 16 : 1952 SCR
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 statute. If the authority has taken into account, it
may even be with the best of intention, as a relevant factor
something which it could not properly take into account in deciding
whether or not to exercise the power or the manner or extent to
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which it should be exercised, the exercise of the power would be
bad. Pratap Singh v. State of Punjab [AIR 1964 SC 72 : (1964)
4 SCR 733]. If there are to be found in the statute expressly or by
implication matters which the authority ought to have regard to,
then, in exercising the power, the authority must have regard to
those matters. The authority must call its attention to the matters
which it is bound to consider.”
In Tata Cellular v. Union of India (1994) 6 SCC 651, after an
exhaustive review of the latest English judgments, this Court held:
 “77. The duty of the court is to confine itself to the question of
legality. Its concern should be:
1. Whether a decision-making authority exceeded its powers?
2. committed an error of law,
3. committed a breach of the rules of natural justice,
4. reached a decision which no reasonable tribunal would have
reached or,
     5. abused its powers.
Therefore, it is not for the court to determine whether a particular
policy or particular decision taken in the fulfilment of that policy is
fair. It is only concerned with the manner in which those decisions
have been taken. The extent of the duty to act fairly will vary
from case to case. Shortly put, the grounds upon which an
administrative action is subject to control by judicial review can
be classified as under:
(i) Illegality: This means the decision-maker must understand cor-
rectly the law that regulates his decision-making power and must
give effect to it.
(ii)
Irrationality, namely, Wednesbury unreasonableness.
(iii) Procedural impropriety.
The above are only the broad grounds but it does not rule out
addition of further grounds in course of time. As a matter of fact,
in R. v. Secretary of State for the Home Department, ex Brind
[(1991) 1 AC 696], Lord Diplock refers specifically to one
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development, namely, the possible recognition of the principle of
proportionality. In all these cases the test to be adopted is that the
court should, “consider whether something has gone wrong of 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 fol-
lowed several judgments, including Barium Chemicals (supra), in the
context of Section 17 of the Gujarat Town Planning and Urban Devel-
opment 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 modifications are
necessary in the draft development plan. The State Government
without forming any such opinion cannot publish the modifications
considered necessary along with notice inviting suggestions or
objections. We have already noticed that as on the day when the
Minister concerned took the decision proposing to designate the
land for educational use the material available on record were:
(a) the opinion of the Chief Town Planner;
(b) note dated 23-4-2004 prepared on the basis of the record
providing the entire background of the previous litigation together
with the suggestion that the land should no more be reserved
for the purpose of South Gujarat University and after releasing
the lands from reservation, the same should be placed under
the residential zone.
21. It is true that the State Government is not bound by such
opinion and is entitled to take its own decision in the matter provided
there is material available on record to form opinion that substantial
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modifications in the draft development plan were necessary.
Formation of opinion is a condition precedent for setting the law
in motion proposing substantial modifications in the draft
development plan.
22. Any opinion of the Government to be formed is not subject to
objective test. The language leaves no room for the relevance of
a judicial examination as to the sufficiency of the grounds on which
the Government acted in forming its opinion. But there must be
material based on which alone the State Government could form
its opinion that it has become necessary to make substantial
modification in the draft development plan.
23. The power conferred by Section 17(1)(a)(ii) read with proviso
is a conditional power. It is not an absolute power to be exercised
in the discretion of the State Government. The condition is
formation of opinion—subjective, no doubt—that it had become
necessary to make substantial modifications in the draft
development plan. This opinion may be formed on the basis of
material sent along with the draft development plan or on the
basis of relevant information that may be available with the State
Government. The existence of relevant material is a precondition
to the formation of opinion. The use of word “may” indicates not
only a discretion but an obligation to consider that a necessity has
arisen to make substantial 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.
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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 think over; it connotes
that there should be active application of the mind. In other words,
the term “consider” postulates consideration of all the relevant
aspects of the matter. A plain reading of the relevant provision
suggests that the State Government may publish the modifications
only after consideration that such modifications have become
necessary. The word “necessary” means indispensable, requisite,
indispensably requisite, useful, incidental or conducive, essential,
unavoidable, impossible to be otherwise, not to be avoided,
inevitable. The word “necessary” must be construed in the
connection in which it is used. (See Advanced Law Lexicon,
P. Ramanatha Aiyar, 3rd Edn., 2005.)
26. The formation of the opinion by the State Government should
reflect intense application of mind with reference to the material
available on record that it had become necessary to propose
substantial modifications to the draft development plan.”
41. However, Shri Tushar Mehta, learned Solicitor General for
India, relied upon M. Jhangir Bhatusha and Ors. v. Union of India
and Ors., 1989 Supp (2) SCC 201, in particular, the passage at page 208
which reads
as follows:
“13. …… Now it is the Central Government which has to be
satisfied, as the authority appointed by Parliament under Section
25(2), that it is necessary in the public interest to make the special
orders of exemption. It has set out the reasons which prompted it
to pass the orders. In our opinion, the circumstances mentioned in
those notifications cannot be said to be irrelevant or unreasonable.
It is not for this Court to sit in judgment on the sufficiency of those
reasons. The limitations on the jurisdiction of the court in cases
where the satisfaction has been entrusted to executive authority
to judge the necessity for passing orders is well defined and has
been long accepted.”
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These observations were made in the context of an argument
that differential treatment was accorded to the State Trading
Corporation vis-à-vis private importers in that the customs duty for the
State Trading Corporation had been reduced by notification under
Section 25(2) of the Customs Act, 1962. What is important to note is
that judicial  review consisted of examining whether the reasons which
prompted the Government to pass the exemption orders could be said to
be irrelevant or unreasonable. 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 the essence
or intrinsic nature of something. 2. Of the utmost importance;
basic and necessary. 3. Having real existence; actual.”
44. In J. Jayalalitha v. Union of India, (1999) 5 SCC 138, this
Court dealt with an argument that there is no guideline contained in
Section 3(1) of the Prevention of Corruption Act, 1988, when the Section
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empowers the Government to appoint as many Special Judges “as may
be necessary”. It was stated that this word has a precise meaning and
means “what is indispensable, needful or essential” [see paragraph 14].
It is thus clear that the Central Government’s mind has to be applied to
whether a compulsory amalgamation under Section 396 is indispensably
necessary, important in the highest degree, and whether such
amalgamation is both basic and necessary.
“PUBLIC INTEREST”
45. The third pre-requisite of Section 396 is that the Central
Government must apply its mind when compulsorily amalgamating two
or more companies in the public interest. “Public interest” is an expression
which is wide and amorphous and takes colour from the context in which
it is used. However, like the expression “public purpose”, what is important
to be noted is that public interest is the general interest of the community,
as distinguished from the private interest of an individual [see State of
Bihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga and
Ors., [1952] 3 SCR 889 at pp. 1073-1075].
46. This is echoed in Manimegalai v. Special Tehsildar (Land
Acquisition Officer) Adi Dravidar Welfare, (2018) 13 SCC 491 as
follows:
“14. Similarly, public purpose is not capable of precise definition.
Each case has to be considered in the light of the purpose for
which acquisition is sought for. It is to serve the general interest
of the community as
opposed to the particular interest of the
individual. Public purpose broadly speaking would include the
purpose in which the general interest of the society as opposed to
the particular interest of the individual is directly and vitally
concerned. Generally, the executive would be the best judge to
determine whether or not the impugned purpose is a public purpose.
Yet it is not beyond the purview of judicial scrutiny. The interest
of a section of the society may be public purpose when it is
benefitted by the acquisition. The acquisition in question must
indicate that it was towards the welfare of the people and not to
benefit a private individual or group of individuals joined
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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 vehicles operating in any route or area, the
condition of roads and bridges on the routes, uneconomic running
of stage carriage services leading to elimination of small operators
and employment of more capital than necessary in any sector
leading to starvation of capital investment in other sectors etc.
Public interest under the Act does not mean the interest of the
operators or of the passengers only. We have to bear in mind that
like every
other economic activity the running of stage carriage
service is an activity which involves use of scarce or limited
productive resources. Motor transport involves a huge capital
investment on motor vehicles, training of competent drivers and
mechanics, establishment of workshops, construction of safe roads
and bridges, deployment of sufficient number of policemen to
preserve law and order and several other matters. To say that
larger the number of stage carriages in any route or area more
convenient it would be to the members of the public is an
oversimplification of a problem with myriad facets affecting the
general public. If we run through the various provisions of the Act
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it becomes clear how much attention is given by it to various
matters affecting public interest. There are provisions relating to
licensing of drivers on the basis of their competence, licensing of
conductors, specifications to which the motor vehicles should
conform, coordination of road and rail transport, prevention of
deterioration of the road system, prevention of uneconomic
competition among motor vehicles, fixation of reasonable fare,
compliance by motor vehicles with the prescribed timetable,
construction of bus stands with necessary amenities, maintenance
of standards of comfort and cleanliness in the vehicles,
development of inter-state tourist traffic and several other matters
with the object of making available adequate and efficient transport
facilities to all parts of the country. Any direction given by the
State Government under Section 43-A of the Act should, therefore,
be in conformity with all matters regarding which the statute has
made provision. In this situation to say that any number of permits
can be issued to any eligible operator without any upper limit is to
overstep the limits of delegation of statutory power and to make a
mockery of an important economic activity like the motor
transport.”
               (emphasis supplied)
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:
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“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 ……”
49. In Municipal Corporation of the City of Ahmedabad and
Ors. v. Jan Mohd. Usmanbhai and Anr., (1986) 3 SCC 20, this Court
stated that the expression “in the interest of the general public” is of
wide import comprehending public order, public health, public security,
morals, economic welfare of the community, and the objects mentioned
in Part IV of the Constitution of India [see paragraph 19].
50. Likewise, in B.P. Sharma v. Union of India and Ors., (2003)
7 SCC 309, this Court held:
“15. …… The phrase “in the interest of the general public” has
come to be considered in several decisions and it has been held
that it would comprise within its ambit interests like public health
and morals (refer to State of Maharashtra v. Himmatbhai
Narbheram Rao [AIR 1970 SC 1157 : (1969) 2 SCR 392]),
economic stability (State of Assam v. Sristikar Dowerah [AIR
1957 SC 414]), stability of the country, equitable distribution of
essential commodities at fair prices (Union of India v. Bhanamal
Gulzarimal Ltd. [AIR 1960 SC 475 : 1960 Cri LJ 664]) for
maintenance of purity in public life, prevention of fraud and similar
considerations. ……”
51. Coming nearer home, Hindustan Lever Employees’ Union
v. Hindustan Lever Ltd. and Ors., 1995 Supp (1) SCC 499, Sahai, J.,
in a concurring judgment, referred to “public interest” in Section 394 of
the Companies Act as follows:
“5. What requires, however, a thoughtful consideration is whether
the company court has applied its mind to the public interest
involved in the merger. In this regard the Indian law is a departure
from the English law and it enjoins a duty on the court to examine
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objectively and carefully if the merger was not violative of public
interest. No such provision exists in the English law. What would
be public interest cannot be put in a strait-jacket. It is a dynamic
concept which keeps on changing. It has been explained in Black’s
Law Dictionary as:
“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
locality which may be affected by the matters in question.
Interest shared by citizens generally in affairs of local, State or
national Government.”
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 merger with a subsidiary of a foreign company then
the test is not only whether the scheme shall result in maximising
profits of the shareholders or whether the interest of employees
was protected but it has to ensure that merger shall not result in
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impeding promotion of industry or shall obstruct growth of national
economy. Liberalised economic policy is to achieve this goal. The
merger, therefore, should not be contrary to this objective. Reliance
on English decisions Hoare & Co. Ltd., Re [1933 All ER Rep
105, Ch D] and Bugle Press Ltd., Re [1961 Ch 270 : (1960) 1 All
ER 768 : (1960) 2 WLR 658] that the power of the court is to be
satisfied only whether the provisions of the Act have been complied
with or that the class or classes were fully represented and the
arrangement was such as a man of business would reasonably
approve between two private companies may be correct and may
normally be adhered to but when the merger is with a subsidiary
of a foreign company then economic interest of the country may
have to be given precedence. The jurisdiction of the court in this
regard is comprehensive.”
   (emphasis supplied)
52. In Bihar Public Service Commission v. Saiyed Hussain
Abbas Rizwi and Anr., (2012) 13 SCC 61, this Court referred to “public
interest” in the context of service law as follows:
“22. The expression “public interest” has to be understood in its
true connotation so as to give complete meaning to the relevant
provisions of the Act. The expression “public interest” must be
viewed in its strict sense with all its exceptions so as to justify
denial of a statutory exemption in terms of the Act. In its common
parlance, the expression “public interest”, like “public purpose”,
is not capable of
any precise definition. It does not have a rigid
meaning, is elastic and takes its colour from the statute in which it
occurs, the concept varying with time and state of society and its
needs (State of Bihar v. Kameshwar Singh [AIR 1952 SC 252]).
It also means the general welfare of the public that warrants
recognition and protection; something in which the public as a
whole has a stake [Black’s Law Dictionary (8th Edn.)].”
53. In R.R. Tripathi v. Union of India, (2010) 1 Bom CR 513,
the Bombay High Court referred to the Business Dictionary, which defines
“public interest” as follows:
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“welfare of the 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 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.
55. At this juncture, we must first see whether each of the
conditions precedent to the applicability of Section 396 applies to the
facts of the present case.  Insofar as the Central Government being
“satisfied” is concerned, the following facts which the Central
Government has taken into account, based upon the Grant Thornton
report and the FMC order dated 17.12.2013, are as follows:
55.1  The Grant Thornton report does indeed begin with a
disclaimer, which reads as follows:
“4. Limitations
4.1. Our findings are based upon the information made available
to us and we have not independently verified or validated the
information.
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4.2. Our work did not constitute an audit under any accounting
standards and the scope of our work was significantly different
from that of a statutory audit. Hence it cannot be relied upon to
provide the same level of assurance as a statutory audit.
4.3. Work done by us was as considered necessary at that point
of time to reflect the scope of work and rigour required.
5. Restrictions
5.1. Our reports and comments are confidential in nature and
not intended for general circulation or publication, nor are they to
be quoted or referred to in whole or in part, without our prior
consent in each specific instance. Such consent shall not be
unreasonably withheld. NSEL and FMC shall have no authority
or ability to modify our findings in any manner. We disclaim all
responsibility or liability for any costs, damages, losses, liabilities,
expenses incurred by anyone as a result of circulation, publication,
reproduction or use of our reports contrary to the provisions of
this paragraph. Should additional information or documentation
become available which impacts upon conclusions reached in our
reports, we reserve the right to amend our findings and reporting
accordingly. Further, comments in our reports are not intended,
nor should they be interpreted to be, legal advice or opinion.”
However, the said report in the executive summary states:
“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’).)
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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:
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1.3 These long-term contracts (e.g. T+25) were first traded on
the NSEL exchange in September 2009. The Board of NSEL
ratified the circulars introducing such long-term contracts over a
period beginning November 2009.
1.4 Further evidence was obtained with regards the existence of
a financing business, such as presentations which stated that a
fixed rate of return was guaranteed on investing in certain products
on the NSEL exchange.
Several internal (NSEL) presentations were found, upon a review
of e-mail databases, setting out a yield (e.g. 16%) as an opportunity
for investors for trading in certain products on the NSEL exchange.
An external presentation was also obtained which had been made
by a brokerage house (Geojit Comtrade Ltd.) for 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:
Trad
e 
Date
De
al

o
Buy
/Sell
Memb
er ID

ame of Member

Contract 
Code 
Sub 
Broker
o. 
Termi
nal ID
Trade 
Price 
Trade 
Value 
02 
April 
2012
87 S 
13790 PD 
AGROPROCESSO
RS PVT. LTD. 
DLF002PDY1121
HR2 
474 
13791 2400.00 360,000 
02 
April 
2012
87 B 
10570 A"A"D RATHI 
COMMODITIES 
LTD.
H"R320PDY1121
HR2 
232 
10575 2400.00 360,000 
02 
April 
2012
88 S 
10570 A"A"D RATHI 
COMMODITIES 
LTD. 
H"R320PY1121H
R25 
232 
10575 2450.70 367,605 
02 
April 
2012
88 B 
13790 PD 
AGROPROCESSO
RS PVT. LTD.
DLC001PY1121H
R25 
474 
13791 2450.70 367,605

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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 granted
between 2009 through to 2013.
Inadequate monitoring of member collateral: NSEL did not carry
out any diligence to establish the existence of stock at member
managed warehouses, upon which trades were being executed.
Grant Thornton carried out a stock verification exercise and found
significant shortages vis-à-vis expected collateral.
Related Party Transactions
1.6 IBMA is registered as a client with Karvy Comtrade limited
for executing trades on futures commodity exchange like MCX
and NCDEX.
SNP Designs Private Limited (SNP) is a client of IBMA and the
managing director of SNP is Mrs. Shalini Sinha, the wife of Mr.
Anjani Sinha (CEO and MD of NSEL
as well as IBMA).
Grant Thornton found evidence of a large volume of trades
executed on the MCX exchange on behalf of SNP, through Karvy
Comtrade Limited. Since April 2012 the total nominal value/volume
traded on MCX is approximately Rs. 40,000 crore.
In spite of heavy losses over the period, trading on behalf of SNP
was allowed to continue. No margin money was ever taken from
SNP. As at 20 September 2013, IBMA is due to receive Rs. 77
crore on account of losses arising from trades executed on behalf
of SNP. No monies have been received from SNP despite
substantial amounts due.
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Further, evidence was obtained that Rs. 10 crore was received
from Mohan India which was credited to an IBMA Bank account.
This was to be adjusted against the SNP receivable balance as
per an instruction made by Mr. Anjani Sinha.
1.7. IBMA is a subsidiary of NSEL and has received funding for
operational needs on several occasions (including a loan of Rs. 5
crore on 5 August 2013). IBMA is also a member on the NSEL
exchange and executes trades on behalf of clients. Margin limit
exemptions have been granted to IBMA on a daily basis since
February 2010.
Corporate Governance & Risk Management
1.8 While the Bye-laws and Rules of the Exchange mandated the
formation of various Committees to effectively manage the
operations of the Exchange; the Board failed to constitute 9 out
of the 10 such committees. Further, there is no documentary
evidence to demonstrate whether the only committee formed
(Membership Committee) was ever convened and hence, met its
objectives.
1.9 The 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
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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. Proteins. Further the Board granted
and approved for issue of a guarantee to KFSL, to the extent of
Rs. 14 crores, in respect of credit facilities extended to N.K.
Proteins.
1.11 Our review of the Information technology identified several
independent standalone systems wherein the flow of business
transactions and related information between different systems
required manual intervention. Given the complexity and nature of
trading transaction such systems including warehouse (eWDMS),
CNS, Delivery System (EMI) and trading should have been
integrated.
Further, these systems did not produce/have any form of MIS
operational. All reporting and analysis was done on manual
worksheets. Our review of the Board minutes did not indicate
any form of MIS reporting or review.
These points collectively indicate significant gaps in IT, Risk &
Corporate Governance.
Misutilisation of client monies
1.12 Misutilisation of client monies/settlement fund: As per the
rules and bye-laws of the NSEL exchange “Margin deposits
received by clearing members from their constituent members
and clients in any forms shall be accounted for and maintained
separately in segregated accounts and shall be used solely for the
benefit of the respective
constituent members’ and client position.”
Grant Thornton found evidence (including e-mails) that client
monies/settlement fund, was used regularly for fulfilling the
obligations of defaulting members.
Further, NSEL utilised client monies/settlement fund for its own
business purposes on a regular basis. For example, on 28 March,
2013, Rs. 236.5 crore was withdrawn from the Settlement Fund
in order to fund NSEL’s own business overdraft account.
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There was a running deficit in the client monies/settlement fund
balance from April 2012 to June 2013. The finance team of FTIL
had raised this as an area of concern on several occasions.
Misrepresentations to the Regulator
1.13 Regulatory Contraventions:
As per a Gazette Notification issued on 5 June 2007 by the Ministry
of Consumer Affairs, the Government of India under Section 27
of the Forward Contracts (Regulation) Act, 1952 (“FCRA”)
exempted all forward contracts of one day duration for the sale
and purchase of commodities traded on NSEL from the operations
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
verification or due diligence was ever undertaken by NSEL to ensure
compliance by its members of the conditions outlined in its rules and
byelaws even though in terms of NSEL byelaws, warehouse receipt
issued by NSEL were meant to evidence a commodity being held in an
approved warehouse. NSEL did not insist upon deposit of commodities
in the warehouses prior to executing sale transactions. Instead NSEL
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resorted to issuing Delivery Allocation Reports (DAR) representing to
genuine investors that each transaction was delivery based and backed
at the time of sale by the required quantity of commodities in its
warehouses.
55.2. The observations and conclusions of the FMC order dated
17.12.2013, based largely on this expert report, read as follows:
“15. Summary Observations and Conclusion:-  After having
accorded due consideration to all the objections and arguments
raised by the noticees vide their written submission as well as oral
presentations through their counsel, we now proceed to conclude
our observations by taking a final view on the status of the four
noticees as ‘fit and proper persons’ in the succeeding paragraphs.
15.1. Noticee No. 1:- Financial Technologies (India) Limited
(FTIL):  We have discussed the equity structure of NSEL, which
is wholly owned by FTIL. We have also pointed out that Shri
Jignesh Shah, Chairman-cum-Managing Director of FTIL has
been a Director on the Board and also functioning as Vice-
Chairman and a key management person of NSEL since its
inception.  Similarly, Shri Joseph Massey and Shri Shreekant
Javalgekar have been Directors of the said company from its
very beginning till the settlement crisis at NSEL first came to light
in July, 2013. The facts establishing the fraud involving a settlement
default over Rs. 5,500 crores at NSEL have been discussed at
length in the SCNs issued to
the noticees as well as reiterated,
albeit illustratively by us at Para No. 14.7 of this Order. The
responsibility of FTIL as the holding company possessing absolute
control over the governance of NSEL has also been highlighted.
The control of FTIL over NSEL becomes further crystallized from
the responses given by M/s. Grant Thornton before the Commission
on 03.12.2013 stating that Shri Jignesh Shah, Mr. Joseph Massey
and a host of other officials of FTIL reviewed the forensic audit
report and it was only after obtaining 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
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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 a dominant influence
on the management, and directed, controlled and supervised the
governance of NSEL. In the face of a fraud of such a magnitude
involving settlement crises of Rs. 5,500 crores owed to over 13,000
sellers/investors on the trading platform of NSEL, FTIL, cannot
seek to take refuge behind the corporate veil so as to unjustifiably
isolate itself from the fraudulent actions that took place at NSEL
resulting in such a huge payment crisis.
15.1.3.  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. As has been demonstrated by FTIL in their
written submission, FTIL has floated a number of regulated
exchanges – both for securities and commodities derivatives – in
India as well as abroad. NSEL was incorporated to provide a
trading platform of commodity spot exchange on a pan-India basis
for the purpose of which apparently it sought and was granted
exemption from the operation of the FCRA, 1952. Since the
objective of the NSEL was promoting spot trading in commodities
on an electronic platform, its business model did not contemplate
venturing into trading in forward contracts. FTIL had already
promoted MCX, a regulated exchange under FCRA, 1952, for
the purpose of trading in forward contracts. Therefore, having
secured an exemption from the purview of FCRA, 1952 on the
ground that it was intended to promote spot trading, NSEL was
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not authorised to allow trading in forward contracts through the
scheme of paired contracts, thereby defying conditions stipulated
in the exemption notification granted to it. 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. The fact that FTIL promoted NSEL sought exemption
from FCRA, 1952 provisions even before they had started any
trading or operation, points to their intention from the outset. In
this manner, it misinterpreted the conditions stipulated in the
exemption notification in collusion with a handful of members,
which ultimately culminated in a massive fraud involving Rs. 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, shall
hold any shares in any association/Exchange recognised by the
Government or registered by the FMC in excess of the threshold
limit of the total paid-up equity capital of such Association/Exchange
as prescribed under the commodity exchange guidelines and post
5-year guidelines.”
 (emphasis in original)
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Based on the Grant Thornton report and the FMC order, the draft
amalgamation order dated 21.10.2014 then relied on the same facts, as
did the final assessment order. The final amalgamation order also refers
to an investigation under Section 209A into the affairs of NSEL which
led to infractions of Sections 211, 217 and 292A of the Companies Act.
These are compoundable offences which have, in fact, been compounded
by orders dated 03.03.2016 and 31.05.2016 by the concerned authority.
55.3. We have seen that neither FTIL nor NSEL has denied the
fact that paired contracts in commodities were going on, and by April to
July, 2013, 99% (and excluding E-series contracts), at least 46% of the
turnover of NSEL was made up of such paired contracts. There is no
doubt that such paired contracts were, in fact, financing transactions
which were distinct from sale and purchase transactions in commodities
and were, thus, in breach of both the exemptions granted to NSEL, and
the FCRA. We have also seen that NSEL throughout kept representing
that it was, in fact, a commodity exchange dealing with spot deliveries.
Apart from the Grant Thornton report and the FMC order, we have also
seen that Shri Jignesh Shah, on 10.07.2013, made representations to the
DCA and the FMC, in which he stated that NSEL had full stock as
collateral; 10-20% of open position as margin money; and that the stock
currently held in NSEL’s 120 warehouses was valued at INR 6000 crore,
all of which turned
out to be incorrect. Further, there is no doubt
whatsoever that in July, 2013, as a result of NSEL stopping trading on its
exchange, a payment crisis of approximately INR 5600 crore arose.
The further question that remains is whether, given these facts, the
conditions precedent for the applicability of Section 396 were followed.
56. When it comes to whether the Central Government’s
satisfaction as to whether it was “essential” to amalgamate the aforesaid
companies, what must be borne in mind is that NSEL had itself offered
a settlement scheme to pay 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
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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 29th
November, 2013 (copy enclosed as Annexure III) constituted a
Monitoring & Auction Committee (MAC) comprising the
representatives of various members associations and investors
bodies to assist and advise the Commission on matters pertaining
to the Commission’s  supervisory role over the settlement of
outstanding contracts at NSEL.
3. It is observed that even after one year’s incessant efforts and
in spite of FMC’s active role in supervising the settlement of
contracts, the settlement plan could not result in making any
substantial payment to the investors as the process of recovery of
dues by NSEL from the defaulting members is very slow. It is
submitted that, it is only the NSEL, which has the responsibility to
take all possible coercive
measures as per their rules/bye-laws
and other laws of the land, to ensure that the outstanding dues of
all investors are settled. However as on date, NSEL has been
able to make a payment of only Rs. 538.56 crores to its members
as against the payment dues of approximately Rs. 5500 crores.
This amount also includes an amount of Rs. 179.26 crores
borrowed by NSEL from its holding company, FTIL which was
distributed to small participants. The representatives of members
associations and investor bodies on the MAC in their meeting
with the Commission have represented the NSEL has lost its
credibility as an institution. Further the employee attrition in NSEL
in the recent months has been extremely high and it is learnt that
the staff strength of NSEL has come down considerably, adversely
affecting the recovery process. As per the information received
from NSEL, the total employee count on NSEL rolls was 193 as
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on 31.07.2013 (when NSEL had suspended trading in one day
forward contracts) which came down to 33 on 31.07.2014. The
morale of the employees at NSEL is also very low. NSEL is also
confronted with a number of cases against it, which are pending
in the High Courts and MPID Court relating to its failure to make
payment to the investors. The company is hardly left with any
financial resources to meet even legal expenses apart from meeting
staff salaries and other expenses related to recovery process.
The members of the Monitoring & Auction Committee have
expressed their views that with the loss of credibility, weak
Organizational structure, depletion of man-power strength and lack
of financial resources, 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 com-
pany i.e. FTIL which holds 99.99% of its share capital.
(ii) In para 14.5.2 it is inter-alia mentioned that since FTIL is
effectively the only shareholder of NSEL, the constitution of
the Board of Directors of NSEL is entirely under its control.
FTIL through the Board of Directors of NSEL constituted by
it possesses effectual and absolute control over its subsidiary
company i.e. NSEL. Such control is further amplified and
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accomplished by the fact that Shri Jignesh Shah, the promoter
and Chairman-cum-Managing Director of FTIL has been on
the Board of NSEL and functioning as Vice-Chairman of the
Company since its inception. Shri Joseph Massey was also a
common Director both on the Board of FTIL and NSEL, while
Shri Shreekant Javalgekar continued to be a Director of NSEL
till he resigned from the post in July 2013;
(iii) In para 14.5.3 of the order it is inter-alia mentioned that it is
on record that all the minutes of Board meetings of NSEL were
regularly tabled at the Board meetings of FTIL. FTIL kept itself
apprised about the affairs of NSEL and also approved/ratified the
actions of NSEL in its Board meetings on a regular basis;
(iv) In para 14.9.1 of the order it is inter-alia mentioned that it is
undisputed that NSEL was an Exchange in which FTIL had own-
ership interest to the extent of 99.9998% leaving a negligible
0.0002% stake to NAFED. The Articles of Association of NSEL
confers authority to its shareholders to appoint Directors. As the
single largest shareholder, it is FTIL which has nominated all the
directors on the NSEL board. As a wholly-owned subsidiary, NSEL
is completely under the control of FTIL, including financial con-
trol over the affairs of NSEL. FTIL, which had the responsibility
of managing the affairs of NSEL, cannot claim to be unaware of
the wrong-doing and fraud committed by the management of
NSEL.
(v) In
para 14.10.06 of the order it is inter-alia mentioned that
FTIL cannot shy away from its role and duty as a parent com-
pany to take reasonable care and exercise prudence in manage-
ment and governance of the subsidiary company.
(vi) In para 14.10.8 of the order it is inter-alia mentioned that
FTIL has not furnished any explanation as to what steps have
been taken by NSEL or by it as a parent company to honour the
commitment of assuring safety and risk-free trading to the mem-
bers and clients who have traded on their platform 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.
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(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 con-
tracts 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 Rs.
5,500 crores thereby causing huge financial loss to more than
13,000 investors. It is submitted that the aforesaid order dated
17th December, 2013 passed by the Commission is based on
tangible facts on the role of FTIL in the affairs of NSEL, mustered
by the Commission on its own and also the facts revealed by the
forensic auditor M/s. Grant Thornton who were engaged by NSEL
to conduct a forensic audit into the affairs of NSEL post the
settlement crisis. It may be
noted the Hon’ble Bombay High Court
has also refused to grant any interim relief to FTIL and three
other individuals in respect of the aforesaid order dated 17th
December, 2013 passed by the Commission declaring FTIL, Shri
Jignesh Shah, Shri Joseph Massey and Shri Shreekant Javalgekar
as not fit and proper persons to be shareholders or a Director in
any of the recognized commodity exchanges. FTIL and other three
individuals have so far not challenged the above interim order of
the Hon’ble High Court.
6. It is also submitted that the Working Group constituted by the
Central Government under the Chairmanship of Deputy Governor,
Reserve Bank of India to examine into the systematic risk arising
in consequence of the NSEL settlement debacle, have inter alia
recommended that the ownership, governance and management
structure at FTIL and the exchanges promoted by FTIL need to
be assessed and the possibility of bringing in an institutionalized
framework and approach to these aspects explored.
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7. It may also be noted here that pursuant to the criminal
proceedings and arrest of Shri Jignesh Shah, Chairman-cum-
Managing Director of FTIL who was also the Vice-Chairman of
NSEL, the EOW of Mumbai Police, has since filed a chargesheet
against Shri Jignesh Shah under various sections of Indian Penal
Code and also the Maharashtra Protection of Interest of Depositors
(MPID) Act, 1999, before the Hon’ble Sessions Judge, Special
Court under MPID Act, Mumbai which vindicates the stand already
taken by the Commission in its order dated 17th December, 2013
pertaining to the role and responsibility of FTIL as a parent
company in the affairs of its wholly owned subsidiary i.e. NSEL.
8. The aforesaid submissions would make it clear that NSEL as a
corporate entity has now been rendered bereft of any credibility
and now seems financially and physically incapable of effecting
any substantial recovery 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 by Working
Group appointed by Government of India.
xxx xxx xxx”
              (emphasis supplied)
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This letter would show that the immediate reason for
amalgamation, according to the FMC, and which was faithfully carried
out by Government, is that NSEL, as a corporate entity, seems financially
and physically incapable of effecting any substantial recovery from
defaulting members. This was the “emergency situation” according to
the FMC, which should lead to an order of amalgamation of the holding
and subsidiary companies so that the holding company’s financial
resources could be used to pursue proceedings by which monies owed
to the alleged duped investors/traders could be recovered.
56.1. What is important to note is that by the time the final order
of amalgamation was passed, i.e., on 12.02.2016, the final order itself
records:
“8.1. Economic Offences Wing, Mumbai:
-   Total amount due and recoverable from 24 defaulters is
Rs. 5689.95 crores.
-    Injunctions against assets of defaulters worth Rs. 4400.10
crore have been obtained.
-    Decrees worth Rs. 1233.02 crore have been obtained against
5 defaulters.
-   Assets worth Rs. 5444.31 crore belonging to the defaulters
have been attached of which assets worth Rs. 4654.62 crore
have been published in Gazette under the MPID Act for
liquidation under the supervision of MPID Court and balance
assets worth Rs. 789.69 crore have been attached/secured
for attachment by the EOW:
-    Assets worth Rs. 885.32 crore belonging to the directors and
employees of NSEL have been attached out of which assets
worth Rs.
882.32 crores have already been published in
Gazette under MPID Act for liquidation under the supervision
of MPID Court and balance assets worth Rs. 3 crore have
been attached/secured for attachment by the EOW;
-    MPID Court has already issued notices u/s 4 & 5 of the MPID
Act to the persons whose assets have been attached as above.
Thus, the process of liquidation of the attached assets has
started.
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-   Bombay High Court has appointed a 3-member committee
headed by Mr. Justice (Retd.) V.C. Daga and 2 experts in
finance and law to recover and monetize the assets of the
defaulters.
-   Rs.558.83 crores have been recovered so far, out of which
Rs. 379.83 crore have been received/recovered from the
defaulters and  Rs. 179 crore were disbursed by NSEL to small
traders/investors.
8.2. Enforcement Directorate:
-
 ED has traced proceeds of crime amounting to Rs. 3973.83
crore to the 25 defaulters;
-
ED has attached assets worth Rs. 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’être 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 defaulters, with INR 835.88 crore crystallised by
the committee set up by the High