REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4476 OF 2019

(Arising out of Special Leave Petition (Civil) No. 4210 of 2018)

63 MOONS TECHNOLOGIES LTD.

(FORMERLY KNOWN AS FINANCIAL

TECHNOLOGIES INDIA LTD.) & ORS. … APPELLANT

VERSUS

UNION OF INDIA & ORS. … RESPONDENT

WITH

CIVIL APPEAL NO. 4478 OF 2019

(Arising out of Special Leave Petition (Civil) No.4652 of 2018)

WITH

CIVIL APPEAL NO. 4477 OF 2019

(Arising out of Special Leave Petition (Civil) No.4239 of 2018)

WITH

CIVIL APPEAL NO. 4479 OF 2019

(Arising out of Special Leave Petition (Civil) No.4659 of 2018)

WITH

CIVIL APPEAL NO. 4481 OF 2019

(Arising out of Special Leave Petition (Civil) No.4816 of 2018)

WITH

CIVIL APPEAL NO. 4480 OF 2019

(Arising out of Special Leave Petition (Civil) No. 4720 of 2018)

WITH

WRIT PETITION (CIVIL) NO.368 OF 2019

1

JUDGMENT

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 from the Board of Directors

of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL

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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

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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

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

4

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

5

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

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

6

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

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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 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

8

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

9

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 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.

10

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

11

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 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

12

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

13

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 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,

14

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

15

Boards of Directors. Thus, to arrive at the conclusion that one

company is the alter ego of the 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.

16

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, which were totally distinct

17

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,

18

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 passing the final amalgamation order as

FTIL and NSEL were both heard pursuant to a Bombay High Court

19

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

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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 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

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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

22

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

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.

23

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.

24

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, 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

25

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

26

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

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

27

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

28

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.

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

29

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

(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;

30

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

31

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 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.”

32

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.

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

33

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 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

34

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

Orders and Notifications issued under those Acts and

35

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

36

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.

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.

37

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 general rule of conduct without

reference to particular cases; an administrative act is the

38

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

39

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? 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

promulgation of a general rule of conduct

without reference to particular cases; an

administrative act is the making and issue of a

40

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 towards 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.”

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

41

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 the provisions, namely, Section 45 of the Banking Regulation

42

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

43

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 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,

44

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

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

45

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

46

but it deals with trade or business; and (3) there is no

direct abridgement of the right of free speech and a

mere incidental 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

47

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 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

48

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 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

49

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

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.,

50

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

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

51

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

52

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:

“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

53

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

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

54

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 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.

55

(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 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)

56

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

57

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.”

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

58

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. 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)

59

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 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]

60

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 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:

61

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 correctly 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 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

followed several judgments, including Barium Chemicals (supra), in

the context of Section 17 of the Gujarat Town Planning and Urban

62

Development 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 modifications in the draft

development plan were necessary. Formation of opinion

is a condition precedent for setting the law in motion

63

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.

64

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, 3

rd

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

65

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.”

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

66

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 (4

th

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 (10

th

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

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

67

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

68

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

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

69

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 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)

70

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 (4

th

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 (6

th

edn.), ‘public interest’ is

defined as follows:

“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].

71

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 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

72

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 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

73

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 (8

th

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:

“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

74

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

75

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.

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.”

76

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’).)

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

77

same parties at a pre-determined price and always

registering a profit on the long-term positions as illustrated

below:

Trad

e

Date

Dea

l

No

Buy

/Sell

Membe

r ID

Name of Member Contract

Code

Sub

Broker

No.

Termin

al ID

Trade

Price

Trade

Value

02

April

2012

87S13790PD

AGROPROCESSOR

S PVT. LTD.

DLF002PDY1121

HR2

474 137912400.00360,000

02

April

2012

87B10570ANAND RATHI

COMMODITIES

LTD.

HNR320PDY1121

HR2

232 105752400.00360,000

02

April

2012

88S10570ANAND RATHI

COMMODITIES

LTD.

HNR320PY1121H

R25

232 105752450.70367,605

02

April

2012

88B13790PD

AGROPROCESSOR

S PVT. LTD.

DLC001PY1121H

R25

474 137912450.70367,605

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:

78

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.

79

No monies have been received from SNP despite

substantial amounts due.

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:

80

Mr. Jignesh Shah

Mr. Joseph Massey

Mr. V. Hariharan

Mr. Shreekant Javalgekar

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

81

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.

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

82

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 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

83

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 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

84

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 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

85

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)

Based on the Grant Thornton report and the FMC order, the draft

amalgamation order dated 21.10.2014 then relied on the same facts,

86

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.

87

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 31.07.2007, the Government of India,

Ministry of Consumer Affairs, Food & Public Distribution,

Department of Consumer Affairs (DCA) vide its

notification dated 6

th

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

88

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 29

th

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 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

89

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 17

th

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 company 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

90

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 ownership

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 control 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 company to take

reasonable care and exercise prudence in

management 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

91

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 members 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.

(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

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.

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 17

th

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

92

individuals in respect of the aforesaid order dated 17

th

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.

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 17

th

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

93

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)

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

94

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.

Bombay High Court has appointed a 3-

95

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 Court,

96

pending acceptance by the High Court, even without using the

financial resources of FTIL as an amalgamated company. What is,

therefore, important to note is that what was emergent, and therefore,

essential, even according to the FMC and the Government in 2013-

2014, has been largely redressed in 2016, by the time the

amalgamation order was made. Also, the Central Government order

does not apply its mind to the essentiality aspect of Section 396 at all.

In fact, in several places, it refers to “essential public interest” as if

“essential” goes with “public interest” instead of being a separate and

distinct condition precedent to the exercise of power under Section

396. On facts, therefore, it is clear that the essentiality test, which is

the condition precedent to the applicable to Section 396, cannot be

said to have been satisfied.

57.During the course of proceedings before the Division Bench of

the Bombay High Court, FTIL tendered an affidavit dated 04.07.2017,

to place on record its resolution dated 28.03.2016 to infuse a sum of

upto INR 50 crore for each of the financial years 2016-2017 to 2018-

2019 to support NSEL to recover dues from defaulters, defend various

cases, and continue taking necessary legal action against various

parties to recover amounts from defaulters. The Division Bench refers

to this affidavit as follows:

97

“293] At the stage, when the final hearing in these

petitions had considerably advanced, FTIL, tendered an

affidavit dated 4th July 2017 to place on record its

resolution dated 28th March 2016 to infuse a sum up to

Rs. 50 crores for each of the financial years, i.e., FY

2016-17 to FY 2018-19, to support NSEL to recover

dues from defaulters; to defend various legal cases; to

continue taking necessary legal actions against various

parties to recover amounts from defaulters; and for

working capital. The affidavit states that such resolution

was passed and such finances are proposed to be

infused at the request of NSEL.

294] The affidavit dated 4th July 2017 also confirms that

the activities of NSEL have come to a grinding halt,

though, the affidavit purports to blame the FMC for such

a situation. The affidavit also states that up to now FTIL

has infused approximately Rs. 109 crores with NSEL,

mainly to prosecute and defend legal proceedings.

There is reference to NSEL having obtained decrees

worth more than Rs. 1200 crores and injunctions against

assets of defaulters valued at Rs. 5444.31 crores. The

affidavit further states that FTIL is committed to funding

NSEL for purposes of recovery from defaulters since the

occurrence of payment crisis on the exchange platform

of NSEL.

295] If the contention of Mr. Chinoy to the effect that

there is absolutely no problem in the functioning of NSEL

or that NSEL has the necessary wherewithal, both

financial as well as infrastructural, to effect recoveries

from the defaulters, is to be accepted, then, there was

no reason to rely upon contribution from FTIL, made or

proposed to be made at a belated stage. The FTIL

resolution dated 28th March 2016, far from affording any

cause to interfere with the impugned order, in fact, lends

support to the reasoning in the impugned order that the

NSEL, on its own, lacks financial as well as

infrastructural capacity to affect any recoveries from the

defaulters. The affidavit dated 4th July 2017 and the

resolution dated 28th March 2016 is also indicative of

the business realities of the situation, which is

incidentally yet another ground in the impugned order.”

98

(emphasis in original)

58.The High Court comment on the aforesaid affidavit is not correct.

The affidavit proceeds on the footing that since the activities of NSEL

have come to a grinding halt, FTIL would help NSEL to effect

recoveries from defaulters. The affidavit nowhere states that there is

no problem in the functioning of NSEL, or that NSEL has or does not

have the necessary wherewithal to effect recovery from defaulters.

Even in the hearing before us, FTIL has submitted an affidavit-cum-

undertaking dated 11.04.2019, stating that it will continue to infuse

funds into NSEL so that recovery of dues from defaulters does not, in

any manner, get stymied. We take this affidavit and undertaking on

record, and hold FTIL to this undertaking made before this Court.

59.When it comes to “public interest” as opposed to the “private

interest” of investors/traders, who have not been paid, the

amalgamation order dated 12.02.2016 makes interesting reading. The

satisfaction as to public interest is stated in the very beginning of the

order as follows:

“Whereas the Central Government is satisfied that to

leverage combined assets, capital and reserves, achieve

economy of scale, efficient administration, gainful

settlement of rights and liabilities of stakeholders and

creditors and to consolidate businesses, ensure

coordination in policy, it is essential in the public

interest…….”

99

What is stated in the opening is repeated in paragraph 2.14.2 as

follows:

“2.14.2 The Central Government also carefully

considered the proposal received from FMC and

DEA and was of the considered opinion that to

leverage combined assets, capital and reserves for

efficient administration and satisfactory settlement of

rights and liabilities of stakeholders and creditors of

NSEL, it would be in essential public interest to

amalgamate NSEL with FTIL.”

It will be seen that all the expressions used in relation to “public

interest” have relation only to the businesses of the two companies

that are sought to be amalgamated. What is important to note is that

there is no interest of the general public as opposed to the businesses

of the two companies that are referred to. It is important to notice that

the leveraging of combined assets, capital, and reserves is only to

settle liabilities of certain stakeholders and creditors when the order is

read as a whole, and given the fact that the businesses of the two

companies were completely different. So far as achieving economy of

scale and efficient administration is concerned, it is difficult to see how

this would apply to the fact situation in this case where NSEL is

admittedly a company which has stopped functioning as a

commodities exchange at least with effect from July, 2013 with no

hope of any revival. Thus, the consolidation of businesses spoken

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about does not exist as a matter of fact, as NSEL’s business has come

to a grinding halt, as has been observed by the FMC and the Central

Government itself. Each one of these expressions, when read with the

rest of the order, therefore, only shows that the sole object of the

amalgamation order is very far from the high-sounding phrases used in

the opening, and is really only to effect speedy recovery of dues of INR

5600 crore, which has been referred to in the letter of the FMC to the

Secretary, Ministry of Corporate Affairs, dated 18.08.2014. This would

be clear from a reading, in particular, of two paragraphs of the order,

namely, paragraphs 2.13.2 and 2.13.3, which read as follows:

“2.13.2. Thus, it would be observed from above that

NSEL is not having the resources, financial or

human, or the organizational capability to

successfully recover the dues to the investors

pending for over a year. Further, NSEL is not left with

any viable, sustainable business while FTIL has the

necessary resources to facilitate speedy recovery of

dues.

2.13.3. In the above background, a proposal had

been received from FMC, vide letter dated 18-08-

2014, proposing the merger of NSEL with FTIL by the

Central Government under the provisions of Section

396 of the Companies Act, 1956. The proposal has

been supported by the Department of Economic

Affairs (DEA), Ministry of Finance, FMC has proposed

the merger/amalgamation of NSEL with FTIL in

essential public interest so that the human/financial

resources of FTIL are also directed towards

facilitating speedy recovery of dues from the

defaulters at NSEL and the FTIL takes responsibility

to resolve the payment crisis at NSEL at the earliest.”

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59.1.However, the Central Government supported this order on the

ground that it is made in public interest essentially on three grounds,

which are repeatedly referred to by the impugned judgment. The three

grounds as stated by the impugned judgment are as follows:

“269. …… (a) Restoring/safeguarding public confidence

in forward contracts and exchanges which are an

integral and essential part of Indian economy and

financial system, by consolidating the businesses of

NSEL and FTIL; (b) Giving effect to business realities of

the case by consolidating the businesses of FTIL and

NSEL and preventing FTIL from distancing itself from

NSEL, which is, even otherwise, its alter ego; and (c)

Facilitating NSEL in recovering dues from defaulters by

pooling human and financial resources of FTIL and

NSEL. Further, we are also satisfied that each of these

three grounds constitute a facet of public interest in the

context of the provisions in Section 396. ……”

59.2.It is important to note that the first and second grounds

mentioned by the High Court are not contained in the draft order of

amalgamation. Had they been so contained, objections and

suggestions would have been made by all stakeholders, which the

Central Government would then have been bound to consider before

passing the final order. However, it was argued on behalf of the

respondents that the first and second grounds are, in reality,

inferences drawn from facts which are already stated in the order and

these inferences do not need to be stated in the draft order. We are

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afraid that this argument is incorrect inasmuch as grounds contained in

reasons (a) and (b) are important grounds which have a vital bearing

on the amalgamation in question. If these grounds were contained in

the draft order, there is no doubt that the shareholders and creditors of

FTIL, and FTIL itself would have had an opportunity to comment on the

same. For example, the “business realities” of the case are facts

known to FTIL; and NSEL, being FTIL’s alter ego, is the subject matter

of dispute in various suits that have been filed and are pending

adjudication. FTIL could have responded giving reasons as to why

NSEL is not its alter ego. Also, whether the amalgamation is, in fact, to

restore or safeguard public confidence in forward contracts and

exchanges is a subject matter on which FTIL, its shareholders and

creditors, could have commented. Equally, whether NSEL’s exchange

was an essential and integral part of the Indian economy and financial

system, and whether this defunct business could be consolidated so

as to impact the economy are all matters for comment by FTIL and its

shareholders and creditors. For all these reasons, we cannot accede

to the respondents’ arguments on this score. On this ground alone,

even assuming that these two grounds obtained and can be culled out

from the final order, not being contained in the draft order, the said

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grounds would be in breach of Section 396(3) and (4), and therefore,

cannot be looked at to support the order.

59.3.It is important to note that grounds (a) and (b) are both culled out

in answer to objections raised by FTIL. The precise objection raised

and the answer given are quoted hereinbelow:

“7.2.1. FTIL has challenged the background and

reasons for the amalgamation as the power under

section 396 of the Act has been used only in case of

Government companies alone. This argument does

not derogate from the scope of the statutory

provisions. The statutory provisions of section 396 of

the Act are being invoked in essential public interest

to safeguard the interest of all stakeholders in the

captioned company. The present status and

composition of the Boards of FTIL and NSEL have

been noted. However, the fact that the Boards had

not acted with an independent mind to collect

information and put the system under a robust

technology is borne out of the simple fact that the

Show Cause Notice dated 27-04-2012 issued by the

Department of Consumer Affairs based on analysis of

trade data by the then Forward Market Commission

had given an alarming picture of the state of affairs of

NSEL. The public interest driving the merger are set

out in the business realities of the case, it is noted

from the facts of the case and the recommendations

of FMC as well as its order dated 17-12-2013 which

throw ample light to the grave shattering of the public

confidence and the purpose of establishing

commodity exchange has been defeated.”

xxx xxx xxx

“7.2.6. FTIL and NSEL have distinct and separate

objects and nature of operations and completely

disparate and unconnected objects, and hence there

is no synergy, efficient administration, consolidation

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of business or co-ordination in policy to be gained

by the forced amalgamation; the argument runs

contrary to the concept of merger which essentially

means that two or more separate entities are getting

merged to achieve the objectives of amalgamation. In

the instant case, amalgamation is targeted to achieve its

stated objects, essentially in public interest. By all

intents and purposes, the way both the companies were

being managed, owned and controlled, NSEL is the alter

ego of FTIL and thus, the two companies have been

practically one entity. All stakeholders were also looking

at them as one entity. The amalgamation u/s. 396 of the

Act only formalizes this practical reality in essential

public interest.”

xxx xxx xxx

“7.2.8. The FTIL has questioned the jurisdiction of

the Central Government to decide on the question of

fraud and claimed that it has to be proved beyond

reasonable doubt by adducing necessary

particulars; the Central Government is invoking section

396 of the Act in essential public interest for the merger

of NSEL, which is an almost wholly-owned subsidiary of

FTIL. The merger is not an adjudication on the alleged

fraud. The merger is targeted to achieve its stated

objectives for long term sustainability in the best interest

of the stakeholders.”

(emphasis in original)

It will be noticed that the objection raised in paragraph 7.2.1 is that

Section 396 can be used in the case of Government companies alone,

whereas the answer given is that this cannot be so, given the business

realities of the case and the FMC order of 17.12.2013 “which throw

ample light to the grave shattering of public confidence and the

purpose of establishing Commodity Exchange has been defeated”.

First and foremost, what is important to notice is that the “business

105

realities” of the case are what is contained in “the recommendations of

the FMC”. We have seen that these recommendations are in the form

of a letter dated 18.08.2014, in which the “business reality” is the fact

that dues of INR 5600 crore have to be paid, and that NSEL does not

have the wherewithal to do so. Thus, its parent company’s financial

resources ought to be used to effect such payment. This “business

reality”, therefore, speaks only of the private interest of the

investors/traders who have been allegedly duped (which fact will only

be established in suits filed by them in 2014), and nothing beyond

(which would show some vestige of public interest). Equally, the grave

shattering of public confidence and purpose of establishing commodity

exchanges having been defeated, according to the Central

Government, is a gloss on the FMC order dated 17.12.2013. If this

were so, one would have expected a resuscitation or revival of the

commodities exchange of NSEL, which could have been achieved by

takeover of its management. It is difficult to imagine that grave

shattering of public confidence by the permanent shutting down of the

commodities exchange of the NSEL would be remedied only by

facilitating the paying of dues to certain allegedly duped

investors/traders, which fact will be proved or disproved in suits filed

by them which are pending adjudication in the Bombay High Court. In

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any case, this reason is wholly irrelevant as an answer to the objection

raised by FTIL which, as we have seen, is an objection stating that the

Section applies to Government companies alone. Also, had FTIL made

no such objection, no such answer would have been forthcoming. As

far as paragraphs 7.2.6 and 7.2.8 of the order are concerned, what is

admitted in the order itself, is that there is no “adjudication” on the

“fraud” in the facts of the present case, and thus, not an exercise of

lifting of the corporate veil of the pre-amalgamation companies. The

amalgamation order contradicts itself by then stating that NSEL is the

alter ego of FTIL, and thus, the two companies are practically one

entity. In any event, these paragraphs do not indicate as to how the

‘alter ego’ argument impacts public interest. For all these reasons,

therefore, neither reason (a) nor reason (b) ought to detain us any

further. Reason (c) is, therefore, the only reason that really remains, as

is contained in the letter of 18.08.2014 by the FMC to the Central

Government. We have already seen that this reason, by itself, is the

protection of the private interest of a group of investors/traders, as

distinct from public interest.

59.4.It is important to note that under Section 396(4)(b), the Central

Government may, after considering suggestions and objections from

the stakeholders mentioned, make modifications in the draft order as

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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. The fact that the

Central Government has not amended the body of the final order is of

great significance – it is only the original reasons given in the draft

order that continue as such in the final order which, as we have seen,

are not in furtherance of public interest at all. Reasons (a) and (b), part

of which is culled out from answers to objections and suggestions

given in the final order, is only given separately by the Central

Government after the amalgamation order to show that the principles

of natural justice as laid down by sub-section (4) of Section 396 have,

in fact, been followed. This becomes clear from paragraphs 6.3 and 7

of the final order, which read as follows:

“6.3. The Central Government received in writing and

through email various objections / suggestions from

various classes of stakeholders including the

shareholders, creditors, and all other interested parties

claiming that monies are recoverable from the

proceedings arising out of the business of the dissolved

company.

7.Dealing with objections, suggestions and

submissions of FTIL, NSEL and other parties – The

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Parties herein have made various objections,

suggestions and submissions on the proposed

amalgamation u/s. 396 of the Act on the order dated 21-

10-2014 in Draft form issued by the Central Government.

The said objections, suggestions and submissions were

made during the course of hearing and written

submissions (physically and electronically) received by

the Central Government on various dates. The said

objections, suggestions and submissions made by each

of the parties are dealt in the manner herein under.”

59.5.So far, we have gone by the Central Government order as it

stands. The Bombay High Court, in stating reasons (a), (b), and (c) as

grounds of public interest, has gone much further than even the

answer given to the objections that are contained in the order itself.

“Restoring/safeguarding public confidence in forward contracts and

exchanges, which are an integral and essential part of the Indian

economy and financial system, by consolidating the businesses of

NSEL and FTIL,” is not contained in the answer given to objections in

the order. First and foremost, restoring public confidence is no part of

the order. What is mentioned is only the fact that public confidence has

been shattered, as is reflected by the FMC order dated 17.12.2013.

Secondly, the entire expression, “which are an integral and essential

part of Indian economy and financial system, by consolidating the

businesses of NSEL and FTIL” is no part even of this answer given,

but a gloss given by the High Court itself relatable to this answer.

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Similarly, when it comes to reason (b), “giving effect to business

realities of the case” contained in the answer to objections does not

contain “by consolidating the businesses of FTIL and NSEL”, nor does

it contain “and preventing FTIL from distancing itself from NSEL, which

is, even otherwise, its alter ego”. On the contrary, the High Court itself

mentions, in paragraph 355, that “this is also not a case where the

Central Government has, in fact, lifted the corporate veil, despite the

alleged non-existence of the circumstances justifying lifting of such

corporate veil”, and further, “this is not a case where the Central

Government has lifted the corporate veil and sought to apportion any

liability upon either NSEL or FTIL”. For all these reasons, we find that

no reasonable body of persons properly instructed in law could

possibly arrive at the conclusion that the impugned order has been

made in public interest.

60.The learned Senior Advocates appearing on behalf of the

respondents has placed great reliance on the judgment in Ganesh

Bank (supra). In this judgment, the Appellant Bank was amalgamated

with Federal Bank under Section 45 of the Banking Regulation Act,

1949. Federal Bank was selected from out of several other banks by

the Reserve Bank of India as its offer to amalgamate with the

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Appellant Bank was unconditional, Federal Bank undertaking to make

full payment to depositors.

61.The judgment in Ganesh Bank (supra) was faced with the

amalgamation of the Appellant Bank after a moratorium had been

imposed on it as it was found that its position was very weak, having

incurred huge losses in the financial year 2004-05. Section 45 of the

Banking Regulation Act reads as follows:

“45. Power of Reserve Bank to apply to Central

Government for suspension of business by a

banking company and to prepare scheme of

reconstitution or amalgamation.—(1) Notwithstanding

anything contained in the foregoing provisions of this

Part or in any other law or any agreement or other

instrument, for the time being in force, where it appears

to the Reserve Bank that there is good reason so to do,

the Reserve Bank may apply to the Central Government

for an order of moratorium in respect of a banking

company.

xxx xxx xxx

(4) During the period of moratorium, if the Reserve Bank

is satisfied that—

(a) in the public interest; or

(b) in the interests of the depositors; or

(c) in order to secure the proper management

of the banking company; or

(d) in the interests of the banking system of the

country as a whole,—

it is necessary so to do, the Reserve Bank may prepare

a scheme—

(i) for the reconstruction of the banking

company, or

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(ii) for the amalgamation of the banking

company with any other banking institution (in

this section referred to as “the transferee

bank”).

xxx xxx xxx”

It is important to note that unlike Section 396 of the Companies Act,

the satisfaction of the Reserve Bank of India can be on any one of four

grounds. Such satisfaction may be in the public interest or in the

interest of depositors. This point is, in fact, highlighted in paragraph 34

of the judgment as follows:

“34. The phrase “good reasons” in sub-section (1) of

Section 45 is a term of wide amplitude and it will not be

correct to restrict it only to the actions mentioned under

sub-section (2) of Section 45 of the Act as is contended

by the appellants. The provision is concerned with

preparing a scheme of reconstruction or amalgamation

which would become necessary where RBI is satisfied

about the existence of any of the four grounds

mentioned in Section 45(4). Apart from public interest

and the interest of the banking system, which are

provided in clauses (a) and (d) thereof, Section 45(4)

provides for the necessary action in the interest of the

depositors or with a view to secure proper management

of the Bank which are clauses (b) and (c) in that sub-

section. Precursor to the framing of the scheme is the

imposition of the moratorium which is provided in sub-

sections (1) and (2) of Section 45. Existence of court

proceedings, mentioned in Section 45(2), would certainly

be one of the good reasons to impose moratorium, but

that certainly cannot be the only one. Considering that

object of the Act is protection of the interest of the

depositors, such an interpretation of the concept of

“good reasons” will have to be adopted, and not a

narrow one.”

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The judgment then goes on to state:

“39. Now, as far as the first two questions of non-

consideration of reconstruction and proposing merger

with Federal Bank are concerned, RBI has noted that the

Bank was in difficulties from 1990 and particularly from

December 2003 when it was placed under monthly

monitoring. RBI in its application for moratorium to the

Central Government dated 4-1-2006 had clearly stated

that during the discussion with the appellant Bank, major

shareholders and Directors had shown total reluctance

to merge into the stronger bank. In view thereof, it was

imperative that immediate arrangement to protect the

interest of the depositors was to be made through its

merger with a bank under Section 45 of the Act. RBI

had, therefore, made an effort and called upon the

appellant Bank, that if possible, to explore the possibility

of merger with another stronger bank. It had also made

an effort to impress that there should be infusion of fresh

capital. That was not coming. There could be a

reconstruction by bringing in more money or by

narrowing the size of the appellant Bank which did not

appear to be feasible. The only option left was that of

amalgamation.”

Thus, two features of Ganesh Bank (supra) distinguish the said case

from the facts of the present case. First, that under Section 45 of the

Banking Regulation Act, the interest of the depositors is to be looked

at; and it was this reason that led to the amalgamation. Secondly, this

Court found that after exploring other options, the only option left was

that of amalgamation.

62.In point of fact, the contrast between Section 45(4) of the

Banking Regulation Act and Section 396 of the Companies Act

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becomes important. Under Section 45(4)(b) and (c) of the Banking

Regulation Act, the satisfaction of the Reserve Bank of India for

preparing a scheme of amalgamation can be in the interest of the

depositors of a particular bank or in order to secure the proper

management of a particular banking company. This must be

contrasted with clauses (a) and (d) of Section 45(4), which speak of

public interest and the interest of the banking system of the country as

a whole. This judgment, on facts, merged a financially weak bank with

a financially strong bank in the interest of the depositors of the

financially weak bank. It is important to note that the business of the

two merged entities is the same, as also Federal Bank’s (i.e., the

strong bank’s) willingness to merge, being an unconditional offer to

merge because it felt that post merger, it could have a significant

presence in western Maharashtra and the Belgaum area of Karnataka,

and could augment its credit disbursal to the agricultural sector. Also,

since the interest of depositors is a separate head, based upon which

the Reserve Bank of India may amalgamate two banking companies, it

is clear that this reason alone will not go to public interest, which is a

separate head contained in Section 45(4). It is in this context that the

observation contained in paragraph 44 is made, namely:

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“44. Under Section 45 of the Act, the primary

consideration is public interest. There is an underlying

object of acting swiftly and decisively to protect the

interests of depositors and ensure public confidence in

the banking system. The emergent situation which

warrants action with expedition cannot be lost sight of

while deciding the legality of the action.”

As we have already seen, the “emergent situation” which obtained in

2013 was no longer there in 2016 when the final order of

amalgamation was passed in the present case.

63.Valiant attempts have been made by counsel in the High Court

as well as counsel in this Court to support the order on grounds which

are outside the order, stating that such grounds make it clear that in

any case, the Government order has been made in public interest. The

celebrated passage in Mohinder Singh Gill (supra) states that:

“8. The second equally relevant matter is that when a

statutory functionary makes an order based on certain

grounds, its validity must be judged by the reasons so

mentioned and cannot be supplemented by fresh

reasons in the shape of affidavit or otherwise. Otherwise,

an order bad in the beginning may, by the time it comes

to Court on account of a challenge, get validated by

additional grounds later brought out. We may here draw

attention to the observations of Bose, J. in Gordhandas

Bhanji [Commr. of Police, Bombay v. Gordhandas

Bhanji, AIR 1952 SC 16] :

“Public orders, publicly made, in exercise of a

statutory authority cannot be construed in the

light of explanations subsequently given by the

officer making the order of what he meant, or of

what was in his mind, or what he intended to

115

do. Public orders made by public authorities are

meant to have public effect and are intended to

affect the actings and conduct of those to

whom they are addressed and must be

construed objectively with reference to the

language used in the order itself.”

Orders are not like old wine becoming better as they

grow older.”

We are of the view that it is the Central Government that has to be

“satisfied” that its order is in public interest and such “satisfaction”

must, therefore, be of the Central Government itself and must,

therefore, appear from the order itself. All these valiant attempts made

to sustain such order must be rejected.

64.However, learned Senior Advocates on behalf of the respondents

have cited Chairman, All India Railway Recruitment Board and

Anr. v. K. Shyam Kumar and Ors. , (2010) 6 SCC 614, which,

according to them, renders the judgment in Mohinder Singh Gill

(supra) inapplicable where larger public interest is involved. In this

judgment, Mohinder Singh Gill (supra) was distinguished thus:

“44. We are also of the view that the High Court has

committed a grave error in taking the view that the order

of the Board could be judged only on the basis of the

reasons stated in the impugned order based on the

report of Vigilance and not on the subsequent materials

furnished by CBI. Possibly, the High Court had in mind

the Constitution Bench judgment of this Court in

Mohinder Singh Gill v. Chief Election Commr. [(1978) 1

SCC 405]

116

45. We are of the view that the decision-maker can

always rely upon subsequent materials to support the

decision already taken when larger public interest is

involved. This Court in Madhyamic Shiksha Mandal,

M.P. v. Abhilash Shiksha Prasar Samiti [(1998) 9 SCC

236] found no irregularity in placing reliance on a

subsequent report to sustain the cancellation of the

examination conducted where there were serious

allegations of mass copying. The principle laid down

in Mohinder Singh Gill case [(1978) 1 SCC 405] is not

applicable where larger public interest is involved and in

such situations, additional grounds can be looked into to

examine the validity of an order. The finding recorded by

the High Court that the report of CBI cannot be looked

into to examine the validity of the order dated 4-6-2004,

cannot be sustained.”

It will be seen that there is no broad proposition that the case of

Mohinder Singh Gill (supra) will not apply where larger public interest

is involved. It is only subsequent materials, i.e., materials in the form of

facts that have taken place after the order in question is passed, that

can be looked at in the larger public interest, in order to support an

administrative order. To the same effect is the judgment in PRP

Exports and Ors. v. Chief Secretary, Government of Tamil Nadu

and Ors., (2014) 13 SCC 692 [at paragraph 8]. It is nobody’s case that

there are any materials or facts subsequent to the passing of the final

order of the Central Government that have impacted the public

interest, and which, therefore, need to be looked at. On facts,

therefore, the two judgments cited on behalf of the respondents have

117

no application. Thus, it is clear that no reasonable body of persons

properly instructed in law could possibly hold, on the facts of this case,

that compulsory amalgamation between FTIL and NSEL would be in

public interest.

65.Section 396(3) speaks of a shareholder’s or a creditor’s interest

in or rights against the company resulting from an amalgamation order.

Such “interest in” or “rights against” obviously refers to real and

substantive rights, as opposed to rights that are only in form. A

shareholder or creditor gets effected by an amalgamation order if the

value of his share gets depleted as a result of the amalgamation and if

dividends that have been paid to him are likely to come down as a

result of the amalgamation. Likewise, a creditor of a solvent company

is directly effected by an amalgamation by which the amount loaned by

such 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

118

granted are likely not to be repaid in time or at all as a result of an

amalgamation, such members or creditors of the amalgamating

company are equally entitled to be compensated for this economic

loss as are the members and creditors of the amalgamated company,

depending on the facts of each case. A reasonable construction must

be given to Section 396. Also, the suggested construction by the

respondents, as has been accepted by the impugned judgment,

operates harshly and ridiculously, and being opposed to justice and

reason, cannot possibly be adopted by this Court. It is clear that

Section 396(3) refers to the economic loss that is to be borne by

shareholders and members of both companies.

66.Thus, it is clear from a reading of Section 396(3), (3A), and (4)

(aa) that every member or creditor of each of the companies before

amalgamation shall have, as nearly as may be, the same interest in or

rights against the company resulting from the amalgamation as he had

in the original company. To the extent to which the interest or rights of

such member or creditor are less than his interest or rights against the

original company, post amalgamation, he shall be entitled to

compensation which is to be assessed. Post assessment, if such

member or creditor is aggrieved, he may prefer an appeal to the

appellate authority under sub-section (3A). Under sub-section (4)(aa),

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no order of amalgamation can be made unless the time for preferring

an appeal under sub-section (3A) has expired, or where any such

appeal has been preferred, the appeal has been finally disposed of.

67.The learned counsel on behalf of the appellant has argued that

the assessment order dated 01.04.2015, passed by the Joint Director

(Accounts), does not reflect any compensation in favour of the

shareholders or creditors of FTIL. According to the learned counsel, it

is clear that if a company with low net worth (NSEL) is amalgamated

with a company with high positive net worth (FTIL), both the

shareholders and the creditors of FTIL will be directly impacted as the

economic value of the shares will plummet, and the creditors of FTIL,

which is a positive net worth company, may have to wait for a long time

before recovery of debts owed to them once the company is

amalgamated with the negative net worth company. In short, the

creditors of FTIL will be put on par with the creditors of NSEL, which

will result in the creditors of FTIL either being paid back their debts

much later in point of time, or not at all. To this argument, the answer

of the Union of India, which has found favour with the Division Bench

of the Bombay High Court, is that “economic value” forms no part of

Section 396. So long as the shareholders of FTIL continued to have

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the same number of shares, it matters not whether their share values

plummet post amalgamation.

68.In Bacha F. Guzdar (supra), this Court held that though a

shareholder acquires no right in the assets of a company as the

company itself is the owner of such assets, yet a shareholder certainly

has the right to dividends and the right to participate in the assets of

the company which would be left over after winding up. The Court

held:

“The true position of a shareholder is that on

buying shares an investor becomes entitled to

participate in the profits of the company in which he

holds the shares if and when the company declares,

subject to the Articles of Association, that the profits or

any portion thereof should be distributed by way of

dividends among the shareholders. He has

undoubtedly a further right to participate in the assets

of the company which would be left over after winding

up but not in the assets as a whole as Lord Anderson

puts it.”

(at p. 882)

(emphasis in original)

69.In Life Insurance Corporation of India v. Escorts Ltd. and

Ors., (1986) 1 SCC 264, this Court dealt generally with the rights of

shareholders as follows:

“84. On an overall view of the several statutory

provisions and judicial precedents to which we have

referred we find that a shareholder has an undoubted

interest in a company, an interest which is represented

by his shareholding. Share is movable property, with all

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the attributes of such property. The rights of a

shareholder are (i) to elect directors and thus to

participate in the management through them; (ii) to vote

on resolutions at meetings of the company; (iii) to enjoy

the profits of the company in the shape of dividends; (iv)

to apply to the court for relief in the case of oppression;

(v) to apply to the court for relief in the case of

mismanagement; (vi) to apply to the court for winding up

of the company; (vii) to share in the surplus on winding

up. ……”

On the facts of the present case, we are directly concerned with points

(iii) and (vii). It has been argued that the profits of the company post-

amalgamation will obviously come down, and dividends payable to

shareholders will consequently either come down or be wiped out if the

low net worth of NSEL is taken into account post amalgamation,

together with potential liabilities of the amalgamated company, which

may have to be paid in the near future. Secondly, if the amalgamated

company is wound up, the amount that is payable to the shareholders

post-amalgamation will be much less, if at all anything is to be paid,

than pre-amalgamation.

70.In fact, in Commissioner of Income Tax (Central) Calcutta v.

Standard Vacuum Oil Co., [1966] 2 SCR 367, this Court held:

“ …… A share is not a sum of money: it represents an

interest measured by a sum of money and made up of

diverse rights contained in the contract evidenced by the

articles of association of the Company. ……”

(at p. 374)

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71.In Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC

579, in the context of a voluntary amalgamation made under Sections

391 to 394 of the Companies Act, this Court went into share valuation.

This Court held:

“40. …… It must at once be stated that valuation of

shares is a technical and complex problem which can be

appropriately left to the consideration of experts in the

field of accountancy. Pennington in his Principles of

Company Law mentions four factors which had to be

kept in mind in the valuation of shares:

“(1) Capital Cover,

(2) Yield,

(3) Earning Capacity, and

(4) Marketability.

For arriving at the fair value of share, three well-known

methods are applied:

(1) The manageable profit-basis method (the

Earning Per Share Method)

(2) The networth method or the break value

method, and

(3) The market value method.”

What is clear from the various methods of valuation of shares, when it

comes to such valuation qua the transferor and transferee company, is

that the market value method is one method in which shares can be

valued so that their equivalent can then be provided for in the

amalgamated company. This would be nothing other than what those

shares were worth in the market on a particular day or an average

taken within a certain period. What is important to note is that the

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market value of shares is market value of shares reflective of their

economic value, being an interest measured by a sum of money, is not

something that is completely alien to determining the rights of or

interest of a shareholder in the transferor or transferee company, as

the case may be.

72.In fact, the Government order dated 12.02.2016 itself reflects the

net worth of NSEL as INR 8.86 crore from its balance sheet dated

31.03.2015, despite its capital being INR 60 crore, inasmuch as the

total reserve and surplus is a negative figure of INR 51.54 crore. As

against this, FTIL’s balance sheet, as on 31.03.2015, discloses that for

the same year, FTIL’s net worth is INR 2779.94 crore. Also, FTIL has

been paying dividends to its shareholders ranging from 1000% to

250% for the years 2007-2008 till 2015-2016. On the other hand,

NSEL has never paid a single dividend ever since its inception. Post

amalgamation, therefore, dividend payable to the shareholders of FTIL

is bound to come down. Correspondingly, the ‘marketable value’ of

such shares will also fall.

73.The impugned Division Bench judgment has incorrectly held that

the economic value of shares cannot be taken into account. In fact,

from the Director’s Report of NSEL dated 20.07.2015, it is specifically

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stated under the caption, “(vi) civil suits / complaints / writs / public

interest litigation” that:

“xxx xxx xxx

c)The Company received a legal opinion to the

effect that the Company is not liable for payment under

the provisions of SGF in the bye-laws. Further in case

of e-Series contract related transactions, no major

infirmity in underlying physical stock was observed.

Therefore, at this stage and in the opinion of the

Management of the Company, relying upon the legal

advices, and as per the provisions of bye-laws of the

exchange there are no direct ascertainable financial

claims against the company. The Company may be

exposed to liabilities in case of any adverse outcome of

these investigations / enquiries or legal cases or any

other investigations / enquires or suits which may arise

at a later date.”

This is further clarified in the consolidated financial statement made for

the financial year 2014-2015 as follows:

“Risk of un-identified financial irregularities

In view of the specific scope of the forensic audits and

the limitations in the forensic audits and investigations,

there is inherent a risk that material errors, fraud and

other illegal acts may exist that could remain

undetected.

Risk of adverse outcome of investigation/enquiry by

law enforcement agencies

Several agencies such as the Police (EOW), Ministry

of Corporate Affairs (MCrA), Enforcement Directorate

(ED), CBI and the Income Tax Department etc. are

currently investigating / enquiring the extent of alleged

irregularities and any breach of law. The matters are

also sub judice before various forums including the

Hon’ble Mumbai High Court. The Company may be

exposed to liabilities in case of any adverse outcome of

these investigations or any other investigations which

may arise at a later date.”

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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.

74.The impugned judgment has also held that no material was

produced before the Court to show that share prices would in fact

plummet post-amalgamation. This is despite the fact that the

impugned judgment itself refers to the fact that since the publication of

the draft order on 21.10.2014, the share value which was INR 211.10,

dropped to INR 174.55 ten days later. The Division Bench then goes

on to state that it is not possible to hold that any case of serious

erosion in economic value has at all been made out, inasmuch as by

21.10.2014, when the draft order of amalgamation was made available

to companies, the news of collapse of NSEL’s exchange was already

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in public domain. This is wholly incorrect for the reason that the news

of collapse took place in July, 2014, i.e., over two months before the

publication of the draft order. It is well known that the stock market is

extremely sensitive to the slightest event that may render a company

less profitable. Over two months is too long a period to relate a share

value of INR 211.10 drastically falling to INR 174.55. On the other

hand, it is obvious that the publication of the draft order on 21.10.2014

had the impact of the share price reducing by a substantial amount,

ten days later. In fact, a reference to the share prices of NSEL

furnished by the learned Additional Solicitor General makes it clear

that the moment the final amalgamation order dated 12.02.2016 was

publicised, the share price fell from INR 89.90 on 12.02.2016 to INR

73.90 on 24.02.2016 and further to INR 73.10 on 29.02.2016.

Incidentally, the High Court realised this, and finally incorrectly

concludes, “there is thus substantial compliance with the provisions of

Section 396(3).” Given the fact that the assessment order dated

01.04.2015 did not provide any compensation to either the

shareholders or creditors of FTIL for the economic loss caused by the

amalgamation in breach of Section 396(3), it is clear that an important

condition precedent to the passing of the final amalgamation order was

not met. On this ground also, therefore, the final amalgamation order

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has to be held to be ultra vires Section 396 of the Companies Act, and,

being arbitrary and unreasonable, violative of Article 14 of the

Constitution of India.

75.However, the learned Senior Advocates for the respondents

have argued that an order of nil compensation is equally an order that

is passed under Section 396(3) which could have been appealed

against but was not appealed against. For this reason, therefore, it is

not correct to state that the condition precedent mentioned in Section

396(4)(aa) has not been fulfilled. It will be noticed that the language

used in the appeal provision, i.e. Section 396(3A), is “any person

aggrieved by any assessment of compensation made by the

prescribed authority under sub-section (3) may…… appeal to the

Tribunal, and thereupon the assessment of the compensation shall be

made by the Tribunal.” The pre-requisites for the application of sub-

section (3A) are that a person first be aggrieved by an “assessment of

compensation” “made” by the prescribed authority. Where no

assessment of compensation whatsoever is made by the prescribed

authority (and on the facts here, the prescribed authority has not, in

fact, stated that for the reasons given by it, compensation awarded to

FTIL, its shareholders and creditors is nil), no person can be aggrieved

by an order which does not assess any compensation, which may be

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interfered with by the Appellate Tribunal which must then assess the

compensation for itself. The statute clearly entitles such shareholders

and creditors to have compensation assessed first by the prescribed

authority and then by the appellate authority. This Court, in Institute of

Chartered Accountants of India v. L.K. Ratna and Ors., [1986] 3

SCR 1049, held that the defect in observing the rules of natural justice

in the trial administrative body cannot be cured by observing such

rules of natural justice in the appellate body. It was held:

“It is then urged by learned counsel for the

appellant that the provision of an appeal under Section

22-A of the Act is a complete safeguard against any

insufficiency in the original proceeding before the

Council, and it is not mandatory that the member

should be heard by the Council before it proceeds to

record its finding. Section 22-A of the Act entitles a

member to prefer an appeal to the High Court against

an order of the Council imposing a penalty under

Section 21(4) of the Act. It is pointed out that no

limitation has been imposed on the scope of the

appeal, and that an appellant is entitled to urge before

the High Court every ground which was available to

him before the Council. Any insufficiency, it is said, can

be cured by resort to such appeal. Learned counsel

apparently has in mind the view taken in some cases

that an appeal provides an adequate remedy for a

defect in procedure during the original proceeding.

Some of those cases as mentioned in Sir William

Wade’s erudite and classic work on “Administrative

Law” (5

th

Edn.). But as that learned author observes (at

p. 487), “in principle there ought to be an observance

of natural justice equally at both stages”, and

“if natural justice is violated at the first stage,

the right of appeal is not so much a true right

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of appeal as a corrected initial hearing:

instead of fair trial followed by appeal, the

procedure is reduced to unfair trial followed

by fair trial.”

And he makes reference to the observations of

Megarry, J. in Leary v. National Union of Vehicle

Builders [(1971) 1 Ch. 34, 49]. Treating with another

aspect of the point, that learned Judge said:

“If one accepts the contention that a defect of

natural justice in the trial body can be cured

by the presence of natural justice in the

appellate body, this has the result of depriving

the member of his right of appeal from the

expelling body. If the rules and the law

combine to give the member the right to a fair

trial and the right of appeal, why should he be

told that he ought to be satisfied with an

unjust trial and a fair appeal? Even if the

appeal is treated as a hearing de novo, the

member is being stripped of his right to

appeal to another body from the effective

decision to expel him. I cannot think that

natural justice is satisfied by a process

whereby an unfair trial, though not resulting in

a valid expulsion, will nevertheless have the

effect of depriving the member of his right of

appeal when a valid decision to expel him is

subsequently made. Such a deprivation would

be a powerful result to be achieved by what in

law is a mere nullity; and it is no mere triviality

that might be justified on the ground that

natural justice does not mean perfect justice.

As a general rule, at all events, I hold that a

failure of natural justice in the trial body

cannot be cured by a sufficiency of natural

justice in an appellate body.”

The view taken by Megarry, J. was followed by the

Ontario High Court in Canada in Re Cardinal and

Board of Commissioners of Police of City of Cornwall,

[(1974) 42 D.L.R. (3d) 323]. The Supreme Court of

New Zealand was similarly inclined in Wislang v.

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Medical Practitioners Disciplinary Committee, [(1974) 1

N.Z.L.R. 29] and so was the Court of Appeal of New

Zealand in Reid v. Rowley [(1977) 2 N.Z.L.R. 472].”

(at pp. 1065-1066)

This judgment was the subject matter of comment in Union Carbide

Corporation v. Union of India, [1991] Supp (1) SCR 251, where this

Court held, following the judgment in Charan Lal Sahu v. Union of

India, (1990) 1 SCC 613, that non-compliance with the obligation to

issue notices to persons effected by the Bhopal gas leak did not, for

this reason alone, vitiate the settlement that was entered into with

Union Carbide by the Government on their behalf. This Court, in

passing, commented that the principle laid down in Leary v. National

Union of Vehicle Builders, [1971] Ch. 34 might perhaps be too broad

a generalisation, except in cases involving public interest. This was an

observation made in answer to an argument by Shri Shanti Bhushan,

stating that a defect of natural justice always goes to the root of the

matter. Ultimately, given the fact that the settlement fund was held to

be sufficient to meet the needs of just compensation to the victims of

the Bhopal gas leak tragedy, it was held that the grievance on the

score of not hearing the victims first would not really survive. However,

what is of fundamental importance is the fact that in the present

situation, a clear statutory right is given to every member or creditor

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who shall be entitled to an assessment of compensation, first by the

prescribed authority and then, a right of appeal to the Appellate

Tribunal. In such cases, therefore, the orders of “non-assessment” by

the prescribed authority can more appropriately be challenged in

judicial review proceedings, in which the High Court, acting under

Article 226 of the Constitution of India can, if an infraction of Section

396(3) is found, send the matter back to the prescribed authority to

determine compensation after which the right of appeal under sub-

section (3A) of Section 396 would then follow. In fact, in Writ Petition

2743 of 2014, which challenged both the draft order and the final order

of amalgamation, the appellant took out a chamber summons for

amendment of its writ petition to challenge the order of assessment of

compensation, dated 01.04.2015, which amendment was allowed vide

order dated 16.02.2016. The order of “non-assessment” of

compensation has thus been challenged by FTIL in proceedings under

Article 226 of the Constitution of India. Even otherwise, this is a case

where there is complete non-application of mind by the authority

assessing compensation to the rights and interests which the

shareholders and creditors of FTIL have and which are referred to in

Section 396(3) of the Act. This being the case, it is clear that Section

396(3) has not been followed either in letter or in spirit.

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76.In conclusion, though other wide-ranging arguments were made

with respect to the validity of the Central Government amalgamation

order, we have not addressed the same as we have held that the order

dated 12.02.2016 is ultra vires Section 396 of the Companies Act, and

violative of Article 14 of the Constitution of India for the reasons stated

by us hereinabove. The appeals are accordingly allowed, and the

impugned judgment of the Bombay High Court is set aside. The writ

petition is disposed of in light of this judgment.

…………………………J.

(R.F. Nariman)

…………………………J.

New Delhi (Vineet Saran)

April 30, 2019.

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