NSEL at NCLT: What the MCA sought versus what it got

Varun Marwah

In a petition filed by the Centre against 63 Moons Technologies Limited, formerly known as Financial Technologies (India) Limited (FTIL), the Chennai Bench of NCLT has passed a set of orders, barring Jignesh Shah and nine others from holding directorship in 63 Moons Technologies as well as any other companies.

The proceedings pertain to the Rs. 5600 crore NSEL Scam which was a result of the violation of the conditions that granted an exemption to NSEL for all one-day duration contracts (spot contracts) under Section 27 of the Forward Contracts Regulation Act, 1952. This meant NSEL was allowed to offer one-day forward contracts provided that members would not resort to short sales and that outstanding positions at the end of the trading day would result in delivery.

NSEL was incorporated as a Joint Venture between FTIL and the National Agricultural Cooperative Marketing Federation of India. Under the JV agreement, FTIL would hold 99.99% in NSEL.

In order to smoothen recovery process, the Ministry of Corporate Affairs (MCA) had issued a final order for merger/amalgamation of NSEL with FTIL under Section 396 of the Companies Act, 1956. FTIL, obviously,  vehemently opposed this merger and filed a writ in the Bombay High Court where it failed to get any relief. This decision has been challenged in the Supreme Court.

In the proceedings before the Chennai NCLT, under various provisions of the Companies Act, 1956, the Union, through the MCA had prayed for the following,

Declare that all the (27) respondents (except for FTIL and NSEL), in the case are not fit and proper to hold the office as a director or any other office connected with FTIL and NSEL or any other company.

Jignesh Shah and nine others have been barred from holding any office connected with the conduct and management of FTIL and NSEL and directorship of any other company.

These ten persons have been particularly barred since they were on the board of FTIL when the NSEL defaults happened. The bench noted the power of the board of FTIL to nominate the board of NSEL, and found it difficult to appreciate the argument that FTIL was completely unaware of happenings at NSEL.

Declare that all the respondents (except for FTIL and NSEL) were acting in an oppressive manner against FTIL and NSEL

The bench found this prayer to be unsustainable since an application for oppressive behaviour can only be made by members of the company. Hence, no directions were issued.

Declare that all the respondents (except for FTIL and NSEL) were conducting affairs of FTIL and NSEL in a manner prejudicial to the public interest as well as the interest of companies

The bench agreed on this point and held that,

actions of the concerned respondents not only affected the traders/investors but also were not in public interest in so far as they adversely impacted the credibility of the Indian financial system with respect to the happenings and acts of default in dealing with NSEL and the misuse of the mechanism of the spot and forward trading in commodities.

Direct the petitioner (MCA) to replace the existing directors by appointed government nominee directors on the board of FTIL to prevent further fraud.

While rejecting the plea to completely supersede the board, the NCLT ordered that the government may nominate not more than 3 directors to the board of 63 Moons Technologies, “to take care of the interest of all stakeholders and also to protect the interest of the investment of FTIL in its subsidiaries.

(Read the order)

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