SC rules against 63 Moons-NSEL merger

New Delhi, April 30 (IANS) The Supreme Court on Tuesday ruled against the government decision to merge crisis-ridden and loss-making subsidiary National Spot Exchange Ltd (NSEL) with 63 Moons Technologies Ltd.

The apex court allowed an appeal against a Bombay High Court order that upheld the decision of merger of 63 Moons Technologies Ltd, earlier known as Financial Technologies India Ltd (FTIL), and NSEL -- a wholly-owned subsidiary of FTIL.

FTIL was rechristened as 63 Moons Technologies Ltd on May 16, 2016.

"We have allowed the appeal," said a bench of Justice Rohinton Fali Nariman and Justice Vineet Saran in their judgment setting aside the high court order.

Speaking for the bench, Justice Nariman said the February 12, 2016 order amalgamating NSEL with FTIL (63 Moons) is "ultra vires Section 396 of the Companies Act, and violative of Article 14 of the Constitution".

By the February 12, 2016 order merging FTIL and NSEL, all assets and liabilities of NSEL would become assets and liabilities of FTIL.

The court said this addressing the questions on 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.

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, the court said and added: "However, this does not mean that Section 396 must be construed in such a fashion that it would lead to arbitrary or unreasonable results."

The court also addressed the question 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.

"The order passed under Section 396 is qua particular companies and does not lay down any general rule of conduct by itself, but in fact, follows the general rule of conduct laid down by Section 396. Thus, the Central government order, made under Section 396, must conform to the fundamental rights guaranteed by Articles 14 and 19(1)(g) of the Constitution of India," the court said making it clear that the amalgamation order by the government does not enjoy the protection of Article 31A.

It further said that it is the "substance of what is effected that counts when it comes to infraction of a fundamental right, and not the form".

Holding that a "reasonable construction" must be given to Section 396a, the court said that the construction given by the high court "operates harshly and ridiculously, and being opposed to justice and reason, cannot possibly be adopted by this court".

Various pre-requisites, the court said, in Section 396 "must first be satisfied before the Section can be said to operate" and that "first and foremost" includes that the "Central government has to be 'satisfied' on certain objective facts, for coming to conclusion that the amalgamation between two or more companies is necessary".

This, the court said, can only be done if the "Central government finds it "essential", i.e., necessary to do so. Also, this can only be done in "public interest"."

The court said that "satisfaction" and essential" has to be based on facts and in public interest and not just "irrelevant or imaginary grounds, as that would vitiate the exercise of power".

Justice Nariman said that the bench has laid down certain norms that include objective criteria and public interest for taking recourse to such a merger.

The 63 Moons had moved the Supreme Court challenging the high court's verdict giving nod to the government decision to merge it with its loss-making subsidiary NSEL.