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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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,

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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

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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.

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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

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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

20

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

21

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

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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

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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

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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

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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

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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.

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(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)

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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)

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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]

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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

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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

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proposing  substantial  modifications  in  the  draft development plan. 22. Any opinion of the Government to be formed is not subject to objective test. The language leaves no room for  the  relevance  of  a  judicial  examination  as  to  the sufficiency  of  the  grounds  on  which  the  Government acted in forming its opinion. But there must be material based on which alone the State Government could form its  opinion  that  it  has  become  necessary  to  make substantial modification in the draft development plan. 23. The power conferred by Section 17(1)(a)(ii) read with proviso  is  a  conditional  power.  It  is  not  an  absolute power  to  be  exercised  in  the  discretion  of  the  State Government.  The  condition  is  formation  of  opinion— subjective, no doubt—that it had become necessary to make substantial modifications in the draft development plan.  This  opinion  may  be  formed  on  the  basis  of material sent along with the draft development plan or on the basis of relevant information that may be available with  the State  Government.  The  existence  of  relevant material  is  a  precondition  to  the  formation  of  opinion. The use of word “may” indicates not only a discretion but an obligation to consider that a necessity has arisen to make substantial modifications in the draft development plan. It also involves an obligation to consider which of the several steps specified in sub-clauses (i), (ii) and (iii) should be taken. 24. The proviso opens with the words “where the State Government is of opinion that substantial modifications in  the  draft  development  plan  and  regulations  are necessary,  …”.  These  words  are  indicative  of  the satisfaction  being  subjective  one  but  there  must  exist circumstances stated in the proviso which are conditions precedent for the formation of the opinion. Opinion to be formed by the State Government cannot be on imaginary grounds, wishful thinking, however laudable that may be. Such a course is impermissible in law. The formation of the opinion,  though subjective,  must  be based on the material disclosing that a necessity had arisen to make substantial modifications in the draft development plan.

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25. The  formation  of  the  opinion  by  the  State Government is with reference to the necessity that may have had arisen to make substantial modifications in the draft development plan. The expression: “as considered necessary”  is  again  of  crucial  importance.  The  term “consider”  means to  think  over;  it  connotes that  there should be active application of the mind. In other words, the term “consider”  postulates  consideration  of  all  the relevant  aspects  of  the  matter.  A plain  reading  of  the relevant provision suggests that the State Government may publish  the  modifications  only  after  consideration that  such  modifications  have  become  necessary.  The word  “necessary”  means  indispensable,  requisite, indispensably requisite, useful, incidental or conducive, essential, unavoidable, impossible to be otherwise, not to be avoided, inevitable. The word “necessary” must be construed  in  the  connection  in  which  it  is  used.  (See Advanced Law Lexicon,  P.  Ramanatha Aiyar,  3rd Edn., 2005.) 26. The  formation  of  the  opinion  by  the  State Government  should  reflect  intense application of  mind with reference to the material available on record that it had  become  necessary  to  propose  substantial modifications to the draft development plan.”

41. However, Shri Tushar Mehta, learned Solicitor General for India,

relied upon  M. Jhangir Bhatusha and Ors. v. Union of India and

Ors., 1989 Supp (2) SCC 201, in particular, the passage at page 208

which reads as follows:

“13. …… Now it is the Central Government which has to be satisfied,  as  the  authority  appointed by Parliament under  Section 25(2),  that  it  is  necessary in  the public interest to make the special orders of exemption. It has set out the reasons which prompted it to pass the orders. In  our  opinion,  the  circumstances  mentioned  in  those notifications  cannot  be  said  to  be  irrelevant  or unreasonable. It is not for this Court to sit in judgment on

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

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cannot be on irrelevant or imaginary grounds, as that would vitiate the

exercise of power.  

“ESSENTIAL  ”

43. The  expression  “essential”  has  been  defined  in  P.  Ramanath

Aiyer’s Law Lexicon (4th Edn.) as follows:

“Essential.  Indispensably  necessary;  important  in  the highest degree: requisite that which is required for the continued existence of a thing.”

Black’s Law Dictionary (10th Edn.) defines “essential” as follows:

“essential, adj. (14c)  1. Of, relating to, or involving the essence  or  intrinsic  nature  of  something.  2.  Of  the utmost importance; basic and necessary. 3. Having real existence; actual.”

44. In J. Jayalalitha v. Union of India, (1999) 5 SCC 138, this Court

dealt with an argument that there is no guideline contained in Section

3(1)  of  the  Prevention  of  Corruption  Act,  1988,  when  the  Section

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

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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

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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)

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48. In Janata Dal v. H.S. Chowdhary and Ors., (1992) 4 SCC 305,

this Court referred to Stroud’s Judicial Dictionary, which defines “public

interest” thus:

“51. In Stroud’s  Judicial  Dictionary,  Vol.  IV  (4th edn.) ‘public interest’ is defined thus:

“Public  interest  —  1.  A  matter  of  public  or general  interest  does not  mean that  which is interesting  as  gratifying  curiosity  or  a  love  of information or amusement; but that in which a class  of  the  community  have  a  pecuniary interest,  or  some interest  by which their  legal rights  or  liabilities  are  affected.”  (Per  Cambel C.J., in R. v. Bedfordshire [24 LJ QB 84] ).

52. In Black’s Law Dictionary (6th edn.), ‘public interest’ is defined as follows:

“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].

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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

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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

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business would reasonably approve between two private companies  may  be  correct  and  may  normally  be adhered to but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. The jurisdiction of the court in this regard is comprehensive.”

(emphasis supplied)

52. In  Bihar  Public  Service  Commission  v.  Saiyed  Hussain

Abbas  Rizwi  and  Anr.,  (2012)  13  SCC 61,  this  Court  referred  to

“public interest” in the context of service law as follows:

“22. The  expression  “public  interest”  has  to  be understood in its true connotation so as to give complete meaning  to  the  relevant  provisions  of  the  Act.  The expression “public interest” must be viewed in its strict sense with all its exceptions so as to justify denial of a statutory exemption in terms of the Act. In its common parlance,  the  expression  “public  interest”,  like  “public purpose”, is not capable of any precise definition. It does not have a rigid meaning, is elastic and takes its colour from the statute in which it occurs, the concept varying with time and state of  society and its needs (State of Bihar v. Kameshwar Singh [AIR 1952 SC 252]).  It  also means the general  welfare of  the public  that  warrants recognition and protection; something in which the public as  a  whole  has  a  stake  [Black’s  Law  Dictionary (8th Edn.)].”

53. In  R.R. Tripathi v. Union of India, (2010) 1 Bom CR 513, the

Bombay High Court referred to the Business Dictionary, which defines

“public interest” as follows:  

“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

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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

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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.”

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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

87 S 13790 PD  AGROPROCESSOR S PVT. LTD.

DLF002 PDY1121 HR2

474 13791 2400.00 360,000

02 April 2012

87 B 10570 ANAND RATHI  COMMODITIES  LTD.

HNR320 PDY1121 HR2

232 10575 2400.00 360,000

02 April 2012

88 S 10570 ANAND RATHI  COMMODITIES  LTD.

HNR320 PY1121H R25

232 10575 2450.70 367,605

02 April 2012

88 B 13790 PD  AGROPROCESSOR S PVT. LTD.

DLC001 PY1121H R25

474 13791 2450.70 367,605

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:

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Repeated Defaults: As per the NSEL exchange rules a member who does not have sufficient collateral/monies etc. to discharge his obligations would not be allowed to trade  further.  This  rule  was overridden on  a  recurring basis. Further despite repeated defaults members were allowed  to  trade  and  increase  their  expenses.  For example,  Lotus  Refineries  had  defaulted,  as  per  the Rules of the Exchange, on 198 days between the fifteen- month period of 1 April 2012 and 30 July 2013. Exemptions from Margin Requirements:  Members who were in a default position or whom had exhausted their margin limits on trading were granted an exemption from margin requirements and thus allowed them to increase their  exposure by engaging in  new trades.  More than 1,800  margin  limit  exemptions  were  granted  between 2009 through to 2013. Inadequate monitoring of member collateral:  NSEL did not carry out any diligence to establish the existence of stock  at  member  managed  warehouses,  upon  which trades were being executed. Grant Thornton carried out a  stock  verification  exercise  and  found  significant shortages vis-à-vis expected collateral. Related Party Transactions 1.6 IBMA is registered as a client with Karvy Comtrade limited  for  executing  trades  on  futures  commodity exchange like MCX and NCDEX. SNP Designs Private Limited (SNP) is a client of IBMA and the managing director of SNP is Mrs. Shalini Sinha, the wife of Mr. Anjani Sinha (CEO and MD of NSEL as well as IBMA). Grant  Thornton  found  evidence  of  a  large  volume  of trades  executed  on  the  MCX  exchange  on  behalf  of SNP, through Karvy Comtrade Limited. Since April 2012 the  total  nominal  value/volume  traded  on  MCX  is approximately Rs. 40,000 crore. In  spite  of  heavy  losses  over  the  period,  trading  on behalf  of  SNP  was  allowed  to  continue.  No  margin money was ever taken from SNP. As at 20 September 2013, IBMA is due to receive Rs. 77 crore on account of losses arising from trades executed on behalf  of SNP.

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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:

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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

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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

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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

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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

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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

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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,

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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.

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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  6th August,  2013  (copy  enclosed  as Annexure  II)  inter-alia  provided  that  settlement  of  all outstanding one day forward contract at NSEL shall be done under the supervision of FMC. In exercise of this supervisory role, the Commission has been continuously taking all possible steps and has been regularly pursuing

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with NSEL to expedite the recovery proceedings against the defaulters at its platform. To ensure better monitoring of  NSEL’s  compliance  the  Commission  had  vide  No. 8/1/2013 (1)-MD-1(1)(C)/Settlement  (Vol.-IV) dated 29th

November,  2013  (copy  enclosed  as  Annexure  III) constituted  a  Monitoring  &  Auction  Committee  (MAC) comprising  the  representatives  of  various  members associations and investors bodies to assist and advise the  Commission  on  matters  pertaining  to  the Commission’s  supervisory role over the settlement of outstanding contracts at NSEL. 3. It is observed that even after one year’s incessant efforts and in spite of FMC’s active role in supervising the settlement of contracts, the settlement plan could not result in making any substantial payment to the investors as the process of recovery of dues by NSEL from the defaulting members is very slow. It is submitted that, it is only the NSEL, which has the responsibility to take all possible coercive measures as per their rules/bye-laws and  other  laws  of  the  land,  to  ensure  that  the outstanding dues of all investors are settled. However as on date, NSEL has been able to make a payment of only Rs.  538.56  crores  to  its  members  as  against  the payment  dues of  approximately  Rs.  5500 crores.  This amount also includes an amount of Rs. 179.26 crores borrowed by NSEL from its holding company, FTIL which was distributed to small participants. The representatives of  members  associations  and  investor  bodies  on  the MAC  in  their  meeting  with  the  Commission  have represented  the  NSEL  has  lost  its  credibility  as  an institution. Further the employee attrition in NSEL in the recent months has been extremely high and it is learnt that  the  staff  strength  of  NSEL  has  come  down considerably,  adversely affecting the recovery process. As  per  the  information  received  from NSEL,  the  total employee  count  on  NSEL  rolls  was  193  as  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

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and MPID Court relating to its failure to make payment to the  investors.  The  company  is  hardly  left  with  any financial resources to meet even legal expenses apart from meeting staff salaries and other expenses related to recovery process.  The members of the Monitoring & Auction Committee have expressed their views that with the  loss  of  credibility,  weak  Organizational  structure, depletion  of  man-power  strength  and  lack  of  financial resources,  NSEL  has  become  totally  ineffective  in pursuing the recovery of the defaulted amounts from the defaulter members. 4. It  may  be  noted  that  NSEL  is  a  subsidiary  of Financial  Technologies  India  Ltd.  (FTIL)  which  holds 99.99% of the shares of NSEL. Hence, for all practical purposes  NSEL is  a  wholly  owned subsidiary  of  FTIL and therefore it is the primary responsibility of the parent company, i.e. FTIL to own complete responsibility for the affairs of its subsidiary company. In this regard attention is drawn to the order of the Commission No. 4/5/2013- MKT-I/B dated 17th December, 2013 (copy enclosed as Annexure IV) in the matter of “Fit  and Proper Person” status of M/s FTIL (another shareholder and promoter of MCX) and  in  the matter  of  Shri  Jignesh  Shah & Shri Joseph  Massey  ex-Directors  &  Shri  Shreekant Javalgekar  ex-MD  and  CEO  of  MCX.  Some  of  the important highlights of the said order pertaining to FTIL are as below:

(i) In para 14.2.1 of the order it is inter-alia mentioned  that  NSEL  by  virtue  of  being  a separate  legal  entity  cannot  be  said  to  be independent  from  the  control  of  the holding/parent  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

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accomplished  by  the  fact  that  Shri  Jignesh Shah,  the  promoter  and  Chairman-cum- Managing  Director  of  FTIL  has  been  on  the Board  of  NSEL  and  functioning  as  Vice- Chairman of the Company since its inception. Shri  Joseph  Massey  was  also  a  common Director both on the Board of FTIL and NSEL, while  Shri  Shreekant  Javalgekar  continued to be a Director of NSEL till he resigned from the post in July 2013; (iii) In para 14.5.3 of the order it is inter-alia mentioned  that  it  is  on  record  that  all  the minutes  of  Board  meetings  of  NSEL  were regularly tabled at the Board meetings of FTIL. FTIL kept  itself  apprised  about  the  affairs  of NSEL and also approved/ratified the actions of NSEL in its Board meetings on a regular basis; (iv) In para 14.9.1 of the order it is inter-alia mentioned that it is undisputed that NSEL was an  Exchange  in  which  FTIL  had  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

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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  17th December,  2013  passed  by  the Commission is  based on tangible  facts  on the role  of FTIL  in  the  affairs  of  NSEL,  mustered  by  the Commission on its own and also the facts revealed by the  forensic  auditor  M/s.  Grant  Thornton  who  were engaged by NSEL to conduct a forensic audit  into the affairs  of  NSEL post  the  settlement  crisis.  It  may  be noted the Hon’ble Bombay High Court has also refused to  grant  any  interim  relief  to  FTIL  and  three  other

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individuals in respect of the aforesaid order dated 17th

December,  2013 passed by the Commission declaring FTIL, Shri Jignesh Shah, Shri Joseph Massey and Shri Shreekant Javalgekar as not fit and proper persons to be shareholders  or  a  Director  in  any  of  the  recognized commodity exchanges. FTIL and other three individuals have so far not challenged the above interim order of the Hon’ble High Court. 6. It  is  also  submitted  that  the  Working  Group constituted  by  the  Central  Government  under  the Chairmanship  of  Deputy  Governor,  Reserve  Bank  of India  to  examine  into  the  systematic  risk  arising  in consequence of the NSEL settlement debacle, have inter alia recommended that the ownership, governance and management  structure  at  FTIL  and  the  exchanges promoted  by  FTIL  need  to  be  assessed  and  the possibility  of  bringing in  an institutionalized framework and approach to these aspects explored. 7. It  may  also  be  noted  here  that  pursuant  to  the criminal  proceedings and arrest  of  Shri  Jignesh Shah, Chairman-cum-Managing Director of FTIL who was also the Vice-Chairman of NSEL, the EOW of Mumbai Police, has since filed a chargesheet against Shri Jignesh Shah under various sections of Indian Penal Code and also the  Maharashtra  Protection  of  Interest  of  Depositors (MPID) Act, 1999, before the Hon’ble Sessions Judge, Special Court under MPID Act, Mumbai which vindicates the stand already taken by the Commission in its order dated 17th December,  2013 pertaining to  the role  and responsibility of FTIL as a parent company in the affairs of its wholly owned subsidiary i.e. NSEL. 8. The aforesaid submissions would make it clear that NSEL as  a  corporate  entity  has  now  been  rendered bereft of any credibility and now seems financially and physically incapable of effecting any substantial recovery from  the  defaulting  members,  notwithstanding  all  the legal and other measures taken by it against them under the instructions/supervision of the Commission. Similarly, the  Board  and  management  of  FTIL,  by  their  very conduct in managing the affairs of NSEL and continuous effort  to  distance  themselves  from  their  responsibility

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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

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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-

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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,

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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:

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“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.”

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(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…….”

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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

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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

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do. Public orders made by public authorities are meant to have public effect and are intended to affect  the  actings  and  conduct  of  those  to whom  they  are  addressed  and  must  be construed  objectively  with  reference  to  the language used in the order itself.”

Orders  are  not  like  old  wine becoming better  as  they grow older.”

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

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

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

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

to sustain such order must be rejected.  

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

have  cited  Chairman, All  India  Railway  Recruitment  Board  and

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

according  to  them,  renders  the  judgment  in  Mohinder  Singh  Gill

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

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

“44. We are also of  the view that  the High Court  has committed a grave error in taking the view that the order of the Board could be judged only on the basis of the reasons  stated  in  the  impugned  order  based  on  the report of Vigilance and not on the subsequent materials furnished by CBI. Possibly, the High Court had in mind the  Constitution  Bench  judgment  of  this  Court  in Mohinder Singh Gill v.  Chief Election Commr. [(1978) 1 SCC 405]

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45. We  are  of  the  view  that  the  decision-maker  can always rely  upon subsequent  materials  to  support  the decision  already  taken  when  larger  public  interest  is involved.  This  Court  in  Madhyamic  Shiksha  Mandal, M.P. v.  Abhilash Shiksha Prasar Samiti  [(1998) 9 SCC 236]  found  no  irregularity  in  placing  reliance  on  a subsequent  report  to  sustain  the  cancellation  of  the examination  conducted  where  there  were  serious allegations  of  mass  copying.  The  principle  laid  down in Mohinder Singh Gill case [(1978) 1 SCC 405] is not applicable where larger public interest is involved and in such situations, additional grounds can be looked into to examine the validity of an order. The finding recorded by the High Court that the report of CBI cannot be looked into to examine the validity of the order dated 4-6-2004, cannot be sustained.”

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

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

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

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

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

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

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

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

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

order  of  the  Central  Government  that  have  impacted  the  public

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

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

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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

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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” (5th Edn.). But as that learned author observes (at p. 487), “in principle there ought to be an observance of natural justice equally at both stages”, and

“if natural justice is violated at the first stage, the right of appeal is not so much a true right

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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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