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TMI Blog2019 (5) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Economic Offences Wing ["EOW"] registered cases against Directors and key management personnel of the NSEL and FTIL, trading members of NSEL, and brokers of NSEL under various provisions of the Indian Penal Code and the Maharashtra Protection of Interest of Depositors Act, 1999 ["MPID Act"]. Several suits were filed by the traders who allegedly have been duped, the most important of which is Suit No.173 of 2014 pending in the Bombay High Court, which is a representative suit filed under Order I Rule 8 of the Code of Civil Procedure, 1908 ["CPC"]. NSEL also filed third-party notices in the said suit for recovery of INR 5600 crore against 24 defaulter traders. It has also filed various arbitration proceedings against them, and is in the process of recovery of INR 3365 crore out of INR 5600 crore, which are in the form of court decrees and arbitration awards. 4. On 17.12.2013, based on the Grant Thornton report dated 21.09.2013, the FMC passed an order declaring that FTIL was not "fit and proper" to hold equity in any commodity exchanges, and must dilute its shareholding to not more than 2% of the paid-up equity capital of MCX. The said order is under challenge in Writ Petition N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in order to unearth the fraud, as a result of which, amalgamation of two companies, where one has defrauded market participants and the other company is cash-rich and capable of addressing the payment crisis more effectively. It was therefore proposed to merge FTIL and NSEL under Section 396 of the Companies Act. On 21.10.2014, a draft order of amalgamation, made in accordance with Section 396(3) of the Companies Act, was circulated to the relevant stakeholders. As a result, FTIL filed Writ Petition No. 2743 of 2014 on 10.11.2014, in which it challenged the impugned draft order. On 27.11.2014, the Bombay High Court directed the parties to maintain status quo. On 16.12.2014, the Union of India filed an affidavit in reply, categorically confirming that the impugned draft order has been made by the Central Government on the basis of the FMC's proposal dated 18.08.2014. On 04.02.2015, the Bombay High Court vacated the status quo order, and passed an order allowing FTIL, NSEL, and their shareholders to file their objections to the draft amalgamation order. Meanwhile, under Section 396(3), a compensation order was made on 01.04.2015, which involved compensation only to a particular sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other hand, the business of FTIL is flourishing. A compulsory amalgamation order would be ultra vires Section 396 if the only object is to foist unadjudicated liability of NSEL on FTIL. It was also pointed out that the basis of the amalgamation order was a letter by the FMC, which in turn was based on a "forensic" audit report of 2013 by Grant Thornton. The so-called report itself stated that there is no independent verification of information provided, and consequently, would not constitute an audit, let alone a forensic audit. It also stated that should additional information become available, which impacts upon conclusions reached in the report, Grant Thornton reserved the right to amend their findings, which are not intended to be interpreted to be either legal advice or opinion; in short, that the findings themselves were inconclusive. 11. Learned counsel have argued that the impugned order is ultra vires Section 396 for many reasons. First and foremost, the condition precedent to passing an amalgamation order is that compensation be assessed under Section 396(3) of the Act. Compensation has to be assessed qua both the transferor and transferee company. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the businesses of NSEL and FTIL; B. Giving effect to the business realities of the case by consolidating the businesses of FTIL and NSEL and preventing FTIL from distancing itself from NSEL, which is even otherwise its alter ego; and C. Facilitating NSEL in recovering dues from the defaulters by pooling human and financial resources of FTIL and NSEL Admittedly, reasons A and B are not in the draft order. This being so, obviously, no objections or suggestions could be made qua reasons A and B, as a result of which the final order would, therefore, be ultra vires Section 396(3) of the Companies Act. 13. All the stated objectives at page 1 of the amalgamation order itself - (a) to leverage combined assets, capital and reserves; (b) to achieve economy of scale; (c) efficient administration; (d) gainful settlement of rights and liabilities of stakeholders and creditors; (e) to consolidate businesses; and (f) to ensure coordination and policy - are totally vague and do not lead to any application of mind to such amalgamation order being essential in public interest. Article 31A of the Constitution of India was relied upon, and it was argued that amalgamation under Article 31A(1)(c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEL is an alter ego of FTIL, is pending adjudication in the suits filed in the Bombay High Court. To come to a conclusion that one is the alter ego of the other is not only contrary to the facts pointed out hereinabove, namely, that the businesses of the two companies are entirely different and the management of both companies is by completely different and distinct Boards of Directors. Thus, to arrive at the conclusion that one company is the alter ego of the 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the FMC, being apprised of the real activities of NSEL, wrote to the DCA, indicating that its business was in complete breach of the FCRA. What is extremely important is that Shri Jignesh Shah made representations to the DCA and the FMC on 10.07.2013, in which he stated that NSEL had full stock of commodities as collateral and had 10-20% of open position as margin money. He also stated that the stock currently held in NSEL's 120 warehouses was valued at around INR 6000 crore. It is in July, 2013 that the payment crisis of INR 5600 crore arose on NSEL, FTIL admitting that this was the result of a fraud. On 14.08.2013, NSEL wrote to the FMC, setting out a detailed settlement plan. The plan indicated the period within which the entire dues would be paid, with simple interest at 8% to 16% per annum. This plan was an abject failure. As a result, a forensic audit was conducted by Grant Thornton, which in its report dated 21.09.2013, came out with damning facts and figures as to the real operations of NSEL, namely, that they are not a commodity exchange, but a finance exchange, and that no commodities were really in stock. As a result, the FMC issued show cause notices and then passed it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be made by the amalgamated company. The amalgamation is only so that the finances of FTIL can be used to pursue on-going litigation as NSEL does not have the wherewithal to do so. Thus, it is wholly incorrect for the appellants to say that FTIL will become mulcted with the liabilities of NSEL, as a result of which the shareholders of FTIL will suffer. He added that the overwhelming majority of shares in FTIL are owned by Shri Jignesh Shah and his family (45%) and by Shri Ravi Sheth and Shri Bharat Sheth (8%). Thus, the majority shares held in FTIL are by two masterminds of the scam. That apart, after the scam, 24% of the shares have been purchased by speculators, taking advantage of the low price at which such shares were offered. Such persons, therefore, are purely speculative investors who do not need to be compensated under Section 396 of the Act. Also, the economic value of shares, if at all it is to be taken into account, is an uncertain and fluctuating phenomenon. As examples, he stated that the book value of a share of FTIL, after the scam broke out, was only INR 2/-, whereas the listed value actually went up after the FMC order of 17.12.2013. All this, therefore, is dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able person would have taken such action, that the Court can intervene. For this purpose, he cited Haryana Financial Corporation v. Jagdamba Oil Mills, (2002) 3 SCC 496. According to him, essentiality is not reviewable except by the Wednesbury test, and the Court should ask itself the question as to whether no reasonable person could have concluded that the impugned order was essential in the public interest. He reiterated that the order dated 12.02.2016 is not ultra vires Section 396 as several findings which show that amalgamation is essential in public interest has been arrived at on the basis of undisputed facts, and that therefore, the said order should be upheld. He also argued that such order, if passed, is in the nature of delegated legislation, and therefore, does not have to satisfy any rules of natural justice outside what is prescribed by Section 396 itself which, according to him, has been procedurally and substantively complied with, as reflected in the order dated 12.02.2016. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest that two or more companies should amalgamate, then, notwithstanding anything contained in Sections 394 and 395 but subject to the provisions of this section, the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution; with such property, powers, rights, interests, authorities and privileges; and with such liabilities, duties, and obligations; as may be specified in the order. (2) The order aforesaid may provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and may also contain such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation. (3) Every member or creditor (including a debenture holder) of each of the companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or creditor; and to the extent to which the interest or rights of such membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 396 must be construed in such a fashion that it would lead to arbitrary or unreasonable results. In Prem Nath Raina v. State of Jammu & Kashmir and Ors., (1983) 4 SCC 616, this Court, in dealing with a challenge to the J&K Agrarian Reforms Act, 1976, which was protected by Article 31A, held: "9. ......The exclusion of a constitutional challenge under Articles 14, 19 and 31 which is provided for by Article 31A does not justify in equity the irrational violation of these articles. This Court did observe in Waman Rao [Waman Rao v. Union of India, (1981) 2 SCC 362 : AIR 1981 SC 271 : (1981) 2 SCR 1] that: "It may happen that while existing inequalities are being removed, new inequalities may arise marginally and incidentally" but the legislature has to take care to see that even marginal and incidental inequalities are not created without rhyme or reason. The Government of J&K would do well to give fresh consideration to the provisions contained in Section 7(2) and modify the provisions regarding residence in order that they may accord with reason and commonsense. Article 31A does not frown upon reason and commonsense." Equally, in Budhan Singh and Anr. v. Nabi Bux and Anr., [1970] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nth 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 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 conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders are of the kind dealt with in Prag Ice & Oil Mills (supra) and Union of India and Anr. v. Cynamide India Ltd. and Anr., (1987) 2 SCC 720 ["Cynamide India"], namely, orders passed under statutes which are in the nature of subordinate legislation, which deal generally with a whole class of persons who are governed by the same in which general rules of conduct are laid down. WHETHER THE CENTRAL GOVERNMENT ORDER IS ADMINISTRATIVE IN NATURE 28. This brings us to what is the nature of the order of the Central Government that is passed under Section 396. It has been argued on behalf of the Union of India, relying upon a number of judgments, that the nature of the order passed under Section 396 is that of delegated legislation. This being the case, it would, therefore, get immunity from challenge on the ground of Articles 14 and 19 of the Constitution of India, as it would then amount to a "law" within the meaning of Article 31A read with Article 13(3)(b). 29. The difference between an order which is legislative in nature and that which is administrative in nature has been discussed in some of our judgments. Thus, in Cynamide India (supra), this Court drew a distinction between ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stand that the scheme-making process under Section 45 is legislative in character and, therefore, outside the purview of the ambit of natural justice under the protective umbrella whereof the need to put the excluded employees to notice or enquiry arose. It is well settled that natural justice will not be employed in the exercise of legislative power and Mr Salve has rightly relied upon a recent decision of this Court being Union of India v. Cynamide India Ltd. [(1987) 2 SCC 720] in support of such a position. But is the scheme-making process legislative? 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 pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the process being legislative, rules of natural justice were not applicable." The fact that, under Section 396(5), the Central Government order has to be laid before the Houses of Parliament also does not detract from the fact that this order is administrative and not legislative in character. Applying these judgments to the Central Government's order passed under Section 396, it is clear that the order directly impacts the rights and liabilities of the companies, their shareholders and creditors, sought to be amalgamated under the order. Such order is not an order in general which applies to all such companies, but only to the particular companies sought to be amalgamated. There is no general rule of conduct, without reference to the particular case that is laid down by such an order. The Central Government order, ultimately, makes a specific direction qua two specific companies which are to be amalgamated. It is clear that such an order is not in the nature of legislation or delegated legislation. 30. Learned counsel appearing on behalf of the respondents have cited New Bank of India Employees' Union and Anr. v. Union of India and Ors., (1996) 8 SCC 407 ["New Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental distinction between the provisions of Section 45 of the Banking Regulation Act, 1949 and Section 9 of the Acquisition Act. Under Section 9 of the Acquisition Act under which Act the impugned scheme has been framed, every scheme framed by the Central Government has to be laid before each House of Parliament for a total period of 30 days and Parliament has the power to agree to the scheme and making any modification or in giving to a decision that the scheme should not be made and it is 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issenting 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 therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as it stood, these constitutional issues did not arise for consideration. We do not think this preliminary objection raised by Mr Divan is sustainable. It is undoubtedly true that the petitioner could have applied for amendment of the writ petition so as to include a claim for compensation but merely because he did not do so, the applications for compensation made by the Delhi Legal Aid and Advice Board and the Delhi Bar Association cannot be thrown out. These applications for compensation are for enforcement of the fundamental right to life enshrined in Article 21 of the Constitution and while dealing with such applications, we cannot adopt a hyper-technical approach which would defeat the ends of justice. This Court has on numerous occasions pointed out that where there is a violation of a fundamental or other legal right of a person or class of persons who by reason of poverty or disability or socially or economically disadvantaged position cannot approach a court of law for justice, it would be open to any public spirited individual or social action group to bring an action for vindication of the fundamental or other legal right of such individual or class of individuals and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 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), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to see which of the two contradictory conclusions reached in Barium Chemicals case is in our judgment, according to law. But before proceeding to analyse Section 237(b) we should like to refer to certain decisions cited at the bar bearing on the question under consideration. (at pp. 120-121) xxx xxx xxx "Coming back to Section 237(b), in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from Sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting Section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1) (g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by majority of the Judges c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government. If there be prima facie evidence on which a reasonable body of persons may hold that it is in the public interest to supply energy directly to the consumers, the requirements of the statute are fulfilled. Normally a licensee of electrical energy, though he has no monopoly, is the person through whom electrical energy would be distributed within the area of supply, since the licensee has to lay down electric supply-lines for transmission of energy and to maintain its establishment. An inroad may be made in that right in the conditions which are statutorily prescribed. In our judgment, the satisfaction of the Government that the supply is necessary in the public interest is in appropriate cases not excluded from judicial review." 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 Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , C.J. thus: "Administrative decisions in exercise of powers even if conferred in subjective terms are to be made in good faith on relevant consideration. The courts inquire whether a reasonable man could have come to the decision in question without misdirecting himself on the law or the facts in a material respect. The standard of reasonableness to which the administrative body is required to conform may range from the courts' own opinion of what is reasonable to the criterion of what a reasonable body might have decided. The courts will find out whether conditions precedent to the formation of the opinion have a factual basis." (at p. 99) In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81, this Court exhaustively set out parameters for judicial review of the subjective satisfaction of the detaining authority in a preventive detention case. This Court held: "9. But that does not mean that the subjective satisfaction of the detaining authority is wholly immune from judicial reviewability. The courts have by judicial decisions carved out an area, limited though it be, within which the validity of the subjective satisfaction can yet be subjected to judicial scrutiny. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdiction 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. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ething. 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 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 commun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to elimination of small operators and employment of more capital than necessary in any sector leading to starvation of capital investment in other sectors etc. Public interest under the Act does not mean the interest of the operators or of the passengers only. We have to bear in mind that like every other economic activity the running of stage carriage service is an activity which involves use of scarce or limited productive resources. Motor transport involves a huge capital investment on motor vehicles, training of competent drivers and mechanics, establishment of workshops, construction of safe roads and bridges, deployment of sufficient number of policemen to preserve law and order and several other matters. To say that larger the number of stage carriages in any route or area more convenient it would be to the members of the public is an oversimplification of a problem with myriad facets affecting the general public. If we run through the various provisions of the Act 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, sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding public order, public health, public security, morals, economic welfare of the community, and the objects mentioned in Part IV of the Constitution of India [see paragraph 19]. 50. Likewise, in B.P. Sharma v. Union of India and Ors., (2003) 7 SCC 309, this Court held: "15. ...... The phrase "in the interest of the general public" has come to be considered in several decisions and it has been held that it would comprise within its ambit interests like public health and morals (refer to State of Maharashtra v. Himmatbhai Narbheram Rao [AIR 1970 SC 1157 : (1969) 2 SCR 392]), economic stability (State of Assam v. Sristikar Dowerah [AIR 1957 SC 414]), stability of the country, equitable distribution of essential commodities at fair prices (Union of India v. Bhanamal Gulzarimal Ltd. [AIR 1960 SC 475 : 1960 Cri LJ 664]) for maintenance of purity in public life, prevention of fraud and similar considerations. ......" 51. Coming nearer home, Hindustan Lever Employees' Union v. Hindustan Lever Ltd. and Ors., 1995 Supp (1) SCC 499, Sahai, J., in a concurring judgment, referred to "public interest" in Section 394 of the Companies Act as follows: "5. What requires, however, a thoughtfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... growth of national economy. Liberalised economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective. Reliance on English decisions Hoare & Co. Ltd., Re [1933 All ER Rep 105, Ch D] and Bugle Press Ltd., Re [1961 Ch 270 : (1960) 1 All ER 768 : (1960) 2 WLR 658] that the power of the court is to be satisfied only whether the provisions of the Act have been complied with or that the class or classes were fully represented and the arrangement was such as a man of business would reasonably approve between two private companies may be correct and may normally be adhered to but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. The jurisdiction of the court in this regard is comprehensive." (emphasis supplied) 52. In Bihar Public Service Commission v. Saiyed Hussain Abbas Rizwi and Anr., (2012) 13 SCC 61, this Court referred to "public interest" in the context of service law as follows: "22. The expression "public interest" has to be understood in its true connotation so as to give complete meaning to the relevant provisions of the Act. The expression "public inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 396 applies to the facts of the present case. Insofar as the Central Government being "satisfied" is concerned, the following facts which the Central Government has taken into account, based upon the Grant Thornton report and the FMC order dated 17.12.2013, are as follows: 55.1. The Grant Thornton report does indeed begin with a disclaimer, which reads as follows: "4. Limitations 4.1. Our findings are based upon the information made available to us and we have not independently verified or validated the information. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod 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: 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 repe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement 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 Audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 of the Forward Contracts (Regulation) Act, 1952 ("FCRA") exempted all forward contracts of one day duration for the sale and purchase of commodities traded on NSEL from the operations of the said Act. Grant Thornton's review of the type of trades executed on the NSEL exchange indicates contravention to the exemption conditions granted. During the period January 2011 to July 2013, FMC sought several clarifications from NSEL on a number of complaints received from the public alleging forward trading and running a financing scheme. All these allegations were refuted by NSEL. Our analysis of such trades indicates misrepresentation by NSEL to FMC on several occasions." The report then goes on to say that there was no documentation in relation to warehouse activities for long term trades indicating that such contracts were not secured by warehouse stocks. The warehouses were customer managed warehouses and the underlying collateral were not in custody of NSEL. NSEL did not have control over these warehouses and Grant Thornton was denied access to number of warehouses. The Warehouse Development and Regulatory Authority had in fact rejected NSEL's application for registration of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hah, 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 doubt in our minds that FTIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 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 N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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 Decembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilarly, the Board and management of FTIL, by their very conduct in managing the affairs of NSEL and continuous effort to distance themselves from their responsibility towards NSEL after the settlement default, have lost their credibility as a responsive and responsible holding company. 9. Keeping the aforesaid emergency situation in view, the Commission is of the view that time has come for the Ministry of Corporate Affairs to consider: (i) merging/amalgamating NSEL with FTIL in public interest so that the human/financial resources of FTIL are also directed towards facilitating speedy recovery of dues from the defaulters at NSEL and FTIL takes responsibility to resolve the payment crisis at NSEL at the earliest. (ii) Further, it is suggested that together with merger/amalgamation of NSEL with FTIL, taking over of the management of FTIL may also be considered so that the affairs of FTIL can be managed in a professional way by bringing in an institutionalized framework as recommended by Working Group appointed by Government of India. xxx xxx xxx" (emphasis supplied) This letter would show that the immediate reason for amalgamation, according to the FMC, and which was faith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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." (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act, 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 396(4)(b), the Central Government may, after considering suggestions and objections from the stakeholders mentioned, make modifications in the draft order as may seem to it desirable in the light of such suggestions and objections. No modification has been made in the body of the Central Government order as finally made. If the Central Government had actually considered that each of these three reasons impact public interest, it would have explicitly said so after suggestions and objections were made by the various stakeholders. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds 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 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 compuls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, 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), 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts (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) 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laints / 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 challeng ..... X X X X Extracts X X X X X X X X Extracts X X X X
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