India: ‘Public Interest'- The Sine Qua Non For Mandatory Amalgamation

The Supreme Court in a significant move on 30 April 2019 set aside a forced amalgamation of two companies being opposed to 'public interest', in a first ever invocation of Section 396 of the Companies Act, 1956 ("Act").

The Apex Court was hearing an appeal by 63 Moons Tech. Ltd. (formerly known as Financial Technologies India Limited) ("FTIL") against a forced merger with its subsidiary company National Spot Exchange Limited ("NSEL"). NSEL is a trading company that underwent severe financial crisis in the wake of fraudulent transactions by its officers in 2013. To facilitate NSEL in recovering dues of INR 5,600 crores from defaulters, the Central Government invoked its power under Section 396 of the Act, which gives it the power to order 'amalgamation' of two companies if it is satisfied that it is 'essential in public interest'. The Government by an order dated 21 October 2014 ("Order") directed a conglomeration of resources and financial assets of FTIL with NSEL. FTIL preferred an appeal against the Order before the Bombay High Court which was rejected on the ground that the merger was 'essential in public interest'.

On a further appeal by FTIL to the Supreme Court, a bench comprising of Justice RF Nariman and Justice Vineet Saran struck down the Order, held it to be ultra-vires Section 396 of the Act and violative of Article 14 of the Constitution.

The Court observed that the Order failed to provide compensation to the would-be affected creditors and shareholders of FTIL and did not fulfil the test of 'satisfaction' of the Central Government, both of which are pre-requisites of the exercise of powers under Section 396. The Court then undertook the exercise of elucidating what constitutes 'public interest' under Section 396.

'Public interest' was defined as the greater interest of the public and society at large as opposed to the interest of a group of private individuals. The Court held that an amalgamation by a combination of resources of two companies is in public interest if it positively impacts the production and consumption of goods and services, and employment of persons, for the general benefit of the community. Conversely, any amalgamation which obstructs or impedes promotion of industry and growth, will not be in public interest under Section 396.

The Central Government justified the Order on three grounds, that it (a) would restore the faith of public in forward contracts and exchanges; (b) give effect to business realities by combining the assets of FTIL and NSEL; and (c) facilitate NSEL to recover dues from its defaulters. The Court rejected ground (a) and (b) because they had not been mentioned in the draft amalgamation order which deprived stakeholders an opportunity of raising objections. The Court then observed that a comprehensive reading of the Order reflected that the sole intent behind the Order was to further private interests of NSEL in recovering dues owed from its defaulters.

"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", explained the court.

The Court referred to clause (b) of the Order and opined that 'effecting business realities' in essence meant the use of assets of FTIL to effect payment of dues to NSEL's investors, and could not be termed as administrative efficiency. Additionally, the Court observed that the Order relies upon misplaced logic, as had restoring public faith in forward contracts been the real intention of the Government, effort should have been instead taken to resurrect or revive the commodities exchange of NSEL. The Court rejected the Government's argument that the only way of restoring public faith in the exchange market would be by facilitating payment of dues of investor and traders of NSEL.

In arriving at the conclusion, the Court opined that Section 396 of the Act used the expression 'essential in public interest'. Therefore, the Order must not only be in public interest but must also satisfy the test of being essential:

"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".

In summary, the Supreme Court held the order of amalgamation was neither passed in 'public interest' nor did it satisfy the essentiality test which is a pre-condition for invocation of Section 396 of the Act. The Court allowed the appeal of FTIL and set aside the impugned order of the Bombay High Court, holding that the order of amalgamation was violative of both Section 396 of the Act and Article 14 of the Constitution.

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