MOONS TECHNOLOGIES LTD. (FORMERLY KNOWN AS FINANCIAL TECHNOLOGIES INDIA LTD.) & ORS. versus UNION OF INDIA on 30 April 2019

SUPREME COURT REPORTS[2019] 8 S.C.R. 26

[2019] 8 S.C.R.

A63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL TECHNOLOGIES INDIA LTD.) & ORS.

v.

UNION OF INDIA

B(Civil Appeal No. 4476 of 2019)

APRIL 30, 2019

[R. F. NARIMAN AND VINEET SARAN, JJ.]

Companies Act, 1956: s.396 – Constitutionality of – Held:Cs.396 provides for compulsory amalgamation of companies in publicinterest – Art.31A of the Constitution envisages that any “law”providing for the amalgamation of two or more corporations in publicinterest is immune from challenge on grounds relatable to Art.14 orArt.19 of the Constitution of India – s.396 of the Companies Act isDsuch a law – Constitution of India – Arts.14, 19 and 31A.

Companies Act, 1956: s.396 – Derivative immunity of theCentral Government order – Whether the Central Government’s ordermade under s.396 would also receive the protective umbrella ofArt.31A, given the fact that s.396 is undoubtedly protected by Art.31AE– Whether order of Central Government passed under s.396 isadministrative in nature – Held: The expression “law”, as definedin Art.13(3)(a), includes an Ordinance, rule, regulation, notification,and custom or usage having in the territory of India the force oflaw – Obviously, therefore, when the expression “order” is used, itwould take colour from Ordinance, rule, regulation, notification,Fwhich are all legislative in nature, and not administrative – Evencustom or usage having the force of law refers to general rules ofconduct, as opposed to administrative orders passed on the facts ofa case – However, the Central Government’s order in questiondirectly impacts the rights and liabilities of the companies, theirGshareholders and creditors, sought to be amalgamated under theorder –Such order is not an order in general which applies to allsuch companies, but only to the particular companies sought to beamalgamated and does not lay down any general rule of conductby itself, but in fact, follows the general rule of conduct laid down H

63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIALTECHNOLOGIES INDIA LTD.) v. U.O.I

by s.396 – Therefore, such an order is not in the nature of legislationor delegated legislation – The fact that, under s.396(5), the CentralGovernment order has to be laid before the Houses of Parliamentdoes not detract from the fact that the order is administrative andnot legislative in character – Constitution of India – Art.13(3).

Companies Act, 1956: s.396 – Essentiality test – Held: TheCentral Government has to be “satisfied”, meaning thereby, that itmust, on certain objective facts, come to a conclusion thatamalgamation between two or more companies is necessary – Thiscan only be done if the Central Government finds it “essential”,i.e., necessary to do so.

Companies Act, 1956: s.396 – Public interest – Meaning of –In the context of compulsory amalgamation of two or morecompanies, the expression “public interest” would mean the welfareof the public or the interest of society as a whole, as contrastedwith the “selfish” interest of a group of private individuals – Thus,“public interest” may have regard to the interest of production ofgoods or services essential to the nation so that they may contributeto the nation’s welfare and progress, and in so doing, may alsoprovide much needed employment – “Public interest” in this contextwould, therefore, mean the combining of resources of two or morecompanies so as to impact production and consumption of goodsand services and employment of persons relatable thereto for thegeneral benefit of the community – Conversely, any action thatimpedes promotion of industry or obstructs growth which is innational or public interest would run counter to public interest asmentioned in s.396 of the Act.

Companies Act, 1956: s.396(3) – Amalgamation order –Compensation – Right of shareholder or a creditor – s.396(3) speaksof a shareholder’s or a creditor’s interest in or rights against thecompany resulting from an amalgamation order – A shareholder orcreditor gets effected by an amalgamation order if the value of hisshare gets depleted as a result of the amalgamation and if dividendsthat have been paid to him are likely to come down as a result of theamalgamation – Likewise, a creditor of a solvent company is directlyeffected by an amalgamation by which the amount loaned by such A

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Acreditor becomes, as a result of the amalgamation, less likely to bepaid back in time, than if the amalgamation did not take place –Every shareholder of a company and indeed, every creditor of acompany, is concerned only with the “economic value” of his shareor the loan granted to a company, as the case may be – The momentthe share value, in real terms, is likely to dip, and/or loans grantedBare likely not to be repaid in time or at all as a result of anamalgamation, such members or creditors of the amalgamatingcompany are equally entitled to be compensated for this economicloss as are the members and creditors of the amalgamated company,depending on the facts of each case – To the extent to which theCinterest or rights of such member or creditor are less than his interestor rights against the original company, post amalgamation, he shallbe entitled to compensation which is to be assessed.

Companies Act, 1956: ss.396(3), 396(3A) – Compensation toaggrieved person – The language used in the appeal provision, i.e.Ds.396(3A), is “any person aggrieved by any assessment ofcompensation made by the prescribed authority under sub-section(3) may…… appeal to the Tribunal, and thereupon the assessmentof 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” byEthe prescribed authority – Where no assessment of compensationwhatsoever is made by the prescribed authority, no person can beaggrieved by an order which does not assess any compensation,which may be interfered with by the Appellate Tribunal which mustthen assess the compensation for itself – The statute clearly entitlesFsuch shareholders and creditors to have compensation assessedfirst by the prescribed authority and then by the appellate authority– The orders of “non-assessment” by the prescribed authority canmore appropriately be challenged in judicial review proceedings,in which the High Court, acting under Art.226 of the Constitutionof India can, if an infraction of s.396(3) is found, send the matterGback to the prescribed authority to determine compensation afterwhich the right of appeal under sub-section (3A) of s.396 wouldthen follow.

Companies Act, 1956: s.396 – Applicability of – Compulsoryamalgamation of companies by a Central Government’s order inH

public interest – NSEL, a 99.99% subsidiary of FTIL, defaulted onnearly 5,600 crore payments to its 13,000 investors – Trading wassuspended in NSEL after payments default – Order of compulsoryamalgamation of NSEL with appellant (FTIL) under s.396 – Whethereach of the conditions precedent for applicability of s.396 appliedto the facts of the instant case – Held: There is no doubt that inJuly, 2013, as a result of NSEL stopping trading on its exchange, apayment crisis of Rs.5600 crore arose – The letter addressed byFMC to the Ministry of Corporate Affairs show that immediatereason for amalgamation, according to the FMC was that NSEL, asa corporate entity, was financially and physically incapable ofeffecting any substantial recovery from defaulting members – Bythe time final amalgamation order was passed, emergent situationof 2013 which required emergent step of compulsory amalgamationby the passage of time, disappeared – Decrees/awards worthRs.3365 crore were obtained against the defaulters, with Rs. 88crore crystallised by the committee set up by the High Court, pendingacceptance by the High Court, even without using the financialresources of FTIL as an amalgamated company – What wasemergent, and essential, even according to the FMC and theGovernment in 2013-2014, was, therefore, largely redressed in 2016,by the time the amalgamation order was made – Therefore, theessentiality test, which is the condition precedent to the applicableto s.396, was not satisfied – When it comes to public interest asopposed to the private interest of investors/traders who have notbeen paid, the amalgamation order at several places refers to“essential public interest” as if “essential” goes with “publicinterest” instead of being a separate and distinct condition precedentto the exercise of power under s.396 – All the expressions used inrelation to “public interest” have relation only to the businesses ofthe two companies that are sought to be amalgamated – Theleveraging of combined assets, capital, and reserves is for thepurpose of only settling liabilities of certain stakeholders andcreditors when the order is read as a whole, and given the fact thatthe businesses of the two companies were completely different – Sofar as achieving economy of scale and efficient administration isconcerned, it is difficult to see how this would apply to the factsituation in this case where NSEL is admittedly a company whichhas stopped functioning as a commodities exchange with no hope AB

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Aof any revival – Government order itself reflects the net worth ofNSEL as INR 8.86 crore despite its capital being INR 60 crore,inasmuch as the total reserve and surplus is a negative figure ofINR 51.54 crore – As against this, FTIL’s balance sheet, as on31.03.2015, discloses that for the same year, FTIL’s net worth isINR 2779.94 crore – Also, FTIL paid high dividends to itsBshareholders while NSEL never paid a single dividend ever sinceits inception – This would show that Post amalgamation dividendpayable to the shareholders of FTIL is bound to come down –Correspondingly, the ‘marketable value’ of such shares will alsofall – The ‘economic value’ of shares held in FTIL may, postCamalgamation, depress the market value of shares held by suchshareholder, and would also impact the dividend payable on suchshares post amalgamation – Further no compensation is providedeither to the shareholders or creditors of FTIL for the economicloss caused by the amalgamation which is breach of s.396(3) – This

Conclusion

is a case where there is complete non-application of mind by theDauthority assessing compensation to the rights and interests whichthe shareholders and creditors of FTIL have and which are referredto in s.396(3) of the Act – This being the case, it is clear that s.396(3)was not followed either in letter or in spirit – The amalgamationorder is, therefore, ultra vires s.396 and being arbitrary andEunreasonable, violative of Art.14 of the Constitution of India.

Disposing of the matters, the Court

HELD: 1. INTERPRETATION OFSECTION 396: Thereis no doubt whatsoever that Section 396 cannot be challenged onthe ground of Article 14 or Article 19, given Article 31A of theFConstitution of India. However, this does not mean that Section396 must be construed in such a fashion that it would lead toarbitrary or unreasonable results.[Para 23] [61-A-B]

Prem Nath Raina v. State of Jammu & Kashmir and Ors.(1983) 4 SCC 616 : [1983] 3 SCR 536 ; Budhan SinghGand Anr. v. Nabi Bux and Anr.[1970] 2 SCR 10– relied on.

2. DERIVATIVE IMMUNITYOFTHE CENTRALGOVERNMENT ORDER: The expression used in Article 31A

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is “law”, for which, one is to see the definition contained in Article13(3). “Law” in Article 13(3) certainly includes “order”. The onlyquestion is whether this would include an administrative orderas well. It is clear, on a reading of Article 13(3), that theexpression “law”, as defined in Article 13(3)(a), includes anOrdinance, rule, regulation, notification, and custom or usagehaving in the territory of India the force of law. Obviously,therefore, when the expression “order” is used, it would takecolour from Ordinance, rule, regulation, notification, which areall legislative in nature, and not administrative. Even custom orusage having the force of law refers to general rules of conduct,as opposed to administrative orders passed on the facts of a givencase. Construing Article 31A in the light of Article 13(3)(a), it isclear that the “order” referred to, can therefore, only be alegislative order.[Paras 24, 26, 27] [62-C; 63-G; 64-A-C]

Union of India and Anr. v. Cynamide India Ltd. andAnr.(1987) 2 SCC 720 – relied on.

Prag Ice & Oil Mills v. Union of India(1978) 3 SCC–459 : [1978] 3 SCR 293 Partly applicable.

3. WHETHER THE CENTRAL GOVERNMENT ORDER ISADMINISTRATIVE IN NATURE

3.1 The fact that, under Section 396(5), the CentralGovernment order has to be laid before the Houses of Parliamentdoes not detract from the fact that this order is administrativeand not legislative in character. The Central Government’s orderdirectly impacts the rights and liabilities of the companies, theirshareholders and creditors, sought to be amalgamated under theorder. Such order is not an order in general which applies to allsuch companies, but only to the particular companies sought tobe amalgamated. Such an order is not in the nature of legislationor delegated legislation. The order passed under Section 396 isqua particular companies and does not lay down any general ruleof conduct by itself, but in fact, follows the general rule of conductlaid down by Section 396. Thus, the Central Government order,made under Section 396, must conform to the fundamental rightsguaranteed by Articles 14 and 19(1)(g) of the Constitution of India.[Paras 29, 33] [67-D-E; 70-B]

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AK.I. Shephard v. Union of India (1987) 4 SCC 431 :[1988] 1 SCR 188; Thomas Dana v. State of Punjab[1959] 1 Suppl. SCR 274 ; Hamdard Dawakhana(Wakf) Lal Kuan, Delhi and Anr. v. Union of India andOrs.[1960] 2 SCR 671 ;Sakal Papers (P) Ltd. andOrs. v. Union of India [1962] 3 SCR 842 ; Ajay HasiaBand Ors. v. Khalid Mujib Sehravardi and Ors. (1981)1 SCC 722 : [1981] 2 SCR 79 ; M.C. Mehta and Anr.v. Union of India and Ors. (Shriram – Oleum Gas)(1987) 1 SCC 395 : [1987] 1 SCR 819 – relied on.

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New Bank of India Employees’ Union and Anr. v. Unionof India and Ors. (1996) 8 SCC 407 : [1996] 3 SCR322;Quarry Owners’ Association v. State of Bihar andOrs. (2000) 8 SCC 655 : [2000] 2 Suppl. SCR 211 ;J.K. (Bombay) (P) Ltd. v. New Kaiser-i-Hind Spinning–and Weaving Co. Ltd.[1969] 2 SCR 866

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Dheld inapplicable.

3.2 Various pre-requisites contained in Section 396 mustfirst be satisfied before the Section can be said to operate. Firstand foremost, the Central Government has to be “satisfied”,meaning thereby, that it must, on certain objective facts, come toEa conclusion that amalgamation between two or more companiesis necessary. This can only be done if the Central Governmentfinds it “essential”, i.e., necessary to do so. Also, this can onlybe done in “public interest”. A condition precedent to the passingof an order by the Central Government under this Section is thatevery member or creditor of eachof the companies beforeFamalgamation shall have, as nearly as may be, the same interestin or rights against the company resulting from the amalgamationas he had in the erstwhile company either as a member or acreditor, and if this is not so, such member or creditor shall beentitled to compensation which is to be assessed by such authorityGas may be prescribed. Unless an order of compensation is firstmade under sub-section (3), and an appeal therefrom has eithernot been filed or has been disposed of, no order of amalgamationcan be made. Another condition precedent is an inbuilt provisionfor natural justice, namely, that a proposed draft order has first H

been sent to each of the companies concerned. The companiesmay then send suggestions or objections to the CentralGovernment, which the Central Government must first considerbefore passing the final order. Such objections and suggestionscan also be sent from any class of shareholders of either of thecompanies, or from any creditors or class of creditors of either ofthe companies. [Paras 34, 36] [74-C-D; 75-C-F]

4. “WHERE THE CENTRAL GOVERNMENT ISSATISFIED”: The Central Government’s satisfaction must beas to the conditions precedent mentioned in the Section ascorrectly understood in law, and must be based on facts that havebeen gathered by the Central Government to show that theconditions precedent exist when the order of the CentralGovernment is made. [Para 42] [87-C-D]

Barium Chemicals Ltd. v. Company Law Board[1967] 1 SCR 898 ; Rohtas Industries Ltd. v. S.D.Agarwal[1969] 3 SCR 108 ;Western U.P. ElectricPower & Supply Co. Ltd. v. State of U.P. and Anr.(1969)1 SCC 817 : [1969] 3 SCR 865 ;Rampur Distillery Co.Ltd. v. Company Law Board[1970] 2 SCR 177 ;M .A. Rasheed and Ors. v. State of Kerala [1975] 2SCR 93 ;Khudiram Das v. State of West Bengal(1975)2 SCC 81 : [1975]2 SCR 832 ;Tata Cellular v. Unionof India (1994) 6 SCC 651 : [1994] 2 Suppl. SCR122;Bhikhubhai Vithlabhai Patel v. State of Gujarat(2008) 4 SCC 144 ; M. Jhangir Bhatusha and Ors. v.Union of India and Ors.(1989) 2 Suppl. SCC 201 :[1989] 3 SCR 356 – referred to.

Haryana Financial Corporation v. Jagdamba Oil Mills(2002) 3 SCC 496 : [2002] 1 SCR 621 - cited.

5. “ESSENTIAL”: The Central Government’s mind has tobe applied to whether a compulsory amalgamation u/s 396 isindispensably necessary, important in the highest degree, andwhether such amalgamation is both basic and necessary.[Para 44] [88-B]

J. Jayalalitha v. Union of India(1999) 5 SCC 138 :

[1999] 3 SCR 653 – referred to.

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P. Ramanath Aiyer’s Law Lexicon (4[[th]] Edn.); AP. Ramanath Aiyer’s Law Lexicon (4[[th]]Black’s Law Dictionary (10[th] Edn.) – referred to.

6.1 “PUBLIC INTEREST”: The third pre-requisite ofSection 396 is that the Central Government must apply its mindwhen compulsorily amalgamating two or more companies in theBpublic interest. “Public interest” is an expression which is wideand amorphous and takes colour from the context in which it isused. Public interest is the general interest of the community, asdistinguished from the private interest of an individual. “Publicinterest” in the context of compulsory amalgamation of two ormore companies would mean the combining of resources of twoCor more companies so as to impact production and consumptionof goods and services and employment of persons relatablethereto for the general benefit of the community.[Paras 45, 54] [88-C; 94-D-E]

State of Bihar v. Maharajadhiraja Sir Kameshwar SinghDof Darbhanga and Ors.[1952] 1 SCR 889;Manimegalai v. Special Tehsildar (Land AcquisitionOfficer) Adi Dravidar Welfare(2018) 13 SCC 491:[2018] 3 SCR 1086;Rameshwar Prasad and Ors. v.State of U.P. and Ors.(1983) 2 SCC 195 : [1983] 2ESCR 418;Janata Dal v. H.S. Chowdhary and Ors.(1992) 4 SCC 305:[1992] 1 Suppl. SCR 226;MunicipalCorporation of the City of Ahmedabad and Ors. v. JanMohd. Usmanbhai and Anr.(1986) 3 SCC 20 : [1986]2 SCR 700; B.P. Sharma v. Union of India and Ors.(2003) 7 SCC 309: [2003] 2 Suppl. SCR 684;FHindustan Lever Employees’ Union v. Hindustan LeverLtd. and Ors.(1995) 1 Suppl. SCC 499 : [1994] 4 Suppl.SCR 723 ;Bihar Public Service Commission v. SaiyedHussain Abbas Rizwi and Anr.(2012) 13 SCC 61; R.R.–Tripathi v. Union of India(2010) 1 Bom CR 513 Grelied on.

6.2 Applicability of Section 396 to the facts of the instantcase. Neither FTIL nor NSEL has denied the fact that pairedcontracts 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. Thereis no doubt that such paired contracts were, in fact, financingtransactions which were distinct from sale and purchasetransactions in commodities and were, thus, in breach of boththe exemptions granted to NSEL, and the FCRA. NSELthroughout kept representing that it was, in fact, a commodityexchange dealing with spot deliveries. Apart from the GrantThornton report and the FMC order, Shri Jignesh Shah, on10.07.2013, made representations to the DCA and the FMC, inwhich he stated that NSEL had full stock as collateral; 10-20% ofopen position as margin money; and that the stock currently heldin NSEL’s 120 warehouses was valued at INR 6000 crore, all ofwhich turned out to be incorrect. Further, there is no doubtwhatsoever that in July, 2013, as a result of NSEL stopping tradingon its exchange, a payment crisis of approximately INR 5600crore arose. The further question that remains is whether, giventhese facts, the conditions precedent for the applicability ofSection 396 were followed. When it comes to whether the CentralGovernment’s satisfaction as to whether it was “essential” toamalgamate the two companies, what must be borne in mind isthat NSEL had itself offered a settlement scheme to pay back thepersons who have allegedly been duped. It was found that thisscheme could not really take off, as a result of which,large amounts continued to be owed to such persons.[Paras 55 and 55.3, 56] [94-F; 105-C-G]

6.3 The raison d’être for applying Section 396 of theCompanies Act has, by the passage of time, itself disappeared.In fact, as on today, decrees/awards worth INR 3365 crore havebeen obtained against the defaulters, with INR 835.88 crorecrystallised by the committee set up by the High Court, pendingacceptance by the High Court, even without using the financialresources of FTIL as an amalgamated company. What wasemergent, and therefore, essential, even according to the FMCand the Government in 2013-2014, has been largely redressedin 2016, by the time the amalgamation order was made. Also, theCentral Government order does not apply its mind to theessentiality aspect of Section 396 at all. In fact, in several places, ABCDE

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Ait refers to “essential public interest” as if “essential” goes with“public interest” instead of being a separate and distinct conditionprecedent to the exercise of power under Section 396. On facts,therefore, it is clear that the essentiality test, which is thecondition precedent to the applicable to Section 396, cannot besaid to have been satisfied. [Para 56.2] [112-F-H; 113-A]

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6.4 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 interestingreading. It will be seen that all the expressions used in relationto “public interest” have relation only to the businesses of theCtwo companies that are sought to be amalgamated. There is nointerest of the general public as opposed to the businesses ofthe two companies that are referred to. The leveraging ofcombined assets, capital, and reserves is only to settle liabilitiesof certain stakeholders and creditors when the order is read as a Dwhole, and given the fact that the businesses of the two companieswere completely different. So far as achieving economy of scaleand efficient administration is concerned, it is difficult to see howthis would apply to the fact situation in this case where NSEL isadmittedly a company which has stopped functioning as acommodities exchange at least with effect from July, 2013 withEno hope of any revival. The sole object of the amalgamation orderis really only to effect speedy recovery of dues of INR 5600 crore,which has been referred to in the letter of the FMC to theSecretary, Ministry of Corporate Affairs, dated 18.08.2014.[Para 59] [114-E; 115-B-E]F

7.1 The “recommendations of the FMC are in the form ofa letter dated 18.08.2014, in which the “business reality” is thefact that dues of INR 5600 crore have to be paid, and that NSELdoes not have the wherewithal to do so. Thus, its parentcompany’s financial resources ought to be used to effect suchGpayment. This “business reality”, therefore, speaks only of theprivate interest of the investors/traders who have been allegedlyduped (which fact will only be established in suits filed by them in2014), and nothing beyond (which would show some vestige ofpublic interest). Equally, the grave shattering of public confidence H

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and purpose of establishing commodity exchanges having beendefeated, according to the Central Government, is a gloss on theFMC order dated 17.12.2013. If this were so, one would haveexpected a resuscitation or revival of the commodities exchangeof NSEL, which could have been achieved by takeover of itsmanagement. It is difficult to imagine that grave shattering ofpublic confidence by the permanent shutting down of thecommodities exchange of the NSEL would be remedied only byfacilitating the paying of dues to certain allegedly duped investors/traders, which fact will be proved or disproved in suits filed bythem which are pending adjudication in the Bombay High Court.In any case, this reason is wholly irrelevant as an answer to theobjection raised by FTIL which is an objection stating that theSection applies to Government companies alone. Also, had FTILmade no such objection, no such answer would have beenforthcoming. It is admitted in the order itself that there is no“adjudication” on the “fraud” in the facts of this case, and thus,not an exercise of lifting of the corporate veil of the pre-amalgamation companies. The amalgamation order contradictsitself by then stating that NSEL is the alter ego of FTIL, andthus, 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. [Para 59.3] [118-F-H;119-A-F]

7.2 Under Section 396(4)(b), the Central Government may,after considering suggestions and objections from thestakeholders mentioned, make modifications in the draft orderas may seem to it desirable in the light of such suggestions andobjections. No modification has been made in the body of theCentral Government order as finally made. If the CentralGovernment had actually considered that each of these threereasons impact public interest, it would have explicitly said soafter suggestions and objections were made by the variousstakeholders. [Para 59.4] [119-G-H; 120-A]

Ganesh Bank of Kurundwad Ltd. v. Union of India–(2006) 10 SCC 645 : [2006] 5 Suppl. SCR 437 distinguished.

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AMohinder Singh Gill v. Chief Election Commissioner(1978) 1 SCC 405 : [1978] 2 SCR 272; Chairman, AllIndia Railway Recruitment Board and Anr. v. K. ShyamKumar and Ors.(2010) 6 SCC 614 ; PRP Exports and Ors. v. Chief Secretary, Government of Tamil Nadu andOrs. (2014) 13 SCC 692 – referred to.B8. Section 396(3) speaks of a shareholder’s or a creditor’sinterest in or rights against the company resulting from anamalgamation order. A shareholder or creditor gets effected byan amalgamation order if the value of his share gets depleted asa result of the amalgamation and if dividends that have been paidCto him are likely to come down as a result of the amalgamation.Likewise, a creditor of a solvent company is directly effected byan amalgamation by which the amount loaned by such creditorbecomes, as a result of the amalgamation, less likely to be paidback in time, than if the amalgamation did not take place. Such Drights and interests of members and creditors are substantiverights which, when effected by the amalgamation, lead tocompensation having to be paid. Every shareholder of a companyand indeed, every creditor of a company, is concerned only withthe “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,Eis likely to dip, and/or loans granted are likely not to be repaid intime or at all as a result of an amalgamation, such members orcreditors of the amalgamating company are equally entitled to becompensated for this economic loss as are the members andcreditors of the amalgamated company, depending on the facts ofFeach case. To the extent to which the interest or rights of suchmember or creditor are less than his interest or rights againstthe original company, post amalgamation, he shall be entitled tocompensation which is to be assessed. [Paras 65, 66] [126-G-H;127-A-C, E]

GBacha F. Guzdar v. Commissioner of Income Tax[1955] 1 SCR 876 ;Life Insurance Corporation of Indiav. Escorts Ltd. and Ors.(1986) 1 SCC 264 : [1985] 3Suppl. SCR 909; Commissioner of Income Tax (Central)Calcutta v. Standard Vacuum Oil Co.

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[1966] 2 SCR 367 ; Miheer H. Mafatlal v. MafatlalIndustries Ltd.(1997) 1 SCC 579 : [1996] 6 Suppl.SCR 1 – referred to.

9.1 Government order dated 12.02.2016 itself reflects thenet worth of NSEL as INR 8.86 crore from its balance sheet dated31.03.2015, despite its capital being INR 60 crore, inasmuch asthe total reserve and surplus is a negative figure of INR 51.54crore. As against this, FTIL’s balance sheet, as on 31.03.2015,discloses that for the same year, FTIL’s net worth is INR 2779.94crore. Also, FTIL has been paying dividends to its shareholdersranging from 1000% to 250% for the years 2007-2008 till2015-2016. On the other hand, NSEL has never paid a singledividend ever since its inception. Post amalgamation, therefore,dividend payable to the shareholders of FTIL is bound to comedown. Correspondingly, the ‘marketable value’ of such shareswill also fall. From the Director’s Report and consolidatedfinancial statements of NSEL, it becomes clear that the companymay be exposed to liabilities in case of any adverse outcome inany 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 5600crore owed to the alleged investors/traders by the 24 defaulterswho are members of NSEL. This would certainly impact the‘economic value’ of shares held in FTIL as this is one factor thatwould, post amalgamation, depress the market value of sharesheld by such shareholder, and would also impact the dividendpayable on such shares post amalgamation. [Paras 72, 73][130-E-G; 131-G-H; 132-A-B]

9.2 The impugned judgment has also held that no materialwas produced before the Court to show that share prices wouldin fact plummet post-amalgamation. This is despite the fact thatthe impugned judgment itself refers to the fact that since thepublication of the draft order on 21.10.2014, the share value whichwas INR 211.10, dropped to INR 174.55 ten days later. It is wellknown that the stock market is extremely sensitive to theslightest event that may render a company less profitable. It isobvious that the publication of the draft order on 21.10.2014 hadthe impact of the share price reducing by a substantial amount,ten days later. The moment the final amalgamation order dated A

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A12.02.2016 was publicised, the share price fell from INR 89.90on 12.02.2016 to INR 73.90 on 24.02.2016 and further to INR73.10 on 29.02.2016. Given the fact that the assessment orderdated 01.04.2015 did not provide any compensation to either theshareholders or creditors of FTIL for the economic loss causedby the amalgamation in breach of Section 396(3), it is clear thatBan important condition precedent to the passing of the finalamalgamation order was not met. On this ground also, therefore,the final amalgamation order has to be held to be ultra viresSection 396 of the Companies Act, and, being arbitrary andunreasonable, violative of Article 14 of the Constitution of India.C[Para 74] [132-C-E, H; 133-A]

9.3 The language used in the appeal provision, i.e. Section396(3A), is “any person aggrieved by any assessment ofcompensation made by the prescribed authority undersub-section (3) may…… appeal to the Tribunal, and thereuponDthe assessment of the compensation shall be made by theTribunal.” The pre-requisites for the application of sub-section(3A) are that a person first be aggrieved by an “assessment ofcompensation” “made” by the prescribed authority. Where noassessment of compensation whatsoever is made by theprescribed authority (and on the facts here, the prescribedEauthority has not, in fact, stated that for the reasons given by it,compensation awarded to FTIL, its shareholders and creditorsis nil), no person can be aggrieved by an order which does notassess any compensation, which may be interfered with by theAppellate Tribunal which must then assess the compensation forFitself. [Para 75] [133-B-E]

Institute of Chartered Accountants of India v. L.K. Ratnaand Ors.[1986] 3 SCR 1049 ; Union CarbideCorporation v. Union of India[1991] 1 Suppl. SCR251 ; Charan Lal Sahu v. Union of India(1990) 1 SCCG613 : [1989] 2 Suppl. SCR 597 - referred to.

Union of India v. G. Ganayutham(1997) 7 SCC 463 :[1997] 3 Suppl. SCR 549;Om Kumar v. Union of India(2001) 2 SCC 386 – cited.

Leary v. National Union of Vehicle BuildersH[1971] Ch. 34 – referred to.

63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL

TECHNOLOGIES INDIA LTD.) v. U.O.I

Case Law Reference

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[2019] 8 S.C.R.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4476of 2019

From the Judgment and Order dated 04.12.2017 of the DivisionBench of High Court of Judicature at Bombay in Writ Petition No. 2743Gof 2014

With

Civil Appeal Nos.4478 of 2019, 4477 of 2019, 4479 of 2019, 4481of 2019, 4480 of 2019 and Writ Petition (Civil) No. 368 of 2019

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Tushar Mehta, SG, Ms. Pinky Anand, ASG, Mukul Rohatgi, A.M.Singhvi, R. Balasubramanian, Neeraj Kishan Kaul and Arvind P. Datar,Sr. Advs., Mahesh Agarwal, Ankur Saigal, Ms. Misha Rohatgi,Ms. Shaneen Parikh, Ms. Namita Shetty, Himanshu Satija, Ms. TanviManchanda, Ms. Priyanka Vora, E. C. Agrawala, Aviskar Singhvi,Himanshu Satija, Ms. Tanvi Manchanda, Arvind Lakhawat,Harshwardhan Reddy, Amit Agrawal, Ms. Diksha Rai, Ms. PalakMahajan, Ishan Bisht, Nakul Mohta, Ardhendumauli Kumar Prasad,Saurabh Kirpal, Rahul G. Tanwani, V.C. Shukla, VNL Sindura, NikhilGoel, Arvind Lakhawat, Ms. Ranjeeta Rohatgi, Vikas Mehta,Varun Singh, Ms. Anushree Menon, Ms. Nupur Desai, Ms. SamikshaGodiyal, Ms. Sanam Tripathi, Shekhar Vyas, Rajesh Ranjan, Ms. PratimaGupta, Anup Dawan, Joel, Ms. Snidha Mehra, Sumit Teterwal, ChakitanVikram Shekher Papta, Ms. Kirti Dua, Ms. Saudamini Sharma, HemantArya, Ms. Tanisha Samanta, Anmol Chandan, Ms. Shraddha Deshmukh,Sai Krishna, A.K. Sharma, D.N. Ray, Chirag Manubhai Shah,Ms. Sanjana Saddy, Lokesh K. Choudhary, Dillip Kumar Nayak,Ms. Disha Ray, Sanjay Lodha, Devanshu Sajlan, Mrs. Sumita Ray, PratapVenugopal, Ms. Surekha Raman, Ms. Viddusshi, Akhil A. Roy, M/s K.J.John & Co., Mukesh Kumar Maroria, Advs. for the appearing parties.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. Leave granted.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. Leave granted.

2. This batch of appeals and writ petition raises questions as tothe applicability and construction of Section 396 of the Companies Act,1956, which deals with compulsory amalgamation of companies by aCentral Government order when this becomes essential in the publicinterest. The appellant, 63 Moons Technologies Ltd. (hereinafter referredto as “FTIL”, which name was changed to 63 Moons Technologies Ltd.on 27.05.2016), is a 99.99% shareholder of the National Spot ExchangeLtd. (hereinafter referred to as “NSEL”), and is a listed company. About45% 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 Indianpublic. Approximately 5% of the shareholding is held by institutionalinvestors. FTIL is a profitable company, having a positive net worth ofover INR 2500 crore, and is in the business of providing software whichis used for trading by brokers and exchanges across the country. FTILhas about 900 employees, and a Board of Directors which is different AB

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Afrom the Board of Directors of its wholly owned subsidiary, i.e., NSEL.On the other hand, NSEL was incorporated in 2005 by Multi CommoditiesExchanges [“MCX”] and its nominees. NSEL provided an electronicplatform for trading of commodities between willing buyers and sellersthrough brokers representing them. On 05.06.2007, the Union of Indiaissued an exemption notification under Section 27 of the ForwardBContracts (Regulation) Act, 1952 [“FCRA”] exempting forwardcontracts of one-day duration for sale and purchase of commoditiestraded on NSEL from operation of the provisions of the FCRA. NSELcommenced operations in October 2008. On 27.04.2012, the Departmentof Consumer Affairs [“DCA”] issued a show cause notice to NSEL asCto why action should not be initiated against it for permitting transactionsin alleged violation of the exemption granted to it under the FCRA. NSELreplied to the show cause notice on 29.05.2012 stating that it had notviolated the exemption granted to it. Without adjudicating upon the showcause notice, on 12.07.2013, the DCA directed NSEL to give anundertaking that no further contracts shall be launched until furtherDinstructions, and that all existing contracts will be settled on due dates.This was effectively a “freezing” order. On 22.07.2013, NSEL gave anundertaking to the DCA.

3. Earlier, in January 2013, representatives of MMTC Ltd., aGovernment of India undertaking, which was one of the trading membersEof NSEL, visited some of the warehouses which were at different locationsin order to verify stocks therein and reported existence of full commoditystock in the said warehouses. Sometime in July 2013, 13,000 personswho traded on the platform of NSEL claimed to have been duped byother trading members (being 24 in number), who defaulted in paymentFof obligations amounting to approximately INR 5600 crore. Due to thesudden and abrupt stoppage of fresh contracts, and media reports aboutthe same, market participation on NSEL’s platform reduced considerably,forcing NSEL to suspend trading and close its spot exchange operationsw.e.f. 31.07.2013. The Forward Markets Commission [“FMC”]recommended to the DCA on 12.08.2013 that steps be taken to verifyGquantity and quality of commodities at various warehouses; financialstatus of buyers and trading members be ascertained, and the liability befixed on promoters of NSEL, i.e., FTIL. On 14.08.2013, NSEL issued apress release in which Shri Sinha, its CEO/MD, made a statement thathe and his management team were responsible for all operations at H

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NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL byGrant Thornton LLP, and the Union of India, on 30.09.2013, orderedinspection of the books of accounts of NSEL and FTIL under Section209A of the Companies Act. On the same day, the Economic OffencesWing [“EOW”] registered cases against Directors and key managementpersonnel of the NSEL and FTIL, trading members of NSEL, and brokersof NSEL under various provisions of the Indian Penal Code and theMaharashtra Protection of Interest of Depositors Act, 1999 [“MPIDAct”]. Several suits were filed by the traders who allegedly have beenduped, the most important of which is Suit No.173 of 2014 pending in theBombay High Court, which is a representative suit filed under Order IRule 8 of the Code of Civil Procedure, 1908 [“CPC”]. NSEL also filedthird-party notices in the said suit for recovery of INR 5600 crore against24 defaulter traders. It has also filed various arbitration proceedingsagainst them, and is in the process of recovery of INR 3365 crore out ofINR 5600 crore, which are in the form of court decrees and arbitrationawards.

4. On 17.12.2013, based on the Grant Thornton report dated21.09.2013, the FMC passed an order declaring that FTIL was not “fitand proper” to hold equity in any commodity exchanges, and must diluteits shareholding to not more than 2% of the paid-up equity capital ofMCX. The said order is under challenge in Writ Petition No. 337 of 2014before the Bombay High Court. On 28.02.2014, the Division Bench ofthe Bombay High Court refused a prayer for stay of the aforesaid order,stating that findings of fact of a serious nature have been recorded againstthe appellant, and the fraud perpetrated is to the tune of INR 5500 crore.

5. On 06.01.2014, the Economic Offences Wing, Mumbai, filedchargesheets against the Managing Director and CEO of NSEL, ShriSinha, the Head of Warehousing of NSEL, Shri Babu Kanvi, and twoother defaulters. In the chargesheet, it was revealed that the aforesaidthree employees of NSEL, in exchange for monetary kickbacks, hadcolluded with the defaulters to enable them to trade on NSEL’s platformwithout depositing adequate goods in the warehouses, in breach of rulesand 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 therepresentative Suit No. 173 of 2014, vide order dated 02.09.2014, the A

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ABombay High Court appointed a three-member committee consisting ofMr. Justice V.C. Daga, Mr. J. Solomon, and Mr. Yogesh Thar forascertaining and crystallising the liability of the defaulters and to assistin recovery of debts from the defaulters. This committee continues tofunction even on date. Thus, in addition to INR 3365 crore, i.e., the totalof decrees and arbitration awards against the defaulters, this high-levelBcommittee has also crystallised a further sum of INR 835.88 crore to berecovered from the defaulters, which is pending before the BombayHigh Court.

7. On 19.09.2014, the Ministry of Finance, Government of India,issued a notification withdrawing the exemption granted to NSEL videCnotification dated 05.06.2007. Exemptions granted to the NationalCommodity and Derivatives Exchange Ltd. (NCDEX) Spot Exchangeand the National Agricultural Produce Market Committee (APMC) werealso withdrawn as the Government was of the view that ready deliveryor spot delivery contracts in commodities ought not to be traded on Dcommodities exchanges at all. On 15.10.2014, Dr. K.P Krishnan,Additional Secretary, Department of Economic Affairs, wrote a letter tothe Ministry of Corporate Affairs stating that FTIL and NSEL appear tobe maintaining separate identities for a fraudulent purpose, i.e., todeprive 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,Eamalgamation of two companies, where one has defrauded marketparticipants and the other company is cash-rich and capable ofaddressing the payment crisis more effectively. It was thereforeproposed to merge FTIL and NSEL under Section 396 of theCompanies Act. On 21.10.2014, a draft order of amalgamation, made inFaccordance with Section 396(3) of the Companies Act, was circulatedto the relevant stakeholders. As a result, FTIL filed Writ Petition No.2743 of 2014 on 10.11.2014, in which it challenged the impugned draftorder. On 27.11.2014, the Bombay High Court directed the parties tomaintain status quo. On 16.12.2014, the Union of India filed an affidavitin reply, categorically confirming that the impugned draft order has beenGmade by the Central Government on the basis of the FMC’s proposaldated 18.08.2014. On 04.02.2015, the Bombay High Court vacated thestatus quo order, and passed an order allowing FTIL, NSEL, and theirshareholders to file their objections to the draft amalgamation order.Meanwhile, under Section 396(3), a compensation order was made onH

01.04.2015, which involved compensation only to a particular shareholderof NSEL. On 28.08.2015, the Central Government issued a notificationto merge the functions of the FMC with the Securities and ExchangeBoard of India [“SEBI”] w.e.f. 28.09.2015. On the same day, the FCRAwas also repealed. Thus, SEBI was now vested with the powers of theFMC which is to be governed by the Securities and Exchange Board ofIndia Act, 1992 [“SEBI Act”].

8. FTIL and NSEL were granted a hearing on their objections tothe impugned draft amalgamation order by a committee consisting ofShri Pritam Singh, Additional Secretary to the Government of India, andShri H.P. Chaturvedi, Joint Secretary and Legal Advisor, Ministry ofLaw and Justice in October 2015, pursuant to a Bombay High Courtorder in the Writ Petition 2743 of 2014 pending before it.

9. On 12.02.2016, a final amalgamation order was passed in termsof Section 396(3), thereby merging FTIL and NSEL, wherein all assetsand liabilities of NSEL would become assets and liabilities of FTIL. Thewrit petition already filed was amended on 28.03.2016 to include achallenge to this order. On 04.12.2017, the impugned judgment of theBombay High Court was passed in which the said writ petition wasdismissed.

10. We have heard Shri Mukul Rohatgi, Shri Vikas Singh, Dr.A.M. Singhvi, and Shri Kavin Gulati, learned Senior Advocates, and ShriArvind Lakhawat, learned Advocate, on behalf of the appellants.According to learned counsel, the first important point to be noted is thatin company law, the holding company, viz. FTIL, is distinct and separatefrom its subsidiary, viz., NSEL. It was pointed out to us that there areseparate and independent Boards of Directors for managing the day-to-day affairs of both companies, which deal in completely differentbusinesses. It was pointed out that FTIL has never participated in theprofits of NSEL, and except for receiving annual maintenance chargesfor providing technology-related services by way of fees, FTIL has notderived any revenue from NSEL. In fact, over a long period of nineyears, 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 toan order dated 12.06.2015 in Writ Petition No. 2187 of 2015. Learnedcounsel were also at pains to point out that NSEL has not defraudedanybody since it is only a platform. Currently, the business of NSEL is AB

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Aclosed, whereas, on the other hand, the business of FTIL is flourishing.A compulsory amalgamation order would be ultra vires Section 396 ifthe only object is to foist unadjudicated liability of NSEL on FTIL. It wasalso pointed out that the basis of the amalgamation order was a letter bythe FMC, which in turn was based on a “forensic” audit report of 2013by Grant Thornton. The so-called report itself stated that there is noBindependent verification of information provided, and consequently, wouldnot constitute an audit, let alone a forensic audit. It also stated that shouldadditional information become available, which impacts upon conclusionsreached in the report, Grant Thornton reserved the right to amend theirfindings, which are not intended to be interpreted to be either legal adviceCor opinion; in short, that the findings themselves were inconclusive.

11. Learned counsel have argued that the impugned order is ultravires Section 396 for many reasons. First and foremost, the conditionprecedent to passing an amalgamation order is that compensation beassessed under Section 396(3) of the Act. Compensation has to beDassessed quaboth the transferor and transferee company. In the presentcase, 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 sameposition “as nearly as possible”. In the present case, the amalgamated company would become a company of negative net worth uponEamalgamation, having had a positive net worth of almost INR 2800 crorepre-amalgamation. This being so, the very basis for application of Section396 would disappear as the amalgamated company, i.e., the transfereecompany would have to pay the compensation that is assessed. Thisobviously cannot be done when the amalgamated company itself becomesFa negative net worth company. It was then argued that the amalgamationorder interfered with the judicial process in that decrees and arbitralawards obtained by NSEL against defaulters are wholly ignored. Further,the process of adjudication, which will determine whether there aredefaults and whether they need to be paid back, has been short-circuitedby amalgamating NSEL with FTIL. Thus, the learned counsel have allGargued that various conditions precedent for applicability of Section 396are wholly absent. Also, in the present case, the Central Governmenthas not applied its mind to whether such an order is, first of all, “essential”.Secondly, unadjudicated so-called liabilities to persons who are membersof one particular exchange can hardly be said to be something which H

requires the Central Government to amalgamate both companies in the“public interest”. The public interest consists of the interests of the generalpublic which would include, inter alia, the interest of the 63,000shareholders of FTIL, who are now going to be mulcted with a hugeliability which would reduce the market value of their shares to nil. Theyhave cited several judgments to buttress these submissions.

12. Thus, the amalgamation order oversteps recognised separationof powers’ limits, and is therefore, ultra vires both Section 396 of theCompanies Act and the Constitution of India. It was then argued thatthere are three grounds in support of the order of amalgamation, whichare to be found in the impugned judgment, namely:

A. Restoring / safeguarding public confidence in forward contractsand exchanges which are an integral and essential part of theIndian economy and financial system, by consolidating thebusinesses of NSEL and FTIL;

B. Giving effect to the business realities of the case byconsolidating the businesses of FTIL and NSEL and preventingFTIL from distancing itself from NSEL, which is even otherwiseits alter ego; and

C. Facilitating NSEL in recovering dues from the defaulters bypooling human and financial resources of FTIL and NSEL

Admittedly, reasons A and B are not in the draft order. This beingso, obviously, no objections or suggestions could be made qua reasons Aand B, as a result of which the final order would, therefore, be ultravires Section 396(3) of the Companies Act.

13. All the stated objectives at page 1 of the amalgamation orderitself – (a) to leverage combined assets, capital and reserves; (b) toachieve economy of scale; (c) efficient administration; (d) gainfulsettlement of rights and liabilities of stakeholders and creditors; (e) toconsolidate businesses; and (f) to ensure coordination and policy – aretotally vague and do not lead to any application of mind to suchamalgamation order being essential in public interest. Article 31A of theConstitution of India was relied upon, and it was argued that amalgamationunder Article 31A(1)(c) of two or more corporations can only be madein public interest or in order to secure proper management of any of thecorporations, which is wholly missing in the present case. It was also A

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Aargued that only Shri Pritam Singh had signed the order which dismissedthe objections, even though the objections were heard by a two-membercommittee. They also made submissions that even otherwise, theimpugned order was violative of natural justice and of Articles 14, 19,and 300A of the Constitution of India. Also, since the amalgamationorder is based upon an order of the FMC, which in turn is based uponBthe Grant Thornton report, which was delivered in a great hurry, andwith such disclaimers that it could never be relied upon to render finalfindings, as has been done by the amalgamation order, the amalgamationorder itself would be without application of mind, excessive and arbitrary,and violative of Article 14 of the Constitution of India on this score alone.

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14. When it came to the impugned judgment, the learned counselfor the appellants were at pains to point out that when the impugnedjudgment held that no compensation need be paid to FTIL as the numberof shares in the amalgamated company of shareholders remain the same,economic value or market value of the shares was totally ignored. Thus,Din ignoring economic value, a totally artificial, formal, and non-substantialtest has been applied by the Bombay High Court, which says that thereis no necessity to compensate the shareholders of FTIL, even thoughonce they become members of the amalgamated company, their shareswould 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 theEthree grounds of the amalgamation order, being reasons for theamalgamation 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 whichare an integral and essential part of the Indian economy, does not obtainFas there were only three commodity exchanges in the country, all ofwhich were shut down w.e.f. September 2014. No similar exchangeshave been created subsequently. In any case, the business done at suchexchanges cannot be said to be an integral and essential part of theIndian 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. ToGcome to a conclusion that one is the alter ego of the other is not onlycontrary to the facts pointed out hereinabove, namely, that the businessesof the two companies are entirely different and the management of bothcompanies is by completely different and distinct Boards of Directors.Thus, to arrive at the conclusion that one company is the alter ego of the H

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other, without adjudication, would itself be arbitrary and violative of Article14 of the Constitution of India. The only reason which would remain,therefore, would be reason C, which is that the real object of the entireexercise to recover alleged dues from alleged defaulters pre-adjudicationand pending adjudication, which would be looking at the problem in awholly one-sided way, and would be an excessive invasion of the rightsof the shareholders and creditors of FTIL, all of whom haveoverwhelmingly voted against amalgamation. In fact, it is pointed outthat there is no question of “public interest” and Section 396 is actuallyused in order to penalise “Ram”, namely, NSEL and FTIL, for the defaultof “Shyam”, namely, the 24 alleged defaulters, when not even a singledefault or any civil or criminal wrong can be attributed either to FTIL orto NSEL. The impugned order would therefore also fail on the ground ofproportionality, which is a facet of Article 14. For all these reasons, inaddition, the impugned order ought to be struck down as ultra viresArticle 31A of the Constitution of India and Section 396 of the CompaniesAct, and be declared to be violative of Article 14, Article 19 and Article300A of the Constitution of India.

15. Shri Shyam Divan, learned Senior Advocate appearing on behalfof Respondent No. 4, NSEL Investors Action Group, supported theimpugned judgment in its entirety. According to the learned SeniorAdvocate, it must never be forgotten that FTIL held 99.9998% of NSEL’sshares, 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 beits own, and was part of its “exchange verticals”. Shri Jignesh Shah isthe common linchpin of both the companies. He holds 45% shares ofFTIL and is its Chairman-cum-Managing Director. He is also ViceChairman on the Board of NSEL, being one of the “key managerialpersonnel” of the aforesaid company. He also was a member of theAudit Committee of NSEL. All the minutes of the Board meetings ofNSEL were regularly tabled at the Board meetings of FTIL, showingtherefore, that FTIL has full knowledge of the goings-on in NSEL.NSEL’s outward emails were routed through an outbox called “FToutbox” through which all emails of all FTIL-group companies wererouted. What is clear, therefore, is that on a reading of the Grant Thorntonreport, NSEL has, at least from 2009, promoted what are called “pairedcontracts” in commodities which were, in fact, financing transactions, A

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Awhich were totally distinct from sale and purchase transactions incommodities. In fact, by April to July, 2013, 99% of the turnover ofNSEL was made up of such paired contracts. This mechanism was inbreach of the conditions of exemption granted to NSEL dated 05.06.2007,and in breach of the provisions of the FCRA. Contrary to what wasactually going on in NSEL, NSEL kept inducing persons to come to itsBplatform by reiterating that they deal only with commodities and spotdelivery of the same. It is only in 2012 that the FMC, being apprised ofthe real activities of NSEL, wrote to the DCA, indicating that its businesswas in complete breach of the FCRA. What is extremely important isthat Shri Jignesh Shah made representations to the DCA and the FMCCon 10.07.2013, in which he stated that NSEL had full stock of commoditiesas collateral and had 10-20% of open position as margin money. He alsostated that the stock currently held in NSEL’s 120 warehouses wasvalued at around INR 6000 crore. It is in July, 2013 that the paymentcrisis of INR 5600 crore arose on NSEL, FTIL admitting that this wasthe result of a fraud. On 14.08.2013, NSEL wrote to the FMC, settingDout a detailed settlement plan. The plan indicated the period within whichthe entire dues would be paid, with simple interest at 8% to 16% perannum. This plan was an abject failure. As a result, a forensic audit wasconducted by Grant Thornton, which in its report dated 21.09.2013, cameout with damning facts and figures as to the real operations of NSEL,Enamely, that they are not a commodity exchange, but a finance exchange,and that no commodities were really in stock. As a result, the FMCissued show cause notices and then passed its order dated 17.12.2013based on the aforesaid report, in which it found NSEL guilty of severemalpractice. Based on this order, the draft order and final order ofamalgamation were then made. Shri Divan was at pains to point out thatFas early as on 18.08.2014, the FMC had written a detailed letter to theSecretary, Ministry of Corporate Affairs, in which it indicated that asNSEL was financially incapable of repaying all those investors/traderswho allegedly got duped, it would be expedient in public interest toamalgamate NSEL with its parent, FTIL, so that its parent’s resourcesGcould be used to repay these debts. He then argued that the reason forthe amalgamation order was not merely the repayment of debts of theallegedly duped investors/traders, but to instil confidence in commoditymarkets, for it is only when their debts are immediately paid would personscome forward to platforms like NSEL to trade in commodities. Accordingto the learned Senior Advocate, there was no breach of natural justice inH

passing the final amalgamation order as FTIL and NSEL were bothheard pursuant to a Bombay High Court order, even though Section 396of the Companies Act does not require any hearing. He also argued thatthe order of amalgamation is of the nature of delegated legislation and isnot an administrative order, as a result of which, the immunity grantedby Article 31A to “all laws” dealing with such amalgamation fromchallenge 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 begone into as they all pertained to infractions of Articles 14 and 19 of theConstitution of India. According to the learned Senior Advocate, theorder was passed after being satisfied on the objective facts set outhereinabove that it was essential in public interest to pass such orderand could not, therefore, be held to be ultra vires. He also supported thejudgment of the High Court when it stated that the economic value ofshares of FTIL is not the subject matter of Section 396, and that, therefore,it was not necessary to provide FTIL’s shareholders any compensationunder Section 396(3).

16. Shri Rakesh Dwivedi, learned Senior Advocate also appearingon behalf of Respondent No.4, supplemented the submissions of ShriDivan. According to him, nowhere does the Central Government orderdirect any payment to be made by the amalgamated company. Theamalgamation is only so that the finances of FTIL can be used to pursueon-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 becomemulcted with the liabilities of NSEL, as a result of which the shareholdersof FTIL will suffer. He added that the overwhelming majority of sharesin FTIL are owned by Shri Jignesh Shah and his family (45%) and byShri Ravi Sheth and Shri Bharat Sheth (8%). Thus, the majority sharesheld in FTIL are by two masterminds of the scam. That apart, after thescam, 24% of the shares have been purchased by speculators, takingadvantage of the low price at which such shares were offered. Suchpersons, therefore, are purely speculative investors who do not need tobe compensated under Section 396 of the Act. Also, the economic valueof shares, if at all it is to be taken into account, is an uncertain andfluctuating phenomenon. As examples, he stated that the book value ofa share of FTIL, after the scam broke out, was only INR 2/-, whereasthe listed value actually went up after the FMC order of 17.12.2013. Allthis, therefore, is dependent on market forces, and share price varies A

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Aaccording to market forces and not as a result of any amalgamation thatis effected. He also added that it is incorrect to state that one of theconditions precedent for applicability of Section 396 was absent. Even ifa compensation order was made awarding nil compensation toshareholders and creditors of FTIL, they could have appealed againstthe same. Not having done so, it cannot be said that the CentralBGovernment order was passed without adhering to the provisions ofSection 396(3) and (4) of the Act. When it came to the three grounds ofpublic interest stated by the High Court, the learned Senior Advocateargued that grounds (a) and (b) are only inferences to be drawn fromfacts which are all stated in the order, and therefore, need not have beenCin the draft order. There is thus no infirmity or breach of principles ofnatural justice as provided in Section 396(3) and (4). He was at pains toanalyse Article 31A, and stated that the expression “public interest”contained in Article 31A will have to be construed broadly. Equally, theword “essential” in Section 396 is essentiality according to the Central

Government, and thus, very wide latitude needs to be extended to theDGovernment when it exercises its discretion, stating that it is essential inpublic interest to amalgamate two companies. He laid great emphasison the judgment in Ganesh Bank of Kurundwad Ltd. v. Union ofIndia, (2006) 10 SCC 645 [“Ganesh Bank”], stressing thatamalgamations that are made under Section 45 of the Banking RegulationEAct, like amalgamations made under Section 396, can be made so that aweak entity merge with a strong entity in the interest of the depositors ofthe weak entity. He also cited various judgments to show that stockexchanges are intimately linked with the economy of the country, andtherefore, if anything goes wrong with them, there is a direct link withpublic interest. He emphasized the fact that in Section 396(3), theFshareholders of FTIL only need to be compensated “as nearly as maybe” and that mathematical precision is not necessary. He thendistinguished the judgment in Mohinder Singh Gill v. Chief ElectionCommissioner, (1978) 1 SCC 405 [“Mohinder Singh Gill”], cited bythe appellants, stating that where larger public interest is involved, theGratio of that judgment will not apply. He cited two judgments in supportof this proposition. He also went on to cite certain judgments whichdistinguished K.I. Shephard v. Union of India, (1987) 4 SCC 431[“K.I. Shephard”], and therefore, argued that the Central Governmentorder passed under Section 396 is really in the nature of delegatedlegislation and need not conform to any natural justice outside what isH

provided for in the Section itself. He then cited certain judgments onlifting 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 WeavingCo. Ltd., [1969] 2 SCR 866 [“J.K. (Bombay) (P) Ltd.”], the CentralGovernment order would have statutory force, and therefore, cannot besaid to be a mere administrative order.

17. Shri Arvind Datar, learned Senior Advocate appearing onbehalf of SEBI, fully supported the impugned judgment and took usthrough various portions of it. He was at pains to point out that the GrantThornton report was a report of a forensic auditor chosen by NSELitself, though required to do so by the FMC. He took us through theFMC order dated 17.12.2013 meticulously, and said that none of thefindings therein could be assailed by either FTIL or NSEL. He thenreferred to the Central Government order and supported the High Courtjudgment’s upholding of it. He then relied upon the Director’s Report ofNSEL dated 20.07.2015, and balance sheet as on 31.03.2015 to showthat no potential liability of INR 5600 crore is at all referred to in theDirector’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 itwould not be responsible for any liabilities incurred by its membersexcept to the extent of the SG fund created out of the members’contribution. He then argued that given the magnitude of the scam thatbroke out in July 2013, the Government had to act. It could have chosenone of many ways in which to act, but since it had bona fide chosen theamalgamation route provided by Section 396 of the Companies Act, it isobvious that in dealing with a scam of this magnitude, the Governmenthas acted in public interest.

18. Ms. Pinky Anand, learned Additional Solicitor Generalappearing on behalf of the Union of India, meticulously took us througha long list of dates and events which showed that NSEL had flouted theconditions of its exemption order and had never really carried out readydelivery or spot delivery contracts in goods. Indeed, according to her,NSEL never had a single registered warehouse in its name as theWarehousing Development and Regulatory Authority had rejectedNSEL’s application for registration of its warehouses as far back as on16.05.2011. Therefore, NSEL stating that it had 120 warehouses ownedby itself was a misrepresentation made to the public from the verybeginning. It is also clear, that when the scam broke out, Grant Thornton, A

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Aas forensic auditor, went into the affairs of NSEL and came out with anumber of key findings, which she referred to and took us through portionsof the Grant Thornton report. The FMC order dated 17.12.2013 wasalso referred to and relied upon by her. She also referred to the fact thatthe exemption order dated 05.06.2007 granted to NSEL was withdrawnon 19.09.2014 as commodities markets which were supposed to beBmarkets where spot delivery of goods took place, had never in fact takenplace and therefore, exemption granted to all spot exchanges dealing incommodities, including two other spot exchanges that existed, werewithdrawn. However, the Bombay Stock Exchange Ltd. (BSE), theNational Stock Exchange of India Ltd. (NSE), and MCX continued withCcommodity trading, but not on a spot basis. She also referred us to asubsequent event, that is an event subsequent even to the impugnedjudgment, namely, to a serious fraud investigation report dated 31.08.2018which, according to her, corroborated all the findings made by GrantThornton, the FMC, and the Central Government by its final order. Shethen argued that Section 396 of the Companies Act is a special, self-Dcontained, standalone code by itself and must be read as such, and thatall procedural aspects of Section 396 have been complied with on thefacts of the present case. The satisfaction of the Central Governmentthat it is essential in public interest to act under Section 396 is purelysubjective satisfaction. She referred to and relied upon Bacha F. GuzdarEv. Commissioner of Income Tax,[1955] 1 SCR 876 [“Bacha F.Guzdar”], to support the reasoning of the High Court on the compensationorder. She also referred to and relied upon the share market prices toshow that market fluctuations took place on their own, and that shareprices plummeted only as a result of the scam which came to light inJuly, 2013. She also stated that since neither FTIL nor its shareholdersFand creditors filed any appeal against the compensation order, they waivedtheir right to do so. She then supported the final amalgamation order andstated 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 counteredGthe submission of Shri Rohatgi that of the two persons who heard theobjections, only one person signed, and therefore, their report would benon-est. She stated that this technical objection cannot stand in the wayof the final government order which took into account all objections andsuggestions made, and answered all of them. She also referred to the H

role of stock markets in the national economy and stated that to prop upstock and commodities exchanges is certainly in public interest. Thethree distinct grounds on public interest, found by the High Court, aremore than sufficient to sustain the impugned Central Government order.Finally, in her last written argument, she relied upon two judgments ofthis Court, namely, Union of India v. G. Ganayutham, (1997) 7 SCC463 and Om Kumar v. Union of India, (2001) 2 SCC 386, stating thecurrent position of the doctrine of proportionality in administrative law.

19. Shri Tushar Mehta, learned Solicitor General for India, whoalso appeared on behalf of the Union of India, re-emphasised the factswhich led to the final amalgamation order. According to him, the impugnedorder dated 12.02.2016 is based on public interest as it reflects theGovernment’s reaction to a large scam which broke in the year 2013,and which effected the commodities market generally. He dwelt at somelength on subjective satisfaction and judicial review, and referred toBarium Chemicals Ltd. v. Company Law Board, [1966] Supp SCR311 [“Barium Chemicals”], Rohtas Industries Ltd. v. S.D. Agarwal,[1969] 3 SCR 108 [“Rohtas Industries”], and other judgments toemphasise that it was not for the Court to sit in judgment over thesufficiency of the reasons for which the Central Government passed itsorder in public interest. He also stated that the right to choose betweendifferent courses of action is a right inherent in a responsive government,and it is only when such choice is so unfair or unreasonable that noreasonable person would have taken such action, that the Court canintervene. For this purpose, he cited Haryana Financial Corporationv. Jagdamba Oil Mills, (2002) 3 SCC 496. According to him, essentialityis not reviewable except by the Wednesbury test, and the Court shouldask itself the question as to whether no reasonable person could haveconcluded that the impugned order was essential in the public interest.He reiterated that the order dated 12.02.2016 is not ultra vires Section396 as several findings which show that amalgamation is essential inpublic interest has been arrived at on the basis of undisputed facts, andthat therefore, the said order should be upheld. He also argued that suchorder, if passed, is in the nature of delegated legislation, and therefore,does not have to satisfy any rules of natural justice outside what isprescribed by Section 396 itself which, according to him, has beenprocedurally and substantively complied with, as reflected in the orderdated 12.02.2016.

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A20.Shri Neeraj Kishan Kaul, learned Senior Advocate, alsoappearing on behalf of some of the alleged duped investors/traders,referred to the Maharashtra Protection of Interest of Depositors (inFinancial Establishments) Act, 1999, and stated that the persons whohad invested monies in the commodities exchange of NSEL have beenheld to be “depositors” by a judgment dated 01.10.2015 of the HighBCourt of Bombay, from which an SLP has been dismissed by this Court.He also brought to our notice another judgment dated 01.11.2018, alsoof the Bombay High Court, in which NSEL and FTIL had breached aninjunction order, and had to apologise and pay back monies in order toavoid being held guilty of contempt of court. He also stressed thatC“economic value” of shares is a stranger to Section 396(3) of theCompanies Act. He then relied upon two reports of the RBI, both ofwhich say that the modern trend in corporate law worldwide is that iflosses are borne by a corporation, it is the shareholders who should bearthe brunt.

D21. Having heard learned counsel for all the parties, it is necessaryat 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, noElaw providing for—

xxx xxx xxx

(c) the amalgamation of two or more corporations either in thepublic interest or in order to secure the proper management ofany of the corporations, or F

xxx xxx xxx

shall be deemed to be void on the ground that it is inconsistentwith, or takes away or abridges any of the rights conferred byarticle 14 or article 19.

Gxxx xxx xxx”

“Law” has been defined in Article 13(3) as follows:

“13. Laws inconsistent with or in derogation of thefundamental rights.—

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(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 territoryof India the force of law;

xxx xxx xxx”

It will thus be seen that any “law” providing for the amalgamationof two or more corporations in public interest is immune from challengeon grounds relatable to Article 14 or Article 19 of the Constitution ofIndia. It is not disputed that Section 396 of the Companies Act is such alaw.

22. Section 396 of the Companies Act, 1956, reads as under:

“396. Power of Central Government to provide foramalgamation of companies in public interest.—(1) Wherethe Central Government is satisfied that it is essential in the publicinterest that two or more companies should amalgamate, then,notwithstanding anything contained in Sections 394 and 395 butsubject to the provisions of this section, the Central Governmentmay, by order notified in the Official Gazette, provide for theamalgamation of those companies into a single company with suchconstitution; with such property, powers, rights, interests, authoritiesand privileges; and with such liabilities, duties, and obligations; asmay be specified in the order.

(2) The order aforesaid may provide for the continuation by oragainst the transferee company of any legal proceedings pendingby or against any transferor company and may also contain suchconsequential, incidental and supplemental provisions as may, inthe opinion of the Central Government, be necessary to give effectto the amalgamation.

(3) Every member or creditor (including a debenture holder) ofeach of the companies before the amalgamation shall have, asnearly as may be, the same interest in or rights against the companyresulting from the amalgamation as he had in the company ofwhich he was originally a member or creditor; and to the extent towhich the interest or rights of such member or creditor in or againstthe company resulting from the amalgamation are less than hisinterest in or rights against the original company, he shall be entitled A

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to compensation which shall be assessed by such authority asmay be prescribed and every such assessment shall be publishedin the Official Gazette.

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The compensation so assessed shall be paid to the memberor creditor concerned by the company resulting from theBamalgamation.

(3A) Any person aggrieved by any assessment of compensationmade by the prescribed authority under sub-section (3) may, withinthirty days from the date of publication of such assessment in theOfficial Gazette, prefer an appeal to the Tribunal and thereuponthe assessment of the compensation shall be made by the Tribunal.

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(4) No order shall be made under this section, unless:

(a) a copy of the proposed order has been sent in draft to eachof the companies concerned; (aa) the time for preferring an appeal under sub-section (3A)has expired, or where any such appeal has been preferred, theappeal has been finally disposed of; and D

(b) the Central Government has considered, and made suchmodifications, if any, in the draft order as may seem to itdesirable in the light of any suggestions and objections whichEmay be received by it from any such company within suchperiod as the Central Government may fix in that behalf, notbeing less than two months from the date on which the copyaforesaid is received by that company, or from any class ofshareholders therein, or from any creditors or any class ofFcreditors thereof.

(5) Copies of every order made under this section shall, as soonas may be after it has been made, be laid before both Houses ofParliament.”

It will be seen that Section 396 provides for compulsoryGamalgamation of companies in public interest. The said Section occursin Chapter V of the Companies Act which reads, “arbitrations,compromises, arrangements and reconstructions”. Sections 391 to 394deal with voluntary compromises and arrangements, includingamalgamation of two or more companies. By way of contrast, SectionH396 deals with compulsory amalgamation of companies.

INTERPRETATION OFSECTION 396

23. There is no doubt whatsoever that Section 396 cannot bechallenged on the ground of Article 14 or Article 19, given Article 31A ofthe Constitution of India. However, this does not mean that Section 396must be construed in such a fashion that it would lead to arbitrary orunreasonable results. In Prem Nath Raina v. State of Jammu &Kashmir and Ors., (1983) 4 SCC 616, this Court, in dealing with achallenge to the J&K Agrarian Reforms Act, 1976, which was protectedby Article 31A, held:

“9. ……The exclusion of a constitutional challenge under Articles14, 19 and 31 which is provided for by Article 31A does not justifyin equity the irrational violation of these articles. This Court didobserve in Waman Rao [Waman Rao v. Union of India, (1981)2 SCC 362 : AIR 1981 SC 271 : (1981) 2 SCR 1] that: “It mayhappen that while existing inequalities are being removed, newinequalities may arise marginally and incidentally” but thelegislature has to take care to see that even marginal and incidentalinequalities are not created without rhyme or reason. TheGovernment of J&K would do well to give fresh consideration tothe provisions contained in Section 7(2) and modify the provisionsregarding residence in order that they may accord with reasonand commonsense. Article 31A does not frown upon reason andcommonsense.”

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. ZamindariAbolition and Land Reforms Act, 1950, held:

“Before considering the meaning of the word “held” in Section9, it is necessary to mention that it is proper to assume that thelaw-makers who are the representatives of the people enact lawswhich the society considers as honest, fair and equitable. Theobject of every legislation is to advance public welfare. In otherwords as observed by Crawford in his book on StatutoryConstructions that the entire legislative process is influenced byconsiderations of justice and reason. Justice and reason constitutethe 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 A

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62SUPREME COURT REPORTS

Aconceptions of justice and reason, in most instances, it would seemthat the apparent or suggested meaning of the statute, was notthe one intended by the law-makers. In the absence of some otherindication that the harsh or ridiculous effect was actually intendedby the legislature, there is little reason to believe that it representsthe legislative intent.”B

(at pp. 15-16)

DERIVATIVE IMMUNITYOFTHE CENTRALGOVERNMENT ORDER

24. The next question is whether the Central Government’s orderCmade under Section 396 would also receive the protective umbrella ofArticle 31A, given the fact that Section 396 is undoubtedly protected byArticle 31A.

25. A similar question was raised and considered with respect toan order passed under the Essential Commodities Act, 1955. In PragDIce & 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 EssentialCommodities Act, 1955 did not receive the immunity of Article 31B.This Court held:

E“46. Article 31A of the Constitution saves laws which provide formatters mentioned in clauses (a) to (e) thereof from a challengeunder Articles 14, 19 or 31 notwithstanding anything contained inArticle 13 of the Constitution. Article 31B which was introducedby the Constitution (First Amendment) Act, 1951, validates certainFActs and Regulations by providing that without prejudice to thegenerality of the provisions contained in Article 31A, “none of theActs and Regulations specified in the Ninth Schedule nor any ofthe provisions thereof” shall be deemed to be void, or ever tohave become void, on the ground that such Act, Regulation orprovision is inconsistent with, or takes away or abridges any ofGthe rights conferred by, any provisions of Part III. On a plainreading of this article it seems to us impossible to accept that theprotective umbrella of the Ninth Schedule takes in its everwideningwings 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 fundamentalrights and doubtless as it may seem that it is inspired by a radiantsocial philosophy, it must be construed as strictly as one may, forthe simple reason that the guarantee of fundamental rights cannotbe permitted to be diluted by implications and inferences. Anexpress provision of the Constitution which prescribes the extentto 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 31Bdeals with, there is, in our opinion, no justification for contendingby judicial interpretation the provisions of the field which is declaredby that article to be immune from challenge on the ground ofviolation or abridgement of fundamental rights. The article affordsprotection to Acts and Regulations specified in the Ninth Schedule.Therefore, whenever a challenge to the constitutionality of aprovision of law on the ground that it violates any of the fundamentalrights conferred by Part III is sought to be repelled by the Stateon the plea that the law is placed in the Ninth Schedule, the narrowquestion to which one must address oneself is whether theimpugned law is specified in that Schedule. If it is, the provisionsof Article 31B would be attracted and the challenge would failwithout any further inquiry. On the other hand, if the law is notspecified in the Ninth Schedule, the validity of the challenge hasto be examined in order to determine whether the provisions thereofinvade in any manner any of the fundamental rights conferred byPart III. It is thus no answer to say that though the particular law,as for example a Control Order, is not specified in the NinthSchedule, the parent Act under which the Order is issued isspecified in that Schedule.”

26. In the present case, this judgment has no direct applicationexcept to say that Article 31A also constitutes a grave encroachment onfundamental rights, and must be construed strictly. The expression usedin Article 31A is “law”, for which, one is to see the definition containedin Article 13(3). “Law” in Article 13(3) certainly includes “order”. Theonly question is whether this would include an administrative order aswell.

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A27. 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 ofIndia 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 customBor usage having the force of law refers to general rules of conduct, asopposed 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. Examplesof legislative orders are of the kind dealt with in Prag Ice & Oil MillsC(supra) and Union of India and Anr. v. Cynamide India Ltd. andAnr., (1987) 2 SCC 720 [“Cynamide India”], namely, orders passedunder statutes which are in the nature of subordinate legislation, whichdeal generally with a whole class of persons who are governed by thesame in which general rules of conduct are laid down.

DWHETHER THE CENTRAL GOVERNMENT ORDER ISADMINISTRATIVE IN NATURE

28. This brings us to what is the nature of the order of the CentralGovernment that is passed under Section 396. It has been argued onbehalf of the Union of India, relying upon a number of judgments, thatEthe nature of the order passed under Section 396 is that of delegatedlegislation. This being the case, it would, therefore, get immunity fromchallenge on the ground of Articles 14 and 19 of the Constitution ofIndia, as it would then amount to a “law” within the meaning of Article31A read with Article 13(3)(b).

29. The difference between an order which is legislative in natureand that which is administrative in nature has been discussed in some ofour judgments. Thus, in Cynamide India (supra), this Court drew adistinction between administrative and legislative orders thus:

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“7. …… Any attempt to draw a distinct line between legislativeGand administrative functions, it has been said, is ‘difficult in theoryand impossible in practice’. Though difficult, it is necessary thatthe line must sometimes be drawn as different legal rights andconsequences may ensue. The distinction between the two hasusually been expressed as ‘one between the general and theparticular’. ‘A legislative act is the creation and promulgation of a H

general rule of conduct without reference to particular cases; anadministrative act is the making and issue of a specific directionor the application of a general rule to a particular case inaccordance with the requirements of policy’. ‘Legislation is theprocess of formulating a general rule of conduct without referenceto particular cases and usually operating in future; administrationis the process of performing particular acts, of issuing particularorders or of making decisions which apply general rules toparticular cases.’ It has also been said: ‘Rule-making is normallydirected toward the formulation of requirements having a generalapplication to all members of a broadly identifiable class’ while,‘an adjudication, on the other hand, applies to specific individualsor situations’. But, this is only a broad distinction, not necessarilyalways true. Administration and administrative adjudication mayalso be of general application and there may be legislation ofparticular application only. That is not ruled out. Again, adjudicationdetermines past and present facts and declares rights and liabilitieswhile legislation indicates the future course of action. Adjudicationis determinative of the past and the present while legislation isindicative of the future.……”

In K.I. Shephard (supra), this Court dealt with a scheme foramalgamation of three private banks with Punjab National Bank, CanaraBank, and State Bank of India, in terms of separate schemes drawn,merging each private bank with state banks under Section 45 of theBanking Regulation Act. It was urged that the order passed by the ReserveBank of India amalgamating these banks was legislative in nature, as aresult of which the principle of natural justice will not apply. In turningdown this contention, this Court held:

“9. …… Learned counsel for RBI and the transferee banks havetaken the stand that the scheme-making process under Section45 is legislative in character and, therefore, outside the purviewof the ambit of natural justice under the protective umbrellawhereof the need to put the excluded employees to notice orenquiry arose. It is well settled that natural justice will not beemployed in the exercise of legislative power and Mr Salve hasrightly relied upon a recent decision of this Court being Union ofIndia v. Cynamide India Ltd. [(1987) 2 SCC 720] in support ofsuch a position. But is the scheme-making process legislative?

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Power has been conferred on the RBI in certain situations to takesteps for applying to the Central Government for an order ofmoratorium and during the period of moratorium to propose eitherreconstruction or amalgamation of the banking company. A schemefor the purposes contemplated has to be framed by RBI and placedbefore the Central Government for sanction. Power has beenvested in the Central Government in terms of what is ordinarilyknown as a Henry VIII clause for making orders for removal ofdifficulties. Section 45(11) requires that copies of the schemes asalso such orders made by the Central Government are to be placedbefore both Houses of Parliament. We do not think this requirementmakes the exercise in regard to schemes a legislative process. Itis not necessary to go to any other authority as the very decisionrelied upon by Mr Salve in the case of Cynamide India Ltd.[(1987) 2 SCC 720] lays down the test. In para 7 of the judgmentit has been indicated: (SCC pp. 735-36)

“Any attempt to draw a distinct line between legislative andadministrative functions, it has been said, is ‘difficult in theoryand impossible in practice’. Though difficult, it is necessarythat the line must sometimes be drawn as different legal rightsand consequences may ensue. The distinction between the twohas usually been expressed as ‘one between the general andthe particular’. ‘A legislative act is the creation and promulga-tion of a general rule of conduct without reference to particu-lar cases; an administrative act is the making and issue of aspecific direction or the application of a general rule to a par-ticular case in accordance with the requirements of policy’.‘Legislation is the process of formulating a general rule of con-duct without reference to particular cases and usually operat-ing in future; administration is the process of performing par-ticular acts, of issuing particular orders or of making decisionswhich apply general rules to particular cases.’ It has also beensaid: ‘Rule-making is normally directed towards the formula-tion of requirements having a general application to all mem-bers of a broadly identifiable class’ while, ‘an adjudication, onthe 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 contentionthat the framing of the scheme under Section 45 involves alegislative process. There are similar statutory provisions whichrequire placing of material before the two Houses of Parliamentyet not involving any legislative activity. The fact that orders madeby the Central Government for removing difficulties ascontemplated under sub-clause (10) are also to be placed beforethe two Houses of Parliament makes it abundantly clear that theplacing of the scheme before the two Houses is not a relevanttest for making the scheme-framing process legislative. Weaccordingly hold that there is no force in the contention of MrSalve that the process being legislative, rules of natural justicewere not applicable.”

The fact that, under Section 396(5), the Central Government orderhas to be laid before the Houses of Parliament also does not detractfrom the fact that this order is administrative and not legislative incharacter. Applying these judgments to the Central Government’s orderpassed under Section 396, it is clear that the order directly impacts therights and liabilities of the companies, their shareholders and creditors,sought to be amalgamated under the order. Such order is not an order ingeneral which applies to all such companies, but only to the particularcompanies sought to be amalgamated. There is no general rule of conduct,without reference to the particular case that is laid down by such anorder. The Central Government order, ultimately, makes a specificdirection qua two specific companies which are to be amalgamated. Itis clear that such an order is not in the nature of legislation or delegatedlegislation.

30. Learned counsel appearing on behalf of the respondents havecited New Bank of India Employees’ Union and Anr. v. Union ofIndia 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 BankingCompanies (Acquisition and Transfer of Undertakings) Act, 1980[“Acquisition Act”], which requires schemes that have been framedunder the said Act to be laid before each House of Parliament for a totalperiod of thirty days, in which, Parliament is then given the power tomake any modification therein. Given the difference in language between A

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Athe provisions, namely, Section 45 of the Banking Regulation Act andSection 9 of the Acquisition Act, this Court distinguished the judgment ofK.I. Shephard (supra) thus:

“32. The only other question which remains for consideration iswhether the conclusion of the High Court that the scheme-makingprocess under Section 9 of the Acquisition Act is not legislative iscorrect in law. In view of our conclusions on the four questionsformulated, this question is not of much relevance but since theHigh Court has recorded a conclusion and the learned AdditionalSolicitor General and Shri Salve advanced the argument we thinkit appropriate to answer this question also. The High Court reliedupon the decision in Shephard case [(1987) 4 SCC 431 : 1987SCC (L&S) 438 : (1988) 1 SCR 188] and came to hold that theprovisions of Section 45 of the Banking Regulation Act being inpari materia with Section 9 of the Banking Companies (Acquisitionand Transfer of Undertakings) Act, 1980, and the scheme framedunder Section 45 of the Banking Regulation Act, 1949 having beenheld by this Court to be not legislative, the scheme framed underthe Acquisition Act as in the present case, must also be held to benot a legislative one. It is undisputed that in Shephard case [(1987)4 SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] the B

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amalgamation was of a private bank with a nationalised bank andthe provisions of the Banking Regulation Act, 1949 applied. ThisCourt in Shephard case [(1987) 4 SCC 431 : 1987 SCC (L&S)438 : (1988) 1 SCR 188] on examining Section 45(11) of the BankingRegulation Act, 1949 came to hold that merely because a schemeframed is required to be laid before both the Houses of Parliamentafter the same has been sanctioned by the Central Governmentthe scheme cannot be held to be legislative in nature. But in ourconsidered opinion the High Court has failed to notice thefundamental distinction between the provisions of Section 45 ofthe Banking Regulation Act, 1949 and Section 9 of the AcquisitionAct. Under Section 9 of the Acquisition Act under which Act theimpugned scheme has been framed, every scheme framed by theCentral Government has to be laid before each House ofParliament for a total period of 30 days and Parliament has thepower to agree to the scheme and making any modification or ingiving to a decision that the scheme should not be made and it is E

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only thereafter the scheme has the effect either in the modifiedform or does not agree (sic). The essential distinction betweenthe two provisions therefore, is that whereas under the BankingRegulation Act, 1949 the scheme framed has merely to be placedbefore Parliament and nothing further but under the AcquisitionAct the scheme becomes effective only after the same is placedbefore both the Houses of Parliament and after Parliament makessuch modification and agrees to the scheme. In this view of thematter the decision of this Court in Shephard case [(1987) 4SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] has noapplication to a scheme framed under the provisions of theAcquisition Act and in our considered opinion, a scheme framedunder Section 9 of the Banking Companies Acquisition andTransfer of Undertakings Act, 1980, is a legislative one. The HighCourt was in error in holding the scheme not to be a legislativeone.”

Since Section 396(5) of the Companies Act is a provision akin tothe provision considered in the case of K.I. Shephard (supra), the ratioof K.I. Shephard (supra) squarely applies. The judgment in New Bankof 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 thencited the judgment in Quarry Owners’ Association v. State of Biharand Ors., (2000) 8 SCC 655. This judgment, in paragraphs 45 and 55,held that even a simple laying of an order before Parliament is a mandatorycondition to be observed, and ordered that the particular order in thatcase be laid before the legislature as it had not so been laid earlier. Thisjudgment again has nothing to do with whether, on account of layingbefore 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 thencited a passage from J.K. (Bombay) (P) Ltd. (supra), and paragraph23 in particular, in which this Court observed that an order made underSection 391 of the Companies Act has statutory force. The fact that asimilar order made under Section 396 may also have statutory forceagain does not answer the precise question before us, namely, as towhether such orders having statutory force are administrative or AB

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Alegislative in nature. This observation again does not carry the mattervery much further.

33. The order passed under Section 396 is qua particular companiesand 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, theBCentral Government order, made under Section 396, must conform tothe fundamental rights guaranteed by Articles 14 and 19(1)(g) of theConstitution of India. This Court has held in a catena of decisions that itis the substance of what is effected that counts when it comes to infractionof 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 dissentingCopinion, stated:

“A fundamental right is transcendental in nature and it controlsboth the legislative and the executive acts. Article 13 explicitlyprohibits the State from making any law which takes away orabridges any fundamental right and declares the law to the extentDof the contravention as void. The law therefore must be carefullyscrutinized to ascertain whether a fundamental right is infringed.It is not the form but the substance that matters. If the legislaturein effect constitutes a judicial tribunal, but calls it an authority, thetribunal does not become any the less a judicial tribunal. Therefore,Ethe correct approach is first to ascertain with exactitude the contentand scope of the fundamental right and then to scrutinize theprovisions of the Act to decide whether in effect and substance,though not in form, the said right is violated or curtailed. Otherwisethe fundamental right will be lost or unduly restricted in ouradherence to the form to the exclusion of the content.”

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(at p. 303)

Likewise, in Hamdard Dawakhana (Wakf) Lal Kuan, Delhiand Anr. v. Union of India and Ors., [1960] 2 SCR 671, it was heldas under:

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“In the present case therefore (1) the advertisements affected bythe Act do not fall within the words freedom of speech withinArticle 19(1)(a); (2) the scope and object of the Act, its truenature and character is not interference with the right of freedomof speech but it deals with trade or business; and (3) there is nodirect abridgement of the right of free speech and a mere incidental H

interference with such right would not alter the character of thelaw; Ram Singh v. State of Delhi [(1951) SCR 451-455]; ExpressNewspapers (Private) Ltd. v. Union of India [(1959) SCR 12,123-133]

It is not the form or incidental infringement that determinesthe constitutionality of a statute in reference to the rightsguaranteed in Art. 19(1), but the reality and substance. The Actread as a whole does not merely prohibit advertisements relatingto drugs and medicines connected with diseases expresslymentioned in s. 3 of the Act but they cover all advertisementswhich are objectionable or unethical and are used to promote self-medication or self-treatment. This is the content of the Act. Viewedin this way, it does not select any of the elements or attributes offreedom 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 interpretedin a broad way and not in a narrow and pedantic sense. Certainrights have been enshrined in our Constitution as fundamentaland, therefore, while considering the nature and content of thoserights the Court must not be too astute to interpret the language ofthe Constitution in so literal a sense as to whittle them down. Onthe other hand the Court must interpret the Constitution in a mannerwhich would enable the citizen to enjoy the rights guaranteed by itin the fullest measure subject, of course, to permissible restrictions.Bearing this principle in mind it would be clear that the right tofreedom of speech and expression carries with it the right to publishand circulate one’s ideas, opinions and views with completefreedom and by resorting to any available means of publication,subject again to such restrictions as could be legitimately imposedunder clause (2) of Article 19. ……… In Dwarkadas Shrinivasv. Sholapur Spinning & Weaving Co. Ltd. [(1954) SCR 674]this Court has pointed out that in construing the Constitution it isthe substance and the practical result of the act of the State thatshould be considered rather than its purely legal aspect. Thecorrect approach in such cases should be to enquire as to what in A

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substance is the loss or injury caused to the citizen and not merelywhat manner and method has been adopted by the State in placingthe restriction.”

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(at pp. 857-858)

A Constitution Bench in Ajay Hasia and Ors. v. Khalid MujibBSehravardi and Ors., (1981) 1 SCC 722 also stated:

“7. While considering this question it is necessary to bear in mindthat an authority falling within the expression “other authorities”is, by reason of its inclusion within the definition of ‘State’ in Article12, subject to the same constitutional limitations as the governmentand is equally bound by the basic obligation to obey theconstitutional mandate of the Fundamental Rights enshrined inPart III of the Constitution. We must therefore give such aninterpretation to the expression “other authorities” as will notstultify the operation and reach of the fundamental rights byenabling the government to its obligation in relation to theFundamental Rights by setting up an authority to act as itsinstrumentality or agency for carrying out its functions. Whereconstitutional fundamentals vital to the maintenance of humanrights are at stake, functional realism and not facial cosmeticsmust be the diagnostic tool, for constitutional law must seek thesubstance and not the form. Now it is obvious that the Governmentmay act through the instrumentality or agency of natural personsor it may employ the instrumentality or agency of juridical personsto carry out its functions. In the early days when the Governmenthad limited functions, it could operate effectively through naturalpersons constituting its civil service and they were found adequateto discharge governmental functions which were of traditionalvintage. But as the tasks of the government multiplied with theadvent of the welfare State, it began to be increasingly felt thatthe framework of civil service was not sufficient to handle thenew tasks which were often specialised and highly technical incharacter and which called for flexibility of approach and quickdecision making. The inadequacy of the civil service to deal withthese new problems came to be realised and it became necessaryto forge a new instrumentality or administrative device for handlingthese new problems. It was in these circumstances and with a C

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view to supplying this administrative need that the corporationcame into being as the third arm of the government and over theyears it has been increasingly utilised by the government for settingup and running public enterprises and carrying out other publicfunctions. ……”

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 Shriramraised a preliminary objection that the court should not proceed todecide these constitutional issues since there was no claim forcompensation originally made in the writ petition and these issuescould not be said to arise on the writ petition. Mr Divan concededthat the escape of oleum gas took place subsequent to the filing ofthe writ petition but his argument was that the petitioner couldhave applied for amendment of the writ petition so as to include aclaim for compensation for the victims of oleum gas but no suchapplication for amendment was made and hence on the writ petitionas it stood, these constitutional issues did not arise for consideration.We do not think this preliminary objection raised by Mr Divan issustainable. It is undoubtedly true that the petitioner could haveapplied for amendment of the writ petition so as to include a claimfor compensation but merely because he did not do so, theapplications for compensation made by the Delhi Legal Aid andAdvice Board and the Delhi Bar Association cannot be thrownout. These applications for compensation are for enforcement ofthe fundamental right to life enshrined in Article 21 of theConstitution and while dealing with such applications, we cannotadopt a hyper-technical approach which would defeat the ends ofjustice. This Court has on numerous occasions pointed out thatwhere there is a violation of a fundamental or other legal right ofa person or class of persons who by reason of poverty or disabilityor socially or economically disadvantaged position cannot approacha court of law for justice, it would be open to any public spiritedindividual or social action group to bring an action for vindicationof the fundamental or other legal right of such individual or classof individuals and this can be done not only by filing a regular writpetition but also by addressing a letter to the court. If this Court is A

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Aprepared to accept a letter complaining of violation of thefundamental right of an individual or a class of individuals whocannot approach the court for justice, there is no reason whythese applications for compensation which have been made forenforcement of the fundamental right of the persons affected bythe oleum gas leak under Article 21 should not be entertained.BThe court while dealing with an application for enforcement of afundamental right must look at the substance and not the form.We cannot therefore sustain the preliminary objection raised byMr Divan.”

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34. Various pre-requisites contained in the said Section must firstCbe satisfied before the Section can be said to operate. First and foremost,the Central Government has to be “satisfied”, meaning thereby, that itmust, on certain objective facts, come to a conclusion that amalgamationbetween two or more companies is necessary. This can only be done ifthe Central Government finds it “essential”, i.e., necessary to do so.DAlso, this can only be done in “public interest” (the Section originallycontained the expression “national interest”. By Amendment Act 65 of1960, “national interest” was substituted by “public interest”).

35. The Notes on Clauses relating to the original Section 396 readsas follows:E“Clause 366

“Clause 366—This is a new provision and it is intended to provide,at the instance of the Government, for the amalgamation of twoor more companies in the national interest. Occasionally, casesarise where such an amalgamation in the national interest is clearlya necessity. The observance of the usual procedure prescribedFby the existing Act in such cases will lead to prolonged delayswhich will be detrimental to the national interest. It has been madeclear that any order made by the Government should provide forthe old shareholders, and the old debenture holders and othercreditors, having the same interest in the company resulting fromthe amalgamation as they had in the original companies. Any orderGmade by the Government under this clause will be laid on thetable of both Houses of Parliament and will therefore be subjectto the Parliamentary scrutiny.”

What is important from the Notes on Clauses is the fact that it isonly “occasionally” that cases arise where an amalgamation in nationalH

interest is “clearly a necessity”. It is made clear that the reason forSection 396 is that the observance of the usual procedure prescribed bythe existing Act (namely, that contained in Sections 391 to 394) in suchcases will lead to prolonged delays, which will be detrimental to nationalinterest. The fact that the procedure contained in Sections 394 and 395need not be carried out is made clear in the non-obstante clause containedin Section 396(1).

36. Section 396(3), (3A), and (4) are also important. A conditionprecedent to the passing of an order by the Central Government underthis Section is that every member or creditor of each of the companiesbefore amalgamation shall have, as nearly as may be, the same interestin or rights against the company resulting from the amalgamation as hehad in the erstwhile company either as a member or a creditor, and ifthis is not so, such member or creditor shall be entitled to compensationwhich is to be assessed by such authority as may be prescribed. Fromthe 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 unlessthe time for preferring an appeal under sub-section (3A) has expired, orwhere any such appeal has been preferred, the appeal has been finallydisposed of. This makes it clear that unless an order of compensation isfirst made under sub-section (3), and an appeal therefrom has either notbeen filed or has been disposed of, no order of amalgamation can bemade. Another condition precedent is an inbuilt provision for naturaljustice, namely, that a proposed draft order has first been sent to each ofthe companies concerned. The companies may then send suggestionsor objections to the Central Government, which the Central Governmentmust first consider before passing the final order. Such objections andsuggestions can also be sent from any class of shareholders of either ofthe companies, or from any creditors or class of creditors of either ofthe companies.

“WHERETHECENTRAL GOVERNMENTISSATISFIED”

37. With regard to similar language that is contained in Section237(b) of the Companies Act, 1956, this Court, in Barium Chemicals(supra), contained separate opinions as to what the phrase “in the opinionof” contained in Section 237(b) meant. In Rohtas Industries (supra),this Court adopted the test laid down by Hidayatullah, J. (as he thenwas) and Shelat, J. as follows:

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“Before taking action under Section 237(b)(i) and (ii), theCentral Government has to form an opinion that there arecircumstances suggesting that the business of the company is beingconducted with intent to defraud its creditors, members or anyother persons, or otherwise for a fraudulent or unlawful purposeor in a manner oppressive to any member or that the companywas formed for any fraudulent or unlawful purpose or that thepersons concerned in the formation or the management of itsaffairs have in connection therewith been guilty of fraud,misfeasance or other misconduct towards the company or towardsany of its members.

From the facts placed before us, it is clear that the Governmenthad not bestowed sufficient attention to the material before it beforepassing the impugned order. It seems to have been oppressed bythe opinion that it had formed about Shri S.P. Jain. From thearguments advanced by Mr Attorney, it is clear that but for theassociation of Mr S.P. Jain with the appellant-company, theinvestigation in question, in all probabilities would not have beenordered. Hence, it is clear that in making the impugned orderirrelevant considerations have played an important part.

The power under Sections 235 to 237 has been conferred onthe Central Government on the faith that it will be exercised in areasonable manner. The department of the Central Governmentwhich deals with companies is presumed to be an expert body incompany law matters. Therefore, the standard that is prescribedunder Section 237(b) is not the standard required of an ordinarycitizen but that of an expert. The learned Attorney did not disputethe position that if we come to the conclusion that no reasonableauthority would have passed the impugned order on the materialbefore it, then the same is liable to be struck down. This positionis also clear from the decision of this Court in Barium Chemicalsand Anr. v. Company Law Board and Anr. [(1966) Supp SCR311].

(at p. 119)

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The decision of this Court in Barium Chemicals case whichconsidered 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 Section237(b) is a discretionary power the first requirement for its exerciseis the honest formation of an opinion that the investigation isnecessary and the further requirement is that “there arecircumstances suggesting” the inference set out in the section; anaction not based on circumstances suggesting an inference of theenumerated kind will not be valid; the formation of the opinion issubjective but the existence of the circumstances relevant to theinference as the sine qua non for action must be demonstratable;if their existence is questioned, it has to be proved at least primefacie; it is not sufficient to assert that those circumstances existand give no clue to what they are, because the circumstancesmust be such as to lead to conclusions of certain definiteness; theconclusions must relate to an intent to defraud, a fraudulent orunlawful purpose, fraud or misconduct. In other words they heldthat although the formation of opinion by the Central Governmentis a purely subjective process and such an opinion cannot bechallenged in a court on the ground of propriety, reasonablenessor sufficiency, the authority concerned is nevertheless required toarrive at such an opinion from circumstances suggesting theconclusion set out in sub-clauses (i), (ii) and (iii) of Section 237(b)and the expression “circumstances suggesting” cannot supportthe construction that even the existence of circumstances is amatter of subjective opinion. Shelat, J. further observed that it ishard to contemplate that the Legislature could have left to thesubjective process both the formation of opinion and also theexistence of circumstances on which it is to be founded; it is alsonot reasonable to say that the clause permitted the Authority tosay that it has formed the opinion on circumstances which in itsopinion exist and which in its opinion suggest an intent to defraudor a fraudulent or unlawful purpose.

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judicial review. Our Brother Bachawat, J., the other learned Judgein that Bench did not express any opinion on this aspect of thecase. Under these circumstances it has become necessary for usto sort out the requirements of Section 237(b) and to see which ofthe two contradictory conclusions reached in Barium Chemicalscase is in our judgment, according to law. But before proceedingto analyse Section 237(b) we should like to refer to certain decisionscited at the bar bearing on the question under consideration.

(at pp. 120-121)

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(at pp. 120-121)

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“Coming back to Section 237(b), in finding out its true scope wehave to bear in mind that that section is a part of the schemereferred to earlier and therefore the said provision takes its colourfrom Sections 235 and 236. In finding out the legislative intent wecannot ignore the requirements of those sections. In interpretingSection 237(b) we cannot ignore the adverse effect of theinvestigation on the company. Finally we must also rememberthat the section in question is an inroad on the powers of thecompany to carry on its trade or business and thereby an infractionof the fundamental right guaranteed to its shareholders underArticle 19(1)(g) and its validity cannot be upheld unless it isconsidered that the power in question is a reasonable restrictionin the interest of the general public. In fact the vires of that provisionwas upheld by majority of the Judges constituting the Bench inBarium Chemicals case principally on the ground that the powerconferred on the Central Government is not an arbitrary powerand the same has to be exercised in accordance with the restraintsimposed by law. For the reasons stated earlier we agree with theconclusion reached by Hidayatullah, J. and Shelat, JJ. in BariumChemicals case that the existence of circumstances suggestingthat the company’s business was being conducted as laid down insub-clause(1) or the persons mentioned in sub-clause (2) wereguilty of fraud or misfeasance or other misconduct towards thecompany or towards any of its members is a condition precedentfor the Government to form the required opinion and if the existenceof those conditions is challenged, the courts are entitled to examinewhether those circumstances were existing when the order was made. In other words, the existence of the circumstances inquestion are open to judicial review though the opinion formed bythe Government is not amenable to review by the courts. As heldearlier the required circumstances did not exist in this case.”

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 asituation where the Indian Electricity Act, 1910 was amended by theU.P. Act 30 of 1961, by which, Section 3(2)(e)(ii) provided that the grantof a licence shall not, in any way, hinder or restrict the supply of energyby the State Government or the State Electricity Board within the samearea where the State Government deems such supply “necessary inpublic interest”. In that case, the High Court had observed that the StateGovernment was the sole judge of whether the direct supply of energywas or was not in public interest, the nature of the power beingsubjective. This Court, in upsetting the High Court’s view, held:

“11. We are unable to agree with that view. By Section 3(2)(e) asamended by the U.P. Act 30 of 1961, the Government is authorisedto supply energy to consumers within the area of the licensee incertain conditions: exercise of the power is conditioned by theGovernment deeming it necessary in public interest to make suchsupply. If challenged, the Government must show that exercise ofthe power was necessary in public interest. The Court is therebynot intended to sit in appeal over the satisfaction of the Government.If there be prima facie evidence on which a reasonable body ofpersons may hold that it is in the public interest to supply energydirectly to the consumers, the requirements of the statute arefulfilled. Normally a licensee of electrical energy, though he hasno monopoly, is the person through whom electrical energy wouldbe distributed within the area of supply, since the licensee has tolay down electric supply-lines for transmission of energy and tomaintain its establishment. An inroad may be made in that right inthe conditions which are statutorily prescribed. In our judgment,the satisfaction of the Government that the supply is necessary inthe public interest is in appropriate cases not excluded from judicialreview.”

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39. Close upon the heels of these judgments, this Court, afterconsidering Barium Chemicals (supra) and Rohtas Industries (supra),restated the test as to judicial review of administrative action in RampurDistillery Co. Ltd. v. Company Law Board, [1970] 2 SCR 177 asfollows:

“The scheme of the section implies investigation and a decisionon the matters set out therein. Section 326 lays down conditionsby sub-section (1)(a) in which the Central Government mayoverride the resolution of the general body of share-holders incertain specified conditions. Upon the Central Government isimposed 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 isenacted in form negative, in substance it confers power upon theGovernment subject to the restrictions imposed by clauses (a),(b) and (c), to refuse to accord approval. Sub-section (2) imposesupon the Central Government the duty not to accord approval toappointment or re-appointment of a proposed managing agentunless the Government is satisfied that the managing agent is a fitand proper person to be appointed, that the conditions of themanaging agency agreement are fair and reasonable and that themanaging agent has fulfilled the conditions which the CentralGovernment required him to fulfil. Thereby the CentralGovernment is not made the final arbiter of the existence of thegrounds on which the satisfaction may be founded. The satisfactionof the Government which is determinative is satisfaction as to theexistence of certain objective facts. The recital about satisfactionmay be displaced by showing that the conditions did not exist, orthat no reasonable body of persons properly versed in law couldhave reached the decision that they did.

The Courts, however, are not concerned with the sufficiency ofthe grounds on which the satisfaction is reached. What is relevantis the satisfaction of the Central Government about the existenceof the conditions in clauses (a), (b) and (c) of sub-section (2) ofSection 326. The enquiry before the Court, therefore, is whetherthe Central Government was satisfied as to the existence of theconditions. The existence of the satisfaction cannot be challengedexcept probably on the ground that the authority acted mala fide.

But if in reaching its satisfaction the Central Governmentmisapprehended the nature of the conditions, or proceeded uponirrelevant materials, or ignores relevant materials, the jurisdictionof the Courts to examine the satisfaction is not excluded. ……”

(at p. 183)

In M.A. Rasheed and Ors. v. State of Kerala, [1975] 2 SCR93, after following Rohtas Industries (supra), the test for judicial reviewof administrative decisions was stated most felicitously by Ray, C.J.thus:

“Administrative decisions in exercise of powers even if conferredin subjective terms are to be made in good faith on relevantconsideration. The courts inquire whether a reasonable man couldhave come to the decision in question without misdirecting himselfon the law or the facts in a material respect. The standard ofreasonableness to which the administrative body is required toconform may range from the courts’ own opinion of what isreasonable to the criterion of what a reasonable body might havedecided. The courts will find out whether conditions precedent tothe formation of the opinion have a factual basis.”

In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81,this Court exhaustively set out parameters for judicial review of thesubjective satisfaction of the detaining authority in a preventive detentioncase. This Court held:

“9. But that does not mean that the subjective satisfaction of thedetaining authority is wholly immune from judicial reviewability.The courts have by judicial decisions carved out an area, limitedthough it be, within which the validity of the subjective satisfactioncan yet be subjected to judicial scrutiny. The basic postulate onwhich the courts have proceeded is that the subjective satisfactionbeing a condition precedent for the exercise of the powerconferred on the Executive, the Court can always examinewhether the requisite satisfaction is arrived at by the authority : ifit is not, the condition precedent to the exercise of the powerwould not be fulfilled and the exercise of the power would bebad. There are several grounds evolved by judicial decisions for A

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saying that no subjective satisfaction is arrived at by the authorityas required under the statute. The simplest case is whether theauthority has not applied its mind at all; in such a case the authoritycould not possibly be satisfied as regards the fact in respect ofwhich 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 dishonestlyor for an improper purpose : such a case would also negative theexistence of satisfaction on the part of the authority. The existenceof “improper purpose”, that is, a purpose not contemplated by thestatute, has been recognised as an independent ground of controlin several decided cases. The satisfaction, moreover, must be asatisfaction of the authority itself, and therefore, if, in exercisingthe power, the authority has acted under the dictation of anotherbody as the Commissioner of Police did in Commissioner ofPolice v. Gordhandas Bhanji [AIR 1952 SC 16 : 1952 SCR135] and the officer of the Ministry of Labour and National Servicedid in Simms Motor Units Ltd. v. Minister of Labour andNational Service [(1946) 2 All ER 201] the exercise of the powerwould be bad and so also would the exercise of the power bevitiated where the authority has disabled itself from applying itsmind to the facts of each individual case by self-created rules ofpolicy or in any other manner. The satisfaction said to have beenarrived at by the authority would also be bad where it is based onthe application of a wrong test or the misconstruction of a statute.Where this happens, the satisfaction of the authority would not bein respect of the thing in regard to which it is required to be satisfied.Then again, the satisfaction must be grounded “on materials whichare of rationally probative value”. Machindar v. King [AIR 1950FC 129 : 51 Cri LJ 1480 : 1949 FCR 827]. The grounds on whichthe satisfaction is based must be such as a rational human beingcan consider connected with the fact in respect of which thesatisfaction is to be reached. They must be relevant to the subject-matter of the inquiry and must not be extraneous to the scope andpurpose of the statute. If the authority has taken into account, itmay even be with the best of intention, as a relevant factorsomething which it could not properly take into account in decidingwhether or not to exercise the power or the manner or extent to

which it should be exercised, the exercise of the power would bebad. 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 byimplication matters which the authority ought to have regard to,then, in exercising the power, the authority must have regard tothose matters. The authority must call its attention to the matterswhich it is bound to consider.”

In Tata Cellular v. Union of India (1994) 6 SCC 651, after anexhaustive review of the latest English judgments, this Court held:

“77. The duty of the court is to confine itself to the question oflegality. Its concern should be:

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 havereached or,

5. abused its powers.

Therefore, it is not for the court to determine whether a particularpolicy or particular decision taken in the fulfilment of that policy isfair. It is only concerned with the manner in which those decisionshave been taken. The extent of the duty to act fairly will varyfrom case to case. Shortly put, the grounds upon which anadministrative action is subject to control by judicial review canbe classified as under:

(i) Illegality: This means the decision-maker must understand cor-rectly the law that regulates his decision-making power and mustgive effect to it.

(ii) Irrationality, namely, Wednesbury unreasonableness.

(iii) Procedural impropriety.

The above are only the broad grounds but it does not rule outaddition 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 A

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Adevelopment, namely, the possible recognition of the principle ofproportionality. In all these cases the test to be adopted is that thecourt should, “consider whether something has gone wrong of anature and degree which requires its intervention”.”

40. In Bhikhubhai Vithlabhai Patel v. State of Gujarat, (2008)B4 SCC 144, this Court, in an elaborate judgment, referred to and fol-lowed several judgments, including Barium Chemicals (supra),in thecontext of Section 17 of the Gujarat Town Planning and Urban Devel-opment Act, 1976, by which, if the State Government is of opinion thatsubstantial modifications in the draft development plan are necessary, itmay publish such modifications. This Court held:C

“20. The State Government is entitled to publish the modificationsprovided it is of opinion that substantial modifications in the draftdevelopment plan are necessary. The expression “‘is of opinion’that substantial modifications in the draft development plan arenecessary” is of crucial importance. Is there any material availableon record which enabled the State Government to form its opinionthat substantial modifications in the draft development plan werenecessary? The State Government’s jurisdiction to make substantialmodifications in the draft development plan is intertwined withthe formation of its opinion that such substantial modifications arenecessary in the draft development plan. The State Governmentwithout forming any such opinion cannot publish the modificationsconsidered necessary along with notice inviting suggestions orobjections. We have already noticed that as on the day when theMinister concerned took the decision proposing to designate theland for educational use the material available on record were:

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(a) the opinion of the Chief Town Planner; (b) note dated 23-4-2004 prepared on the basis of the recordproviding the entire background of the previous litigation togetherwith the suggestion that the land should no more be reservedfor the purpose of South Gujarat University and after releasingthe lands from reservation, the same should be placed underthe residential zone.

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21. It is true that the State Government is not bound by suchopinion and is entitled to take its own decision in the matter providedthere is material available on record to form opinion that substantial H

modifications in the draft development plan were necessary.Formation of opinion is a condition precedent for setting the lawin motion proposing substantial modifications in the draftdevelopment plan.

22. Any opinion of the Government to be formed is not subject toobjective test. The language leaves no room for the relevance ofa judicial examination as to the sufficiency of the grounds on whichthe Government acted in forming its opinion. But there must bematerial based on which alone the State Government could formits opinion that it has become necessary to make substantialmodification in the draft development plan.

23. The power conferred by Section 17(1)(a)(ii) read with provisois a conditional power. It is not an absolute power to be exercisedin the discretion of the State Government. The condition isformation of opinion—subjective, no doubt—that it had becomenecessary to make substantial modifications in the draftdevelopment plan. This opinion may be formed on the basis ofmaterial sent along with the draft development plan or on thebasis of relevant information that may be available with the StateGovernment. The existence of relevant material is a preconditionto the formation of opinion. The use of word “may” indicates notonly a discretion but an obligation to consider that a necessity hasarisen to make substantial modifications in the draft developmentplan. It also involves an obligation to consider which of the severalsteps specified in sub-clauses (i), (ii) and (iii) should be taken.

24. The proviso opens with the words “where the StateGovernment is of opinion that substantial modifications in the draftdevelopment plan and regulations are necessary, …”. These wordsare indicative of the satisfaction being subjective one but theremust exist circumstances stated in the proviso which are conditionsprecedent for the formation of the opinion. Opinion to be formedby the State Government cannot be on imaginary grounds, wishfulthinking, however laudable that may be. Such a course isimpermissible in law. The formation of the opinion, thoughsubjective, must be based on the material disclosing that a necessityhad arisen to make substantial modifications in the draftdevelopment plan.

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A25. The formation of the opinion by the State Government is withreference to the necessity that may have had arisen to makesubstantial modifications in the draft development plan. Theexpression: “as considered necessary” is again of crucialimportance. The term “consider” means to think over; it connotesthat there should be active application of the mind. In other words,Bthe term “consider” postulates consideration of all the relevantaspects of the matter. A plain reading of the relevant provisionsuggests that the State Government may publish the modificationsonly after consideration that such modifications have becomenecessary. The word “necessary” means indispensable, requisite,Cindispensably requisite, useful, incidental or conducive, essential,unavoidable, impossible to be otherwise, not to be avoided,inevitable. The word “necessary” must be construed in theconnection in which it is used. (See Advanced Law Lexicon,P. Ramanatha Aiyar, 3[rd] Edn., 2005.)

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26. The formation of the opinion by the State Government shouldreflect intense application of mind with reference to the materialavailable on record that it had become necessary to proposesubstantial modifications to the draft development plan.”

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41. However, Shri Tushar Mehta, learned Solicitor General forIndia, relied upon M. Jhangir Bhatusha and Ors. v. Union of Indiaand Ors., 1989 Supp (2) SCC 201, in particular, the passage at page 208which reads as follows:

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“13. …… Now it is the Central Government which has to besatisfied, as the authority appointed by Parliament under Section25(2), that it is necessary in the public interest to make the specialorders of exemption. It has set out the reasons which prompted itto pass the orders. In our opinion, the circumstances mentioned inthose notifications cannot be said to be irrelevant or unreasonable.It is not for this Court to sit in judgment on the sufficiency of thosereasons. The limitations on the jurisdiction of the court in caseswhere the satisfaction has been entrusted to executive authorityto judge the necessity for passing orders is well defined and hasbeen long accepted.”

These observations were made in the context of an argumentthat differential treatment was accorded to the State TradingCorporation vis-à-vis private importers in that the customs duty for theState Trading Corporation had been reduced by notification underSection 25(2) of the Customs Act, 1962. What is important to note isthat judicial review consisted of examining whether the reasons whichprompted the Government to pass the exemption orders could be said tobe irrelevant or unreasonable. If so, the orders would be struck down inexercise of judicial review.

42. Thus, at the very least, it is clear that the Central Government’ssatisfaction must be as to the conditions precedent mentioned in theSection as correctly understood in law, and must be based on facts thathave been gathered by the Central Government to show that theconditions precedent exist when the order of the Central Government ismade. There must be facts on which a reasonable body of personsproperly instructed in law may hold that it is essential in public interest toamalgamate two or more companies. The formation of satisfaction cannotbe on irrelevant or imaginary grounds, as that would vitiate the exerciseof power.

“ESSENTIAL”

43. The expression “essential” has been defined in P. RamanathAiyer’s Law Lexicon (4[th] Edn.) as follows:

“Essential. Indispensably necessary; important in the highestdegree: requisite that which is required for the continued existenceof a thing.”

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

“essential, adj. (14c) 1. Of, relating to, or involving the essenceor 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, thisCourt dealt with an argument that there is no guideline contained inSection 3(1) of the Prevention of Corruption Act, 1988, when the Section A

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Aempowers the Government to appoint as many Special Judges “as maybe necessary”. It was stated that this word has a precise meaning andmeans “what is indispensable, needful or essential” [see paragraph 14].It is thus clear that the Central Government’s mind has to be applied towhether a compulsory amalgamation under Section 396 is indispensablynecessary, important in the highest degree, and whether suchBamalgamation is both basic and necessary.

“PUBLIC INTEREST”

45. The third pre-requisite of Section 396 is that the CentralGovernment must apply its mind when compulsorily amalgamating twoCor more companies in the public interest. “Public interest” is an expressionwhich is wide and amorphous and takes colour from the context in whichit is used. However, like the expression “public purpose”, what is importantto be noted is that public interest is the general interest of the community,as distinguished from the private interest of an individual [seeState ofDBihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga andOrs., [1952] 3 SCR 889 at pp. 1073-1075].

46. This is echoed in Manimegalai v. Special Tehsildar (LandAcquisition Officer) Adi Dravidar Welfare, (2018) 13 SCC 491 asfollows:

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“14. Similarly, public purpose is not capable of precise definition.Each case has to be considered in the light of the purpose forwhich acquisition is sought for. It is to serve the general interestof the community as opposed to the particular interest of theindividual. Public purpose broadly speaking would include theFpurpose in which the general interest of the society as opposed tothe particular interest of the individual is directly and vitallyconcerned. Generally, the executive would be the best judge todetermine whether or not the impugned purpose is a public purpose.Yet it is not beyond the purview of judicial scrutiny. The interestGof a section of the society may be public purpose when it isbenefitted by the acquisition. The acquisition in question mustindicate that it was towards the welfare of the people and not tobenefit a private individual or group of individuals joined collectively. Therefore, acquisition for anything which is not for apublic purpose cannot be done compulsorily.”

47. In the context of the Motor Vehicles Act, 1939, in RameshwarPrasad and Ors. v. State of U.P. and Ors., (1983) 2 SCC 195, thisCourt held:

“19. ……… What does Section 43-A(1) after all say? It saysthat the State Government may issue such directions of a generalcharacter as it may consider necessary in the public interest. Whatis the meaning of the term “public interest”? In the context of theAct, it takes within its fold several factors such as, the maximumnumber of permits that may be issued on a route or in any areahaving regard to the needs and convenience of the travelling public,the non-availability of sufficient number of stage carriage servicesin other routes or areas which may be in need of running ofadditional services, the problems of law and order, availability offuel, problems arising out of atmospheric pollution caused by alarge number of motor vehicles operating in any route or area, thecondition of roads and bridges on the routes, uneconomic runningof stage carriage services leading to elimination of small operatorsand employment of more capital than necessary in any sectorleading to starvation of capital investment in other sectors etc.Public interest under the Act does not mean the interest of theoperators or of the passengers only. We have to bear in mind thatlike every other economic activity the running of stage carriageservice is an activity which involves use of scarce or limitedproductive resources. Motor transport involves a huge capitalinvestment on motor vehicles, training of competent drivers andmechanics, establishment of workshops, construction of safe roadsand bridges, deployment of sufficient number of policemen topreserve law and order and several other matters. To say thatlarger the number of stage carriages in any route or area moreconvenient it would be to the members of the public is anoversimplification of a problem with myriad facets affecting thegeneral public. If we run through the various provisions of the Act A

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it becomes clear how much attention is given by it to variousmatters affecting public interest. There are provisions relating tolicensing of drivers on the basis of their competence, licensing ofconductors, specifications to which the motor vehicles shouldconform, coordination of road and rail transport, prevention ofdeterioration of the road system, prevention of uneconomiccompetition among motor vehicles, fixation of reasonable fare,compliance by motor vehicles with the prescribed timetable,construction of bus stands with necessary amenities, maintenanceof standards of comfort and cleanliness in the vehicles,development of inter-state tourist traffic and several other matterswith the object of making available adequate and efficient transportfacilities to all parts of the country. Any direction given by theState Government under Section 43-A of the Act should, therefore,be in conformity with all matters regarding which the statute hasmade provision. In this situation to say that any number of permitscan be issued to any eligible operator without any upper limit is tooverstep the limits of delegation of statutory power and to make amockery of an important economic activity like the motortransport.”

48. In Janata Dal v. H.S. Chowdhary and Ors., (1992) 4 SCC305, this Court referred to Stroud’s Judicial Dictionary, which defines“public interest” thus:

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

“Public interest — 1. A matter of public or general interestdoes not mean that which is interesting as gratifying curiosityor a love of information or amusement; but that in which aclass of the community have a pecuniary interest, or someinterest 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 (6[th] edn.), ‘public interest’ isdefined as follows:

“Public Interest — Something in which the public, thecommunity at large, has some pecuniary interest, or someinterest by which their legal rights or liabilities are affected. Itdoes not mean anything so narrow as mere curiosity, or as theinterests of the particular localities, which may be affected bythe matters in question. Interest shared by citizens generally inaffairs of local, state or national government ……”

49. In Municipal Corporation of the City of Ahmedabad andOrs. v. Jan Mohd. Usmanbhai and Anr., (1986) 3 SCC 20, this Courtstated that the expression “in the interest of the general public” is ofwide import comprehending public order, public health, public security,morals, economic welfare of the community, and the objects mentionedin 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” hascome to be considered in several decisions and it has been heldthat it would comprise within its ambit interests like public healthand morals (refer to State of Maharashtra v. HimmatbhaiNarbheram Rao [AIR 1970 SC 1157 : (1969) 2 SCR 392]),economic stability (State of Assam v. Sristikar Dowerah [AIR1957 SC 414]), stability of the country, equitable distribution ofessential commodities at fair prices (Union of India v. BhanamalGulzarimal Ltd. [AIR 1960 SC 475 : 1960 Cri LJ 664]) formaintenance of purity in public life, prevention of fraud and similarconsiderations. ……”

51. Coming nearer home, Hindustan Lever Employees’ Unionv. Hindustan Lever Ltd. and Ors., 1995 Supp (1) SCC 499, Sahai, J.,in a concurring judgment, referred to “public interest” in Section 394 ofthe Companies Act as follows:

“5. What requires, however, a thoughtful consideration is whetherthe company court has applied its mind to the public interestinvolved in the merger. In this regard the Indian law is a departurefrom the English law and it enjoins a duty on the court to examine AB

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objectively and carefully if the merger was not violative of publicinterest. No such provision exists in the English law. What wouldbe public interest cannot be put in a strait-jacket. It is a dynamicconcept which keeps on changing. It has been explained in Black’sLaw Dictionary as:

“Something in which the public, the community at large, hassome pecuniary interest, or some interest by which their legalrights or liabilities are affected. It does not mean anything sonarrow as mere curiosity, or as the interests of the particularlocality which may be affected by the matters in question.Interest shared by citizens generally in affairs of local, State ornational Government.”

It is an expression of wide amplitude. It may have differentconnotation and understanding when used in service law and ayet different meaning in criminal law than civil law and its shademay be entirely different in company law. Its perspective maychange when merger is of two Indian companies. But when it iswith subsidiary of foreign company the consideration may beentirely different. It is not the interest of shareholders or theemployees only but the interest of society which may have to beexamined. And a scheme valid and good may yet be bad if it isagainst public interest.

6. Section 394 casts an obligation on the court to be satisfied thatthe scheme for amalgamation or merger was not contrary to publicinterest. The basic principle of such satisfaction is none otherthan the broad and general principles inherent in any compromiseor settlement entered between parties that it should not be unfairor contrary to public policy or unconscionable. In amalgamationof companies, the courts have evolved, the principle of “prudentbusiness management test” or that the scheme should not be adevice to evade law. But when the court is concerned with ascheme of merger with a subsidiary of a foreign company thenthe test is not only whether the scheme shall result in maximisingprofits of the shareholders or whether the interest of employeeswas protected but it has to ensure that merger shall not result in

impeding promotion of industry or shall obstruct growth of nationaleconomy. Liberalised economic policy is to achieve this goal. Themerger, therefore, should not be contrary to this objective. Relianceon English decisions Hoare & Co. Ltd., Re [1933 All ER Rep105, Ch D] and Bugle Press Ltd., Re [1961 Ch 270 : (1960) 1 AllER 768 : (1960) 2 WLR 658] that the power of the court is to besatisfied only whether the provisions of the Act have been compliedwith or that the class or classes were fully represented and thearrangement was such as a man of business would reasonablyapprove between two private companies may be correct and maynormally be adhered to but when the merger is with a subsidiaryof a foreign company then economic interest of the country mayhave to be given precedence. The jurisdiction of the court in thisregard is comprehensive.”

52. In Bihar Public Service Commission v. Saiyed HussainAbbas Rizwi and Anr., (2012) 13 SCC 61, this Court referred to “publicinterest” in the context of service law as follows:

“22. The expression “public interest” has to be understood in itstrue connotation so as to give complete meaning to the relevantprovisions of the Act. The expression “public interest” must beviewed in its strict sense with all its exceptions so as to justifydenial of a statutory exemption in terms of the Act. In its commonparlance, the expression “public interest”, like “public purpose”,is not capable of any precise definition. It does not have a rigidmeaning, is elastic and takes its colour from the statute in which itoccurs, the concept varying with time and state of society and itsneeds (State of Bihar v. Kameshwar Singh [AIR 1952 SC 252]).It also means the general welfare of the public that warrantsrecognition and protection; something in which the public as awhole has a stake [Black’s Law Dictionary (8[th] 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:

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A“welfare of the general public (in contrast to the selfish interest ofa person, group, or firm) in which the whole society has a stakeand which warrants recognition, promotion, and protection by thegovernment and its agencies. Despite the vagueness of the term,public interest is claimed generally by governments in matters ofstate secrecy and confidentiality. It is approximated by comparingBexpected gains and potential costs or losses associated with adecision, policy, program, or project.”

54. In the context of compulsory amalgamation of two or moreCcompanies, the expression “public interest” would mean the welfare ofthe 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 essentialto the nation so that they may contribute to the nation’s welfare andprogress, and in so doing, may also provide much needed employment.D“Public interest” in this context would, therefore, mean the combining ofresources of two or more companies so as to impact production andconsumption of goods and services and employment of persons relatablethereto for the general benefit of the community. Conversely, any actionthat impedes promotion of industry or obstructs growth which is in nationalEor public interest would run counter to public interest as mentioned inthis Section.

55. At this juncture, we must first see whether each of theconditions precedent to the applicability of Section 396 applies to thefacts of the present case. Insofar as the Central Government beingF“satisfied” is concerned, the following facts which the CentralGovernment has taken into account, based upon the Grant Thorntonreport and the FMC order dated 17.12.2013, are as follows:

55.1 The Grant Thornton report does indeed begin with adisclaimer, which reads as follows:

G“4. Limitations

4.1. Our findings are based upon the information made availableto us and we have not independently verified or validated theinformation.

4.2. Our work did not constitute an audit under any accountingstandards and the scope of our work was significantly differentfrom that of a statutory audit. Hence it cannot be relied upon toprovide the same level of assurance as a statutory audit.

4.3. Work done by us was as considered necessary at that pointof time to reflect the scope of work and rigour required.

5. Restrictions

5.1. Our reports and comments are confidential in nature andnot intended for general circulation or publication, nor are they tobe quoted or referred to in whole or in part, without our priorconsent in each specific instance. Such consent shall not beunreasonably withheld. NSEL and FMC shall have no authorityor ability to modify our findings in any manner. We disclaim allresponsibility 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 ofthis paragraph. Should additional information or documentationbecome available which impacts upon conclusions reached in ourreports, we reserve the right to amend our findings and reportingaccordingly. Further, comments in our reports are not intended,nor should they be interpreted to be, legal advice or opinion.”

However, the said report in the executive summary states:

“B. Executive Summary

This executive summary is to be read in conjunction with the wholereport and should not be treated as a standalone document.

Financing Business

1.1 The NSEL exchange platform was being used to conduct afinancing business.

Indian Bullion Market Association (‘IBMA’) enabled large volumesof trading by a related party on FTIL group exchanges (NSELand Multi-Commodity Exchange of India Limited (‘MCX’).)

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[2019] 8 S.C.R.

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1.2 Grant Thornton observed that a large volume of NSELexchange 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 same parties atGa pre-determined price and always registering a profit on the long-termpositions as illustrated below:

1.3 These long-term contracts (e.g. T+25) were first traded onthe NSEL exchange in September 2009. The Board of NSELratified the circulars introducing such long-term contracts over aperiod beginning November 2009.

1.4 Further evidence was obtained with regards the existence ofa financing business, such as presentations which stated that afixed rate of return was guaranteed on investing in certain productson the NSEL exchange.

Several internal (NSEL) presentations were found, upon a reviewof e-mail databases, setting out a yield (e.g. 16%) as an opportunityfor investors for trading in certain products on the NSEL exchange.

An external presentation was also obtained which had been madeby a brokerage house (Geojit Comtrade Ltd.) for their clientsclaiming a fixed return on investments made on the NSELexchange. Further, this presentation, declared that actual deliveryof stocks in such transactions would not be required.

1.5 Grant Thornton also obtained evidence of repeatedcontraventions of NSEL exchange rules and bye-laws whichfacilitated such financing transactions to continue and grow insize as below:

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Repeated Defaults: As per the NSEL exchange rules a memberwho does not have sufficient collateral/monies etc. to dischargehis obligations would not be allowed to trade further. This rulewas overridden on a recurring basis. Further despite repeateddefaults members were allowed to trade and increase theirexpenses. For example, Lotus Refineries had defaulted, as perthe 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 adefault position or whom had exhausted their margin limits ontrading were granted an exemption from margin requirements andthus allowed them to increase their exposure by engaging in newtrades. More than 1,800 margin limit exemptions were grantedbetween 2009 through to 2013.

Inadequate monitoring of member collateral: NSEL did not carryout any diligence to establish the existence of stock at membermanaged warehouses, upon which trades were being executed.Grant Thornton carried out a stock verification exercise and foundsignificant shortages vis-à-vis expected collateral.

Related Party Transactions

1.6 IBMA is registered as a client with Karvy Comtrade limitedfor executing trades on futures commodity exchange like MCXand NCDEX.

SNP Designs Private Limited (SNP) is a client of IBMA and themanaging 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 tradesexecuted on the MCX exchange on behalf of SNP, through KarvyComtrade Limited. Since April 2012 the total nominal value/volumetraded on MCX is approximately Rs. 40,000 crore.

In spite of heavy losses over the period, trading on behalf of SNPwas allowed to continue. No margin money was ever taken fromSNP. As at 20 September 2013, IBMA is due to receive Rs. 77crore on account of losses arising from trades executed on behalfof SNP. No monies have been received from SNP despitesubstantial amounts due.

Further, evidence was obtained that Rs. 10 crore was receivedfrom Mohan India which was credited to an IBMA Bank account.This was to be adjusted against the SNP receivable balance asper an instruction made by Mr. Anjani Sinha.

1.7. IBMA is a subsidiary of NSEL and has received funding foroperational needs on several occasions (including a loan of Rs. 5crore on 5 August 2013). IBMA is also a member on the NSELexchange and executes trades on behalf of clients. Margin limitexemptions have been granted to IBMA on a daily basis sinceFebruary 2010.

Corporate Governance & Risk Management

1.8 While the Bye-laws and Rules of the Exchange mandated theformation of various Committees to effectively manage theoperations of the Exchange; the Board failed to constitute 9 outof the 10 such committees. Further, there is no documentaryevidence to demonstrate whether the only committee formed(Membership Committee) was ever convened and hence, met itsobjectives.

1.9 The Board Meeting minutes regularly (eg. 11 June 2008, 15June 2009, 25 May 2011) stated that the Audit Committee haddetailed discussions on the Annual Financial Statements, theInternal Control Systems, reviewing the scope of Internal Auditfunctions, the performance of the statutory and internal auditors,the scope of work for the internal auditors, the planning of thestatutory audit for the current financial year, the payment of auditfees, the observations by the auditors in the draft Auditor Reportetc.

Upon review of the corresponding Audit Committee minutes wenoted no reference to discussions on Internal Control Systems,reviewing the scope of Internal Audit functions, performance ofinternal auditors and scope of work for the internal auditors.

Common members of the Board and the Audit Committee were:Mr. Jignesh ShahMr. Joseph MasseyMr. V. HariharanMr. Shreekant Javalgekar A

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1.10 The Board Meeting minutes of 31 March 2010 and 11 August2010 stated that the Company (NSEL) approached KarvyFinancial Services Limited (KFSL) to extend credit facilities to amember, specifically N.K. Proteins. Further the Board grantedand approved for issue of a guarantee to KFSL, to the extent ofRs. 14 crores, in respect of credit facilities extended to N.K.Proteins.

1.11 Our review of the Information technology identified severalindependent standalone systems wherein the flow of businesstransactions and related information between different systemsrequired manual intervention. Given the complexity and nature oftrading transaction such systems including warehouse (eWDMS),CNS, Delivery System (EMI) and trading should have beenintegrated.

Further, these systems did not produce/have any form of MISoperational. All reporting and analysis was done on manualworksheets. Our review of the Board minutes did not indicateany 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 therules and bye-laws of the NSEL exchange “Margin depositsreceived by clearing members from their constituent membersand clients in any forms shall be accounted for and maintainedseparately in segregated accounts and shall be used solely for thebenefit of the respective constituent members’ and client position.”

Grant Thornton found evidence (including e-mails) that clientmonies/settlement fund, was used regularly for fulfilling theobligations of defaulting members.

Further, NSEL utilised client monies/settlement fund for its ownbusiness purposes on a regular basis. For example, on 28 March,2013, Rs. 236.5 crore was withdrawn from the Settlement Fundin order to fund NSEL’s own business overdraft account.

There was a running deficit in the client monies/settlement fundbalance from April 2012 to June 2013. The finance team of FTILhad 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 Ministryof Consumer Affairs, the Government of India under Section 27of the Forward Contracts (Regulation) Act, 1952 (“FCRA”)exempted all forward contracts of one day duration for the saleand purchase of commodities traded on NSEL from the operationsof the said Act. Grant Thornton’s review of the type of tradesexecuted on the NSEL exchange indicates contravention to theexemption conditions granted.

During the period January 2011 to July 2013, FMC sought severalclarifications from NSEL on a number of complaints receivedfrom the public alleging forward trading and running a financingscheme. All these allegations were refuted by NSEL. Our analysisof such trades indicates misrepresentation by NSEL to FMC onseveral occasions.”

The report then goes on to say that there was no documentationin relation to warehouse activities for long term trades indicating thatsuch contracts were not secured by warehouse stocks. The warehouseswere customer managed warehouses and the underlying collateral werenot in custody of NSEL. NSEL did not have control over thesewarehouses and Grant Thornton was denied access to number ofwarehouses. The Warehouse Development and Regulatory Authorityhad in fact rejected NSEL’s application for registration of its warehousesway back on 16.05.2011. Notwithstanding such rejection, NSEL’s websiterepresented that its warehouses were registered with the Authority. Noverification or due diligence was ever undertaken by NSEL to ensurecompliance by its members of the conditions outlined in its rules andbyelaws even though in terms of NSEL byelaws, warehouse receiptissued by NSEL were meant to evidence a commodity being held in anapproved warehouse. NSEL did not insist upon deposit of commoditiesin the warehouses prior to executing sale transactions. Instead NSEL

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Aresorted to issuing Delivery Allocation Reports (DAR) representing togenuine investors that each transaction was delivery based and backedat the time of sale by the required quantity of commodities in itswarehouses.

55.2. The observations and conclusions of the FMC order datedB17.12.2013, based largely on this expert report, read as follows:

“15. Summary Observations and Conclusion:- After havingaccorded due consideration to all the objections and argumentsraised by the noticees vide their written submission as well as oralpresentations through their counsel, we now proceed to concludeour observations by taking a final view on the status of the fournoticees as ‘fit and proper persons’ in the succeeding paragraphs.

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15.1. Noticee No. 1:- Financial Technologies (India) Limited(FTIL): We have discussed the equity structure of NSEL, whichis wholly owned by FTIL. We have also pointed out that ShriJignesh Shah, Chairman-cum-Managing Director of FTIL hasbeen a Director on the Board and also functioning as Vice-Chairman and a key management person of NSEL since itsinception. Similarly, Shri Joseph Massey and Shri ShreekantJavalgekar have been Directors of the said company from itsvery beginning till the settlement crisis at NSEL first came to lightin July, 2013. The facts establishing the fraud involving a settlementdefault over Rs. 5,500 crores at NSEL have been discussed atlength in the SCNs issued to the noticees as well as reiterated,albeit illustratively by us at Para No. 14.7 of this Order. Theresponsibility of FTIL as the holding company possessing absolutecontrol over the governance of NSEL has also been highlighted.The control of FTIL over NSEL becomes further crystallized fromthe responses given by M/s. Grant Thornton before the Commissionon 03.12.2013 stating that Shri Jignesh Shah, Mr. Joseph Masseyand a host of other officials of FTIL reviewed the forensic auditreport and it was only after obtaining their clearance, the forensicauditor finalised its report.

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15.1.1. The violation of conditions prescribed in the exemptionnotification, trading in paired contracts to generate assured financialreturns under the garb of commodity trading, admission ofmembers who were thinly capitalised having poor net worth and H

giving margin exemptions to those who were repeatedly defaultingin settling their dues, poor warehousing facilities with no orinadequate 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 toShri Jignesh Shah, and apparent complicity with the defaulters todefraud the investors, etc., lead to an inescapable conclusion thata huge fraud was perpetrated by NSEL while having the presenceof two Board members of FTIL on the Board of NSEL, one ofwhom was the Vice-Chairman of the company.

15.1.2. The facts of the case and the manner in which the businessaffairs of NSEL were conducted leaves no doubt in our mindsthat FTIL, notwithstanding its contentions that it was ignorant ofthe affairs and conduct of NSEL, exerted a dominant influenceon the management, and directed, controlled and supervised thegovernance of NSEL. In the face of a fraud of such a magnitudeinvolving settlement crises of Rs. 5,500 crores owed to over 13,000sellers/investors on the trading platform of NSEL, FTIL, cannotseek to take refuge behind the corporate veil so as to unjustifiablyisolate itself from the fraudulent actions that took place at NSELresulting in such a huge payment crisis.

15.1.3. FTIL has its principal business of development of softwarewhich has become the technology platform for almost the entireindustry engaged in broking in shares and securities, commodities,foreign exchange etc. As has been demonstrated by FTIL in theirwritten submission, FTIL has floated a number of regulatedexchanges – both for securities and commodities derivatives – inIndia as well as abroad. NSEL was incorporated to provide atrading platform of commodity spot exchange on a pan-India basisfor the purpose of which apparently it sought and was grantedexemption from the operation of the FCRA, 1952. Since theobjective of the NSEL was promoting spot trading in commoditieson an electronic platform, its business model did not contemplateventuring into trading in forward contracts. FTIL had alreadypromoted MCX, a regulated exchange under FCRA, 1952, forthe purpose of trading in forward contracts. Therefore, havingsecured an exemption from the purview of FCRA, 1952 on theground that it was intended to promote spot trading, NSEL was A

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not authorised to allow trading in forward contracts through thescheme of paired contracts, thereby defying conditions stipulatedin the exemption notification granted to it. The motive behindallowing trading in forward contracts on the NSEL platform in acircuitous manner on NSEL which was neither recognized norregistered under FCRA, 1952 indicates mala fide intention on thepart of the promoter of FTIL to use the trading platform of itssubsidiary company for illicit gains away from the eyes ofRegulator. The fact that FTIL promoted NSEL sought exemptionfrom FCRA, 1952 provisions even before they had started anytrading or operation, points to their intention from the outset. Inthis manner, it misinterpreted the conditions stipulated in theexemption notification in collusion with a handful of members,which ultimately culminated in a massive fraud involving Rs. 5,500crores, which has the potential effect of eroding trust andconfidence in exchanges and financial markets.

15.1.4. Keeping in view the foregoing observations and the factswhich reveal misconduct, lack of integrity and unfair practices onthe part of FTIL in planning, directing and controlling the activitiesof its subsidiary company, NSEL, we conclude that FTIL, as theanchor 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 aforesaidregulated exchange. Therefore, in the public interest and inthe interest of the Commodities Derivatives Market whichis regulated under FCRA, 1952, the Commission holds thatFinancial Technologies (India) Ltd. (FTIL) is not a ‘fit andproper person’ to continue to be a shareholder of 2% ormore of the paid-up equity capital of MCX as prescribedunder the guidelines issued by the Government of Indiafor capital structure of commodity exchanges post 5-yearsof operation. It is further ordered that neither FTIL, nor anycompany/entity controlled by it, either directly or indirectly, shallhold any shares in any association/Exchange recognised by theGovernment or registered by the FMC in excess of the thresholdlimit of the total paid-up equity capital of such Association/Exchangeas prescribed under the commodity exchange guidelines and post5-year guidelines.”

(emphasis in original)

Based on the Grant Thornton report and the FMC order, the draftamalgamation order dated 21.10.2014 then relied on the same facts, asdid the final assessment order. The final amalgamation order also refersto an investigation under Section 209A into the affairs of NSEL whichled to infractions of Sections 211, 217 and 292A of the Companies Act.These are compoundable offences which have, in fact, been compoundedby 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 thefact that paired contracts in commodities were going on, and by April toJuly, 2013, 99% (and excluding E-series contracts), at least 46% of theturnover of NSEL was made up of such paired contracts. There is nodoubt that such paired contracts were, in fact, financing transactionswhich were distinct from sale and purchase transactions in commoditiesand were, thus, in breach of both the exemptions granted to NSEL, andthe FCRA. We have also seen that NSEL throughout kept representingthat it was, in fact, a commodity exchange dealing with spot deliveries.Apart from the Grant Thornton report and the FMC order, we have alsoseen that Shri Jignesh Shah, on 10.07.2013, made representations to theDCA and the FMC, in which he stated that NSEL had full stock ascollateral; 10-20% of open position as margin money; and that the stockcurrently held in NSEL’s 120 warehouses was valued at INR 6000 crore,all of which turned out to be incorrect. Further, there is no doubtwhatsoever that in July, 2013, as a result of NSEL stopping trading on itsexchange, a payment crisis of approximately INR 5600 crore arose.The further question that remains is whether, given these facts, theconditions precedent for the applicability of Section 396 were followed.

56. When it comes to whether the Central Government’ssatisfaction as to whether it was “essential” to amalgamate the aforesaidcompanies, what must be borne in mind is that NSEL had itself offereda settlement scheme to pay back the persons who have allegedly beenduped. It was found that this scheme could not really take off, as a resultof which, large amounts continued to be owed to such persons. Thatthis was the real concern of the FMC is clear from a letter dated18.08.2014 addressed by the FMC to the Secretary, Ministry of CorporateAffairs. This letter states:

“xxx xxx xxx

2. As apprised earlier, consequent to the suspension of tradingand a huge settlement default that took place at NSEL on A

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31.07.2007, the Government of India, Ministry of ConsumerAffairs, Food & Public Distribution, Department of ConsumerAffairs (DCA) vide its notification dated 6[th] August, 2013 (copyenclosed as Annexure II) inter-alia provided that settlement of alloutstanding one day forward contract at NSEL shall be done underthe supervision of FMC. In exercise of this supervisory role, theCommission has been continuously taking all possible steps andhas been regularly pursuing with NSEL to expedite the recoveryproceedings against the defaulters at its platform. To ensure bettermonitoring of NSEL’s compliance the Commission had vide No.8/1/2013 (1)-MD-1(1)(C)/Settlement (Vol.-IV) dated 29[th]November, 2013 (copy enclosed as Annexure III) constituted aMonitoring & Auction Committee (MAC) comprising therepresentatives of various members associations and investorsbodies to assist and advise the Commission on matters pertainingto the Commission’s supervisory role over the settlement ofoutstanding contracts at NSEL.

3. It is observed that even after one year’s incessant efforts andin spite of FMC’s active role in supervising the settlement ofcontracts, the settlement plan could not result in making anysubstantial payment to the investors as the process of recovery ofdues by NSELfrom the defaulting members is very slow. It issubmitted that, it is only the NSEL, which has the responsibility totake all possible coercive measures as per their rules/bye-lawsand other laws of the land, to ensure that the outstanding dues ofall investors are settled. However as on date, NSEL has beenable to make a payment of only Rs. 538.56 crores to its membersas against the payment dues of approximately Rs. 5500 crores.This amount also includes an amount of Rs. 179.26 croresborrowed by NSEL from its holding company, FTIL which wasdistributed to small participants. The representatives of membersassociations and investor bodies on the MAC in their meetingwith the Commission have represented the NSEL has lost itscredibility as an institution. Further the employee attrition in NSELin the recent months has been extremely high and it is learnt thatthe staff strength of NSEL has come down considerably, adverselyaffecting the recovery process. As per the information receivedfrom NSEL, the total employee count on NSEL rolls was 193 as on 31.07.2013 (when NSEL had suspended trading in one dayforward contracts) which came down to 33 on 31.07.2014. Themorale of the employees at NSEL is also very low. NSEL is alsoconfronted with a number of cases against it, which are pendingin the High Courts and MPID Court relating to its failure to makepayment to the investors. The company is hardly left with anyfinancial resources to meet even legal expenses apart from meetingstaff salaries and other expenses related to recovery process.The members of the Monitoring & Auction Committee haveexpressed their views that with the loss of credibility, weakOrganizational structure, depletion of man-power strength and lackof financial resources, NSEL has become totally ineffective inpursuing the recovery of the defaulted amounts from the defaultermembers.

4. It may be noted that NSEL is a subsidiary of FinancialTechnologies India Ltd. (FTIL) which holds 99.99% of the sharesof NSEL. Hence, for all practical purposes NSEL is a whollyowned subsidiary of FTIL and therefore it is the primaryresponsibility of the parent company, i.e. FTIL to own completeresponsibility for the affairs of its subsidiary company. In this regardattention is drawn to the order of the Commission No. 4/5/2013-MKT-I/B dated 17[th] December, 2013 (copy enclosed as AnnexureIV) in the matter of “Fit and Proper Person” status of M/s FTIL(another shareholder and promoter of MCX) and in the matter ofShri Jignesh Shah & Shri Joseph Massey ex-Directors & ShriShreekant Javalgekar ex-MD and CEO of MCX. Some of theimportant highlights of the said order pertaining to FTIL are asbelow:

(i) In para 14.2.1 of the order it is inter-alia mentioned thatNSEL by virtue of being a separate legal entity cannot be saidto be independent from the control of the holding/parent com-pany 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 iseffectively the only shareholder of NSEL, the constitution ofthe Board of Directors of NSEL is entirely under its control.FTIL through the Board of Directors of NSEL constituted byit possesses effectual and absolute control over its subsidiarycompany i.e. NSEL. Such control is further amplified and A

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accomplished by the fact that Shri Jignesh Shah, the promoterand Chairman-cum-Managing Director of FTIL has been onthe Board of NSEL and functioning as Vice-Chairman of theCompany since its inception. Shri Joseph Massey was also acommon Director both on the Board of FTIL and NSEL, whileShri Shreekant Javalgekar continued to be a Director of NSELtill he resigned from the post in July 2013;

(iii) In para 14.5.3 of the order it is inter-alia mentioned that it ison record that all the minutes of Board meetings of NSEL wereregularly tabled at the Board meetings of FTIL. FTIL kept itselfapprised about the affairs of NSEL and also approved/ratified theactions 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 isundisputed that NSEL was an Exchange in which FTIL had own-ership interest to the extent of 99.9998% leaving a negligible0.0002% stake to NAFED. The Articles of Association of NSELconfers authority to its shareholders to appoint Directors. As thesingle largest shareholder, it is FTIL which has nominated all thedirectors on the NSEL board. As a wholly-owned subsidiary, NSELis completely under the control of FTIL, including financial con-trol over the affairs of NSEL. FTIL, which had the responsibilityof managing the affairs of NSEL, cannot claim to be unaware ofthe wrong-doing and fraud committed by the management ofNSEL.

(v) In para 14.10.06 of the order it is inter-alia mentioned thatFTIL cannot shy away from its role and duty as a parent com-pany to take reasonable care and exercise prudence in manage-ment and governance of the subsidiary company.

(vi) In para 14.10.8 of the order it is inter-alia mentioned thatFTIL has not furnished any explanation as to what steps havebeen taken by NSEL or by it as a parent company to honour thecommitment of assuring safety and risk-free trading to the mem-bers and clients who have traded on their platform purely on thebasis of an explicit assurance that the Exchange shall step intothe shoes of counter parties should there be any default by anyparticipant.

(vii) In para 15.1.3 of the order it is inter-alia mentioned that FTILhas its principal business of development of software which hasbecome the technology platform for almost the entire industryengaged in broking in shares and securities, commodities, foreignexchange etc. The motive behind allowing trading in forward con-tracts on the NSEL platform in a circuitous manner on NSELwhich was neither recognized nor registered under FCRA, 1952indicates mala fide intention on the part of the promoter of FTILto use the trading platform of its subsidiary company for illicitgains away from the eyes of Regulator.

5. The aforesaid facts would clearly establish that the Board ofFTIL and its promoters under the leadership of Shri Jignesh Shahhave been actively controlling and directing the affairs of NSELand it is due to the poor governance and irregularities perpetratedin to the affairs of NSEL by FTIL and its promoters that thedefaulting members defrauded the exchange to the extent of Rs.5,500 crores thereby causing huge financial loss to more than13,000 investors. It is submitted that the aforesaid order dated17[th] December, 2013 passed by the Commission is based ontangible facts on the role of FTIL in the affairs of NSEL, musteredby the Commission on its own and also the facts revealed by theforensic auditor M/s. Grant Thornton who were engaged by NSELto conduct a forensic audit into the affairs of NSEL post thesettlement crisis. It may be noted the Hon’ble Bombay High Courthas also refused to grant any interim relief to FTIL and threeother individuals in respect of the aforesaid order dated 17[th]December, 2013 passed by the Commission declaring FTIL, ShriJignesh Shah, Shri Joseph Massey and Shri Shreekant Javalgekaras not fit and proper persons to be shareholders or a Director inany of the recognized commodity exchanges. FTIL and other threeindividuals have so far not challenged the above interim order ofthe Hon’ble High Court.

6. It is also submitted that the Working Group constituted by theCentral Government under the Chairmanship of Deputy Governor,Reserve Bank of India to examine into the systematic risk arisingin consequence of the NSEL settlement debacle, have inter aliarecommended that the ownership, governance and managementstructure at FTIL and the exchanges promoted by FTIL need tobe assessed and the possibility of bringing in an institutionalizedframework and approach to these aspects explored.

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7. It may also be noted here that pursuant to the criminalproceedings and arrest of Shri Jignesh Shah, Chairman-cum-Managing Director of FTIL who was also the Vice-Chairman ofNSEL, the EOW of Mumbai Police, has since filed a chargesheetagainst Shri Jignesh Shah under various sections of Indian PenalCode and also the Maharashtra Protection of Interest of Depositors(MPID) Act, 1999, before the Hon’ble Sessions Judge, SpecialCourt under MPID Act, Mumbai which vindicates the stand alreadytaken by the Commission in its order dated 17[th] December, 2013pertaining to the role and responsibility of FTIL as a parentcompany in the affairs of its wholly owned subsidiary i.e. NSEL.

8. The aforesaid submissions would make it clear that NSEL as acorporate entity has now been rendered bereft of any credibilityand now seems financially and physically incapable of effectingany substantial recovery from the defaulting members,notwithstanding all the legal and other measures taken by it againstthem under the instructions/supervision of the Commission.Similarly, the Board and management of FTIL, by their veryconduct in managing the affairs of NSEL and continuous effort todistance themselves from their responsibility towards NSEL afterthe settlement default, have lost their credibility as a responsiveand responsible holding company.

9. Keeping the aforesaid emergency situation in view, theCommission is of the view that time has come for the Ministry ofCorporate Affairs to consider:

(i) merging/amalgamating NSEL with FTIL in public interestso that the human/financial resources of FTIL are also directedtowards facilitating speedy recovery of dues from the defaultersat NSEL and FTIL takes responsibility to resolve the paymentcrisis at NSEL at the earliest.

(ii) Further, it is suggested that together with merger/amalgamation of NSEL with FTIL, taking over of themanagement of FTIL may also be considered so that the affairsof FTIL can be managed in a professional way by bringing inan institutionalized framework as recommended by WorkingGroup appointed by Government of India.xxx xxx xxx”

This letter would show that the immediate reason foramalgamation, according to the FMC, and which was faithfully carriedout by Government, is that NSEL, as a corporate entity, seems financiallyand physically incapable of effecting any substantial recovery fromdefaulting members. This was the “emergency situation” according tothe FMC, which should lead to an order of amalgamation of the holdingand subsidiary companies so that the holding company’s financialresources could be used to pursue proceedings by which monies owedto the alleged duped investors/traders could be recovered.

56.1. What is important to note is that by the time the final orderof amalgamation was passed, i.e., on 12.02.2016, the final order itselfrecords:

“8.1. Economic Offences Wing, Mumbai:

- Total amount due and recoverable from 24 defaulters isRs. 5689.95 crores.

- Injunctions against assets of defaulters worth Rs. 4400.10crore have been obtained.

- Decrees worth Rs. 1233.02 crore have been obtained against5 defaulters.

- Assets worth Rs. 5444.31 crore belonging to the defaultershave been attached of which assets worth Rs. 4654.62 crorehave been published in Gazette under the MPID Act forliquidation under the supervision of MPID Court and balanceassets worth Rs. 789.69 crore have been attached/securedfor attachment by the EOW:

- Assets worth Rs. 885.32 crore belonging to the directors andemployees of NSEL have been attached out of which assetsworth Rs. 882.32 crores have already been published inGazette under MPID Act for liquidation under the supervisionof MPID Court and balance assets worth Rs. 3 crore havebeen attached/secured for attachment by the EOW;

- MPID Court has already issued notices u/s 4 & 5 of the MPIDAct to the persons whose assets have been attached as above.Thus, the process of liquidation of the attached assets hasstarted.

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A- Bombay High Court has appointed a 3-member committeeheaded by Mr. Justice (Retd.) V.C. Daga and 2 experts infinance and law to recover and monetize the assets of thedefaulters.

- Rs.558.83 crores have been recovered so far, out of whichBRs. 379.83 crore have been received/recovered from thedefaulters and Rs. 179 crore were disbursed by NSEL to smalltraders/investors.

8.2. Enforcement Directorate:

- ED has traced proceeds of crime amounting to Rs. 3973.83Ccrore to the 25 defaulters; -ED has attached assets worth Rs. 837.01 crore belonging to 12defaulters; -As per the recent amendment in the PMLA, the assets attachedDby ED can be used for restitution to the victims.8.3. The above status indicates that the said enforcement agenciesare working as per their mandate…….”

56.2. What concerned the FMC in August 2014 has, by the dateof the final amalgamation order, been largely redressed withoutEamalgamation. The “emergency situation” of 2013 which, even accordingto the Central Government, required the emergent step of compulsoryamalgamation has, by the time of the passing of the Central Governmentorder, disappeared. Thus, the raison d’être for applying Section 396 ofthe Companies Act has, by the passage of time, itself disappeared. Infact, as on today, decrees/awards worth INR 3365 crore have beenFobtained against the defaulters, with INR 835.88 crore crystallised bythe committee set up by the High Court, pending acceptance by theHigh Court, even without using the financial resources of FTIL as anamalgamated company. What is, therefore, important to note is that whatwas emergent, and therefore, essential, even according to the FMC and

Gthe Government in 2013-2014, has been largely redressed in 2016, bythe time the amalgamation order was made. Also, the Central Governmentorder does not apply its mind to the essentiality aspect of Section 396 atall. In fact, in several places, it refers to “essential public interest” as if“essential” goes with “public interest” instead of being a separate anddistinct condition precedent to the exercise of power under Section 396.H

On facts, therefore, it is clear that the essentiality test, which is thecondition precedent to the applicable to Section 396, cannot be said tohave been satisfied.

57. During the course of proceedings before the Division Benchof 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 uptoINR 50 crore for each of the financial years 2016-2017 to 2018-2019 tosupport NSEL to recover dues from defaulters, defend various cases,and continue taking necessary legal action against various parties torecover amounts from defaulters. The Division Bench refers to thisaffidavit as follows:

“293] At the stage, when the final hearing in these petitions hadconsiderably advanced, FTIL, tendered an affidavit dated 4th July2017 to place on record its resolution dated 28th March 2016 toinfuse 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 duesfrom defaulters; to defend various legal cases; to continue takingnecessary legal actions against various parties to recover amountsfrom defaulters; and for working capital. The affidavit states thatsuch resolution was passed and such finances are proposed to beinfused at the request of NSEL.

294] The affidavit dated 4th July 2017 also confirms that theactivities of NSEL have come to a grinding halt, though, theaffidavit purports to blame the FMC for such a situation. Theaffidavit also states that up to now FTIL has infused approximatelyRs. 109 crores with NSEL, mainly to prosecute and defend legalproceedings. There is reference to NSEL having obtained decreesworth more than Rs. 1200 crores and injunctions against assetsof defaulters valued at Rs. 5444.31 crores. The affidavit furtherstates that FTIL is committed to funding NSEL for purposes ofrecovery from defaulters since the occurrence of payment crisison the exchange platform of NSEL.

295] If the contention of Mr. Chinoy to the effect that there isabsolutely no problem in the functioning of NSEL or that NSELhas the necessary wherewithal, both financial as well asinfrastructural, to effect recoveries from the defaulters, is to beaccepted, then, there was no reason to rely upon contribution from A

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AFTIL, made or proposed to be made at a belated stage. The FTILresolution dated 28th March 2016, far from affording any causeto interfere with the impugned order, in fact, lends support to thereasoning in the impugned order that the NSEL, on its own, lacksfinancial as well as infrastructural capacity to affect any recoveriesfrom the defaulters. The affidavit dated 4th July 2017 and theBresolution dated 28th March 2016 is also indicative of the businessrealities of the situation, which is incidentally yet another groundin the impugned order.”

(emphasis in original)

C58. The High Court comment on the aforesaid affidavit is notcorrect. The affidavit proceeds on the footing that since the activities ofNSEL have come to a grinding halt, FTIL would help NSEL to effectrecoveries from defaulters. The affidavit nowhere states that there is noproblem in the functioning of NSEL, or that NSEL has or does not havethe necessary wherewithal to effect recovery from defaulters. Even inDthe hearing before us, FTIL has submitted an affidavit-cum-undertakingdated 11.04.2019, stating that it will continue to infuse funds into NSELso that recovery of dues from defaulters does not, in any manner, getstymied. We take this affidavit and undertaking on record, and hold FTILto this undertaking made before this Court.

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59. When it comes to “public interest” as opposed to the “privateinterest” of investors/traders, who have not been paid, the amalgamationorder dated 12.02.2016 makes interesting reading. The satisfaction as topublic interest is stated in the very beginning of the order as follows:

“Whereas the Central Government is satisfied that to leverageFcombined assets, capital and reserves, achieve economy of scale,efficient administration, gainful settlement of rights and liabilitiesof stakeholders and creditors and to consolidate businesses, ensurecoordination in policy, it is essential in the public interest…….”

What is stated in the opening is repeated in paragraph 2.14.2 asGfollows:

“2.14.2 The Central Government also carefully considered theproposal received from FMC and DEA and was of the consideredopinion that to leverage combined assets, capital and reserves forefficient administration and satisfactory settlement of rights and H

liabilities of stakeholders and creditors of NSEL, it would be inessential public interest to amalgamate NSEL with FTIL.”

It will be seen that all the expressions used in relation to “publicinterest” have relation only to the businesses of the two companies thatare sought to be amalgamated. What is important to note is that there isno interest of the general public as opposed to the businesses of the twocompanies that are referred to. It is important to notice that the leveragingof combined assets, capital, and reserves is only to settle liabilities ofcertain stakeholders and creditors when the order is read as a whole,and given the fact that the businesses of the two companies werecompletely different. So far as achieving economy of scale and efficientadministration is concerned, it is difficult to see how this would apply tothe fact situation in this case where NSEL is admittedly a companywhich has stopped functioning as a commodities exchange at least witheffect from July, 2013 with no hope of any revival. Thus, the consolidationof businesses spoken about does not exist as a matter of fact, as NSEL’sbusiness has come to a grinding halt, as has been observed by the FMCand the Central Government itself. Each one of these expressions, whenread with the rest of the order, therefore, only shows that the sole objectof the amalgamation order is very far from the high-sounding phrasesused in the opening, and is really only to effect speedy recovery of duesof INR 5600 crore, which has been referred to in the letter of the FMCto the Secretary, Ministry of Corporate Affairs, dated 18.08.2014. Thiswould be clear from a reading, in particular, of two paragraphs of theorder, 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 nothaving the resources, financial or human, or the organizationalcapability to successfully recover the dues to the investors pendingfor over a year. Further, NSEL is not left with any viable,sustainable business while FTIL has the necessary resources tofacilitate speedy recovery of dues.

2.13.3. In the above background, a proposal had been receivedfrom FMC, vide letter dated 18-08-2014, proposing the merger ofNSEL with FTIL by the Central Government under the provisionsof Section 396 of the Companies Act, 1956. The proposal hasbeen supported by the Department of Economic Affairs (DEA),Ministry of Finance, FMC has proposed the merger/amalgamationof NSEL with FTIL in essential public interest so that the human/

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Afinancial resources of FTIL are also directed towards facilitatingspeedy recovery of dues from the defaulters at NSEL and theFTIL takes responsibility to resolve the payment crisis at NSELat the earliest.”

59.1. However, the Central Government supported this order onBthe ground that it is made in public interest essentially on three grounds,which are repeatedly referred to by the impugned judgment. The threegrounds as stated by the impugned judgment are as follows:

“269. …… (a) Restoring/safeguarding public confidence inforward contracts and exchanges which are an integral andCessential part of Indian economy and financial system, byconsolidating the businesses of NSEL and FTIL; (b) Giving effectto business realities of the case by consolidating the businesses ofFTIL and NSEL and preventing FTIL from distancing itself fromNSEL, which is, even otherwise, its alter ego; and (c) FacilitatingNSEL in recovering dues from defaulters by pooling human andDfinancial resources of FTIL and NSEL. Further, we are alsosatisfied that each of these three grounds constitute a facet ofpublic interest in the context of the provisions in Section 396.……”

59.2. It is important to note that the first and second groundsEmentioned by the High Court are not contained in the draft order ofamalgamation. Had they been so contained, objections and suggestionswould have been made by all stakeholders, which the Central Governmentwould then have been bound to consider before passing the final order.However, it was argued on behalf of the respondents that the first andFsecond grounds are, in reality, inferences drawn from facts which arealready stated in the order and these inferences do not need to be statedin the draft order. We are afraid that this argument is incorrect inasmuchas grounds contained in reasons (a) and (b) are important grounds whichhave a vital bearing on the amalgamation in question. If these groundswere contained in the draft order, there is no doubt that the shareholdersGand creditors of FTIL, and FTIL itself would have had an opportunity tocomment on the same. For example, the “business realities” of the caseare facts known to FTIL; and NSEL, being FTIL’s alter ego, is thesubject matter of dispute in various suits that have been filed and arepending adjudication. FTIL could have responded giving reasons as to H

why NSEL is not its alter ego. Also, whether the amalgamation is, infact, to restore or safeguard public confidence in forward contracts andexchanges is a subject matter on which FTIL, its shareholders andcreditors, could have commented. Equally, whether NSEL’s exchangewas an essential and integral part of the Indian economy and financialsystem, and whether this defunct business could be consolidated so asto impact the economy are all matters for comment by FTIL and itsshareholders and creditors. For all these reasons, we cannot accede tothe respondents’ arguments on this score. On this ground alone, evenassuming that these two grounds obtained and can be culled out fromthe final order, not being contained in the draft order, the said groundswould be in breach of Section 396(3) and (4), and therefore, cannot belooked at to support the order.

59.3. It is important to note that grounds (a) and (b) are bothculled out in answer to objections raised by FTIL. The precise objectionraised and the answer given are quoted hereinbelow:

“7.2.1. FTIL has challenged the background and reasons forthe amalgamation as the power under section 396 of the Acthas been used only in case of Government companies alone.This argument does not derogate from the scope of the statutoryprovisions. The statutory provisions of section 396 of the Act arebeing invoked in essential public interest to safeguard the interestof all stakeholders in the captioned company. The present statusand composition of the Boards of FTIL and NSEL have beennoted. However, the fact that the Boards had not acted with anindependent mind to collect information and put the system undera robust technology is borne out of the simple fact that the ShowCause Notice dated 27-04-2012 issued by the Department ofConsumer Affairs based on analysis of trade data by the thenForward Market Commission had given an alarming picture ofthe state of affairs of NSEL. The public interest driving the mergerare set out in the business realities of the case, it is noted from thefacts of the case and the recommendations of FMC as well as itsorder dated 17-12-2013 which throw ample light to the graveshattering of the public confidence and the purpose of establishingcommodity exchange has been defeated.”

xxx xxx xxx

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“7.2.6. FTIL and NSEL have distinct and separate objectsand nature of operations and completely disparate andunconnected objects, and hence there is no synergy, efficientadministration, consolidation of business or co-ordination inpolicy to be gained by the forced amalgamation; the argumentruns contrary to the concept of merger which essentially meansthat two or more separate entities are getting merged to achievethe objectives of amalgamation. In the instant case, amalgamationis targeted to achieve its stated objects, essentially in public interest.By all intents and purposes, the way both the companies werebeing managed, owned and controlled, NSEL is the alter ego ofFTIL and thus, the two companies have been practically one entity.All stakeholders were also looking at them as one entity. Theamalgamation u/s. 396 of the Act only formalizes this practicalreality in essential public interest.”

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“7.2.8. The FTIL has questioned the jurisdiction of the CentralGovernment to decide on the question of fraud and claimedthat it has to be proved beyond reasonable doubt by adducingnecessary particulars; the Central Government is invoking section396 of the Act in essential public interest for the merger of NSEL,which is an almost wholly-owned subsidiary of FTIL. The mergeris not an adjudication on the alleged fraud. The merger is targetedto achieve its stated objectives for long term sustainability in thebest interest of the stakeholders.”

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(emphasis in original)

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It will be noticed that the objection raised in paragraph 7.2.1 isthat Section 396 can be used in the case of Government companiesalone, whereas the answer given is that this cannot be so, given thebusiness realities of the case and the FMC order of 17.12.2013 “whichthrow ample light to the grave shattering of public confidence and theGpurpose of establishing Commodity Exchange has been defeated”. Firstand 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 letterdated 18.08.2014, in which the “business reality” is the fact that dues ofINR 5600 crore have to be paid, and that NSEL does not have the H

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wherewithal to do so. Thus, its parent company’s financial resourcesought to be used to effect such payment. This “business reality”, therefore,speaks only of the private interest of the investors/traders who havebeen allegedly duped (which fact will only be established in suits filed bythem in 2014), and nothing beyond (which would show some vestige ofpublic interest). Equally, the grave shattering of public confidence andpurpose of establishing commodity exchanges having been defeated,according to the Central Government, is a gloss on the FMC order dated17.12.2013. If this were so, one would have expected a resuscitation orrevival of the commodities exchange of NSEL, which could have beenachieved by takeover of its management. It is difficult to imagine thatgrave shattering of public confidence by the permanent shutting downof the commodities exchange of the NSEL would be remedied only byfacilitating the paying of dues to certain allegedly duped investors/traders,which fact will be proved or disproved in suits filed by them which arepending adjudication in the Bombay High Court. In any case, this reasonis wholly irrelevant as an answer to the objection raised by FTIL which,as we have seen, is an objection stating that the Section applies toGovernment companies alone. Also, had FTIL made no such objection,no such answer would have been forthcoming. As far as paragraphs7.2.6 and 7.2.8 of the order are concerned, what is admitted in the orderitself, is that there is no “adjudication” on the “fraud” in the facts of thepresent case, and thus, not an exercise of lifting of the corporate veil ofthe pre-amalgamation companies. The amalgamation order contradictsitself by then stating that NSEL is the alter ego of FTIL, and thus, thetwo companies are practically one entity. In any event, these paragraphsdo not indicate as to how the ‘alter ego’ argument impacts public interest.For all these reasons, therefore, neither reason (a) nor reason (b) oughtto detain us any further. Reason (c) is, therefore, the only reason thatreally remains, as is contained in the letter of 18.08.2014 by the FMC tothe Central Government. We have already seen that this reason, byitself, 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 CentralGovernment may, after considering suggestions and objections from thestakeholders mentioned, make modifications in the draft order as mayseem to it desirable in the light of such suggestions and objections. Nomodification has been made in the body of the Central Government order A

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Aas finally made. If the Central Government had actually considered thateach of these three reasons impact public interest, it would have explicitlysaid so after suggestions and objections were made by the variousstakeholders. The fact that the Central Government has not amendedthe body of the final order is of great significance – it is only the originalreasons given in the draft order that continue as such in the final orderBwhich, 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 objectionsand suggestions given in the final order, is only given separately by theCentral Government after the amalgamation order to show that theprinciples of natural justice as laid down by sub-section (4) of SectionC396 have, in fact, been followed. This becomes clear from paragraphs6.3 and 7 of the final order, which read as follows:

“6.3. The Central Government received in writing and throughemail various objections / suggestions from various classes ofstakeholders including the shareholders, creditors, and all otherDinterested parties claiming that monies are recoverable from theproceedings arising out of the business of the dissolved company.

7. Dealing with objections, suggestions and submissions of FTIL,NSEL and other parties – The Parties herein have made variousobjections, suggestions and submissions on the proposedEamalgamation u/s. 396 of the Act on the order dated 21-10-2014in Draft form issued by the Central Government. The saidobjections, suggestions and submissions were made during thecourse of hearing and written submissions (physically andelectronically) received by the Central Government on variousdates. The said objections, suggestions and submissions made byFeach of the parties are dealt in the manner herein under.”

59.5. So far, we have gone by the Central Government order as itstands. The Bombay High Court, in stating reasons (a), (b), and (c) asgrounds of public interest, has gone much further than even the answergiven to the objections that are contained in the order itself. “Restoring/Gsafeguarding public confidence in forward contracts and exchanges,which are an integral and essential part of the Indian economy andfinancial system, by consolidating the businesses of NSEL and FTIL,” isnot contained in the answer given to objections in the order. First andforemost, restoring public confidence is no part of the order. What is H

mentioned is only the fact that public confidence has been shattered, asis reflected by the FMC order dated 17.12.2013. Secondly, the entireexpression, “which are an integral and essential part of Indian economyand 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 Courtitself relatable to this answer. Similarly, when it comes to reason (b),“giving effect to business realities of the case” contained in the answerto objections does not contain “by consolidating the businesses of FTILand NSEL”, nor does it contain “and preventing FTIL from distancingitself 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 acase where the Central Government has, in fact, lifted the corporateveil, despite the alleged non-existence of the circumstances justifyinglifting of such corporate veil”, and further, “this is not a case where theCentral Government has lifted the corporate veil and sought to apportionany liability upon either NSEL or FTIL”. For all these reasons, we findthat no reasonable body of persons properly instructed in law couldpossibly arrive at the conclusion that the impugned order has been madein public interest.

60. The learned Senior Advocates appearing on behalf of therespondents has placed great reliance on the judgment in Ganesh Bank(supra). In this judgment, the Appellant Bank was amalgamated withFederal Bank under Section 45 of the Banking Regulation Act, 1949.Federal Bank was selected from out of several other banks by theReserve Bank of India as its offer to amalgamate with the AppellantBank was unconditional, Federal Bank undertaking to make full paymentto depositors.

61. The judgment in Ganesh Bank (supra) was faced with theamalgamation of the Appellant Bank after a moratorium had beenimposed on it as it was found that its position was very weak, havingincurred huge losses in the financial year 2004-05. Section 45 of theBanking Regulation Act reads as follows:

“45. Power of Reserve Bank to apply to CentralGovernment for suspension of business by a bankingcompany and to prepare scheme of reconstitution oramalgamation.—(1) Notwithstanding anything contained in theforegoing provisions of this Part or in any other law or any A

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agreement or other instrument, for the time being in force, whereit appears to the Reserve Bank that there is good reason so to do,the Reserve Bank may apply to the Central Government for anorder of moratorium in respect of a banking company.

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(4) During the period of moratorium, if the Reserve Bank is satisfiedthat—

(a) in the public interest; or

(b) in the interests of the depositors; or C

(c) in order to secure the proper management of the bankingcompany; or (d) in the interests of the banking system of the country as awhole,—

it is necessary so to do, the Reserve Bank may prepare aDscheme—

(i) for the reconstruction of the banking company, or

(ii) for the amalgamation of the banking company with anyother banking institution (in this section referred to as “theEtransferee bank”).

xxx xxx xxx”

It is important to note that unlike Section 396 of the CompaniesAct, the satisfaction of the Reserve Bank of India can be on any one offour grounds. Such satisfaction may be in the public interest or in theFinterest of depositors. This point is, in fact, highlighted in paragraph 34 ofthe judgment as follows:

“34. The phrase “good reasons” in sub-section (1) of Section 45is a term of wide amplitude and it will not be correct to restrict itonly to the actions mentioned under sub-section (2) of Section 45Gof the Act as is contended by the appellants. The provision isconcerned with preparing a scheme of reconstruction oramalgamation which would become necessary where RBI issatisfied about the existence of any of the four grounds mentionedin Section 45(4). Apart from public interest and the interest of the H

banking system, which are provided in clauses (a) and (d) thereof,Section 45(4) provides for the necessary action in the interest ofthe depositors or with a view to secure proper management ofthe Bank which are clauses (b) and (c) in that sub-section.Precursor to the framing of the scheme is the imposition of themoratorium which is provided in sub-sections (1) and (2) of Section45. 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 objectof the Act is protection of the interest of the depositors, such aninterpretation of the concept of “good reasons” will have to beadopted, and not a narrow one.”

The judgment then goes on to state:

“39. Now, as far as the first two questions of non-considerationof reconstruction and proposing merger with Federal Bank areconcerned, RBI has noted that the Bank was in difficulties from1990 and particularly from December 2003 when it was placedunder monthly monitoring. RBI in its application for moratoriumto the Central Government dated 4-1-2006 had clearly stated thatduring the discussion with the appellant Bank, major shareholdersand Directors had shown total reluctance to merge into the strongerbank. In view thereof, it was imperative that immediatearrangement to protect the interest of the depositors was to bemade through its merger with a bank under Section 45 of the Act.RBI had, therefore, made an effort and called upon the appellantBank, that if possible, to explore the possibility of merger withanother stronger bank. It had also made an effort to impress thatthere should be infusion of fresh capital. That was not coming.There could be a reconstruction by bringing in more money or bynarrowing the size of the appellant Bank which did not appear tobe feasible. The only option left was that of amalgamation.”

Thus, two features of Ganesh Bank (supra) distinguish the saidcase from the facts of the present case. First, that under Section 45 ofthe Banking Regulation Act, the interest of the depositors is to be lookedat; and it was this reason that led to the amalgamation. Secondly, thisCourt found that after exploring other options, the only option left wasthat of amalgamation.

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A62. In point of fact, the contrast between Section 45(4) of theBanking Regulation Act and Section 396 of the Companies Act becomesimportant. Under Section 45(4)(b) and (c) of the Banking RegulationAct, the satisfaction of the Reserve Bank of India for preparing a schemeof amalgamation can be in the interest of the depositors of a particularbank or in order to secure the proper management of a particular bankingBcompany. This must be contrasted with clauses (a) and (d) of Section45(4), which speak of public interest and the interest of the bankingsystem of the country as a whole. This judgment, on facts, merged afinancially weak bank with a financially strong bank in the interest of thedepositors of the financially weak bank. It is important to note that theCbusiness 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 offerto merge because it felt that post merger, it could have a significantpresence 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 theDReserve Bank of India may amalgamate two banking companies, it isclear that this reason alone will not go to public interest, which is aseparate head contained in Section 45(4). It is in this context that theobservation contained in paragraph 44 is made, namely:

“44. Under Section 45 of the Act, the primary consideration isEpublic interest. There is an underlying object of acting swiftly anddecisively to protect the interests of depositors and ensure publicconfidence in the banking system. The emergent situation whichwarrants action with expedition cannot be lost sight of whiledeciding the legality of the action.”FAs we have already seen, the “emergent situation” which obtainedin 2013 was no longer there in 2016 when the final order of amalgamationwas passed in the present case.

63. Valiant attempts have been made by counsel in the High Courtas well as counsel in this Court to support the order on grounds whichGare outside the order, stating that such grounds make it clear that in anycase, the Government order has been made in public interest. Thecelebrated passage in Mohinder Singh Gill (supra) states that:

“8. The second equally relevant matter is that when a statutoryfunctionary makes an order based on certain grounds, its validity H

must be judged by the reasons so mentioned and cannot besupplemented by fresh reasons in the shape of affidavit orotherwise. Otherwise, an order bad in the beginning may, by thetime it comes to Court on account of a challenge, get validated byadditional grounds later brought out. We may here draw attentionto 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 statutoryauthority cannot be construed in the light of explanationssubsequently given by the officer making the order of what hemeant, or of what was in his mind, or what he intended to do.Public orders made by public authorities are meant to havepublic effect and are intended to affect the actings and conductof those to whom they are addressed and must be construedobjectively with reference to the language used in the orderitself.”

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

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

We are of the view that it is the Central Government that has tobe “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 sustainsuch order must be rejected.

64. However, learned Senior Advocates on behalf of therespondents have cited Chairman,All India Railway RecruitmentBoard and Anr. v. K. Shyam Kumar and Ors., (2010) 6 SCC 614,which, according to them, renders the judgment in Mohinder SinghGill (supra) inapplicable where larger public interest is involved. In thisjudgment, Mohinder Singh Gill (supra) was distinguished thus:

“44. We are also of the view that the High Court has committeda grave error in taking the view that the order of the Board couldbe judged only on the basis of the reasons stated in the impugnedorder based on the report of Vigilance and not on the subsequentmaterials furnished by CBI. Possibly, the High Court had in mindthe Constitution Bench judgment of this Court in Mohinder SinghGill v. Chief Election Commr. [(1978) 1 SCC 405]

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A45. We are of the view that the decision-maker can always relyupon subsequent materials to support the decision already takenwhen larger public interest is involved. This Court in MadhyamicShiksha Mandal, M.P. v. Abhilash Shiksha Prasar Samiti[(1998) 9 SCC 236] found no irregularity in placing reliance on asubsequent report to sustain the cancellation of the examinationBconducted where there were serious allegations of mass copying.The principle laid down in Mohinder Singh Gill case [(1978) 1SCC 405] is not applicable where larger public interest is involvedand in such situations, additional grounds can be looked into toexamine the validity of an order. The finding recorded by the HighCCourt that the report of CBI cannot be looked into to examine thevalidity of the order dated 4-6-2004, cannot be sustained.”

It will be seen that there is no broad proposition that the case ofMohinder Singh Gill (supra) will not apply where larger public interestis involved. It is only subsequent materials, i.e., materials in the form ofDfacts that have taken place after the order in question is passed, that canbe looked at in the larger public interest, in order to support anadministrative order. To the same effect is the judgment in PRP Exportsand Ors. v. Chief Secretary, Government of Tamil Nadu and Ors.,(2014) 13 SCC 692 [at paragraph 8]. It is nobody’s case that there areany materials or facts subsequent to the passing of the final order of theECentral Government that have impacted the public interest, and which,therefore, need to be looked at. On facts, therefore, the two judgmentscited on behalf of the respondents have no application. Thus, it is clearthat no reasonable body of persons properly instructed in law couldpossibly hold, on the facts of this case, that compulsory amalgamationFbetween FTIL and NSEL would be in public interest.

65. Section 396(3) speaks of a shareholder’s or a creditor’s interestin or rights against the company resulting from an amalgamation order.Such “interest in” or “rights against” obviously refers to real andsubstantive rights, as opposed to rights that are only in form. A shareholderGor creditor gets effected by an amalgamation order if the value of hisshare gets depleted as a result of the amalgamation and if dividends thathave been paid to him are likely to come down as a result of theamalgamation. Likewise, a creditor of a solvent company is directlyeffected by an amalgamation by which the amount loaned by such H

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creditor becomes, as a result of the amalgamation, less likely to be paidback in time, than if the amalgamation did not take place. Such rightsand interests of members and creditors are substantive rights which,when effected by the amalgamation, lead to compensation having to bepaid. Every shareholder of a company and indeed, every creditor of acompany, is concerned only with the “economic value” of his share orthe loan granted to a company, as the case may be. The moment theshare value, in real terms, is likely to dip, and/or loans granted are likelynot to be repaid in time or at all as a result of an amalgamation, suchmembers or creditors of the amalgamating company are equally entitledto be compensated for this economic loss as are the members andcreditors of the amalgamated company, depending on the facts of eachcase. A reasonable construction must be given to Section 396. Also, thesuggested construction by the respondents, as has been accepted by theimpugned judgment, operates harshly and ridiculously, and being opposedto justice and reason, cannot possibly be adopted by this Court. It isclear that Section 396(3) refers to the economic loss that is to be borneby 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 beforeamalgamation shall have, as nearly as may be, the same interest in orrights against the company resulting from the amalgamation as he had inthe original company. To the extent to which the interest or rights ofsuch member or creditor are less than his interest or rights against theoriginal company, post amalgamation, he shall be entitled to compensationwhich is to be assessed. Post assessment, if such member or creditor isaggrieved, he may prefer an appeal to the appellate authority under sub-section (3A). Under sub-section (4)(aa), no order of amalgamation canbe made unless the time for preferring an appeal under sub-section (3A)has expired, or where any such appeal has been preferred, the appealhas been finally disposed of.

67. The learned counsel on behalf of the appellant has arguedthat the assessment order dated 01.04.2015, passed by the Joint Director(Accounts), does not reflect any compensation in favour of theshareholders or creditors of FTIL. According to the learned counsel, it isclear that if a company with low net worth (NSEL) is amalgamated witha company with high positive net worth (FTIL), both the shareholders A

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128SUPREME COURT REPORTS

Aand the creditors of FTIL will be directly impacted as the economicvalue of the shares will plummet, and the creditors of FTIL, which is apositive net worth company, may have to wait for a long time beforerecovery of debts owed to them once the company is amalgamated withthe negative net worth company. In short, the creditors of FTIL will beput on par with the creditors of NSEL, which will result in the creditorsBof FTIL either being paid back their debts much later in point of time, ornot at all. To this argument, the answer of the Union of India, which hasfound favour with the Division Bench of the Bombay High Court, is that“economic value” forms no part of Section 396. So long as theshareholders of FTIL continued to have the same number of shares, itCmatters not whether their share values plummet post amalgamation.

68. In Bacha F. Guzdar (supra), this Court held that though ashareholder acquires no right in the assets of a company as thecompany itself is the owner of such assets, yet a shareholder certainlyhas the right to dividends and the right to participate in the assets of theDcompany which would be left over after winding up. The Court held:

“The true position of a shareholder is that on buying shares aninvestor becomes entitled to participate in the profits of thecompany in which he holds the shares if and when the companydeclares, subject to the Articles of Association, that the profits orEany portion thereof should be distributed by way of dividends amongthe shareholders. He has undoubtedly a further right toparticipate in the assets of the company which would be leftover after winding up but not in the assets as a whole as LordAnderson puts it.”

(at p. 882)

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69. In Life Insurance Corporation of India v. Escorts Ltd.and Ors., (1986) 1 SCC 264, this Court dealt generally with the rights ofshareholders as follows:G“

“84. On an overall view of the several statutory provisions andjudicial precedents to which we have referred we find that ashareholder has an undoubted interest in a company, an interestwhich is represented by his shareholding. Share is movableproperty, with all the attributes of such property. The rights of a H

shareholder are (i) to elect directors and thus to participate in themanagement through them; (ii) to vote on resolutions at meetingsof the company; (iii) to enjoy the profits of the company in theshape of dividends; (iv) to apply to the court for relief in the caseof oppression; (v) to apply to the court for relief in the case ofmismanagement; (vi) to apply to the court for winding up of thecompany; (vii) to share in the surplus on winding up. ……”

On the facts of the present case, we are directly concerned withpoints (iii) and (vii). It has been argued that the profits of the companypost-amalgamation will obviously come down, and dividends payable toshareholders will consequently either come down or be wiped out if thelow net worth of NSEL is taken into account post amalgamation, togetherwith potential liabilities of the amalgamated company, which may haveto be paid in the near future. Secondly, if the amalgamated company iswound up, the amount that is payable to the shareholderspost-amalgamation will be much less, if at all anything is to be paid, thanpre-amalgamation.

70. In fact, in Commissioner of Income Tax (Central)Calcutta v. Standard Vacuum Oil Co., [1966] 2 SCR 367, this Courtheld:

“ …… A share is not a sum of money: it represents an interestmeasured by a sum of money and made up of diverse rightscontained in the contract evidenced by the articles of associationof 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 underSections 391 to 394 of the Companies Act, this Court went into sharevaluation. This Court held:

“40. …… It must at once be stated that valuation of shares is atechnical and complex problem which can be appropriately left tothe consideration of experts in the field of accountancy. Penningtonin his Principles of Company Law mentions four factors whichhad to be kept in mind in the valuation of shares:

“(1) Capital Cover,

(2) Yield,

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A (3) Earning Capacity, and

(4) Marketability.

For arriving at the fair value of share, three well-known methodsare applied:

(1) The manageable profit-basis method (the Earning Per ShareBMethod)

(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,Cwhen it comes to such valuation qua the transferor and transfereecompany, is that the market value method is one method in which sharescan be valued so that their equivalent can then be provided for in theamalgamated company. This would be nothing other than what thoseshares were worth in the market on a particular day or an average takenwithin a certain period. What is important to note is that the marketDvalue of shares is market value of shares reflective of their economicvalue, being an interest measured by a sum of money, is not somethingthat is completely alien to determining the rights of or interest of ashareholder in the transferor or transferee company, as the case maybe.

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72. In fact, the Government order dated 12.02.2016 itself reflectsthe net worth of NSEL as INR 8.86 crore from its balance sheet dated31.03.2015, despite its capital being INR 60 crore, inasmuch as the totalreserve and surplus is a negative figure of INR 51.54 crore. As againstthis, FTIL’s balance sheet, as on 31.03.2015, discloses that for the sameFyear, FTIL’s net worth is INR 2779.94 crore. Also, FTIL has been payingdividends to its shareholders ranging from 1000% to 250% for the years2007-2008 till 2015-2016. On the other hand, NSEL has never paid asingle 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.G

73. The impugned Division Bench judgment has incorrectly heldthat 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

stated under the caption, “(vi) civil suits / complaints / writs / publicinterest litigation” that:

“xxx xxx xxx

c) The Company received a legal opinion to the effect that theCompany is not liable for payment under the provisions of SGF inthe bye-laws. Further in case of e-Series contract relatedtransactions, no major infirmity in underlying physical stock wasobserved. Therefore, at this stage and in the opinion of theManagement of the Company, relying upon the legal advices, andas per the provisions of bye-laws of the exchange there are nodirect ascertainable financial claims against the company. TheCompany may be exposed to liabilities in case of any adverseoutcome of these investigations / enquiries or legal cases or anyother investigations / enquires or suits which may arise at a laterdate.”

This is further clarified in the consolidated financial statementmade 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 thelimitations in the forensic audits and investigations, there isinherent a risk that material errors, fraud and other illegal actsmay exist that could remain undetected.

Risk of adverse outcome of investigation/enquiry by lawenforcement agencies Several agencies such as the Police (EOW), Ministry ofCorporate Affairs (MCrA), Enforcement Directorate (ED), CBIand the Income Tax Department etc. are currently investigating /enquiring the extent of alleged irregularities and any breach oflaw. The matters are also sub judice before various forumsincluding the Hon’ble Mumbai High Court. The Company may beexposed to liabilities in case of any adverse outcome of theseinvestigations or any other investigations which may arise at alater date.”

From the Director’s Report and consolidated financial statementsof NSEL, it becomes clear that the company may be exposed toliabilities in case of any adverse outcome in any of the proceedings that A

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Amay be pending, as a result of which, it may have to pay back the wholeor some part of the INR 5600 crore owed to the alleged investors/traders by the 24 defaulters who are members of NSEL. This wouldcertainly impact the ‘economic value’ of shares held in FTIL as this isone factor that would, post amalgamation, depress the market value ofshares held by such shareholder, and would also impact the dividendBpayable on such shares post amalgamation.

74. The impugned judgment has also held that no material wasproduced before the Court to show that share prices would in factplummet post-amalgamation. This is despite the fact that the impugnedjudgment itself refers to the fact that since the publication of the draftCorder on 21.10.2014, the share value which was INR 211.10, dropped toINR 174.55 ten days later. The Division Bench then goes on to statethat it is not possible to hold that any case of serious erosion in economicvalue has at all been made out, inasmuch as by 21.10.2014, when thedraft order of amalgamation was made available to companies, the newsDof collapse of NSEL’s exchange was already in public domain. This iswholly incorrect for the reason that the news of collapse took place inJuly, 2014, i.e., over two months before the publication of the draftorder. It is well known that the stock market is extremely sensitive to theslightest event that may render a company less profitable. Over twomonths is too long a period to relate a share value of INR 211.10Edrastically falling to INR 174.55. On the other hand, it is obvious that thepublication of the draft order on 21.10.2014 had the impact of the shareprice reducing by a substantial amount, ten days later. In fact, areference to the share prices of NSEL furnished by the learnedAdditional Solicitor General makes it clear that the moment the finalFamalgamation order dated 12.02.2016 was publicised, the share pricefell from INR 89.90 on 12.02.2016 to INR 73.90 on 24.02.2016 andfurther to INR 73.10 on 29.02.2016. Incidentally, the High Court realisedthis, and finally incorrectly concludes, “there is thus substantialcompliance with the provisions of Section 396(3).” Given the fact thatthe assessment order dated 01.04.2015 did not provide anyGcompensation to either the shareholders or creditors of FTIL for theeconomic loss caused by the amalgamation in breach of Section 396(3),it is clear that an important condition precedent to the passing of the finalamalgamation order was not met. On this ground also, therefore, the final amalgamation order has to be held to be ultra vires Section 396 ofthe Companies Act, and, being arbitrary and unreasonable, violative ofArticle 14 of the Constitution of India.

75. However, the learned Senior Advocates for the respondentshave argued that an order of nil compensation is equally an order that ispassed under Section 396(3) which could have been appealed againstbut was not appealed against. For this reason, therefore, it is not correctto state that the condition precedent mentioned in Section 396(4)(aa)has not been fulfilled. It will be noticed that the language used in theappeal provision, i.e. Section 396(3A), is “any person aggrieved by anyassessment of compensation made by the prescribed authority undersub-section (3) may…… appeal to the Tribunal, and thereupon theassessment of the compensation shall be made by the Tribunal.” Thepre-requisites for the application of sub-section (3A) are that a personfirst be aggrieved by an “assessment of compensation” “made” by theprescribed authority. Where no assessment of compensationwhatsoever is made by the prescribed authority (and on the facts here,the prescribed authority has not, in fact, stated that for the reasons givenby it, compensation awarded to FTIL, its shareholders and creditors isnil), no person can be aggrieved by an order which does not assess anycompensation, which may be interfered with by the Appellate Tribunalwhich must then assess the compensation for itself. The statute clearlyentitles such shareholders and creditors to have compensation assessedfirst by the prescribed authority and then by the appellate authority. ThisCourt, in Institute of Chartered Accountants of India v. L.K. Ratnaand Ors., [1986] 3 SCR 1049, held that the defect in observing the rulesof natural justice in the trial administrative body cannot be cured byobserving such rules of natural justice in the appellate body. It was held:

“It is then urged by learned counsel for the appellant that theprovision of an appeal under Section 22-A of the Act is a completesafeguard against any insufficiency in the original proceedingbefore the Council, and it is not mandatory that the member shouldbe heard by the Council before it proceeds to record its finding.Section 22-A of the Act entitles a member to prefer an appeal tothe High Court against an order of the Council imposing a penaltyunder Section 21(4) of the Act. It is pointed out that no limitationhas been imposed on the scope of the appeal, and that an appellantis entitled to urge before the High Court every ground which was A

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available to him before the Council. Any insufficiency, it is said,can be cured by resort to such appeal. Learned counsel apparentlyhas in mind the view taken in some cases that an appeal providesan adequate remedy for a defect in procedure during the originalproceeding. Some of those cases as mentioned in Sir WilliamWade’s erudite and classic work on “Administrative Law”(5[th] Edn.). But as that learned author observes (at p. 487), “inprinciple there ought to be an observance of natural justice equallyat both stages”, and “if natural justice is violated at the first stage, the right of appealis not so much a true right of appeal as a corrected initialhearing: instead of fair trial followed by appeal, the procedureis reduced to unfair trial followed by fair trial.”

And he makes reference to the observations of Megarry, J. inLeary v. National Union of Vehicle Builders [(1971) 1 Ch. 34,49]. Treating with another aspect of the point, that learned Judgesaid:

“If one accepts the contention that a defect of natural justicein the trial body can be cured by the presence of natural justicein the appellate body, this has the result of depriving the memberof his right of appeal from the expelling body. If the rules andthe law combine to give the member the right to a fair trial andthe right of appeal, why should he be told that he ought to besatisfied with an unjust trial and a fair appeal? Even if theappeal is treated as a hearing de novo, the member is beingstripped of his right to appeal to another body from the effectivedecision to expel him. I cannot think that natural justice issatisfied by a process whereby an unfair trial, though notresulting in a valid expulsion, will nevertheless have the effectof depriving the member of his right of appeal when a validdecision to expel him is subsequently made. Such a deprivationwould be a powerful result to be achieved by what in law is amere nullity; and it is no mere triviality that might be justifiedon the ground that natural justice does not mean perfect justice.As a general rule, at all events, I hold that a failure of naturaljustice in the trial body cannot be cured by a sufficiency ofnatural justice in an appellate body.”

The view taken by Megarry, J. was followed by the Ontario HighCourt in Canada in Re Cardinal and Board of Commissionersof Police of City of Cornwall, [(1974) 42 D.L.R. (3d) 323]. TheSupreme Court of New Zealand was similarly inclined in Wislangv. Medical Practitioners Disciplinary Committee, [(1974) 1N.Z.L.R. 29] and so was the Court of Appeal of New Zealand inReid v. Rowley [(1977) 2 N.Z.L.R. 472].”

(at pp. 1065-1066)

This judgment was the subject matter of comment in UnionCarbide 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 obligationto issue notices to persons effected by the Bhopal gas leak did not, forthis reason alone, vitiate the settlement that was entered into with UnionCarbide by the Government on their behalf. This Court, in passing,commented that the principle laid down in Leary v. National Union ofVehicle Builders, [1971] Ch. 34 might perhaps be too broad ageneralisation, except in cases involving public interest. This was anobservation made in answer to an argument by Shri Shanti Bhushan,stating that a defect of natural justice always goes to the root of thematter. Ultimately, given the fact that the settlement fund was held tobe sufficient to meet the needs of just compensation to the victims of theBhopal gas leak tragedy, it was held that the grievance on the score ofnot hearing the victims first would not really survive. However, what isof fundamental importance is the fact that in the present situation, aclear statutory right is given to every member or creditor who shall beentitled to an assessment of compensation, first by the prescribed authorityand then, a right of appeal to the Appellate Tribunal. In such cases,therefore, the orders of “non-assessment” by the prescribed authoritycan more appropriately be challenged in judicial review proceedings, inwhich the High Court, acting under Article 226 of the Constitution ofIndia can, if an infraction of Section 396(3) is found, send the matterback to the prescribed authority to determine compensation after whichthe right of appeal under sub-section (3A) of Section 396 would thenfollow. In fact, in Writ Petition 2743 of 2014, which challenged both thedraft order and the final order of amalgamation, the appellant took out achamber summons for amendment of its writ petition to challenge the AB

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Aorder of assessment of compensation, dated 01.04.2015, whichamendment was allowed vide order dated 16.02.2016. The order of“non-assessment” of compensation has thus been challenged by FTILin proceedings under Article 226 of the Constitution of India. Evenotherwise, this is a case where there is complete non-application of mindby the authority assessing compensation to the rights and interests whichBthe shareholders and creditors of FTIL have and which are referred toin Section 396(3) of the Act. This being the case, it is clear that Section396(3) has not been followed either in letter or in spirit.

76. In conclusion, though other wide-ranging arguments were madewith respect to the validity of the Central Government amalgamationCorder, we have not addressed the same as we have held that the orderdated 12.02.2016 is ultra vires Section 396 of the Companies Act, andviolative of Article 14 of the Constitution of India for the reasons statedby us hereinabove. The appeals are accordingly allowed, and theimpugned judgment of the Bombay High Court is set aside. The writDpetition is disposed of in light of this judgment.

Devika Gujral

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Matters disposed of.

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