Legal experts have raised eyebrows over basic issues that have not been addressed in the Bombay High Court order, given that the economic impact of this order will have larger repercussions on Corporate India as it shakes the very foundation of independent corporate personality and limited liability. What is frightening in this case is the fact that the corporate veil has been lifted without any adjudication.

Entrepreneurs are encouraged to take risks by enabling them to function through companies that are governed by the Company Law. This forced merger order, takes away the ability and appetite of the entrepreneurs for risk-taking as it does not see any difference between a company and its shareholders. Thus, for the growth of any entrepreneur and consequently that of the economy, maintaining of the corporate veil is the fundamental and basic premise of global business.

As a matter of fact, destroying the corporate veil through an administrative order confirmed in writ proceedings without any evidence-led trial is contrary to the basic tenets of natural justice.

The Bombay High Court upheld the order of the Ministry of Corporate Affairs (MCA) to forcefully merge NSEL, a subsidiary company with its parent, 63 moons technologies limited, under Section 396 of the Companies Act, by lifting the corporate veil without an evidence-led adjudication, conveniently under the garb of public interest.

What is more surprising in this case is despite the fact that in the payment default crisis at NSEL, the entire money has to be recovered from the 24 defaulting entities (none of them connected to NSEL/FTIL), the merger is being done to recover the money for the said crisis from the parent company rather than the 24 defaulting entities.

This sets a dangerous precedent as going forward Section 396 will now become a more convenient tool for recovering monies from bank loan defaulting companies, and as such, banks laden with huge NPAs will have to recover money through this route, instead of relying on the Insolvency and Bankruptcy Code (IBC) or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

In such a situation, Section 396 of the Companies Act will gain preference over both IBC & SARFAESI as a recovery tool since the Ministry of Corporate Affairs can choose to merge a healthy group company of a bank loan defaulting company and utilize the healthy company’s assets to pay off the debts of the bank loan defaulting companies. There will also be no need for either the government or the affected parties to approach the National Company Law Tribunal (NCLT) or the Debts Recovery Tribunal (DRT) in such matters.

It may not even be necessary to take a haircut of any nature thereby compromising public interest because now the MCA is duty-bound to use Section 396 for recovery first instead of assuming any haircut under any recovery proceedings. Also, investors in India do have a huge reason to fear the safety of their investment as the MCA can now snatch it away in the name of recovery and public interest.

The authority to define what constitutes ‘recovery’ and ‘public interest’ is left to the government officers and not the judiciary. This is just the beginning where public interest has been used to merge two companies for recoveries. Such a forced amalgamation process can also be used to amalgamate a foreign-owned Indian company with a loss-making PSU to usurp technology belonging to the foreign company in the name of public interest.

In a consensual merger of government companies, the principle of natural justice, public interest, constitutional validity and stakeholder voting are taken into account. Whereas in this case of non-consensual merger of NSEL with FTIL, public interest has been conveniently defined and that too without verification; brushing aside shareholders’ resolutions.

In fact, soon after the payment default crisis took place at NSEL in 2013, the government had classified it as a private dispute in the market, refusing any role of the government and FMC. The government had also confirmed that there was no systemic risk because of the crisis. On one hand, the FMC has declared FTIL as “not fit and proper” entity to run exchanges as a result of which FTIL was forced to sell its premier exchanges such as MCX, IEX and MCX-SX. On the other hand, through this forced merger order, NSEL is being merged with the “not fit and proper” FTIL; which is a paradox.

If restoring public confidence in financial markets is the real objective of this forced merger then

The FMC ought to have taken a leaf out of its peers like the RBI and merged NSEL with other exchanges such as the BSE, NSE or MCX where the nature of business is the same. In the past, the RBI had merged weaker banks with stronger banks.

What’s more, even in the case of consensual merger of government companies’, they still need to obtain 100% shareholders’ approval and 90% approval from creditors and employees with no dissenting vote; whereas in this case of a forced merger of completely two distinct private companies, they have brushed aside shareholders’ resolutions, which is the standard requisite.

This situation makes India come across as a country with complete lawlessness as far as company law is concerned. Through this forced merger, a dangerous precedent is being set. In the over enthusiasm to kill one corporate, in effect the entire Corporate India is being killed. Considering this, which investor would want to invest in any company where one is exposed to the risk of unlimited liability without ruled by law adjudication?

On one hand, the country seeks to encourage the Limited Liability Partnership (LLP) but in reality the limited liability foundation of public limited companies is getting eroded. This would surely sound the death knell of ‘limited liability’ in Corporate India. As a result, it would have adverse impact on the reviving private domestic investment as well as the inflow of FDIs & FIIs into India.

While the case may be heard in the Supreme Court, the Government has to realise that the negative repercussions of lifting the corporate veil and rupturing limited liability will change the dimensions of Corporate India in the longer run.

Is India prepared for this eventuality?