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    September 2015

Misplaced liability, faulty exchange?

Editor-Post

In a well functioning corporate structure, there is a reason why a subsidiary exists. The purpose of subsidiary is to ensure that the liabilities are properly managed and to limit the liability of the parent corporation in its subsidiary. Limited liability is one of the most sacred and basic principles in corporate finance and its protection is essential for the smooth function of any business model across the world. This seems to be forgotten by the Government in the case of its handling of the NSEL crisis.
 
In 2013 when the crisis was first reported, the Government machinery went through many twists and turns on the pretext of recovering Rs 5,600 crore from the National Spot Exchange defaulters. 
 
In a first of its kind order, the Ministry of Corporate Affairs proposed a forced merger of the National Spot Exchange Ltd with its parent company, Financial Technologies (India) Limited, removed the board of directors and freezed the assets of the FTIL. The draft order was one-sided and an ill-conceived move which aimed at punishing the shareholders of the FTIL for the liabilities of the NSEL, even before the charges were established against its promoters in the court of law.
 
Our Cover Story reveals how the crisis was crafted by an unholy nexus of some bureaucrats and market competitors who were working on “vested interests”. The “possible conspiracy” killed India’s first spot commodity exchange, forced the promoters of the company to bear liabilities and face pending litigation, all in the name of larger public interest. And in doing so, the “vested interests” not only killed a successful business model but also destroyed over one million jobs in the country.
 
The recovery process can be expedited only if the Government takes action against the defaulters because the money is with them. Intense action has been taken only against the NSEL and the FTIL. It is important to uphold the sanctity of the principle of liability that says that a company is a separate entity, distinct from its promoters and other stakeholders.
Is it fair to destroy a company for the promoters' actions even before the verdict of the court of law? 
 
This will set a dangerous precedent. The signal that this move will send to the investors is that whenever a bureaucrat feels, the clause of limited liability can be suspended arbitrarily under the pretext of the public interest. 
 
Therefore, it is important in the public interest to show that the Government respects the norms that form the basis of capital markets and well-functioning corporate structures. It is important that the faith of the investors in our bureaucratic machinery remains intact so that India continues to attract foreign investment.
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