Section 396 of the Companies Act 1956 cannot be applied for the merger of a sick company with a healthy one in public interest, especially when such amalgamation results in erosion of net worth of the healthy company and loss of its shareholder wealth while taking on the liabilities of the sick company.
This was the nub of closing arguments by leading counsel Harish Salve, appearing on behalf of Financial Technologies (now 63 moons) against a government order to merge its scam-hit subsidiary, NSEL, with itself.
Liabilities of NSEL, which was forced by the government to suspend trading of commodity contracts in July 2013, are about Rs 5,600 crore. The net worth of its parent FTIL at the end of September 2016 was Rs 2,800 crore. Salve held that if the merger resulted in 13,000 investors on NSEL getting restitution, who would compensate the loss to shareholders and creditors of FTIL.
“From positive net worth of Rs 2,800 crore, FTIL would be left with a negative net worth of Rs 2,800 crore should the merger happen,” Salve said, enjoining that by its merger order the government had placed the interest of one class of shareholders/investors above that of the other (shareholder /creditor of FTIL), a scheme not envisaged by Section 396, in which shareholders from both companies had to be compensated for any loss.
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Source: Economic Times