Holding

The order of compulsory amalgamation under Section 396 of the Companies Act, 1956 is ultra vires and violative of Article 14 of the Constitution.

Summary

The Supreme Court examined the Central Government's order under Section 396 of the Companies Act, 1956 that compulsorily amalgamated 63 Moons Technologies Ltd. (FTIL) with its wholly‑owned subsidiary National Spot Exchange Ltd. (NSEL). The Court held that the order was ultra vires because the statutory conditions precedent – the "essentiality" test, the public‑interest requirement, and the mandatory assessment of compensation for shareholders and creditors – were not satisfied. The order was also found to be arbitrary and violative of Article 14 of the Constitution, despite the protection afforded by Article 31A. Consequently, the High Court's judgment upholding the amalgamation was set aside and the writ petition was disposed of.

Issues considered

The constitutionality of Section 396 of the Companies Act, 1956 in view of Article 31A of the Constitution
Whether the Central Government's order under Section 396 is a legislative or administrative act and its consequent immunity
Whether the Central Government was "satisfied" that amalgamation was essential in the public interest
Whether the "public interest" requirement under Section 396 was met
Whether the mandatory compensation assessment under Section 396(3) and the right of appeal under 396(3A) were complied with
Whether the amalgamation order is ultra vires and violative of Article 14

Legislation cited

Banking Regulation Act, 1949s. Section 45
Companies Act, 1956s. 209A, s. 237(b), s. 391-394, s. 394, s. 396, s. 396(3), s. 396(3A), s. 396(4), s. 396(5)
Constitution of Indias. Article 13(3), s. Article 14, s. Article 19(1)(g), s. Article 31A
Forward Contracts (Regulation) Act, 1952s. Section 27
Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999

Subjects

Compulsory amalgamationSection 396Public interestEssentiality testCompensation assessmentArticle 14Article 31ACorporate veilNSELFTILJudicial reviewAdministrative law

Judgment

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

A 63 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:
C s.396 provides for compulsory amalgamation of companies in public
interest – Art.31A of the Constitution envisages that any “law”
providing for the amalgamation of two or more corporations in public
interest is immune from challenge on grounds relatable to Art.14 or
Art.19 of the Constitution of India – s.396 of the Companies Act is
D such a law – Constitution of India – Arts.14, 19 and 31A.
Companies Act, 1956: s.396 – Derivative immunity of the
Central Government order – Whether the Central Government’s order
made under s.396 would also receive the protective umbrella of
Art.31A, given the fact that s.396 is undoubtedly protected by Art.31A
E – Whether order of Central Government passed under s.396 is
administrative in nature – Held: The expression “law”, as defined
in Art.13(3)(a), includes an Ordinance, rule, regulation, notification,
and custom or usage having in the territory of India the force of
law – Obviously, therefore, when the expression “order” is used, it
would take colour from Ordinance, rule, regulation, notification,
F which are all legislative in nature, and not administrative – Even
custom or usage having the force of law refers to general rules of
conduct, as opposed to administrative orders passed on the facts of
a case – However, the Central Government’s order in question
directly impacts the rights and liabilities of the companies, their
G shareholders and creditors, sought to be amalgamated under the
order – Such order is not an order in general which applies to all
such companies, but only to the particular companies sought to be
amalgamated and does not lay down any general rule of conduct
by itself, but in fact, follows the general rule of conduct laid down

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by s.396 – Therefore, such an order is not in the nature of legislation A
or delegated legislation – The fact that, under s.396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that the order is administrative and
not legislative in character – Constitution of India – Art.13(3).
Companies Act, 1956: s.396 – Essentiality test – Held: The B
Central Government has to be “satisfied”, meaning thereby, that it
must, on certain objective facts, come to a conclusion that
amalgamation between two or more companies is necessary – This
can only be done if the Central Government finds it “essential”,
i.e., necessary to do so.
C
Companies Act, 1956: s.396 – Public interest – Meaning of –
In the context of compulsory amalgamation of two or more
companies, the expression “public interest” would mean the welfare
of the 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 D
goods or services essential to the nation so that they may contribute
to the nation’s welfare and progress, and in so doing, may also
provide much needed employment – “Public interest” in this context
would, therefore, mean the combining of resources of two or more
companies so as to impact production and consumption of goods E
and services and employment of persons relatable thereto for the
general benefit of the community – Conversely, any action that
impedes promotion of industry or obstructs growth which is in
national or public interest would run counter to public interest as
mentioned in s.396 of the Act.
F
Companies Act, 1956: s.396(3) – Amalgamation order –
Compensation – Right of shareholder or a creditor – s.396(3) speaks
of a shareholder’s or a creditor’s interest in or rights against the
company resulting from an amalgamation order – A shareholder or
creditor gets effected by an amalgamation order if the value of his
share gets depleted as a result of the amalgamation and if dividends G
that have been paid to him are likely to come down as a result of the
amalgamation – Likewise, a creditor of a solvent company is directly
effected by an amalgamation by which the amount loaned by such

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

A creditor becomes, as a result of the amalgamation, less likely to be
paid back in time, than if the amalgamation did not take place –
Every shareholder of a company and indeed, every creditor of a
company, is concerned only with the “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, is likely to dip, and/or loans granted
B
are likely not to be repaid in time or at all as a result of an
amalgamation, such members or creditors of the amalgamating
company are equally entitled to be compensated for this economic
loss as are the members and creditors of the amalgamated company,
depending on the facts of each case – To the extent to which the
C interest or rights of such member or creditor are less than his interest
or rights against the original company, post amalgamation, he shall
be entitled to compensation which is to be assessed.
Companies Act, 1956: ss.396(3), 396(3A) – Compensation to
aggrieved person – The language used in the appeal provision, i.e.
D s.396(3A), is “any person aggrieved by any assessment of
compensation made by the prescribed authority under sub-section
(3) may…… appeal to the Tribunal, and thereupon the assessment
of 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” by
E the prescribed authority – Where no assessment of compensation
whatsoever is made by the prescribed authority, no person can be
aggrieved by an order which does not assess any compensation,
which may be interfered with by the Appellate Tribunal which must
then assess the compensation for itself – The statute clearly entitles
F such shareholders and creditors to have compensation assessed
first by the prescribed authority and then by the appellate authority
– The orders of “non-assessment” by the prescribed authority can
more appropriately be challenged in judicial review proceedings,
in which the High Court, acting under Art.226 of the Constitution
of India can, if an infraction of s.396(3) is found, send the matter
G back to the prescribed authority to determine compensation after
which the right of appeal under sub-section (3A) of s.396 would
then follow.
Companies Act, 1956: s.396 – Applicability of – Compulsory
amalgamation of companies by a Central Government’s order in
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public interest – NSEL, a 99.99% subsidiary of FTIL, defaulted on A
nearly 5,600 crore payments to its 13,000 investors – Trading was
suspended in NSEL after payments default – Order of compulsory
amalgamation of NSEL with appellant (FTIL) under s.396 – Whether
each of the conditions precedent for applicability of s.396 applied
to the facts of the instant case – Held: There is no doubt that in
B
July, 2013, as a result of NSEL stopping trading on its exchange, a
payment crisis of Rs.5600 crore arose – The letter addressed by
FMC to the Ministry of Corporate Affairs show that immediate
reason for amalgamation, according to the FMC was that NSEL, as
a corporate entity, was financially and physically incapable of
effecting any substantial recovery from defaulting members – By C
the time final amalgamation order was passed, emergent situation
of 2013 which required emergent step of compulsory amalgamation
by the passage of time, disappeared – Decrees/awards worth
Rs.3365 crore were obtained against the defaulters, with Rs. 88
crore crystallised by the committee set up by the High Court, pending
D
acceptance by the High Court, even without using the financial
resources of FTIL as an amalgamated company – What was
emergent, and essential, even according to the FMC and the
Government in 2013-2014, was, therefore, largely redressed in 2016,
by the time the amalgamation order was made – Therefore, the
essentiality test, which is the condition precedent to the applicable E
to s.396, was not satisfied – When it comes to public interest as
opposed to the private interest of investors/traders who have not
been paid, the amalgamation order at several places refers to
“essential public interest” as if “essential” goes with “public
interest” instead of being a separate and distinct condition precedent
F
to the exercise of power under s.396 – All the expressions used in
relation to “public interest” have relation only to the businesses of
the two companies that are sought to be amalgamated – The
leveraging of combined assets, capital, and reserves is for the
purpose of only settling liabilities of certain stakeholders and
creditors when the order is read as a whole, and given the fact that G
the businesses of the two companies were completely different – So
far as achieving economy of scale and efficient administration is
concerned, it is difficult to see how this would apply to the fact
situation in this case where NSEL is admittedly a company which
has stopped functioning as a commodities exchange with no hope
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30 SUPREME COURT REPORTS [2019] 8 S.C.R.

A of any revival – Government order itself reflects the net worth of
NSEL as INR 8.86 crore despite its capital being INR 60 crore,
inasmuch as the total reserve and surplus is a negative figure of
INR 51.54 crore – As against this, FTIL’s balance sheet, as on
31.03.2015, discloses that for the same year, FTIL’s net worth is
INR 2779.94 crore – Also, FTIL paid high dividends to its
B
shareholders while NSEL never paid a single dividend ever since
its inception – This would show that Post amalgamation dividend
payable to the shareholders of FTIL is bound to come down –
Correspondingly, the ‘marketable value’ of such shares will also
fall – The ‘economic value’ of shares held in FTIL may, post
C amalgamation, depress the market value of shares held by such
shareholder, and would also impact the dividend payable on such
shares post amalgamation – Further no compensation is provided
either to the shareholders or creditors of FTIL for the economic
loss caused by the amalgamation which is breach of s.396(3) – This
is a case where there is complete non-application of mind by the
D
authority assessing compensation to the rights and interests which
the shareholders and creditors of FTIL have and which are referred
to 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 amalgamation
order is, therefore, ultra vires s.396 and being arbitrary and
E unreasonable, violative of Art.14 of the Constitution of India.
Disposing of the matters, the Court
HELD: 1. INTERPRETATION OF SECTION 396: There
is no doubt whatsoever that Section 396 cannot be challenged on
the ground of Article 14 or Article 19, given Article 31A of the
F Constitution of India. However, this does not mean that Section
396 must be construed in such a fashion that it would lead to
arbitrary 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 Singh
G and Anr. v. Nabi Bux and Anr.[1970] 2 SCR 10
– relied on.
2. DERIVATIVE IMMUNITY OF THE CENTRAL
GOVERNMENT ORDER: The expression used in Article 31A

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is “law”, for which, one is to see the definition contained in Article A
13(3). “Law” in Article 13(3) certainly includes “order”. The only
question is whether this would include an administrative order
as well. 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
B
having in the territory of India 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 custom or
usage having the force of law refers to general rules of conduct,
as opposed to administrative orders passed on the facts of a given C
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. [Paras 24, 26, 27] [62-C; 63-G; 64-A-C]
Union of India and Anr. v. Cynamide India Ltd. and
Anr. (1987) 2 SCC 720 – relied on. D
Prag Ice & Oil Mills v. Union of India (1978) 3 SCC
459 : [1978] 3 SCR 293 – Partly applicable.
3. WHETHER THE CENTRAL GOVERNMENT ORDER IS
ADMINISTRATIVE IN NATURE
E
3.1 The fact that, under Section 396(5), the Central
Government order has to be laid before the Houses of Parliament
does not detract from the fact that this order is administrative
and not legislative in character. The Central Government’s order
directly impacts the rights and liabilities of the companies, their
shareholders and creditors, sought to be amalgamated under the F
order. Such order is not an order in general which applies to all
such companies, but only to the particular companies sought to
be amalgamated. Such an order is not in the nature of legislation
or delegated legislation. The order passed under Section 396 is
qua particular companies and does not lay down any general rule G
of conduct by itself, but in fact, follows the general rule of conduct
laid down by Section 396. Thus, the Central Government order,
made under Section 396, must conform to the fundamental rights
guaranteed by Articles 14 and 19(1)(g) of the Constitution of India.
[Paras 29, 33] [67-D-E; 70-B]
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32 SUPREME COURT REPORTS [2019] 8 S.C.R.

A K.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 and
Ors. [1960] 2 SCR 671 ; Sakal Papers (P) Ltd. and
Ors. v. Union of India [1962] 3 SCR 842 ; Ajay Hasia
B
and 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.
New Bank of India Employees’ Union and Anr. v. Union
C of India and Ors. (1996) 8 SCC 407 : [1996] 3 SCR
322; Quarry Owners’ Association v. State of Bihar and
Ors. (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 –
D held inapplicable.
3.2 Various pre-requisites contained in Section 396 must
first be satisfied before the Section can be said to operate. First
and foremost, the Central Government has to be “satisfied”,
meaning thereby, that it must, on certain objective facts, come to
E a conclusion that amalgamation between two or more companies
is necessary. This can only be done if the Central Government
finds it “essential”, i.e., necessary to do so. Also, this can only
be done in “public interest”. A condition precedent to the passing
of an order by the Central Government under this Section is that
every member or creditor of each of the companies before
F amalgamation shall have, as nearly as may be, the same interest
in or rights against the company resulting from the amalgamation
as he had in the erstwhile company either as a member or a
creditor, and if this is not so, such member or creditor shall be
entitled to compensation which is to be assessed by such authority
G as may be prescribed. Unless an order of compensation is first
made under sub-section (3), and an appeal therefrom has either
not been filed or has been disposed of, no order of amalgamation
can be made. Another condition precedent is an inbuilt provision
for natural justice, namely, that a proposed draft order has first

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been sent to each of the companies concerned. The companies A
may then send suggestions or objections to the Central
Government, which the Central Government must first consider
before passing the final order. Such objections and suggestions
can also be sent from any class of shareholders of either of the
companies, or from any creditors or class of creditors of either of
B
the companies. [Paras 34, 36] [74-C-D; 75-C-F]
4. “WHERE THE CENTRAL GOVERNMENT IS
SATISFIED”: The Central Government’s satisfaction must be
as to the conditions precedent mentioned in the Section as
correctly understood in law, and must be based on facts that have
been gathered by the Central Government to show that the C
conditions precedent exist when the order of the Central
Government 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. Electric D
Power & 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] 2
SCR 93 ; Khudiram Das v. State of West Bengal (1975) E
2 SCC 81 : [1975] 2 SCR 832 ; Tata Cellular v. Union
of India (1994) 6 SCC 651 : [1994] 2 Suppl. SCR
122; 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. F

Haryana Financial Corporation v. Jagdamba Oil Mills
(2002) 3 SCC 496 : [2002] 1 SCR 621 - cited.
5. “ESSENTIAL”: The Central Government’s mind has to
be applied to whether a compulsory amalgamation u/s 396 is G
indispensably necessary, important in the highest degree, and
whether 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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34 SUPREME COURT REPORTS [2019] 8 S.C.R.

A P. Ramanath Aiyer ’s Law Lexicon (4 th Edn.);
Black’s Law Dictionary (10th Edn.) – referred to.
6.1 “PUBLIC INTEREST”: The third pre-requisite of
Section 396 is that the Central Government must apply its mind
when compulsorily amalgamating two or more companies in the
B public interest. “Public interest” is an expression which is wide
and amorphous and takes colour from the context in which it is
used. Public interest is the general interest of the community, as
distinguished from the private interest of an individual. “Public
interest” in the context of compulsory amalgamation of two or
more companies would mean the combining of resources of two
C or more companies so as to impact production and consumption
of goods and services and employment of persons relatable
thereto for the general benefit of the community.
[Paras 45, 54] [88-C; 94-D-E]
State of Bihar v. Maharajadhiraja Sir Kameshwar Singh
D of Darbhanga and Ors. [1952] 1 SCR 889;
Manimegalai v. Special Tehsildar (Land Acquisition
Officer) 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] 2
E SCR 418; Janata Dal v. H.S. Chowdhary and Ors.
(1992) 4 SCC 305:[1992] 1 Suppl. SCR 226; Municipal
Corporation of the City of Ahmedabad and Ors. v. Jan
Mohd. 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;
F Hindustan Lever Employees’ Union v. Hindustan Lever
Ltd. and Ors. (1995) 1 Suppl. SCC 499 : [1994] 4 Suppl.
SCR 723 ; Bihar Public Service Commission v. Saiyed
Hussain Abbas Rizwi and Anr. (2012) 13 SCC 61; R.R.
Tripathi v. Union of India (2010) 1 Bom CR 513 –
G relied on.
6.2 Applicability of Section 396 to the facts of the instant
case. Neither FTIL nor NSEL has denied the fact that paired
contracts in commodities were going on, and by April to July,
2013, 99% (and excluding E-series contracts), at least 46% of
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the turnover of NSEL was made up of such paired contracts. There A
is no doubt that such paired contracts were, in fact, financing
transactions which were distinct from sale and purchase
transactions in commodities and were, thus, in breach of both
the exemptions granted to NSEL, and the FCRA. NSEL
throughout kept representing that it was, in fact, a commodity
B
exchange dealing with spot deliveries. Apart from the Grant
Thornton report and the FMC order, Shri Jignesh Shah, on
10.07.2013, made representations to the DCA and the FMC, in
which he stated that NSEL had full stock as collateral; 10-20% of
open position as margin money; and that the stock currently held
in NSEL’s 120 warehouses was valued at INR 6000 crore, all of C
which turned out to be incorrect. Further, there is no doubt
whatsoever that in July, 2013, as a result of NSEL stopping trading
on its exchange, a payment crisis of approximately INR 5600
crore arose. The further question that remains is whether, given
these facts, the conditions precedent for the applicability of
D
Section 396 were followed. When it comes to whether the Central
Government’s satisfaction as to whether it was “essential” to
amalgamate the two companies, what must be borne in mind is
that NSEL had itself offered a settlement scheme to pay back the
persons who have allegedly been duped. It was found that this
scheme could not really take off, as a result of which, E
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 the
Companies Act has, by the passage of time, itself disappeared.
In fact, as on today, decrees/awards worth INR 3365 crore have F
been obtained against the defaulters, with INR 835.88 crore
crystallised by the committee set up by the High Court, pending
acceptance by the High Court, even without using the financial
resources of FTIL as an amalgamated company. What was
emergent, and therefore, essential, even according to the FMC
and the Government in 2013-2014, has been largely redressed G
in 2016, by the time the amalgamation order was made. Also, the
Central Government order does not apply its mind to the
essentiality aspect of Section 396 at all. In fact, in several places,

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

A it refers to “essential public interest” as if “essential” goes with
“public interest” instead of being a separate and distinct condition
precedent to the exercise of power under Section 396. On facts,
therefore, it is clear that the essentiality test, which is the
condition precedent to the applicable to Section 396, cannot be
said to have been satisfied. [Para 56.2] [112-F-H; 113-A]
B
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 interesting
reading. It will be seen that all the expressions used in relation
to “public interest” have relation only to the businesses of the
C two companies that are sought to be amalgamated. There is no
interest of the general public as opposed to the businesses of
the two companies that are referred to. The leveraging of
combined assets, capital, and reserves is only to settle liabilities
of certain stakeholders and creditors when the order is read as a
D whole, and given the fact that the businesses of the two companies
were completely different. So far as achieving economy of scale
and efficient administration is concerned, it is difficult to see how
this would apply to the fact situation in this case where NSEL is
admittedly a company which has stopped functioning as a
commodities exchange at least with effect from July, 2013 with
E no hope of any revival. The sole object of the amalgamation order
is really only to effect speedy recovery of dues of INR 5600 crore,
which has been referred to in the letter of the FMC to the
Secretary, 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 of
a letter dated 18.08.2014, in which the “business reality” is the
fact that dues of INR 5600 crore have to be paid, and that NSEL
does not have the wherewithal to do so. Thus, its parent
company’s financial resources ought to be used to effect such
G payment. This “business reality”, therefore, speaks only of the
private interest of the investors/traders who have been allegedly
duped (which fact will only be established in suits filed by them in
2014), and nothing beyond (which would show some vestige of
public interest). Equally, the grave shattering of public confidence

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and purpose of establishing commodity exchanges having been A
defeated, according to the Central Government, is a gloss on the
FMC order dated 17.12.2013. If this were so, one would have
expected a resuscitation or revival of the commodities exchange
of NSEL, which could have been achieved by takeover of its
management. It is difficult to imagine that grave shattering of
B
public confidence by the permanent shutting down of the
commodities exchange of the NSEL would be remedied only by
facilitating the paying of dues to certain allegedly duped investors/
traders, which fact will be proved or disproved in suits filed by
them which are pending adjudication in the Bombay High Court.
In any case, this reason is wholly irrelevant as an answer to the C
objection raised by FTIL which is an objection stating that the
Section applies to Government companies alone. Also, had FTIL
made no such objection, no such answer would have been
forthcoming. It is admitted in the order itself that there is no
“adjudication” on the “fraud” in the facts of this case, and thus,
D
not an exercise of lifting of the corporate veil of the pre-
amalgamation companies. The amalgamation order contradicts
itself by then stating that NSEL is the alter ego of FTIL, and
thus, 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; E
119-A-F]
7.2 Under Section 396(4)(b), the Central Government may,
after considering suggestions and objections from the
stakeholders mentioned, make modifications in the draft order
as may seem to it desirable in the light of such suggestions and F
objections. No modification has been made in the body of the
Central Government order as finally made. If the Central
Government had actually considered that each of these three
reasons impact public interest, it would have explicitly said so
after suggestions and objections were made by the various
stakeholders. [Para 59.4] [119-G-H; 120-A] G

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

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

A Mohinder Singh Gill v. Chief Election Commissioner
(1978) 1 SCC 405 : [1978] 2 SCR 272; Chairman, All
India Railway Recruitment Board and Anr. v. K. Shyam
Kumar and Ors. (2010) 6 SCC 614 ; PRP Exports and
Ors. v. Chief Secretary, Government of Tamil Nadu and
Ors. (2014) 13 SCC 692 – referred to.
B
8. Section 396(3) speaks of a shareholder’s or a creditor’s
interest in or rights against the company resulting from an
amalgamation order. A shareholder or creditor gets effected by
an amalgamation order if the value of his share gets depleted as
a result of the amalgamation and if dividends that have been paid
C to him are likely to come down as a result of the amalgamation.
Likewise, a creditor of a solvent company is directly effected by
an amalgamation by which the amount loaned by such creditor
becomes, as a result of the amalgamation, less likely to be paid
back in time, than if the amalgamation did not take place. Such
D rights and interests of members and creditors are substantive
rights which, when effected by the amalgamation, lead to
compensation having to be paid. Every shareholder of a company
and indeed, every creditor of a company, is concerned only with
the “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,
E is likely to dip, and/or loans granted are likely not to be repaid in
time or at all as a result of an amalgamation, such members or
creditors of the amalgamating company are equally entitled to be
compensated for this economic loss as are the members and
creditors of the amalgamated company, depending on the facts of
F each case. To the extent to which the interest or rights of such
member or creditor are less than his interest or rights against
the original company, post amalgamation, he shall be entitled to
compensation which is to be assessed. [Paras 65, 66] [126-G-H;
127-A-C, E]
G Bacha F. Guzdar v. Commissioner of Income Tax
[1955] 1 SCR 876 ; Life Insurance Corporation of India
v. Escorts Ltd. and Ors. (1986) 1 SCC 264 : [1985] 3
Suppl. SCR 909; Commissioner of Income Tax (Central)
Calcutta v. Standard Vacuum Oil Co.

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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 39
TECHNOLOGIES INDIA LTD.) v. U.O.I

[1966] 2 SCR 367 ; Miheer H. Mafatlal v. Mafatlal A
Industries Ltd. (1997) 1 SCC 579 : [1996] 6 Suppl.
SCR 1 – referred to.
9.1 Government order dated 12.02.2016 itself reflects the
net worth of NSEL as INR 8.86 crore from its balance sheet dated
31.03.2015, despite its capital being INR 60 crore, inasmuch as B
the total reserve and surplus is a negative figure of INR 51.54
crore. As against this, FTIL’s balance sheet, as on 31.03.2015,
discloses that for the same year, FTIL’s net worth is INR 2779.94
crore. Also, FTIL has been paying dividends to its shareholders
ranging from 1000% to 250% for the years 2007-2008 till
2015-2016. On the other hand, NSEL has never paid a single C
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. From the Director’s Report and consolidated
financial statements of NSEL, it becomes clear that the company D
may be exposed to liabilities in case of any adverse outcome in
any 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 5600
crore owed to the alleged investors/traders by the 24 defaulters
who are members of NSEL. This would certainly impact the
‘economic value’ of shares held in FTIL as this is one factor that E
would, post amalgamation, depress the market value of shares
held by such shareholder, and would also impact the dividend
payable 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 material F
was produced before the Court to show that share prices would
in fact plummet post-amalgamation. This is despite the fact that
the impugned judgment itself refers to the fact that since the
publication of the draft order on 21.10.2014, the share value which
was INR 211.10, dropped to INR 174.55 ten days later. It is well G
known that the stock market is extremely sensitive to the
slightest event that may render a company less profitable. It is
obvious that the publication of the draft order on 21.10.2014 had
the impact of the share price reducing by a substantial amount,
ten days later. The moment the final amalgamation order dated
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40 SUPREME COURT REPORTS [2019] 8 S.C.R.

A 12.02.2016 was publicised, the share price fell from INR 89.90
on 12.02.2016 to INR 73.90 on 24.02.2016 and further to INR
73.10 on 29.02.2016. Given the fact that the assessment order
dated 01.04.2015 did not provide any compensation to either the
shareholders or creditors of FTIL for the economic loss caused
by the amalgamation in breach of Section 396(3), it is clear that
B
an important condition precedent to the passing of the final
amalgamation order was not met. On this ground also, therefore,
the final amalgamation order has to be held to be ultra vires
Section 396 of the Companies Act, and, being arbitrary and
unreasonable, 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. Section
396(3A), is “any person aggrieved by any assessment of
compensation made by the prescribed authority under
sub-section (3) may…… appeal to the Tribunal, and thereupon
D the assessment of 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” by the prescribed authority. Where no
assessment of compensation whatsoever is made by the
prescribed authority (and on the facts here, the prescribed
E authority has not, in fact, stated that for the reasons given by it,
compensation awarded to FTIL, its shareholders and creditors
is nil), no person can be aggrieved by an order which does not
assess any compensation, which may be interfered with by the
Appellate Tribunal which must then assess the compensation for
F itself. [Para 75] [133-B-E]
Institute of Chartered Accountants of India v. L.K. Ratna
and Ors. [1986] 3 SCR 1049 ; Union Carbide
Corporation v. Union of India [1991] 1 Suppl. SCR
251 ; Charan Lal Sahu v. Union of India (1990) 1 SCC
G 613 : [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 Builders
H [1971] Ch. 34 – referred to.
63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 41
TECHNOLOGIES INDIA LTD.) v. U.O.I

Case Law Reference A
[2006] 5 Suppl. SCR 437 distinguished Para 16
[1978] 2 SCR 272 referred to Para 16
[1988] 1 SCR 188 relied on Para 16
[1969] 2 SCR 866 held inapplicable Para 16 B
[1955] 1 SCR 876 referred to Para 18
[1997] 3 Suppl. SCR 549 cited Para 18
[2000] 4 Suppl. SCR 693 cited Para 18
C
[1967] 1 SCR 898 referred to Para 19
[1969] 3 SCR 108 referred to Para 19
[2002] 1 SCR 621 cited Para 19
[1983] 3 SCR 536 relied on Para 23
D
[1970] 2 SCR 10 relied on Para 23
[1978] 3 SCR 293 partly applicable Para 25
(1987) 2 SCC 720 relied on Para 27
[1996] 3 SCR 322 held inapplicable Para 30
E
[2000] 2 Suppl. SCR 211 held inapplicable Para 31
[1959] 1 Suppl. SCR 274 relied on Para 33
[1960] 2 SCR 671 relied on Para 33
[1962] 3 SCR 842 relied on Para 33 F
[1981] 2 SCR 79 relied on Para 33
[1987] 1 SCR 819 relied on Para 33
[1969] 3 SCR 865 referred to Para 38
[1970] 2 SCR 177 referred to Para 39 G
[1975] 2 SCR 93 referred to Para 39
[1975] 2 SCR 832 referred to Para 39
[1994] 2 Suppl. SCR 122 referred to Para 39
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42 SUPREME COURT REPORTS [2019] 8 S.C.R.

A [2008] 4 SCC 144 referred to Para 40
[1989] 3 SCR 356 referred to Para 41
[1999] 3 SCR 653 referred to Para 44
[1952] 1 SCR 889 relied on Para 45
B [2018] 13 SCC 491 relied on Para 46
[1983] 2 SCR 418 relied on Para 47
[1992] 1 Suppl. SCR 226 relied on Para 48
[1986] 2 SCR 700 relied on Para 49
C
[2003] 2 Suppl. SCR 684 relied on Para 50
[1994] 4 Suppl. SCR 723 relied on Para 51
(2012) 13 SCC 61 relied on Para 52
(2010) 1 Bom CR 513 relied on Para 53
D
[2010] 6 SCC 614 referred to Para 64
[2014] 13 SCC 692 referred to Para 64
[1985] 3 Suppl. SCR 909 referred to Para 69
[1966] 2 SCR 367 referred to Para 70
E
[1996] 6 Suppl. SCR 1 referred to Para 71
[1986] 3 SCR 1049 referred to Para 75
[1991] 1 Suppl. SCR 251 referred to Para 75

F [1989] 2 Suppl. SCR 597 referred to Para 75
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4476
of 2019
From the Judgment and Order dated 04.12.2017 of the Division
Bench of High Court of Judicature at Bombay in Writ Petition No. 2743
G of 2014
With
Civil Appeal Nos.4478 of 2019, 4477 of 2019, 4479 of 2019, 4481
of 2019, 4480 of 2019 and Writ Petition (Civil) No. 368 of 2019

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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 43
TECHNOLOGIES INDIA LTD.) v. U.O.I

Tushar Mehta, SG, Ms. Pinky Anand, ASG, Mukul Rohatgi, A.M. A
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. Tanvi
Manchanda, Ms. Priyanka Vora, E. C. Agrawala, Aviskar Singhvi,
Himanshu Satija, Ms. Tanvi Manchanda, Arvind Lakhawat,
B
Harshwardhan Reddy, Amit Agrawal, Ms. Diksha Rai, Ms. Palak
Mahajan, Ishan Bisht, Nakul Mohta, Ardhendumauli Kumar Prasad,
Saurabh Kirpal, Rahul G. Tanwani, V.C. Shukla, VNL Sindura, Nikhil
Goel, Arvind Lakhawat, Ms. Ranjeeta Rohatgi, Vikas Mehta,
Varun Singh, Ms. Anushree Menon, Ms. Nupur Desai, Ms. Samiksha
Godiyal, Ms. Sanam Tripathi, Shekhar Vyas, Rajesh Ranjan, Ms. Pratima C
Gupta, Anup Dawan, Joel, Ms. Snidha Mehra, Sumit Teterwal, Chakitan
Vikram Shekher Papta, Ms. Kirti Dua, Ms. Saudamini Sharma, Hemant
Arya, 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,
D
Ms. Disha Ray, Sanjay Lodha, Devanshu Sajlan, Mrs. Sumita Ray, Pratap
Venugopal, 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. E
2. This batch of appeals and writ petition raises questions as to
the applicability and construction of Section 396 of the Companies Act,
1956, which deals with compulsory amalgamation of companies by a
Central Government order when this becomes essential in the public
interest. The appellant, 63 Moons Technologies Ltd. (hereinafter referred F
to as “FTIL”, which name was changed to 63 Moons Technologies Ltd.
on 27.05.2016), is a 99.99% shareholder of the National Spot Exchange
Ltd. (hereinafter referred to as “NSEL”), and is a listed company. About
45% 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 Indian
public. Approximately 5% of the shareholding is held by institutional G
investors. FTIL is a profitable company, having a positive net worth of
over INR 2500 crore, and is in the business of providing software which
is used for trading by brokers and exchanges across the country. FTIL
has about 900 employees, and a Board of Directors which is different
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44 SUPREME COURT REPORTS [2019] 8 S.C.R.

A from the Board of Directors of its wholly owned subsidiary, i.e., NSEL.
On the other hand, NSEL was incorporated in 2005 by Multi Commodities
Exchanges [“MCX”] and its nominees. NSEL provided an electronic
platform for trading of commodities between willing buyers and sellers
through brokers representing them. On 05.06.2007, the Union of India
issued an exemption notification under Section 27 of the Forward
B
Contracts (Regulation) Act, 1952 [“FCRA”] exempting forward
contracts of one-day duration for sale and purchase of commodities
traded on NSEL from operation of the provisions of the FCRA. NSEL
commenced operations in October 2008. On 27.04.2012, the Department
of Consumer Affairs [“DCA”] issued a show cause notice to NSEL as
C to why action should not be initiated against it for permitting transactions
in alleged violation of the exemption granted to it under the FCRA. NSEL
replied to the show cause notice on 29.05.2012 stating that it had not
violated the exemption granted to it. Without adjudicating upon the show
cause notice, on 12.07.2013, the DCA directed NSEL to give an
undertaking that no further contracts shall be launched until further
D
instructions, and that all existing contracts will be settled on due dates.
This was effectively a “freezing” order. On 22.07.2013, NSEL gave an
undertaking to the DCA.
3. Earlier, in January 2013, representatives of MMTC Ltd., a
Government of India undertaking, which was one of the trading members
E of NSEL, visited some of the warehouses which were at different locations
in order to verify stocks therein and reported existence of full commodity
stock in the said warehouses. Sometime in July 2013, 13,000 persons
who traded on the platform of NSEL claimed to have been duped by
other trading members (being 24 in number), who defaulted in payment
F of obligations amounting to approximately INR 5600 crore. Due to the
sudden and abrupt stoppage of fresh contracts, and media reports about
the same, market participation on NSEL’s platform reduced considerably,
forcing NSEL to suspend trading and close its spot exchange operations
w.e.f. 31.07.2013. The Forward Markets Commission [“FMC”]
recommended to the DCA on 12.08.2013 that steps be taken to verify
G quantity and quality of commodities at various warehouses; financial
status of buyers and trading members be ascertained, and the liability be
fixed on promoters of NSEL, i.e., FTIL. On 14.08.2013, NSEL issued a
press release in which Shri Sinha, its CEO/MD, made a statement that
he and his management team were responsible for all operations at
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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 45
TECHNOLOGIES INDIA LTD.) v. U.O.I [R. F. NARIMAN, J.]

NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL by A
Grant Thornton LLP, and the Union of India, on 30.09.2013, ordered
inspection of the books of accounts of NSEL and FTIL under Section
209A of the Companies Act. On the same day, the Economic Offences
Wing [“EOW”] registered cases against Directors and key management
personnel of the NSEL and FTIL, trading members of NSEL, and brokers
B
of NSEL under various provisions of the Indian Penal Code and the
Maharashtra Protection of Interest of Depositors Act, 1999 [“MPID
Act”]. Several suits were filed by the traders who allegedly have been
duped, the most important of which is Suit No.173 of 2014 pending in the
Bombay High Court, which is a representative suit filed under Order I
Rule 8 of the Code of Civil Procedure, 1908 [“CPC”]. NSEL also filed C
third-party notices in the said suit for recovery of INR 5600 crore against
24 defaulter traders. It has also filed various arbitration proceedings
against them, and is in the process of recovery of INR 3365 crore out of
INR 5600 crore, which are in the form of court decrees and arbitration
awards.
D
4. On 17.12.2013, based on the Grant Thornton report dated
21.09.2013, the FMC passed an order declaring that FTIL was not “fit
and proper” to hold equity in any commodity exchanges, and must dilute
its shareholding to not more than 2% of the paid-up equity capital of
MCX. The said order is under challenge in Writ Petition No. 337 of 2014
before the Bombay High Court. On 28.02.2014, the Division Bench of E
the Bombay High Court refused a prayer for stay of the aforesaid order,
stating that findings of fact of a serious nature have been recorded against
the appellant, and the fraud perpetrated is to the tune of INR 5500 crore.
5. On 06.01.2014, the Economic Offences Wing, Mumbai, filed
chargesheets against the Managing Director and CEO of NSEL, Shri F
Sinha, the Head of Warehousing of NSEL, Shri Babu Kanvi, and two
other defaulters. In the chargesheet, it was revealed that the aforesaid
three employees of NSEL, in exchange for monetary kickbacks, had
colluded with the defaulters to enable them to trade on NSEL’s platform
without depositing adequate goods in the warehouses, in breach of rules G
and 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 the
representative Suit No. 173 of 2014, vide order dated 02.09.2014, the
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46 SUPREME COURT REPORTS [2019] 8 S.C.R.

A Bombay High Court appointed a three-member committee consisting of
Mr. Justice V.C. Daga, Mr. J. Solomon, and Mr. Yogesh Thar for
ascertaining and crystallising the liability of the defaulters and to assist
in recovery of debts from the defaulters. This committee continues to
function even on date. Thus, in addition to INR 3365 crore, i.e., the total
of decrees and arbitration awards against the defaulters, this high-level
B
committee has also crystallised a further sum of INR 835.88 crore to be
recovered from the defaulters, which is pending before the Bombay
High Court.
7. On 19.09.2014, the Ministry of Finance, Government of India,
issued a notification withdrawing the exemption granted to NSEL vide
C notification dated 05.06.2007. Exemptions granted to the National
Commodity and Derivatives Exchange Ltd. (NCDEX) Spot Exchange
and the National Agricultural Produce Market Committee (APMC) were
also withdrawn as the Government was of the view that ready delivery
or spot delivery contracts in commodities ought not to be traded on
D commodities exchanges at all. On 15.10.2014, Dr. K.P Krishnan,
Additional Secretary, Department of Economic Affairs, wrote a letter to
the Ministry of Corporate Affairs stating that FTIL and NSEL appear to
be maintaining separate identities for a fraudulent purpose, i.e., to
deprive 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,
E amalgamation of two companies, where one has defrauded market
participants and the other company is cash-rich and capable of
addressing the payment crisis more effectively. It was therefore
proposed to merge FTIL and NSEL under Section 396 of the
Companies Act. On 21.10.2014, a draft order of amalgamation, made in
F accordance with Section 396(3) of the Companies Act, was circulated
to the relevant stakeholders. As a result, FTIL filed Writ Petition No.
2743 of 2014 on 10.11.2014, in which it challenged the impugned draft
order. On 27.11.2014, the Bombay High Court directed the parties to
maintain status quo. On 16.12.2014, the Union of India filed an affidavit
in reply, categorically confirming that the impugned draft order has been
G made by the Central Government on the basis of the FMC’s proposal
dated 18.08.2014. On 04.02.2015, the Bombay High Court vacated the
status quo order, and passed an order allowing FTIL, NSEL, and their
shareholders to file their objections to the draft amalgamation order.
Meanwhile, under Section 396(3), a compensation order was made on
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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 47
TECHNOLOGIES INDIA LTD.) v. U.O.I [R. F. NARIMAN, J.]

01.04.2015, which involved compensation only to a particular shareholder A
of NSEL. On 28.08.2015, the Central Government issued a notification
to merge the functions of the FMC with the Securities and Exchange
Board of India [“SEBI”] w.e.f. 28.09.2015. On the same day, the FCRA
was also repealed. Thus, SEBI was now vested with the powers of the
FMC which is to be governed by the Securities and Exchange Board of
B
India Act, 1992 [“SEBI Act”].
8. FTIL and NSEL were granted a hearing on their objections to
the impugned draft amalgamation order by a committee consisting of
Shri Pritam Singh, Additional Secretary to the Government of India, and
Shri H.P. Chaturvedi, Joint Secretary and Legal Advisor, Ministry of
Law and Justice in October 2015, pursuant to a Bombay High Court C
order in the Writ Petition 2743 of 2014 pending before it.
9. On 12.02.2016, a final amalgamation order was passed in terms
of Section 396(3), thereby merging FTIL and NSEL, wherein all assets
and liabilities of NSEL would become assets and liabilities of FTIL. The
writ petition already filed was amended on 28.03.2016 to include a D
challenge to this order. On 04.12.2017, the impugned judgment of the
Bombay High Court was passed in which the said writ petition was
dismissed.
10. We have heard Shri Mukul Rohatgi, Shri Vikas Singh, Dr.
A.M. Singhvi, and Shri Kavin Gulati, learned Senior Advocates, and Shri E
Arvind Lakhawat, learned Advocate, on behalf of the appellants.
According to learned counsel, the first important point to be noted is that
in company law, the holding company, viz. FTIL, is distinct and separate
from its subsidiary, viz., NSEL. It was pointed out to us that there are
separate and independent Boards of Directors for managing the day-to- F
day affairs of both companies, which deal in completely different
businesses. It was pointed out that FTIL has never participated in the
profits of NSEL, and except for receiving annual maintenance charges
for providing technology-related services by way of fees, FTIL has not
derived any revenue from NSEL. In fact, over a long period of nine
years, FTIL has received only a sum of INR 84 crore from NSEL which, G
in any case, is deposited by FTIL in the Bombay High Court pursuant to
an order dated 12.06.2015 in Writ Petition No. 2187 of 2015. Learned
counsel were also at pains to point out that NSEL has not defrauded
anybody since it is only a platform. Currently, the business of NSEL is
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48 SUPREME COURT REPORTS [2019] 8 S.C.R.

A closed, whereas, on the other hand, the business of FTIL is flourishing.
A compulsory amalgamation order would be ultra vires Section 396 if
the only object is to foist unadjudicated liability of NSEL on FTIL. It was
also pointed out that the basis of the amalgamation order was a letter by
the FMC, which in turn was based on a “forensic” audit report of 2013
by Grant Thornton. The so-called report itself stated that there is no
B
independent verification of information provided, and consequently, would
not constitute an audit, let alone a forensic audit. It also stated that should
additional information become available, which impacts upon conclusions
reached in the report, Grant Thornton reserved the right to amend their
findings, which are not intended to be interpreted to be either legal advice
C or opinion; in short, that the findings themselves were inconclusive.
11. Learned counsel have argued that the impugned order is ultra
vires Section 396 for many reasons. First and foremost, the condition
precedent to passing an amalgamation order is that compensation be
assessed under Section 396(3) of the Act. Compensation has to be
D assessed qua both the transferor and transferee company. In the present
case, 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 same
position “as nearly as possible”. In the present case, the amalgamated
company would become a company of negative net worth upon
E amalgamation, having had a positive net worth of almost INR 2800 crore
pre-amalgamation. This being so, the very basis for application of Section
396 would disappear as the amalgamated company, i.e., the transferee
company would have to pay the compensation that is assessed. This
obviously cannot be done when the amalgamated company itself becomes
F a negative net worth company. It was then argued that the amalgamation
order interfered with the judicial process in that decrees and arbitral
awards obtained by NSEL against defaulters are wholly ignored. Further,
the process of adjudication, which will determine whether there are
defaults and whether they need to be paid back, has been short-circuited
by amalgamating NSEL with FTIL. Thus, the learned counsel have all
G argued that various conditions precedent for applicability of Section 396
are wholly absent. Also, in the present case, the Central Government
has not applied its mind to whether such an order is, first of all, “essential”.
Secondly, unadjudicated so-called liabilities to persons who are members
of one particular exchange can hardly be said to be something which
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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 49
TECHNOLOGIES INDIA LTD.) v. U.O.I [R. F. NARIMAN, J.]

requires the Central Government to amalgamate both companies in the A
“public interest”. The public interest consists of the interests of the general
public which would include, inter alia, the interest of the 63,000
shareholders of FTIL, who are now going to be mulcted with a huge
liability which would reduce the market value of their shares to nil. They
have cited several judgments to buttress these submissions.
B
12. Thus, the amalgamation order oversteps recognised separation
of powers’ limits, and is therefore, ultra vires both Section 396 of the
Companies Act and the Constitution of India. It was then argued that
there are three grounds in support of the order of amalgamation, which
are to be found in the impugned judgment, namely:
C
A. Restoring / safeguarding public confidence in forward contracts
and exchanges which are an integral and essential part of the
Indian economy and financial system, by consolidating the
businesses of NSEL and FTIL;
B. Giving effect to the business realities of the case by D
consolidating the businesses of FTIL and NSEL and preventing
FTIL from distancing itself from NSEL, which is even otherwise
its alter ego; and
C. Facilitating NSEL in recovering dues from the defaulters by
pooling human and financial resources of FTIL and NSEL E
Admittedly, reasons A and B are not in the draft order. This being
so, obviously, no objections or suggestions could be made qua reasons A
and B, as a result of which the final order would, therefore, be ultra
vires Section 396(3) of the Companies Act.
13. All the stated objectives at page 1 of the amalgamation order F
itself – (a) to leverage combined assets, capital and reserves; (b) to
achieve economy of scale; (c) efficient administration; (d) gainful
settlement of rights and liabilities of stakeholders and creditors; (e) to
consolidate businesses; and (f) to ensure coordination and policy – are
totally vague and do not lead to any application of mind to such
G
amalgamation order being essential in public interest. Article 31A of the
Constitution of India was relied upon, and it was argued that amalgamation
under Article 31A(1)(c) of two or more corporations can only be made
in public interest or in order to secure proper management of any of the
corporations, which is wholly missing in the present case. It was also
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50 SUPREME COURT REPORTS [2019] 8 S.C.R.

A argued that only Shri Pritam Singh had signed the order which dismissed
the objections, even though the objections were heard by a two-member
committee. They also made submissions that even otherwise, the
impugned order was violative of natural justice and of Articles 14, 19,
and 300A of the Constitution of India. Also, since the amalgamation
order is based upon an order of the FMC, which in turn is based upon
B
the Grant Thornton report, which was delivered in a great hurry, and
with such disclaimers that it could never be relied upon to render final
findings, as has been done by the amalgamation order, the amalgamation
order itself would be without application of mind, excessive and arbitrary,
and violative of Article 14 of the Constitution of India on this score alone.
C 14. When it came to the impugned judgment, the learned counsel
for the appellants were at pains to point out that when the impugned
judgment held that no compensation need be paid to FTIL as the number
of shares in the amalgamated company of shareholders remain the same,
economic value or market value of the shares was totally ignored. Thus,
D in ignoring economic value, a totally artificial, formal, and non-substantial
test has been applied by the Bombay High Court, which says that there
is no necessity to compensate the shareholders of FTIL, even though
once they become members of the amalgamated company, their shares
would 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 the
E three grounds of the amalgamation order, being reasons for the
amalgamation 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 which
are an integral and essential part of the Indian economy, does not obtain
F as there were only three commodity exchanges in the country, all of
which were shut down w.e.f. September 2014. No similar exchanges
have been created subsequently. In any case, the business done at such
exchanges cannot be said to be an integral and essential part of the
Indian 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. To
G come to a conclusion that one is the alter ego of the other is not only
contrary to the facts pointed out hereinabove, namely, that the businesses
of the two companies are entirely different and the management of both
companies is by completely different and distinct Boards of Directors.
Thus, to arrive at the conclusion that one company is the alter ego of the
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other, without adjudication, would itself be arbitrary and violative of Article A
14 of the Constitution of India. The only reason which would remain,
therefore, would be reason C, which is that the real object of the entire
exercise to recover alleged dues from alleged defaulters pre-adjudication
and pending adjudication, which would be looking at the problem in a
wholly one-sided way, and would be an excessive invasion of the rights
B
of the shareholders and creditors of FTIL, all of whom have
overwhelmingly voted against amalgamation. In fact, it is pointed out
that there is no question of “public interest” and Section 396 is actually
used in order to penalise “Ram”, namely, NSEL and FTIL, for the default
of “Shyam”, namely, the 24 alleged defaulters, when not even a single
default or any civil or criminal wrong can be attributed either to FTIL or C
to NSEL. The impugned order would therefore also fail on the ground of
proportionality, which is a facet of Article 14. For all these reasons, in
addition, the impugned order ought to be struck down as ultra vires
Article 31A of the Constitution of India and Section 396 of the Companies
Act, and be declared to be violative of Article 14, Article 19 and Article
D
300A of the Constitution of India.
15. Shri Shyam Divan, learned Senior Advocate appearing on behalf
of Respondent No. 4, NSEL Investors Action Group, supported the
impugned judgment in its entirety. According to the learned Senior
Advocate, it must never be forgotten that FTIL held 99.9998% of NSEL’s
shares, and that NSEL was promoted by and is part of the FTIL group. E
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 be
its own, and was part of its “exchange verticals”. Shri Jignesh Shah is
the common linchpin of both the companies. He holds 45% shares of
FTIL and is its Chairman-cum-Managing Director. He is also Vice F
Chairman on the Board of NSEL, being one of the “key managerial
personnel” of the aforesaid company. He also was a member of the
Audit Committee of NSEL. All the minutes of the Board meetings of
NSEL were regularly tabled at the Board meetings of FTIL, showing
therefore, that FTIL has full knowledge of the goings-on in NSEL.
NSEL’s outward emails were routed through an outbox called “FT G
outbox” through which all emails of all FTIL-group companies were
routed. What is clear, therefore, is that on a reading of the Grant Thornton
report, NSEL has, at least from 2009, promoted what are called “paired
contracts” in commodities which were, in fact, financing transactions,
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52 SUPREME COURT REPORTS [2019] 8 S.C.R.

A which were totally distinct from sale and purchase transactions in
commodities. In fact, by April to July, 2013, 99% of the turnover of
NSEL was made up of such paired contracts. This mechanism was in
breach of the conditions of exemption granted to NSEL dated 05.06.2007,
and in breach of the provisions of the FCRA. Contrary to what was
actually going on in NSEL, NSEL kept inducing persons to come to its
B
platform by reiterating that they deal only with commodities and spot
delivery of the same. It is only in 2012 that the FMC, being apprised of
the real activities of NSEL, wrote to the DCA, indicating that its business
was in complete breach of the FCRA. What is extremely important is
that Shri Jignesh Shah made representations to the DCA and the FMC
C on 10.07.2013, in which he stated that NSEL had full stock of commodities
as collateral and had 10-20% of open position as margin money. He also
stated that the stock currently held in NSEL’s 120 warehouses was
valued at around INR 6000 crore. It is in July, 2013 that the payment
crisis of INR 5600 crore arose on NSEL, FTIL admitting that this was
the result of a fraud. On 14.08.2013, NSEL wrote to the FMC, setting
D
out a detailed settlement plan. The plan indicated the period within which
the entire dues would be paid, with simple interest at 8% to 16% per
annum. This plan was an abject failure. As a result, a forensic audit was
conducted by Grant Thornton, which in its report dated 21.09.2013, came
out with damning facts and figures as to the real operations of NSEL,
E namely, that they are not a commodity exchange, but a finance exchange,
and that no commodities were really in stock. As a result, the FMC
issued show cause notices and then passed its order dated 17.12.2013
based on the aforesaid report, in which it found NSEL guilty of severe
malpractice. Based on this order, the draft order and final order of
amalgamation were then made. Shri Divan was at pains to point out that
F
as early as on 18.08.2014, the FMC had written a detailed letter to the
Secretary, Ministry of Corporate Affairs, in which it indicated that as
NSEL was financially incapable of repaying all those investors/traders
who allegedly got duped, it would be expedient in public interest to
amalgamate NSEL with its parent, FTIL, so that its parent’s resources
G could be used to repay these debts. He then argued that the reason for
the amalgamation order was not merely the repayment of debts of the
allegedly duped investors/traders, but to instil confidence in commodity
markets, for it is only when their debts are immediately paid would persons
come forward to platforms like NSEL to trade in commodities. According
to the learned Senior Advocate, there was no breach of natural justice in
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passing the final amalgamation order as FTIL and NSEL were both A
heard pursuant to a Bombay High Court order, even though Section 396
of the Companies Act does not require any hearing. He also argued that
the order of amalgamation is of the nature of delegated legislation and is
not an administrative order, as a result of which, the immunity granted
by Article 31A to “all laws” dealing with such amalgamation from
B
challenge 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 be
gone into as they all pertained to infractions of Articles 14 and 19 of the
Constitution of India. According to the learned Senior Advocate, the
order was passed after being satisfied on the objective facts set out
hereinabove that it was essential in public interest to pass such order C
and could not, therefore, be held to be ultra vires. He also supported the
judgment of the High Court when it stated that the economic value of
shares of FTIL is not the subject matter of Section 396, and that, therefore,
it was not necessary to provide FTIL’s shareholders any compensation
under Section 396(3).
D
16. Shri Rakesh Dwivedi, learned Senior Advocate also appearing
on behalf of Respondent No.4, supplemented the submissions of Shri
Divan. According to him, nowhere does the Central Government order
direct any payment to be made by the amalgamated company. The
amalgamation is only so that the finances of FTIL can be used to pursue
on-going litigation as NSEL does not have the wherewithal to do so. E
Thus, it is wholly incorrect for the appellants to say that FTIL will become
mulcted with the liabilities of NSEL, as a result of which the shareholders
of FTIL will suffer. He added that the overwhelming majority of shares
in FTIL are owned by Shri Jignesh Shah and his family (45%) and by
Shri Ravi Sheth and Shri Bharat Sheth (8%). Thus, the majority shares F
held in FTIL are by two masterminds of the scam. That apart, after the
scam, 24% of the shares have been purchased by speculators, taking
advantage of the low price at which such shares were offered. Such
persons, therefore, are purely speculative investors who do not need to
be compensated under Section 396 of the Act. Also, the economic value
of shares, if at all it is to be taken into account, is an uncertain and G
fluctuating phenomenon. As examples, he stated that the book value of
a share of FTIL, after the scam broke out, was only INR 2/-, whereas
the listed value actually went up after the FMC order of 17.12.2013. All
this, therefore, is dependent on market forces, and share price varies
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54 SUPREME COURT REPORTS [2019] 8 S.C.R.

A according to market forces and not as a result of any amalgamation that
is effected. He also added that it is incorrect to state that one of the
conditions precedent for applicability of Section 396 was absent. Even if
a compensation order was made awarding nil compensation to
shareholders and creditors of FTIL, they could have appealed against
the same. Not having done so, it cannot be said that the Central
B
Government order was passed without adhering to the provisions of
Section 396(3) and (4) of the Act. When it came to the three grounds of
public interest stated by the High Court, the learned Senior Advocate
argued that grounds (a) and (b) are only inferences to be drawn from
facts which are all stated in the order, and therefore, need not have been
C in the draft order. There is thus no infirmity or breach of principles of
natural justice as provided in Section 396(3) and (4). He was at pains to
analyse Article 31A, and stated that the expression “public interest”
contained in Article 31A will have to be construed broadly. Equally, the
word “essential” in Section 396 is essentiality according to the Central
Government, and thus, very wide latitude needs to be extended to the
D
Government when it exercises its discretion, stating that it is essential in
public interest to amalgamate two companies. He laid great emphasis
on the judgment in Ganesh Bank of Kurundwad Ltd. v. Union of
India, (2006) 10 SCC 645 [“Ganesh Bank”], stressing that
amalgamations that are made under Section 45 of the Banking Regulation
E Act, like amalgamations made under Section 396, can be made so that a
weak entity merge with a strong entity in the interest of the depositors of
the weak entity. He also cited various judgments to show that stock
exchanges are intimately linked with the economy of the country, and
therefore, if anything goes wrong with them, there is a direct link with
public interest. He emphasized the fact that in Section 396(3), the
F
shareholders of FTIL only need to be compensated “as nearly as may
be” and that mathematical precision is not necessary. He then
distinguished the judgment in Mohinder Singh Gill v. Chief Election
Commissioner, (1978) 1 SCC 405 [“Mohinder Singh Gill”], cited by
the appellants, stating that where larger public interest is involved, the
G ratio of that judgment will not apply. He cited two judgments in support
of this proposition. He also went on to cite certain judgments which
distinguished K.I. Shephard v. Union of India, (1987) 4 SCC 431
[“K.I. Shephard”], and therefore, argued that the Central Government
order passed under Section 396 is really in the nature of delegated
legislation and need not conform to any natural justice outside what is
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provided for in the Section itself. He then cited certain judgments on A
lifting 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 Weaving
Co. Ltd., [1969] 2 SCR 866 [“J.K. (Bombay) (P) Ltd.”], the Central
Government order would have statutory force, and therefore, cannot be
said to be a mere administrative order.
B
17. Shri Arvind Datar, learned Senior Advocate appearing on
behalf of SEBI, fully supported the impugned judgment and took us
through various portions of it. He was at pains to point out that the Grant
Thornton report was a report of a forensic auditor chosen by NSEL
itself, though required to do so by the FMC. He took us through the
FMC order dated 17.12.2013 meticulously, and said that none of the C
findings therein could be assailed by either FTIL or NSEL. He then
referred to the Central Government order and supported the High Court
judgment’s upholding of it. He then relied upon the Director’s Report of
NSEL dated 20.07.2015, and balance sheet as on 31.03.2015 to show
that no potential liability of INR 5600 crore is at all referred to in the D
Director’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 it
would not be responsible for any liabilities incurred by its members
except to the extent of the SG fund created out of the members’
contribution. He then argued that given the magnitude of the scam that
broke out in July 2013, the Government had to act. It could have chosen E
one of many ways in which to act, but since it had bona fide chosen the
amalgamation route provided by Section 396 of the Companies Act, it is
obvious that in dealing with a scam of this magnitude, the Government
has acted in public interest.
18. Ms. Pinky Anand, learned Additional Solicitor General F
appearing on behalf of the Union of India, meticulously took us through
a long list of dates and events which showed that NSEL had flouted the
conditions of its exemption order and had never really carried out ready
delivery or spot delivery contracts in goods. Indeed, according to her,
NSEL never had a single registered warehouse in its name as the G
Warehousing Development and Regulatory Authority had rejected
NSEL’s application for registration of its warehouses as far back as on
16.05.2011. Therefore, NSEL stating that it had 120 warehouses owned
by itself was a misrepresentation made to the public from the very
beginning. It is also clear, that when the scam broke out, Grant Thornton,
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56 SUPREME COURT REPORTS [2019] 8 S.C.R.

A as forensic auditor, went into the affairs of NSEL and came out with a
number of key findings, which she referred to and took us through portions
of the Grant Thornton report. The FMC order dated 17.12.2013 was
also referred to and relied upon by her. She also referred to the fact that
the exemption order dated 05.06.2007 granted to NSEL was withdrawn
on 19.09.2014 as commodities markets which were supposed to be
B
markets where spot delivery of goods took place, had never in fact taken
place and therefore, exemption granted to all spot exchanges dealing in
commodities, including two other spot exchanges that existed, were
withdrawn. However, the Bombay Stock Exchange Ltd. (BSE), the
National Stock Exchange of India Ltd. (NSE), and MCX continued with
C commodity trading, but not on a spot basis. She also referred us to a
subsequent event, that is an event subsequent even to the impugned
judgment, namely, to a serious fraud investigation report dated 31.08.2018
which, according to her, corroborated all the findings made by Grant
Thornton, the FMC, and the Central Government by its final order. She
then argued that Section 396 of the Companies Act is a special, self-
D
contained, standalone code by itself and must be read as such, and that
all procedural aspects of Section 396 have been complied with on the
facts of the present case. The satisfaction of the Central Government
that it is essential in public interest to act under Section 396 is purely
subjective satisfaction. She referred to and relied upon Bacha F. Guzdar
E v. Commissioner of Income Tax, [1955] 1 SCR 876 [“Bacha F.
Guzdar”], to support the reasoning of the High Court on the compensation
order. She also referred to and relied upon the share market prices to
show that market fluctuations took place on their own, and that share
prices plummeted only as a result of the scam which came to light in
July, 2013. She also stated that since neither FTIL nor its shareholders
F
and creditors filed any appeal against the compensation order, they waived
their right to do so. She then supported the final amalgamation order and
stated 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 countered
G the submission of Shri Rohatgi that of the two persons who heard the
objections, only one person signed, and therefore, their report would be
non-est. She stated that this technical objection cannot stand in the way
of the final government order which took into account all objections and
suggestions made, and answered all of them. She also referred to the
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role of stock markets in the national economy and stated that to prop up A
stock and commodities exchanges is certainly in public interest. The
three distinct grounds on public interest, found by the High Court, are
more than sufficient to sustain the impugned Central Government order.
Finally, in her last written argument, she relied upon two judgments of
this Court, namely, Union of India v. G. Ganayutham, (1997) 7 SCC
B
463 and Om Kumar v. Union of India, (2001) 2 SCC 386, stating the
current position of the doctrine of proportionality in administrative law.
19. Shri Tushar Mehta, learned Solicitor General for India, who
also appeared on behalf of the Union of India, re-emphasised the facts
which led to the final amalgamation order. According to him, the impugned
order dated 12.02.2016 is based on public interest as it reflects the C
Government’s reaction to a large scam which broke in the year 2013,
and which effected the commodities market generally. He dwelt at some
length on subjective satisfaction and judicial review, and referred to
Barium Chemicals Ltd. v. Company Law Board, [1966] Supp SCR
311 [“Barium Chemicals”], Rohtas Industries Ltd. v. S.D. Agarwal, D
[1969] 3 SCR 108 [“Rohtas Industries”], and other judgments to
emphasise that it was not for the Court to sit in judgment over the
sufficiency of the reasons for which the Central Government passed its
order in public interest. He also stated that the right to choose between
different courses of action is a right inherent in a responsive government,
and it is only when such choice is so unfair or unreasonable that no E
reasonable person would have taken such action, that the Court can
intervene. For this purpose, he cited Haryana Financial Corporation
v. Jagdamba Oil Mills, (2002) 3 SCC 496. According to him, essentiality
is not reviewable except by the Wednesbury test, and the Court should
ask itself the question as to whether no reasonable person could have F
concluded that the impugned order was essential in the public interest.
He reiterated that the order dated 12.02.2016 is not ultra vires Section
396 as several findings which show that amalgamation is essential in
public interest has been arrived at on the basis of undisputed facts, and
that therefore, the said order should be upheld. He also argued that such
order, if passed, is in the nature of delegated legislation, and therefore, G
does not have to satisfy any rules of natural justice outside what is
prescribed by Section 396 itself which, according to him, has been
procedurally and substantively complied with, as reflected in the order
dated 12.02.2016.
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58 SUPREME COURT REPORTS [2019] 8 S.C.R.

A 20.Shri Neeraj Kishan Kaul, learned Senior Advocate, also
appearing on behalf of some of the alleged duped investors/traders,
referred to the Maharashtra Protection of Interest of Depositors (in
Financial Establishments) Act, 1999, and stated that the persons who
had invested monies in the commodities exchange of NSEL have been
held to be “depositors” by a judgment dated 01.10.2015 of the High
B
Court of Bombay, from which an SLP has been dismissed by this Court.
He also brought to our notice another judgment dated 01.11.2018, also
of the Bombay High Court, in which NSEL and FTIL had breached an
injunction order, and had to apologise and pay back monies in order to
avoid being held guilty of contempt of court. He also stressed that
C “economic value” of shares is a stranger to Section 396(3) of the
Companies Act. He then relied upon two reports of the RBI, both of
which say that the modern trend in corporate law worldwide is that if
losses are borne by a corporation, it is the shareholders who should bear
the brunt.
D 21. Having heard learned counsel for all the parties, it is necessary
at 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, no
E law providing for—
xxx xxx xxx
(c) the amalgamation of two or more corporations either in the
public interest or in order to secure the proper management of
any of the corporations, or
F
xxx xxx xxx
shall be deemed to be void on the ground that it is inconsistent
with, or takes away or abridges any of the rights conferred by
article 14 or article 19.
G xxx xxx xxx”
“Law” has been defined in Article 13(3) as follows:
“13. Laws inconsistent with or in derogation of the
fundamental rights.—

H xxx xxx xxx
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(3) In this article, unless the context otherwise requires,— A
(a) “law” includes any Ordinance, order, bye-law, rule,
regulation, notification, custom or usage having in the territory
of India the force of law;
xxx xxx xxx”
B
It will thus be seen that any “law” providing for the amalgamation
of two or more corporations in public interest is immune from challenge
on grounds relatable to Article 14 or Article 19 of the Constitution of
India. It is not disputed that Section 396 of the Companies Act is such a
law.
C
22. Section 396 of the Companies Act, 1956, reads as under:
“396. Power of Central Government to provide for
amalgamation of companies in public interest.—(1) Where
the Central Government is satisfied that it is essential in the public
interest that two or more companies should amalgamate, then, D
notwithstanding anything contained in Sections 394 and 395 but
subject to the provisions of this section, the Central Government
may, by order notified in the Official Gazette, provide for the
amalgamation of those companies into a single company with such
constitution; with such property, powers, rights, interests, authorities
and privileges; and with such liabilities, duties, and obligations; as E
may be specified in the order.
(2) The order aforesaid may provide for the continuation by or
against the transferee company of any legal proceedings pending
by or against any transferor company and may also contain such
consequential, incidental and supplemental provisions as may, in F
the opinion of the Central Government, be necessary to give effect
to the amalgamation.
(3) Every member or creditor (including a debenture holder) of
each of the companies before the amalgamation shall have, as
nearly as may be, the same interest in or rights against the company G
resulting from the amalgamation as he had in the company of
which he was originally a member or creditor; and to the extent to
which the interest or rights of such member or creditor in or against
the company resulting from the amalgamation are less than his
interest in or rights against the original company, he shall be entitled
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60 SUPREME COURT REPORTS [2019] 8 S.C.R.

A to compensation which shall be assessed by such authority as
may be prescribed and every such assessment shall be published
in the Official Gazette.
The compensation so assessed shall be paid to the member
or creditor concerned by the company resulting from the
B amalgamation.
(3A) Any person aggrieved by any assessment of compensation
made by the prescribed authority under sub-section (3) may, within
thirty days from the date of publication of such assessment in the
Official Gazette, prefer an appeal to the Tribunal and thereupon
C the assessment of the compensation shall be made by the Tribunal.
(4) No order shall be made under this section, unless:
(a) a copy of the proposed order has been sent in draft to each
of the companies concerned;

D (aa) the time for preferring an appeal under sub-section (3A)
has expired, or where any such appeal has been preferred, the
appeal has been finally disposed of; and
(b) the Central Government has considered, and made such
modifications, if any, in the draft order as may seem to it
desirable in the light of any suggestions and objections which
E
may be received by it from any such company within such
period as the Central Government may fix in that behalf, not
being less than two months from the date on which the copy
aforesaid is received by that company, or from any class of
shareholders therein, or from any creditors or any class of
F creditors thereof.
(5) Copies of every order made under this section shall, as soon
as may be after it has been made, be laid before both Houses of
Parliament.”
It will be seen that Section 396 provides for compulsory
G amalgamation of companies in public interest. The said Section occurs
in Chapter V of the Companies Act which reads, “arbitrations,
compromises, arrangements and reconstructions”. Sections 391 to 394
deal with voluntary compromises and arrangements, including
amalgamation of two or more companies. By way of contrast, Section
H 396 deals with compulsory amalgamation of companies.
63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 61
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INTERPRETATION OF SECTION 396 A
23. There is no doubt whatsoever that Section 396 cannot be
challenged on the ground of Article 14 or Article 19, given Article 31A of
the Constitution of India. However, this does not mean that Section 396
must be construed in such a fashion that it would lead to arbitrary or
unreasonable results. In Prem Nath Raina v. State of Jammu & B
Kashmir and Ors., (1983) 4 SCC 616, this Court, in dealing with a
challenge to the J&K Agrarian Reforms Act, 1976, which was protected
by Article 31A, held:
“9. ……The exclusion of a constitutional challenge under Articles
14, 19 and 31 which is provided for by Article 31A does not justify C
in equity the irrational violation of these articles. This Court did
observe in Waman Rao [Waman Rao v. Union of India, (1981)
2 SCC 362 : AIR 1981 SC 271 : (1981) 2 SCR 1] that: “It may
happen that while existing inequalities are being removed, new
inequalities may arise marginally and incidentally” but the
legislature has to take care to see that even marginal and incidental D
inequalities are not created without rhyme or reason. The
Government of J&K would do well to give fresh consideration to
the provisions contained in Section 7(2) and modify the provisions
regarding residence in order that they may accord with reason
and commonsense. Article 31A does not frown upon reason and E
commonsense.”
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. Zamindari
Abolition and Land Reforms Act, 1950, held:
“Before considering the meaning of the word “held” in Section F
9, it is necessary to mention that it is proper to assume that the
law-makers who are the representatives of the people enact laws
which the society considers as honest, fair and equitable. The
object of every legislation is to advance public welfare. In other
words as observed by Crawford in his book on Statutory G
Constructions that the entire legislative process is influenced by
considerations of justice and reason. Justice and reason constitute
the 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
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62 SUPREME COURT REPORTS [2019] 8 S.C.R.

A conceptions of justice and reason, in most instances, it would seem
that the apparent or suggested meaning of the statute, was not
the one intended by the law-makers. In the absence of some other
indication that the harsh or ridiculous effect was actually intended
by the legislature, there is little reason to believe that it represents
the legislative intent.”
B
(at pp. 15-16)
DERIVATIVE IMMUNITY OF THE CENTRAL
GOVERNMENT ORDER
24. The next question is whether the Central Government’s order
C made under Section 396 would also receive the protective umbrella of
Article 31A, given the fact that Section 396 is undoubtedly protected by
Article 31A.
25. A similar question was raised and considered with respect to
an order passed under the Essential Commodities Act, 1955. In Prag
D Ice & 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 Essential
Commodities Act, 1955 did not receive the immunity of Article 31B.
This Court held:
E “46. Article 31A of the Constitution saves laws which provide for
matters mentioned in clauses (a) to (e) thereof from a challenge
under Articles 14, 19 or 31 notwithstanding anything contained in
Article 13 of the Constitution. Article 31B which was introduced
by the Constitution (First Amendment) Act, 1951, validates certain
F Acts and Regulations by providing that without prejudice to the
generality of the provisions contained in Article 31A, “none of the
Acts and Regulations specified in the Ninth Schedule nor any of
the provisions thereof” shall be deemed to be void, or ever to
have become void, on the ground that such Act, Regulation or
provision is inconsistent with, or takes away or abridges any of
G the rights conferred by, any provisions of Part III. On a plain
reading of this article it seems to us impossible to accept that the
protective umbrella of the Ninth Schedule takes in its everwidening
wings not only the Acts and Regulations specified therein but also

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Orders and Notifications issued under those Acts and Regulations. A
Article 31B constitutes a grave encroachment on fundamental
rights and doubtless as it may seem that it is inspired by a radiant
social philosophy, it must be construed as strictly as one may, for
the simple reason that the guarantee of fundamental rights cannot
be permitted to be diluted by implications and inferences. An
B
express provision of the Constitution which prescribes the extent
to 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 31B
deals with, there is, in our opinion, no justification for contending
by judicial interpretation the provisions of the field which is declared C
by that article to be immune from challenge on the ground of
violation or abridgement of fundamental rights. The article affords
protection to Acts and Regulations specified in the Ninth Schedule.
Therefore, whenever a challenge to the constitutionality of a
provision of law on the ground that it violates any of the fundamental
D
rights conferred by Part III is sought to be repelled by the State
on the plea that the law is placed in the Ninth Schedule, the narrow
question to which one must address oneself is whether the
impugned law is specified in that Schedule. If it is, the provisions
of Article 31B would be attracted and the challenge would fail
without any further inquiry. On the other hand, if the law is not E
specified in the Ninth Schedule, the validity of the challenge has
to be examined in order to determine whether the provisions thereof
invade in any manner any of the fundamental rights conferred by
Part III. It is thus no answer to say that though the particular law,
as for example a Control Order, is not specified in the Ninth
F
Schedule, the parent Act under which the Order is issued is
specified in that Schedule.”
26. In the present case, this judgment has no direct application
except to say that Article 31A also constitutes a grave encroachment on
fundamental rights, and must be construed strictly. The expression used
in Article 31A is “law”, for which, one is to see the definition contained G
in Article 13(3). “Law” in Article 13(3) certainly includes “order”. The
only question is whether this would include an administrative order as
well.

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A 27. 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 of
India 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 custom
B
or usage having the force of law refers to general rules of conduct, as
opposed 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. Examples
of legislative orders are of the kind dealt with in Prag Ice & Oil Mills
C (supra) and Union of India and Anr. v. Cynamide India Ltd. and
Anr., (1987) 2 SCC 720 [“Cynamide India”], namely, orders passed
under statutes which are in the nature of subordinate legislation, which
deal generally with a whole class of persons who are governed by the
same in which general rules of conduct are laid down.
D WHETHER THE CENTRAL GOVERNMENT ORDER IS
ADMINISTRATIVE IN NATURE
28. This brings us to what is the nature of the order of the Central
Government that is passed under Section 396. It has been argued on
behalf of the Union of India, relying upon a number of judgments, that
E the nature of the order passed under Section 396 is that of delegated
legislation. This being the case, it would, therefore, get immunity from
challenge on the ground of Articles 14 and 19 of the Constitution of
India, as it would then amount to a “law” within the meaning of Article
31A read with Article 13(3)(b).

F 29. The difference between an order which is legislative in nature
and that which is administrative in nature has been discussed in some of
our judgments. Thus, in Cynamide India (supra), this Court drew a
distinction between administrative and legislative orders thus:
“7. …… Any attempt to draw a distinct line between legislative
G and administrative functions, it has been said, is ‘difficult in theory
and impossible in practice’. Though difficult, it is necessary that
the line must sometimes be drawn as different legal rights and
consequences may ensue. The distinction between the two has
usually been expressed as ‘one between the general and the
particular’. ‘A legislative act is the creation and promulgation of a
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general rule of conduct without reference to particular cases; an A
administrative act is the making and issue of a specific direction
or the application of a general rule to a particular case in
accordance with the requirements of policy’. ‘Legislation is the
process of formulating a general rule of conduct without reference
to particular cases and usually operating in future; administration
B
is the process of performing particular acts, of issuing particular
orders or of making decisions which apply general rules to
particular cases.’ It has also been said: ‘Rule-making is normally
directed toward the formulation of requirements having a general
application to all members of a broadly identifiable class’ while,
‘an adjudication, on the other hand, applies to specific individuals C
or situations’. But, this is only a broad distinction, not necessarily
always true. Administration and administrative adjudication may
also be of general application and there may be legislation of
particular application only. That is not ruled out. Again, adjudication
determines past and present facts and declares rights and liabilities
D
while legislation indicates the future course of action. Adjudication
is determinative of the past and the present while legislation is
indicative of the future.……”
In K.I. Shephard (supra), this Court dealt with a scheme for
amalgamation of three private banks with Punjab National Bank, Canara
Bank, and State Bank of India, in terms of separate schemes drawn, E
merging each private bank with state banks under Section 45 of the
Banking Regulation Act. It was urged that the order passed by the Reserve
Bank of India amalgamating these banks was legislative in nature, as a
result of which the principle of natural justice will not apply. In turning
down this contention, this Court held: F
“9. …… Learned counsel for RBI and the transferee banks have
taken the stand that the scheme-making process under Section
45 is legislative in character and, therefore, outside the purview
of the ambit of natural justice under the protective umbrella
whereof the need to put the excluded employees to notice or G
enquiry arose. It is well settled that natural justice will not be
employed in the exercise of legislative power and Mr Salve has
rightly relied upon a recent decision of this Court being Union of
India v. Cynamide India Ltd. [(1987) 2 SCC 720] in support of
such a position. But is the scheme-making process legislative?
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A Power has been conferred on the RBI in certain situations to take
steps for applying to the Central Government for an order of
moratorium and during the period of moratorium to propose either
reconstruction or amalgamation of the banking company. A scheme
for the purposes contemplated has to be framed by RBI and placed
before the Central Government for sanction. Power has been
B
vested in the Central Government in terms of what is ordinarily
known as a Henry VIII clause for making orders for removal of
difficulties. Section 45(11) requires that copies of the schemes as
also such orders made by the Central Government are to be placed
before both Houses of Parliament. We do not think this requirement
C makes the exercise in regard to schemes a legislative process. It
is not necessary to go to any other authority as the very decision
relied upon by Mr Salve in the case of Cynamide India Ltd.
[(1987) 2 SCC 720] lays down the test. In para 7 of the judgment
it has been indicated: (SCC pp. 735-36)
D “Any attempt to draw a distinct line between legislative and
administrative functions, it has been said, is ‘difficult in theory
and impossible in practice’. Though difficult, it is necessary
that the line must sometimes be drawn as different legal rights
and consequences may ensue. The distinction between the two
has usually been expressed as ‘one between the general and
E the 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 a
specific direction or the application of a general rule to a par-
ticular case in accordance with the requirements of policy’.
F ‘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 decisions
which apply general rules to particular cases.’ It has also been
said: ‘Rule-making is normally directed towards the formula-
G tion of requirements having a general application to all mem-
bers of a broadly identifiable class’ while, ‘an adjudication, on
the other hand, applies to specific individuals or situations’.
But, this is only a broad distinction, not necessarily always true.”

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Applying these tests it is difficult to accept Mr Salve’s contention A
that the framing of the scheme under Section 45 involves a
legislative process. There are similar statutory provisions which
require placing of material before the two Houses of Parliament
yet not involving any legislative activity. The fact that orders made
by the Central Government for removing difficulties as
B
contemplated under sub-clause (10) are also to be placed before
the two Houses of Parliament makes it abundantly clear that the
placing of the scheme before the two Houses is not a relevant
test for making the scheme-framing process legislative. We
accordingly hold that there is no force in the contention of Mr
Salve that the process being legislative, rules of natural justice C
were not applicable.”
The fact that, under Section 396(5), the Central Government order
has to be laid before the Houses of Parliament also does not detract
from the fact that this order is administrative and not legislative in
character. Applying these judgments to the Central Government’s order D
passed under Section 396, it is clear that the order directly impacts the
rights and liabilities of the companies, their shareholders and creditors,
sought to be amalgamated under the order. Such order is not an order in
general which applies to all such companies, but only to the particular
companies sought to be amalgamated. There is no general rule of conduct,
without reference to the particular case that is laid down by such an E
order. The Central Government order, ultimately, makes a specific
direction qua two specific companies which are to be amalgamated. It
is clear that such an order is not in the nature of legislation or delegated
legislation.
30. Learned counsel appearing on behalf of the respondents have F
cited New Bank of India Employees’ Union and Anr. v. Union of
India 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 Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980 G
[“Acquisition Act”], which requires schemes that have been framed
under the said Act to be laid before each House of Parliament for a total
period of thirty days, in which, Parliament is then given the power to
make any modification therein. Given the difference in language between

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A the provisions, namely, Section 45 of the Banking Regulation Act and
Section 9 of the Acquisition Act, this Court distinguished the judgment of
K.I. Shephard (supra) thus:
“32. The only other question which remains for consideration is
whether the conclusion of the High Court that the scheme-making
B process under Section 9 of the Acquisition Act is not legislative is
correct in law. In view of our conclusions on the four questions
formulated, this question is not of much relevance but since the
High Court has recorded a conclusion and the learned Additional
Solicitor General and Shri Salve advanced the argument we think
it appropriate to answer this question also. The High Court relied
C upon the decision in Shephard case [(1987) 4 SCC 431 : 1987
SCC (L&S) 438 : (1988) 1 SCR 188] and came to hold that the
provisions of Section 45 of the Banking Regulation Act being in
pari materia with Section 9 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980, and the scheme framed
D under Section 45 of the Banking Regulation Act, 1949 having been
held by this Court to be not legislative, the scheme framed under
the Acquisition Act as in the present case, must also be held to be
not a legislative one. It is undisputed that in Shephard case [(1987)
4 SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] the
amalgamation was of a private bank with a nationalised bank and
E the provisions of the Banking Regulation Act, 1949 applied. This
Court in Shephard case [(1987) 4 SCC 431 : 1987 SCC (L&S)
438 : (1988) 1 SCR 188] on examining Section 45(11) of the Banking
Regulation Act, 1949 came to hold that merely because a scheme
framed is required to be laid before both the Houses of Parliament
F after the same has been sanctioned by the Central Government
the scheme cannot be held to be legislative in nature. But in our
considered opinion the High Court has failed to notice the
fundamental distinction between the provisions of Section 45 of
the Banking Regulation Act, 1949 and Section 9 of the Acquisition
Act. Under Section 9 of the Acquisition Act under which Act the
G impugned scheme has been framed, every scheme framed by the
Central Government has to be laid before each House of
Parliament for a total period of 30 days and Parliament has the
power to agree to the scheme and making any modification or in
giving to a decision that the scheme should not be made and it is
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only thereafter the scheme has the effect either in the modified A
form or does not agree (sic). The essential distinction between
the two provisions therefore, is that whereas under the Banking
Regulation Act, 1949 the scheme framed has merely to be placed
before Parliament and nothing further but under the Acquisition
Act the scheme becomes effective only after the same is placed
B
before both the Houses of Parliament and after Parliament makes
such modification and agrees to the scheme. In this view of the
matter the decision of this Court in Shephard case [(1987) 4
SCC 431 : 1987 SCC (L&S) 438 : (1988) 1 SCR 188] has no
application to a scheme framed under the provisions of the
Acquisition Act and in our considered opinion, a scheme framed C
under Section 9 of the Banking Companies Acquisition and
Transfer of Undertakings Act, 1980, is a legislative one. The High
Court was in error in holding the scheme not to be a legislative
one.”
Since Section 396(5) of the Companies Act is a provision akin to D
the provision considered in the case of K.I. Shephard (supra), the ratio
of K.I. Shephard (supra) squarely applies. The judgment in New Bank
of 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 then E
cited the judgment in Quarry Owners’ Association v. State of Bihar
and 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 mandatory
condition to be observed, and ordered that the particular order in that
case be laid before the legislature as it had not so been laid earlier. This
judgment again has nothing to do with whether, on account of laying F
before 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 then
cited a passage from J.K. (Bombay) (P) Ltd. (supra), and paragraph
23 in particular, in which this Court observed that an order made under G
Section 391 of the Companies Act has statutory force. The fact that a
similar order made under Section 396 may also have statutory force
again does not answer the precise question before us, namely, as to
whether such orders having statutory force are administrative or
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A legislative in nature. This observation again does not carry the matter
very much further.
33. The order passed under Section 396 is qua particular companies
and 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, the
B Central Government order, made under Section 396, must conform to
the fundamental rights guaranteed by Articles 14 and 19(1)(g) of the
Constitution of India. This Court has held in a catena of decisions that it
is the substance of what is effected that counts when it comes to infraction
of 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 dissenting
C opinion, stated:
“A fundamental right is transcendental in nature and it controls
both the legislative and the executive acts. Article 13 explicitly
prohibits the State from making any law which takes away or
abridges any fundamental right and declares the law to the extent
D of the contravention as void. The law therefore must be carefully
scrutinized to ascertain whether a fundamental right is infringed.
It is not the form but the substance that matters. If the legislature
in effect constitutes a judicial tribunal, but calls it an authority, the
tribunal does not become any the less a judicial tribunal. Therefore,
E the correct approach is first to ascertain with exactitude the content
and scope of the fundamental right and then to scrutinize the
provisions of the Act to decide whether in effect and substance,
though not in form, the said right is violated or curtailed. Otherwise
the fundamental right will be lost or unduly restricted in our
adherence to the form to the exclusion of the content.”
F
(at p. 303)
Likewise, in Hamdard Dawakhana (Wakf) Lal Kuan, Delhi
and Anr. v. Union of India and Ors., [1960] 2 SCR 671, it was held
as under:
G “In the present case therefore (1) the advertisements affected by
the Act do not fall within the words freedom of speech within
Article 19(1)(a); (2) the scope and object of the Act, its true
nature and character is not interference with the right of freedom
of speech but it deals with trade or business; and (3) there is no
direct abridgement of the right of free speech and a mere incidental
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interference with such right would not alter the character of the A
law; Ram Singh v. State of Delhi [(1951) SCR 451-455]; Express
Newspapers (Private) Ltd. v. Union of India [(1959) SCR 12,
123-133]
It is not the form or incidental infringement that determines
the constitutionality of a statute in reference to the rights B
guaranteed in Art. 19(1), but the reality and substance. The Act
read as a whole does not merely prohibit advertisements relating
to drugs and medicines connected with diseases expressly
mentioned in s. 3 of the Act but they cover all advertisements
which are objectionable or unethical and are used to promote self-
medication or self-treatment. This is the content of the Act. Viewed C
in this way, it does not select any of the elements or attributes of
freedom 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, D
[1962] 3 SCR 842, this Court held:
“It must be borne in mind that the Constitution must be interpreted
in a broad way and not in a narrow and pedantic sense. Certain
rights have been enshrined in our Constitution as fundamental
and, therefore, while considering the nature and content of those E
rights the Court must not be too astute to interpret the language of
the Constitution in so literal a sense as to whittle them down. On
the other hand the Court must interpret the Constitution in a manner
which would enable the citizen to enjoy the rights guaranteed by it
in the fullest measure subject, of course, to permissible restrictions.
Bearing this principle in mind it would be clear that the right to F
freedom of speech and expression carries with it the right to publish
and circulate one’s ideas, opinions and views with complete
freedom and by resorting to any available means of publication,
subject again to such restrictions as could be legitimately imposed
under clause (2) of Article 19. ……… In Dwarkadas Shrinivas G
v. Sholapur Spinning & Weaving Co. Ltd. [(1954) SCR 674]
this Court has pointed out that in construing the Constitution it is
the substance and the practical result of the act of the State that
should be considered rather than its purely legal aspect. The
correct approach in such cases should be to enquire as to what in
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A substance is the loss or injury caused to the citizen and not merely
what manner and method has been adopted by the State in placing
the restriction.”
(at pp. 857-858)
A Constitution Bench in Ajay Hasia and Ors. v. Khalid Mujib
B Sehravardi and Ors., (1981) 1 SCC 722 also stated:
“7. While considering this question it is necessary to bear in mind
that an authority falling within the expression “other authorities”
is, by reason of its inclusion within the definition of ‘State’ in Article
12, subject to the same constitutional limitations as the government
C and is equally bound by the basic obligation to obey the
constitutional mandate of the Fundamental Rights enshrined in
Part III of the Constitution. We must therefore give such an
interpretation to the expression “other authorities” as will not
stultify the operation and reach of the fundamental rights by
D enabling the government to its obligation in relation to the
Fundamental Rights by setting up an authority to act as its
instrumentality or agency for carrying out its functions. Where
constitutional fundamentals vital to the maintenance of human
rights are at stake, functional realism and not facial cosmetics
must be the diagnostic tool, for constitutional law must seek the
E substance and not the form. Now it is obvious that the Government
may act through the instrumentality or agency of natural persons
or it may employ the instrumentality or agency of juridical persons
to carry out its functions. In the early days when the Government
had limited functions, it could operate effectively through natural
F persons constituting its civil service and they were found adequate
to discharge governmental functions which were of traditional
vintage. But as the tasks of the government multiplied with the
advent of the welfare State, it began to be increasingly felt that
the framework of civil service was not sufficient to handle the
new tasks which were often specialised and highly technical in
G character and which called for flexibility of approach and quick
decision making. The inadequacy of the civil service to deal with
these new problems came to be realised and it became necessary
to forge a new instrumentality or administrative device for handling
these new problems. It was in these circumstances and with a
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view to supplying this administrative need that the corporation A
came into being as the third arm of the government and over the
years it has been increasingly utilised by the government for setting
up and running public enterprises and carrying out other public
functions. ……”
Also, in M.C. Mehta and Anr. v. Union of India and Ors. B
(Shriram – Oleum Gas), (1987) 1 SCC 395, this Court held:
“2. Mr Divan, learned counsel appearing on behalf of Shriram
raised a preliminary objection that the court should not proceed to
decide these constitutional issues since there was no claim for
compensation originally made in the writ petition and these issues C
could not be said to arise on the writ petition. Mr Divan conceded
that the escape of oleum gas took place subsequent to the filing of
the writ petition but his argument was that the petitioner could
have applied for amendment of the writ petition so as to include a
claim for compensation for the victims of oleum gas but no such
application for amendment was made and hence on the writ petition D
as it stood, these constitutional issues did not arise for consideration.
We do not think this preliminary objection raised by Mr Divan is
sustainable. It is undoubtedly true that the petitioner could have
applied for amendment of the writ petition so as to include a claim
for compensation but merely because he did not do so, the E
applications for compensation made by the Delhi Legal Aid and
Advice Board and the Delhi Bar Association cannot be thrown
out. These applications for compensation are for enforcement of
the fundamental right to life enshrined in Article 21 of the
Constitution and while dealing with such applications, we cannot
adopt a hyper-technical approach which would defeat the ends of F
justice. This Court has on numerous occasions pointed out that
where there is a violation of a fundamental or other legal right of
a person or class of persons who by reason of poverty or disability
or socially or economically disadvantaged position cannot approach
a court of law for justice, it would be open to any public spirited G
individual or social action group to bring an action for vindication
of the fundamental or other legal right of such individual or class
of individuals and this can be done not only by filing a regular writ
petition but also by addressing a letter to the court. If this Court is

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A prepared to accept a letter complaining of violation of the
fundamental right of an individual or a class of individuals who
cannot approach the court for justice, there is no reason why
these applications for compensation which have been made for
enforcement of the fundamental right of the persons affected by
the oleum gas leak under Article 21 should not be entertained.
B
The court while dealing with an application for enforcement of a
fundamental right must look at the substance and not the form.
We cannot therefore sustain the preliminary objection raised by
Mr Divan.”
34. Various pre-requisites contained in the said Section must first
C be satisfied before the Section can be said to operate. First and foremost,
the Central Government has to be “satisfied”, meaning thereby, that it
must, on certain objective facts, come to a conclusion that amalgamation
between two or more companies is necessary. This can only be done if
the Central Government finds it “essential”, i.e., necessary to do so.
D Also, this can only be done in “public interest” (the Section originally
contained the expression “national interest”. By Amendment Act 65 of
1960, “national interest” was substituted by “public interest”).
35. The Notes on Clauses relating to the original Section 396 reads
as follows:
E “Clause 366—This is a new provision and it is intended to provide,
at the instance of the Government, for the amalgamation of two
or more companies in the national interest. Occasionally, cases
arise where such an amalgamation in the national interest is clearly
a necessity. The observance of the usual procedure prescribed
F by the existing Act in such cases will lead to prolonged delays
which will be detrimental to the national interest. It has been made
clear that any order made by the Government should provide for
the old shareholders, and the old debenture holders and other
creditors, having the same interest in the company resulting from
the amalgamation as they had in the original companies. Any order
G made by the Government under this clause will be laid on the
table of both Houses of Parliament and will therefore be subject
to the Parliamentary scrutiny.”
What is important from the Notes on Clauses is the fact that it is
only “occasionally” that cases arise where an amalgamation in national
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interest is “clearly a necessity”. It is made clear that the reason for A
Section 396 is that the observance of the usual procedure prescribed by
the existing Act (namely, that contained in Sections 391 to 394) in such
cases will lead to prolonged delays, which will be detrimental to national
interest. The fact that the procedure contained in Sections 394 and 395
need not be carried out is made clear in the non-obstante clause contained
B
in Section 396(1).
36. Section 396(3), (3A), and (4) are also important. A condition
precedent to the passing of an order by the Central Government under
this Section is that every member or creditor of each of the companies
before amalgamation shall have, as nearly as may be, the same interest
in or rights against the company resulting from the amalgamation as he C
had in the erstwhile company either as a member or a creditor, and if
this is not so, such member or creditor shall be entitled to compensation
which is to be assessed by such authority as may be prescribed. From
the order of such assessment, an appeal is provided by sub-section (3A).
What is important is the mandatory language contained in sub-section D
(4), which states that no order shall be made under the Section unless
the time for preferring an appeal under sub-section (3A) has expired, or
where any such appeal has been preferred, the appeal has been finally
disposed of. This makes it clear that unless an order of compensation is
first made under sub-section (3), and an appeal therefrom has either not
been filed or has been disposed of, no order of amalgamation can be E
made. Another condition precedent is an inbuilt provision for natural
justice, namely, that a proposed draft order has first been sent to each of
the companies concerned. The companies may then send suggestions
or objections to the Central Government, which the Central Government
must first consider before passing the final order. Such objections and F
suggestions can also be sent from any class of shareholders of either of
the companies, or from any creditors or class of creditors of either of
the companies.
“WHERE THE CENTRAL GOVERNMENT IS SATISFIED”
37. With regard to similar language that is contained in Section G
237(b) of the Companies Act, 1956, this Court, in Barium Chemicals
(supra), contained separate opinions as to what the phrase “in the opinion
of” contained in Section 237(b) meant. In Rohtas Industries (supra),
this Court adopted the test laid down by Hidayatullah, J. (as he then
was) and Shelat, J. as follows: H
76 SUPREME COURT REPORTS [2019] 8 S.C.R.

A “Before taking action under Section 237(b)(i) and (ii), the
Central Government has to form an opinion that there are
circumstances suggesting that the business of the company is being
conducted with intent to defraud its creditors, members or any
other persons, or otherwise for a fraudulent or unlawful purpose
or in a manner oppressive to any member or that the company
B
was formed for any fraudulent or unlawful purpose or that the
persons concerned in the formation or the management of its
affairs have in connection therewith been guilty of fraud,
misfeasance or other misconduct towards the company or towards
any of its members.
C From the facts placed before us, it is clear that the Government
had not bestowed sufficient attention to the material before it before
passing the impugned order. It seems to have been oppressed by
the opinion that it had formed about Shri S.P. Jain. From the
arguments advanced by Mr Attorney, it is clear that but for the
D association of Mr S.P. Jain with the appellant-company, the
investigation in question, in all probabilities would not have been
ordered. Hence, it is clear that in making the impugned order
irrelevant considerations have played an important part.
The power under Sections 235 to 237 has been conferred on
E the Central Government on the faith that it will be exercised in a
reasonable manner. The department of the Central Government
which deals with companies is presumed to be an expert body in
company law matters. Therefore, the standard that is prescribed
under Section 237(b) is not the standard required of an ordinary
citizen but that of an expert. The learned Attorney did not dispute
F the position that if we come to the conclusion that no reasonable
authority would have passed the impugned order on the material
before it, then the same is liable to be struck down. This position
is also clear from the decision of this Court in Barium Chemicals
and Anr. v. Company Law Board and Anr. [(1966) Supp SCR
G 311].
(at p. 119)
xxx xxx xxx

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The decision of this Court in Barium Chemicals case which A
considered 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 Section
237(b) is a discretionary power the first requirement for its exercise
is the honest formation of an opinion that the investigation is
B
necessary and the further requirement is that “there are
circumstances suggesting” the inference set out in the section; an
action not based on circumstances suggesting an inference of the
enumerated kind will not be valid; the formation of the opinion is
subjective but the existence of the circumstances relevant to the
inference as the sine qua non for action must be demonstratable; C
if their existence is questioned, it has to be proved at least prime
facie; it is not sufficient to assert that those circumstances exist
and give no clue to what they are, because the circumstances
must be such as to lead to conclusions of certain definiteness; the
conclusions must relate to an intent to defraud, a fraudulent or
D
unlawful purpose, fraud or misconduct. In other words they held
that although the formation of opinion by the Central Government
is a purely subjective process and such an opinion cannot be
challenged in a court on the ground of propriety, reasonableness
or sufficiency, the authority concerned is nevertheless required to
arrive at such an opinion from circumstances suggesting the E
conclusion set out in sub-clauses (i), (ii) and (iii) of Section 237(b)
and the expression “circumstances suggesting” cannot support
the construction that even the existence of circumstances is a
matter of subjective opinion. Shelat, J. further observed that it is
hard to contemplate that the Legislature could have left to the
F
subjective process both the formation of opinion and also the
existence of circumstances on which it is to be founded; it is also
not reasonable to say that the clause permitted the Authority to
say that it has formed the opinion on circumstances which in its
opinion exist and which in its opinion suggest an intent to defraud
or a fraudulent or unlawful purpose. G
On the other hand Sarkar, C.J. and Mudholkar, J. held that the
power conferred on the Central Government under Section 237(b)
is a discretionary power and no facet of that power is open to

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A judicial review. Our Brother Bachawat, J., the other learned Judge
in that Bench did not express any opinion on this aspect of the
case. Under these circumstances it has become necessary for us
to sort out the requirements of Section 237(b) and to see which of
the two contradictory conclusions reached in Barium Chemicals
case is in our judgment, according to law. But before proceeding
B
to analyse Section 237(b) we should like to refer to certain decisions
cited at the bar bearing on the question under consideration.
(at pp. 120-121)
xxx xxx xxx
C “Coming back to Section 237(b), in finding out its true scope we
have to bear in mind that that section is a part of the scheme
referred to earlier and therefore the said provision takes its colour
from Sections 235 and 236. In finding out the legislative intent we
cannot ignore the requirements of those sections. In interpreting
D Section 237(b) we cannot ignore the adverse effect of the
investigation on the company. Finally we must also remember
that the section in question is an inroad on the powers of the
company to carry on its trade or business and thereby an infraction
of the fundamental right guaranteed to its shareholders under
Article 19(1)(g) and its validity cannot be upheld unless it is
E considered that the power in question is a reasonable restriction
in the interest of the general public. In fact the vires of that provision
was upheld by majority of the Judges constituting the Bench in
Barium Chemicals case principally on the ground that the power
conferred on the Central Government is not an arbitrary power
F and the same has to be exercised in accordance with the restraints
imposed by law. For the reasons stated earlier we agree with the
conclusion reached by Hidayatullah, J. and Shelat, JJ. in Barium
Chemicals case that the existence of circumstances suggesting
that the company’s business was being conducted as laid down in
sub-clause(1) or the persons mentioned in sub-clause (2) were
G guilty of fraud or misfeasance or other misconduct towards the
company or towards any of its members is a condition precedent
for the Government to form the required opinion and if the existence
of those conditions is challenged, the courts are entitled to examine
whether those circumstances were existing when the order was
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made. In other words, the existence of the circumstances in A
question are open to judicial review though the opinion formed by
the Government is not amenable to review by the courts. As held
earlier the required circumstances did not exist in this case.”
(at pp. 128-129)
38. In Western U.P. Electric Power & Supply Co. Ltd. v. B
State of U.P. and Anr., (1969) 1 SCC 817, this Court dealt with a
situation where the Indian Electricity Act, 1910 was amended by the
U.P. Act 30 of 1961, by which, Section 3(2)(e)(ii) provided that the grant
of a licence shall not, in any way, hinder or restrict the supply of energy
by the State Government or the State Electricity Board within the same C
area where the State Government deems such supply “necessary in
public interest”. In that case, the High Court had observed that the State
Government was the sole judge of whether the direct supply of energy
was or was not in public interest, the nature of the power being
subjective. This Court, in upsetting the High Court’s view, held:
D
“11. We are unable to agree with that view. By Section 3(2)(e) as
amended by the U.P. Act 30 of 1961, the Government is authorised
to supply energy to consumers within the area of the licensee in
certain conditions: exercise of the power is conditioned by the
Government deeming it necessary in public interest to make such
supply. If challenged, the Government must show that exercise of E
the power was necessary in public interest. The Court is thereby
not intended to sit in appeal over the satisfaction of the Government.
If there be prima facie evidence on which a reasonable body of
persons may hold that it is in the public interest to supply energy
directly to the consumers, the requirements of the statute are F
fulfilled. Normally a licensee of electrical energy, though he has
no monopoly, is the person through whom electrical energy would
be distributed within the area of supply, since the licensee has to
lay down electric supply-lines for transmission of energy and to
maintain its establishment. An inroad may be made in that right in
the conditions which are statutorily prescribed. In our judgment, G
the satisfaction of the Government that the supply is necessary in
the public interest is in appropriate cases not excluded from judicial
review.”

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

A 39. Close upon the heels of these judgments, this Court, after
considering Barium Chemicals (supra) and Rohtas Industries (supra),
restated the test as to judicial review of administrative action in Rampur
Distillery Co. Ltd. v. Company Law Board, [1970] 2 SCR 177 as
follows:
B “The scheme of the section implies investigation and a decision
on the matters set out therein. Section 326 lays down conditions
by sub-section (1)(a) in which the Central Government may
override the resolution of the general body of share-holders in
certain specified conditions. Upon the Central Government is
imposed a duty not to accord approval to the appointment or re-
C appointment of a proposed managing agent in the light of clauses
(a), (b) and (c) of sub-section (2). Though the sub-section is
enacted in form negative, in substance it confers power upon the
Government subject to the restrictions imposed by clauses (a),
(b) and (c), to refuse to accord approval. Sub-section (2) imposes
D upon the Central Government the duty not to accord approval to
appointment or re-appointment of a proposed managing agent
unless the Government is satisfied that the managing agent is a fit
and proper person to be appointed, that the conditions of the
managing agency agreement are fair and reasonable and that the
managing agent has fulfilled the conditions which the Central
E Government required him to fulfil. Thereby the Central
Government is not made the final arbiter of the existence of the
grounds on which the satisfaction may be founded. The satisfaction
of the Government which is determinative is satisfaction as to the
existence of certain objective facts. The recital about satisfaction
F may be displaced by showing that the conditions did not exist, or
that no reasonable body of persons properly versed in law could
have reached the decision that they did.
The Courts, however, are not concerned with the sufficiency of
the grounds on which the satisfaction is reached. What is relevant
G is the satisfaction of the Central Government about the existence
of the conditions in clauses (a), (b) and (c) of sub-section (2) of
Section 326. The enquiry before the Court, therefore, is whether
the Central Government was satisfied as to the existence of the
conditions. The existence of the satisfaction cannot be challenged
except probably on the ground that the authority acted mala fide.
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But if in reaching its satisfaction the Central Government A
misapprehended the nature of the conditions, or proceeded upon
irrelevant materials, or ignores relevant materials, the jurisdiction
of the Courts to examine the satisfaction is not excluded. ……”
(at p. 183)
In M.A. Rasheed and Ors. v. State of Kerala, [1975] 2 SCR B
93, after following Rohtas Industries (supra), the test for judicial review
of administrative decisions was stated most felicitously by Ray, C.J.
thus:
“Administrative decisions in exercise of powers even if conferred
in subjective terms are to be made in good faith on relevant C
consideration. The courts inquire whether a reasonable man could
have come to the decision in question without misdirecting himself
on the law or the facts in a material respect. The standard of
reasonableness to which the administrative body is required to
conform may range from the courts’ own opinion of what is D
reasonable to the criterion of what a reasonable body might have
decided. The courts will find out whether conditions precedent to
the formation of the opinion have a factual basis.”
(at p. 99)
In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81, E
this Court exhaustively set out parameters for judicial review of the
subjective satisfaction of the detaining authority in a preventive detention
case. This Court held:
“9. But that does not mean that the subjective satisfaction of the
detaining authority is wholly immune from judicial reviewability. F
The courts have by judicial decisions carved out an area, limited
though it be, within which the validity of the subjective satisfaction
can yet be subjected to judicial scrutiny. The basic postulate on
which the courts have proceeded is that the subjective satisfaction
being a condition precedent for the exercise of the power
G
conferred on the Executive, the Court can always examine
whether the requisite satisfaction is arrived at by the authority : if
it is not, the condition precedent to the exercise of the power
would not be fulfilled and the exercise of the power would be
bad. There are several grounds evolved by judicial decisions for
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82 SUPREME COURT REPORTS [2019] 8 S.C.R.

A saying that no subjective satisfaction is arrived at by the authority
as required under the statute. The simplest case is whether the
authority has not applied its mind at all; in such a case the authority
could not possibly be satisfied as regards the fact in respect of
which 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.
B
Then there may be a case where the power is exercised dishonestly
or for an improper purpose : such a case would also negative the
existence of satisfaction on the part of the authority. The existence
of “improper purpose”, that is, a purpose not contemplated by the
statute, has been recognised as an independent ground of control
C in several decided cases. The satisfaction, moreover, must be a
satisfaction of the authority itself, and therefore, if, in exercising
the power, the authority has acted under the dictation of another
body as the Commissioner of Police did in Commissioner of
Police v. Gordhandas Bhanji [AIR 1952 SC 16 : 1952 SCR
135] and the officer of the Ministry of Labour and National Service
D
did in Simms Motor Units Ltd. v. Minister of Labour and
National Service [(1946) 2 All ER 201] the exercise of the power
would be bad and so also would the exercise of the power be
vitiated where the authority has disabled itself from applying its
mind to the facts of each individual case by self-created rules of
E policy or in any other manner. The satisfaction said to have been
arrived at by the authority would also be bad where it is based on
the application of a wrong test or the misconstruction of a statute.
Where this happens, the satisfaction of the authority would not be
in respect of the thing in regard to which it is required to be satisfied.
Then again, the satisfaction must be grounded “on materials which
F
are of rationally probative value”. Machindar v. King [AIR 1950
FC 129 : 51 Cri LJ 1480 : 1949 FCR 827]. The grounds on which
the satisfaction is based must be such as a rational human being
can consider connected with the fact in respect of which the
satisfaction is to be reached. They must be relevant to the subject-
G matter of the inquiry and must not be extraneous to the scope and
purpose of the statute. If the authority has taken into account, it
may even be with the best of intention, as a relevant factor
something which it could not properly take into account in deciding
whether or not to exercise the power or the manner or extent to
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which it should be exercised, the exercise of the power would be A
bad. 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 by
implication matters which the authority ought to have regard to,
then, in exercising the power, the authority must have regard to
those matters. The authority must call its attention to the matters
B
which it is bound to consider.”
In Tata Cellular v. Union of India (1994) 6 SCC 651, after an
exhaustive review of the latest English judgments, this Court held:
“77. The duty of the court is to confine itself to the question of
legality. Its concern should be: C
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 have D
reached or,
5. abused its powers.
Therefore, it is not for the court to determine whether a particular
policy or particular decision taken in the fulfilment of that policy is
fair. It is only concerned with the manner in which those decisions E
have been taken. The extent of the duty to act fairly will vary
from case to case. Shortly put, the grounds upon which an
administrative action is subject to control by judicial review can
be classified as under:
(i) Illegality: This means the decision-maker must understand cor- F
rectly the law that regulates his decision-making power and must
give effect to it.
(ii) Irrationality, namely, Wednesbury unreasonableness.
(iii) Procedural impropriety. G
The above are only the broad grounds but it does not rule out
addition 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
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84 SUPREME COURT REPORTS [2019] 8 S.C.R.

A development, namely, the possible recognition of the principle of
proportionality. In all these cases the test to be adopted is that the
court should, “consider whether something has gone wrong of a
nature and degree which requires its intervention”.”
40. In Bhikhubhai Vithlabhai Patel v. State of Gujarat, (2008)
B 4 SCC 144, this Court, in an elaborate judgment, referred to and fol-
lowed several judgments, including Barium Chemicals (supra), in the
context of Section 17 of the Gujarat Town Planning and Urban Devel-
opment Act, 1976, by which, if the State Government is of opinion that
substantial modifications in the draft development plan are necessary, it
may publish such modifications. This Court held:
C
“20. The State Government is entitled to publish the modifications
provided it is of opinion that substantial modifications in the draft
development plan are necessary. The expression “‘is of opinion’
that substantial modifications in the draft development plan are
necessary” is of crucial importance. Is there any material available
D on record which enabled the State Government to form its opinion
that substantial modifications in the draft development plan were
necessary? The State Government’s jurisdiction to make substantial
modifications in the draft development plan is intertwined with
the formation of its opinion that such substantial modifications are
E necessary in the draft development plan. The State Government
without forming any such opinion cannot publish the modifications
considered necessary along with notice inviting suggestions or
objections. We have already noticed that as on the day when the
Minister concerned took the decision proposing to designate the
land for educational use the material available on record were:
F
(a) the opinion of the Chief Town Planner;
(b) note dated 23-4-2004 prepared on the basis of the record
providing the entire background of the previous litigation together
with the suggestion that the land should no more be reserved
G for the purpose of South Gujarat University and after releasing
the lands from reservation, the same should be placed under
the residential zone.
21. It is true that the State Government is not bound by such
opinion and is entitled to take its own decision in the matter provided
there is material available on record to form opinion that substantial
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modifications in the draft development plan were necessary. A
Formation of opinion is a condition precedent for setting the law
in motion proposing substantial modifications in the draft
development plan.
22. Any opinion of the Government to be formed is not subject to
objective test. The language leaves no room for the relevance of B
a judicial examination as to the sufficiency of the grounds on which
the Government acted in forming its opinion. But there must be
material based on which alone the State Government could form
its opinion that it has become necessary to make substantial
modification in the draft development plan.
C
23. The power conferred by Section 17(1)(a)(ii) read with proviso
is a conditional power. It is not an absolute power to be exercised
in the discretion of the State Government. The condition is
formation of opinion—subjective, no doubt—that it had become
necessary to make substantial modifications in the draft
development plan. This opinion may be formed on the basis of D
material sent along with the draft development plan or on the
basis of relevant information that may be available with the State
Government. The existence of relevant material is a precondition
to the formation of opinion. The use of word “may” indicates not
only a discretion but an obligation to consider that a necessity has E
arisen to make substantial modifications in the draft development
plan. It also involves an obligation to consider which of the several
steps specified in sub-clauses (i), (ii) and (iii) should be taken.
24. The proviso opens with the words “where the State
Government is of opinion that substantial modifications in the draft F
development plan and regulations are necessary, …”. These words
are indicative of the satisfaction being subjective one but there
must exist circumstances stated in the proviso which are conditions
precedent for the formation of the opinion. Opinion to be formed
by the State Government cannot be on imaginary grounds, wishful
thinking, however laudable that may be. Such a course is G
impermissible in law. The formation of the opinion, though
subjective, must be based on the material disclosing that a necessity
had arisen to make substantial modifications in the draft
development plan.
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86 SUPREME COURT REPORTS [2019] 8 S.C.R.

A 25. The formation of the opinion by the State Government is with
reference to the necessity that may have had arisen to make
substantial modifications in the draft development plan. The
expression: “as considered necessary” is again of crucial
importance. The term “consider” means to think over; it connotes
that there should be active application of the mind. In other words,
B
the term “consider” postulates consideration of all the relevant
aspects of the matter. A plain reading of the relevant provision
suggests that the State Government may publish the modifications
only after consideration that such modifications have become
necessary. The word “necessary” means indispensable, requisite,
C indispensably requisite, useful, incidental or conducive, essential,
unavoidable, impossible to be otherwise, not to be avoided,
inevitable. The word “necessary” must be construed in the
connection in which it is used. (See Advanced Law Lexicon,
P. Ramanatha Aiyar, 3rd Edn., 2005.)
D 26. The formation of the opinion by the State Government should
reflect intense application of mind with reference to the material
available on record that it had become necessary to propose
substantial modifications to the draft development plan.”

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

“13. …… Now it is the Central Government which has to be
F satisfied, as the authority appointed by Parliament under Section
25(2), that it is necessary in the public interest to make the special
orders of exemption. It has set out the reasons which prompted it
to pass the orders. In our opinion, the circumstances mentioned in
those notifications cannot be said to be irrelevant or unreasonable.
It is not for this Court to sit in judgment on the sufficiency of those
G reasons. The limitations on the jurisdiction of the court in cases
where the satisfaction has been entrusted to executive authority
to judge the necessity for passing orders is well defined and has
been long accepted.”

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

42. Thus, at the very least, it is clear that the Central Government’s
satisfaction must be as to the conditions precedent mentioned in the C
Section as correctly understood in law, and must be based on facts that
have been gathered by the Central Government to show that the
conditions precedent exist when the order of the Central Government is
made. There must be facts on which a reasonable body of persons
properly instructed in law may hold that it is essential in public interest to
amalgamate two or more companies. The formation of satisfaction cannot D
be on irrelevant or imaginary grounds, as that would vitiate the exercise
of power.

“ESSENTIAL”

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

“Essential. Indispensably necessary; important in the highest
degree: requisite that which is required for the continued existence
of a thing.”
F
Black’s Law Dictionary (10th Edn.) defines “essential” as follows:

“essential, adj. (14c) 1. Of, relating to, or involving the essence
or intrinsic nature of something. 2. Of the utmost importance;
basic and necessary. 3. Having real existence; actual.”
G
44. In J. Jayalalitha v. Union of India, (1999) 5 SCC 138, this
Court dealt with an argument that there is no guideline contained in
Section 3(1) of the Prevention of Corruption Act, 1988, when the Section

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

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

“PUBLIC INTEREST”

45. The third pre-requisite of Section 396 is that the Central
Government must apply its mind when compulsorily amalgamating two
C
or more companies in the public interest. “Public interest” is an expression
which is wide and amorphous and takes colour from the context in which
it is used. However, like the expression “public purpose”, what is important
to be noted is that public interest is the general interest of the community,
as distinguished from the private interest of an individual [see State of
D Bihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga and
Ors., [1952] 3 SCR 889 at pp. 1073-1075].

46. This is echoed in Manimegalai v. Special Tehsildar (Land
Acquisition Officer) Adi Dravidar Welfare, (2018) 13 SCC 491 as
follows:
E
“14. Similarly, public purpose is not capable of precise definition.
Each case has to be considered in the light of the purpose for
which acquisition is sought for. It is to serve the general interest
of the community as opposed to the particular interest of the
individual. Public purpose broadly speaking would include the
F purpose in which the general interest of the society as opposed to
the particular interest of the individual is directly and vitally
concerned. Generally, the executive would be the best judge to
determine whether or not the impugned purpose is a public purpose.
Yet it is not beyond the purview of judicial scrutiny. The interest
G of a section of the society may be public purpose when it is
benefitted by the acquisition. The acquisition in question must
indicate that it was towards the welfare of the people and not to
benefit a private individual or group of individuals joined

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collectively. Therefore, acquisition for anything which is not for a A
public purpose cannot be done compulsorily.”

(emphasis supplied)

47. In the context of the Motor Vehicles Act, 1939, in Rameshwar
Prasad and Ors. v. State of U.P. and Ors., (1983) 2 SCC 195, this B
Court held:

“19. ……… What does Section 43-A(1) after all say? It says
that the State Government may issue such directions of a general
character as it may consider necessary in the public interest. What
is the meaning of the term “public interest”? In the context of the C
Act, it takes within its fold several factors such as, the maximum
number of permits that may be issued on a route or in any area
having regard to the needs and convenience of the travelling public,
the non-availability of sufficient number of stage carriage services
in other routes or areas which may be in need of running of D
additional services, the problems of law and order, availability of
fuel, problems arising out of atmospheric pollution caused by a
large number of motor vehicles operating in any route or area, the
condition of roads and bridges on the routes, uneconomic running
of stage carriage services leading to elimination of small operators
and employment of more capital than necessary in any sector E
leading to starvation of capital investment in other sectors etc.
Public interest under the Act does not mean the interest of the
operators or of the passengers only. We have to bear in mind that
like every other economic activity the running of stage carriage
service is an activity which involves use of scarce or limited F
productive resources. Motor transport involves a huge capital
investment on motor vehicles, training of competent drivers and
mechanics, establishment of workshops, construction of safe roads
and bridges, deployment of sufficient number of policemen to
preserve law and order and several other matters. To say that
larger the number of stage carriages in any route or area more G
convenient it would be to the members of the public is an
oversimplification of a problem with myriad facets affecting the
general public. If we run through the various provisions of the Act

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

A it becomes clear how much attention is given by it to various
matters affecting public interest. There are provisions relating to
licensing of drivers on the basis of their competence, licensing of
conductors, specifications to which the motor vehicles should
conform, coordination of road and rail transport, prevention of
deterioration of the road system, prevention of uneconomic
B
competition among motor vehicles, fixation of reasonable fare,
compliance by motor vehicles with the prescribed timetable,
construction of bus stands with necessary amenities, maintenance
of standards of comfort and cleanliness in the vehicles,
development of inter-state tourist traffic and several other matters
C with the object of making available adequate and efficient transport
facilities to all parts of the country. Any direction given by the
State Government under Section 43-A of the Act should, therefore,
be in conformity with all matters regarding which the statute has
made provision. In this situation to say that any number of permits
can be issued to any eligible operator without any upper limit is to
D
overstep the limits of delegation of statutory power and to make a
mockery of an important economic activity like the motor
transport.”

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

“51. In Stroud’s Judicial Dictionary, Vol. IV (4th edn.) ‘public
interest’ is defined thus:
F
“Public interest — 1. A matter of public or general interest
does not mean that which is interesting as gratifying curiosity
or a love of information or amusement; but that in which a
class of the community have a pecuniary interest, or some
G interest 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 (6th edn.), ‘public interest’ is
defined as follows:

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“Public Interest — Something in which the public, the A
community at large, has some pecuniary interest, or some
interest by which their legal rights or liabilities are affected. It
does not mean anything so narrow as mere curiosity, or as the
interests of the particular localities, which may be affected by
the matters in question. Interest shared by citizens generally in
B
affairs of local, state or national government ……”

49. In Municipal Corporation of the City of Ahmedabad and
Ors. v. Jan Mohd. Usmanbhai and Anr., (1986) 3 SCC 20, this Court
stated that the expression “in the interest of the general public” is of
wide import comprehending public order, public health, public security, C
morals, economic welfare of the community, and the objects mentioned
in 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:
D
“15. …… The phrase “in the interest of the general public” has
come to be considered in several decisions and it has been held
that it would comprise within its ambit interests like public health
and morals (refer to State of Maharashtra v. Himmatbhai
Narbheram Rao [AIR 1970 SC 1157 : (1969) 2 SCR 392]),
economic stability (State of Assam v. Sristikar Dowerah [AIR E
1957 SC 414]), stability of the country, equitable distribution of
essential commodities at fair prices (Union of India v. Bhanamal
Gulzarimal Ltd. [AIR 1960 SC 475 : 1960 Cri LJ 664]) for
maintenance of purity in public life, prevention of fraud and similar
considerations. ……”
F
51. Coming nearer home, Hindustan Lever Employees’ Union
v. Hindustan Lever Ltd. and Ors., 1995 Supp (1) SCC 499, Sahai, J.,
in a concurring judgment, referred to “public interest” in Section 394 of
the Companies Act as follows:

“5. What requires, however, a thoughtful consideration is whether G
the company court has applied its mind to the public interest
involved in the merger. In this regard the Indian law is a departure
from the English law and it enjoins a duty on the court to examine

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

A objectively and carefully if the merger was not violative of public
interest. No such provision exists in the English law. What would
be public interest cannot be put in a strait-jacket. It is a dynamic
concept which keeps on changing. It has been explained in Black’s
Law Dictionary as:
B “Something in which the public, the community at large, has
some pecuniary interest, or some interest by which their legal
rights or liabilities are affected. It does not mean anything so
narrow as mere curiosity, or as the interests of the particular
locality which may be affected by the matters in question.
C Interest shared by citizens generally in affairs of local, State or
national Government.”

It is an expression of wide amplitude. It may have different
connotation and understanding when used in service law and a
yet different meaning in criminal law than civil law and its shade
D may be entirely different in company law. Its perspective may
change when merger is of two Indian companies. But when it is
with subsidiary of foreign company the consideration may be
entirely different. It is not the interest of shareholders or the
employees only but the interest of society which may have to be
examined. And a scheme valid and good may yet be bad if it is
E against public interest.

6. Section 394 casts an obligation on the court to be satisfied that
the scheme for amalgamation or merger was not contrary to public
interest. The basic principle of such satisfaction is none other
than the broad and general principles inherent in any compromise
F
or settlement entered between parties that it should not be unfair
or contrary to public policy or unconscionable. In amalgamation
of companies, the courts have evolved, the principle of “prudent
business management test” or that the scheme should not be a
device to evade law. But when the court is concerned with a
G scheme of merger with a subsidiary of a foreign company then
the test is not only whether the scheme shall result in maximising
profits of the shareholders or whether the interest of employees
was protected but it has to ensure that merger shall not result in

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impeding promotion of industry or shall obstruct growth of national A
economy. Liberalised economic policy is to achieve this goal. The
merger, therefore, should not be contrary to this objective. Reliance
on English decisions Hoare & Co. Ltd., Re [1933 All ER Rep
105, Ch D] and Bugle Press Ltd., Re [1961 Ch 270 : (1960) 1 All
ER 768 : (1960) 2 WLR 658] that the power of the court is to be
B
satisfied only whether the provisions of the Act have been complied
with or that the class or classes were fully represented and the
arrangement was such as a man of business would reasonably
approve between two private companies may be correct and may
normally be adhered to but when the merger is with a subsidiary
of a foreign company then economic interest of the country may C
have to be given precedence. The jurisdiction of the court in this
regard is comprehensive.”

(emphasis supplied)

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

“22. The expression “public interest” has to be understood in its
true connotation so as to give complete meaning to the relevant
provisions of the Act. The expression “public interest” must be E
viewed in its strict sense with all its exceptions so as to justify
denial of a statutory exemption in terms of the Act. In its common
parlance, the expression “public interest”, like “public purpose”,
is not capable of any precise definition. It does not have a rigid
meaning, is elastic and takes its colour from the statute in which it
F
occurs, the concept varying with time and state of society and its
needs (State of Bihar v. Kameshwar Singh [AIR 1952 SC 252]).
It also means the general welfare of the public that warrants
recognition and protection; something in which the public as a
whole has a stake [Black’s Law Dictionary (8th Edn.)].”
G
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 of
a person, group, or firm) in which the whole society has a stake
and which warrants recognition, promotion, and protection by the
government and its agencies. Despite the vagueness of the term,
public interest is claimed generally by governments in matters of
state secrecy and confidentiality. It is approximated by comparing
B
expected gains and potential costs or losses associated with a
decision, policy, program, or project.”
(emphasis supplied)
54. In the context of compulsory amalgamation of two or more
C companies, the expression “public interest” would mean the welfare of
the 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 essential
to the nation so that they may contribute to the nation’s welfare and
progress, and in so doing, may also provide much needed employment.
D
“Public interest” in this context would, therefore, mean the combining of
resources of two or more companies so as to impact production and
consumption of goods and services and employment of persons relatable
thereto for the general benefit of the community. Conversely, any action
that impedes promotion of industry or obstructs growth which is in national
E or public interest would run counter to public interest as mentioned in
this Section.
55. At this juncture, we must first see whether each of the
conditions precedent to the applicability of Section 396 applies to the
facts of the present case. Insofar as the Central Government being
F “satisfied” is concerned, the following facts which the Central
Government has taken into account, based upon the Grant Thornton
report and the FMC order dated 17.12.2013, are as follows:
55.1 The Grant Thornton report does indeed begin with a
disclaimer, which reads as follows:
G “4. Limitations
4.1. Our findings are based upon the information made available
to us and we have not independently verified or validated the
information.

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4.2. Our work did not constitute an audit under any accounting A
standards and the scope of our work was significantly different
from that of a statutory audit. Hence it cannot be relied upon to
provide the same level of assurance as a statutory audit.

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

5. Restrictions

5.1. Our reports and comments are confidential in nature and
not intended for general circulation or publication, nor are they to
be quoted or referred to in whole or in part, without our prior C
consent in each specific instance. Such consent shall not be
unreasonably withheld. NSEL and FMC shall have no authority
or ability to modify our findings in any manner. We disclaim all
responsibility or liability for any costs, damages, losses, liabilities,
expenses incurred by anyone as a result of circulation, publication,
D
reproduction or use of our reports contrary to the provisions of
this paragraph. Should additional information or documentation
become available which impacts upon conclusions reached in our
reports, we reserve the right to amend our findings and reporting
accordingly. Further, comments in our reports are not intended,
nor should they be interpreted to be, legal advice or opinion.” E

However, the said report in the executive summary states:

“B. Executive Summary

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

Financing Business

1.1 The NSEL exchange platform was being used to conduct a
financing business.
G
Indian Bullion Market Association (‘IBMA’) enabled large volumes
of trading by a related party on FTIL group exchanges (NSEL
and Multi-Commodity Exchange of India Limited (‘MCX’).)

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A This is illustrated as per the diagram below:—

B

C

D

E

F
1.2 Grant Thornton observed that a large volume of NSEL
exchange 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 at
G
a pre-determined price and always registering a profit on the long-term
positions as illustrated below:

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A
Trad De Buy Memb ame of Member Contract Sub Termi Trade Trade
e al /Sell er ID Code Broker nal ID Price Value
Date o o.
02 87 S 13790 PD DLF002 PDY1121 474 13791 2400.00 360,000
April AGROPROCESSO HR2
2012 RS PVT. LTD.
02 87 B 10570 A"A"D RATHI H"R320PDY1121 232 10575 2400.00 360,000 B
April COMMODITIES HR2
2012 LTD.
02 88 S 10570 A"A"D RATHI H"R320PY1121H 232 10575 2450.70 367,605
April COMMODITIES R25
2012 LTD.
02 88 B 13790 PD DLC001 PY1121H 474 13791 2450.70 367,605 C
April AGROPROCESSO R25
2012 RS PVT. LTD.

D
1.3 These long-term contracts (e.g. T+25) were first traded on
the NSEL exchange in September 2009. The Board of NSEL
ratified the circulars introducing such long-term contracts over a
period beginning November 2009.
1.4 Further evidence was obtained with regards the existence of
E
a financing business, such as presentations which stated that a
fixed rate of return was guaranteed on investing in certain products
on the NSEL exchange.
Several internal (NSEL) presentations were found, upon a review
of e-mail databases, setting out a yield (e.g. 16%) as an opportunity
F
for investors for trading in certain products on the NSEL exchange.
An external presentation was also obtained which had been made
by a brokerage house (Geojit Comtrade Ltd.) for their clients
claiming a fixed return on investments made on the NSEL
exchange. Further, this presentation, declared that actual delivery
of stocks in such transactions would not be required. G

1.5 Grant Thornton also obtained evidence of repeated
contraventions of NSEL exchange rules and bye-laws which
facilitated such financing transactions to continue and grow in
size as below:
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A Repeated Defaults: As per the NSEL exchange rules a member
who does not have sufficient collateral/monies etc. to discharge
his obligations would not be allowed to trade further. This rule
was overridden on a recurring basis. Further despite repeated
defaults members were allowed to trade and increase their
expenses. For example, Lotus Refineries had defaulted, as per
B
the 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 a
default position or whom had exhausted their margin limits on
trading were granted an exemption from margin requirements and
C thus allowed them to increase their exposure by engaging in new
trades. More than 1,800 margin limit exemptions were granted
between 2009 through to 2013.
Inadequate monitoring of member collateral: NSEL did not carry
out any diligence to establish the existence of stock at member
D managed warehouses, upon which trades were being executed.
Grant Thornton carried out a stock verification exercise and found
significant shortages vis-à-vis expected collateral.
Related Party Transactions

E 1.6 IBMA is registered as a client with Karvy Comtrade limited
for executing trades on futures commodity exchange like MCX
and NCDEX.
SNP Designs Private Limited (SNP) is a client of IBMA and the
managing director of SNP is Mrs. Shalini Sinha, the wife of Mr.
F Anjani Sinha (CEO and MD of NSEL as well as IBMA).
Grant Thornton found evidence of a large volume of trades
executed on the MCX exchange on behalf of SNP, through Karvy
Comtrade Limited. Since April 2012 the total nominal value/volume
traded on MCX is approximately Rs. 40,000 crore.
G In spite of heavy losses over the period, trading on behalf of SNP
was allowed to continue. No margin money was ever taken from
SNP. As at 20 September 2013, IBMA is due to receive Rs. 77
crore on account of losses arising from trades executed on behalf
of SNP. No monies have been received from SNP despite
substantial amounts due.
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Further, evidence was obtained that Rs. 10 crore was received A
from Mohan India which was credited to an IBMA Bank account.
This was to be adjusted against the SNP receivable balance as
per an instruction made by Mr. Anjani Sinha.
1.7. IBMA is a subsidiary of NSEL and has received funding for
operational needs on several occasions (including a loan of Rs. 5 B
crore on 5 August 2013). IBMA is also a member on the NSEL
exchange and executes trades on behalf of clients. Margin limit
exemptions have been granted to IBMA on a daily basis since
February 2010.
Corporate Governance & Risk Management C
1.8 While the Bye-laws and Rules of the Exchange mandated the
formation of various Committees to effectively manage the
operations of the Exchange; the Board failed to constitute 9 out
of the 10 such committees. Further, there is no documentary
evidence to demonstrate whether the only committee formed D
(Membership Committee) was ever convened and hence, met its
objectives.
1.9 The Board Meeting minutes regularly (eg. 11 June 2008, 15
June 2009, 25 May 2011) stated that the Audit Committee had
detailed discussions on the Annual Financial Statements, the E
Internal Control Systems, reviewing the scope of Internal Audit
functions, the performance of the statutory and internal auditors,
the scope of work for the internal auditors, the planning of the
statutory audit for the current financial year, the payment of audit
fees, the observations by the auditors in the draft Auditor Report
etc. F
Upon review of the corresponding Audit Committee minutes we
noted no reference to discussions on Internal Control Systems,
reviewing the scope of Internal Audit functions, performance of
internal auditors and scope of work for the internal auditors.
G
Common members of the Board and the Audit Committee were:
Mr. Jignesh Shah
Mr. Joseph Massey
Mr. V. Hariharan
Mr. Shreekant Javalgekar
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A 1.10 The Board Meeting minutes of 31 March 2010 and 11 August
2010 stated that the Company (NSEL) approached Karvy
Financial Services Limited (KFSL) to extend credit facilities to a
member, specifically N.K. Proteins. Further the Board granted
and approved for issue of a guarantee to KFSL, to the extent of
Rs. 14 crores, in respect of credit facilities extended to N.K.
B
Proteins.
1.11 Our review of the Information technology identified several
independent standalone systems wherein the flow of business
transactions and related information between different systems
required manual intervention. Given the complexity and nature of
C trading transaction such systems including warehouse (eWDMS),
CNS, Delivery System (EMI) and trading should have been
integrated.
Further, these systems did not produce/have any form of MIS
operational. All reporting and analysis was done on manual
D worksheets. Our review of the Board minutes did not indicate
any form of MIS reporting or review.
These points collectively indicate significant gaps in IT, Risk &
Corporate Governance.

E Misutilisation of client monies
1.12 Misutilisation of client monies/settlement fund: As per the
rules and bye-laws of the NSEL exchange “Margin deposits
received by clearing members from their constituent members
and clients in any forms shall be accounted for and maintained
F separately in segregated accounts and shall be used solely for the
benefit of the respective constituent members’ and client position.”
Grant Thornton found evidence (including e-mails) that client
monies/settlement fund, was used regularly for fulfilling the
obligations of defaulting members.
G Further, NSEL utilised client monies/settlement fund for its own
business purposes on a regular basis. For example, on 28 March,
2013, Rs. 236.5 crore was withdrawn from the Settlement Fund
in order to fund NSEL’s own business overdraft account.

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There was a running deficit in the client monies/settlement fund A
balance from April 2012 to June 2013. The finance team of FTIL
had raised this as an area of concern on several occasions.
Misrepresentations to the Regulator
1.13 Regulatory Contraventions:
B
As per a Gazette Notification issued on 5 June 2007 by the Ministry
of Consumer Affairs, the Government of India under Section 27
of the Forward Contracts (Regulation) Act, 1952 (“FCRA”)
exempted all forward contracts of one day duration for the sale
and purchase of commodities traded on NSEL from the operations
of the said Act. Grant Thornton’s review of the type of trades C
executed on the NSEL exchange indicates contravention to the
exemption conditions granted.
During the period January 2011 to July 2013, FMC sought several
clarifications from NSEL on a number of complaints received
from the public alleging forward trading and running a financing D
scheme. All these allegations were refuted by NSEL. Our analysis
of such trades indicates misrepresentation by NSEL to FMC on
several occasions.”
The report then goes on to say that there was no documentation
in relation to warehouse activities for long term trades indicating that E
such contracts were not secured by warehouse stocks. The warehouses
were customer managed warehouses and the underlying collateral were
not in custody of NSEL. NSEL did not have control over these
warehouses and Grant Thornton was denied access to number of
warehouses. The Warehouse Development and Regulatory Authority F
had in fact rejected NSEL’s application for registration of its warehouses
way back on 16.05.2011. Notwithstanding such rejection, NSEL’s website
represented that its warehouses were registered with the Authority. No
verification or due diligence was ever undertaken by NSEL to ensure
compliance by its members of the conditions outlined in its rules and
byelaws even though in terms of NSEL byelaws, warehouse receipt G
issued by NSEL were meant to evidence a commodity being held in an
approved warehouse. NSEL did not insist upon deposit of commodities
in the warehouses prior to executing sale transactions. Instead NSEL

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A resorted to issuing Delivery Allocation Reports (DAR) representing to
genuine investors that each transaction was delivery based and backed
at the time of sale by the required quantity of commodities in its
warehouses.
55.2. The observations and conclusions of the FMC order dated
B 17.12.2013, based largely on this expert report, read as follows:
“15. Summary Observations and Conclusion:- After having
accorded due consideration to all the objections and arguments
raised by the noticees vide their written submission as well as oral
presentations through their counsel, we now proceed to conclude
C our observations by taking a final view on the status of the four
noticees as ‘fit and proper persons’ in the succeeding paragraphs.
15.1. Noticee No. 1:- Financial Technologies (India) Limited
(FTIL): We have discussed the equity structure of NSEL, which
is wholly owned by FTIL. We have also pointed out that Shri
D Jignesh Shah, Chairman-cum-Managing Director of FTIL has
been a Director on the Board and also functioning as Vice-
Chairman and a key management person of NSEL since its
inception. Similarly, Shri Joseph Massey and Shri Shreekant
Javalgekar have been Directors of the said company from its
very beginning till the settlement crisis at NSEL first came to light
E in July, 2013. The facts establishing the fraud involving a settlement
default over Rs. 5,500 crores at NSEL have been discussed at
length in the SCNs issued to the noticees as well as reiterated,
albeit illustratively by us at Para No. 14.7 of this Order. The
responsibility of FTIL as the holding company possessing absolute
F control over the governance of NSEL has also been highlighted.
The control of FTIL over NSEL becomes further crystallized from
the responses given by M/s. Grant Thornton before the Commission
on 03.12.2013 stating that Shri Jignesh Shah, Mr. Joseph Massey
and a host of other officials of FTIL reviewed the forensic audit
report and it was only after obtaining their clearance, the forensic
G auditor finalised its report.
15.1.1. The violation of conditions prescribed in the exemption
notification, trading in paired contracts to generate assured financial
returns under the garb of commodity trading, admission of
members who were thinly capitalised having poor net worth and
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giving margin exemptions to those who were repeatedly defaulting A
in settling their dues, poor warehousing facilities with no or
inadequate 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 to
Shri Jignesh Shah, and apparent complicity with the defaulters to
B
defraud the investors, etc., lead to an inescapable conclusion that
a huge fraud was perpetrated by NSEL while having the presence
of two Board members of FTIL on the Board of NSEL, one of
whom was the Vice-Chairman of the company.
15.1.2. The facts of the case and the manner in which the business
affairs of NSEL were conducted leaves no doubt in our minds C
that FTIL, notwithstanding its contentions that it was ignorant of
the affairs and conduct of NSEL, exerted a dominant influence
on the management, and directed, controlled and supervised the
governance of NSEL. In the face of a fraud of such a magnitude
involving settlement crises of Rs. 5,500 crores owed to over 13,000 D
sellers/investors on the trading platform of NSEL, FTIL, cannot
seek to take refuge behind the corporate veil so as to unjustifiably
isolate itself from the fraudulent actions that took place at NSEL
resulting in such a huge payment crisis.
15.1.3. FTIL has its principal business of development of software E
which has become the technology platform for almost the entire
industry engaged in broking in shares and securities, commodities,
foreign exchange etc. As has been demonstrated by FTIL in their
written submission, FTIL has floated a number of regulated
exchanges – both for securities and commodities derivatives – in
India as well as abroad. NSEL was incorporated to provide a F
trading platform of commodity spot exchange on a pan-India basis
for the purpose of which apparently it sought and was granted
exemption from the operation of the FCRA, 1952. Since the
objective of the NSEL was promoting spot trading in commodities
on an electronic platform, its business model did not contemplate G
venturing into trading in forward contracts. FTIL had already
promoted MCX, a regulated exchange under FCRA, 1952, for
the purpose of trading in forward contracts. Therefore, having
secured an exemption from the purview of FCRA, 1952 on the
ground that it was intended to promote spot trading, NSEL was
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A not authorised to allow trading in forward contracts through the
scheme of paired contracts, thereby defying conditions stipulated
in the exemption notification granted to it. The motive behind
allowing trading in forward contracts on the NSEL platform in a
circuitous manner on NSEL which was neither recognized nor
registered under FCRA, 1952 indicates mala fide intention on the
B
part of the promoter of FTIL to use the trading platform of its
subsidiary company for illicit gains away from the eyes of
Regulator. The fact that FTIL promoted NSEL sought exemption
from FCRA, 1952 provisions even before they had started any
trading or operation, points to their intention from the outset. In
C this manner, it misinterpreted the conditions stipulated in the
exemption notification in collusion with a handful of members,
which ultimately culminated in a massive fraud involving Rs. 5,500
crores, which has the potential effect of eroding trust and
confidence in exchanges and financial markets.
D 15.1.4. Keeping in view the foregoing observations and the facts
which reveal misconduct, lack of integrity and unfair practices on
the part of FTIL in planning, directing and controlling the activities
of its subsidiary company, NSEL, we conclude that FTIL, as the
anchor investor in the Multi-Commodity Exchange Ltd. (MCX)
does not carry a good reputation and character, record of fairness,
E integrity or honesty to continue to be a shareholder of the aforesaid
regulated exchange. Therefore, in the public interest and in
the interest of the Commodities Derivatives Market which
is regulated under FCRA, 1952, the Commission holds that
Financial Technologies (India) Ltd. (FTIL) is not a ‘fit and
F proper person’ to continue to be a shareholder of 2% or
more of the paid-up equity capital of MCX as prescribed
under the guidelines issued by the Government of India
for capital structure of commodity exchanges post 5-years
of operation. It is further ordered that neither FTIL, nor any
company/entity controlled by it, either directly or indirectly, shall
G hold any shares in any association/Exchange recognised by the
Government or registered by the FMC in excess of the threshold
limit of the total paid-up equity capital of such Association/Exchange
as prescribed under the commodity exchange guidelines and post
5-year guidelines.”
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Based on the Grant Thornton report and the FMC order, the draft A
amalgamation order dated 21.10.2014 then relied on the same facts, as
did the final assessment order. The final amalgamation order also refers
to an investigation under Section 209A into the affairs of NSEL which
led to infractions of Sections 211, 217 and 292A of the Companies Act.
These are compoundable offences which have, in fact, been compounded
B
by 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 the
fact that paired contracts 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. There is no
doubt that such paired contracts were, in fact, financing transactions C
which were distinct from sale and purchase transactions in commodities
and were, thus, in breach of both the exemptions granted to NSEL, and
the FCRA. We have also seen that NSEL throughout kept representing
that it was, in fact, a commodity exchange dealing with spot deliveries.
Apart from the Grant Thornton report and the FMC order, we have also D
seen that Shri Jignesh Shah, on 10.07.2013, made representations to the
DCA and the FMC, in which he stated that NSEL had full stock as
collateral; 10-20% of open position as margin money; and that the stock
currently held in NSEL’s 120 warehouses was valued at INR 6000 crore,
all of which turned out to be incorrect. Further, there is no doubt
whatsoever that in July, 2013, as a result of NSEL stopping trading on its E
exchange, a payment crisis of approximately INR 5600 crore arose.
The further question that remains is whether, given these facts, the
conditions precedent for the applicability of Section 396 were followed.
56. When it comes to whether the Central Government’s
satisfaction as to whether it was “essential” to amalgamate the aforesaid F
companies, what must be borne in mind is that NSEL had itself offered
a settlement scheme to pay back the persons who have allegedly been
duped. It was found that this scheme could not really take off, as a result
of which, large amounts continued to be owed to such persons. That
this was the real concern of the FMC is clear from a letter dated G
18.08.2014 addressed by the FMC to the Secretary, Ministry of Corporate
Affairs. This letter states:
“xxx xxx xxx
2. As apprised earlier, consequent to the suspension of trading
and a huge settlement default that took place at NSEL on H
106 SUPREME COURT REPORTS [2019] 8 S.C.R.

A 31.07.2007, the Government of India, Ministry of Consumer
Affairs, Food & Public Distribution, Department of Consumer
Affairs (DCA) vide its notification dated 6th August, 2013 (copy
enclosed as Annexure II) inter-alia provided that settlement of all
outstanding one day forward contract at NSEL shall be done under
the supervision of FMC. In exercise of this supervisory role, the
B
Commission has been continuously taking all possible steps and
has been regularly pursuing with NSEL to expedite the recovery
proceedings against the defaulters at its platform. To ensure better
monitoring of NSEL’s compliance the Commission had vide No.
8/1/2013 (1)-MD-1(1)(C)/Settlement (Vol.-IV) dated 29 th
C November, 2013 (copy enclosed as Annexure III) constituted a
Monitoring & Auction Committee (MAC) comprising the
representatives of various members associations and investors
bodies to assist and advise the Commission on matters pertaining
to the Commission’s supervisory role over the settlement of
outstanding contracts at NSEL.
D
3. It is observed that even after one year’s incessant efforts and
in spite of FMC’s active role in supervising the settlement of
contracts, the settlement plan could not result in making any
substantial payment to the investors as the process of recovery of
dues by NSEL from the defaulting members is very slow. It is
E submitted that, it is only the NSEL, which has the responsibility to
take all possible coercive measures as per their rules/bye-laws
and other laws of the land, to ensure that the outstanding dues of
all investors are settled. However as on date, NSEL has been
able to make a payment of only Rs. 538.56 crores to its members
F as against the payment dues of approximately Rs. 5500 crores.
This amount also includes an amount of Rs. 179.26 crores
borrowed by NSEL from its holding company, FTIL which was
distributed to small participants. The representatives of members
associations and investor bodies on the MAC in their meeting
with the Commission have represented the NSEL has lost its
G credibility as an institution. Further the employee attrition in NSEL
in the recent months has been extremely high and it is learnt that
the staff strength of NSEL has come down considerably, adversely
affecting the recovery process. As per the information received
from NSEL, the total employee count on NSEL rolls was 193 as
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on 31.07.2013 (when NSEL had suspended trading in one day A
forward contracts) which came down to 33 on 31.07.2014. The
morale of the employees at NSEL is also very low. NSEL is also
confronted with a number of cases against it, which are pending
in the High Courts and MPID Court relating to its failure to make
payment to the investors. The company is hardly left with any
B
financial resources to meet even legal expenses apart from meeting
staff salaries and other expenses related to recovery process.
The members of the Monitoring & Auction Committee have
expressed their views that with the loss of credibility, weak
Organizational structure, depletion of man-power strength and lack
of financial resources, NSEL has become totally ineffective in C
pursuing the recovery of the defaulted amounts from the defaulter
members.
4. It may be noted that NSEL is a subsidiary of Financial
Technologies India Ltd. (FTIL) which holds 99.99% of the shares
of NSEL. Hence, for all practical purposes NSEL is a wholly D
owned subsidiary of FTIL and therefore it is the primary
responsibility of the parent company, i.e. FTIL to own complete
responsibility for the affairs of its subsidiary company. In this regard
attention is drawn to the order of the Commission No. 4/5/2013-
MKT-I/B dated 17th December, 2013 (copy enclosed as Annexure
IV) in the matter of “Fit and Proper Person” status of M/s FTIL E
(another shareholder and promoter of MCX) and in the matter of
Shri Jignesh Shah & Shri Joseph Massey ex-Directors & Shri
Shreekant Javalgekar ex-MD and CEO of MCX. Some of the
important highlights of the said order pertaining to FTIL are as
below: F
(i) In para 14.2.1 of the order it is inter-alia mentioned that
NSEL by virtue of being a separate legal entity cannot be said
to 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 is G
effectively the only shareholder of NSEL, the constitution of
the Board of Directors of NSEL is entirely under its control.
FTIL through the Board of Directors of NSEL constituted by
it possesses effectual and absolute control over its subsidiary
company i.e. NSEL. Such control is further amplified and H
108 SUPREME COURT REPORTS [2019] 8 S.C.R.

A accomplished by the fact that Shri Jignesh Shah, the promoter
and Chairman-cum-Managing Director of FTIL has been on
the Board of NSEL and functioning as Vice-Chairman of the
Company since its inception. Shri Joseph Massey was also a
common Director both on the Board of FTIL and NSEL, while
Shri Shreekant Javalgekar continued to be a Director of NSEL
B
till he resigned from the post in July 2013;
(iii) In para 14.5.3 of the order it is inter-alia mentioned that it is
on record that all the minutes of Board meetings of NSEL were
regularly tabled at the Board meetings of FTIL. FTIL kept itself
apprised about the affairs of NSEL and also approved/ratified the
C actions 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 is
undisputed that NSEL was an Exchange in which FTIL had own-
ership interest to the extent of 99.9998% leaving a negligible
0.0002% stake to NAFED. The Articles of Association of NSEL
D confers authority to its shareholders to appoint Directors. As the
single largest shareholder, it is FTIL which has nominated all the
directors on the NSEL board. As a wholly-owned subsidiary, NSEL
is completely under the control of FTIL, including financial con-
trol over the affairs of NSEL. FTIL, which had the responsibility
E of managing the affairs of NSEL, cannot claim to be unaware of
the wrong-doing and fraud committed by the management of
NSEL.
(v) In para 14.10.06 of the order it is inter-alia mentioned that
FTIL cannot shy away from its role and duty as a parent com-
F 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 that
FTIL has not furnished any explanation as to what steps have
been taken by NSEL or by it as a parent company to honour the
G commitment of assuring safety and risk-free trading to the mem-
bers and clients who have traded on their platform purely on the
basis of an explicit assurance that the Exchange shall step into
the shoes of counter parties should there be any default by any
participant.

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(vii) In para 15.1.3 of the order it is inter-alia mentioned that FTIL A
has its principal business of development of software which has
become the technology platform for almost the entire industry
engaged in broking in shares and securities, commodities, foreign
exchange etc. The motive behind allowing trading in forward con-
tracts on the NSEL platform in a circuitous manner on NSEL
B
which was neither recognized nor registered under FCRA, 1952
indicates mala fide intention on the part of the promoter of FTIL
to use the trading platform of its subsidiary company for illicit
gains away from the eyes of Regulator.
5. The aforesaid facts would clearly establish that the Board of
FTIL and its promoters under the leadership of Shri Jignesh Shah C
have been actively controlling and directing the affairs of NSEL
and it is due to the poor governance and irregularities perpetrated
in to the affairs of NSEL by FTIL and its promoters that the
defaulting members defrauded the exchange to the extent of Rs.
5,500 crores thereby causing huge financial loss to more than
D
13,000 investors. It is submitted that the aforesaid order dated
17th December, 2013 passed by the Commission is based on
tangible facts on the role of FTIL in the affairs of NSEL, mustered
by the Commission on its own and also the facts revealed by the
forensic auditor M/s. Grant Thornton who were engaged by NSEL
to conduct a forensic audit into the affairs of NSEL post the E
settlement crisis. It may be noted the Hon’ble Bombay High Court
has also refused to grant any interim relief to FTIL and three
other individuals in respect of the aforesaid order dated 17th
December, 2013 passed by the Commission declaring FTIL, Shri
Jignesh Shah, Shri Joseph Massey and Shri Shreekant Javalgekar
F
as not fit and proper persons to be shareholders or a Director in
any of the recognized commodity exchanges. FTIL and other three
individuals have so far not challenged the above interim order of
the Hon’ble High Court.
6. It is also submitted that the Working Group constituted by the
Central Government under the Chairmanship of Deputy Governor, G
Reserve Bank of India to examine into the systematic risk arising
in consequence of the NSEL settlement debacle, have inter alia
recommended that the ownership, governance and management
structure at FTIL and the exchanges promoted by FTIL need to
be assessed and the possibility of bringing in an institutionalized
framework and approach to these aspects explored. H
110 SUPREME COURT REPORTS [2019] 8 S.C.R.

A 7. It may also be noted here that pursuant to the criminal
proceedings and arrest of Shri Jignesh Shah, Chairman-cum-
Managing Director of FTIL who was also the Vice-Chairman of
NSEL, the EOW of Mumbai Police, has since filed a chargesheet
against Shri Jignesh Shah under various sections of Indian Penal
Code and also the Maharashtra Protection of Interest of Depositors
B
(MPID) Act, 1999, before the Hon’ble Sessions Judge, Special
Court under MPID Act, Mumbai which vindicates the stand already
taken by the Commission in its order dated 17th December, 2013
pertaining to the role and responsibility of FTIL as a parent
company in the affairs of its wholly owned subsidiary i.e. NSEL.
C 8. The aforesaid submissions would make it clear that NSEL as a
corporate entity has now been rendered bereft of any credibility
and now seems financially and physically incapable of effecting
any substantial recovery from the defaulting members,
notwithstanding all the legal and other measures taken by it against
D them under the instructions/supervision of the Commission.
Similarly, the Board and management of FTIL, by their very
conduct in managing the affairs of NSEL and continuous effort to
distance themselves from their responsibility towards NSEL after
the settlement default, have lost their credibility as a responsive
and responsible holding company.
E
9. Keeping the aforesaid emergency situation in view, the
Commission is of the view that time has come for the Ministry of
Corporate Affairs to consider:
(i) merging/amalgamating NSEL with FTIL in public interest
F so that the human/financial resources of FTIL are also directed
towards facilitating speedy recovery of dues from the defaulters
at NSEL and FTIL takes responsibility to resolve the payment
crisis at NSEL at the earliest.
(ii) Further, it is suggested that together with merger/
amalgamation of NSEL with FTIL, taking over of the
G management of FTIL may also be considered so that the affairs
of FTIL can be managed in a professional way by bringing in
an institutionalized framework as recommended by Working
Group appointed by Government of India.
xxx xxx xxx”
H (emphasis supplied)
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This letter would show that the immediate reason for A
amalgamation, according to the FMC, and which was faithfully carried
out by Government, is that NSEL, as a corporate entity, seems financially
and physically incapable of effecting any substantial recovery from
defaulting members. This was the “emergency situation” according to
the FMC, which should lead to an order of amalgamation of the holding
B
and subsidiary companies so that the holding company’s financial
resources could be used to pursue proceedings by which monies owed
to the alleged duped investors/traders could be recovered.
56.1. What is important to note is that by the time the final order
of amalgamation was passed, i.e., on 12.02.2016, the final order itself
records: C

“8.1. Economic Offences Wing, Mumbai:
- Total amount due and recoverable from 24 defaulters is
Rs. 5689.95 crores.
- Injunctions against assets of defaulters worth Rs. 4400.10 D
crore have been obtained.
- Decrees worth Rs. 1233.02 crore have been obtained against
5 defaulters.
- Assets worth Rs. 5444.31 crore belonging to the defaulters
E
have been attached of which assets worth Rs. 4654.62 crore
have been published in Gazette under the MPID Act for
liquidation under the supervision of MPID Court and balance
assets worth Rs. 789.69 crore have been attached/secured
for attachment by the EOW:
F
- Assets worth Rs. 885.32 crore belonging to the directors and
employees of NSEL have been attached out of which assets
worth Rs. 882.32 crores have already been published in
Gazette under MPID Act for liquidation under the supervision
of MPID Court and balance assets worth Rs. 3 crore have
been attached/secured for attachment by the EOW; G
- MPID Court has already issued notices u/s 4 & 5 of the MPID
Act to the persons whose assets have been attached as above.
Thus, the process of liquidation of the attached assets has
started.
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112 SUPREME COURT REPORTS [2019] 8 S.C.R.

A - Bombay High Court has appointed a 3-member committee
headed by Mr. Justice (Retd.) V.C. Daga and 2 experts in
finance and law to recover and monetize the assets of the
defaulters.
- Rs.558.83 crores have been recovered so far, out of which
B Rs. 379.83 crore have been received/recovered from the
defaulters and Rs. 179 crore were disbursed by NSEL to small
traders/investors.
8.2. Enforcement Directorate:
- ED has traced proceeds of crime amounting to Rs. 3973.83
C crore to the 25 defaulters;
- ED has attached assets worth Rs. 837.01 crore belonging to 12
defaulters;
- As per the recent amendment in the PMLA, the assets attached
D by ED can be used for restitution to the victims.
8.3. The above status indicates that the said enforcement agencies
are working as per their mandate…….”
56.2. What concerned the FMC in August 2014 has, by the date
of the final amalgamation order, been largely redressed without
E amalgamation. The “emergency situation” of 2013 which, even according
to the Central Government, required the emergent step of compulsory
amalgamation has, by the time of the passing of the Central Government
order, disappeared. Thus, the raison d’être for applying Section 396 of
the Companies Act has, by the passage of time, itself disappeared. In
fact, as on today, decrees/awards worth INR 3365 crore have been
F
obtained against the defaulters, with INR 835.88 crore crystallised by
the committee set up by the High Court, pending acceptance by the
High Court, even without using the financial resources of FTIL as an
amalgamated company. What is, therefore, important to note is that what
was emergent, and therefore, essential, even according to the FMC and
G the Government in 2013-2014, has been largely redressed in 2016, by
the time the amalgamation order was made. Also, the Central Government
order does not apply its mind to the essentiality aspect of Section 396 at
all. In fact, in several places, it refers to “essential public interest” as if
“essential” goes with “public interest” instead of being a separate and
distinct condition precedent to the exercise of power under Section 396.
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On facts, therefore, it is clear that the essentiality test, which is the A
condition precedent to the applicable to Section 396, cannot be said to
have been satisfied.
57. During the course of proceedings before the Division Bench
of 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 upto B
INR 50 crore for each of the financial years 2016-2017 to 2018-2019 to
support NSEL to recover dues from defaulters, defend various cases,
and continue taking necessary legal action against various parties to
recover amounts from defaulters. The Division Bench refers to this
affidavit as follows:
C
“293] At the stage, when the final hearing in these petitions had
considerably advanced, FTIL, tendered an affidavit dated 4th July
2017 to place on record its resolution dated 28th March 2016 to
infuse 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 dues
from defaulters; to defend various legal cases; to continue taking D
necessary legal actions against various parties to recover amounts
from defaulters; and for working capital. The affidavit states that
such resolution was passed and such finances are proposed to be
infused at the request of NSEL.
294] The affidavit dated 4th July 2017 also confirms that the E
activities of NSEL have come to a grinding halt, though, the
affidavit purports to blame the FMC for such a situation. The
affidavit also states that up to now FTIL has infused approximately
Rs. 109 crores with NSEL, mainly to prosecute and defend legal
proceedings. There is reference to NSEL having obtained decrees F
worth more than Rs. 1200 crores and injunctions against assets
of defaulters valued at Rs. 5444.31 crores. The affidavit further
states that FTIL is committed to funding NSEL for purposes of
recovery from defaulters since the occurrence of payment crisis
on the exchange platform of NSEL.
G
295] If the contention of Mr. Chinoy to the effect that there is
absolutely no problem in the functioning of NSEL or that NSEL
has the necessary wherewithal, both financial as well as
infrastructural, to effect recoveries from the defaulters, is to be
accepted, then, there was no reason to rely upon contribution from
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114 SUPREME COURT REPORTS [2019] 8 S.C.R.

A FTIL, made or proposed to be made at a belated stage. The FTIL
resolution dated 28th March 2016, far from affording any cause
to interfere with the impugned order, in fact, lends support to the
reasoning in the impugned order that the NSEL, on its own, lacks
financial as well as infrastructural capacity to affect any recoveries
from the defaulters. The affidavit dated 4th July 2017 and the
B
resolution dated 28th March 2016 is also indicative of the business
realities of the situation, which is incidentally yet another ground
in the impugned order.”
(emphasis in original)
C 58. The High Court comment on the aforesaid affidavit is not
correct. The affidavit proceeds on the footing that since the activities of
NSEL have come to a grinding halt, FTIL would help NSEL to effect
recoveries from defaulters. The affidavit nowhere states that there is no
problem in the functioning of NSEL, or that NSEL has or does not have
the necessary wherewithal to effect recovery from defaulters. Even in
D the hearing before us, FTIL has submitted an affidavit-cum-undertaking
dated 11.04.2019, stating that it will continue to infuse funds into NSEL
so that recovery of dues from defaulters does not, in any manner, get
stymied. We take this affidavit and undertaking on record, and hold FTIL
to this undertaking made before this Court.
E 59. 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 interesting reading. The satisfaction as to
public interest is stated in the very beginning of the order as follows:
“Whereas the Central Government is satisfied that to leverage
F combined assets, capital and reserves, achieve economy of scale,
efficient administration, gainful settlement of rights and liabilities
of stakeholders and creditors and to consolidate businesses, ensure
coordination in policy, it is essential in the public interest…….”
What is stated in the opening is repeated in paragraph 2.14.2 as
G follows:
“2.14.2 The Central Government also carefully considered the
proposal received from FMC and DEA and was of the considered
opinion that to leverage combined assets, capital and reserves for
efficient administration and satisfactory settlement of rights and
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liabilities of stakeholders and creditors of NSEL, it would be in A
essential public interest to amalgamate NSEL with FTIL.”
It will be seen that all the expressions used in relation to “public
interest” have relation only to the businesses of the two companies that
are sought to be amalgamated. What is important to note is that there is
no interest of the general public as opposed to the businesses of the two B
companies that are referred to. It is important to notice that the leveraging
of combined assets, capital, and reserves is only to settle liabilities of
certain stakeholders and creditors when the order is read as a whole,
and given the fact that the businesses of the two companies were
completely different. So far as achieving economy of scale and efficient
administration is concerned, it is difficult to see how this would apply to C
the fact situation in this case where NSEL is admittedly a company
which has stopped functioning as a commodities exchange at least with
effect from July, 2013 with no hope of any revival. Thus, the consolidation
of businesses spoken about does not exist as a matter of fact, as NSEL’s
business has come to a grinding halt, as has been observed by the FMC D
and the Central Government itself. Each one of these expressions, when
read with the rest of the order, therefore, only shows that the sole object
of the amalgamation order is very far from the high-sounding phrases
used in the opening, and is really only to effect speedy recovery of dues
of INR 5600 crore, which has been referred to in the letter of the FMC
to the Secretary, Ministry of Corporate Affairs, dated 18.08.2014. This E
would be clear from a reading, in particular, of two paragraphs of the
order, 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 not
having the resources, financial or human, or the organizational
capability to successfully recover the dues to the investors pending F
for over a year. Further, NSEL is not left with any viable,
sustainable business while FTIL has the necessary resources to
facilitate speedy recovery of dues.
2.13.3. In the above background, a proposal had been received
from FMC, vide letter dated 18-08-2014, proposing the merger of G
NSEL with FTIL by the Central Government under the provisions
of Section 396 of the Companies Act, 1956. The proposal has
been supported by the Department of Economic Affairs (DEA),
Ministry of Finance, FMC has proposed the merger/amalgamation
of NSEL with FTIL in essential public interest so that the human/ H
116 SUPREME COURT REPORTS [2019] 8 S.C.R.

A financial resources of FTIL are also directed towards facilitating
speedy recovery of dues from the defaulters at NSEL and the
FTIL takes responsibility to resolve the payment crisis at NSEL
at the earliest.”
59.1. However, the Central Government supported this order on
B the ground that it is made in public interest essentially on three grounds,
which are repeatedly referred to by the impugned judgment. The three
grounds as stated by the impugned judgment are as follows:
“269. …… (a) Restoring/safeguarding public confidence in
forward contracts and exchanges which are an integral and
C essential part of Indian economy and financial system, by
consolidating the businesses of NSEL and FTIL; (b) Giving effect
to business realities of the case by consolidating the businesses of
FTIL and NSEL and preventing FTIL from distancing itself from
NSEL, which is, even otherwise, its alter ego; and (c) Facilitating
NSEL in recovering dues from defaulters by pooling human and
D financial resources of FTIL and NSEL. Further, we are also
satisfied that each of these three grounds constitute a facet of
public interest in the context of the provisions in Section 396.
……”
59.2. It is important to note that the first and second grounds
E mentioned by the High Court are not contained in the draft order of
amalgamation. Had they been so contained, objections and suggestions
would have been made by all stakeholders, which the Central Government
would then have been bound to consider before passing the final order.
However, it was argued on behalf of the respondents that the first and
F second grounds are, in reality, inferences drawn from facts which are
already stated in the order and these inferences do not need to be stated
in the draft order. We are afraid that this argument is incorrect inasmuch
as grounds contained in reasons (a) and (b) are important grounds which
have a vital bearing on the amalgamation in question. If these grounds
were contained in the draft order, there is no doubt that the shareholders
G and creditors of FTIL, and FTIL itself would have had an opportunity to
comment on the same. For example, the “business realities” of the case
are facts known to FTIL; and NSEL, being FTIL’s alter ego, is the
subject matter of dispute in various suits that have been filed and are
pending adjudication. FTIL could have responded giving reasons as to
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why NSEL is not its alter ego. Also, whether the amalgamation is, in A
fact, to restore or safeguard public confidence in forward contracts and
exchanges is a subject matter on which FTIL, its shareholders and
creditors, could have commented. Equally, whether NSEL’s exchange
was an essential and integral part of the Indian economy and financial
system, and whether this defunct business could be consolidated so as
B
to impact the economy are all matters for comment by FTIL and its
shareholders and creditors. For all these reasons, we cannot accede to
the respondents’ arguments on this score. On this ground alone, even
assuming that these two grounds obtained and can be culled out from
the final order, not being contained in the draft order, the said grounds
would be in breach of Section 396(3) and (4), and therefore, cannot be C
looked at to support the order.
59.3. It is important to note that grounds (a) and (b) are both
culled out in answer to objections raised by FTIL. The precise objection
raised and the answer given are quoted hereinbelow:
“7.2.1. FTIL has challenged the background and reasons for D
the amalgamation as the power under section 396 of the Act
has been used only in case of Government companies alone.
This argument does not derogate from the scope of the statutory
provisions. The statutory provisions of section 396 of the Act are
being invoked in essential public interest to safeguard the interest E
of all stakeholders in the captioned company. The present status
and composition of the Boards of FTIL and NSEL have been
noted. However, the fact that the Boards had not acted with an
independent mind to collect information and put the system under
a robust technology is borne out of the simple fact that the Show
Cause Notice dated 27-04-2012 issued by the Department of F
Consumer Affairs based on analysis of trade data by the then
Forward Market Commission had given an alarming picture of
the state of affairs of NSEL. The public interest driving the merger
are set out in the business realities of the case, it is noted from the
facts of the case and the recommendations of FMC as well as its G
order dated 17-12-2013 which throw ample light to the grave
shattering of the public confidence and the purpose of establishing
commodity exchange has been defeated.”
xxx xxx xxx
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118 SUPREME COURT REPORTS [2019] 8 S.C.R.

A “7.2.6. FTIL and NSEL have distinct and separate objects
and nature of operations and completely disparate and
unconnected objects, and hence there is no synergy, efficient
administration, consolidation of business or co-ordination in
policy to be gained by the forced amalgamation; the argument
runs contrary to the concept of merger which essentially means
B
that two or more separate entities are getting merged to achieve
the objectives of amalgamation. In the instant case, amalgamation
is targeted to achieve its stated objects, essentially in public interest.
By all intents and purposes, the way both the companies were
being managed, owned and controlled, NSEL is the alter ego of
C FTIL and thus, the two companies have been practically one entity.
All stakeholders were also looking at them as one entity. The
amalgamation u/s. 396 of the Act only formalizes this practical
reality in essential public interest.”
xxx xxx xxx
D “7.2.8. The FTIL has questioned the jurisdiction of the Central
Government to decide on the question of fraud and claimed
that it has to be proved beyond reasonable doubt by adducing
necessary particulars; the Central Government is invoking section
396 of the Act in essential public interest for the merger of NSEL,
E which is an almost wholly-owned subsidiary of FTIL. The merger
is not an adjudication on the alleged fraud. The merger is targeted
to achieve its stated objectives for long term sustainability in the
best interest of the stakeholders.”
(emphasis in original)
F It will be noticed that the objection raised in paragraph 7.2.1 is
that Section 396 can be used in the case of Government companies
alone, whereas the answer given is that this cannot be so, given the
business realities of the case and the FMC order of 17.12.2013 “which
throw ample light to the grave shattering of public confidence and the
G purpose of establishing Commodity Exchange has been defeated”. First
and 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 letter
dated 18.08.2014, in which the “business reality” is the fact that dues of
INR 5600 crore have to be paid, and that NSEL does not have the
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wherewithal to do so. Thus, its parent company’s financial resources A
ought to be used to effect such payment. This “business reality”, therefore,
speaks only of the private interest of the investors/traders who have
been allegedly duped (which fact will only be established in suits filed by
them in 2014), and nothing beyond (which would show some vestige of
public interest). Equally, the grave shattering of public confidence and
B
purpose of establishing commodity exchanges having been defeated,
according to the Central Government, is a gloss on the FMC order dated
17.12.2013. If this were so, one would have expected a resuscitation or
revival of the commodities exchange of NSEL, which could have been
achieved by takeover of its management. It is difficult to imagine that
grave shattering of public confidence by the permanent shutting down C
of the commodities exchange of the NSEL would be remedied only by
facilitating the paying of dues to certain allegedly duped investors/traders,
which fact will be proved or disproved in suits filed by them which are
pending adjudication in the Bombay High Court. In any case, this reason
is wholly irrelevant as an answer to the objection raised by FTIL which,
D
as we have seen, is an objection stating that the Section applies to
Government companies alone. Also, had FTIL made no such objection,
no such answer would have been forthcoming. As far as paragraphs
7.2.6 and 7.2.8 of the order are concerned, what is admitted in the order
itself, is that there is no “adjudication” on the “fraud” in the facts of the
present case, and thus, not an exercise of lifting of the corporate veil of E
the pre-amalgamation companies. The amalgamation order contradicts
itself by then stating that NSEL is the alter ego of FTIL, and thus, 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.
For all these reasons, therefore, neither reason (a) nor reason (b) ought
F
to detain us any further. Reason (c) is, therefore, the only reason that
really remains, as is contained in the letter of 18.08.2014 by the FMC to
the Central Government. We have already seen that this reason, by
itself, 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 Central G
Government may, after considering suggestions and objections from the
stakeholders mentioned, make modifications in the draft order as may
seem to it desirable in the light of such suggestions and objections. No
modification has been made in the body of the Central Government order
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A as finally made. If the Central Government had actually considered that
each of these three reasons impact public interest, it would have explicitly
said so after suggestions and objections were made by the various
stakeholders. The fact that the Central Government has not amended
the body of the final order is of great significance – it is only the original
reasons given in the draft order that continue as such in the final order
B
which, 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 objections
and suggestions given in the final order, is only given separately by the
Central Government after the amalgamation order to show that the
principles of natural justice as laid down by sub-section (4) of Section
C 396 have, in fact, been followed. This becomes clear from paragraphs
6.3 and 7 of the final order, which read as follows:
“6.3. The Central Government received in writing and through
email various objections / suggestions from various classes of
stakeholders including the shareholders, creditors, and all other
D interested parties claiming that monies are recoverable from the
proceedings 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 various
objections, suggestions and submissions on the proposed
E amalgamation u/s. 396 of the Act on the order dated 21-10-2014
in Draft form issued by the Central Government. The said
objections, suggestions and submissions were made during the
course of hearing and written submissions (physically and
electronically) received by the Central Government on various
dates. The said objections, suggestions and submissions made by
F each of the parties are dealt in the manner herein under.”
59.5. So far, we have gone by the Central Government order as it
stands. The Bombay High Court, in stating reasons (a), (b), and (c) as
grounds of public interest, has gone much further than even the answer
given to the objections that are contained in the order itself. “Restoring/
G safeguarding public confidence in forward contracts and exchanges,
which are an integral and essential part of the Indian economy and
financial system, by consolidating the businesses of NSEL and FTIL,” is
not contained in the answer given to objections in the order. First and
foremost, restoring public confidence is no part of the order. What is
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mentioned is only the fact that public confidence has been shattered, as A
is reflected by the FMC order dated 17.12.2013. Secondly, the entire
expression, “which are an integral and essential part of Indian economy
and 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 Court
itself relatable to this answer. Similarly, when it comes to reason (b),
B
“giving effect to business realities of the case” contained in the answer
to objections does not contain “by consolidating the businesses of FTIL
and NSEL”, nor does it contain “and preventing FTIL from distancing
itself 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 a
case where the Central Government has, in fact, lifted the corporate C
veil, despite the alleged non-existence of the circumstances justifying
lifting of such corporate veil”, and further, “this is not a case where the
Central Government has lifted the corporate veil and sought to apportion
any liability upon either NSEL or FTIL”. For all these reasons, we find
that no reasonable body of persons properly instructed in law could
D
possibly arrive at the conclusion that the impugned order has been made
in public interest.
60. The learned Senior Advocates appearing on behalf of the
respondents has placed great reliance on the judgment in Ganesh Bank
(supra). In this judgment, the Appellant Bank was amalgamated with
Federal Bank under Section 45 of the Banking Regulation Act, 1949. E
Federal Bank was selected from out of several other banks by the
Reserve Bank of India as its offer to amalgamate with the Appellant
Bank was unconditional, Federal Bank undertaking to make full payment
to depositors.
61. The judgment in Ganesh Bank (supra) was faced with the F
amalgamation of the Appellant Bank after a moratorium had been
imposed on it as it was found that its position was very weak, having
incurred huge losses in the financial year 2004-05. Section 45 of the
Banking Regulation Act reads as follows:
“45. Power of Reserve Bank to apply to Central G
Government for suspension of business by a banking
company and to prepare scheme of reconstitution or
amalgamation.—(1) Notwithstanding anything contained in the
foregoing provisions of this Part or in any other law or any
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A agreement or other instrument, for the time being in force, where
it appears to the Reserve Bank that there is good reason so to do,
the Reserve Bank may apply to the Central Government for an
order of moratorium in respect of a banking company.
xxx xxx xxx
B (4) During the period of moratorium, if the Reserve Bank is satisfied
that—
(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 banking
company; or
(d) in the interests of the banking system of the country as a
whole,—
it is necessary so to do, the Reserve Bank may prepare a
D
scheme—
(i) for the reconstruction of the banking company, or
(ii) for the amalgamation of the banking company with any
other banking institution (in this section referred to as “the
E transferee bank”).
xxx xxx xxx”
It is important to note that unlike Section 396 of the Companies
Act, the satisfaction of the Reserve Bank of India can be on any one of
four grounds. Such satisfaction may be in the public interest or in the
F interest of depositors. This point is, in fact, highlighted in paragraph 34 of
the judgment as follows:
“34. The phrase “good reasons” in sub-section (1) of Section 45
is a term of wide amplitude and it will not be correct to restrict it
only to the actions mentioned under sub-section (2) of Section 45
G of the Act as is contended by the appellants. The provision is
concerned with preparing a scheme of reconstruction or
amalgamation which would become necessary where RBI is
satisfied about the existence of any of the four grounds mentioned
in Section 45(4). Apart from public interest and the interest of the
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banking system, which are provided in clauses (a) and (d) thereof, A
Section 45(4) provides for the necessary action in the interest of
the depositors or with a view to secure proper management of
the Bank which are clauses (b) and (c) in that sub-section.
Precursor to the framing of the scheme is the imposition of the
moratorium which is provided in sub-sections (1) and (2) of Section
B
45. 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 object
of the Act is protection of the interest of the depositors, such an
interpretation of the concept of “good reasons” will have to be
adopted, and not a narrow one.” C
The judgment then goes on to state:
“39. Now, as far as the first two questions of non-consideration
of reconstruction and proposing merger with Federal Bank are
concerned, RBI has noted that the Bank was in difficulties from
1990 and particularly from December 2003 when it was placed D
under monthly monitoring. RBI in its application for moratorium
to the Central Government dated 4-1-2006 had clearly stated that
during the discussion with the appellant Bank, major shareholders
and Directors had shown total reluctance to merge into the stronger
bank. In view thereof, it was imperative that immediate E
arrangement to protect the interest of the depositors was to be
made through its merger with a bank under Section 45 of the Act.
RBI had, therefore, made an effort and called upon the appellant
Bank, that if possible, to explore the possibility of merger with
another stronger bank. It had also made an effort to impress that
there should be infusion of fresh capital. That was not coming. F
There could be a reconstruction by bringing in more money or by
narrowing the size of the appellant Bank which did not appear to
be feasible. The only option left was that of amalgamation.”
Thus, two features of Ganesh Bank (supra) distinguish the said
case from the facts of the present case. First, that under Section 45 of G
the Banking Regulation Act, the interest of the depositors is to be looked
at; and it was this reason that led to the amalgamation. Secondly, this
Court found that after exploring other options, the only option left was
that of amalgamation.
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A 62. In point of fact, the contrast between Section 45(4) of the
Banking Regulation Act and Section 396 of the Companies Act becomes
important. Under Section 45(4)(b) and (c) of the Banking Regulation
Act, the satisfaction of the Reserve Bank of India for preparing a scheme
of amalgamation can be in the interest of the depositors of a particular
bank or in order to secure the proper management of a particular banking
B
company. This must be contrasted with clauses (a) and (d) of Section
45(4), which speak of public interest and the interest of the banking
system of the country as a whole. This judgment, on facts, merged a
financially weak bank with a financially strong bank in the interest of the
depositors of the financially weak bank. It is important to note that the
C business 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 offer
to merge because it felt that post merger, it could have a significant
presence 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 the
D
Reserve Bank of India may amalgamate two banking companies, it is
clear that this reason alone will not go to public interest, which is a
separate head contained in Section 45(4). It is in this context that the
observation contained in paragraph 44 is made, namely:
“44. Under Section 45 of the Act, the primary consideration is
E public interest. There is an underlying object of acting swiftly and
decisively to protect the interests of depositors and ensure public
confidence in the banking system. The emergent situation which
warrants action with expedition cannot be lost sight of while
deciding the legality of the action.”
F As we have already seen, the “emergent situation” which obtained
in 2013 was no longer there in 2016 when the final order of amalgamation
was passed in the present case.
63. Valiant attempts have been made by counsel in the High Court
as well as counsel in this Court to support the order on grounds which
G are outside the order, stating that such grounds make it clear that in any
case, the Government order has been made in public interest. The
celebrated passage in Mohinder Singh Gill (supra) states that:
“8. The second equally relevant matter is that when a statutory
functionary makes an order based on certain grounds, its validity
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must be judged by the reasons so mentioned and cannot be A
supplemented by fresh reasons in the shape of affidavit or
otherwise. Otherwise, an order bad in the beginning may, by the
time it comes to Court on account of a challenge, get validated by
additional grounds later brought out. We may here draw attention
to the observations of Bose, J. in Gordhandas Bhanji [Commr.
B
of Police, Bombay v. Gordhandas Bhanji, AIR 1952 SC 16] :
“Public orders, publicly made, in exercise of a statutory
authority cannot be construed in the light of explanations
subsequently given by the officer making the order of what he
meant, or of what was in his mind, or what he intended to do.
Public orders made by public authorities are meant to have C
public effect and are intended to affect the actings and conduct
of those to whom they are addressed and must be construed
objectively with reference to the language used in the order
itself.”
Orders are not like old wine becoming better as they grow D
older.”
We are of the view that it is the Central Government that has to
be “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 sustain E
such order must be rejected.
64. However, learned Senior Advocates on behalf of the
respondents have cited Chairman, All India Railway Recruitment
Board and Anr. v. K. Shyam Kumar and Ors., (2010) 6 SCC 614,
which, according to them, renders the judgment in Mohinder Singh F
Gill (supra) inapplicable where larger public interest is involved. In this
judgment, Mohinder Singh Gill (supra) was distinguished thus:
“44. We are also of the view that the High Court has committed
a grave error in taking the view that the order of the Board could
be judged only on the basis of the reasons stated in the impugned G
order based on the report of Vigilance and not on the subsequent
materials furnished by CBI. Possibly, the High Court had in mind
the Constitution Bench judgment of this Court in Mohinder Singh
Gill v. Chief Election Commr. [(1978) 1 SCC 405]
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A 45. We are of the view that the decision-maker can always rely
upon subsequent materials to support the decision already taken
when larger public interest is involved. This Court in Madhyamic
Shiksha Mandal, M.P. v. Abhilash Shiksha Prasar Samiti
[(1998) 9 SCC 236] found no irregularity in placing reliance on a
subsequent report to sustain the cancellation of the examination
B
conducted where there were serious allegations of mass copying.
The principle laid down in Mohinder Singh Gill case [(1978) 1
SCC 405] is not applicable where larger public interest is involved
and in such situations, additional grounds can be looked into to
examine the validity of an order. The finding recorded by the High
C Court that the report of CBI cannot be looked into to examine the
validity of the order dated 4-6-2004, cannot be sustained.”
It will be seen that there is no broad proposition that the case of
Mohinder Singh Gill (supra) will not apply where larger public interest
is involved. It is only subsequent materials, i.e., materials in the form of
D facts that have taken place after the order in question is passed, that can
be looked at in the larger public interest, in order to support an
administrative order. To the same effect is the judgment in PRP Exports
and Ors. v. Chief Secretary, Government of Tamil Nadu and Ors.,
(2014) 13 SCC 692 [at paragraph 8]. It is nobody’s case that there are
any materials or facts subsequent to the passing of the final order of the
E Central Government that have impacted the public interest, and which,
therefore, need to be looked at. On facts, therefore, the two judgments
cited on behalf of the respondents have no application. Thus, it is clear
that no reasonable body of persons properly instructed in law could
possibly hold, on the facts of this case, that compulsory amalgamation
F between FTIL and NSEL would be in public interest.
65. Section 396(3) speaks of a shareholder’s or a creditor’s interest
in or rights against the company resulting from an amalgamation order.
Such “interest in” or “rights against” obviously refers to real and
substantive rights, as opposed to rights that are only in form. A shareholder
G or creditor gets effected by an amalgamation order if the value of his
share gets depleted as a result of the amalgamation and if dividends that
have been paid to him are likely to come down as a result of the
amalgamation. Likewise, a creditor of a solvent company is directly
effected by an amalgamation by which the amount loaned by such

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creditor becomes, as a result of the amalgamation, less likely to be paid A
back in time, than if the amalgamation did not take place. Such rights
and interests of members and creditors are substantive rights which,
when effected by the amalgamation, lead to compensation having to be
paid. Every shareholder of a company and indeed, every creditor of a
company, is concerned only with the “economic value” of his share or
B
the loan granted to a company, as the case may be. The moment the
share value, in real terms, is likely to dip, and/or loans granted are likely
not to be repaid in time or at all as a result of an amalgamation, such
members or creditors of the amalgamating company are equally entitled
to be compensated for this economic loss as are the members and
creditors of the amalgamated company, depending on the facts of each C
case. A reasonable construction must be given to Section 396. Also, the
suggested construction by the respondents, as has been accepted by the
impugned judgment, operates harshly and ridiculously, and being opposed
to justice and reason, cannot possibly be adopted by this Court. It is
clear that Section 396(3) refers to the economic loss that is to be borne
D
by 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 before
amalgamation shall have, as nearly as may be, the same interest in or
rights against the company resulting from the amalgamation as he had in
the original company. To the extent to which the interest or rights of E
such member or creditor are less than his interest or rights against the
original company, post amalgamation, he shall be entitled to compensation
which is to be assessed. Post assessment, if such member or creditor is
aggrieved, he may prefer an appeal to the appellate authority under sub-
section (3A). Under sub-section (4)(aa), no order of amalgamation can F
be made unless the time for preferring an appeal under sub-section (3A)
has expired, or where any such appeal has been preferred, the appeal
has been finally disposed of.
67. The learned counsel on behalf of the appellant has argued
that the assessment order dated 01.04.2015, passed by the Joint Director G
(Accounts), does not reflect any compensation in favour of the
shareholders or creditors of FTIL. According to the learned counsel, it is
clear that if a company with low net worth (NSEL) is amalgamated with
a company with high positive net worth (FTIL), both the shareholders

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A and the creditors of FTIL will be directly impacted as the economic
value of the shares will plummet, and the creditors of FTIL, which is a
positive net worth company, may have to wait for a long time before
recovery of debts owed to them once the company is amalgamated with
the negative net worth company. In short, the creditors of FTIL will be
put on par with the creditors of NSEL, which will result in the creditors
B
of FTIL either being paid back their debts much later in point of time, or
not at all. To this argument, the answer of the Union of India, which has
found favour with the Division Bench of the Bombay High Court, is that
“economic value” forms no part of Section 396. So long as the
shareholders of FTIL continued to have the same number of shares, it
C matters not whether their share values plummet post amalgamation.
68. In Bacha F. Guzdar (supra), this Court held that though a
shareholder acquires no right in the assets of a company as the
company itself is the owner of such assets, yet a shareholder certainly
has the right to dividends and the right to participate in the assets of the
D company which would be left over after winding up. The Court held:
“The true position of a shareholder is that on buying shares an
investor becomes entitled to participate in the profits of the
company in which he holds the shares if and when the company
declares, subject to the Articles of Association, that the profits or
E any portion thereof should be distributed by way of dividends among
the shareholders. He has undoubtedly a further right to
participate in the assets of the company which would be left
over after winding up but not in the assets as a whole as Lord
Anderson puts it.”

F (at p. 882)
(emphasis in original)
69. In Life Insurance Corporation of India v. Escorts Ltd.
and Ors., (1986) 1 SCC 264, this Court dealt generally with the rights of
shareholders as follows:
G
“84. On an overall view of the several statutory provisions and
judicial precedents to which we have referred we find that a
shareholder has an undoubted interest in a company, an interest
which is represented by his shareholding. Share is movable
property, with all the attributes of such property. The rights of a
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shareholder are (i) to elect directors and thus to participate in the A
management through them; (ii) to vote on resolutions at meetings
of the company; (iii) to enjoy the profits of the company in the
shape of dividends; (iv) to apply to the court for relief in the case
of oppression; (v) to apply to the court for relief in the case of
mismanagement; (vi) to apply to the court for winding up of the
B
company; (vii) to share in the surplus on winding up. ……”
On the facts of the present case, we are directly concerned with
points (iii) and (vii). It has been argued that the profits of the company
post-amalgamation will obviously come down, and dividends payable to
shareholders will consequently either come down or be wiped out if the
low net worth of NSEL is taken into account post amalgamation, together C
with potential liabilities of the amalgamated company, which may have
to be paid in the near future. Secondly, if the amalgamated company is
wound up, the amount that is payable to the shareholders
post-amalgamation will be much less, if at all anything is to be paid, than
pre-amalgamation. D
70. In fact, in Commissioner of Income Tax (Central)
Calcutta v. Standard Vacuum Oil Co., [1966] 2 SCR 367, this Court
held:
“ …… A share is not a sum of money: it represents an interest
measured by a sum of money and made up of diverse rights E
contained in the contract evidenced by the articles of association
of the Company. ……”
(at p. 374)
71. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) F
1 SCC 579, in the context of a voluntary amalgamation made under
Sections 391 to 394 of the Companies Act, this Court went into share
valuation. This Court held:
“40. …… It must at once be stated that valuation of shares is a
technical and complex problem which can be appropriately left to
G
the consideration of experts in the field of accountancy. Pennington
in his Principles of Company Law mentions four factors which
had 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 methods
are applied:
(1) The manageable profit-basis method (the Earning Per Share
B Method)
(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,
C when it comes to such valuation qua the transferor and transferee
company, is that the market value method is one method in which shares
can be valued so that their equivalent can then be provided for in the
amalgamated company. This would be nothing other than what those
shares were worth in the market on a particular day or an average taken
within a certain period. What is important to note is that the market
D value of shares is market value of shares reflective of their economic
value, being an interest measured by a sum of money, is not something
that is completely alien to determining the rights of or interest of a
shareholder in the transferor or transferee company, as the case may
be.
E 72. In fact, the Government order dated 12.02.2016 itself reflects
the net worth of NSEL as INR 8.86 crore from its balance sheet dated
31.03.2015, despite its capital being INR 60 crore, inasmuch as the total
reserve and surplus is a negative figure of INR 51.54 crore. As against
this, FTIL’s balance sheet, as on 31.03.2015, discloses that for the same
F year, FTIL’s net worth is INR 2779.94 crore. Also, FTIL has been paying
dividends to its shareholders ranging from 1000% to 250% for the years
2007-2008 till 2015-2016. On the other hand, NSEL has never paid a
single 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 held
that 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

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stated under the caption, “(vi) civil suits / complaints / writs / public A
interest litigation” that:
“xxx xxx xxx
c) The Company received a legal opinion to the effect that the
Company is not liable for payment under the provisions of SGF in
the bye-laws. Further in case of e-Series contract related B
transactions, no major infirmity in underlying physical stock was
observed. Therefore, at this stage and in the opinion of the
Management of the Company, relying upon the legal advices, and
as per the provisions of bye-laws of the exchange there are no
direct ascertainable financial claims against the company. The C
Company may be exposed to liabilities in case of any adverse
outcome of these investigations / enquiries or legal cases or any
other investigations / enquires or suits which may arise at a later
date.”
This is further clarified in the consolidated financial statement D
made 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 the
limitations in the forensic audits and investigations, there is
inherent a risk that material errors, fraud and other illegal acts E
may exist that could remain undetected.
Risk of adverse outcome of investigation/enquiry by law
enforcement agencies
Several agencies such as the Police (EOW), Ministry of
F
Corporate Affairs (MCrA), Enforcement Directorate (ED), CBI
and the Income Tax Department etc. are currently investigating /
enquiring the extent of alleged irregularities and any breach of
law. The matters are also sub judice before various forums
including the Hon’ble Mumbai High Court. The Company may be
exposed to liabilities in case of any adverse outcome of these G
investigations or any other investigations which may arise at a
later date.”
From the Director’s Report and consolidated financial statements
of NSEL, it becomes clear that the company may be exposed to
liabilities in case of any adverse outcome in any of the proceedings that H
132 SUPREME COURT REPORTS [2019] 8 S.C.R.

A may be pending, as a result of which, it may have to pay back the whole
or some part of the INR 5600 crore owed to the alleged investors/
traders by the 24 defaulters who are members of NSEL. This would
certainly impact the ‘economic value’ of shares held in FTIL as this is
one factor that would, post amalgamation, depress the market value of
shares held by such shareholder, and would also impact the dividend
B
payable on such shares post amalgamation.
74. The impugned judgment has also held that no material was
produced before the Court to show that share prices would in fact
plummet post-amalgamation. This is despite the fact that the impugned
judgment itself refers to the fact that since the publication of the draft
C order on 21.10.2014, the share value which was INR 211.10, dropped to
INR 174.55 ten days later. The Division Bench then goes on to state
that it is not possible to hold that any case of serious erosion in economic
value has at all been made out, inasmuch as by 21.10.2014, when the
draft order of amalgamation was made available to companies, the news
D of collapse of NSEL’s exchange was already in public domain. This is
wholly incorrect for the reason that the news of collapse took place in
July, 2014, i.e., over two months before the publication of the draft
order. It is well known that the stock market is extremely sensitive to the
slightest event that may render a company less profitable. Over two
months is too long a period to relate a share value of INR 211.10
E drastically falling to INR 174.55. On the other hand, it is obvious that the
publication of the draft order on 21.10.2014 had the impact of the share
price reducing by a substantial amount, ten days later. In fact, a
reference to the share prices of NSEL furnished by the learned
Additional Solicitor General makes it clear that the moment the final
F amalgamation order dated 12.02.2016 was publicised, the share price
fell from INR 89.90 on 12.02.2016 to INR 73.90 on 24.02.2016 and
further to INR 73.10 on 29.02.2016. Incidentally, the High Court realised
this, and finally incorrectly concludes, “there is thus substantial
compliance with the provisions of Section 396(3).” Given the fact that
the assessment order dated 01.04.2015 did not provide any
G compensation to either the shareholders or creditors of FTIL for the
economic loss caused by the amalgamation in breach of Section 396(3),
it is clear that an important condition precedent to the passing of the final
amalgamation order was not met. On this ground also, therefore, the

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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 133
TECHNOLOGIES INDIA LTD.) v. U.O.I [R. F. NARIMAN, J.]

final amalgamation order has to be held to be ultra vires Section 396 of A
the Companies Act, and, being arbitrary and unreasonable, violative of
Article 14 of the Constitution of India.
75. However, the learned Senior Advocates for the respondents
have argued that an order of nil compensation is equally an order that is
passed under Section 396(3) which could have been appealed against B
but was not appealed against. For this reason, therefore, it is not correct
to state that the condition precedent mentioned in Section 396(4)(aa)
has not been fulfilled. It will be noticed that the language used in the
appeal provision, i.e. Section 396(3A), is “any person aggrieved by any
assessment of compensation made by the prescribed authority under
sub-section (3) may…… appeal to the Tribunal, and thereupon the C
assessment of 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” by the
prescribed authority. Where no assessment of compensation
whatsoever is made by the prescribed authority (and on the facts here, D
the prescribed authority has not, in fact, stated that for the reasons given
by it, compensation awarded to FTIL, its shareholders and creditors is
nil), no person can be aggrieved by an order which does not assess any
compensation, which may be interfered with by the Appellate Tribunal
which must then assess the compensation for itself. The statute clearly
entitles such shareholders and creditors to have compensation assessed E
first by the prescribed authority and then by the appellate authority. This
Court, in Institute of Chartered Accountants of India v. L.K. Ratna
and Ors., [1986] 3 SCR 1049, held that the defect in observing the rules
of natural justice in the trial administrative body cannot be cured by
observing such rules of natural justice in the appellate body. It was held: F
“It is then urged by learned counsel for the appellant that the
provision of an appeal under Section 22-A of the Act is a complete
safeguard against any insufficiency in the original proceeding
before the Council, and it is not mandatory that the member should
be heard by the Council before it proceeds to record its finding. G
Section 22-A of the Act entitles a member to prefer an appeal to
the High Court against an order of the Council imposing a penalty
under Section 21(4) of the Act. It is pointed out that no limitation
has been imposed on the scope of the appeal, and that an appellant
is entitled to urge before the High Court every ground which was
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134 SUPREME COURT REPORTS [2019] 8 S.C.R.

A available to him before the Council. Any insufficiency, it is said,
can be cured by resort to such appeal. Learned counsel apparently
has in mind the view taken in some cases that an appeal provides
an adequate remedy for a defect in procedure during the original
proceeding. Some of those cases as mentioned in Sir William
Wade’s erudite and classic work on “Administrative Law”
B
(5th Edn.). But as that learned author observes (at p. 487), “in
principle there ought to be an observance of natural justice equally
at both stages”, and
“if natural justice is violated at the first stage, the right of appeal
is not so much a true right of appeal as a corrected initial
C hearing: instead of fair trial followed by appeal, the procedure
is reduced to unfair trial followed by fair trial.”
And he makes reference to the observations of Megarry, J. in
Leary v. National Union of Vehicle Builders [(1971) 1 Ch. 34,
49]. Treating with another aspect of the point, that learned Judge
D said:
“If one accepts the contention that a defect of natural justice
in the trial body can be cured by the presence of natural justice
in the appellate body, this has the result of depriving the member
of his right of appeal from the expelling body. If the rules and
E the law combine to give the member the right to a fair trial and
the right of appeal, why should he be told that he ought to be
satisfied with an unjust trial and a fair appeal? Even if the
appeal is treated as a hearing de novo, the member is being
stripped of his right to appeal to another body from the effective
F decision to expel him. I cannot think that natural justice is
satisfied by a process whereby an unfair trial, though not
resulting in a valid expulsion, will nevertheless have the effect
of depriving the member of his right of appeal when a valid
decision to expel him is subsequently made. Such a deprivation
would be a powerful result to be achieved by what in law is a
G mere nullity; and it is no mere triviality that might be justified
on the ground that natural justice does not mean perfect justice.
As a general rule, at all events, I hold that a failure of natural
justice in the trial body cannot be cured by a sufficiency of
natural justice in an appellate body.”
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63 MOONS TECHNOLOGIES LTD.(FORMERLY KNOWN AS FINANCIAL 135
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The view taken by Megarry, J. was followed by the Ontario High A
Court in Canada in Re Cardinal and Board of Commissioners
of Police of City of Cornwall, [(1974) 42 D.L.R. (3d) 323]. The
Supreme Court of New Zealand was similarly inclined in Wislang
v. Medical Practitioners Disciplinary Committee, [(1974) 1
N.Z.L.R. 29] and so was the Court of Appeal of New Zealand in
B
Reid v. Rowley [(1977) 2 N.Z.L.R. 472].”
(at pp. 1065-1066)
This judgment was the subject matter of comment in Union
Carbide Corporation v. Union of India, [1991] Supp (1) SCR 251,
where this Court held, following the judgment in Charan Lal Sahu v. C
Union of India, (1990) 1 SCC 613, that non-compliance with the obligation
to issue notices to persons effected by the Bhopal gas leak did not, for
this reason alone, vitiate the settlement that was entered into with Union
Carbide by the Government on their behalf. This Court, in passing,
commented that the principle laid down in Leary v. National Union of
Vehicle Builders, [1971] Ch. 34 might perhaps be too broad a D
generalisation, except in cases involving public interest. This was an
observation made in answer to an argument by Shri Shanti Bhushan,
stating that a defect of natural justice always goes to the root of the
matter. Ultimately, given the fact that the settlement fund was held to
be sufficient to meet the needs of just compensation to the victims of the E
Bhopal gas leak tragedy, it was held that the grievance on the score of
not hearing the victims first would not really survive. However, what is
of fundamental importance is the fact that in the present situation, a
clear statutory right is given to every member or creditor who shall be
entitled to an assessment of compensation, first by the prescribed authority
and then, a right of appeal to the Appellate Tribunal. In such cases, F
therefore, the orders of “non-assessment” by the prescribed authority
can more appropriately be challenged in judicial review proceedings, in
which the High Court, acting under Article 226 of the Constitution of
India can, if an infraction of Section 396(3) is found, send the matter
back to the prescribed authority to determine compensation after which G
the right of appeal under sub-section (3A) of Section 396 would then
follow. In fact, in Writ Petition 2743 of 2014, which challenged both the
draft order and the final order of amalgamation, the appellant took out a
chamber summons for amendment of its writ petition to challenge the

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

A order of assessment of compensation, dated 01.04.2015, which
amendment was allowed vide order dated 16.02.2016. The order of
“non-assessment” of compensation has thus been challenged by FTIL
in proceedings under Article 226 of the Constitution of India. Even
otherwise, this is a case where there is complete non-application of mind
by the authority assessing compensation to the rights and interests which
B
the shareholders and creditors of FTIL have and which are referred to
in Section 396(3) of the Act. This being the case, it is clear that Section
396(3) has not been followed either in letter or in spirit.
76. In conclusion, though other wide-ranging arguments were made
with respect to the validity of the Central Government amalgamation
C order, we have not addressed the same as we have held that the order
dated 12.02.2016 is ultra vires Section 396 of the Companies Act, and
violative of Article 14 of the Constitution of India for the reasons stated
by us hereinabove. The appeals are accordingly allowed, and the
impugned judgment of the Bombay High Court is set aside. The writ
D petition is disposed of in light of this judgment.

Devika Gujral Matters disposed of.
.

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