Corporate laws – compulsory amalgamation of companies- In conclusion, though other wide-ranging arguments were made with respect to the validity of the Central Government amalgamation 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.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4476 OF 2019
(Arising out of Special Leave Petition (Civil) No. 4210 of 2018)
63 MOONS TECHNOLOGIES LTD.
(FORMERLY KNOWN AS FINANCIAL
TECHNOLOGIES INDIA LTD.) & ORS. … APPELLANT
VERSUS
UNION OF INDIA & ORS. … RESPONDENT
WITH
CIVIL APPEAL NO. 4478 OF 2019
(Arising out of Special Leave Petition (Civil) No.4652 of 2018)
WITH
CIVIL APPEAL NO. 4477 OF 2019
(Arising out of Special Leave Petition (Civil) No.4239 of 2018)
WITH
CIVIL APPEAL NO. 4479 OF 2019
(Arising out of Special Leave Petition (Civil) No.4659 of 2018)
WITH
CIVIL APPEAL NO. 4481 OF 2019
(Arising out of Special Leave Petition (Civil) No.4816 of 2018)
WITH
CIVIL APPEAL NO. 4480 OF 2019
(Arising out of Special Leave Petition (Civil) No. 4720 of 2018)
WITH
WRIT PETITION (CIVIL) NO.368 OF 2019
1
JUDGMENT
R.F. NARIMAN, J.

  1. Leave granted.
  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 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 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 from the Board of Directors
    of its wholly owned subsidiary, i.e., NSEL. On the other hand, NSEL
    2
    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 Contracts
    (Regulation) Act, 1952 [“FCRA”] exempting forward contracts of oneday 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 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
    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
    3
    members 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 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 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
    NSEL. On 27.08.2013, the FMC directed a forensic audit of NSEL by
    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
    4
    Wing [“EOW”] registered cases against Directors and key
    management personnel of the NSEL and FTIL, trading members of
    NSEL, and brokers 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 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.
  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 the Bombay High Court refused a prayer for stay of
    the aforesaid order, stating that findings of fact of a serious nature
    5
    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
    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 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
    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 committee has also crystallised a further sum of INR 835.88
    6
    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
    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
    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,
    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 accordance with Section 396(3) of the Companies Act, was
    7
    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 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 01.04.2015, which involved
    compensation only to a particular shareholder 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 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
    8
    Shri H.P. Chaturvedi, Joint Secretary and Legal Advisor, Ministry of
    Law and Justice in October 2015, pursuant to a Bombay High Court
    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
    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
    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-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
    9
    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, 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 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 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 or opinion; in short, that the findings themselves were
    inconclusive.
    10
  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
    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 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 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
    11
    amalgamating NSEL with FTIL. Thus, the learned counsel have all
    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 requires the Central Government to
    amalgamate both companies in the “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.
  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:
    A. Restoring / safeguarding public confidence in forward
    contracts and exchanges which are an integral and essential part
    12
    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
    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
    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
    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
    amalgamation order being essential in public interest. Article 31A of
    the Constitution of India was relied upon, and it was argued that
    13
    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 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 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.
  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, in ignoring economic value, a totally artificial,
    14
    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 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 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
    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
    15
    Boards of Directors. Thus, to arrive at the conclusion that one
    company is the alter ego of the other, without adjudication, would itself
    be arbitrary and violative of Article 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 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 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 300A of the Constitution of India.
    16
  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. 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-cumManaging Director. He is also Vice 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 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, which were totally distinct
    17
    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 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 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 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,
    18
    which in its report dated 21.09.2013, came out with damning facts and
    figures as to the real operations of NSEL, 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 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
    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 passing the final amalgamation order as
    FTIL and NSEL were both heard pursuant to a Bombay High Court
    19
    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 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 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).
  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
    20
    pursue on-going litigation as NSEL does not have the wherewithal to
    do so. Thus, it is wholly incorrect for the appellants to say that FTIL will
    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 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 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 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
    21
    shareholders and creditors of FTIL, they could have appealed against
    the same. Not having done so, it cannot be said that the Central
    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 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 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 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
    22
    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 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 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
    provided for in the Section itself. He then cited certain judgments on
    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.
    23
  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
    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 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 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.
    24
  18. Ms. Pinky Anand, learned Additional Solicitor General 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
    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, 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 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
    25
    Exchange Ltd. (BSE), the National Stock Exchange of India Ltd.
    (NSE), and MCX continued with 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-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 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 and creditors filed any appeal against the
    compensation order, they waived their right to do so. She then
    26
    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 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
    role of stock markets in the national economy and stated that to prop
    up 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 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
    27
    impugned order dated 12.02.2016 is based on public interest as it
    reflects the 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, [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 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 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
    28
    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,
    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.
  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
    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 “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
    29
    worldwide is that if losses are borne by a corporation, it is the
    shareholders who should bear the brunt.
  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 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
    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.
    xxx xxx xxx”
    “Law” has been defined in Article 13(3) as follows:
    “13. Laws inconsistent with or in derogation of the
    fundamental rights.—
    xxx xxx xxx
    (3) In this article, unless the context otherwise requires,

    (a) “law” includes any Ordinance, order, byelaw, rule, regulation, notification, custom or
    usage having in the territory of India the force
    of law;
    30
    xxx xxx xxx”
    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.
  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, 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 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 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 resulting
    from the amalgamation as he had in the company of
    which he was originally a member or creditor; and to the
    31
    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 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 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 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;
    (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 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 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.”
    32
    It will be seen that Section 396 provides for compulsory 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 396 deals with
    compulsory amalgamation of companies.
    INTERPRETATION OF SECTION 396
  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 &
    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 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
    33
    the legislature has to take care to see that even marginal
    and incidental 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 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 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 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 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.”
    (at pp. 15-16)
    DERIVATIVE IMMUNITY OF THE CENTRAL GOVERNMENT ORDER
    34
  24. The next question is whether the Central Government’s order
    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 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:
    “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 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 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
    Orders and Notifications issued under those Acts and
    35
    Regulations. 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 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 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 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 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 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
    36
    used in Article 31A is “law”, for which, one is to see the definition
    contained 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.
  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 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 (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.
    37
    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
    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).
  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 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 general rule of conduct without
    reference to particular cases; an administrative act is the
    38
    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 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 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 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, 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:
    “9. …… Learned counsel for RBI and the transferee
    banks have taken the stand that the scheme-making
    39
    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 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? 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 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 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)
    “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 the
    particular’. ‘A legislative act is the creation and
    promulgation of a general rule of conduct
    without reference to particular cases; an
    administrative act is the making and issue of a
    40
    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 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 towards 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 or situations’. But, this is
    only a broad distinction, not necessarily always
    true.”
    Applying these tests it is difficult to accept Mr Salve’s
    contention 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
    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
    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 passed
    41
    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 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
    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
    [“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 the provisions, namely, Section 45 of the Banking Regulation
    42
    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 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 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 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 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 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 impugned scheme has been
    43
    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 only thereafter the scheme
    has the effect either in the modified 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 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 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 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
    cited the judgment in Quarry Owners’ Association v. State of Bihar
    and Ors., (2000) 8 SCC 655. This judgment, in paragraphs 45 and 55,
    44
    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 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
    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
    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
    Central Government order, made under Section 396, must conform to
    45
    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 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 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, 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.”
    (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:
    “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
    46
    but it deals with trade or business; and (3) there is no
    direct abridgement of the right of free speech and a
    mere incidental interference with such right would not
    alter the character of the 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 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 selfmedication or self-treatment. This is the content of the
    Act. Viewed 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, [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 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
    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
    47
    clause (2) of Article 19. ……… In Dwarkadas Shrinivas
    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 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
    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 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 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 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 persons
    constituting its civil service and they were found
    48
    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
    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 view to supplying this administrative need that the
    corporation 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. (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 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 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
    49
    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 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 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
    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. 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 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.,
    50
    necessary to do so. 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:
    “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 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 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
    interest is “clearly a necessity”. It is made clear that the reason for
    Section 396 is that the observance of the usual procedure prescribed
    by the existing Act (namely, that contained in Sections 391 to 394) in
    51
    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 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 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 (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 subsection (3), and an appeal therefrom has either not been filed or has
    been disposed of, no order of amalgamation can be made. Another
    52
    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
    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
    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:
    “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 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
    53
    fraud, misfeasance or other misconduct towards the
    company or towards any of its members.
    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
    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 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 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 311].
    (at p. 119)
    xxx xxx xxx
    The decision of this Court in Barium Chemicals case
    which 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
    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
    54
    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; 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 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 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 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.
    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 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 to analyse Section 237(b)
    we should like to refer to certain decisions cited at the
    bar bearing on the question under consideration.
    55
    (at pp. 120-121)
    xxx xxx xxx
    “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 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
    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 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 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 made. In other words, the existence
    of the circumstances in 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)
    56
  38. In Western U.P. Electric Power & Supply Co. Ltd. v. State of
    U.P. and Anr., (1969) 1 SCC 817, this Court dealt with 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
    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:
    “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 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 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
    57
    that right in the conditions which are statutorily
    prescribed. In our judgment, the satisfaction of the
    Government that the supply is necessary in the public
    interest is in appropriate cases not excluded from judicial
    review.”
  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:
    “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 reappointment 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 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 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
    58
    certain objective facts. The recital about satisfaction 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 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. But if in
    reaching its satisfaction the Central Government
    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 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 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 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)
    59
    In Khudiram Das v. State of West Bengal, (1975) 2 SCC 81, 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. 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 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 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. 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 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]
    60
    and the officer of the Ministry of Labour and National
    Service 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 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 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-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 which it should be exercised, the exercise of
    the power would be 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 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:
    61
  40. Whether a decision-making authority
    exceeded its powers?
  41. committed an error of law,
  42. committed a breach of the rules of natural
    justice,
  43. reached a decision which no reasonable
    tribunal would have reached or,
  44. 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 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 correctly the law that
    regulates his decision-making power and
    must give effect to it.
    (ii) Irrationality, namely, Wednesbury
    unreasonableness.
    (iii) Procedural impropriety.
    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 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”.”
  45. In Bhikhubhai Vithlabhai Patel v. State of Gujarat, (2008) 4
    SCC 144, this Court, in an elaborate judgment, referred to and
    followed several judgments, including Barium Chemicals (supra), in
    the context of Section 17 of the Gujarat Town Planning and Urban
    62
    Development 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:
    “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 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 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:
    (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 for the purpose of South Gujarat
    University and after releasing the lands from
    reservation, the same should be placed under
    the residential zone.
  46. 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 modifications in the draft
    development plan were necessary. Formation of opinion
    is a condition precedent for setting the law in motion
    63
    proposing substantial modifications in the draft
    development plan.
  47. Any opinion of the Government to be formed is not
    subject to objective test. The language leaves no room
    for the relevance of 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.
  48. 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
    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 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.
  49. The proviso opens with the words “where the State
    Government is of opinion that substantial modifications
    in the draft 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 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.
    64
  50. 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,
    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,
    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.)
  51. 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.”
  52. However, Shri Tushar Mehta, learned Solicitor General for 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 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
    65
    the sufficiency of those 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.”
    These observations were made in the context of an argument 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
    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.
  53. Thus, at the very least, it is clear that 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
    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
    66
    cannot be on irrelevant or imaginary grounds, as that would vitiate the
    exercise of power.
    “ ESSENTIAL”
  54. The expression “essential” has been defined in P. Ramanath
    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.”
    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.”
  55. 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
    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
    67
    396 is indispensably necessary, important in the highest degree, and
    whether such amalgamation is both basic and necessary.
    “ PUBLIC INTEREST”
  56. 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 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 Bihar v. Maharajadhiraja Sir
    Kameshwar Singh of Darbhanga and Ors., [1952] 3 SCR 889 at pp.
    1073-1075].
  57. This is echoed in Manimegalai v. Special Tehsildar (Land
    Acquisition Officer) Adi Dravidar Welfare, (2018) 13 SCC 491 as
    follows:
    “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 purpose in which the
    general interest of the society as opposed to the
    68
    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 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
    collectively. Therefore, acquisition for anything which is
    not for a public purpose cannot be done compulsorily.”
    (emphasis supplied)
  58. 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
    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 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
    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 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
    69
    other economic activity the running of stage carriage
    service is an activity which involves use of scarce or
    limited 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 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 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 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 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 overstep the limits of delegation of statutory power
    and to make a mockery of an important economic
    activity like the motor transport.”
    (emphasis supplied)
    70
  59. 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:
    “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 interest by which their legal
    rights or liabilities are affected.” (Per Cambel
    C.J., in R. v. Bedfordshire [24 LJ QB 84] ).
  60. In Black’s Law Dictionary (6th edn.), ‘public interest’ is
    defined as follows:
    “Public Interest — 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
    localities, which may be affected by the matters
    in question. Interest shared by citizens
    generally in affairs of local, state or national
    government ……”
  61. 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,
    morals, economic welfare of the community, and the objects
    mentioned in Part IV of the Constitution of India [see paragraph 19].
    71
  62. Likewise, in B.P. Sharma v. Union of India and Ors., (2003) 7
    SCC 309, this Court held:
    “15. …… The phrase “in the interest of the general
    public” 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 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. ……”
  63. 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 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 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:
    “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
    72
    the particular locality which may be affected by
    the matters in question. 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 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 against public interest.
  64. 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 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 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 impeding promotion of
    industry or shall obstruct growth of national 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 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
    73
    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 have to be given precedence. The jurisdiction of the
    court in this regard is comprehensive.”
    (emphasis supplied)
  65. In Bihar Public Service Commission v. Saiyed Hussain
    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 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 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.)].”
  66. 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:
    “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
    74
    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 expected gains and potential costs or losses
    associated with a decision, policy, program, or project.”
    (emphasis supplied)
  67. 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 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 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 this Section.
  68. 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 “satisfied” is
    75
    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:
    “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.
    4.2. Our work did not constitute an audit under any
    accounting 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.
  69. 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 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, 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.”
    76
    However, the said report in the executive summary states:
    “B. Executive Summary
    This executive summary is to be read in conjunction with
    the whole 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.
    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’).)
    This is illustrated as per the diagram below:—
    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
    77
    same parties at a pre-determined price and always
    registering a profit on the long-term positions as illustrated
    below:
    Trad
    e
    Date
    Dea
    l
    No
    Buy
    /Sell
    Membe
    r ID
    Name of Member Contract
    Code
    Sub
    Broker
    No.
    Termin
    al ID
    Trade
    Price
    Trade
    Value
    02
    April
    2012
    87 S 13790 PD
    AGROPROCESSOR
    S PVT. LTD.
    DLF002 PDY1121
    HR2
    474 13791 2400.00 360,000
    02
    April
    2012
    87 B 10570 ANAND RATHI
    COMMODITIES
    LTD.
    HNR320 PDY1121
    HR2
    232 10575 2400.00 360,000
    02
    April
    2012
    88 S 10570 ANAND RATHI
    COMMODITIES
    LTD.
    HNR320 PY1121H
    R25
    232 10575 2450.70 367,605
    02
    April
    2012
    88 B 13790 PD
    AGROPROCESSOR
    S PVT. LTD.
    DLC001 PY1121H
    R25
    474 13791 2450.70 367,605
    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 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 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.
    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:
    78
    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 the
    Rules of the Exchange, on 198 days between the fifteenmonth 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 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 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
    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. 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.
    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.
    79
    No monies have been received from SNP despite
    substantial amounts due.
    Further, evidence was obtained that Rs. 10 crore was
    received 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 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
    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
    (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 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.
    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.
    Common members of the Board and the Audit
    Committee were:
    80
    Mr. Jignesh Shah
    Mr. Joseph Massey
    Mr. V. Hariharan
    Mr. Shreekant Javalgekar
    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.
    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 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 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.
    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 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.
    Further, NSEL utilised client monies/settlement fund for
    its own business purposes on a regular basis. For
    81
    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.
    There was a running deficit in the client
    monies/settlement fund balance from April 2012 to June
  70. The finance team of FTIL had raised this as an
    area of concern on several occasions.
    Misrepresentations to the Regulator
    1.13 Regulatory Contraventions:
    As per a Gazette Notification issued on 5 June 2007 by
    the 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 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 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
    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
    82
    Authority 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 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 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
    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 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
    83
    pointed out that Shri Jignesh Shah, Chairman-cumManaging 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 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 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 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 giving
    margin exemptions to those who were repeatedly
    defaulting 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 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
    84
    doubt in our minds 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 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 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 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 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 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 part of the promoter
    of FTIL to use the trading platform of its subsidiary
    company for illicit gains away from the eyes of
    85
    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 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.
    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,
    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 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 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.”
    (emphasis in original)
    Based on the Grant Thornton report and the FMC order, the draft
    amalgamation order dated 21.10.2014 then relied on the same facts,
    86
    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 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
    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 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.
    87
    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 Section 396 were followed.
  71. When it comes to whether the Central Government’s satisfaction
    as to whether it was “essential” to amalgamate the aforesaid
    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 18.08.2014 addressed by the FMC to the Secretary,
    Ministry of Corporate Affairs. This letter states:
    “xxx xxx xxx
  72. As apprised earlier, consequent to the suspension
    of trading and a huge settlement default that took place
    at NSEL on 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 Commission has been continuously
    taking all possible steps and has been regularly pursuing
    88
    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 29th
    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.
  73. 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 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 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 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 on
    31.07.2013 (when NSEL had suspended trading in one
    day 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
    89
    and MPID Court relating to its failure to make payment to
    the investors. The company is hardly left with any
    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
    pursuing the recovery of the defaulted amounts from the
    defaulter members.
  74. 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 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 (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:
    (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 company 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 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
    90
    accomplished by the fact that Shri Jignesh
    Shah, the promoter and Chairman-cumManaging Director of FTIL has been on the
    Board of NSEL and functioning as ViceChairman 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 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 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 ownership
    interest to the extent of 99.9998% leaving a
    negligible 0.0002% stake to NAFED. The
    Articles of Association of NSEL 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 control over the affairs of
    NSEL. FTIL, which had the responsibility 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 interalia mentioned that FTIL cannot shy away from
    its role and duty as a parent company to take
    reasonable care and exercise prudence in
    management 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
    91
    explanation as to what steps have been taken
    by NSEL or by it as a parent company to
    honour the commitment of assuring safety and
    risk-free trading to the members 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.
    (vii) In para 15.1.3 of the order it is inter-alia
    mentioned that FTIL 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
    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 part of the promoter
    of FTIL to use the trading platform of its
    subsidiary company for illicit gains away from
    the eyes of Regulator.
  75. The aforesaid facts would clearly establish that the
    Board of FTIL and its promoters under the leadership of
    Shri Jignesh Shah 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 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 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
    92
    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 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.
  76. It is also submitted that the Working Group
    constituted by the Central Government under the
    Chairmanship of Deputy Governor, 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.
  77. 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
    (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.
  78. 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 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
    93
    towards NSEL after the settlement default, have lost
    their credibility as a responsive and responsible holding
    company.
  79. 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 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 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”
    (emphasis supplied)
    This letter would show that the immediate reason for 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 and subsidiary companies so that the holding company’s
    financial resources could be used to pursue proceedings by which
    94
    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:
    “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 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 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:
     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;
     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.
     Bombay High Court has appointed a 3-
    95
    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 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 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 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
    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 obtained against the defaulters, with INR
    835.88 crore crystallised by the committee set up by the High Court,
    96
    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 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
  80. 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.
  81. 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 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:
    97
    “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 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 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
    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.
    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 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
    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.”
    98
    (emphasis in original)
  82. 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 the hearing before us, FTIL has submitted an affidavit-cumundertaking 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.
  83. 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 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…….”
    99
    What is stated in the opening is repeated in paragraph 2.14.2 as
    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 liabilities of stakeholders and creditors of
    NSEL, it would be in 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 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 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
    100
    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 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 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 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 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/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.”
    101
    59.1. However, the Central Government supported this order on 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 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 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
    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 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
    102
    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 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 why
    NSEL is not its alter ego. Also, whether the amalgamation is, in 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 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
    103
    grounds would be in breach of Section 396(3) and (4), and therefore,
    cannot be 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 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 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 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 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
    “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
    104
    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 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 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
    “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, 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)
    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
    purpose of establishing Commodity Exchange has been defeated”.
    First and foremost, what is important to notice is that the “business
    105
    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 wherewithal to do so. Thus, its parent company’s financial
    resources 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 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 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
    106
    any case, this reason is wholly irrelevant as an answer to the objection
    raised by FTIL which, 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 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 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
    Government may, after considering suggestions and objections from
    the stakeholders mentioned, make modifications in the draft order as
    107
    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 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 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 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 interested parties
    claiming that monies are recoverable from the
    proceedings arising out of the business of the dissolved
    company.
  84. Dealing with objections, suggestions and
    submissions of FTIL, NSEL and other parties – The
    108
    Parties herein have made various objections,
    suggestions and submissions on the proposed
    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 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/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 mentioned is only the fact that public confidence has
    been shattered, as 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.
    109
    Similarly, when it comes to reason (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 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
    possibly arrive at the conclusion that the impugned order has been
    made in public interest.
  85. 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,
  86. Federal Bank was selected from out of several other banks by
    the Reserve Bank of India as its offer to amalgamate with the
    110
    Appellant Bank was unconditional, Federal Bank undertaking to make
    full payment to depositors.
  87. The judgment in Ganesh Bank (supra) was faced with the
    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
    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 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
    (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) 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 scheme—
    (i) for the reconstruction of the banking
    company, or
    111
    (ii) for the amalgamation of the banking
    company with any other banking institution (in
    this section referred to as “the 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
    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 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 banking system, which are
    provided in clauses (a) and (d) thereof, 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 subsection. Precursor to the framing of the scheme is the
    imposition of the moratorium which is provided in subsections (1) and (2) of Section 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.”
    112
    The judgment then goes on to state:
    “39. Now, as far as the first two questions of nonconsideration 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 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 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. 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 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.
  88. In point of fact, the contrast between Section 45(4) of the
    Banking Regulation Act and Section 396 of the Companies Act
    113
    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 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 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 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:
    114
    “44. Under Section 45 of the Act, the primary
    consideration is 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.”
    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.
  89. 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
    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 must be judged by the reasons so
    mentioned and cannot be 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. 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
    115
    do. Public orders made by public authorities are
    meant to have 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 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 such order must be rejected.
  90. 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 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 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]
    116
  91. 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 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 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
    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 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
    117
    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 between FTIL and NSEL would be in
    public interest.
  92. 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 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 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
    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, is likely to dip, and/or loans
    118
    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 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 by
    shareholders and members of both companies.
  93. 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
    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),
    119
    no order of amalgamation can 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.
  94. The learned counsel on behalf of the appellant has argued that
    the assessment order dated 01.04.2015, passed by the Joint Director
    (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 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 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
    120
    the same number of shares, it matters not whether their share values
    plummet post amalgamation.
  95. 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 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
    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.”
    (at p. 882)
    (emphasis in original)
  96. 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:
    “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
    121
    the attributes of such property. The rights of a
    shareholder are (i) to elect directors and thus to
    participate in the 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 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 postamalgamation 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 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.
  97. 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 contained in the contract evidenced by the
    articles of association of the Company. ……”
    (at p. 374)
    122
  98. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 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 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,
    (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 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, 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
    123
    market 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.
  99. 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 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.
  100. 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
    124
    stated under the caption, “(vi) civil suits / complaints / writs / public
    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 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 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 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 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 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 investigations or any other investigations which
    may arise at a later date.”
    125
    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 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 payable
    on such shares post amalgamation.
  101. 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 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 of collapse of NSEL’s exchange was already
    126
    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 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 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 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 final amalgamation order
    127
    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.
  102. 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 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 assessment of the compensation shall be
    made by the Tribunal.” The pre-requisites for the application of subsection (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 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
    128
    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 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:
    “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. 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 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” (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
    129
    of appeal as a corrected initial 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 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 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
    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 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.”
    The view taken by Megarry, J. was followed by the
    Ontario High 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.
    130
    Medical Practitioners Disciplinary Committee, [(1974) 1
    N.Z.L.R. 29] and so was the Court of Appeal of New
    Zealand in 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. 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 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 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
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    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, 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 the right of appeal under subsection (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 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 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.
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  103. In conclusion, though other wide-ranging arguments were made
    with respect to the validity of the Central Government amalgamation
    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
    petition is disposed of in light of this judgment.
    …………………………J.
    (R.F. Nariman)
    …………………………J.
    New Delhi (Vineet Saran)
    April 30, 2019.
    133