The Mumbai High Court has ruled that the Company Affairs Department is correct in its order asking for a forced merger of a private company with an entirely separate entity, in order to make the former company responsible for liabilities incurred by the latter. This was the first time that Section 396A of the Companies Act 1956 was used to force through a merger between two private entities. The order for the same was issued in 2014 by the government, and now that the judiciary has certified its legality, the way is open for the government to utilise its vast reservoir of powers in order to enforce mergers of other private companies, such that the losses of one are made up by the reserves of the other. As in the above case, common shareholding or membership of the Board of Directors can be the basis for such actions. Allegations have been made that the action of the government in the matter of the company that made losses was motivated by officials involved in past decisions regarding the company, who sought to ensure that those associates of the first company, who were responsible for owing thousands of crores to thousands of investors, escape their fiduciary responsibility, which will instead fall on the shareholders and employees of the company forcibly merged with the first. The Department of Company Affairs must ensure that any impression of selective targeting and bias does not gain traction, and the most effective way of doing that would be to initiate similar action at short notice against other private and limited liability companies that have common shareholding, but where one is characterised by losses and the other with ample reserves of cash that may be used, on the lines shown to be proper and justified by the Mumbai High Court to clear liabilities, mainly to the banking system. Making the taxpayer pay for the acts of omission and commission of company managements as well as bank executives is unjust, and the Ministry of Finance and the RBI need to concentrate on innovative approaches to ensure that the precedent followed in the case mentioned above becomes the norm for dealing with debt-ridden companies that are known to have NPAs. This even while banks for clearly collateral reasons such as a high degree of political interference and influence do an injustice to themselves and to the wider economy by refusing to certify them as such. When the Department of Company Affairs used the innovative process of forced merger of two private companies to pay debts, this publication welcomed the move and waited for many more others, which however failed to appear. Perhaps the reluctance of the government to act in more such instances (such as by merging UB with Kingfisher Airlines) may have been to await the legal challenge posed to its action. Now that such a hurdle has been crossed, the way is clear for many such mergers, with the companies once run by Vijay Mallya as prime contenders for being the next in line, followed by others. It is a disgrace that nearly Rs 900,000 crore of bad debts have been accumulated by the banking system, especially by public sector banks. Such reckless behaviour while disposing of the savings of the people needs to be met with accountability.  The way out of such a deliberately created mess is not to place doubt about the safety of bank deposits by arrogating powers to the banks to forcibly convert these into equity, but to work out expeditious means of ensuring that loans get repaid. The Narendra Modi government will be judged by its success in reducing NPAs in a manner such that it is not the innocent taxpayer who has to shoulder the cost, but those actually guilty of mismanagement and fraud. Bank officials and directors both current and former need to be held accountable for the growth of NPAs under their watch. Politically connected bank directors who lobby for loans to be given to corporates in which they have an interest, should not be permitted to escape. There is a case for public hearings in the matter of NPAs, with present and former bank officials being made to testify about the decisions they have taken and why it is that so many ended up with the banks suffering huge losses and the defaulters smiling all the way to their offshore banks. Sporadic and one-off action is worse than useless. There should be a comprehensive and coordinated drive to recover NPAs, including by coming to negotiated settlements with those delinquent in the matter. The government needs to get back at least Rs 400,000 crore of NPAs by means of forcible merger of private companies in the way that has been so innovatively and imaginatively done by the Modi government in a particular case. Also, by negotiated settlements with loan defaulters on pain of prosecution and confiscation of assets. The taxpayer should not be made to pick up the bill for a feast in which he has not in any way participated. Those who have full confidence in the integrity and efficiency of the Narendra Modi government are waiting for a slew of orders forcing merger of private companies controlled by those with common links, and for a comprehensive and public investigation into why NPAs have been permitted to rise to such unbearable levels.  Writing them off at the taxpayers’ expense would be wrong.

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