Analysis of Section 396 of the Companies Act, 1956 in the light of NSEL merger order.

Section 396 of the Companies Act 1956 (‘the Erstwhile Act’) (i.e. Section 237 of the Companies Act 2013) gives power to the Central Government to order "forced amalgamation" of two companies if it is satisfied that it is essential in the “public interest". This was invoked for the first time by the Ministry of Corporate Affairs (‘MCA’) in 2014. The order came in order to revive the National Spot Exchange Limited (‘NSEL’) from the major financial crisis in the year 2013 and in the setting, the Forward Market Commission (‘FMC’) had proposed a merger between NSEL and its holding company FTIL (now 63 moons) in 'public interest' so that dues amounting to Rs. 5,600 crores could be paid to investors and traders of NSEL. It was an unprecedented order made by the MCA and led to a lot of speculations on how the said provision can be invoked to revive a private limited company. Before analyzing the given provision under law, it would be relevant to discuss the background of the case.


In 2013, NSEL, a spot exchange for trading commodities was trading in commodities which were not backed by the stocks in the warehouse. This resulted in a crisis with NSEL owing more than INR 5500 crores to its investors. Thereafter, the Government suspended all the forward trading operations by NSEL and made it subject to resolution plan of 33 weeks so as to revive it. The plans failed and NSEL could not be restored to its normal or even near-normal functional capabilities. To revive the subsidiary and to protect all its shareholders, FMC recommended its merger with its holding company (i.e. 63 moons). This step appeared to be in contradiction to the "limited liability" state of private companies and was criticized by many. Subsequently, in order to revive NSEL, MCA passed a merger order and marked it as a precedent for all similar future scenarios. This order was eventually contested in the Bombay High Court, where the bench upheld the merger order. It was further appealed by 63 moons in the apex court which rejected the order by analyzing the principle behind Section 396 of the Erstwhile Act.

Legal Provision

MCA passed the merger order by the powers it had under Section 396 of the Erstwhile Act (i.e. Section 237 of the Companies Act, 2013)[1]. Section 396(1) reads:

"(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."

Further, Section 396(3) of the Erstwhile Act reads:

"(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 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 underlined words suggest that the powers held by the Central Government may be exercised only when an amalgamation is "essential in public interest". Also, it is to be noted that the stakeholders would continue to enjoy the same rights and interests in the new company post amalgamation as they were entitled earlier. Therefore, any order made invoking the said provision has to satisfy these basic criteria as pre-requisites.


MCA propounded while giving the merger order that it 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". MCA further contended that NSEL seemed incapable of recovering any of its dues from its defaulting members and given the amount in question it intended to protect the interests of the creditors by merging the defaulting holding company with its parent company, considering that NSEL does not have the wherewithal to make payment of Rs. 5,600 crore.

The apex court’s bench consisting of Justice R. F. Nariman and Justice Vineet Saran heard contentions of both sides and held that the amalgamation order was ultra-vires Section 396 and violative of Article 14 of the Constitution of India and struck it down.

The court discussed the meaning and application of term "public interest” at length. To quote from the judgement authored by Justice Nariman:

"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."

Further Justice Nariman concluded that on a holistic reading of the amalgamation order, the leveraging of combined assets, capital, and reserves of the companies was primarily intended to settle liabilities of certain stakeholders and creditors who had allegedly been duped and hence no “public interest” was served through the amalgamation order.

Explaining the scope of Section 396 of the Erstwhile Act, the court explained that, “essential to public interest” is the first and foremost criteria which should be satisfied whenever an order is invoked under this section. The expression “essential” has been defined in P. Ramanathiyer’s Law Lexicon (4thEdn.) as follows:

Essential. Indispensably necessary; important in the highest degree: requisite that which is required for the continued existence of a thing.

In this instance, the sole objective of the amalgamation is to satisfy the dues of the creditors and this being a private interest cannot be translated into an essential public interest. Therefore, an amalgamation order should not only be in public interest but it should also satisfy the litmus test of being essential.

The Hon’ble Supreme Court also settled the issue with respect to immunity of the Central Government’s amalgamation order under Section 396 of the Erstwhile Act from being challenged under Article 14 or Article 19 by virtue of Article 31 A of the Constitution of India. Article 31A(c) of the Constitution saves certain laws from being challenged under Article 14 or Article 19 if the law provides for the amalgamation of two or more corporations either in the public interest or for the proper management of any corporation. It was opined by the apex court that Article 31A has to be construed in light of Article 13 (3) of the Indian Constitution, which defines ‘law’. It states ‘law’ could be any ordinance, order, by-law, rule, regulation, notification, custom or usage in India having the force of law.

However, the ‘order’ should be legislative in nature and not administrative. The Hon’ble Supreme Court relied on number of judgements to set out the difference between a legislative order and an administrative order. It has laid down that legislation is a rule making process wherein a general rule of conduct is formulated without referring to any particular case. It is indicative of the future course of action. Whereas administration is the process of applying the general rule of conduct to particular cases by performing particular acts or issuing orders. It is determinative of past and present facts and the rights and liabilities. While the former is general, the latter is particular.

The argument that the amalgamation orders passed under Section 396 of the Constitution of India is immune from being challenged under Article 14 or Article 19 by virtue of Article 31A was not accepted by the Apex Court. It was held that the above-mentioned amalgamation order was not a legislative order but an administrative order because it directly impacted the rights and liabilities of the company, its shareholders and creditors. Such orders do not generally apply to all the companies but to particular companies which are to be amalgamated. There is an absence of general rule of conduct in the Central Government’s amalgamation order as it a specific direction with respect to two specific companies. Relying on the K.I. Shephard judgment[2], the bench concluded that even if Section 396 (5) mandates the Central Government order to be laid before the Houses of Parliament, it does not detract from the fact that the order is administrative in nature and not legislative. Therefore, it cannot be construed as ‘law’ within the meaning of Article 13 and the Central Government order cannot claim immunity under Article 31A.


In the context of the exceptional order of the Central Government, the court analysed the power of the Central Government in relation to the amalgamation of companies in public interest. For a Section 396 merger, no order of amalgamation can be made unless an order of compensation is first made under sub-section (3) of Section 396, and an appeal therefrom has either not been filed or has been disposed of. Also, keeping the corporate identity of a holding-subsidiary company intact, a merger under the said section should be ordered only when all other possible routes of reviving a company have failed.

Authors: Unnita Bhattacharya and Asis Panda


[1] [Last Accessed on May 15 2019 at 4pm]

[2] K.I. Shephard&Ors. v Union Of India, 1988 AIR 686

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