Compulsory Amalgamation Of Companies In Public Interest

Author: LawSphereX

Category: General Law

Published: 2026-08-23T18:52:53.98+00:00

Updated: 2026-08-30T07:05:58.617Z

COMPULSORY AMALGAMATION OF COMPANIES IN

PUBLIC INTEREST

Manisha $ Shraddha SS

ABSTRACT

The research aims to identify and analyze existing definitions and interpretations of "public interest" through a comprehensive study of case laws and explore how “public interest” has been defined under other legal and regulatory frameworks. The research also aims to analyze the historical evolution of the concept of "public interest" and its implications for contemporary legal and regulatory practices. Furthermore, the research aims to evaluate the role of judicial bodies in defining and protecting public interest in the context of compulsory amalgamations through case law analysis. The research also aims to draw a comparison between the definition of “public interest” taken by the judiciary and that adopted by the Regional Director. The objective is to do a critical analysis of whether the RD should be the authoritative figure on defining public interest.

The research also aims to review relevant legal and regulatory frameworks to identify the extent to which the rights of shareholders and creditors are currently incorporated into the concept of public interest through the critical analysis of case law and precedents. The research aims to assess how courts have interpreted and balanced the rights of shareholders, creditors, and broader public interests in corporate governance and regulatory decisions and examine the potential implications of incorporating shareholder and creditor rights into public interest considerations for corporate governance practices and regulatory interventions. The research also aims to propose recommendations or guidelines for policymakers and regulators on how to reconcile the interests of shareholders, creditors, and broader public interests in decision-making processes.

RESEARCH QUESTIONS

1. Whether the contours of “public interest” have been distinctly defined?

2. Whether the rights of shareholders and creditors be considered within the definition of

public interest?

3. Whether compulsory amalgamation should be allowed only through a process overseen

by the Tribunal since judicial bodies are better suited to define public interest? RESEARCH QUESTION 1: WHETHER THE CONTOURS OF “PUBLIC INTEREST” HAVE BEEN DISTINCTLY DEFINED?

Section 237 of the Companies Act 2013 (hereinafter the Act) (formerly Section 396 of the Companies Act 1956) grants the Central Government authority to facilitate the amalgamation of companies in the public interest. This provision allows the Central Government to mandate the amalgamation of two or more companies if it deems such consolidation essential in public interest. If the Central Government determines that amalgamating multiple companies into a single entity, with a specified structure, assets, rights, authorities, interests, privileges, liabilities, and obligations outlined in the government's order, is in the public interest, then such amalgamation is legally valid.

It is mandated that every member of the amalgamating company should receive a fair and proportionate share of interests and rights in the resulting amalgamated company, comparable to what they held in the original amalgamating company. Failure by the amalgamated company to adhere to these conditions entitles the member to seek compensation from the amalgamated entity. However, the term Public Interest1 has not been defined anywhere in the Act. Despite, the same being used time and again in the said act. Under section 2(95)2, the act provides that for any words and expressions that are not defined in the act shall mean the same as defined under the SCRA3 or the SEBI4 act. However, despite both these acts using the term public interest the same has not been defined under any of the acts either.

1 The phrase “Public Interest” and the abbreviation PI are used interchangeably in the work.

2 Companies Act, 2013, § 2(95).

3 Securities Contracts (Regulation) Act, 1956, No. 42, Acts of Parliament, 1956 (India).

4 Securities and Exchange Board of India Act, 1992, No. 15, Acts of Parliament, 1992 (India).

Therefore, it becomes pertinent to look for the meaning of the term Public Interest elsewhere such as through legal dictionaries, commentaries and judgements of various high courts and Supreme Court Black’s Law Dictionary5 defines Public Interest as “the welfare of the public as compared to the welfare of a private individual or company. All of society has a stake in this interest and the government recognises the promotion of and protection of the general public”. Justice Felix Frankfurter of the US Supreme Court stated that “the idea of public interest impalpable, but all controlling consideration”. Another definition of public interest was given by E.

Pendleton6 wherein he described the expression as “an elusive abstraction meaning general social welfare or regard for social good and predicating interest of the general public in matters where regard for the social good is of the first moment”. The Dictionary of Sociology7 defines PI as “a thing that is or can be made to appear to be contributing to the general welfare rather than the special privileges of a class, group or individual”. The definitions imply that while the term Public Interest remains elusive to precise formulation, it cannot be regarded in isolation, as it must possess a reasonable level of clarity to be effectively utilized in policy decisions. It suggests that Public Interest specifies a standard of virtue for judging private acts and conduct in the social context.

Public Interest can be discerned from the self-interest of an individual, or a specific class or group, although self-interest does not invariably conflict with the public interest. For self-interest to detrimentally affect public interest, it must contravene the principles of public good or the overall common welfare of the community. In everyday language, "public interest" typically denotes the welfare of the community, nation, or the governmental body representing them. Situations may arise where these interests clash, necessitating a determination of which takes precedence. As the Apex Court held in State of Bihar v Kameshwar Singh8, “the expression is not capable of precise definition and has not a rigid meaning, and is elastic and takes its colours from the statute in which it occurs, the concept

5 Black's Law Dictionary (11th ed. 2019).

6 See public administration and public interest by e. Pendleton herring

7 The Dictionary of Sociology (11th ed. 2014).

8 State of Bihar v. Kameshwar Singh AIR (1952) SC 252 (India).

varying with the time and state of society and its needs. Thus, what is ‘public interest’ today may not be so considered a decade later. In any case, the expression cannot be considered in vacuo but must be decided on the facts and circumstances”. In the context of a company, the notion of "public interest" extends beyond the traditional scope limited to shareholder concerns. It underscores the company's responsibility to operate for the benefit of the public or the overall welfare of the community, ensuring that its actions do not undermine the public good. The phrase "in a manner prejudicial to public interest" was incorporated into the statute through Central Act 53 of 1963 as an amendment.

This phrase represents a complex concept, signifying the broader societal welfare or consideration for the common good, particularly emphasizing the public's interest in issues where prioritizing social welfare is paramount9. The common good or general welfare of the community promotes public interest. An action is considered to be in the public interest when it is perceived or can be shown to contribute to the overall well-being of society. The Hon’ble High Court in 63 Moons10 held that the term "public interest" signifies the overall well-being of the public, deserving acknowledgment and safeguarding; it represents a matter of collective concern. Its interpretation is contingent upon the specific statutory framework within which it is employed.

In the specific framework of amalgamation as outlined in the 1956 Act, "public interest" refers to matters in which the public, encompassing the broader community, holds some financial stake or where their legal rights or obligations are impacted. This interpretation should not be narrowly confined to the interests of shareholders or employees alone; rather, it necessitates consideration of the interests of society as a whole. In Re Wood Polymer11, the Hon’ble Gujarat High Court held that the term "public interest," when considered in isolation, may seem ambiguous and lacking specific definition, potentially encompassing multiple interpretations. Thus, to determine its precise meaning within a given statute, it must be interpreted within the context of the legislation, the particular provision in which it appears, and the intended objective of utilizing the term.

When there are multiple possible constructions available, the one to be selected is the alternative that aligns with the efficient functioning of the system that the statute aims to regulate. Conversely, the alternative

9 N.R. Murty v Industrial Development Corporation of Orissa, (1977) 47 Com Cases 389 (India).

10 HC judgement

11 Wood Polymer Limited, In re, (1977) 109 ITR 177 (India).

that would introduce uncertainty, friction, or confusion into the operation of the system should be discarded. Irrespective of the circumstances, an expression with potential for multiple interpretations must derive its significance and scope from the specific context in which it is employed. Therefore, when interpreting the phrase "public interest," it becomes imperative to consider the surrounding context. It is worth noting that the inclusion of "public interest" in company law represents a recent addition, marking a departure from earlier practices. In Hindustan Lever12, the Supreme Court held that, “What would be public interest cannot be put in a straight jacket. It is a dynamic concept which keeps on changing”.

According to Black's Law Dictionary, the term "public interest" refers to matters wherein the broader community has a financial stake or is affected in terms of their legal rights or responsibilities. This definition extends beyond mere curiosity or the interests of specific localities impacted by the issue at hand. Instead, it encompasses the collective concern of citizens in local, state, or national governmental affairs. The scope of this term is broad and may vary in interpretation across different legal domains, such as service law, criminal law, or civil law. Furthermore, its implications can differ based on the context, such as in company law, where the perspective may shift depending on whether the merger involves two Indian companies or a foreign company's subsidiary.

Importantly, the concept of public interest transcends the interests of shareholders or employees of the company alone, necessitating consideration of the broader societal impact. Thus, even a scheme that appears valid and beneficial may be deemed detrimental if it contradicts the public interest. In the case of Emperor v. Jesingbhai,13 the interpretation of the term "interest of the general public" was discussed. It was concluded that this phrase holds broad significance and carries multiple implications. Its meaning is shaped by the specific context it is employed in, the purpose intended by the legislature, and the problems it aims to address. These considerations collectively define what constitutes the public interest within the framework of the relevant legislation.

Thus, it is reasonable to infer that while the term PI lacks a formal definition and precise boundaries, it has frequently been invoked by courts and within various provisions of the

12 Hindustan Lever Employees' Union v. Hindustan Lever Ltd., AIR (1995) SC 470 (India).

13 Emperor v. Jesingbhai, (1948)50 Bom. L.R. 544 (India).

Companies Act, 2013. Consequently, the notion of PI cannot be understood in isolation but rather necessitates consideration of the specific facts and circumstances of each case. Its interpretation is influenced by the context of the statute in which it is referenced, and as such, the understanding of PI evolves over time in response to societal changes and requirements. RESEARCH QUESTION 2: WHETHER THE RIGHTS OF SHAREHOLDERS AND CREDITORS CAN BE TAKEN UNDER THE AMBIT OF PUBLIC INTEREST?

Upon trying to elucidate upon the notion of PI, our focus now shifts to its application within the framework of the Companies Act. We have previously explored the notion of PI concerning companies, with reference to various legal precedents. In the background of compulsory amalgamation of companies, the term "public interest" signifies the well-being of the public or the broader societal interest, as opposed to the self-serving motives of a specific group of individuals. Accordingly, PI encompasses considerations related to the production of essential goods or services vital to the nation's welfare and advancement, which, in turn, contribute to employment opportunities.

14 In this context, "public interest" denotes the consolidation of resources from multiple companies to enhance the production and consumption of goods and services, as well as the employment opportunities associated with them, for the overall welfare of the community. On the contrary, any action that hinders the promotion of industry or obstructs growth, contrary to national or public interest, would be deemed contrary to the public interest as delineated in this Section. 15 In Wiki Kids, the National Company Law Appellate Tribunal (NCLAT) examined the proposed scheme and determined that it favoured only a select few shareholders rather than benefiting all shareholders. Additionally, in the same ruling, the NCLAT affirmed that the lower tribunal possesses the requisite expertise to evaluate the Scheme of Amalgamation and ensure its fairness to all shareholders.

The tribunal is obligated to act in the public interest and must scrutinize whether the proposed actions serve the interests of both the shareholders and the company as a whole. This ruling underscore the court's assertion that it holds a duty to prioritize

14 63 Moons Technologies v. Union of India, AIR (2019) SC 249 (India).

15 Ibid.

Public Interest, placing the responsibility on tribunals to safeguard the interests of all shareholders. The High Court of Bombay in 63 Moons16 held that when interpreting the significance of the term PI within the framework of company amalgamation, the focus should not solely be on the interests of creditors or members of the involved companies. It is imperative to also consider the interests of other significant stakeholders in the industrial and commercial sectors. The notion of public interest serves as a regulatory mechanism to prevent the unrestricted exercise of private rights, whether by management of the company or shareholders.

In cases where PI is a pertinent factor, it should take precedence over other considerations, such as the freedom of the management to conduct the affairs of the company or the rights of shareholders to take corporate decisions according to their preferences. In Wood Polymer17, the High Court held that Section 396 of the Act grants power to the Central Government to amalgamate two companies if deemed to be in the PI. Section 396 serves as a legislative elucidation regarding the intent behind empowering the Central Government to approve or direct amalgamation, emphasizing that such actions must serve the public interest. The HC further elucidated that amalgamation, therefore, must serve a tangible purpose that is connected to the PI, fulfilling a perceived need or objective.

If the sole discernible purpose behind an amalgamation is to evade taxes, such as through the creation of a paper company and the transfer of assets to it, with the subsequent amalgamation enabling the transfer of assets to another company, it becomes evident that the provision for such a scheme of amalgamation has been exploited for the explicit purpose of tax evasion. Furthermore, the High Court asserted that within the framework of the Act, the concept of "public interest" is explicitly acknowledged in various sections such as 89(4), 205(1), 211(3), 221, 244(1), 250, 303, 326, 352, and 396. The term PI serves as a regulatory mechanism to prevent the unchecked exercise of private rights, whether by management or shareholders.

Our company law acknowledges that certain domains within this realm require adherence to public policy, even if it means overriding the collective will of management and shareholders. In areas where public interest is deemed relevant, the autonomy of decision-making by management

16 63 Moons Technologies v. State of Maharashtra, (2019) SCC OnLine Bom 1648 (India). – HC JUDGEMENT

17 Wood Polymer Limited, In re, (1977) 109 ITR 177 (India).

and shareholders regarding the company's affairs is subject to the condition that such decisions must not supersede the concept of public interest. The term "public interest" signifies the overall welfare of the public, deserving acknowledgment and protection, and represents matters in which the collective populace has a vested interest. Its interpretation is influenced by the specific statutory context in which it appears. In the particular scenario of amalgamation governed by the Companies Act, 1956, "public interest" denotes issues in which the broader community holds a financial stake or where their legal rights or obligations are impacted.

It is crucial to recognize that this term cannot be narrowly construed to solely encompass the interests of shareholders or employees; rather, it necessitates consideration of the welfare of society as a whole, as emphasized by the Supreme Court in Hindustan Lever Employees Union18. Similarly, when assessing the import of PI in the context of companies amalgamating, the focus cannot be restricted solely to the interests of creditors or members of the companies involved. The interests of other key stakeholders in industry and commercial services must also be taken into account. PI serves as a regulatory mechanism to prevent the unrestricted abuse of private rights by shareholders. When public interest is deemed relevant, it must take precedence over other considerations, such as the freedom of the company or the rights of shareholders to conduct business as they see fit.

The interest of the investing public aligns with the broader public interest, as established in Wood Polymer Limited19. Furthermore, within the realm of Company Law, the use of the term PI expands the conventional scope of company concerns beyond shareholder interests alone. It underscores the concept of companies operating for the public good or the general welfare, ensuring that their actions do not undermine public wellbeing, as affirmed in the case of N. R. Murty20. The concept of public interest transcends the concerns solely of shareholders, creditors, or management. Section 237 of the Companies Act explicitly delineates provisions for safeguarding the interests of shareholders and creditors individually, thereby excluding them from falling under the purview of public interest.

As elucidated in diverse dictionaries and legal precedents, public interest encompasses the broader rights of the general public and the welfare

18 Hindustan Lever Employees' Union v. Hindustan Lever Ltd., AIR (1995) SC 470 (India).

19 Wood Polymer Limited, In re, (1977) 109 ITR 177 (India).

20 N.R. Murty v Industrial Development Corporation of Orissa, (1977) 47 Com Cases 389 (India).

of society as a whole, rather than solely serving the interests of a select few vested parties. RESEARCH QUESTION 3: WHETHER COMPULSORY AMALGAMATION SHOULD BE ALLOWED ONLY THROUGH A PROCESSOVERSEEN BY THE TRIBUNAL SINCE JUDICIAL BODIES ARE BETTER SUITED TO DEFINE PUBLIC INTEREST?

Interpretation of PI by the SC and the NCLAT

63 MOONS TECHNOLOGIES LIMITED v. UNION OF INDIA

In 63 Moons Technologies Limited, the circumstances can be summarized as follows: following a payment failure, the National Spot Exchange Ltd (NSEL), a 99. 99 percent affiliate of Financial Technologies India Ltd (FTIL), ceased its operations. The Forward Market Commission, now part of SEBI, advised NSEL against entering into new contracts. Subsequently, in response to the crisis, the Ministry of Corporate Affairs (MCA) utilized its authority under Section 396 of the erstwhile Companies Act, 1956, to mandate the merger of two entities: NSEL and 63 moons technologies Ltd. (formerly FTIL) in 2016. FTIL contested the MCA's decision, which was dismissed by the Bombay High Court. Subsequently, FTIL appealed this decision in the Supreme Court, which delivered its verdict on April 30, 2019.

The SC defined PI as the overarching interest of the general public, in contrast with the concerns of individuals or a limited group. It emphasized that a merger would be deemed to be PI if it positively impacted wages, productivity, and the consumption of goods and services by the general populace. Conversely, mergers hindering societal progress and development were not considered to be in PI. The SC found that the proposed merger, which was ordered to help alleviate the debt owed by FTIL to its creditors and shareholders, was not a scheme proposed in PI. The SC concluded that the primary aim of the merger was to settle NSEL's debts and revive its commodity exchange, rather than serving the broader public interest. Consequently, the SC deemed the order of compulsory merger unlawful under Section 396 of the Companies Act of

1956 and Article 14 of the Indian Constitution.

WIKI KIDS LTD. AND AVANTEL LTD. V. REGIONAL DIRECTOR, SOUTH EAST REGION AND OTHERS In this instance, the Transferor and Transferee Companies proposed a merger arrangement, which the Tribunal rejected due to concerns that, based on the valuation analysis, certain promoters associated with both companies would receive disproportionate benefits. Despite meeting all stipulated conditions without objections from relevant authorities or the public, the tribunal found that traditional promoters enjoyed an unfair advantage as per the valuation assessment. The Transferor Company augmented its asset base, yet neither entity generated sales nor marketed any products since inception. Only a select few promoters stood to gain financially from the proposed arrangement.

The objective of the scheme was to ensure the fulfilment of all shareholders' expectations and prevent any party from gaining an undue advantage, a principle evidently violated in this scenario. The Tribunal concluded that the entire system appeared biased towards certain promoters, with incentives for other stakeholders contingent upon potential sales realization. Consequently, the appeal was dismissed, and the Tribunal's decision to reject the proposed plan was upheld. INTERPRETATION OF PI BY THE CENTRAL GOVERNMENT To provide clarity regarding the central government’s interpretation of the phrase Public Interest, two schemes of amalgamation in Public Interest have been formulated by the government under Section 396 of the old Companies Act21 have been reproduced herein under.

For the sake of brevity, the entire scheme is not reproduced bur the government’s reasoning as to how the scheme pertains to Public Interest have been reproduced.

1. Chandpur Sugar Company Limited and U.P. State Sugar Corporation Limited

(Amalgamation) Order, 1989: “...the purposes of ensuring co-ordination in policy, efficient administration, gainful employment of surplus funds generated for the growth of the sugar industry, it is essential, in the public interest, that the U.P. State Sugar Corporation Limited, a Government Company, incorporated under the Companies Act, 1956 (1 of 1956) having its Registered Office at No. 5 Mira Bai Marg, Lucknow-226 001, Uttar Pradesh and the said Chandpur

21 Companies Act, 1956, § 396 (India).

Sugar Company Limited, a Government Company should be amalgamated into a single company.”

2. Bharat Refractories Limited and the Steel Authority of India Limited

Amalgamation Order, 2009. – “... the purpose of enabling the undertaking currently owned and operated by the transferor company, which is producing items and material necessary for the steel manufacturing industry, to be able to modernize and function in an efficient and financially viable manner, achieve size, scale, integration and greater financial strength and flexibility and thereby contribute to the efficient utilization of the overall steel manufacturing capacity of the country. ” From the schemes and judgments provided above, we can infer how both the judiciary and the central government interpret the scope of PI. It is apparent that within the realm of PI, the central government considers the broader economy as a whole, without solely focusing on the interests of a select few. National interest or the broader picture such as the economy is taken into consideration.

When such a broad aspect is considered, individual rights are adversely affected. The Courts, on the other hand seem to be able to strike a balance between individual rights and PI. As seen in Wiki Kids, the scheme is rejected because it fails to take inro consideration the interest of all shareholders and instead favours a few promoters. Similarly, in 63 Moons, the objective may have been to revive the trust of the investing public in the companies again, but the since the proposed merger failed to do so, it was rejected by the SC. The Courts are looking at the bigger picture, such as public trust in companies, however, they may miss the woods for the tree by focussing on a group/class of people in each scheme. Therefore, based on this inference, it seems that the most appropriate approach under Section

237 involves a two-step process, similar to the one established under the Banking Regulation22

Act23. The consideration of the Central Government with respect to what would benefit the society or the nation as a whole and the Tribunal/Court’s understanding of what would be in 22 In this process, the Reserve Bank of India (RBI) drafts the scheme, which then requires approval from the central government.

23 Banking Regulation Act, 1949, § 237 (India).

the best interest of the parties who are affected by such scheme together would allow for a more balanced and just approach instead of giving the Central Government all the power. Such a two-step process would allow for oversight over the Government’s power and an appellate mechanism. The issue of implementing a two-step process or an oversight mechanism under Section 237 has already been addressed by the J. J. Irani Committee24. In paragraph 29 of the report, the Committee recommends the following: "Existing Section 396 empowers the Central Government to order the amalgamation of companies in the public interest. However, it is suggested that these provisions should be reviewed. It is proposed that amalgamation should only occur through a process overseen by the Courts/Tribunals.

Therefore, instead of the current provisions of Section 396, there should be a provision empowering the Central Government to seek approval from the Court/Tribunal for the amalgamation of companies.

RECOMMENDATIONS

AND SUGGESTIONS Ø IMPLEMENTATION OF A TWO-STEP PROCESS As mentioned above, the Banking Regulation Act provides for a two-step process when ordering for compulsory amalgamation of banking companies. A similar process is suggested for compulsory amalgamation of Companies under the Companies Act, 2013. As previously suggested by the Committee, let the tribunal/court oversee the amalgamating process. Similar to how the RBI presents a scheme to the Central Government under the Banking Regulation Act, let the Central Government present the scheme before the Tribunal and allow the Tribunal to adjudicate on whether the same is actually in public interest or not. A tribunal/ Court being quasi-judicial/judicial bodies are better equipped to define public policy since the judges are trained professionals.

Ø APPELLATE MECHANISM The section ought to provide for appellate mechanism wherein the transferor companies and their members can appeal to against the scheme of the Central Government. Under the present provision, an appeal can lie against the scheme only if the members or creditors are dissatisfied with the compensation awarded to them. There lies no appeal against the

24 CITE THE COMMITTEE

scheme of amalgamation itself. In the case of 63 moons25, the members had to appear before the High Court in a writ petition to be appeal against the scheme of the Central Government. It becomes a cumbersome burden for the members and is indirectly a deterrent for them to dissent to the scheme of the Central Government. Ø DEFINE THE AMBIT OF PUBLIC INTEREST The use of the expression public interest under Section 237 has a wide connotation. For a section such as 237, a phrase that is open to interpretation and lacks a standard meaning, can have civil consequences and open the legislation to never ending litigation. It is hereby submitted that such broad conceptualisation of Public Interest to regulate companies is not in line with ensuring certainty and precision in legal standards.

A suggestion for the statute is to provide an explanation regarding the phrase Public Interest that help understand the basic contours of the nature of the power that is exercisable by the Central Government under Section 237. Such explanation need not be exhaustive in nature but an inclusive list that may suggest some instances and circumstances where Public Interest may be triggered such as when a public company is under a huge debt and unable to pay back the money to the public. Ø REASONED ORDER TO BE PASSED Under Section 237(5)(c)26 of the Act, the Central Government must consider the suggestions and objections of the company before passing an order under the section. However, the Section is silent on whether the Central Government must compulsorily abide by the suggestions/objections.

The 63 Moons case suggests that the Central Government is not bound to abide by such objections and suggestions. However, it is strongly suggested that the Central Government must be held accountable to give a reasoned order underlining the reasons why the suggestions and objections of the Companies have been rejected. This would help bring about some transparency in the proceedings and accountability of the Central Government while passing order under this section.

25 63 Moons Technologies v. Union of India, AIR (2019) SC 249 (India).

26 Companies Act, 2013, § 237(5)(c).