SEBI vs Sahara Analysissebi vs sahara

7/28/2019 SEBI vs Sahara Analysissebi vs sahara

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The Supreme Court on 31st August, 2012 in one of its most anticipated judgment of recent times hasdirected the Sahara Group and its two group companies Sahara India Real Estate Corporation Limited(SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to refund around Rs 17,400 croreto their investors within 3 months from the date of the order with an interest of 15%. The Supreme Courtwhile confirming the findings of the SAT has further asked SEBI to probe into the matter and find out theactual investor base who have subscribed to the Optionally Fully Convertible Debentures (OFCDs) issuedby the two group companies SIRECL and SHICL.

Background: Earlier SIRECL and SHICL floated an issue of OFCDs and started collecting subscriptionsfrom investors with effect from 25th April 2008 up to 13th April 2011. During this period, the company hada total collection of over Rs 17,656 crore. The amount was collected from about 30 million investors in theguise of a "Private Placement" without complying with the requirements applicable to the public offeringsof securities. The Whole Time Member of SEBI while taking cognizance of the matter passed an orderdated 23rd June, 2011 thereby directing the two companies to refund the money so collected to theinvestors and also restrained the promoters of the two companies including Mr. Subrata Roy fromaccessing the securities market till further orders. Sahara then preferred an appeal before SAT againstthe order of the Whole Time Member and after hearing the SAT confirmed and maintained the order ofthe Whole Time Member by an order dated 18th October, 2011. Subsequently Sahara filed an appealbefore the Supreme Court of India against the SAT order.

Issues in Question and Observations of the Supreme Court: The Supreme Court of India whileinterpreting various provisions of the Companies Act, SEBI Act, Securities Contract (Regulation)Act,1956, (SCRA) and various Rules and regulations formulated there-under made some interestingobservations on the issues raised before it which forms the operative part of the judgment in the formofratio decidendi.

The issues raised and the corresponding observations made by the Supreme Court are enumeratedbelow:

Issue 1. Whether SEBI has the power to investigate and adjudicate in this matter as per Sec 11,11A, 11B of SEBI Act and under Sec 55A of the Companies Act. Or is it the Ministry of CorporateAffairs (MCA) which has the jurisdiction under Sec 55A (c) of the Companies Act.

Observations of SC: The Supreme Court held that SEBI does have power to investigate and adjudicatein this matter. It categorically iterated that the SEBI Act is a special legislation bestowing SEBI withspecial powers to investigate and adjudicate to protect the interests of the investors. It has special powersand its powers are not derogatory to any other provisions existing in any other law and are analogous tosuch other law and should be read harmoniously with such other provisions and there is no conflict ofjurisdiction between the MCA and the SEBI in the matters where interests of the investors are at stake.To support this view, the Supreme Court laid emphasis on the legislative intent and the statement ofobjectives for the enactment of SEBI Act and the insertion of Section 55A in the Companies Act todelegate special powers to SEBI in matters of issue, allotment and transfer of securities. The Courtobserved that as per provisions enumerated under Section 55A of the Companies Act, so far mattersrelate to issue and transfer of securities and non-payment of dividend, SEBI has the power to administerin the case of listed public companies and in the case of those public companies which intend to get their

securities listed on a recognized stock exchange in India.

Issue 2. Whether the hybrid OFCDs fall within the definition of "Securities" within the meaning ofCompanies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate andadjudicate.

Observations of SC: The Supreme Court held that although the OFCDs issued by the two companiesare in the nature of "hybrid" instruments, it does not cease to be a "Security" within the meaning ofCompanies Act, SEBI Act and SCRA. It says although the definition of "Securities" under section 2(h) of


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SCRA does not contain the term "hybrid instruments", the definition as provided in the Act is an inclusiveone and covers all "Marketable securities". As in this case such OFCDs were offered to millions of peoplethere is no question about the marketability of such instrument. And since the name itself contains theterm "Debenture", it is deemed to be a security as per the provisions of Companies Act, SEBI Act andSCRA.

Issue 3. Whether the issue of OFCDs to millions of persons who subscribed to the issue is aPrivate Placement so as not to fall within the purview of SEBI Regulations and various provisionsof Companies Act.

Observations of SC: The Supreme Court went on to hold that although the intention of the companieswas to make the issue of OFCDs look like a private placement, it ceases to be so when such securitiesare offered to more than 50 persons. Section 67(3) specifically mentions that when any security is offeredto and subscribed by more than 50 persons it will be deemed to be a Public Offer and therefore SEBI willhave jurisdiction in the matter and the issuer will have to comply with the various provisions of the legalframework for a public issue. Although the Sahara companies contended that they are exempted underthe provisos to Sec 67 (3) since the Information memorandum specifically mentioned that the OFCDswere issued only to those related to the Sahara Group and there was no public offer, the Supreme Courthowever did not find enough strength in this argument. The Supreme Court observed as the companies

elicited public demand for the OFCDs through issue of Information Memorandum under Section 60B ofthe Companies Act, which is only meant for Public Issues. Supreme Court also observed that sinceintroducers were needed for someone to subscribe to the OFCDs, it is clear that the issue was not meantfor persons related or associated with the Sahara Group because in that case an introducer would not berequired as such a person is already associated or related to the Sahara Group. Thus the Supreme Courtconcluded that the actions and intentions on the part of the two companies clearly show that they wantedto issue securities to the public in the garb of a private placement to bypass the various laws andregulations in relation to that. The Court observed that the Sahara Companies have issued securities tomore than the threshold statutory limit fixed under proviso to Section 67(3) and hence violated the listingprovisions attracting civil and criminal liability. The Supreme Court also observed that issue of OFCDsthrough circulation of IM to public attracted provisions of Section 60B of the Companies Act, whichrequired filing of prospectus under Section 60B(9) and since the companies did not come out with a finalprospectus on the closing of the offer and failed to register it with SEBI, the Supreme Court held thatthere was violation of sec 60B of the Companies Act also.

Issue 4. Whether listing provisions under Sec 73 mandatorily applies to all public issues ordepends upon the "intention of the company" to get listed.

Observations of SC: Although Sahara argued that listing requirement under Sec 73 of Companies Act isnot mandatory and applies to those companies only who "intend to get listed", no company can be forcedto get listed on a stock exchange and in such cases it will be a violation of corporate autonomy. TheSupreme Court rejected this contention and held as long as the law is clear and unambiguous, and anyissue of securities is made to more than 49 persons as per Sec 67(3) of the Companies Act, the intentionof the companies to get listed does not matter at all and Sec 73 (1) is a mandatory provision of law whichcompanies are required to comply with. The Supreme Court observed that Section 73(1) of the Act castsan obligation on every company intending to offer shares or debentures to the public to apply on a stockexchange for listing of its securities. In addition the Supreme Court observed that the maxim ''acta exteriorindicant interiora secreta''(external action reveals inner secrets) applies with all force in the case ofSaharas. The Court observed that the contention that they did not want their securities listed does notstand. The duty of listing flows from the act of issuing securities to the pubic, provided such offer is madeto fifty or more than fifty persons. Any offering of securities to fifty or more is a public offering by virtue ofSection 67(3) of the Companies Act, which the Saharas very well knew, their subsequent actions andconducts unquestionably reveal so.

Issue 5. Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 will apply inthis case.


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SEBI vs Sahara Analysissebi vs sahara