1. Project Report : Critical Analysis of Sahara Judgment
Submitted as per the course requirements of Financial Market Regulation
National Law School of India University
Submitted to:
Prof. Dr. N.L Mitra
Course Teacher
SUBMITTED BY
RONAK KARANPURIA
ID NO. 534, 1ST YEAR LLM
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2. Critical analysis of SEBI v. Sahara
Facts:
Earlier SIRECL and SHICL floated an issue of OFCDs and started collecting subscriptions
from investors with effect from 25th April 2008 up to 13th April 2011. During this period, the
company had a total collection of over Rs 17,656 crore. The amount was collected from about
3 million investors in the guise of a "Private Placement" without complying with the
requirements applicable to the public offerings of securities.
The Whole Time Member of SEBI while taking cognizance of the matter passed an order dated
23rd June, 2011 thereby directing the two companies to refund the money so collected to the
investors and also restrained the promoters of the two companies including Mr. Subrata Roy
from accessing the securities market till further orders. Sahara then preferred an appeal before
SAT against the order of the Whole Time Member and after hearing the SAT confirmed and
maintained the order of the Whole Time Member by an order . Subsequently Sahara filed an
appeal before the Supreme Court of India against the SAT order.
The Supreme Court on 31st August, 2012 in one of its most anticipated judgment of recent
times has directed 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 crore to their investors within 3 months from the date of the order
with an interest of 15%. The Supreme Court while confirming the findings of the SAT has
further asked SEBI to probe into the matter and find out the actual investor base who have
subscribed to the Optionally Fully Convertible Debentures (OFCDs) issued by the two group
companies SIRECL and SHICL.
Issues raised
1. Jurisdiction/Power of SEBI:
Whether SEBI has jurisdiction to deal with the matter of Sahara (Issue of securities by
private placement)?
Learned senior counsel argument (Sahara)
a. Section 55A of Companies Act confers no power on SEBI to administer the
provisions of Sections 56, 62, 63 and 73 of the Companies Act of an unlisted
company or to adjudicate upon the alleged violation of those provisions, that too
without framing any regulations under Section 642(4) of the Companies Act.
b. That Sections 11, 11A and 11B of the SEBI Act empower SEBI to protect the interest
of investors but not to administer the provisions of the Companies Act so far as an
unlisted public company is concerned.
c. Sahara(both companies) Not a listed company, nor did it intend to get its securities
listed on any recognized stock exchange in India and that OFCDs issued by the
company would not fall under Sections 55A(a) and/or (b) and hence the issue and/or
transfer of securities and/or non-payment of dividend or administration of either the
company or its issuance of OFCDs, were not to be administered by SEBI and all
matters pertaining to the unlisted company would fall under the administration of the
Central Government or RoC.
d. Regulations 3 and 6 of ICDR 2009 would not apply, since there was no public issue
either in the nature of an initial public offer or further public offer as defined by
Regulation 2(zc), 2(p) and/or 2(n) of ICDR 2009.
e. Power of administration of Sections 56, 62, 63 and 73 with respect to OFCDs is
vested only with the Central Government and not with SEBI.
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3. f. Conspicuous omission of Section 60B in Section 55A which, according to the senior
counsel, indicates that SEBI cannot administer in case of any violation of Section
60B
g. That Unlisted Public Companies (Preferential Allotment) Rules, 2003 (for short '2003
Rules') and submitted that unlisted public companies, for the first time, could make
preferential allotment through private placement pursuant to a special resolution
passed under Sub-section (1A) of Section 81 of the Companies Act, if authorized by
its Article of Association. Section 60B, it was pointed out, contemplated an unlisted
company filing a RHP even though OFCDs were not offered or to be offered to the
public.
h. No statutory requirement to list OFCD on any recognized stock exchange under the
provisions of 2003 rules.
Advocate argument (SEBI)
a. Issuance of OFCDs was a public issue and, therefore, securities were liable to be
listed on a recognized stock exchange under Section 73 of the Companies Act.
b. offer/issue was made on private placement basis, any offer/issue to fifty or more
persons would be treated as public issue/offer in terms of the first proviso to Sub-
section (3) of Section 67 of the Companies Act and the provisions of the
Companies Act governing public issues and the provisions of DIP Guidelines and
ICDR 2009 would consequently apply.
c. The word “including” in Section 55A has been used to emphasize and to make it
abundantly clear that Sections 68A, 77A and 80A will be administered by SEBI
even though they do not primarily deal with the issue and transfer of securities and
non-payment of dividend.
d. Section 55A also applies to companies which “intend to” get their securities listed
and that on a combined reading of the proviso to Section 67(3) and Section 73(1),
since Saharas had made an offer of OFCDs to more than forty nine persons, the
requirement to make an application for listing became mandatory and SEBI has
the necessary jurisdiction even though Saharas had not got their securities listed
on a stock exchange.
e. Section 11(1) of the SEBI Act, SEBI is duty bound to protect the interest of investors
in securities either listed or which are required by law to be listed, and under
Section 11B, SEBI has the power to issue appropriate directions, in the interests
of investors in securities and the securities market, to any person who is associated
with securities market.
Analysis:
Scope and ambit of Sections 55A of Companies Act read with Sections 11, 11A and 11B of
SEBI Act and took the view that a plain reading of those provisions would indicate that SEBI
has jurisdiction over the Saharas since OFCDs issued were in the nature of securities and
hence should have been listed on any of the recognized exchanges of India.
From the aforementioned it can be gathered that (i) listed companies and (ii) those intending
to get listed are companies subject to the jurisdiction of SEBI. What would tantamount to
'intending to get listed' was a question before the SC. The SC while answering this question
described in great detail the role of SEBI as an institution to promote orderly and healthy
growth of the securities market and for investors’ protection. Against this backdrop, the SC
correctly analyseds the contentions of the Appellants and the relevant laws. SC is right in
analysing this aspect went by the conduct of the Appellants and stated that company’s option,
choice, election, interest or design does not matter, it is the conduct and action that matters
and that is what the law demands’. Since, in this instant case, the issue of OFCDs was held
to be a public issue, which entailed a listing, the SC held that the Appellants were seen to
have intended to get their securities listed.
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4. 2. Public Issue v. Private Placement
Issue 2: Whether the issue of OFCDs to millions of persons who subscribed to the issue is a
Private Placement so as not to fall within the purview of SEBI Regulations and various
provisions of Companies Act. Whether sec-67(3) of Companies act 1956 implies that
companies’ offer of share or debenture to 50 person or more then such an offer means public
offer?
Learned senior counsel argument (Sahara)
a. That the number of allottees or offerees was immaterial in determining whether an offer
was a public issue – it was the intention that mattered. The intention to offer to a select
or identified group would make the offer a private placement. To support their argument
the Appellants relied on the Unlisted Public Companies (Preferential Allotment) Rules,
2003 which do not stipulate a limit to the number of persons that a preferential
allotment may be made.
b. DIP Guidelines were expressly repealed by ICDR 2009 and even if the DIP Guidelines
apply, the same would not cover the preferential issue of OFCDs by Saharas under
2003 Rules read with Section 81(1A) of the Companies Act.
c. ICDR 2009 would apply to the OFCDs issued by SIRECL by private placement and
when it comes to regulating preferential allotment by private placement by unlisted
public companies, the same is governed by 2003 Rules and only in case of preferential
allotment by listed public companies, ICDR 2009 would apply.
d. The proviso of Section 67(3) of the Companies Act, added by the Companies
Amendment Act, 2000 (w.e.f. 13.12.2000), was also not attracted to 2003 Rules, hence
it was urged that, in view of the statutory rules of 2003, preferential allotment by
unlisted public companies by private placement was provided for and permitted without
any restriction on numbers as per the proviso to Section 67(3) and without requiring
listing of OFCDs on any recognized stock exchange. It was also pointed out that it is
only from 14.12.2011, the 2003 Rules were amended, whereby the definition of
preferential allotment was substituted, without disturbing or amending Rule 2 of 2003
Rules.
Advocate argument (SEBI)
a. A public issue would not become a preferential allotment by merely labeling it as such
and the facts on record show that the issue could not be termed as a preferential
allotment. Preferential allotment, learned counsel submits, is made by passing a
special resolution under Section 81(1A) and is an exception to the rule of rights issue
that requires new shares or debentures to be offered to the existing members/holders
on a pro rata basis. Once the offer is made to more than forty nine persons, then apart
from compliance with Section 81(1A), other requirements regarding public issues have
to be complied with.
b. After insertion of the proviso to Section 67(3) in December, 2000, private placement
as allowed under Section 67(3) was restricted up to forty nine persons only and 2003
Rules were framed keeping this statutory provision in mind and were never intended
for private placement/preferential issue to more than forty nine persons and the
amendments to these rules made in the year 2011 merely made the said legal position
under the 2003 Rules, explicit.
Analysis:
The arguments of the Appellants and relied on Section 67 to conclude that an offer to 50 or
more persons constitutes a public issue, and hence the issuance of OFCDs by the Appellants
was a public issue. To arrive at this conclusion, the SC correclty lifted the veil to examine the
conduct and method adopted by the Appellants and placed reliance on interalia the following
to determine that even in spirit the issuance by the Appellants was a public issue. The actions
and intentions on the part of the two companies clearly show that they wanted to issue
securities to the public in the garb of a private placement to bypass the various laws and
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5. regulations in relation to that. Section 67(3) then is in the form of an exception to the aforesaid
two sub-sections and it lays down that no invitation or offer shall be an offer to the public if it
cannot be made to persons other than those receiving the invitation/offer. To put it differently,
an offer or an invitation shall be to the public if the same can be passed on to persons other
than those to whom it is made. In other words, an offer/invitation without the right of
renunciation in favour of others cannot be termed as an offer or invitation to the public
3. Hybrid nature of Securities
Issue3. Whether the hybrid OFCDs fall within the definition of "Securities" within the meaning
of Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate
and adjudicate.
To resolve this question, it is first necessary to understand the nature of hybrid securities
themselves. Section 2(19A) of the Companies Act defines ‘hybrid’ as to mean “any security
which has the character of more than one type of security, including their derivatives”.
(Introduced through the Amendment Act No.53 of 2000).
Learned senior counsel argument (Sahara)
a) OFCDs issued were in the nature of “hybrid” as defined under the Companies Act
and SEBI did not have jurisdiction to administer those securities since Hybrid
securities were not included in the definition of 'securities' under the SEBI Act,
SCR Act etc.
b) Hybrids were issued in terms of Section 60B of the Companies Act and, therefore,
only the Central Government had the jurisdiction under Section 55A(c) of the
Companies Act.
c) Sections 67 and 73 of the Companies Act could not be made applicable to Hybrid
securities, so also the DIP Guidelines and ICDR 2009.
Advocate argument (SEBI)
a. OFCDs issued to the public were in the nature of Hybrid securities, marketable
and would not fall outside the genus of debentures.
b. Saharas had designed the OFCDs to invite subscription from the public at large
through their agents, private offices and information memorandum.
c. OFCDs issued by Saharas should have been listed on a recognized stock
exchange and ought to have followed the disclosure requirement and other
investors' protection norms. Section 28(1)(b) of SCR Act does not apply to
convertible debentures and the plea raised by Saharas is also untenable
because the interpretation placed on Section 28(1)(b) would be in contradiction
to the mandatory provisions of Section 73(1) and the proviso to Section 67(3) of
the Companies Act.
d. If the convertible debentures are excluded from SCR Act, it would lead to a
paradoxical situation because these debentures are required to be listed under
Section 73(1) but they cannot be listed in view of Section 28(1)(b).
Analysis:
As Black’s Law Dictionary defines hybrid security as follows:
“A security with features of a debt instrument (such as bond) and an equity interest (such as
share or stock), , which can be exchanged for shares in the issuing corporation and is subject
to stock-price fluctuations.
A Ramayia sheds light on hybrid securities, and the features that distinguish them from other
securities. “Hybrid Securities means securities which have some of the attributes of both debt
securities and equity securities. A type of security which, in the form of a debenture, contains
elements of indebtedness and elements of equity stock also is an example of a hybrid.”
In the matter of Sudhir Shantilal Mehta vs. Central Bureau of Investigation commenting on the
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6. scope of securities encompassed by the definition of the term in Section 2(h) of the SCR Act,
the Honourable Supreme Court of India, observed as follows:
“The definition of 'securities' is an inclusive one. It is not exhaustive. It takes within its purview
not only the matter specified therein but also all other types of securities as commonly
understood. The term 'securities', thus, should be given an expansive meaning."
Scope of Transferability vs. Marketability
The relation between transferability and marketability of the securities is also an important
factor to address this issue. To explain this we may refer to;
Dahiben Umedbhai Patel v. Norman James Hamilton and Others The Honourable Court
observed as follows:
“If one goes through the provisions of the Act, the scheme of the Act makes it clear that no
restrictive interpretation can be placed on the terms used in the Act. If the provisions of the
Act are looked at, it is clear that it relates not merely to securities which are listed but it also
relates to securities which may not be listed in any stock exchange. All that is required is that
there must be "marketability". it cannot be said that any security which is not listed on any
recognised stock exchange is not "marketable".
Based on the guidance of the Honourable High Court correctly outlined above we may
conclude that firstly, marketability of a security denotes the ease with which it can be sold,
secondly what is freely transferable is marketable and thirdly what is saleable is also
marketable.
Hence, clearly the OFCDs issued by the two Companies to such a wide base of investors who
can transfer / sell these securities among themselves, if not to others are evidently
‘marketable’ .Therefore the OFCDs issued by the two Companies as marketable securities
and fall within the definition of "Securities" under Companies Act, SEBI Act and SCRA so as
to vest SEBI with the jurisdiction to investigate and adjudicate.
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