Sahara India Real Estate Corporation Limited and Others v. Security and Exchange Board of India (SEBI), Case no. 8643 OF 2012

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Case Name: Sahara India Real Estate Corporation Limited and Others v. Security and Exchange Board of India (SEBI)

Civil Appeal No.: 8643 OF 2012

Court: Supreme Court of India

Bench: Justice Altamas Kabir, Justice Surinder Singh Nijjar, Justice J.Chelameswar

Date of Judgment: 5^thDecember 2012

Introduction:

At present our society is a capitalist society and massive corporate development is the highest ladder of development. But unregulated development in such sector comes with its own kinds of risks. Such default on part of corporate sectors hampers the overall construction and functioning of capitalistic society at large. In terms of socio-economic offences Sahara India investor fraud is one of a kind. It is also one of the landmark judgments of the Supreme Court, Sahara v. SEBI, 2012, an arduous five year legal battle between the Sahara Group and the regulatory of Security and Exchange Board of India.

Background of the Case:

Sahara India Pariwar is an Indian conglomerate headquartered in Lucknow, India with business interests in finance, infrastructure & housing, media &entertainment, consumer merchandise retail venture, manufacturing and information technology¹. Sahara India Pariwar was founded by Subrata Roy in1978, Gorakhpur. The group operates 4,799 establishments under the Sahara India umbrella . Sahara India Real Estate Corporation Limited (SIRECL) and the Sahara Housing Investment Corporation (SHICL), subsidiaries of the conglomerate, buy and develop land for residential housing projects across India. Sahara India Pariwar investor fraud case is the case of the failure of Subrata Roy-led Sahara India Pariwar to return Rs 24,000 crore plus interests to its investors as directed by the Supreme Court of India, after a prolonged legal battle with the Securities and Exchange Board of India. Earlier SIRECL and SHICL floated an issue of Optionally Fully Convertible Debentures (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 30 million investors in the guise of a “Private Placement” without complying with the requirements applicable to the public offerings of securities. It was then SEBI caught hold of Sahara, when SAHARA claimed of raising money worth approx. Rs. 24,000 crores raised from estimated 3 crores investors that too through para-chit banking money process. SAHARA contentions included that the investors’ money sometimes went from Rs. 2000 to Rs. 20,000. Meanwhile, SEBI in Nov 2010, had restrained the above two companies from raising funds in the form of Optionally Fully Convertible Debentures (OFCD)².

Facts of the Case:

In 2008, RBI debarred Sahara India Financial Corporation from raising fresh deposits. The growth of Sahara‘s empire was always a mystery; many believed it ran a Ponzi scheme by collecting funds from investors. The group needed continuous flow of fresh funds to keep it afloat. With RBI closing a door on the group from collecting deposits from the people, the group needed a financial instrument that would be out of the purview of RBI but still get access to public funds.
Sahara decided to issue OFCDs by floating two companies – Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC). It was the Registrar of Companies (ROC) that needed to clear these investment vehicles.
Firstly, the sheer size of the issue makes it a public issue. Any company seeking money from more than 50 persons has to take the approval of SEBI in doing so, in which case the company would have to make all the disclosures required as per SEBI norms. The Sahara group had sought money from nearly 30 million investors. Apart from the size and number of investors, another deliberate error was keeping the issue open ended; ideally such issues should be closed within six weeks. In fact, a Sahara group company kept an issue of Rs 17,250 crore open for 10 years.
Sahara‘s money-making machine could have continued had it not committed another major mistake. Sahara decided to tap the stock markets to raise money through Sahara Prime City. In doing so the company had to file a Red Herring Prospectus and disclose working and financials of other group companies. This is when K M Abraham spotted SIREC and SHIC and found that the money raised through OFCDs was camouflaged as private placements.
Abraham found out that even though the Sahara group companies collected money they did not have proper records of the identity of its investors. How and to whom would they then return the money? Even professional agencies were unable to locate the investors.
The two companies, Abraham alleged, intended to rotate money between group companies. Though the OFCD instruments were issued in the name of the two companies, cheques were sought in the name of Sahara India.
When SEBI issued its order on the wrongdoings of the Sahara group on June 23, 2011, Sahara group took the matter with Securities Appellate Tribunal (SAT). But SAT held the SEBI findings to be correct. SAT in its order said ―Why it (Red Herring Prospectus) did not disclose was the fact that the information memorandum was being issued to more than 30 million persons inviting them to subscribe to the OFCDs and there lies the catch…This concealment is, indeed, very significant and goes to the root of the controversy.
Sahara group then approached the Supreme Court but in August 2012, the honourable court asked the group to repay an amount of over Rs 24,000 crore to SEBI within 90 days. The regulator will then distribute the money to bonafide investors. But suddenly Sahara said it had repaid most of the money over the last one year and an amount of just over Rs 5,000 crore was pending.
In the October hearing Supreme Court had clearly hinted that it was no longer amused by the delaying tactics of the Sahara group and would detain the group’s officials till the payments are made. The Supreme Court Bench had said that previous orders not been compiled with and that was why Roy and the directors have been summoned to explain the delay. Roy did not turn up, thus the non-bail able warrant with an order to appear before the court on March 4³.

Issues Raised in the Case:

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 Corporate Affairs (MCA) which has the jurisdiction under Sec 55A (c) of the Companies Act.

2. 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.

3. 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.

4. Whether listing provisions under Sec 73 mandatorily applies to all public issues or depends upon the “intention of the company” to get listed.

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

6. Whether OFCDs are Convertible Bonds and whether exempted from application of SCRA as per the provisions of sec 28(1)(b).

Arguments of the Petitioner:

The petitioner contended that according to Section 55A of The Companies Act, 1956, SEBI is empowered to seek information and investigate only in case of those companies which are listed in the stock market. As the application of Sahara companies was still pending at the time of the investigation, SEBI has no power to seek any information from these two Sahara Companies. Sahara argued that listing requirement under Sec 73 of Companies Act is not mandatory and applies to those companies only who “intend to get listed”, forcing any company to get listed on a stock exchange is a violation of corporate autonomy. Further, according to Section 60B if any company files DRHP directly to the Registrar of Companies then that company can directly collect money from the public and in such case SEBI has no jurisdiction over such company.

The petitioner also argued that OFCDs issued by the two companies were in the nature of hybrid instrument and here in case of these two companies in question, they were placed privately. Sahara companies contended that they are exempted under the provisos to Sec 67 (3) since the Information memorandum specifically mentioned that the OFCDs were issued only to those related to the Sahara Group and there was no public offer.

The Companies also contended that according to the Unlisted Public Companies (Preferential Allotment) Rules 2003, preferential allotment by unlisted public companies on private placement was given authorization without any restriction on numbers according to Section 67(3) of the Companies Act. Moreover, Section 67(3) is applicable to Preferential Allotment which was made by unlisted public companies in 2011 by amending the 2003 rules which was with prospective effect and not with retrospective effect. Therefore, before the 2011 Rules were made there was liberty to make preferential allotment to more than 50 persons.

Arguments of the Respondent:

The respondent contented that the confusion that was tried to be created by the Sahara Companies that SEBI has no jurisdiction according to Section 55A of The Companies Act, 1956, over the private companies. SEBI being the regulatory board has in fact, jurisdiction over any kind of company which makes an offer to the public at large.

The OFCDs issued by the two companies aresecurities within the meaning of companies act, SEBI and SCRA. As in this case such OFCDs were offered to millions of people so there is no question about the marketability of such instrument. And the name itself contain ‘debenture’, it is deemed to be a security as per the provisions of companies act, SEBI and SCRA.

The respondent further argued that according to Section 67(3) of the Companies Act, when any security is offered to and subscribed by more than 50 persons it will be deemed to be a Public Offer and therefore SEBI will have jurisdiction in the matter and the issuer will have to comply with the various provisions of the legal framework for a public issue.

Supreme Court’s Observation:

1. The Supreme Court held that SEBI does have power to investigate and adjudicate in this matter. Also the Court said that according to the SEBI Act, the SEBI has special powers for doing investigation and adjudication to protect the interests of the investors. It has special powers and its powers are not derogatory to any other provisions existing in any other law and are analogous to such other law and should be read harmoniously with such other provisions and there is no conflict of jurisdiction 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 of objectives for the enactment of SEBI Act. The Court observed that as per provisions under Section 55A of the Companies Act, so far matters relate to issue and transfer of securities and non-payment of dividend, SEBI has the power to administer in 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.

2. The Supreme Court held that although the OFCDs issued by the two companies are in the nature of hybrid instrument, it does not cease to be a security within the meaning of companies act, SEBI and SCRA. As in this case such OFCDs were offered to millions of people so there is no question about the marketability of such instrument. And the name itself contain ‘debenture’, it is deemed to be a security as per the provisions of companies act, SEBI and SCRA.

3. In light of Section 67(3) of the Companies Act, The Supreme Court went on to hold that when any security is offered to and subscribed by more than 50 persons it will be deemed to be a Public Offer and therefore SEBI will have jurisdiction in the matter and the issuer will have to comply with the various provisions of the legal framework for a public issue. Sahara Companies have issued securities to more than the threshold statutory limit fixed under proviso to Section 67(3) and hence violated the listing provisions attracting civil and criminal liability. The Supreme Court also observed that issue of OFCDs through circulation of IM to public attracted provisions of Section 60B of the Companies Act, which required filing of prospectus under Section 60B(9) and since the companies did not come out with a final prospectus on the closing of the offer and failed to register it with SEBI, the Supreme Court held that there was violation of sec 60B of the Companies Act also.

4. Sahara argued that listing requirement under Sec 73 of Companies Act is not mandatory and applies to those companies only who “intend to get listed”, forcing any company to get listed on a stock exchange is a violation of corporate autonomy. The Supreme Court rejected this contention and held as long as the law is clear and unambiguous, and any issue of securities is made to more than 49 persons as per Sec 67(3) of the Companies Act, the intention of the companies to get listed does not matter at all and Sec 73 (1) is a mandatory provision of law which companies are required to comply with. The Supreme Court observed that Section 73(1) of the Act casts an obligation on every company intending to offer shares or debentures to the public to apply on a stock exchange for listing of its securities.

4. The Companies also contended that according to the Unlisted Public Companies (Preferential Allotment) Rules 2003, preferential allotment by unlisted public companies on private placement was given authorization without any restriction on numbers. The Supreme Court disagreed and observed that 2003 Rules apply only in the context of preferential allotment of unlisted companies; however, if the preferential allotment is a public issue, then 2003 Rules would not apply.

5. The two Sahara companies also contended that the OFCDs being in the nature of Convertible bonds issued on the basis of the price agreed upon at the time of issue and, therefore, the provisions of SCR Act are not applicable in view of Section 28(1)(b) thereof and therefore SEBI will have no jurisdiction. The Supreme Court rejected this contention and clarified that section 28(1)(b),clearly indicates that it is only the convertible bonds and share/warrant of the type referred to therein that are excluded from the applicability of the SCRA and not debentures which are separate category of securities in the definition contained in Section 2(h) of SCRA.

Judgment:

The honourable Supreme Court ordered Sahara to refund the entire deposits collected by it with an interest of 15% till the date of refund. It also authorized SEBI to take legal recourse in case the appellant that is Sahara fails to comply with the said order. On 24^th February court sanctioned a non- bailable warrant for the arrest of Sahara India Pariwar Chairman and other members for not complying with the order.

Conclusion:

Sahara v. SEBI is one of the landmark judgments relating to India’s corporate landscape. This case has been a great example of safeguarding the investors’ interest and money in case of corporate or share-market scams. The Apex Court, by this judgment, vests SEBI with enormous powers to investigate into any matter concerning the interest of the investors even if it pertains to companies which are not listed. It clarifies significant points of law and removes the grey areas relating to issue of securities by the so called unlisted companies taking advantage of the loopholes of law. Also, in the matters of jurisdiction, this Judgment has removed the jurisdictional gap which previously existed between that of the Ministry of Corporate Affairs and SEBI.

References:

Aparajita Pande, Corporate Funds in India, Case Studies of Sahara and Saradha, Sevenpillar Institute (2014), https://sevenpillarsinstitute.org/ last seen on 18/04/23
Archita Tiwari, Case Study on Subrat Roy Sahara v/s Union of India and Ors. 5, The Law Brigade Publishing Group 113, 115, (2020), https://thelawbrigade.com/wp-content/uploads/2020/06/Archita-LPR.pdf , last seen on 18/04/23
Archita Tiwari, Case Study on Subrat Roy Sahara v/s Union of India and Ors. 5, The Law Brigade Publishing Group 113, 116, (2020), https://thelawbrigade.com/wp-content/uploads/2020/06/Archita-LPR.pdf , last seen on 18/04/23
Sahara India Real Estate … vs Securities & Exch.Board Of India on 5 December, 2012, Indian Kanoon, https://indiankanoon.org/doc/52860197/ , last seen on 18/04/23
Sahara vs. SEBI- An In-depth Analysis of the Landmark Supreme Court Ruling, mondaq.com, https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling , last seen on 18/04/23
Supreme Court, SEBI and Sahara India – The Investor Fraud Case, Libertatem Magazine, https://libertatem.in/featured/supreme-court-sebi-sahara-india-investor-fraud-case/ , last seen on 18/04/23