SAHARA v. SEBI (2012)

                                 SAHARA v. SEBI (2012)

Citation	(2012)
Date of judgement	5 December 2012
Court	Supreme court of India
Appellent	SAHARA
Responded	SEBI
Bench	J. Altamas Kabir, J. Surinder Singh Nijjar ,J.ChelameswaR

KEYWORDS

SAHARA , SEBI , Public limited , companies

INTRODUCTION

At present our society is a capitalist society and massive corporate development is the highest ladder of development. But unregulated development in such a 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.

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 to the 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 4.

ISSUES

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

JUDGEMENT FOR ISSUE 1

In the present matter the

 The Supreme Court held that SEBI has power to adjudicate and investigate. Also the SC said that according to the SEBI Act, the SEBI has special powers for doing investigation and adjudication to protect the interests of the investors.

This special power of the SEBI does not show disrespectful attitude to any provisions which are present in any law. They are analogous to other laws and it should be read in a harmonious manner with other provisions. In the present matter where the interests of the investors are at stake, there is no conflict of jurisdiction between the SEBI and the MCA.

For supporting this view, the Supreme Court gave special importance to the legislative intent, and also to the statement of objectives for enacting the SEBI Act and the inserting Section 55A in the Companies Act to authorize special powers to SEBI in the matters of issue, allotment and transfer of the securities.

The SC observed that according to provisions mentioned under Section 55A of the Companies Act, so far matters connected to issue and transfer of the securities and non-payment of the dividend, the SEBI has the power to administer in the case of listed public companies and also in the case of those public companies which intended of getting their securities listed on a recognized and identified stock exchange in India.

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.

         JUDGEMENT FOR ISSUE 2

The OFCDs issued two companies which are in the nature of “hybrid” instruments. The Supreme Court held that even though the OFCDs had issued that, it do not cease to be a “Security” within the meaning of the SEBI Act, Companies Act, and SCRA.

It says in spite of having the definition of “Securities” under section 2(h) of SCRA, it doesn’t contain the term “hybrid instruments”. The definition which is provided in the Act is covering all the “Marketable securities”.

In this case such OFCDs were offered to a number of people, so the question about the marketability of such instruments do not arise. Additionally, since the name itself was comprise of the term “Debenture”, it is considered as a security according to the provisions of the SEBI Act, Companies Act and SCRA.

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.

JUDGEMENT FOR ISSUE 3

The Supreme Court held that even though the intention of the companies was of making the issue of OFCDs look as a private placement, but when such securities are given to more than 50 persons, it ceases to be so.

This is specifically mentioned in Section 67(3). Hence the SEBI will have jurisdiction in that matter. Here, the issuer has to act in accordance with the provisions of the legal framework for a public issue. Although Sahara companies opposed that they do not fall under the provisos to Sec 67 (3) as the Information memorandum mentioned that OFCDs were issued only to those belonging to Sahara Group.

No public offer was present, but the SC held that as the companies elicited public demand for OFCDs via issue of Information Memorandum under Sec 60B of the Companies Act, is only meant for Public Issues. Additionally, observed that the issue was not for persons associated with the Sahara Group as introducers were required for someone to subscribe to OFCDs and in the present case introducer will not be needed because a person is already associated with the Sahara Group.

Hence, the SC concluded that it can be clearly noticed from the intentions and actions of the two companies that they desired to issue securities to the public in the garb of a private placement for bypassing various laws and regulations in relation to that. Moreover, SC observed, Sahara companies had violated the provisions of Sec 67(3) as they had issued securities to more than the statutory limit.

 Hence attracting civil and criminal liability. Also, the Supreme Court held that the violation of sec 60B of the Companies Act had took place. Because issue of OFCDs by circulation of IM to public had attracted provisions of Section 60B of the Companies Act, which are required in filing prospectus under Sec 60B(9) and companies had not given a final prospectus on closing of the offer and also can’t manage to register it with SEBI.

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

      JUDGEMENT FOR ISSUE 4

The Sahara argued that the listing requirement under Section 73 of Companies Act is optional and it applies only to those companies who “intend to get listed”, and no company can be forced to get listed on a stock exchange or else it will be a violation of corporate autonomy.

However, the SC refused this and held that, Sec 73 (1) is a compulsory provision of law which companies should comply with and any issue of securities exceeds 49 persons according to Sec 67(3) of the Companies Act, the intention of companies to get listed do not matter at all. 

Section 73(1) of the Act puts obligation on every company who is intending to offer debentures or shares to the public for applying on a stock exchange to list its securities. Also, the maxim “acta exterior indicant interiora secreta ” i.e external action reveals inner secrets applies in this case of Saharas.

The court also held that, if securities to fifty or more are offered, it is a public offering as per Section 67(3) of the Companies Act.

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

 JUDGEMENT FOR ISSUE 5

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, argued by the companies.

Moreover, Sec 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 freedom to make preferential allotment to more than 50 persons also.

Nevertheless, the SC 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.

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

   JUDGEMENT FOR ISSUE 6

Here the Supreme Court held that 28(1)(b), accurately points out that only the convertible bonds and share or warrant of the type referred here are excluded from applicability of SCRA and not debentures which are another category of securities in definition which is present in Section 2(h) of SCRA.

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 the 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 contended 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 are securities 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 instruments. And the name itself contains ‘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. 

CONCLUSION

The judgment not only consecrates SEBI’s absolute power to investigate in the matters of listed companies, but also in matters pertaining to unlisted companies. It removes the grey areas of securities issues by the unlisted companies taking advantage of loopholes of the law. This is a landmark judgement in India’s corporate landscape.

Written by VRINDA PURI   a student of Chanderprabhu Jain college of higher studies , Narela , 4^th  semester ,an intern under Legal Vidhiya.