Analysis of Judgment of Supreme Court in Sahara India Real Estate Corpn. Ltd & ors Vs. SEBI & Anr
Supreme Court delivered a judgment in Sahara’s Case which now confirms the jurisdiction and power of SEBI to inquire into hybrid securities issued by unlisted public Ltd companies in the name of private placement when offered to more than 50 persons.
Sahara Case background:
Sahara India Real Estate Corporation Limited(SIRECL) and Sahara Housing Investment corporation Ltd(SHIC) filed an appeal before Supreme Court(SC) being aggrieved by the order of Securities Appellate Tribunal(SAT). In this appeal Supreme Court was required to decide the following legal issues:-
a. Whether OFCDs issued by the Appellant are securities within the meaning of Section 2(h) of SEBI Act?
b. Whether SEBI has jurisdiction u/s 55 A(b) of the Companies Act,1956 to call for information and investigate the matters relating issue and transfer of Optionally Fully Convertible Securities(OFCDS) offered by the appellants to more than 50 persons?
c. Whether the Appellant had committed any violation of sections of companies Act relating to issue of prospectus, misstatements in prospectus and criminal liability and penalties for violations?
Provisions of Companies Act:
In order to understand the crux of the Sahara’s case, it would be useful to refer to Section 55-A which was inserted by the Companies (Amendment) Act 2000. As per this section, SEBI has jurisdiction only over listed public companies and also public companies which intend to get their securities listed on the stock exchange. As a consequence, SEBI is vested with power to inspect books of accounts of listed companies’ u/s 209A and also to file complaints u/s 621 of he companies Act for offences relating to issue and transfer of securities and non payment of dividend by listed companies.
Explanation to Section 55-A further clarifies that all matters relating to prospectus, statement in lie of prospectus, return of allotment, issue of shares, and redemption of irredeemable preference shares shall be exercised by Central Government.
Readers may refer to case law Kalpana Bhandarai Vs SEBI(2003)56 CLA167(Bom).In this case an application for exercise of jurisdiction by SEBI was rejected by Bombay high court as the applicants failed to produce Board’s resolution contemplating listing of shares and directed them to approach Central Government u/s 55A(c) of companies Act,1956.
The petitioners submitted that Sesa Industries Ltd company(subsidiary of SESA Gova Ltd) offered to buy back shares allotted at a premium for a lesser price detrimental to their interest. SEBI, as First respondent, submitted that in view of Section 55-A, only Central Govt. had jurisdiction to inquire into the allegation made by the applicants. Even expressing intention to list shares is enough for SEBI to exercise jurisdiction.
In the above legal back ground, it becomes easier for the readers to understand the judgment of Supreme Court.
Shareholders of SIRECL approved a resolution u/s 81(1A) for raising funds by issuance of Optionally Fully Convertible Debentures (OFCDs) on private placement basis. The company filed Red herring prospectus with the RoC and it specifically stated that it did not intend to list the shares on any Stock exchange. The main intention of raising funds was to finance infrastructural activities. It circulated the Information Memorandum (IM) to friends, associate companies, Workers/employees. It collected huge sums of money amounting to about 19400 crores. In a similar way its other group company SHIC also raised funds.
SEBI on the basis of a complaint, issued a notice to Sahara and called for information on the OFCDs issued by Sahara. Sahara refused to give information on the ground that SEBI had no locus standi to call for such information. SEBI had to issue summons calling for information as interest of investors was involved. Ministry of Corporate Affairs(MCA)had also called for information and informed SEBI that it found compliances in respect of certain queries but advised Saharas to file prospectus as per Section 60 B(9) of the Companies Act,1956.
SEBI issued a show cause notice alleging that issuance of OFDS was a public issue as it involved more than 50 persons and, therefore, securities were liable to be listed on a recognized stock exchange under Section 73 of the Companies Act. It is also required to comply with various clauses of DIP Guidelines and violated Regulations 4(2), 5(1), 6, 7,16(1), 20(1), 25, 26, 36, 37, 46 and 57 of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR 2009)
Sahara replied to show cause notice stating that SEBI has no jurisdiction. It defended its actions by stating that:
a. Hybrid securities and are not defined in SEBI Act or Securities Contract Regulations Act
b. Issuance of hybrid securities is in terms of 60-B(information memorandum) and only Central Govt. had jurisdiction u/s 55-A(c)of the Companies Act,1956
c. Funds are raised by private placement with friends, associates and group companies as such provisions of Section 67 and 73 are not applicable
d. Red Herring Prospectus was registered with ROC, Kanpur
Sahara challenged the show cause notice issued by SEBI in Allahabad High court and obtained stay. SEBI took the matter to Supreme Court which ordered for early disposal of the writ by the High court. In between Sahara after furnishing information to MCA as well as SEBI again approached Supreme Court when Allahabad high court rejected its petition for recall of previous order. Supreme Court’s order made SEBI issue a fresh notice to Saharas alleging violations of several sections of the Companies Act and DIP Guidelines and ICDR 2009.Thereafter after it confirmed violations by its order. Sahara appealed against the said order of SEBI in SAT. When it lost its appeal before SAT, it approached Supreme Court again. Finally the matter was decided by the Supreme Court.
Important observations of Supreme Court:
a. Section 60B(1) casts no obligation to issue Information memorandum. (IM).However Sahara companies chose to issue IM and invited public demand for OFCDS. Having filed IM, Sahara aught to have filed a final prospectus prior to opening of subscription lists.
b. SC noted that although Sahara defended its action saying that issue of OFCDS is on a private placement, but its actions/facts were contrary to that stand.
c. When such securities were offered to more than 50 persons and it is deemed to be a public offer in terms of Section 67(3). SEBI therefore gets jurisdiction as per Section 55-A(c).
d. SC observed from the Documents produced before it and before the fact finding authorities, do not show the relationship Sahara Group had with the investors. But they had taken a declaration from the bondholders that they are associated with the company.
e. SC arrived at a conclusion from the conduct and actions of Sahara that the two companies wanted to issue securities to the public in the garb of a private placement to bypass the various laws and regulations in relation to that. Court can, in such circumstances, lift the veil to examine the conduct and method adopted by Sahara companies to defeat the various provisions of the Companies Act, and the provisions of the SEBI Act.
Effect of SC Order: Supreme Court dismissed the appeal and upheld the orders passed by SEBI and SAT. It appointed Mr. Justice B N Agarwal to oversee the activities for effective implementation of the directions the court. It ordered Sahara to refund of the entire amount collected through RHP with interest of 15% till the date of refund. Such refund amount be deposited an interest bearing deposit a/c with a nationalize bank and authorised SEBI to take legal recourse, if Sahara fails to comply with the directions.
Conclusion: It is a very good judgment. This will act as a deterrent on those unscrupulous promoters who raise huge money in the name of savings from public who are unaware of the risks involved in such investments. In this case the fight given by SEBI to protect the interests of small investors is commendable.
G.S.Rao,DGM,(Legal),OCL India Limited.