CASE ANALYSIS: SAHARA vs.

SEBI

Submitted by
Lavenya R
17BLA1043
Background

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 30 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 dated 18th October 2011. Subsequently, Sahara filed an appeal before the Supreme Court of India against the SAT
order .

Issues in Question

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

Issue 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.

Issue 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.

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

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

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

Ratio Analysis

One of the noteworthy facts of this case was that Sahara took investment from the people belonging to the
lower strata of the society who don’t have much idea about the working of financial institutions,
fluctuations in the market and the skill to check the daily performance of the company. Sahara claimed that
it was a private placement and only selected clients were intimated about the scheme. SEBI has no
jurisdiction with respect to the same as its jurisdiction is restricted only to listed company. It also contended
that OFCD’s issued by the company does not fall within the ambit of the definition of the “securities” as
provided under the SEBI Act. The main contention raised by the Sahara was that SEBI has no jurisdiction
over the unlisted companies and, therefore, objected its interference in the present case on the ground that
the said company comes within the ambit of Unlisted Public Companies Rules 2003.

Objections raised by Sebi

As per the provision of Section 55A of the Companies Act, 2013, it paves the path for SEBI’s jurisdiction and also
restricts it to a listed public company and in this case, the company in question is an unlisted one does not fall within
the ambit of SEBI’s jurisdiction. As per the facts of the case if Sahara contends that it was a private placement and
only selected clients were asked for investment then the whole task of OFCD should have been wrapped up within
10 days as per rules and regulations and in adherence to the guidelines and also the offer should have been restricted
to not more than 50 members. But in this case more than 23 million people invested in the scheme and it went down
for more than 2 years which made it an obligation on the company to make it listed as per Section 73 of the
Companies Act, 2013 which prohibits private company to take deposits from the public and allows only eligible
companies to accept deposits from the public. It must be intimated to the registrar of the company and in such a
circumstance brings it within the purview of the SEBI. Therefore, in the light of facts provided and arguments
advanced SEBI contented that OFCD scheme is within the purview of the definition of securities as provided by
SEBI Act 1992 and Sahara should be obligated to refund the deposits of more than Rs. 24000 crores to its investors
as it was taken in contravention of the laws of the land

Application

Debenture can be understood as an instrument to raise loan by the company. For example, if company X requires
capital in order to proceed with its new idea or project it can opt to raise capital by taking a loan from the bank, but
that would raise the issue of high interest rates and other terms which the company should adhere to. In this case, the
company has an option to raise a loan from the public by means of debentures. One of the important aspects of this
type of fundraising is that the company has to pay the specified amount with interest, and although the money raised
by the debentures becomes a part of the company’s capital, it does not become share capital. The company can issue
secured and unsecured debentures. A debenture may be wholly or partially convertible at the time of redemption
depending on the fact that whether the special resolution is passed by the shareholders. Now under Optionally Fully
Convertible Debentures, it depends on the choice of the investor as when the debt holder wants to convert its
debentures into shares. The conversion is good in case the company is about to make a good amount of profit, or the
price of the shares of the company is about to increase. Thus, the very fact which should be taken into consideration
is that the investor in this case where he has been issued OFCD should have basic ideas of the performance of the
company, market fluctuations and other financial market aspects to gain on the conversion of the debentures.

Observations of SC:

The Supreme Court held that SEBI does have power to investigate and adjudicate in this matter. It categorically iterated
that the SEBI Act is a special legislation bestowing SEBI with special powers to investigate and adjudicate 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 and the insertion of Section 55A in the Companies Act to delegate special powers to SEBI in
matters of issue, allotment and transfer of securities. The Court observed that as per provisions enumerated 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.

In issue 2
The Supreme Court held that although the OFCDs issued by the two companies are in the nature of "hybrid" instruments,
it does not cease to be a "Security" within the meaning of Companies Act, SEBI Act and SCRA. It says although the
definition of "Securities" under section 2(h) of SCRA does not contain the term "hybrid instruments", the definition as
provided in the Act is an inclusive one and covers all "Marketable securities". As in this case such OFCDs were offered to
millions of people there is no question about the marketability of such instrument. And since the name itself contains the
term "Debenture", it is deemed to be a security as per the provisions of Companies Act, SEBI Act and SCRA.

In issue 3
The Supreme Court went on to hold that although the intention of the companies was to make the issue of OFCDs look
like a private placement, it ceases to be so when such securities are offered to more than 50 persons. Section 67(3)
specifically mentions 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. Although the 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 Supreme Court however 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 of the Companies Act, which is only meant for Public Issues.
Supreme Court also observed that since introducers were needed for someone to subscribe to the OFCDs, it is clear that
the issue was not meant for persons related or associated with the Sahara Group because in that case an introducer would
not be required as such a person is already associated or related to the Sahara Group

In issue 4

Although 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", no company can be forced to get listed on a stock exchange and in such cases it
will be 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. In addition the Supreme Court observed that the maxim ''acta exterior indicant interiora secreta'' (external
action reveals inner secrets) applies with all force in the case of Saharas. The Court observed that the contention that they
did not want their securities listed does not stand. The duty of listing flows from the act of issuing securities to the pubic,
provided such offer is made to fifty or more than fifty persons. Any offering of securities to fifty or more is a public
offering by virtue of Section 67(3) of the Companies Act, which the Saharas very well knew, their subsequent actions and
conducts unquestionably reveal so.

In issue 5
 The companies also argued that as per the Unlisted Public Companies (Preferential Allotment) Rules 2003, preferential
allotment by unlisted public companies on private placement was provided for and permitted without any restriction on
numbers as per the proviso to Section 67(3) of the Companies Act and without requiring listing of such OFCDs on a
recognized stock exchange. They went on to argue that Sec 67(3) was made applicable to Preferential Allotment made by
unlisted public companies only in 2011 by amending the 2003 rules with prospective effect and not with retrospective
effect. Hence before the 2011 Rules were framed, they were free to make a preferential allotments to more than 50
persons also. However, the Supreme Court did not agree and held that the legislative intent was not so, and such a Rule
being a delegated piece of legislation cannot supersede the statutory provisions of Sec 67(3) and in the existence of Sec
67(3) it is implied that even the 2003 preferential allotment rules were required to comply with the requirement of Sec
67(3). The Supreme Court observed that Even if armed with a special resolution for any further issue of capital to person
other than shareholders, it can only be subjected to the provisions of Section 67 of the Company Act, that is if the offer is
made to fifty persons or more, then it will have to be treated as public issue and not a private placement. The Court
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.

In issue 6
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 held that
the amendment in the SCRA was made and subsequently Sec 28 was inserted to exempt convertible bonds by foreign
financial institutions that had an option to obtain shares at a later date. The Supreme Court further held that the
inapplicability of SCRA, as contemplated in Section 28(1)(b), is not to the convertible bonds, but to the entitlement of a
person to whom such share, warrant or convertible bond has been issued, to have shares at his option. The Act is,
therefore, inapplicable only to the options or rights or entitlement that are attached to the bond/warrant and not to the
bond/warrant itself. The Supreme Court clarified by saying that 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.

Conclusion

The Hon’ble Supreme Court ordered Sahara to refund the entire deposits collected by it through Red Herring
Prospectus at an interest rate of 15% till the date of refund. It also authorized SEBI to take legal recourse in case the
appellant i.e. Sahara fails to comply with the said order.

I believe that the observation made by the Supreme Court is justified from all perspectives as it emphasized the fact
that how Sahara tried to defeat the provisions of various acts like SEBI Act, 1992, Companies Act, 2013 and
jeopardized the lives of so many investors who mainly belonged to the lower strata of the society and barely earned
enough to keep their body and soul together. It tried to gamble the life of a majorly illiterate group of people who
have less or no idea of the financial position of a company and thus are ambiguous about harnessing the opportunity
to make benefit out of schemes such as OFCD which requires knowledge about the performance of the company and
basic knowledge about the proper time to turn such debentures into shares which will be profitable for them. Such
investors are unaware of the risk that comes along with such luring schemes and out of ignorance they put all their
money in one hope given by such unscrupulous managers of these companies. This decision of the Supreme Court in
every manner will be a major precedent that will act as a deterrent for them not to involve themselves in such
incoherent schemes.