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Sahara India Real Estate Corporation Limited & Others Vs. SEBI.

A landmark judgment was passed on 31st August 2012 by the Supreme Court of India, in Sahara India Real Estate Corporation Ltd. and others v. Securities and Exchange Board of India and another [2012] 174 Comp Cas 154 (SC) wherein the two companies of the Sahara Group, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL), were directed to refund around Rs 17,400 crores to their investors within three months from the date of the order with an interest of 15% per annum. Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL), appellants are Companies controlled by the Sahara Group. The two appellant companies raised from investors by issuance of Optionally Fully Convertible Debentures (OFCDs) and collected between April 2008 and April 2011 over Rs. 17,656 crores, from about three crore investors. This was done pursuant to special resolutions passed under section 81(1A) approving the issue of OFCDs. For inviting investors to subscribe to the OFCDs, an Information Memorandum (IM) was circulated after it was filed with the Registrar of Companies, purportedly under section 60B of the Companies Act, 1956. But the IM described the issue as 'Private Placement Issue' and hence did not comply with the requirements applicable to the 'public issue' of securities. On investigation, a Whole-time Member of SEBI passed an order on 23 June 2011 directing the two companies to refund the money so collected to the investors and also restrained the promoters of the two companies from accessing the securities market till further orders. In the appeal that Sahara preferred before the Securities Appellate Tribunal (SAT) against the order of the Whole-time Member, the SAT confirmed and maintained the order of the Whole-time Member by an order dated 18th October, 2011. Sahara’s contentions in the detailed reply dated 30.5.2011 were as under:
  1. The raising of funds through issue of OFCDs was in compliance with all regulations and was legal.
  2. The raising of funds through issue of OFCDs was by way of private placement to persons who were associated with Sahara Group and those issues were not public issues.
  3. The 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.
  4. That such 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.
  5. Sections 67 and 73 of the Companies Act could not be made applicable to Hybrid securities, so also the DIP Guidelines and ICDR 2009.
  6. The company had raised funds by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated with Sahara Group, without giving any advertisement to the public.
  7. The RoC, Kanpur and Maharashtra had registered those RHPs without any demur and, therefore, it was unnecessary to send it to SEBI.
SEBIs contentions:
  1. Sahara Group was issuing Housing bonds without complying with the rules/regulations and guidelines.
  2. The issue of OFCDs was public issue.
  3. Issuance of OFCD was made to more than 50 investors and therefore securities were liable to be listed on a recognized stock exchange under Section 73 of Companies Act, 1956. SEBI also held that the parliament had conferred powers on it under Section 55A to administer issue of securities to public.
  4. SEBI analysed and concluded that OFCDs are indeed securities (Transferable hence marketable as provided in terms and conditions in bond agreement).
  5. Sahara violated the provision of Section 73 of Companies Act, 1956 and subsequently it comes under the ambit of provision of Section 55 of Companies Act, 1956 under which listing of instrument was mandatory.
  6. Issuance of OFCD by Sahara’s was prima facie violation of Sec 56 and Sec 73 of the Companies Act, 1956.
  7. Saharas violated DIP Guidelines & SCR Act regulations.
  8. OFCDs issued by Saharas would come within the definition of Securities under provision of Section 2(h) of SCR Act.
  9. OFCDs are marketable and comes under the meaning of debentures.
  10. Having made a public issue, it cannot escape from complying with the requirements of Section 73(1) of the companies Act, 1956.
Subsequently Sahara filed an appeal before the Supreme Court against the SAT order. The Supreme Court confirmed the findings of the SAT based on the below observations:
  • Issue of OFCDs is not a private placement.
  • When the above securities are offered to more than 50 persons it is to be considered as a public issue accordingly SEBI has jurisdiction as per Section 55A in the matter of unlisted public companies.
Supreme Court concluded that the appellants companies knowingly issued securities by way of private placement in order to diminish various laws and regulation also asked SEBI to probe into the matter and find out the actual investors who had subscribed to the OFCDs.
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