Sahara India Real Estate Corporation Ltd. v. SEBI

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Previously[1] Sahara India Real Estate Corporation Limited (“SIRECL”) and Sahara Housing Investment Corporation Limited (“SHICL”) floated a problem of OFCDs and commenced accumulating subscriptions from buyers with impact from twenty-fifth April 2008 as much as thirteenth April 2011. During this period, the organization had a complete series of over Rs 17,656 crore. The quantity was accrued from approximately three million buyers withinside the guise of a “Private Placement” without complying with the necessities relevant to the public services of securities. The Whole Time Member of SEBI, whilst taking awareness of the problem, handed an order dated twenty-third June 2011, thereby directing the two corporations to refund the cash so accrued to the buyers and additionally constrained the promoters of the two corporations such as Mr Subrata Roy from gaining access to the securities marketplace until similarly orders. Sahara then desired an enchantment earlier than the Securities Appellate Tribunal (“SAT”) in opposition to the order of the Whole Time Member. After hearing, the SAT confirmed and maintained the order of the Whole Time Member through an order. Subsequently, Sahara filed an enchantment earlier than the Supreme Court of India in opposition to the SAT order. 

On 31st August 2012, the Supreme Court, in one in every of its maximum expected judgment of new instances, has directed the Sahara Group and its institution corporations SIRECL and SHICL to refund around Rs 17400 crores to their buyers within three months from the date of the order with An interest of 15%. While confirming the SAT findings, the Supreme Court has similarly requested SEBI to probe into the problem and discover the natural investor base who’ve subscribed to the Optionally Fully Convertible Debentures (OFCDs) issued through the two institution corporations SIRECL and SHICL.

Following are the key issues:

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?

In law, the judiciary might also try to investigate legislative purpose where the law is ambiguous or no longer seem to without delay or adequately address specific trouble, or whilst there seems to have been a legislative drafting error. Section 55A turned inserted withinside the Companies Act 1956 via way of the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000. The Statement of Objects and Reasons indicates the intention of the Legislature read as follows:

to provide that the Securities and Exchange Board of India be entrusted with powers with regard to all matters relating to public issues and transfers including the power to prosecute defaulting companies and their directors.”

Hence, from above, it’s far clear that the legislative purpose behind incorporating Section 55A of the Legislature turned into vest SEBI with powers to analyze and adjudicate in all of the remember associated with the general public trouble of securities.

The cause of the guideline of thumb is to make clear wherein there may be any obscurity or vagueness withinside the principal enactment then with a purpose to make it steady with the dominant item which it appears to serve, and the statutes ought to be studied in harmony with every different. 

In Sundaram Pillai & Ors. v. V.R. Pattabiraman & Ors[2]., the Supreme Court found that the principle a part of Section 55A confers jurisdiction on SEBI regarding a few classes, i.e. trouble of securities, switch of securities and non-price of dividend. The expression “all different matters” stated withinside the clarification could refer to powers apart from the above-stated classes. Further, it could also be remembered that the rationale now no longer put off the powers conferred on SEBI via way of other sections of the Companies Act. Therefore, via way of distinctive feature of the above rules, the Apex Court concluded that SEBI has powers to research and adjudicate the problem below SEBI Act 1992 and The Companies Act 1956.

Issue 2

Whether The Hybrid Ofcds Fall Within The Definition Of “Securities” Within The Meaning Of Companies Act, Sebi Act And Scra To Vest Sebi With The Jurisdiction To Investigate And Adjudicate?

To solve this question, first, it is vital to recognize the character of hybrid securities themselves. Section 2(19A) of the Companies Act defines ‘hybrid’ as to mean “any safety which has the individual of extra than one form of safety, consisting of their derivatives”. (Introduced thru the Amendment Act No.fifty three of 2000). Section 2(45AA) of the Companies Act defines ‘securities’ as described in clause (h) of segment 2 of the SCR Act and includes hybrids. Black’s Law Dictionary defines hybrid safety as follows a safety with capabilities of a debt instrument (which includes bond) and a fairness interest (such as proportion or inventory), which may be exchanged for stocks withinside the issuing enterprise and is a challenge to inventory-rate fluctuations. 

In the problem of Sudhir Shantilal Mehta vs Central Bureau of Investigation[3] commenting on the scope of securities encompassed via way of means of the definition of the period in Section 2(h) of the SCR Act, the Supreme Court, observed that the definition of securities is an inclusive one and now no longer exhaustive. It takes inside its purview now no longer the most straightforward problem; however, all different securities are usually understood. The period securities, thus, should receive an expansive meaning.” 

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The relation between transferability and marketability of the securities is additionally an essential aspect to deal with this issue. To explain this, we might also additionally refer to the case of  Dahiben Umedbhai Patel v. Norman James Hamilton and Others[4], the Bombay High Court observed:

If one goes through the provisions of the Act, the scheme of the Act makes it clear that no restrictive interpretation can be placed on the terms used in the Act. If the provisions of the Act are looked at, it is clear that it relates not merely to securities listed but also to securities that may not be listed in any stock exchange. All that is required is that there must be “marketability”. It cannot be said that any security which is not listed on any recognized stock exchange is not “marketable”. As laid down by the Single Judge and the Division Bench (in the judgments set out above), “marketability” implies ease of selling and includes any security which is capable of being sold in the market. This does not mean that it must be sold in the market. All bonds of Government companies are freely and easily transferable. Normally, shares of public limited companies are also freely transferable. Any security which is capable of being freely transferable is marketable.As is seen, the definition of the word “security” under Section 2(h) is an inclusive definition. It is very wide. Thus all securities which are marketable and which have ease or facility of selling and/or which have a high degree of liquidity and/ or are capable of being sold in a market, i.e. stock exchange, are included. ….”

Based on the steerage of the High Court mentioned above, the OFCDs issued with the aid of using the 2 Companies to this sort of extensive base of investors who can transfer/promote those securities amongst themselves, if now no longer to others are evidently ‘marketable’. The OFCDs issued with the aid of using the two Companies as marketable securities and fall within the definition of “Securities” below Companies Act, SEBI Act and SCRA so that you can vest SEBI with the jurisdiction analyze and adjudicate. 

Issue 3

Whether The Problem Of Ofcds To Hundreds Of Thousands Of Men And Women Who Subscribed To The Problem Is A Private Placement In Order Now No Longer To Fall Withinside The Purview Of Sebi Regulations And Diverse Provisions Of Companies Act?

  • In the problem of Toubro Infotech and Industries Limited and Another vs SEBI, the Hon’ble SAT discovered that an invite to subscription made to 50 or extra men and women ceases to be a non-public placement.”
  • Also, the first proviso to segment sixty-seven (three) says that if a suggestion of securities is made to extra than forty-nine men and women then, it’ll now no longer be a non-public placement and such provide public provide. But it’s miles instructive to examine whether or not the Companies Act affords any exemption from this rule. The 2d proviso to Section sixty-seven (three) is the following: 

“Provided similarly that not anything contained withinside the first proviso shall follow to the non-banking monetary agencies or public monetary establishments laid out in segment 4A of the Companies Act, 1956.” 

The Court discovered that the Sahara Companies have issued securities to extra than the brink statutory restriction constant below proviso to Section sixty-seven (three) and violated the list provisions attracting civil and crook liability. The Apex Court additionally discovered that difficulty of OFCDs thru the circulation of Information Memorandum to the public attracted provisions of Section 60B of the Companies Act, which required submitting of prospectus below Section 60B(9) and for the reason that agencies did now no longer pop out with the latest prospectus at the last of the provide and didn’t check in it with SEBI, the Supreme Court held that there had been a violation of Section 60B of the Companies Act attracting civil and criminal liability.

Issue 4

Whether Listing Provisions Under Sec 73 Applies To All Public Issues Or Depends Upon The “Intention Of The Company” To Get Listed?

Although Sahara argued that the list requirement below Section seventy-three of the Companies Act isn’t obligatory and applies to the agencies best who “intend to get indexed”, no employer may be pressured to get indexed on an inventory change. In such instances, it might be an infringement of company autonomy. The Supreme Court held as long as the regulation is apparent and unambiguous. Any difficulty of securities is made to extra than forty nine men and women as in step with Sec sixty seven(three) of the Companies Act, the goal of the agencies to get indexed does now no longer count in any respect. Sec seventy-three (1) is an obligatory provision of a regulation that agencies must conform with. The Supreme Court discovered that Section seventy-three (1) of the Act casts a duty on each employer to provide stocks or debentures to the general public to use an inventory change for a list of its securities. Besides, the Supreme Court discovered that the maxim “acta outside indicant interiora secret” (The outward acts show the secret intentions) applies with all pressure withinside the case of Saharas. The Court discovered that the competition they did now no longer need their securities indexed does no longer stand. 

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Issue 5

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

The Public Unlisted Companies (Preferential Allotment Rules) 2003 Rules had been framed with the aid of using the Central Government in the workout of the powers conferred below Section 81 (1A) examine with Section 642 of the Companies Act to offer for regulations relevant to the unlisted public agencies. Section 81 of the Companies Act offers similar difficulty of securities and best offers pre-emptive rights to the prevailing shareholders of the employer, so that following provisions of securities need to be presented to them as their “rights”. Section 81(1A), it could be noted, is best an exception to the stated rule. The similarly stocks can be presented to any men and women situation to passing a unique decision to use the employer of their general meeting. 

The Hon’ble Supreme Court discovered that Section 81 (1A) could not, in any view, have an overriding impact on the provisions referring to public difficulty. Even if armed with a unique decision for any similar difficulty of capital to man or woman aside from shareholders, it can best be subjected to the provisions of Section sixty-seven of the Company Act, and this is if the provider is made to fifty men and women or extra, it’ll need to be handled as public difficulty and now no longer a non-public placement. 

A public difficulty of securities will now no longer turn out to be a preferential allotment on label descriptions. The Proviso to Section 67(3) no longer makes any difference among indexed and unlisted public agencies or preferential or regular allotment. Even previous to the advent of the proviso to Section 67(3), any difficulty of securities to the general public required obligatory packages for the list to 1 or extra inventory exchanges. After insertion of the proviso to Section 67(3) in December 2000, non-public placement allowed below Section 67(3) became additionally limited as much as forty-nine men and women. 2003 Rules follow best with inside the context of preferential allotment of unlisted agencies. However, if the preferential allotment is a public difficulty, then 2003 Rules might now no longer follow. 

Issue 6

Whether OFCDs are Convertible Bonds and whether they exempted from applying SCRA as per the provisions of sec 28(1)(b)?

One of the crucial issues followed with using the Supreme Court of India in arriving at this sort of end is that a compulsorily convertible debenture does now no longer postulate any reimbursement of the essential. Each one of those six bonds issued with the aid of Sahara postulates a reimbursement of the essential. The reimbursement of the essential might be at the choice of the investor. The investor holds the choice, which offers her a proper to determine whether she would like to get her essential again in coins or as fairness stocks. Hence, Optionally Fully Convertible Debentures in contrast to their counterpart class of Compulsorily Convertible Debentures do now no longer percentage the characteristic talked about with the aid of using the Honourable Supreme Court arriving at the realization that Compulsorily Convertible Debentures are extra of fairness than of debentures. Thus, all of the six monetary gadgets issued to use the 2 Companies percentage the defining function of debentures. A price of hobby to the investor and reimbursement of the essential, albeit at the investor’s choice, is postulated. 

Issue 7

Application Of Dip And Icdr Regulations 2009. 

Regulation 111(1) of the SEBI (ICDR) Regulations, 2009 rescinded the DIP Guidelines from 26.8.2009 and clause (2) of Regulation 111 carries the saving clause. The expression “something performed” or “any motion taken” below Regulation 111(1) are of extensive import and might take something performed with the aid of using the employer left out to be performed which they legally have to have performed. Non-overall performance of statutory responsibilities purposely or in any other case can also fall withinside the above-noted expressions. Failure to take any motion with the aid of using SEBI below DIP Guidelines, notwithstanding the truth that the Sahara agencies did now no longer discharge their statutory duty, might now no longer be a floor to contend that 2009 Regulations might now no longer follow as additionally the saving clause. The aforesaid ICDR Regulations will follow to all agencies whether or not indexed or unlisted. Further, in on the spontaneous case, SEBI became now no longer knowledgeable of the issuance of securities with the aid of using the Saharas even as the DIP Guidelines had been under pressure and the Sahara agencies persisted in mobilizing budget from the general public, which became not anything however persisted violation which commenced while the DIP Guidelines had been in pressure and additionally. In contrast, they had been changed with the aid of using 2009 Regulations. 

[1] Sahara India Real Estate Corporation Ltd. v. SEBI, C.A. No. 9813 of 2011.

[2] S. Sundaram Pillai, Etc vs V.R. Pattabiraman Etc, 1985 AIR 582.

[3] Sudhir Shantilal Mehta vs C.B.I on 7 August, 2009 (INSC) 1421.

[4] Dahiben Umedbhai Patel v. Norman James Hamilton and Others, (1983) 85 BOMLR 275.