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An Analysis of Hon'ble Supreme Court Judgement dated 31.08.2012 in the matter of Sahara India Real Estate Corporation Ltd. & Others vs. SEBI
Garima Soni Singh analysis the Apex Court's decision in the matter of Sahara India Real Estate Corporation Ltd. & Others vs. SEBI
 
 
Introduction

Earlier Sahara India Real Estate Corporation Limited ("SIRECL") and Sahara Housing Investment Corporation Limited ("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 3 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 Securities Appellate Tribunal ("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. Subsequently Sahara filed an appeal before the Supreme Court of India against the SAT order.

The Supreme Court on 31st August, 2012 in one of its most anticipated judgment of recent times has directed the Sahara Group and its two group companies SIRECL and SHICL to refund around Rs 17,400 crore to their investors within 3 months from the date of the order with an interest of 15%. The Supreme Court while confirming the findings of the SAT has further asked SEBI to probe into the matter and find out the actual investor base who have subscribed to the Optionally Fully Convertible Debentures (OFCDs) issued by the two group companies SIRECL and SHICL.

Following are the key issues which were debated and decided upon by the SC:

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?

In order to address this issue the Hon'ble SC applied the following two rules of statutory interpretation:

i.  Legislative intent

In law, the judiciary may attempt to assess legislative intent where legislation is ambiguous, or does not appear to directly or adequately address a particular issue, or when there appears to have been a legislative drafting error. Section 55A was inserted in the Companies Act 1956 by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000. The Statement of Objects and Reasons give an indication of 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 power to prosecute defaulting companies and their directors."

Therefore, from above it is clear that the legislative intent behind incorporation of Section 55A, of the legislature, was to vest SEBI with powers to investigate and adjudicate in all the matter related to the public issue of securities.

ii.  Rule of Harmonious Construction

The purpose of the rule is to clarify where there is any obscurity or vagueness in the main enactment then in order to make it consistent with the dominant object which it seems to serve, the statutes must be read in harmony with each other.

In Sundaram Pillai & Ors. v. V.R. Pattabiraman & Ors., the Hon’ble Supreme Court of India observed that the main part of Section 55A confers jurisdiction on SEBI with regard to three categories i.e. issue of securities, transfer of securities and non-payment of dividend. The expression "all other matters" mentioned in the explanation would refer to powers other than the above mentioned categories. Further, it may also be remembered that the explanation does not take away the powers conferred on SEBI by any other sections of the Companies Act. Therefore, by virtue of the above two rules, the Apex Court concluded that SEBI has powers to investigate and adjudicate the matter under 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 so as to vest SEBI with the jurisdiction to investigate and adjudicate?

To resolve this question, it is first necessary to understand the nature of hybrid securities themselves. Section 2(19A) of the Companies Act defines ‘hybrid’ as to mean "any security which has the character of more than one type of security, including their derivatives". (Introduced through the Amendment Act No.53 of 2000). Section 2(45AA) of the Companies Act defines ‘securities’ as defined in clause (h) of section 2 of the SCR Act and includes hybrids. Black’s Law Dictionary defines hybrid security as follows a security with features of a debt instrument (such as bond) and an equity interest (such as share or stock) , which can be exchanged for shares in the issuing corporation and is subject to stock-price fluctuations.

A Ramayia sheds light on hybrid securities, and the features that distinguish them from other securities. Hybrid Securities means securities which have some of the attributes of both debt securities and equity securities. A type of security which, in the form of a debenture, contains elements of indebtedness and elements of equity stock also is an example of a hybrid. In the matter of Sudhir Shantilal Mehta vs. Central Bureau of Investigation commenting on the scope of securities encompassed by the definition of the term in Section 2(h) of the SCR Act, the Honourable Supreme Court of India, observed that the definition of 'securities' is an inclusive one and not exhaustive. It takes within its purview not only the matter specified therein but also all other types of securities as commonly understood. The term 'securities', thus, should be given an expansive meaning."

Transferability vs. Marketability

The relation between transferability and marketability of the securities is also an important factor to address this issue. To explain this we may refer to the case of Dahiben Umedbhai Patel v. Norman James Hamilton and Others, 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 which are listed but it also relates to securities which 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 recognised 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 an 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. …." (Emphasis supplied)

Based on the guidance of the Honourable High Court outlined above, I would like to conclude that firstly, marketability of a security denotes the ease with which it can be sold, secondly what is freely transferable is marketable and thirdly what is saleable is also marketable. Hence, clearly the OFCDs issued by the two Companies to such a wide base of investors who can transfer / sell these securities among themselves, if not to others are evidently ‘marketable’ .Also the OFCDs issued by the two Companies as marketable securities and fall within the definition of "Securities" under 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?

  • In the matter of Toubro Infotech and Industries Limited and Another vs. SEBI , the Hon’ble SAT observed that "an invitation to subscription made to 50 or more persons ceases to be a private placement."
  • Also first proviso to section 67(3) says that if an offer of securities is made to more than 49 persons then, it will not be a private placement and such offer is public offer. But it is instructive to examine, whether the Companies Act provides any exemption from this rule. The second proviso to Section 67(3) is the following:

    "Provided further that nothing contained in the first proviso shall apply to the non-banking financial companies or public financial institutions specified in section 4A of the Companies Act, 1956."

    Therefore, what this implies is that other than non banking financial companies or public financial institutions under Section 4A of the Companies Act, no other entity is exempted from the ‘Rule of 50’. Also, the Supreme Court observed as the companies in the Sahara matter 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. Thus the Supreme Court concluded that the actions and intentions on the part of the two companies clearly show that they 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. The Court observed that the Sahara Companies have issued securities to more than the threshold statutory limit fixed under proviso to Section 67(3) and hence violated the listing provisions attracting civil and criminal liability. The Apex Court also observed that issue of OFCDs through circulation of Information Memorandum to public attracted provisions of Section 60B of the Companies Act, which required filing of prospectus under Section 60B(9) and since the companies did not come out with a final prospectus on the closing of the offer and failed to register it with SEBI, the Supreme Court held that there was violation of Section 60B of the Companies Act attracting civil and criminal liability.


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?

Although Sahara argued that listing requirement under Section 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 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.

Additionally, Schedule II of the Companies Act prescribes the matters to be specified in the prospectus. Paragraph 22 of this Schedule prescribes the final Declaration to be signed by the Directors of the Company and reads as follows:

"Declaration: That all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government or the guidelines issued by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992, as the case may be, have been complied with and no statement made in prospectus to the provisions of the Companies Act, 1956 or the Securities Exchange Board of India Act, 1992 or rules made thereunder or guidelines issued as the case may be. Signatures of directors"

Saharas conveniently omitted the reference to SEBI in the declaration given in the prospectus.

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 were framed by the Central Government in exercise of the powers conferred under Section 81(1A) read with Section 642 of the Companies Act to provide for rules applicable to the unlisted public companies. Section 81 of the Companies Act deals with further issue of securities and only gives pre-emptive rights to the existing shareholders of the company, so that subsequent offer of securities have to be offered to them as their "rights". Section 81(1A), it may be noted, is only an exception to the said rule, that the further shares may be offered to any persons subject to passing a special resolution by the company in their general meeting.

The Hon'ble Supreme Court observed that Section 81(1A) cannot, in any view, have an overriding effect on the provisions relating to public issue. 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, it will have to be treated as public issue and not a private placement. A public issue of securities will not become a preferential allotment on description of label. The Proviso to Section 67(3) does not make any distinction between listed and unlisted public companies or between preferential or ordinary allotment. Even prior to the introduction of the proviso to Section 67(3), any issue of securities to the public required mandatory applications for listing to one or more stock exchanges. After insertion of the proviso to Section 67(3) in December 2000, private placement allowed under Section 67(3) was also restricted up to 49 persons. 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.

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

The inapplicability of SCR Act, 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 expression "insofar as it entitles the person" clearly indicates that it was not intended to exclude convertible bonds as a class. Section 28(1)(b), therefore, 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 SCR Act and not debentures which are separate category of securities in the definition contained in Section 2(h) of SCR Act.

In Narendra Kumar Maheshwari vs. Union of India, the Honourable Supreme Court observed that in the various guidelines applicable to such instruments, compulsorily convertible debentures are regarded as ‘equity’ and not as a loan or debt. One of the critical considerations adopted by the Supreme Court of India in arriving at such a conclusion is that a compulsorily convertible debenture does not postulate any repayment of the principal. It is evident that all these six bonds issued by Sahara postulate a repayment of the principal. The repayment of the principal will be at the option of the investor. The investor holds the option, which gives her a right to determine whether she would like to get her principal back in cash or as equity shares. Hence, Optionally Fully Convertible Debentures unlike their counterpart category of Compulsorily Convertible Debentures do not share the characteristic pointed out by the Honourable Supreme Court in arriving at the conclusion that Compulsorily Convertible Debentures are more of equity than of debentures. Thus, all the six financial instruments issued by the two Companies share the defining feature of debentures in that a payment of interest to the investor and a repayment of the principal, albeit at the option of the investor are postulated.

Issue 7: Application of DIP and ICDR Regulations 2009.

  • In the matter of Yogesh M. Bhansali (HUF) and others vs. SEBI , the SAT held that the SEBI DIP Guidelines of 2000 were statutory in nature.
  • In the matter of Kimsuk Krishna Sinha vs SEBI and Ors, (W.P.(C) 7976 of 2007 & CM APPL No. 15084/07), the Hon’ble Delhi High Court observed that "It hardly needs to be stated that the SEBI (DIP) Guidelines are of statutory character. They are enforceable as such."
  • In the matter of Toubro Infotech and Industries Limited and Another vs. SEBI, the SAT observed that: "DIP Guidelines had statutory force since they were framed by SEBI in exercise of its powers conferred on it under Sections 11 and 11A of the SEBI Act. Powers have been conferred on SEBI to protect the interests of the investors in securities and regulate the Pageissue of prospectus, offer documents or advertisement soliciting money through the issue of prospectus."


Regulation 111(1) of the SEBI (ICDR) Regulations, 2009 rescinded the DIP Guidelines from 26.8.2009 and clause (2) of Regulation 111 contains the saving clause. The expression "anything done" or "any action taken" under Regulation 111(1) are of wide import and would take anything done by the company omitted to be done which they legally ought to have done. Non-performance of statutory obligations purposely or otherwise may also fall within the above mentioned expressions. Failure to take any action by SEBI under DIP Guidelines, in spite of the fact that the Sahara companies did not discharge their statutory obligation, would not be a ground to contend that 2009 Regulations would not apply as also the saving clause. The aforesaid ICDR Regulations will apply to all companies whether listed or unlisted. Further, in the instant case, SEBI was not informed of the issuance of securities by the Saharas while the DIP Guidelines were in force and the Sahara companies continued to mobilize funds from the public which was nothing but continued violation which started when the DIP Guidelines were in force and also when they were replaced by 2009 Regulations. Analysis:

1. End of road for Sahara?: This judgment may not be the end of road for the Sahara Group. It can be reviewed by a review petition, and on dismissal of a review petition, further by a curative petition. However, the grounds for admitting such petitions are very limited, like for admitting a review petition, there should be a discovery of new and important matter of evidence, or some mistake or error apparent on the face of the record. Similarly, for a curative petition, which is ought to be treated as a rarity, there should be a gross miscarriage of justice resulting from violation of principles of natural justice as mentioned in the case of Rupa Hurra vs. Ashok Hurra & Another (AIR 2002 SC 177), or the judgment should adversely affect a person and he should not be a party to the dispute, or if he was a party, he should not have been served with notice of the proceedings and the matter should have proceeded as if he had notice.

2. Jurisdiction of SEBI versus ROC: This judgment is a very crucial one for SEBI as it not only affirms its jurisdiction and power to administer various provisions of the Companies Act, but also clarifies that even unlisted companies (whether private or public) which intend to (by conduct or otherwise) get their securities listed on any stock exchange now fall within the radar of SEBI. Thus, the general perception that SEBI can only monitor listed companies and it does not have jurisdiction over unlisted companies may not be entirely correct. Also, the role of ROC in such cases may now be limited.

3. The Public Issue vs. Private Placement debate: By clarifying that the offer of security to 50 or more persons would qualify as a public issue, the SC has brought some clarity to this long standing debate. Earlier, there was an ambiguity as to whether an offer of security to more than 49 persons would ipso facto become a public issue or not. Though the Statement of Objects and Reasons for the Companies (Amendment) Act, 2000 provided that 'any offer of shares or debentures to more than 50 persons shall be treated as a public issue with suitable modification in the case of public financial institutions and non-banking financial companies’, however, the Section 67 of the Companies Act does not expressly mention so.

Having said the above, there is still an ambiguity as to whether multiple offers of security by any company at reasonable intervals of time, with each offer being to less than 49 persons but in aggregate more than 49 persons, would qualify as public issue or not. Also, so far the emphasis has always been on an 'offer' to 50 or more persons. What constitutes 'offer' has not been addressed by the Court in the Sahara Judgement. For instance, does just addressing a gathering of persons constitute an offer / invitation, or is it the actual act of distributing an IM which constitutes an offer / invitation. Further, it is not clear as to what happens when a company does not make an offer or invitation to the public, but only issues its securities to more than 49 persons at their instance. Though unlikely, but whether such cases would fall outside the purview of public issue is yet to be seen.

4. Transferable means marketable: Though, not a ratio decidendi in this case, however, the SC has stated that any security which is capable of being freely transferable is marketable. This may have some implications, especially, in case of stamp duty. For instance, the Indian Stamp Act, 1899 defines the term 'marketable' as 'security of such a description as to be capable of being sold in any stock market in India or in the United Kingdom’. Sans the above statement from the SC, one possible interpretation could be that unless the security is not listed, it cannot be sold in any stock market, and hence only listed securities should fall within the purview of marketable securities. However, as per the statement of the SC, the moment a security is a transferable, it becomes marketable. Hence, there arises an ambiguity as to whether an unlisted transferable security would also be considered 'capable of being sold in a stock market' and hence 'marketable' for the purpose of the stamp duty.

5. Criminal sanctions: No criminal sanction has been imposed on the Appellants or the promoters / directors in the instant case. However, the SC has directed the Appellants to furnish details with supporting documents to SEBI. SEBI has been asked to ascertain the genuineness of the subscribers with the help of investigating officers / experts in finance and accounts. If the event, SEBI suspects the genuineness of the subscribers, they are required to give the Appellants a hearing. However, the SC has directed that the decision of SEBI (WTM) in this behalf shall be final and binding on the Appellants as well as the subscribers.

Under the SEBI Act, SEBI has inter-alia been granted with powers to impose imprisonment up to 10 years. Though, this power is used sparingly by SEBI, however, they have not been shy when the case demands. For instance, in the past, SEBI has imposed criminal sanctions against the managing director of VR Mathur Mass Communications Limited under Sections 63 and 68 of Companies Act for material mis-statements in the prospectus of the company during its public issue of shares. It has also in case of Gold star Teak Forest India Ltd. & others, as well as Angel Green Forest Ltd. & others, imposed rigorous imprisonment of 6 months on the accused for violation under the SEBI (Collective Investment Schemes) Regulations, 1999.

If SEBI finds the information submitted by the Appellants about the applicants or refunds already made, to be fictitious or concocted, SEBI may be at liberty to use its powers to impose sanctions as it may deem fit.

Conclusion:

This landmark Judgment is undoubtedly a milestone in India's Corporate landscape, as it not only sanctifies SEBI's absolute power to investigate into the matters of listed companies, but also into the matters pertaining to the unlisted companies. It vests SEBI with myriad powers to investigate into any matter concerning the interest of the investors even if it pertains to companies which are not listed. It clarifies significant points of law and removes the grey areas relating to issue of securities by the so called unlisted companies taking advantage of the loopholes of law. Also, in the matters of jurisdiction, this Judgment has bridged the jurisdictional gap which previously existed between that of the Ministry of Corporate Affairs ("MCA") and SEBI. It is hoped that in future this judgment will be instrumental in preventing turf war between the MCA and SEBI concerning jurisdictional issues as it categorically iterates that in the matter of public interest, both SEBI and MCA will have concurrent jurisdiction. This is a welcome relief, as in the past many defaulting parties have taken advantage of this jurisdictional lacuna and have been able to easily get off the hooks. Sahara has already filed a review petition against this judgment before the Supreme Court. In a public statement they have also said even if the review petition fails, they will challenge the same vide a curative petition before the Supreme Court. Whether Sahara gets any relief in the near future remains to be seen. It however, seems to be a tough legal battle ahead of them.

Note: The Supreme Court, while confirming the findings of SAT has appointed retired apex court judge Justice BN Aggarwal to oversee the probe by SEBI against the two Sahara companies. On a preliminary analysis of the judgment it appears that this order comes as a big blow to the already reeling Subrata Roy led Sahara India Group and once again confirms and puts a judicial sanction on the myriad powers of SEBI to investigate and adjudicate into any matter potential enough to prejudice the interests of the investors. The Supreme Court at the same time admonished the Sahara group for being casual and not maintaining proper records of the subscribers to the OFCDs despite the amount of money involved is close to 30,000 crore and investor base is about 3 million.
 
GARIMA SONI SINGH is an Assistant Legal Advisor with the Securities and Exchange Board of India (SEBI). She can be reached at garimas1981@gmail.com.
 
REFERENCES
  1. Appeal No.141/2003, SAT order dated 19.07.2004.
  2. 1990 (Suppl.) SCC 440
  3. (decided on September 23, 2009). See also, SPS International v. Vijay Remedies [1998]93 Comp Case 547 (CLB) where CLB also proceeded with the assumption of taking the "guidelines" as "regulations".
  4. http://www.watchoutinvestors.com/Press_Release/sebi/2002162.asp
  5. http://www.sebi.gov.in/cis/ProsecutionConviction.pdf
 
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