Sahara India Real Estate Corporation Ltd & Ors vs. Securities & Exchange Board of India (SEBI) & Anr
Bench– HON’BLE MR. JUSTICE K.S. RADHAKRISHNAN HON’BLE MR. JUSTICE JAGDISH SINGH KHEHAR
Citation– (2013) 1 SCC 1
Court– The Supreme Court of India
Date of Judgment– 31st August 2012
Facts– In 2005, 2 new companies of Sahara i.e., Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) got enrolled under the Companies Act, 1956 with the appropriate Registrar of Companies in Kanpur and Maharashtra. A resolution was passed by the two companies in an annual meeting and it was to raise funds through a private placement of Optionally Fully Convertible Debentures (OFCD‘s) from friends, family members, and associates of the board of directors and to trusted investors by way of an information memorandum. The collection of subscriptions from the investors with effect from 25th April 2008 up to 13th April 2011. During this period, both the companies had a total collection of Rs.24, 029.73 crores from 30 million investors over 3 years in the guise of a “Private Placement”. In 2010, SEBI received a complaint from a man named Roshan Lal who claimed that SHICL and SIRECL used illegal means at the time of the issuance of OFCD‘s. Keeping this in mind, SEBI started an investigation against Sahara India to know about the fundraising activities of SHICL and SIRECL along with the investor information. On receiving strong compliance from Sahara, SEBI passed an order on 23rd June 2011 thereby directing the two companies to refund the money to the investors within three months from the date of the order with an interest of 15% per annum and conjointly restrained the promoters of the two companies including Mr. Subrata Roy from accessing the securities market till further orders. Sahara then appealed before Securities Appellate Tribunal (SAT) against the order of SEBI. After hearing the appeal, the SAT confirmed and maintained the order of SEBI. Subsequently, Sahara then appealed in Supreme Court against the SEBI orders scrutinizing their jurisdiction in the issue.
Issues Raised–
- 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 MCA which has the jurisdiction under Sec 55A (c) of the Companies Act?
55A (a) – those companies that have been publicly listed.
55(b) – those companies that wish to be publicly listed.
55A(c) – the remaining companies which come under the jurisdiction of the Central Government and the Ministry of Corporate Affairs.
- 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
- 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.
- Whether listing provisions under Sec 73 mandatorily applies to all public issues or depends upon the “intention of the company” to get listed.
- Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 will apply in this case.
- Whether OFCDs are Convertible Bonds and whether exempted from application of SCRA as per the provisions of sec 28(1) (b).
- Whether OFCDs are Convertible Bonds and whether exempted from application of SCRA as per the provisions of sec 28(1) (b).
Contentions from both sides
Petitioner
The counsel from the petitioner side argued that:-
The motive behind the issuance of the OFCD‘s was to raise funds and hence the procedure was legal, adhering to all rules and guidelines. The OFCD‘s were issued to the persons who were associated with the Sahara group i.e., utilizing the private placement and was not a public issue. Moreover, the issued OFCD‘s were neither shares nor debentures but was of ‘hybrid’ nature and SEBI does not have any power to control those securities since hybrid securities are not circumfused in the definition of ‘securities’ under the SEBI Act, SCR Act, etc.
Furthermore, the power of such hybrid securities solely lie within the hands of the Central Government under Sec 55 A(c) of the Companies Act, and also Sec 67 and Sec 73 of the Companies Act could not be made applicable to hybrid securities, thus additionally the DIP Guidelines and ICDR 2009. Besides the RHP’s had been enlisted under the RoC’s- in Kanpur and Maharashtra with none demur and therefore it SEBI need not interfere.
Respondent
The counsel from the respondent’s side argued that:-
The issue of Housing Bonds by the Sahara Group was not obliged to the rules and guidelines. It was a public issue and hence Sahara cannot escape from obliging with the necessities of Sec 73(1) of the Companies Act, 1956, and besides such OFCD ‘s were issued to more than 50 investors which make Sahara prone to list the securities on a recognized Stock Exchange under Sec 73 of Companies Act, 1956. Additionally, SEBI held that the parliament had given the jurisdiction to it under Sec 55A to administer the issue of securities to the public. Moreover, such OFCD ‘s were transferable and also, Sahara violated the provision of Sec 73 of Companies Act, 1956 and subsequently, it comes under the ambit of the provision of Sec 55 of Companies Act, 1956 under which listing of the instrument was obligatory. It was also contended that OFCD ‘s issued by Sahara would come within the definition of ‘securities’ under the provision of Sec 2(h) of the SCR Act. Furthermore, Sahara’s violated DIP Guidelines and SCR Act regulations.
Judgment
After interpreting various provisions, rules and regulations of the Companies Act, SEBI Act, and Securities Contract (Regulation) Act, 1956 the Supreme Court there-under made some fascinating observations on the issues that were raised before it which forms the operative part of the judgment in the form of ratio decidendi.
For Issue (a) Supreme Court held that that SEBI does have the power to investigate and adjudicate in this matter. It said again that the SEBI Act is special legislation conferring SEBI with special powers to investigate and adjudicate to protect the interest of the investors. SEBI has special powers and such powers are not derogatory to any other provisions existing in any other law. Thus, there shouldn’t be any conflict between the MCA and the SEBI when it comes to the matter where the interest of the investors are at stake. To support this view, the Supreme Court laid priority to the legislative intent and the statement of objectives for the implementation of the SEBI Act and also the insertion of Section 55A within the Companies Act to delegate special powers to SEBI in matters relating to the issue, allotment, and transfer of securities. The Court further determined that as per provisions specified under Section 55A of the Companies Act, so far matters relating to issue and transfer of securities and non-payment of dividend, SEBI has the power to administer within 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.
For Issue (b) the Supreme Court held that although Sahara classified the OFCDs are as “hybrid” instruments, it is a “Security” within the meaning of Companies Act, SEBI Act, and SCRA through the 2003 Amendment, the corresponding changes were not made in the SEBI and SCRA. It says that the definition of “Securities” under section 2(h) of SCRA does not contain the term “hybrid instruments”, but it is an inclusive definition and covers all “Marketable securities”. As in this case, OFCDs were offered to 30 million people hence its marketability cannot be denied. And in addition to it the name itself contains the term “Debenture”, it is considered to be security as per the provisions of the Companies Act, SEBI Act, and SCRA.
For Issue (c) the Supreme Court held that the intention of the two companies cannot be considered once the securities are offered to more than 50 persons. Sec 67(3) clearly states that when any security is offered to or subscribed by more than 50 persons it will be expressed as a Public Offer and therefore SEBI will have full power and control in the matter and hence, the issuer will have to oblige with the various provisions of the Act. Though, the two companies of Sahara relied upon the argument that they were exempted by the provisions mentioned under 67(3) since the Information Memorandum primarily mentioned that the OFCD‘s were issued to only those who were associated with the Sahara Group and there was no public offer. However, the Supreme Court does not found any weightage in this argument. The Supreme Court held that as the companies evoked public demand for the OFCD ‘s this draws a clear outline that the issue was not meant for people related to the Sahara Group because in In such a case the introducer would not require any person as the person will be already a part of the Sahara group. The Supreme Court concluded by saying that the actions as well as the intentions on the part of the two companies undoubtedly portray that they wanted to issue securities to the public in the clothing of private placement to avoid the rules and regulations concerning that. The Court further observed that Sahara Companies violated the statutory limit fixed under the provision of Sec 67(3) and therefore attracted civil and criminal liability, also, issuance of OFCD ‘s through the circulation of Information Memorandum attracted public provisions of Section 60B of the Companies Act, which required the filing of a prospectus under Sec 60B(9) and here the companies did not come out with a final prospectus too on the closure of the offer and were unsuccessful to register it with the SEBI, it was observed that there was an infringement of Sec 60(B) of the Companies Act.
For Issue (d) Even though Sahara argued that listing a company under Sec 73 of Companies Act is not obligatory and applies to solely those company who “intent to get listed”, no company can be compelled to get listed on a stock exchange, and in such a case it will be a violation of corporate autonomy. The Supreme Court rejected this argument and held as long as the law is clear and not ambiguous if any issue is made to more then 49 persons as mentioned under Sec 67(3) of the Companies Act, then the intention of the companies to get listed does not matter at all and Sec 73 (1) is an obligatory 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 the listing of its securities. Also, the Supreme Court observed that the maxim ”acta exterior indicant interiora secreta” (external action reveals inner secrets) applies with all potency in the case of Saharas. The Court observed that the argument that they did not want their securities listed does not stand as any offering of securities to fifty or more is a public offering by Section 67(3) of the Companies Act, which the Saharas very well knew; their subsequent actions and conducts undisputedly reveal so.
For Issue (e) the Supreme Court 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 within the existence of Sec 67(3), it is implicit that even 2003 preferential allotment rules were filled to comply with the requirement of Sec 67(3). The Supreme Court observed that even if armed with a special resolution of 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, and then it will have to be treated as a public issue and not a private placement. The Court then held that 2003 Rules apply only in the ambiance of preferential allotment of unlisted companies; however, 2003 Rules would not be applicable if the preferential allotment is a public issue.
For Issue (f) The Supreme Court 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 a choice 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 possess shares at his option. The Act is, therefore, irrelevant solely to the options or rights or the entitlement that are attached to the bond/warrant and not to the bond/warrant itself. The Supreme Court cleared out by saying that 28(1)(b), clearly indicates that it is solely the convertible bonds and share/warrant of the type stated in this are excluded from the pertinence of the SCRA and not debentures which are a separate category of securities in the definition contained in Section 2(h) of SCRA.
Effect of the Judgment: The Supreme Court dismissed the appeal and maintained the orders passed by SEBI and SAT. It appointed Mr. Justice B N Aggarwal to administer the activities for the effective implementation of the directions of the court. It ordered Sahara to refund the whole amount collected through RHP with an interest of 15% till the date of refund. Such a refund amount be deposited an interest-bearing deposit a/c with a nationalized bank and approved SEBI to take a legitimate plan of action if Sahara fails to comply with the directions.
Securities and Exchange Board of India barred Sahara India Pariwar chief Mr. Subrata Roy and two of its companies – Sahara India Real Estate Corp (SIREC) and Sahara Housing Investment Corp (SHIC) – from raising money from the public as they had raised several thousand crores through optionally fully convertible debentures (OFCDs) that SEBI deemed illegal. In February 2014, Subrata Roy got arrested by Uttar Pradesh police for failure to appear before the Supreme Court. In March 2014, he along with two other directors of Sahara was sent to Tihar jail. Thereafter in March 2015, SEBI canceled the license of Sahara’s mutual fund business. In May 2016, Subrata Roy mother got expired and he was released on parole.
A formal Memorandum of Understanding (MoU) was signed between the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) 07th June 2019. This MoU was needed in this increasing need for surveillance in the context of Corporate Funds affecting the important sectors of the economy. The MoU will facilitate the sharing of data and information between SEBI and MCA on an automatic basis. It will enable the sharing of specific information such as details of suspended companies, delisted companies, shareholding pattern from SEBI and financial statements filed with the Registrar by Corporates, returns of allotment of shares, audit reports relating to corporates. In addition to its SEBI and MCA will also exchange with each other any information available in their respective databases for the purpose of carrying out scrutiny, inspection, investigation, and prosecution. This MoU marks the beginning of a new era of cooperation and synergy between the two regulators.
In September 2019, SEBI initiated the refund process for investors of Shah Group Builders and asked them to submit their bank details as well as other documents. The case was related to rising of money through the issuance of shares to more than 1,500 people between July-November 2008 without obliging with the regulatory provisions applicable for a public issue. More than 600 shareholders were asked to submit their entire details to the company with a copy marked to SEBI. In July 2015, SEBI directed the company to refund the amount along with 15% per annum interest to the defaulters within one year.
SEBI barred Birla Pacific Medspa Ltd., Yashovrdhan Birla, and eight others from the securities market for two years for misutilization of IPO proceeds. The company came out with offer documents in March 2011 and had floated over Rs. 65-crore initial public offering (IPO) in June 2011. Thereafter, the regulator found that the company made misstatements in the prospectus in respect of the objects of the IPO. Around 75 percent of the IPO proceeds were promised to be utilized in setting up of Evolve Medspa centers as stated under the ‘objects of issue’ in the prospectus, no such centers ultimately have been set up, SEBI said. Further, it was added that 15 such centres were promised to be set up by the end of March 2012, but not even a single centre was set up by that time. On the contrary, SEBI said, 50 percent of the IPO proceeds or Rs 31.54 crore were deployed as inter-corporate deposits (ICDs) to group companies, out of which 60 per cent of ICD’s were never returned to the company. The prospectus permitted the interim deployment of proceeds as an investment in liquid instruments only and did not permit such deployment of funds as ICDs. Thus, the statement in the prospectus relating to ‘objects of the issue’ and ‘interim use of funds’ were untrue and inadequate on material terms, SEBI said in an order passed on 23rd October, 2020. Through such acts, the entities violated the provisions of ICDR (Issue of Capital and Disclosure Requirements) Regulations.
For now, SEBI has barred the company, Yashovardhan Birla, and eight others from accessing the securities market and further prohibited them from buying, selling, or otherwise dealing in securities for two years, while one individual has been prohibited from the capital markets for six months.
SEBI on 23rd October 2020 disposed of proceedings against IL & FS Financial Services Ltd without issuing any direction against it in a matter pertaining to an alleged violation of underwriter norms. The firm is a SEBI registered underwriter. The order came after MCA forwarded a report to SEBI to ascertain if the underwriter, which is a 100 per cent subsidiary of Infrastructure Leasing & Financial Services Ltd, was qualified to be a “fit and proper person” to continue as a SEBI registered intermediary.
Serious Fraud Investigation Office (SFIO) had conducted an investigation into the affairs of IL&FS and its subsidiary companies and the same report was forwarded by the MCA to SEBI. The report pointed out various irregularities, showing an apparent violation of various provisions of the Indian Penal Code, Companies Act 1956, the Companies Act 2013 and the RBI Act 1934, and leading to the rising of integrity issues in respect of IL&FS Financial Services. SEBI started its proceedings under Intermediaries norms and appointed a designated authority (DA) to look into the matter. The report was hence submitted by the DA in May 2020 which concluded that IL&FS Financial Services was no longer a fit and proper person as required under market norms. Further, the DA report demanded to cancel the certification registration of the firm.
SEBI also stated that IL&FS Financial Services has never undertaken activities as an underwriter from the date of the grant of certificate of registration since January 2009. Hence, without going into the merit of the issue at hand, SEBI has disposed of the proceedings without issuing any direction against.
Case Comment: There is no doubt that this judgment served as a benchmark in India’s corporate terrain, as it not only provided SEBI with the power of investigation and adjudication into the matters of the listed companies but also sanctifies the power to investigate into the matters of unlisted companies. It vested SEBI with the jurisdiction to investigate any matter concerning the interest of the investor’s even if it concerns unlisted companies. It clears up the significant points of law and removes the doubts related to the issuance of the securities by the so-called unlisted companies who were taking advantage by raising huge money in the name of investments from the general public who were unaware of the risks involved in such investments. Another fruitful thing of this judgment is that it connected the gap which existed between the Ministry of Corporate Affairs and SEBI. This served as a relief because in the past many parties have taken advantage of this jurisdictional gap. The stand taken by SEBI in the matter relating to the protection of the investors is highly commendable.
