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Sahara India Real Estate Corporation Limited vs. Securities and Exchange Board of India: Increasing paradigm of SEBI

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BY: Lopamudra Dasgupta, LL.M., IInd Year & Shambhavi, LL.B., IVth Year; Hidayatullah National Law University, Raipur, C.G

Sahara India Real Estate Corporation Limited vs. Securities and Exchange Board of India: Increasing paradigm of SEBI
Lopamudra Dasgupta, LL.M., IInd Year & Shambhavi, IVth Year Hidayatullah National Law University, Raipur, C.G
Abstract: Problem Statement -This paper analyses the judgment of Supreme Court in the case of Sahara India Real Estate Corporation Limited v. Securities and Exchange Board of India. The paper shows how the decision has increased the domain of SEBI to include unlisted companies which intend to get their securities listed on any recognised stock exchange in India. It also emphasises that the judgment has brought clarity to the term public issue and reaffirmed that a public issue has mandatorily to be listed on stock exchange. Lastly, the authors provide a detailed analysis and views on the judgment.

INTRODUCTION: Securities and Exchange Board of India (SEBI) has been established as a statutory body in the year 1992 with the passing of the Securities and Exchange Board of India Act, 1992 [hereinafter referred to as SEBI Act]. To ensure effective regulation of the securities market, the Act has empowered SEBI to protect the interests of the investors in securities, promote the development of the securities market and regulate the securities market and for matters connected therewith and incidental thereto. SEBI has been authorised to administer the issuance and transfer of securities with respect to listed companies and companies intending to be listed on any recognised stock exchange in India under Section 55A of the Companies Act, 1956. In case of unlisted companies, the administrative authority continues to be the Department of Company Affairs. However, the Supreme Court has increased the paradigm of SEBI to cover unlisted companies as well if such entities have raised funds from the public as has been held in the case of Sahara India Real Estate Corporation Limited vs. Securities and Exchange Board of India. FACTS IN NUTSHELL: Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHIC) [appellants] are the companies controlled by the Sahara Group. The two appellant companies have raised about 19000 crores rupees from investors by

issuance of Optionally Fully Convertible Debentures (OFCDs) by passing special resolution u/s 81(1A). Pursuant to their board resolutions, both, SIRECL and SHICL filed red herring prospectus (RHP) under Section 60B of the Companies Act. The RHP provided that the Appellants did not intend to get their securities listed on any recognized stock exchange, and that only those persons to whom the information memorandum was circulated and/or those associated with Sahara Group, would be eligible to apply. The RHP also provided that the funds raised would be utilised for financing the completion of projects, namely, establishing/constructing the bridges, modernizing or setting up of airports, rail system or any other projects which might be allotted to the company from time to time. One of the group companies, Sahara Prime City Limited, intending to raise funds through listing of its shares has filed Prospectus to SEBI for processing. SEBI also received complaint from Roshan Lal (Chartered Accountant) alleging that Sahara group was issuing Housing Bonds without complying with the Rules. On further investigation and multiple correspondences later, SEBI passed an order on June 23, 2011 holding the Appellants to be in violation of various provisions of the corporate and securities laws, dealt with later in this article. An appeal was then filed by the Appellants against the SEBI Order in the Securities Appellate Tribunal (SAT), which was decided in favour of SEBI vide an order dated October 18, 2011. A further appeal was then filed by the Appellants against the SAT Order in the Supreme Court. ISSUES: Some of the key issues under consideration of the case were as follows: 1. Whether SEBI has locus standi to administer compliances of unlisted public company? 2. Whether raising of fund by way of private placement is a public issue? 3. Are hybrid instruments also within the ambit of the SEBI to regulate? 4. Whether OFCDs issued by the Appellants are liable to be listed under the provisions of Securities Contract (Regulation) Act, 1956? As per Section 55A of the Companies Act it can be gathered that (i) listed companies and (ii) those intending to get listed are companies subject to the jurisdiction of SEBI. What would tantamount to intending to get listed was a question before the Supreme Court. The

Supreme Court while analyzing this aspect went by the conduct of the Appellants and stated that a companys option, choice, election, interest or design does not matter; it is the conduct and action that matters and that is what the law demands. Since the conduct of the company entailed a listing, the Supreme Court held that the Appellants were seen to have intended to get their securities listed and the issue was the public issue. Section 67 of the Companies Act is an aid to interpreting what offering shares or debentures to the public means. Section 67 (1) and (2) provides that an offer to public is one that is offered to any section of the public. Section 67(3), however, excludes from the definition of offer to the public, an offer or invitation that is (i) not being calculated to result directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation, or (ii) otherwise as being a domestic concern of the persons making and receiving the offer or invitations; except if made to 50 persons or more. The Supreme Court has stated that under Section 67 an offer to 50 or more persons constitutes a public issue, and hence the issuance of OFCDs by the Appellants was a public issue as the Appellants could not substantiate their claim that the investors were friends, associated group companies, workers/employees and other individuals who were associated/affiliated or connected with Sahara Group. Section 73(1) of the Companies 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. Such companies have no option or choice but to list their securities on a recognized stock exchange, once they invite subscription from over 49 investors from the public. The Supreme Court on the basis of the conduct of the Appellants concluded that they intended to offer the OFCDs to the public and hence they were obligated to apply for listing of OFCDs. The OFCDs issued by the Appellants undoubtedly were unsecured debentures by name and nature. Though, they have the dual characteristics of shares and debentures, as defined by the term hybrids, however, they continue to remain debentures till the time they are converted. In other words, OFCDs issued by the Appellants are debentures in present and become shares in future and are within the ambit of SEBI to regulate. Section 28(1)(b) of the Securities Contract (Regulation) Act, 1956 [hereinafter referred to as SC(R) Act] indicates that it is only convertible bonds and share/warrant of the type referred to therein, which are excluded from the applicability of the SC(R) Act and not debentures, which are separate category of securities in the definition contained in Section 2(h) of SC(R)

Act. Contention of Saharas that OFCDs issued by them are convertible bonds issued on the basis of the price agreed upon at the time of issue and, therefore, the provisions of SC(R) Act would not apply in view of Section 28(1)(b), cannot be sustained. Therefore, OFCDs issued by the Appellants are liable to be listed under the provisions of SC(R) Act. On August 31, 2012, the Supreme Court while upholding the order passed by SEBI dated 23.6.2011 and SAT dated 18.10.2011 ordered Sahara to refund the amount of Rs.17, 400 crores with 15% interest. Saharas have been also directed to furnish the details with supporting documents to establish whether they had refunded any amount to the persons who had subscribed through RHPs. Mr. Justice B.N. Agrawal, a retired Judge of the Supreme Court, has been appointed to oversee whether directions issued by the Court are properly and effectively complied with by the SEBI. The Court has also made it clear that if Saharas fail to comply with these directions and do not effect refund of money as directed, SEBI can take recourse to all legal remedies, including attachment and sale of properties, freezing of bank accounts etc. for realizations of the amounts. ANALYSIS AND CONCLUSION: Section 73(1) of the Companies Act requires that every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange. Thus the Judgment in Sahara Case has also reaffirmed the fact that a public issue would mandatorily entail an application for listing on a stock exchange. OFCDs issued by Saharas to the public were actually a public offer dressed up as a private placement. By virtue of Section 67(3) of the Companies Act read with its proviso, subscription received from a group of investors pursuant to an offer of shares or debentures should be classified as a public issue and cannot be treated as private placement, if such offer to subscribe for shares or debentures is made to fifty persons or more. In the present case, as OFCDs are being issued to more than 49 people, it becomes a public issue and therefore falls within the jurisdiction of SEBI. As allotment of OFCDs to more than forty nine persons amounts to offering of debentures to the public, and as per Section 73 of the Companies Act, the Company ought to have applied for permission for the listing of the issue, the intention of the Sahara companies to list or not is immaterial. The companies are statutorily bound to apply for listing permission and cannot evade this statutory obligation by

stating in the prospectus that the company does not intend to list its securities. This provision has been incorporated for the protection and benefit of the investors who subscribe to such offers, since it provides liquidity and easy exit opportunity for them to sell it through Stock Exchanges. 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. The Supreme Court has clarified in this case that offer of security to 50 or more persons would qualify as a public issue. For protection of investors and development of securities market, SEBI has been conferred enormous powers under Sections 11, 11A, 11B of the SEBI Act which apply to both listed and unlisted companies. The Court has made it clear that the capital market regulator can exercise its jurisdiction under Sections 11(1), 11(4), 11A(1)(b) and 11B of SEBI Act and Regulation 107 of Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations, 2009 over public companies who have issued shares or debentures to fifty or more, but not complied with the provisions of Section 73(1) by not listing its securities on a recognized stock exchange. Thus, though Section 55A of the Companies Act has made SEBI the administrative authority for the issuance and transfer of securities only with respect to listed companies and companies intending to be listed, the judgment in Sahara Case has affirmed that SEBI has jurisdiction and power to administer even unlisted companies which intend to (by conduct or otherwise) get their securities listed on any stock exchange. Therefore, the case is of vital importance as it has the impact of increase in the paradigm of SEBI.