Ashwin Singh
1. THE DETAILS OF THE CASE
2. CASE ANALYSIS: IRAC METHOD
2.1. Overview of the Case: Facts & History
2.1.1. Facts of the Case
The facts of the present case revolve around Optionally Fully Convertible Debentures (hereinafter OFCD)[1] which were issued by the appellants[2]. The Appellant has in their general meeting decided to raise funds via the usage of unsecured OFCDs by way of private placement & without any public announcement.[3] Whilst dealing with the IPO of other Sahara group companies, SEBI noticed in the disclosures about the OFCDs & how funds have been raised by the appellants, which is presumably in contravention of the provisions of the Companies Act[4], SEBI Act[5], Guidelines[6] & Regulations[7]. After which necessary information was sought by SEBI from the company, however even after extension no information was provided.[8]
Since the information was not provided, SEBI started an investigation. As a result of which the company was directed not to offer its OFCDs and to keep out of the securities market. After which the appellant filed a writ petition to Allahabad High Court (hereinafter HC), whilst SEBI challenged the order of the HC in Supreme Court (hereinafter SC). Simultaneously Final order by SEBI was passed wherein the appellants were found in contravention of law and directions were issued, Subsequently, the SC also dismissed the Petition.
2.1.2. Procedural History
The Present Case has a multi-level procedural history, the brief of the same is as below:
The foremost procedure in the present case started with the investigation by SEBI.
After which a Writ Petition was filled in the HC, whose order was challenged in the Supreme Court.
After the SEBI final order under directions issued by the SC, the petition before the SC was also dismissed.
Thereafter the appeal of the SEBI order is being filled in the present case.
2.1.3. Brief Judgment of the Tribunal
In the judgment, the tribunal upheld the impugned order and the appeals were dismissed.
3. POINTS OF CONTENTION: ISSUES VIS-À-VIS RULES
3.1. Issue I
Whether the disclosure in the Red Herring Prospectus (hereinafter RHS) by the appellant was Complete.
3.1.1. Rule
Sections 55 to 58, 60 & 67 of the Companies Act[9] are applicable in the present issue. The application of the Rules in the present issue is focused on the number of people the OFCDs were advertised to & to all the current shareholders of the company. Alongside the legal validity of the information provided in the RHS.
3.2. Issue II
What is the nature of OFCDs as securities & Whether the same would come under the regulatory jurisdiction of SEBI?
3.2.1. Rule
Section 2 of the SCRA[10], Section 2 of the SEBI Act[11], Clause 45(AA) in Section 2 of the Companies Act[12] are applicable in the present issue regarding the nature of OFCDs. Whereas Chapter IV[13] & Sections 11 & 55A[14] of the SEBI Act along with Section 60 of the Companies Act were the rules applicable concerning the jurisdiction of SEBI in the present matter.
3.3. Issue III
The concomitant issue is whether OFCDs issued by the present companies are required to be mandatorily listed on a Stock Market Exchange.
3.3.1. Rule
Sections 55A, 60 & 73 of the Companies Act[15] were referred to, to understand the allotment of shares & debentures along with the listing of the same by an unlisted company.
3.4. Issue IV
Whether untrue statements recorded by the full-time member are legal & acceptable in the present matter.
3.4.1. Rule
Section 11 & 55A of the Companies Act[16] along with Section 2 & 28 of SCRA[17] were referred to shed light upon this issue & the roles of the Central Government, Tribunals & SEBI with regards to the collection of facts & usage of the same.
“A Brief Explainer on the Overall Matter”
4. ANALYSIS: FINDING THE PUNDIT IN THE JUDGMENT
4.1. Issue I
Although the appellant has contended that the RHS[18] was issued to private parties and not to the public at large, yet the memorandum for the same was issued to more than thirty million people, which invited them to subscribe to the OFCDs. The law in this regard states that if any offering for subscription is made to more than 49 people, then the same shall be treated as a public issue & is nothing but advertisement.[19] The knowledge of the company that the offer was made to millions & is going to be subscribed by millions, played a crucial role. Furthermore, the current shareholders of the company were not informed of the same, which effectively results in a major breach of law.
Even the conduct of the Registrar of Companies (RoC) has been questioned in the present issue, as the same was supposed to be aware of the 20,000-crore target by private placement. Furthermore, the fact that the same could not be raised through 49 people, should have been enough for him to raise some queries, however the same was not done.[20]
4.2. Issue II
The Prime contention in this issue from the appellant side was that the OFCDs are not securities and thus SEBI does not have the necessary jurisdiction over them. For this, the SCRA and the definitions provided within it needs to be referred. Since the appellant was referring to the OFCDs as a hybrid, the definition of the same was referred to under Section 2(19A) of the Companies Act[21]. Through a combined understanding of the word “securities” & “hybrid”, and the fact that OFCDs are debentures, as specified in their name themselves, the tribunal concluded the OFCDs to be a form of hybrid, yet as one security that comes within the jurisdiction of SEBI. The focus was that SCRA is inclusive legislation & covers all “Marketable Securities” of which the OFCD forms a part.[22]
After this, the tribunal focused on Sections 11, 11A & 11B of the SEBI Act[23] and the powers & scope of SEBI itself. The tribunal focused upon the aim behind the creation & the wide powers of SEBI, which are ultimately aimed at protecting the interests of the investor.[24] This combined with the presence of OFCDs as securities led to the conclusion that SEBI indeed has jurisdiction over the present securities matter.[25] The situation of SEBI act as special legislation was focused upon, the special powers granted to investigate & adjudicate were the prime points of contentions in the present issue.[26] It was also focused upon that in situations wherein the interest of the investor is concerned, no conflict of interests arises between the SEBI & the Ministry of Corporate Affairs. [27]
4.3. Issue III
The next uninterrupted line of arguments now focuses on the prime issue within the present case, whether the listings of the OFCDs are required by law or not. For this Section 67 of the Companies Act[28] was referred which deals with the offering of shares or debentures to the public. Furthermore, Section 53 was also referred to wherein the issue of the OFCDs being a public issue was debated upon.[29] The tribunal on both the facts weighed heavily on the respondent side and concluded that the listing of OFCDs was necessary. Furthermore, the transferability of the OFCDs was also noted to be an important factor in terming the same as security. This also confirmed that SEBI was correct in taking action as a primae facie issue existed in the present matter.
Now the next issue was whether the present unlisted company would be bound by the jurisdiction was SEBI. With regards to the present issue, the focus was upon the actions of the companies. The tribunal referred to Section 11, 55A, 60 among others.[30] The tribunal reached the situation wherein they asserted that although the company was indeed unlisted, yet even after that the company cannot take usage of illegal means to get away from the clutches of the market regulator.[31] The intentions of the company in the present situation to raise a herculean amount of funds from millions of people cannot be ignored on the pretext that the offering was issued to private investors only.[32] As a direct consequence of this, it was held in the tribunal’s judgment that the present appellants are also listed companies for the scope of understanding. Thus, as a result of this SEBI has the necessary authority to deal in matters concerning the issue, allotment & transfer of securities.[33] Multiple judgments referred to in the present issue by the appellants were not taken into consideration following the limited preview of the learned judges within those judgments.[34]
4.4. Issue IV
The findings of the untrue statement were challenged because SEBI does not have the authority to question the companies, the power for the same was reserved to the Central Government or the Company Law Board. With regards to the same, attention should be brought to Section 55A of the Companies Act[35] and the related explanation by the parliament for removal of doubts. With a reference to the same, SEBI was correct in its actions, according to the legislation & the explanation provided therein and the present contention of the appellant was thereby quashed. Section 11(A) of the SEBI Act[36] was further referred by the appellant & precedents were cited. However, the focus of the present tribunal remained upon the core actions of SEBI under the law and in the present case, which as per the understanding of the present tribunal was correct. As for the precedents cited, the tribunal, after an individual understanding of all the precedents, concluded that the facts in the precedents and the present case were nowhere similar, and thus the same would not be applicable in the present case.[37]
4.5. Post Analysis: The Ratio Decidendi of the Tribunal
In the concluding paragraph of the judgment the tribunal finished their finding by stating their decision in the judgment. The tribunal also stated the important fact that the majority of the contentions raised by the appellants were dealt with in the discussion therein and some small contentions although not expressly explained could be derived from the explanation of the main contention itself. In their conclusion, both of the present appeals were dismissed and the order for collection of the money raised from the OFCDs was also provided.[38]
5. CONCLUSION
Although the present judgment and the issues herein are primarily associated with a legal understanding. Yet a good part of the decision taken was depended upon the intention of the companies and their activities in accordance. It could be rightly regarded as a landmark judgment & a milestone in India’s Corporate law landscape.[39] The Prime benefactors of the present judgment were the Indian Investor, as they in the end got a sanctified regulatory body with absolute power to protect their interests.[40] The present judgment also removed & solved issues relating to several grey areas of law and thus strengthened the Indian Market against another Harshad Mehta Scam.[41] The issue of jurisdiction between the MCA & SEBI was also resolved and thus the major grey zone in the corporate governance was also removed.[42]
The present case started a chain event that is even going on right now. After the appeal of the present judgment to the supreme court and an affirmation by the same, the order to the repayment of funds taken was ordered. The Sahara group was unable to pay the same back, this resulted in the iconic arrest of the MD of the Sahara.[43] Furthermore, several Litigations have subsequently followed after the present judgment, but all of them have resulted in the side of SEBI & against Sahara Group.[44] This goes to showcase that the rule of law is of prime importance and even the directors of huge multi-billion companies are no different than the common man.[45]
[1] Investopedia. (2021). Fully Convertible Debenture (FCD). [online] Available at: https://www.investopedia.com/terms/f/fully-convertible-debenture.asp [Accessed 18 Nov. 2021]. [2] Two Companies of Sahara group, namely Sahara India Real Estate Corp Ltd (SIRECL) & Sahara Housing Investment Corp Ltd (SHICL). [3] This was in effect from 25th April 2008 up to 13th April 2011. [4] THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [5] SECURITIES AND EXCHANGE BOARD OF INDIA ACT, Act No. 15 OF 1992. [6] SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009 No. LAD-NRO/GN/2009-10/15/174471. [7] SECURITIES CONTRACTS (REGULATION) ACT, 1956 Act No. 42 OF 1956. [8] Sebi.gov.in. (2011). SEBI | Order in the matter of issuance of Optionally Fully Convertible Debentures by Sahara India Real Estate Corporation Limited (Now known as Sahara Commodity Services Corporation Limited) and Sahara Housing Investment Corporation Limited [SAT Appeal No.131/2011] [SC Civil Appeal No. 9813 & 9833 of 2011] [SC CP(C) 1820-1822/2017] Available at: https://www.sebi.gov.in/enforcement/orders/jun-2011/order-in-the-matter-of-issuance-of-optionally-fully-convertible-debentures-by-sahara-india-real-estate-corporation-limited-now-known-as-sahara-commodity-services-corporation-limited-and-sahara-housi-_20091.html [Accessed 18 Nov. 2021]. [9] Sections 55, 56, 57, 58, 60 & 67, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [10] Section 2, SECURITIES CONTRACTS (REGULATION) ACT, 1956 Act No. 42 OF 1956. [11] Section 2, SECURITIES AND EXCHANGE BOARD OF INDIA ACT, Act No. 15 OF 1992. [12] Section 2, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [13] Chapter IV, SECURITIES AND EXCHANGE BOARD OF INDIA ACT, Act No. 15 OF 1992. [14] Section 11 & 55A, SECURITIES AND EXCHANGE BOARD OF INDIA ACT, Act No. 15 OF 1992. [15] Sections 55A, 60 & 73, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [16] Sections 11 & 55A THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [17] Section 2 & 28, SECURITIES CONTRACTS (REGULATION) ACT, 1956 Act No. 42 OF 1956. [18] Sections 32 THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [19] Sections 60 & 67, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [20] Firstpost. (2011). Sahara scam: SAT blasts RoC for “dereliction of duty” -Business News , Firstpost. [online] Available at: https://www.firstpost.com/business/sahara-caper-sat-blasts-roc-for-dereliction-of-duty-110918.html [Accessed 18 Nov. 2021]. [21] Sections 2(19A), THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [22] SECURITIES CONTRACTS (REGULATION) ACT, 1956 Act No. 42 OF 1956. [23] Section 11, 11A & 11B SECURITIES AND EXCHANGE BOARD OF INDIA ACT, Act No. 15 OF 1992. [24] Parsoli Corporation Ltd. and others vs. Securities and Exchange Board of India, Appeal no. 146 of 2010 [25] Yogesh Malhan (2013). Optionally fully convertible debentures – whether securities or not. [online] Lexology. Available at: https://www.lexology.com/library/detail.aspx?g=1d3db8c8-64d0-4b38-9b11-6bd6a562ef6c [Accessed 18 Nov. 2021]. [26] Singh, V.K., 2013. Whistle Blowers Policy Challenges and Solutions for India with Special Reference to Corporate Governance. GNLU JL Dev. & Pol., 3, p.5. [27]Id. [28] Sections 67, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [29] Sections 53, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [30] Section 11, 55A & 60, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [31] Dhanaiah, G. and Prasad, R.S.R., 2016. Frauds in Indian Capital Market-A Study. Journal of Commerce and Trade, 11(2), pp.64-74. [32] Archana, M.C. and Nidhalkar, V., 2011. Strategies of conglomerates to synergize multiple businesses. [33] Sawhney, D.V. (2012). Sahara vs. SEBI-An In-Depth Analysis Of The Landmark Supreme Court Ruling. [online] Mondaq.com. Available at: https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [Accessed 18 Nov. 2021]. [34] Collector of Central Excise vs. Tata Engineering and Locomotive - MANU/SC/0872/2003 : 2003 (11) SCC 193; Birla Corporation Ltd. vs. Commissioner of Central Excise, Baroda - MANU/SC/2519/2005 : 2005 (6) SCC 95; Jayaswals NECO Ltd. vs. Commissioner of Central Excise, Nagpur - 2007 (13) SCC 807 and Indian Oil Corporation Ltd. vs. Collector of Central Excise, Baroda - 2007 (13) SCC 803. [35] Section 55A, THE COMPANIES ACT, 2013 Act No. 18 OF 2013. [36] Section 11A SECURITIES AND EXCHANGE BOARD OF INDIA ACT, Act No. 15 OF 1992. [37]Id. [38] This as a matter of fact has not yet been complied fully by Sahara group & also become the reason for the downfall of the company. [39] Flatscher, A. (2012). Financial Sector Regulation Heats up in India amid Sahara Case. [online] CFA Institute Market Integrity Insights. Available at: https://blogs.cfainstitute.org/marketintegrity/2012/09/12/financial-sector-regulation-heats-up-in-india-amid-sahara-case/ [Accessed 18 Nov. 2021]. [40] Editor (2014). Case Comment: Sahara India Real Estate Corporation Ltd. and Others v. Securities and Exchange Board of India and Another, MANU/SC/0735/2012 – Rostrum’s Law Review. [online] Rostrum’s Law Review. Available at: https://journal.rostrumlegal.com/case-comment-sahara-india-real-estate-corporation-ltd-and-others-v-securities-and-exchange-board-of-india-and-another-manusc07352012/ [Accessed 18 Nov. 2021]. [41] Global Jurix, Advocates & Solicitors (2013). Fight Between Sebi & Sahara May Bring Change In Corporate Law. [online] Mondaq.com. Available at: https://www.mondaq.com/india/corporate-and-company-law/270066/fight-between-sebi-sahara-may-bring-change-in-corporate-law [Accessed 18 Nov. 2021]. [42] Kirchmaier, T., Gerner-Beuerle Edited, C., Ahsan, I., Rafael, G. and Bueta, P. (2021). CORPORATE GOVERNANCE IN SOUTH ASIA TRENDS AND CHALLENGES. [online] Available at: https://www.adb.org/sites/default/files/publication/667006/corporate-governance-south-asia.pdf. [43]Dhanaiah, G. and Prasad, R.S.R., 2016. Frauds in Indian Capital Market-A Study. Journal of Commerce and Trade, 11(2), pp.64-74. [44] IANS (2020). Sahara files contempt petition in Supreme Court against regulator SEBI. Business Standard India. [online] 2 Dec. Available at: https://www.business-standard.com/article/companies/sahara-files-contempt-petition-in-supreme-court-against-regulator-sebi-120120200784_1.html [Accessed 18 Nov. 2021]. [45] Gill, D. and Kathuria, I., 2014. CORPORATE SOCIAL RESPONSIBILITY: A CASE STUDY ON SAHARA INDIA PARIWAR.
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