By Swatilekha Chakraborty, Symbiosis Law School,Pune.

Remarkable role of SEBI in the SEBI Sahara legal dispute

The role of SEBI as an investor protection agency is truly a remarkable. The jurisdiction granted to it under Sec. 55A of the Companies Act and Sec. 11 of the SEBI Act had been contended by Sahara, and was negated by the Securities Appellant Tribunal (hereinafter called SAT). Aggrieved by the judgement of granting jurisdiction to SEBI, Sahara filed appeals, under Section 15Z of the SEBI Act. The question before the Apex Court was whether SEBI could exercise its jurisdiction under Section 55A of the Companies Act administering Sections 11(1), 11(4), 11A(1)(b) and 11B of SEBI Act. Further, violation of mandatorily getting listed under Sec. 73 of the Companies Act was brought to the notice of the Apex Court and how Sahara had not complied with the DIP Guidelines. Open violation of Sec. 67(3) was seen in the Information Memorandum and the Red Herring Prospectus which was issued by Sahara to the public. The role of SEBI in bringing Sahara to justice has been a magnanimous one. The same shall be seen in detail in the below mentioned issues which had been dealt by the Supreme Court during the proceedings:

  1. SEBI’s JURISDICTION UNDER Sec. 55A of COMPANIES ACT:

The Hon’ble Apex Court before adjudicating upon the issue of jurisdiction noted that when we interpret and deal with the provisions like Sec. 55A, 60B, 67, 73, etc. of the Companies Act, we have to always bear in mind the various provisions of the SEBI Act, especially Sec. 11, 11A, 11B, 11C, 32, etc. This is because those provisions are in addition to and not in derogation of the provisions of the Companies Act. In the present matter the provisions taken into consideration were; Sec. 11 of the SEBI Act as it states that it shall be the duty of SEBI to protect the interests of investors in securities and to promote development of and to trade practices relating to securities market; Sec. 11A of SEBI Act authorizes SEBI to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities. All the provisions, i.e. Sec.11, 11A, 11B were found to be inter-related and inter-connected as the main focus is on investor protection power and is further conferred on SEBI under Sec. 11C to conduct investigation if the transactions are bring dealt in a manner detrimental to investors or securities market.

A bare perusal of Sec. 55A makes it clear that SEBI would have jurisdiction so far as the matter related to issue and transfer of securities and non-payment of dividend in case of public listed companies and companies which intend to get listed on a recognized stock exchange. The contention made by the learned counsel representing Sahara was that the mere emphasis given to Sections 68A, 77A and 80A of the Companies Act would mean the exclusion of Sec. 60B, 67(3), 73, etc. from Sec. 59-81 as enumerated in brackets in Sec. 55A of the Companies Act. The Hon’ble Apex Court rejected this contention and stated that all sections from 59-81 were to be a part of Sec. 55A, this was not only held in this instance but also in Hindustan Lever Ltd. v. Ashok Vishnu Kate & Ors.[1], Delhi Judicial Services Association v. State of Gujarat[2]and S. Sundaram Pillai & Ors. v. V.R. Pattabiraman[3].

Thus, it was clearly made out that under Sec. 55A SEBI could exercise its jurisdiction and Sec. 11A of the SEBI Act complimented the said provision. The contention raised by Sahara was redundant; the ruling given by the Hon’ble Supreme Court gave a precise and correct interpretation of the provisions of the Companies Act read along with the SEBI Act.      

  1. PUBLIC ISSUE OF OFCDs

Section 67(3) of the Companies Act states that once the number of people to whom securities are issued crosses forty nine, it shall be considered as an issue to the public, which attracts Section 73(1) and an application for listing becomes mandatory which fall under the administration of SEBI under Section 55A(1)(b)of the Companies Act. In order for a company to classify its issue of securities as a private placement under Sec. 67(3) it would have to fulfil the following requirements:

  • Offer of securities made to less than 50 persons;
  • Offer made only to the existing shareholders of the company (Right Issue);
  • Offer made to a particular addressee and be accepted only persons to whom it is addressed;
  • Offer or invitation being made and it is the domestic concern of those making and receiving that offer.

Thus, resultantly if an offer of securities is made to fifty or more persons it would be deemed to be a public issue, even if it is a domestic concern or proved that the shares or debentures are not available for subscription or purchase by persons other than those received the offer or invitation. Hence, it is clear that Sahara had made an issue to the public and was in no manner private placement made under Sec. 81A of the Companies Act. This not only shows Sahara trying to evade the law, but also shows the incompetence of the RoC for allowing the issue of the OFCDs.

  • NATURE OF OFCDs

The definition of “securities” was amended to include hybrids in the Companies Act, no corresponding amendment was made in the SCR and SEBI Act, and hence it was contended by Sahara that SEBI has no jurisdiction or control over the hybrid securities. It was contended that hybrids would come under regulatory control of the MCA (Ministry of Corporate Affairs) and the Central Government. Further, Sahara contended that Sec. 67 only spoke about shares and debentures and did not reflect the change brought about in Sec. 2(19A) of the Companies Act with respect to hybrids. However, it was pointed out by SEBI that the definition of securities under SCR was an inclusive definition not an exhaustive one, as stated by the Apex Court in Sudhir Shantilal Mehta v. Central Bureau of Investigation[4] and Naresh K. Aggarwala & Company v. Canbank Financial Services Ltd. & Anr.[5] Further, it was brought to the notice of the Court that Sahara had treated OFCDs only as debentures in the IM, RHP, application forms and also in their balance sheet. The term “securities” defined in the Companies Act has the same meaning as defined in SCR Act, which would also cover the species of “hybrid” defined under Sec. 2(19A) of the Companies Act. Since the definition of “securities” as under Sec. 2(45AA) was inclusive of “hybrids” as stated in the provision itself, SEBI would very well have jurisdiction under Sec. 55A of the Companies Act.

CONCLUSION:

The above discussion clearly indicate that OFCDs issued by Sahara were public issue of debentures, hence securities. Once there is an intention to issue shares or debentures to the public, it is/was obligatory to make an application to one or more recognized stock exchanges, prior to such issue. Registration of RHPs to the RoC (Registrar of Companies) does not mean that mandatory provisions of Sec. 67(3), 73(1) and DIP Guidelines have been followed. Sahara could not have filed for RHP or any prospectus with RoC without submitting the same to SEBI under clauses 1.4, 2.1.1 and 2.1.4 of DIP Guidelines. SEBI has been proactive in unearthing every deliberate violation under Companies Act, SEBI Act, DIP Guidelines and ICDR. An exhaustive task was taken up, and every legal dispute and aspect of the matter was tackled and overcome with finesse. SEBI in the facts and circumstances of the case had rightly claimed jurisdiction over the OFCDs issued by Sahara. Sahara had no right to collect Rs. 27,000crores from three million investors without complying with any regulatory provisions. The lack of steps taken by the MCA and the RoC in this legal dispute is appalling. Had the RoC not allowed the issue of IMs or RHPs, or let ‘private placements’ under Sec. 81A of the Companies Act, unnecessary litigation could have been avoided. This legal dispute has brought out the inefficiency of the RoC and the MCA.

[1] (1995) 6 SCC 326

[2] AIR 1991 SC 2176

[3] (1985) 1 SCC 591

[4] (2009) 8 SCC 1

[5] (2010) 6 SCC 178

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