CASE COMMENTARY: Sahara India Real Estate Corporation Limited and Others v. Security and Exchange Board of India (Sahara vs SEBI)

CASE COMMENTARY

Author- Ayush Shukla, a Student of Savitribai Phule Pune University

Case Name: Sahara India Real Estate Corporation Limited and Others v. Security and Exchange Board of India (Sahara vs SEBI)

Civil Appeal No.: 8643 OF 2012

Court: Supreme Court of India

Bench: Justice Altamas Kabir, Justice Surinder Singh Nijjar, Justice J.Chelameswar

Date of Judgment:  5th December 2012

The Supreme Court, on August 31, 2012, passed a landmark judgment directing the Sahara Group and its two group companies, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL), to refund about ₹17,400 crore to their investors in three months, which later came up with an interest rate of 15%. The Court has upheld the conclusion of the SAT and ordered the SEBI to conduct an in-depth investigation into the real investor base involved in the OFCDs issued by SIRECL and SHICL.

Background of the case-

Sahara India Pariwar is a big Indian conglomerate headquartered in Lucknow, diversified into several business sectors: finance, infrastructure, real estate, media and entertainment, retail, manufacturing, and information technology. This group was founded in 1978 by Subrata Roy in Gorakhpur and operates 4,799 establishments with the Sahara India brand across the nation. There are two subsidiaries included in the group that exclusively deal with acquisition and development, particularly concerning land for housing purposes in various parts of the country: Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited.

The Sahara India Pariwar investor fraud case essentially refers to the failure of the group to repay more than ₹24,000 crores to its investors, together with interest accrued, in compliance with the Supreme Court’s order that came after a protracted legal battle between the company and the Securities and Exchange Board of India (SEBI).

During the period between April 25, 2008 and April 13, 2011, SIRECL and SHICL issued OFCDs and mobilized more than ₹17,656 crore from nearly 30 million investors. Being issues made as a “Private Placement,” such issues were placed outside the regulatory regime applicable to public issues of securities. SEBI took action after Sahara claimed to have collected nearly ₹24,000 crore from over 30 million investors, at a minimum subscription of ₹2,000 and upwards of ₹20,000 plus. In November 2010, the regulator interdicted further OFCD mobilization by these companies.

The beginning Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited issued OFCDs and began collecting subscriptions from the public from April 25 2008 to April 13, 2011. The companies collected more than ₹ 17,656 crore from about 30 million investors. It was a huge collection under the disguise of a “Private Placement,” with an intent to avoid the statutory regulatory compliances applicable for a public issue of securities. These practices led the Whole Time Member of the Securities and Exchange Board of India to pass an order dated June 23, 2011, which inter alia directed SIRECL and SHICL to refund the money so collected to the subscribers. The said order also restrained the promoters of the two companies, including Mr. Subrata Roy, from accessing the securities market until further notice.

Sahara, therefore, challenged this order before the SAT, which, after considering the matter, confirmed and ruled in the continuing operation of the Whole Time Member’s order through its judgment/ order dated 18.10.2011. Aggrieved by this order passed by SAT, Sahara approached the Supreme Court of India by filing an appeal against the order of the SAT.

Facts Of The Case- 

In the year 2008, the RBI banned Sahara India Financial Corporation from raising more public deposits. The order was issued amidst suspicion that Sahara was running a Ponzi scheme-like operation, reliant on constant new injections of capital to sustain the business. Confronted with this inhibiting regulation, Sahara needed to find another financial mechanism to get around RBI scrutiny and at the same time siphon public money.

For this purpose, Sahara started issuing Optionally Fully Convertible Debentures OFCDs through two newly set up companies, namely Sahara India Real Estate Corporation SIREC and Sahara Housing Investment Corporation SHIC. This type of financial instrument required only ROC permission to operate.

Matters were not helped by some thorny legal and regulatory issues. The sheer size of the OFCD issuance virtually qualified it as a public offering. Under the regulations, any issuing firm that is raising funds from more than 50 investors had to seek approval from the Securities and Exchange Board of India and comply with its disclosure norms. Sahara’s activities entailed collecting deposits from close to 30 million depositors. Besides, OFCDs were kept open-ended, as generally, an OFCD issue closes within six weeks. One Sahara group entity kept an issue open for as long as 10 years and collected around ₹17,250 crore. Matters became worse when Sahara tried to raise capital through Sahara Prime City by accessing the stock markets. As this involves a Red Herring Prospectus, full disclosure of financial data relating to group companies is mandatory. On scrutiny, K. M. Abraham found flagrant violations with SIREC and SHIC that the funds collected through OFCDs were being misrepresented as private placement. Abraham’s probe showed that, though large amounts of money were collected, the Sahara subsidiaries did not maintain adequate records of investor identities. This non-availability of records raised very critical questions about the modalities of repayment of the amount to whom and how. The attempts to trace the investors with the help of professional agencies also proved futile.

Sahara Group, on the other hand, appealed against the findings of SEBI before SAT, which also upheld the findings and revealed that Sahara had not disclosed the correct number of investors in its Red Herring Prospectus.

The matter was then taken to the Supreme Court. In August 2012, the Court ordered Sahara to refund more than ₹24,000 crore to SEBI within three months. SEBI would distribute the money to genuine investors. Sahara claimed it had already returned more than ₹18,000 crore of this amount in the past year and had only approximately ₹5,000 odd crores to pay. In October 2012, the Supreme Court expressed its discontent with Sahara’s delaying tactics and threatened possible jail terms for the executives of the group if money did not come in quickly. It pointed out the flouting of earlier directives and called for Subrata Roy and other directors to explain the reason behind the delay. The failure of Subrata Roy to appear resulted in the issuance of a non-bailable warrant and an order for his appearance before the Court on March 4- the date of March 43 was probably a typographical error.

Issues raised in Sahara vs SEBI

The Supreme Court in the case of Sahara vs SEBI addressed the following crucial issues:

• Jurisdictional Authority: The central issue before the tribunal was whether any jurisdiction to investigate and adjudicate was vested with SEBI under Sections 11, 11A, and 11B of the SEBI Act and Section 55A of the Companies Act, or whether such jurisdiction vested exclusively in MCA under Section 55A(c) of the Companies Act.

• Definition of OFCDs as Securities: The issue was whether Optionally Fully Convertible Debentures would come within the meaning of “securities” under the Companies Act and the SEBI Act and the Securities Contracts (Regulation) Act. If the definition were to hold, then the financial instrument would be within the purview of SEBI.

• Private Placement vs. Public Offering: The first issue was whether the issue of OFCDs to a large base of subscribers would amount to private placement and, hence, be exempt from the regulatory provisions of SEBI, among other statutory provisions applicable to public issues.

• Listing Provisions Applicability: Whether the listing requirements under Section 73 of the Companies Act, 1956, were applicable in each and every public issue or whether compliance thereof depended upon the intent of the company seeking a listing.

• Preferential Allotment Rules: The said Public Unlisted Companies (Preferential Allotment) Rules 2003 were applicable on the issue of OFCDs or not.

The last point for determination was whether the OFCDs as convertible bonds were excluded from the operation of the SCRA by the exemption provided under Section 28(1)(b).

These issues sum up the legal and regulatory complexities in the Sahara India Pariwar investor fraud case involving jurisdictional power, character of financial instruments, and compliance with the regulatory prescription.

ARGUMENT BY PETITIONER

Jurisdiction of Sebi under Section 55A: Under Section 55A of the Companies Act, 1956, the petitioner contended that Sebi had jurisdiction only over and regarding companies which are listed with the stock exchange. As the applications for listing filed by Sahara are pending, the petitioner contended that Sebi has no jurisdiction over the petitioner companies to call for any information from them.

• Listing Requirement under Section 73: The petitioner contended that listing requirement under Section 73 was not mandatory but only extended to companies proposing to list their securities. Its application could be viewed as an infringement on corporate autonomy.

• SEBI’s jurisdiction and filing of DRHP: It was contended under Section 60B that once a company files a DRHP with the Registrar of Companies directly, no jurisdiction of SEBI would extend over the company to raise funds from the public.

• The nature of the OFCDs and private placement: The petitioner thus submitted that the OFCDs were hybrid instruments issued privately, hence exemption under Section 67(3) was applicable as they were issued to affiliates and not to the public.

• Preferential Allotment Rules 2003: Therefore, the petitioner thus submitted that under the Unlisted Public Companies (Preferential Allotment) Rules, 2003, preferential allotments could be granted without numerical threshold prior to 2011 amendment, which was thus prospective in nature .

Respondent’s Arguments:

• Jurisdiction of SEBI over Public Offers: The respondent made a submission that all public offers fell within the jurisdiction of SEBI and not whether a company is a private or public company, as this was an authority on the regulation of public offers.

• Nature of OFCDs as Securities: The respondent thus stated that the OFCDs ought to fall within the category of securities as defined under the Companies Act, the SEBI Act, and the SCRA. The wide public issue of these instruments settled their being marketable and, thus, coming within the definition of securities.

• Public Offering under Section 67(3): The respondent relied upon Section 67(3) to contend that an offer and invitation to more than 50 persons amounts to a public offer, and therefore, becomes a subject of SEBI’s jurisdiction to follow the regulations of public issue.

Observations and Findings by the Supreme Court

1. Power to Investigate and Adjudicate: SEBI’s power to investigate and adjudicate was upheld by the Court: “The powers conferred upon the SEBI are basically meant for the protection of investors’ interest and, therefore, at variance with the Companies Act.” Equally stated, SEBI does not derogate from the existing legislation but is an interlocking component in ensuring an effective regulatory regime leaving no area of conflict with the jurisdiction of the MCA.

2. OFCDs as securities- The court said that though OFCDs are hybrid instruments, the nature of OFCD would fall within the definition of securities under the Companies Act, SEBI Act, and SCRA. The extensive issue of OFCDs proved the fact that they were being marketed and, therefore, securities.

3. Public Offer under Section 67(3): The Court explained that an issue of securities to persons more than 50 would amount to a public offer within the meaning of Section 67(3). In the instant case, Sahara has issued OFCDs to more than that number and hence it was a public issue, thereby making such public issues covered under SEBI’s regulatory ambit for public issues.

4. Compulsory Listing Requirement: The Court refused the contention that the listing requirement under Section 73, would depend upon the intent of the company to list. It confirmed that Section 73(1) makes the listing requirement compulsory in every public issue with more than 49 persons, and thus, the companies have to apply for a listing on the stock exchange.

5. Application of Preferential Allotment Rules 2003: The Court explained thereby that though the Preferential Allotment Rules, 2003 are applicable for a preferential allotment made by an unlisted company, they do not exempt the public issue to comply with the statutory provisions such as Section 67(3) of the Act.

6. Nature of OFCDs and SCRA Exemption: It rejected the contention of the appellants that the OFCDs were convertible bonds and hence fell within the exemption under Section 28(1)(b) from the operation of the SCRA. It clarified with it that though the options or rights appended to convertible bonds are excluded from the purview of the exemption, no debentures can be kept without the ambit of the SCRA.

Judgment of the Supreme Court in Sahara vs SEBI

• Refund of Deposits with Interest: The Supreme Court ordered Sahara India Pariwar to refund deposits collected with an interest of 15% per annum up to the date of refund, so as to protect the interests of the investors.

• SEBI’s Authority: The Court upheld the authority given to SEBI for enabling it to enforce the order for refund so as to ensure regulatory compliance and protection to the investors.

• Non-bailable Warrant: For the non-compliance of the refund direction, the Court has issued a non-bailable warrant for the arrest of the Chairman of Sahara India Pariwar and other defaulting members, which tells us how serious compliance of the Courts’ and SEBI’s regulations is.

Conclusion- 

The judgment in the Sahara case is, without any doubt, a landmark one, as it introduced a very critical twist in the corporate regulatory environment of India. In this, the Supreme Court of India upholds the amalgamated authority of SEBI to investigate issues concerning listed and unlisted companies. It further strengthens the role of SEBI in protecting investor interests while widening its purview of listed entities to include issues related to unlisted companies.

This judgment removes critical ambiguities in law, more so about the issue of securities by unlisted companies that could otherwise be misused as grey areas between regulations. The judgment effectively bridges the gap of jurisdiction that existed between SEBI and the MCA, making it clear that both can take up matters concerning public interest simultaneously. As such, these two wings align their policies so that no court debates on such issues in the future, nor is there any chance of misusing these ambiguities by defaulting parties. 

The Sahara India Pariwar has already approached the Supreme Court with a review petition and also declared its intention to file a curative petition, whichever way the review goes against its expectations. All these processes remain uncertain in terms of the outcomes, definitely not an easy road ahead for Sahara. The judgment is expected to play an important role in bringing about regulative coherence and investor protection in the corporate sector of India.