Case: Sahara vs. SEBI-An In-Depth Analysis of The Landmark Supreme Court Ruling
Case: Sahara vs. SEBI-An In-Depth Analysis of The Landmark Supreme Court Ruling
Observations of SC: The Supreme Court held that SEBI does have power to
investigate and adjudicate in this matter. It categorically iterated that the SEBI
Act is a special legislation bestowing SEBI with special powers to investigate
and adjudicate to protect the interests of the investors. It has special powers
and its powers are not derogatory to any other provisions existing in any other
law and are analogous to such other law and should be read harmoniously
with such other provisions and there is no conflict of jurisdiction between the
MCA and the SEBI in the matters where interests of the investors are at
stake. To support this view, the Supreme Court laid emphasis on the
legislative intent and the statement of objectives for the enactment of SEBI
Act and the insertion of Section 55A in the Companies Act to delegate special
powers to SEBI in matters of issue, allotment and transfer of securities. The
Court observed that as per provisions enumerated under Section 55A of the
Companies Act, so far matters relate to issue and transfer of securities and
non-payment of dividend, SEBI has the power to administer in 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.
Observations of SC: The Supreme Court went on to hold that although the
intention of the companies was to make the issue of OFCDs look like a private
placement, it ceases to be so when such securities are offered to more than
50 persons. Section 67(3) specifically mentions that when any security is
offered to and subscribed by more than 50 persons it will be deemed to be a
Public Offer and therefore SEBI will have jurisdiction in the matter and the
issuer will have to comply with the various provisions of the legal framework
for a public issue. Although the Sahara companies contended that they are
exempted under the provisos to Sec 67 (3) since the Information
memorandum specifically mentioned that the OFCDs were issued only to
those related to the Sahara Group and there was no public offer, the Supreme
Court however did not find enough strength in this argument. The Supreme
Court observed as the companies elicited public demand for the OFCDs
through issue of Information Memorandum under Section 60B of the
Companies Act, which is only meant for Public Issues. Supreme Court also
observed that since introducers were needed for someone to subscribe to the
OFCDs, it is clear that the issue was not meant for persons related or
associated with the Sahara Group because in that case an introducer would
not be required as such a person is already associated or related to the
Sahara Group. Thus the Supreme Court concluded that the actions and
intentions on the part of the two companies clearly show that they wanted to
issue securities to the public in the garb of a private placement to bypass the
various laws and regulations in relation to that. The Court observed that the
Sahara Companies have issued securities to more than the threshold
statutory limit fixed under proviso to Section 67(3) and hence violated the
listing provisions attracting civil and criminal liability. The Supreme Court also
observed that issue of OFCDs through circulation of IM to public attracted
provisions of Section 60B of the Companies Act, which required filing of
prospectus under Section 60B(9) and since the companies did not come out
with a final prospectus on the closing of the offer and failed to register it with
SEBI, the Supreme Court held that there was violation of sec 60B of the
Companies Act also.
Observations of the SC: The two Sahara companies also contended that the
OFCDs being in the nature of Convertible bonds issued on the basis of the
price agreed upon at the time of issue and, therefore, the provisions of SCR
Act are not applicable in view of Section 28(1)(b) thereof and therefore SEBI
will have no jurisdiction. The Supreme Court rejected this contention and 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
an option 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 have shares at his option.
The Act is, therefore, inapplicable only to the options or rights or entitlement
that are attached to the bond/warrant and not to the bond/warrant itself. The
Supreme Court clarified by saying that 28(1)(b),clearly indicates that it is only
the convertible bonds and share/warrant of the type referred to therein that
are excluded from the applicability of the SCRA and not debentures which are
separate category of securities in the definition contained in Section 2(h) of
SCRA.
SUMMARY
a. Whether OFCDs issued by the Appellant are securities within the meaning
of Section 2(h) of SEBI Act?
Sahara aggrieved against the notice of SEBI moved the Allahabad High court
and obtained stay. Thereafter SEBI filed petition to Supreme Court which
directed for early disposal of the case by the High Court. SEBI again file
petition for recall of the earlier order, Allahabad High Court rejected SEBI
petition for recall. SEBI again filed petition to Supreme court to consider
Sahara case into its Jurisdiction. Thereafter Supreme Court directs SEBI to
issue fresh notice to Saharas for non compliance to statutory provisions under
Companies Act, SCR Act, ICDR 2009, DIP guidelines.
After continue contentions between the parties Supreme Court was confirmed
about the gross violations of rules and regulations mentioned above.
Aggrieved against the order of the Supreme Court, Sahara appealed to SAT
(Securities Appellate Tribunal). SAT ruled in favour of SEBI and directed in
favour of SEBIs order. Again aggrieved by SAT ruling, Saharas approached
Supreme Court. Supreme Court upheld the earlier direction to the Saharas
and upheld SEBI notice and direction.
b. SC noted that although Sahara defended its action saying that issue of
OFCDS is on a private placement, but its actions/facts were contrary to that
stand.
d. SC observed from the Documents produced before it and before the fact
finding authorities, do not show the relationship Sahara Group had with the
investors. But they had taken a declaration from the bondholders that they are
associated with the company.
e. SC arrived at a conclusion from the conduct and actions of Sahara that the
two companies wanted to issue securities to the public in the garb of a private
placement to bypass the various laws and regulations in relation to that. Court
can, in such circumstances, lift the veil to examine the conduct and method
adopted by Sahara companies to defeat the various provisions of the
Companies Act, and the provisions of the SEBI Act.
JUDGEMENT:
The two Sahara companies also contended that the OFCDs being in the
nature of Convertible bonds issued on the basis of the price agreed upon at
the time of issue and, therefore, the provisions of SCR Act are not applicable
in view of Section 28(1)(b) thereof and therefore SEBI will have no jurisdiction.
The Supreme Court rejected this contention and 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 an option to obtain
shares at a later date.
CONCLUSION: