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Sahara v. SEBI

Sahara v. SEBI

Citation: (2013) 1 SCC 

Facts: Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) floated an issue of OFCDs and started collecting subscriptions from investors with effect from 25th April 2008 up to 13th April 2011. During this period, the company had a total collection of over Rs 17,656 crore. The amount was collected from about 30 million investors in the guise of a “Private Placement” without complying with the requirements applicable to the public offerings of securities. 

The Whole Time Member of SEBI while taking cognizance of the matter passed an order dated 23rd June, 2011 thereby directing the two companies to refund the money so collected to the investors and also restrained the promoters of the two companies including Mr. Subrata Roy from accessing the securities market till further orders. Sahara then preferred an appeal before SAT after hearing the SAT confirmed and maintained the order of the Whole Time Member. Subsequently Sahara filed an appeal before the Supreme Court of India against the SAT order.

Issues: 

  1. Whether SEBI has the power to investigate and adjudicate in this matter as per Sec 11, 11A, 11B of SEBI Act and under Sec 55A of the Companies Act?
  2. Whether the hybrid OFCDs fall within the definition of “Securities” within the meaning of Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate and adjudicate?
  3. Whether the issue of OFCDs to millions of persons who subscribed to the issue is a Private Placement so as not to fall within the purview of SEBI Regulations and various provisions of Companies Act?
  4. Whether listing provisions under Sec 73 mandatorily applies to all public issues or depends upon the “intention of the company” to get listed?
  5. Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 will apply in this case?
  6. Whether OFCDs are Convertible Bonds and whether exempted from application of SCRA as per the provisions of sec 28(1)(b)?

Judgement: The Supreme Court directed the Sahara Group and its two group companies Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to refund around Rs 17,400 crore to their investors within 3 months from the date of the order with an interest of 15%. It held that there was violation of sec 60B of the Companies Act.

The Supreme Court held that SEBI does have power to investigate and adjudicate in this matter. It also held that although the OFCDs issued by the two companies are in the nature of “hybrid” instruments, it does not cease to be a “Security” within the meaning of Companies Act, SEBI 

The Supreme Court observed that Section 73(1) of the 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. In addition the Supreme Court observed that the maxim ”acta exterior indicant interiora secreta” (external action reveals inner secrets) applies in the case of Saharas. 

The Court also observed that 2003 Rules apply only in the context of preferential allotment of unlisted companies, however, if the preferential allotment is a public issue, then 2003 Rules would not apply.

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. 

Conclusion:This landmark Judgment is undoubtedly a milestone in India’s Corporate landscape, as it not only sanctifies SEBI’s absolute power to investigate into the matters of listed companies, but also into the matters pertaining to the unlisted companies. 

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