CASE ANALYSIS: SAHARA INDIA REAL ESTATE LIMITED & ORS. V. SECURITIES EXCHANGE BOARD OF INDIA & ORS.

-Aniket Dhwaj Singh

College of Legal Studfies, UPES, Dehradun

INTRODUCTION

Sahara India Parivar, founded in 1978 by Subrata Roy, is one of the largest conglomerates of the country. Its businesses range from media to housing projects. As on March, 2014, the Sahara Parivar had a net worth of Rs. 68,174 crores, an asset worth of Rs. 152,815 crores, a landholding of 36,361 acres and a depositor base of 5.1 crore people; all this within 40 years of its existence. With a founder who calls himself the ―Managing Worker‖ of this empire, when the news of an investor fraud broke, naturally, it sent shockwaves through the country. After months of a direct faceoff between the SEBI and Sahara, with Sahara publishing full page advertisements in the newspapers claiming their innocence and SEBI warning the public against investing in the conglomerate, when Subrata Roy finally surrendered in May 2014, it seemed like a poetic culmination to a 4 year long legal battle. This case note follows the case from the time SEBI spotted unusual fund raising activity in SHICL and SIRECL (companies under Sahara India) in 2009 till the time Roy surrendered in 2014 with a special analysis of the landmark judgement given by the Supreme Court on 12th August, 2012.

FACTS

Sahara India floated 2 new companies- Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation (SHIC) in 2005 by registering them under the Companies Act, 1956 with the relevant Registrar of Companies in Kanpur and Maharashtra respectively. In theannual meetings held by both the companies, a resolution was passed to raise funds through private placement of optionally fully convertible debentures (OFCD‘s) from the friends, associates, and family members of the Board of Directors. Funds were also to be raised through the circulation of an information memorandum[2] to a few trusted investors. The date of commencement of issues of the debentures was 25th April, 2008 and 20th November, 2009, respectively. SIRECL collected Rs. 17,656.53 crores (net value) between 25th April, 2008 and 13th April, 2011. SHICL collected Rs. 6373.20 crores (net value) between 20th November, 2009 and 13th April, 2011. Thus both the companies collected Rs. 24,029.73 crores from 30 million investors over a period of 3 years. In 2009, when a red herring prospectus for Sahara Prime City (a real estate venture of Sahara India) was submitted to SEBI for approval, SEBI noticed unusual fund raising activity in the 2 firms- SHICL and SIRECL. On 4th January, 2010, SEBI received a complaint from a man, RoshanLal, who alleged that ―illegal means were being used by SHICL and SIRECL in issuance of OFCD‘s.‖ Following this, SEBI launched an investigation against Sahara India, inquiring into the fund raising activities of SHICL and SIRECL along with investor information. On receiving stiff resistance from Sahara, SEBI passed an interim order confirming that there was illegal activity with regard to issuance of OFCD‘s and instructed SHICL and SIRECL to refund the money to the investors with interest. Following this, Sahara filed a petition in the Court asking for a stay order. Since Sahara was not co-operative with the authorities, eventually the stay order was vacated and a final order was passed by SEBI on 23rd June, 2011. Even the Securities Appellate Tribunal (SAT) approved the SEBI order on 18th October, 2011. After this, Sahara appealed the SEBI order in the SupremeCourt, questioning their jurisdiction in the matter and alleging a defamatory agenda on part of SEBI to destroy the market reputation of Sahara India.

Background of the Law

In this case, 2 laws are put under the lens- the Companies Act, 1956 and the SEBI Act, 1992. The Companies Act was introduced in 1956 with an aim to establish a formal procedure to be followed by companies for registration. It also defined the roles of the directors, promotors and the secretaries of a company. It has been amended several times since its inception to account for the changing circumstances. The Companies Act is general and not prerogative in nature. This means that if another law is applicable to a company in addition to the Companies Act, then the company will have to follow the provisions of both the acts. In other words, the company act can be enforced in conjunction with another act. The Security Exchange Board of India Act (SEBI Act), 1992 had 2 important applications. Firstly, it provided statutory powers to the Security Exchange Board of India formed in 1988. Secondly, it provided guidelines for the development and regulation of security markets in India. Like the Company Act, it has been amended several times since its inception and can be enforced in conjunction with another act.

Order Given by SEBI

The final SEBI order was given on 23rd June, 2011 by K.M. Abraham, a full time member of SEBI. In the SEBI order by K.M. Abraham, the report has been divided into 3 parts. Part A addressed the questions of jurisdiction raised by Sahara. Part B discussed the provisions of the Companies Act, SEBI Act and the SEBI (Issue of Capital & Disclosure Requirements) Regulations that were applicable to the case and their subsequent violation. Part C included K.M. Abraham‘s findings and the particulars of the order. The order provided a logical explanation that proved that OFCD‘s, even though classified as ―hybrids‖, fall under the category of debentures. Hence they are still included within the ambit of the meaning of ―securities‖ as defined in S. 2(h) of the Securities Contract Regulation Act[3] and will thus come under the scrutiny of SEBI under S.11, 11(4), 11A and 11B of the SEBI Act[4] . This solved the question of Jurisdiction. With respect to Part B, K.M. Abraham found SHICL and SIRECL in violation of S. 62[5] , S.63[6] , S. 67(3), S. 73, S.117A[7] , S.117B[8] and S.117C[9] of the Indian Companies Act, 1956. In addition to this, SEBI found the Sahara Companies in violation of Regulation 107 of the SEBI (Issue of Capital & Disclosure Requirement) Regulations, 2009 (discussed in detail in the latter paragraphs). In Part C, the final order was given by K.M. Abraham under S.19[10] along with S. 11, 11(4), 11A and 11B of the SEBI Act. He held the Sahara Companies guilty of illegal issuance of the debentures to 30 million investors and ordered for the refund of the full amount collected + interestpayable from the date of collecting the money to the date of repayment. This money was to be paid off by the promotor of the company, Subrata Roy and by the directors of the company- Ravi Shankar Dubey, VandanaBhargava and Ashok Roy Chaudhary jointly and severally. The payment was to be made by way of cash through demand drafts. Cheques would be unacceptable. In addition to this, the Sahara Companies would have to publish a detailed explanation of the payback mechanism, along with names and contact details of people handling the payback, in a Hindi and an English Daily. The Companies and the Board Members will be banned from accessing the security markets in any way before the payment is complete. After the payment is complete, the details of the same will have to be submitted to the SEBI. Post verification by 2 ICAI certified Chartered Accountants; a certificate will be issued by SEBI clearing Sahara. Only after the procurement of this certificate will the Sahara Companies resume their ordinary course of business and access the security markets. Since the Hon‘ble Supreme Court in the order dated May 12, 2011, stated that the SEBI‘s final order will be actionable after verification by the Supreme Court, K.M. Abraham requested for an expeditious hearing to settle the matter.

Order Given by the Security Appellate Tribunal (SAT)-:

SHICL and SIRECL appealed the SEBI order before the Security Appellate Tribunal (also known as SAT). SAT passed its order approving the SEBI order dated 23rd June, 2011 on 18th October, 2011. The SAT order passed, validated the logic on the basis of which SEBI concluded that OFCD‘s were included in the genus of debentures and therefore fell within the scope of the definition of ―securities as given in S.2 (h) of the Securities Contract Regulation Act. In the matter of jurisdiction, SAT confirmed that under S.55A of the Companies Act, theSahara Companies would be regarded as public companies and would thus not fall under S.55A(c), but under S.55A (b). This provision when read with S. 11, 11(4), 11A and 11B of the SEBI Act confirm SEBI‘s jurisdiction in the matter. Aside from this, the SAT also found that the red herring prospectus issued by SIRECL was registered by the Registrar of Companies on 18th March, 2008, but the information memorandum was issued in April, 2008. This was in contravention with S.60B of the Companies Act, 1956 which stated that the information memorandum of a public issue was to be circulated prior to the filing of the prospectus of the company. Since the information memorandum had been circulated by 10 lakh agents and 2900 branch offices to 30 million investors, it was already established that the securities issue was a public one. The SAT order also pointed out that the RoC failed to forward the draft of the prospectus to SEBI as is the norm for a public issue. Since the issue of OFCD‘s was to 30 million investors, Sahara could not escape S.73 (1) of the Companies Act, 1956 which stated that any public company has to compulsorily list its securities with a recognized stock exchange of India before making the initial offer. Thus the SAT confirmed that Sahara would have to face the consequence given in S.73 (2). The SAT ordered SHICL and SIRECL to pay Rs. 17,400 crores + 15% interest by 28th November, 2011.

Analysis of the Supreme Court Judgement Dated 12th August, 2012

Sahara appealed the SAT order in the Supreme Court. The judgement was given by K.S. Radhakrishnan, J. The judgement upheld the SEBI order and ordered Sahara to pay Rs. 24,400 crores (after including the interest and adjusting the redemption vouchers) to SEBI in 3 installments within 4 months along with investor information. SEBI was then to distribute the money to the investors on behalf of Sahara. A reading of the judgementmakes it clear that there are multiple ratio decidendi provided in the judgement. I have isolated 4 issues that will be analyzed in the following paragraphs.

1. Whether SEBI has jurisdiction over the matter under S.55A of the Companies Act, 1956?

A question that has been raised by Sahara at every point along the case is whether SEBI has jurisdiction on the matter despite the fact that SHICL and SIRECL are not public listed companies and have clearly mentioned in their prospectus that they do not wish to list their securities on any stock exchange of India at any point in time in the future. According to S.55A of the Companies Act, 1956, there are 3 categories of companies- Ø

• 55A (a) – those companies that have been publicly listed
• 55A (b) – those companies that wish to be publicly listed.
• 55A (c) – the remaining companies which come under the jurisdiction of the Central Government and the Ministry of Corporate Affairs.

The Senior Council for the Sahara Companies, ShriFaliNariman, stated that under S. 55 A, the companies fall under the third category of companies and thus should be answerable only to the Ministry of Corporate Affairs (MCA). He further added that Sahara fully cooperated with the MCA when asked for information and only had to file a final prospectus with the MCA in accordance to S. 60B (9). This closing prospectus would provide all the information the MCA needed. In addition to this he added, the companies had been registered with 2 separate RoC‘s – in Kanpur and Maharashtra. If these registrars registered the companies without an issue, then the SEBI need not interfere. The Council also reiterated that there had been a private placement of OFCD‘s. Application for the issue of the OFCD‘s wasdistributed only to the friends, family members and associates of the board members and to trusted investors by way of an information memorandum. This further strengthened the stand of the companies that they belonged to S. 55 A (c). However the application of issue of the OFCD‘s was distributed to 30 million investors and Rs. 25000 crores was picked up from the investors. Hence this would classify as a public issue of shares as opposed to a private placement. Since a public issue of OFCD‘s was undertaken, SHICL and SIRECL automatically fell under S. 55 A (b) of the Act. SEBI has jurisdiction over companies belonging to S. 55 A (a) and S. 55 A (b). Thus, we can conclude that SEBI had jurisdiction over SHICL and SIRECL as well. Hence these companies would have to adhere to S.11, 11(4), 11A and 11B of the SEBI Act in addition to the relevant provisions of the Companies Act.

2. Whether Hybrids fall under the category of securities as defined in the Securities Contract Regulation (SCR) Act?

Sahara classified the optionally fully convertible debentures (OFCD‘s) as ―hybrid‖ securities. While ―hybrid‖ securities had been included in the definition of the term ―securities in the Companies Act through the 2003 Amendment, the corresponding changes were not made in the SEBI and the Security Contract Regulation (SCR) Act. However, according to the SCR Act, any marketable security is included within the ambit of the definition of the term ―securities. Since the OFCD‘s were distributed to 30 million investors, their marketability cannot be denied. In addition to this, OFCD‘s are, naturally, type of debentures, having the word ―debentures in the name itself. Thus we can say that OFCD‘s are marketable securities and hence included within the ambit of S. 2 (h) of the SCR Act

3. Whether the issue of OFCD‘s to 30 million people qualifies as a private placement?
4. 67 (3) of the Companies Act, 1956 states that if a public company sends an offer/ invitation to purchase securities to less than 50 people, it not regarded as a public offer. The Companies Act did not specifically define private placement, but only mentioned certain cases where an offer for securities by a listed company was not a public offer. Also there was no provision under the act that described a private placement with regard to an unlisted company. Sahara utilized this ambiguity of law to its benefit and interpreted it as- ―private placement is a situation wherein each investor receives a special invitation to purchase the securities‖. On the basis of this faulty interpretation, Sahara tried to pass of selling securities to 30 million people as a private placement. However, in the judgment, it has been clarified by the K.S. Radhakrishnan, J. that a private placement is limited to 50 people receiving invitations to purchase securities. As soon as the number rises beyond 50, a private placement ceases to exist and it must be verified by the SEBI, whether it is a listed or an unlisted company. Thus the issue of OFCD‘s to 30 million people did not qualify as a private placement despite the fact that all of them received an invitation to buy.

 

Conclusion

Since the fraud, the Companies (Amendment) Act, 2013 has been enforced. In this act, S.42 deals with private placement of securities. S.42 defines private placement of securities as any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section including the condition that he offer or invitation is made to not more than 50 or such higher number of persons as may be prescribed in a financial year”. It must be noted that the term ―private placement of shares‖ has been replaced with the term ―private placement of securities‖ to include a wider scope of instruments such as shares, bonds, marketable securities, etc. In addition to this S.42 (4) has been included to emphasize the importance of the SEBI and SCR Act. According to the provisions of the section, the company is supposed to collect the security money in the form of cheques that are deposited in a separate bank account. This money will be inaccessible till allotment of securities is complete. In addition to this, the allotment of thesecurities must be completed within 60 days of collecting the money. If not, the money has to be refunded to the investors within a 15 days period. Noncompliance with the provisions of S.42 will result in strict penalty under S.42 (10). S.42 (10) provides that the promotors and directors have to refund the entire amount collected from investors or pay a fine of Rs. 2 crores, whichever maybe higher. The refund to investors will have to be completed within a 30 day period. This is the most radical change in company law due to the Sahara Scam. Since the 12th August, 2012 judgment, only Rs. 5,120 crores of the Rs. 24,400 crores has been paid by Sahara to SEBI. Sahara claims to have paid off Rs. 20,000 crores to the investors directly but is unable to provide proof of the payment to SEBI. Subrata Roy is currently in jail since May, 2014 on a non bailable warrant for nonpayment of the dues to SEBI and noncompliance of court orders. Roy will be allowed to leave the jail only when Rs. 10,000 crores is deposited with SEBI in the form of cash as a demand draft. Last heard, Subrata Roy was trying to liquidate his assets such as selling the prized London‘s Grosvenor Hotel to collect sufficient funds but, his freedom seems a long way off.

[1]AniketDhwaj Singh, 3^rdYear,  College of Legal Studies, UPES, Dehradun

[2]Full Text of the Information Memorandum circulated by SIRECL available at –: http://supremecourtofindia.nic.in/outtoday/CA9813%20Sahara%20combined.pdf pg.5

[3] “securities”‖ include—shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

[4]S.11 of the SEBI Act – Explains the function of the Security Exchange Board of India. S. 11(4) of the SEBI Act –Explains the powers conferred upon SEBI while giving an interim order and while passing a final order. S.11A of the SEBI Act- Board has the authority to regulate or prohibit the issue of prospectus, offer document or advertisement soliciting for money for issue of securities. S.11B of the SEBI Act- Explains the powers to issue directions to the body under investigation if found guilty.

[5] S.62 of the Indian Companies Act, 1956 provides that all the directors and promotors will be held liable to refund the investors who have invested in a company on the basis of false statements included in the prospectus.

[6] S.63 of the Indian Companies Act, 1956 provides that the promotors and directors shall be punished with two years‘ imprisonment or a fine of Rs. 50,000 or both for allowing the publication of the false statements, unless they can prove that they had no reason to believe till the time of publication that the statements were false.

[7] S.117 A of the Companies Act, 1956 provides for the creation of a debenture trust deed.

[8] S.117 B of the Companies Act, 1956 provides for the appointment of debenture trustees and a debenture trust.

[9] S.117 C of the Companies Act, 1956 provides for the creation of liability of a company to create a security and debenture reserve

[10]S. 19 of the SEBI Act- Confers powers onto another authority to pass the order before it becomes actionable in certain cases.