Sahara vs SEBI

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

In our current society, capitalism reigns supreme and corporate development on a massive scale is regarded as the pinnacle of progress. However, unchecked growth in this sector brings with it inherent risks. Such transgressions by corporate entities can disrupt the overall fabric of a capitalist society.

Among the myriad socio-economic offences, the Sahara India investor fraud case stands out as a notable example. It represents a significant milestone in legal history, encapsulated in the Supreme Court ruling of Sahara vs SEBI in 2012. This legal battle spanned five gruelling years, pitting the Sahara Group against the regulatory authority of the Securities and Exchange Board of India (SEBI).

Background of Sahara vs SEBI

Sahara India Pariwar is an Indian conglomerate headquartered in Lucknow, India, with diverse business interests encompassing finance, infrastructure, housing, media and entertainment, consumer merchandise retail ventures, manufacturing and information technology. Founded by Subrata Roy in 1978 in Gorakhpur, the group operates an extensive network of 4,799 establishments under the Sahara India umbrella. Subsidiaries of this conglomerate, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation (SHICL), are primarily involved in the acquisition and development of land for residential housing projects across India.

The Sahara India Pariwar investor fraud case revolves around the failure of the Subrata Roy-led Sahara India Pariwar to honour its commitment to return more than Rs 24,000 crore, along with accrued interest, to its investors. This commitment was made pursuant to a directive from the Supreme Court of India, following a protracted legal battle with the Securities and Exchange Board of India (SEBI).

SIRECL and SHICL initiated an offering of Optionally Fully Convertible Debentures (OFCDs) and began soliciting subscriptions from investors starting on April 25, 2008 and continuing until April 13, 2011. During this period, the companies amassed a total collection exceeding Rs 17,656 crore. This colossal sum was procured from approximately 30 million investors under the guise of a “Private Placement,” circumventing the regulatory requirements applicable to public offerings of securities. It was during this time that SEBI intervened in response to Sahara’s assertion that they had raised approximately Rs 24,000 crore from an estimated three crore investors, often in increments ranging from Rs 2000 to Rs 20,000. In November 2010, SEBI had already barred the two companies from further fundraising through Optionally Fully Convertible Debentures (OFCDs).

Facts of Sahara vs SEBI

In 2008, the Reserve Bank of India (RBI) imposed a ban on Sahara India Financial Corporation, preventing it from raising additional deposits. The growth of Sahara’s business empire had always been shrouded in mystery, with suspicions that it operated a Ponzi scheme by collecting funds from investors. The group relied on a continuous influx of fresh capital to sustain its operations. With the RBI closing the door on collecting deposits from the public, Sahara needed a financial instrument that could bypass RBI’s oversight while still accessing public funds.

Sahara decided to issue Optionally Fully Convertible Debentures (OFCDs) by establishing two companies: Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC). The Registrar of Companies (ROC) had to grant approval for these investment vehicles.

Several factors contributed to the complex legal situation. Firstly, the sheer scale of the issue made it essentially a public offering. Any company seeking funds from more than 50 individuals had to obtain approval from the Securities and Exchange Board of India (SEBI) and adhere to SEBI’s disclosure requirements. The Sahara group had sought investments from nearly 30 million investors. In addition to the size and number of investors, another deliberate oversight was keeping the offering open-ended, whereas such issues should typically close within six weeks. In fact, a Sahara group company kept an issue open for 10 years, raising Rs 17,250 crore.

Sahara’s troubles escalated when the group attempted to raise funds through Sahara Prime City by tapping into the stock markets. In doing so, the company had to file a Red Herring Prospectus and disclose financial information about other group companies. It was during this process that K M Abraham identified irregularities with SIREC and SHIC, revealing that the money raised through OFCDs was disguised as private placements.

Abraham discovered that despite collecting significant sums of money, Sahara group companies lacked proper records of their investors’ identities, raising questions about how and to whom the funds would be returned. Even professional agencies were unable to trace the investors.

The Sahara group contested SEBI’s findings by taking the matter to the Securities Appellate Tribunal (SAT). However, SAT upheld SEBI’s findings, emphasising the significance of Sahara’s failure to disclose the vast number of investors in their Red Herring Prospectus.

Sahara then escalated the matter to the Supreme Court, but in August 2012, the court ordered the group to repay over Rs 24,000 crore to SEBI within 90 days. SEBI would then distribute these funds to genuine investors. However, Sahara claimed to have already repaid most of the money over the past year, leaving just over Rs 5,000 crore pending.

In October, the Supreme Court expressed frustration with Sahara’s delay tactics and hinted at the possibility of detaining the group’s officials until the payments were made. The Supreme Court Bench noted that previous orders had not been complied with, leading to the summons of Subrata Roy and other directors to explain the delay. Subrata Roy did not appear, resulting in a non-bailable warrant and an order to appear before the court on March 43 (likely a typographical error, presumably referring to March 4).

Issues Raised in the Case

 The issues raised in Sahara vs SEBI were:

1. Jurisdictional Dispute: The primary issue in Sahara vs SEBI revolves around the jurisdictional authority to investigate and adjudicate on the matter. It questions whether the Securities and Exchange Board of India (SEBI) has the legal authority to handle this case under Sec 11, 11A, 11B of the SEBI Act and Sec 55A of the Companies Act, or if it falls under the purview of the Ministry of Corporate Affairs (MCA) based on Sec 55A (c) of the Companies Act.

2. Classification of OFCDs as Securities: Another critical issue in Sahara vs SEBI pertains to the classification of Optionally Fully Convertible Debentures (OFCDs) as “securities” within the definitions provided by the Companies Act, SEBI Act and the Securities Contracts (Regulation) Act (SCRA). This classification determines whether SEBI has the jurisdiction to investigate and adjudicate on this financial instrument.

3. Private Placement vs. Public Issue: The case questions whether the issuance of OFCDs to a large number of subscribers qualifies as a private placement, exempting it from the regulatory oversight of SEBI and various provisions of the Companies Act. The distinction between private placement and public issue is central to this matter.

4. Applicability of Listing Provisions: Sahara vs SEBI raises the issue of whether the provisions outlined in Section 73, which pertain to listing requirements, are mandatory for all public issues or if their application depends on the “intention of the company” to seek a listing.

5. Application of Preferential Allotment Rules: It is questioned whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 apply in this case and have relevance to the issuance of OFCDs.

6. Classification of OFCDs as Convertible Bonds: The final issue in Sahara vs SEBI is whether OFCDs should be classified as convertible bonds and whether they are exempted from the application of the Securities Contracts (Regulation) Act (SCRA) under the provisions of Sec 28(1)(b).

These issues highlight the complex legal and regulatory challenges surrounding the Sahara India Pariwar investor fraud case, with significant implications for the jurisdiction, classification and regulatory oversight of financial instruments like OFCDs.

Arguments of the Petitioner

1. SEBI’s Jurisdiction under Section 55A of The Companies Act: The petitioner in Sahara v SEBI argued that according to Section 55A of The Companies Act, 1956, SEBI’s authority is limited to seeking information and investigating companies listed on the stock market. Since the Sahara companies’ applications for listing were still pending during the investigation, the petitioner contended that SEBI had no authority to request information from these companies.

2. Mandatory Listing Requirement: The petitioner asserted that the listing requirement outlined in Section 73 of the Companies Act is not mandatory and only applies to companies that have the intention to get listed. Forcing any company to seek a stock exchange listing was seen as a violation of corporate autonomy.

3. SEBI’s Jurisdiction Based on DRHP Filing: The petitioner in Sahara vs SEBI further argued that according to Section 60B, if a company files a Draft Red Herring Prospectus (DRHP) directly with the Registrar of Companies, it can collect funds directly from the public and in such cases, SEBI has no jurisdiction over the company.

4. Nature of OFCDs and Private Placement: The petitioner contended that the Optionally Fully Convertible Debentures (OFCDs) issued by the two Sahara companies were hybrid instruments and they were placed privately. Sahara companies claimed exemption under the provisos to Section 67(3) of the Companies Act because the Information Memorandum specified that OFCDs were issued only to individuals related to the Sahara Group and there was no public offering involved.

5. Unlisted Public Companies (Preferential Allotment) Rules 2003: The petitioner in Sahara v. SEBI also argued that the Unlisted Public Companies (Preferential Allotment) Rules 2003 allowed preferential allotment by unlisted public companies on private placement without any restriction on the number of allottees, as per Section 67(3) of the Companies Act. The petitioner emphasised that these rules were amended in 2011 with prospective effect, not retrospective, providing the liberty to make preferential allotment to more than 50 persons before the 2011 Rules were implemented.

Arguments of the Respondent

1. SEBI’s Jurisdiction over Public Offers: The respondent countered in Sahara vs SEBI the petitioner’s claim by asserting that SEBI has jurisdiction over any company that makes an offer to the public at large, regardless of whether it is a private or public company. The respondent emphasised SEBI’s role as a regulatory authority with authority over companies making public offers.

2. Classification of OFCDs as Securities: The respondent in Sahara versus SEBI further argued that the Optionally Fully Convertible Debentures (OFCDs) issued by the two companies should be classified as securities within the definitions provided by the Companies Act, SEBI Act and SCRA. These OFCDs were offered to millions of people, leaving no doubt about their marketability. The inclusion of the term “debenture” in the name of the instrument indicated it should be treated as a security under the relevant provisions.

3. Deemed Public Offer under Section 67(3): The respondent invoked Section 67(3) of the Companies Act, which stipulates that when any security is offered to and subscribed by more than 50 persons, it will be deemed to be a public offer. Consequently, SEBI would have jurisdiction in such cases and the issuer would be obligated to comply with the various provisions of the legal framework for a public issue.

These arguments represent the core legal positions of both the petitioner and the respondent in the Sahara India Pariwar investor fraud case, highlighting the dispute over SEBI’s jurisdiction, the nature of OFCDs and the classification of the offering as a public or private placement.

Supreme Court’s Observations and Rulings in Sahara vs SEBI

1. SEBI’s Jurisdiction: The Supreme Court ruled in Sahara vs SEBI that SEBI does indeed possess the authority to investigate and adjudicate in this matter. It emphasised that SEBI’s powers are intended to protect the interests of investors and are not in conflict with the Companies Act. The Court pointed out that SEBI’s powers are supplementary and should be read harmoniously with existing laws. SEBI has special powers and there is no jurisdictional conflict between the Ministry of Corporate Affairs (MCA) and SEBI when it comes to safeguarding investor interests. This ruling underscores the importance of SEBI’s role in overseeing securities-related matters.

2. Classification of OFCDs as Securities: The Supreme Court held that even though the Optionally Fully Convertible Debentures (OFCDs) issued by the two companies are hybrid instruments, they still qualify as securities under the definitions provided by the Companies Act, SEBI Act and Securities Contracts (Regulation) Act (SCRA). The Court stressed that the broad offering of OFCDs to millions of individuals confirmed their marketability as securities and the inclusion of “debenture” in their name solidified their classification as securities.

3. Deemed Public Offer under Section 67(3): The Supreme Court in Sahara v SEBI further ruled that when any security is offered to and subscribed by more than 50 persons, it is deemed to be a public offer under Section 67(3) of the Companies Act. Consequently, SEBI has jurisdiction in such cases and the issuer must comply with the various provisions of the legal framework for a public issue. The Sahara companies exceeded the threshold statutory limit set forth in Section 67(3) and thus, they violated listing provisions, incurring civil and criminal liabilities.

4. Mandatory Listing Requirement: The Supreme Court rejected the petitioner’s argument in Sahara v. SEBI that the listing requirement under Section 73 of the Companies Act is not mandatory and applies only to companies that “intend to get listed.” The Court ruled that as long as the law is clear and unambiguous and securities are issued to more than 49 persons under Section 67(3), the intention of the companies to get listed is irrelevant. Section 73(1) is a mandatory provision and companies must comply with it, obliging them to apply for the listing of their securities on a stock exchange.

5. Unlisted Public Companies (Preferential Allotment) Rules 2003: The Supreme Court clarified that the Unlisted Public Companies (Preferential Allotment) Rules 2003 apply solely in the context of preferential allotment by unlisted companies. If the preferential allotment constitutes a public issue, the 2003 Rules do not apply.

6. Nature of OFCDs and Applicability of SCRA: The Supreme Court in Sahara vs SEBI dismissed the Sahara companies’ argument that OFCDs, being convertible bonds, were exempt from the Securities Contracts (Regulation) Act (SCRA) under Section 28(1)(b). The Court clarified that Section 28(1)(b) only excludes convertible bonds and shares/warrants of a specific type from the applicability of the SCRA, but it does not exclude debentures, which are a distinct category of securities under Section 2(h) of the SCRA.

These observations and rulings by the Supreme Court in Sahara versus SEBI provide legal clarity on the jurisdiction of SEBI, the classification of OFCDs as securities, the implications of exceeding the threshold for a public offer under Section 67(3) and the mandatory nature of listing requirements under Section 73 of the Companies Act. The Court’s decisions have significant implications for regulatory oversight in the financial markets and investor protection.

Judgment of Supreme Court in Sahara vs SEBI

In its judgment, the honorable Supreme Court of India issued several critical directives in the Sahara v. SEBI case:

1. Refund of Deposits with Interest: Sahara India Pariwar was ordered by the Supreme Court to refund the entire amount of deposits it had collected, along with an interest rate of 15% applied until the date of the refund. This ruling aimed to protect the interests of the investors who had been affected by the OFCD issue.

2. SEBI’s Authority: The Supreme Court not only upheld SEBI’s authority but also empowered it further by granting the regulator the legal means to enforce the refund order. This demonstrated the Court’s commitment to investor protection and ensuring regulatory oversight in financial markets.

3. Non-Bailable Warrant: The Court issued a non-bailable warrant for the arrest of Sahara India Pariwar Chairman and other members who failed to comply with the refund order. This action underscored the seriousness of adhering to the Court’s directives and compliance with SEBI’s regulations.

Conclusion

The Sahara vs SEBI case holds significant importance in India’s corporate and regulatory landscape. It serves as a landmark judgment in safeguarding the interests and financial well-being of investors in cases of corporate and share-market irregularities. This case clarifies various legal aspects related to the issuance of securities by unlisted companies and addresses the exploitation of legal loopholes.

Furthermore, the judgment reinforces SEBI’s authority and investigative powers, enabling it to address matters concerning investor interests, even when they involve unlisted companies. By closing jurisdictional gaps between the Ministry of Corporate Affairs and SEBI, this ruling promotes regulatory consistency and investor protection.

Overall, the Sahara vs SEBI case exemplifies the Indian judiciary’s commitment to upholding transparency, fairness and accountability in financial markets, thereby safeguarding the interests of investors and maintaining the integrity of the corporate sector.

Sahara vs SEBI Summary

In the Sahara vs. SEBI case, the Supreme Court of India ruled in favour of the Securities and Exchange Board of India (SEBI), reinforcing its authority and investor protection measures. Sahara India Pariwar was ordered to refund all deposits collected with a 15% interest rate, and SEBI was granted the power to enforce this order.

Sahara vs SEBI clarified SEBI jurisdiction’s to investigate and regulate companies, even if they were not listed on stock exchanges. Additionally, the Court closed jurisdictional gaps between the Ministry of Corporate Affairs and SEBI. This landmark case serves as a pivotal example of upholding transparency, accountability, and investor interests in India’s corporate landscape, setting important precedents for regulatory enforcement and investor protection.