It is a historic decision on several grounds – of the companies being asked to refund huge sums of money, of a pursuit by SEBI till the logical end despite numerous hurdles including inter-regulator conflicts, of certain important rulings on the point of law by the Supreme Court which involved, perhaps on facts, removal of several creases in various laws. It is worth knowing the entire sequence of facts, the issues involved and the orders passed. This article cannot obviously do justice to the 263 page Supreme Court order, but an attempt to highlight important issues has been made.
The matter, of course, is far more complex than being a linear sequence of orders and appeals. It had several detours to Allahabad and other courts but, in essence, it is sufficient to consider this series of orders only. The decision covers many important areas – powers of SEBI, what constitutes an issue to the public, the sanctity in law of Guidelines of SEBI and so on. Concerns have been expressed about the dubious role that the Registrar of Companies performed. The Supreme Court also appears to have endorsed the possibility of criminal action against the Saharas (the two Sahara group companies against whom the orders were passed). These and other issues may need separate analysis as to its scope and implications. Further, the progress of implementation of the order of the Supreme Court in terms of payment of refund monies into the designated bank, identification of the OFCDs holders, etc. will have to be seen. There are reports that the Saharas may pursue further litigation and hence, this matter may develop even further.
The essential facts – as stated in the decisions – are summarised in a simplified manner below. However, one preliminary thought comes to mind. The facts are quite glaring and extreme. The Saharas offered their Optionally Fully Convertible Debentures (“OFCDs”) to crores of people, hiring lakhs of agents through thousands of branches and raised tens of thousands of crores of rupees. And then they claimed, clearly on technical grounds, that there was no issue of securities to the public that would result in need for compliance of SEBI Regulations and other laws for disclosure, investor protection, etc. Further, they refused to provide information to SEBI and adopted delaying tactics. In the face of such facts, one even wonders whether the decision – which rejects every contention of the Saharas and even removes several creases and gaps in law in the process – could be interpreted to some extent as restricted to the facts of the case.
The Saharas, as the Supreme Court records, sought to raise funds through OFCDs. They filed/circulated an information memorandum/ Red Herring Prospectus with the Registrar of Companies, but no documents with SEBI. It took a view that issue of shares to a group of people – described in an extremely broad manner – did not amount to an issue to the public requiring compliance with the provisions of the Companies Act, 1956, the SEBI Act and Regulations, etc. that dealt with public issues. The Saharas, however, appointed about 10,00,000 agents, opened 2900 branches and offered the OFCDs to crores of people, and issued the OFCDs to some 66 lakh people (it appears that the actual figures may be even higher).
Contrast this with the maximum limit of 49 offerees permitted u/s 67(3) of the Companies Act, 1956, beyond which the offer would become a public offer. When the Sahara Group filed an offer document through a merchant banker for a public issue of shares of another group company, SEBI, having come to know through this offer document of the earlier issues of OFCDs, made preliminary inquiries with the merchant banker. The merchant banker essentially replied, relying on legal opinions, that the earlier issues of OFCDs were in compliance of law but did not provide more details. When SEBI pursued the matter further with the Saharas, they insisted that SEBI had no jurisdiction and that they had complied with the law and would respond only to the Registrar of Companies. In what was seen to be further delaying tactic, they claimed that the issue as to whether they are liable to provide information to SEBI was pending determination before the Law Ministry and SEBI should wait till the matter was resolved. This resulted in gathering of information by SEBI from ROC documents and passing of certain orders by SEBI, petitions before the High Court, etc. and finally, the Order by SEBI which, alongwith the Order on appeal by SAT was upheld by the Supreme Court. Several issues were raised before the Supreme Court. The ruling of the Supreme Court and its implications would need a far more detailed analysis and at this stage, some of the important issues and rulings are highlighted below. Was the offer of OFCDs by the Saharas a “private placement” or an issue to the public? It was noted that the offer was made to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies”. These persons in reality turned out to be nearly 3 crore in number. When finally the details of the allottees were provided, the Supreme Court was dissatisfied with the details and noted that just the first page of the data was enough to cast doubts on the genuineness of the persons. An allottee was named merely “Kalavati” and the person introducing her was named “Haridwar”. No details were provided on how the allottees formed part of the group described above. The Court held that in view of the first proviso to section 67(3), offer to more than 49 persons would be deemed to be an offer to the public. The fact that the offer was clearly made to more than 49 persons attracted this provision. Apart from the offer to more than 49, another preceding condition, that the offer should have been made as a matter of domestic concern between the persons making and receiving the offer, was also not satisfied in view of the extremely broad description of the offerees. Further, since the OFCDs were transferable, yet another preceding condition – that the offer should not be calculated to be received by persons other than the offerees – was also not satisfied. Thus, the offer was clearly an offer to the public u/s. 67(3) of the Companies Act, 1956.
Whether the OFCDs which admittedly were “hybrids”, were securities and hence amenable to jurisdiction of SEBI? The Saharas contrasted the definition of securities under the SEBI Act/SCRA and the Companies Act, 1956 to submit that the term securities under the SEBI Act/SCRA did not cover hybrids while that under the Companies Act, 1956, covered it. Reliance was placed on the definition under the Companies Act, 1956, which reads:- “2(45AA) “securities” means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes hybrids;” (emphasis supplied). Thus, it was argued by Saharas that since hybrids were specifically included as an addition, it showed that the basic definition of securities under SCRA could not have included hybrids. Thus, in short, the OFCDs, being hybrids, were governed only by the Companies Act, 1956, and SEBI – which derives jurisdiction under the SEBI Act/SCRA, could not govern issue of securities.
The Supreme Court first held that since u/s 55A, SEBI had powers to administer various specified provisions of the Companies Act, 1956, in matters of issue of securities and since securities specifically included hybrids, SEBI did have jurisdiction to that extent.
Then, the Supreme Court examined the definition of hybrid under the Companies Act, 1956, and noted that it covered any security that had the character of more than one type of security including their derivatives. The definition under SCRA defines securities inclusively and not exhaustively. Since, by definition, a hybrid is a “security”, it is covered by definition of “securities” under SCRA. Further, securities under SCRA included “other marketable securities of a like nature” and thus hybrids would once again be covered. It was particularly noted that the OFCDs were transferable, i.e., “marketable” as understood in this context.
Thus, hybrids were held to be securities under SCRA too and hence, SEBI was held to have jurisdiction over them.
It is submitted that this does not fully explain why the definition under the Companies Act, 1956, specifically included hybrids.
Whether the listing of OFCDs on stock exchanges was optional or mandatory?
The Saharas argued that u/s. 60B, there was a clear demarcation of listed and unlisted companies and unlisted companies were required to file the RHP only with the Registrar of Companies. The Saharas were neither listed nor intended to be listed. SEBI countered that section 73 clearly requires that a company seeking to offer securities to the public has to apply for listing to the stock exchanges.
The Supreme Court read section 60B and section 73 harmoniously and held that it was concluded by it earlier that the offer was indeed an offer to the public. In view of this, there was no option left in the manner of applying for listing. Listing was an inevitable consequence of such an offer and thus not optional but mandatory. Requirement of listing automatically brings in the jurisdiction of the SEBI, as it transforms a “public company” into a “listed public company” and thus covered by section 60B too.
Whether Section 55A gave powers to SEBI to administer specific provisions on unlisted companies that did not intend to get their securities listed?
Section 55A gives powers to SEBI to administer certain provisions in case of listed companies and unlisted companies that intended to get their securities listed on the recognised stock exchanges. The Saharas were neither listed nor, they claimed, they intended to get listed. This was even clearly specified in various documents.
The Supreme Court held that the intention could not be grasped and determined out of context of the actions of the Saharas. The Saharas did make an issue to the public. Such a public issue necessarily resulted in their being mandatorily required to get such securities listed. Thus, there is a deemed intention, since they could not carry out acts which require listing and then claim that they do not intend to list their securities.
Even otherwise, the Supreme Court held, section 11 of the SEBI Act was wide enough to give powers to SEBI to protect the interest of investors in securities and to regulate the securities markets by such measures as it thinks fit. This is wide enough to give powers to SEBI under the present facts. Later provisions of the Act do state that SEBI has certain powers over “other persons associated with the securities markets” and public companies, which intend to get their securities listed on the recognised stock exchanges. Even if these are taken to be restrictions for those sections and purposes, they do not apply to the former provisions. Thus, SEBI has adequate powers to govern the unlisted Saharas.
Furthermore, section 11A is even more specific in matters of issue of prospectus, etc. Sections 11B/11C reinforce this conclusion that SEBI has powers to govern listed and unlisted companies. Being a stand alone statute, the SEBI Act cannot be limited even by the provisions of the Companies Act, 1956.
Thus, SEBI had the jurisdiction to regulate and administer the unlisted Saharas.
Whether the SEBI DIP Guidelines had statutory force or were mere “departmental instructions”?
The Supreme Court held that the DIP Guidelines did have “statutory force” and that the OFCDs were issued in contravention of the DIP Guidelines as also of the SEBI ICDR Regulations that succeeded them.
Whether there was a pre-planned attempt by the Saharas to bypass the regulatory and administrative authority of SEBI in respect of issue of OFCDs?
It was pointed out by SEBI that the Saharas had modified the explicit format of declaration required to be given in the prescribed format. The prescribed format required the companies issuing a prospectus to state, inter alia, that the guidelines of SEBI have been complied with and no statement is made contrary to the provisions of the SEBI Act or rules made thereunder or guidelines issued thereunder. The Saharas omitted these declarations. There was further attempt to misguide by stating that the offer was by way of private placement when the invitation was extended to approximately three crore persons. The Supreme Court said that it cer-tainly seemed so that there was a pre-planned intention to bypass the regulatory and administrative authority of SEBI.
The manner of issuing the information memorandum/RHP showed that the procedure adopted was “obviously topsy-turvy and contrary to the recognised norms in company affairs”. All this made, the Supreme Court said, the entire approach of the Saharas “calculated and crafty”.
Their repeated refusals to share information and their non-cooperation, the unrealistic and possibly fictitious information provided and other similar factors made the Supreme Court to also state that the whole affair was “doubtful, dubious and questionable”.
Accordingly, the Supreme Court upheld the proceedings initiated by SEBI and the Orders of SEBI and SAT. It upheld the Order of SAT for refund of the amounts collected by issue of OFCDs alongwith interest @ 15% per annum. A mechanism was laid down to ensure this including deposit of the amounts with a nationalised bank, appointment of a retired Judge of the Supreme Court to oversee the process and several other directions for safeguarding various interests.
