Is issue of shares by a
company to 50 persons or more a public issue requiring compliance with various
requirements, procedures, etc. ? Recently SEBI passed an order (‘the Order’) in
regard to certain companies of the Sahara Group and decided on this and certain
other issues. This decision can have far-reaching implications.
As per press reports,
however, a stay has been granted by the Allahabad High Court. That being said,
it appears that the basic findings of law have not yet been examined by the
Court. The object here in any case is not to consider whether the allegations or
the ‘findings’ of facts by SEBI are correct or not. The exercise here is to
determine what conclusions in the law did SEBI reach and what implications the
same can have.
In essence, the allegations
were that two companies of the Sahara Group raised large funds (just one company
raised nearly Rs.5000 crore) through issue of Optionally Fully Convertible
Debentures (‘OFCDs’). Also, allegedly, the cost of the projects for which these
OFCDs were issued was Rs.20,000 crore for each company. SEBI came across this
accidentally whilst examining a Red Herring Prospectus filed by another company
of the Sahara Group. SEBI sought various details from these two companies who
had issued the OFCDs to determine whether the issue was a ‘public issue’. The
two companies made certain submissions with regard to the information sought,
but in essence they inter alia stated that SEBI had no jurisdiction in
the matter as the matter was being examined by the Ministry of Company Affairs.
Since SEBI did not receive
the information it asked for, it compiled certain information as available on
the MCA website. It found out, for example, that the OFCDs were issued of
amounts between Rs.5,000 to Rs.24,000. Since specific information was not
available from the company, SEBI extrapolated that the number of persons to whom
such OFCDs of an amount of around Rs.5000 crore in just one company were issued
must be large, but in any case not less than 50 persons.
SEBI alleged that in view of
the provisions of S. 67(3) of the Companies Act, 1956, the issue of OFCDs
amounted to a public issue requiring compliance with the provisions relating to
public issue including the Companies Act, 1956, as well as the SEBI (ICDR)
Regulations, 2009. The companies stated (on the basis of legal opinions
obtained) that these provisions did not apply and hence there was no question of
compliance.
At this stage, a broad
description of the scheme of provisions may be in order. The Companies Act,
1956, as duly aligned with the provisions of the SEBI Act and the SEBI (ICDR)
Regulations, 2000 (‘the Regulations’) essentially requires that an issue of
shares can be on a ‘private placement’ basis or a public issue. Loosely stated,
in case of a private placement, a selected group of people are approached for
subscription of the securities. The issue of securities is restricted to them
and the ‘right’ to subscribe, generally speaking, is not transferable. In case
of a public issue, however, persons beyond this known group are approached for
such subscription. The scheme of the law intends that if such a wider issue is
made public, certain procedures and restrictions in regards to the interests of
investors should be followed. These would include certain mandatory disclosures
regarding the company, listing of the securities to ensure easy transferability,
etc. These provisions are formalised in certain provisions of the Companies Act,
1956, and the SEBI Act, Regulations, etc.
Let us first consider the
provisions of S. 67(3) which is one of the central points to this controversy.
Essentially, as readers are aware, S. 67 seeks to ‘deem’ certain issues of
securities as issues to the public. The Section is reproduced below for ready
reference (emphasis supplied in this section and in other extracts later herein)
:
“67. Construction of
references to of fering shares or debentures to the public, etc.
Any reference in this Act or
in the articles of a company to offering shares or debentures to the public
shall, subject to any provision to the contrary contained in this Act and
subject also to the provisions of Ss.(3) and Ss.(4), be construed as including a
reference to offering them to any section of the public, whether selected as
members or debenture holders of the company concerned or as clients of the
person issuing the prospectus or in any other manner.
Any reference in this Act or
in the articles of a company to invite the public to subscribe for shares or
debentures shall, subject as aforesaid, be construed as including a reference to
invitations to subscribe for them extended to any section of the public, whether
selected as members or debenture holders of the company concerned or as clients
of the person issuing the prospectus or in any other manner.
No offer or invitation shall
be treated as made to the public by virtue of Ss.(1) or Ss.(2), as the case may
be, if the offer or invitation can properly be regarded, in all circumstances —
as not being calculated to
result, directly
or indirectly, in the shares or debentures becoming available for subscription
or purchase by persons other than those receiving the offer or invitation; or
otherwise as being a
domestic concern of the persons making and receiving the offer or invitation.
Provided that nothing
contained in this sub-section shall apply in a case where the offer or
invitation to subscribe for shares or debentures is made to fifty persons or
more :”
The question was whether the
issue by the Sahara Group companies was an issue to the public in terms of S.
67(3). SEBI observed and held as follows in its Order :
“14. In order to curb the companies from offering shares and debentures to a wider group of people by disguising it as ‘domestic concern’, vide the Companies (Amendment) Act, 2000, with effect from December 13, 2000, a proviso was inserted to S. 67(3) stating that nothing contained therein shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more. Therefore, if an offer is made to fifty or more persons, it would be deemed to be a public issue, even if it is of ‘domestic concern’ or shown that “the shares or debentures are not available for subscription or purchase by persons other than those receiving the offer or invitation”. First proviso to S. 67(3) of the Act is as clear as that. In other words, even if an issue is made by way of private placement to fifty or more persons, it would be deemed to be a public issue, irrespective of whether it was offered to public at large or to just a section of the public chosen, in whatever manner.”
Curiously, SEBI has held that “even if an issue is made by way of private placement to fifty or more persons, it would be deemed to be a public issue, irrespective of whether it was offered to the public at large or to just a section of the public chosen, in whatever manner.” This statement can have far reaching implications. It is possible that many public companies make such a private placement of securities to more than 50 persons and in such a case, as per this ruling, the provisions of S. 67(3) would be per se attracted and the provisions relating to public issue would have to be complied with.
SEBI further explained the reasoning of its ruling as follows:
“15. The intention of the Legislature, more specifically as evinced in the amendment to the Act referred to above, is very clear that any and all mobilisation of funds from a group of investors, fifty or more in number should be classified as a ‘public issue’ and consequently be accorded all the safeguards provided, that typically accompanies the safety and protection accorded to their funds, in law. In view of the above, the contention of the companies that the OFCDs are issued by way of private placement basis to friends, associates, group companies, workers/employees and other individuals who are associated/affiliated or connected in any manner with Sahara India Group of Companies, would not give it a different colour. The rigour of the procedures enshrined in law, for the protection of investors who subscribe to an issue of securities would have to be preserved in toto. Though, the companies have stated that the offer was made on private placement to a select group, they could not provide any details of the group despite the fact that SEBI has issued summons seeking such information. This would lead to an adverse inference that they were offering OFCDs to fifty or more persons.”
Another contention raised by the companies was that the provisions of S. 67(3) should not apply to them since they had passed a resolution u/s.81(1A) for the issue of the OFCDs. This contention was rejected by SEBI stating the following:
“The companies, on the basis of the legal opinion received by them, have stated that they had passed the resolution u/s.81(1A) of the Act (which states that further shares may be offered to any persons in any manner whatsoever) and that their offer to a select set of persons should not be construed as a public offer. S. 81(1A) of the Act cannot have an overriding effect on the provisions relating to public issue, specified in the Act. S. 81 of the Act deals with further issue of securities and only gives pre-emptive rights to the existing shareholders of a company so that the subsequent offer of securities have to be offered to them as their ‘rights’. S. 81(1A) is only an exception to the said rule, subject to the procedural requirements contained therein. However, any further issue of capital, even pursuant to a resolution made u/s.81(1A) of the Act, is subject to the provisions of Part III of the Act, if the offer is made to fifty persons or more. Hence, the views submitted in the legal opinion that since the companies had passed resolutions u/s.81(1A) of the Act, the issuance of shares/debentures to a select group (however large, they may be), ceases to be an offer to the public, is devoid of any legal basis and hence cannot be accepted. It is quite obvious from a reading of S. 81(1A) that it was never intended to dilute the provisions of the Act relating to the definition of public issues. Whether an issue is a public or not is to be decided on the basis of S. 67 of the Act. As stated above in this Order, the first proviso to S. 67(3) of the Act makes it very clear that any offer or invitation to subscribe of shares or debentures to fifty persons or more should be treated as a public issue.”
The other contention of the companies was that S. 60B(9) effectively allows for a system where the Red Herring Prospectus needs to be filed only with the Registrar of Companies and once this is done, no other procedure is to be followed if the intention is not to get the shares of the company listed. SEBI rejected this argument too, stating that this would go counter to the scheme of provisions relating to public issue of shares and listing. SEBI held that as soon as the shares are offered to the public, the intention to list or not to list becomes irrelevant. The company has to list their shares and since this is mandatory, an attempt to take shelter u/s.60B(9) on claim that it never intended to list will not help.
An argument that was also made was that the is-sue was made that on a ‘private placement’ basis to friends, group companies, etc. and particularly to ‘other individuals who are associated/affiliated or connected in any manner with Sahara India Group of Companies’. SEBI had made a finding that apart from a declaration obtained that a particular subscriber was ‘associated’ with the Sahara Group, no other association was established. On this and other grounds discussed above, SEBI did not ac-cept that this did not amount to a public issue.
SEBI also considered the fact that they filed a prospectus with the Registrar supporting the view that the companies intended to raise funds from the public.
SEBI drew attention to S. 73(4) of the Companies Act, 1956, which provides that any condition that binds an applicant into making waiver of the requirement of that Section is null and void. Hence, listing was mandatory and it cannot be the subject matter of any ‘intention’ once the basic conditions are attracted.
As discussed, the Order may be considered by the Court on various grounds. One will have to see whether the Court disposes the petition only on the issue of jurisdiction or whether even the issue and ruling on S. 67(3), S. 81(1A) and S. 60B are also decided upon. For companies seeking to issue shares to 50 persons or more, this Order of SEBI has to be considered and the further developments in Court to be closely watched.
