REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 9813 OF 2011
Sahara India Real Estate Corporation Limited & Ors. .. Appellants
Versus
Securities and Exchange Board of India & Anr. .. Respondents
WITH
CIVIL APPEAL NO. 9833 OF 2011
J U D G M E N T
K. S. RADHAKRISHNAN, J.
1. We are, in these appeals, primarily concerned with the powers of
the Securities and Exchange Board of India (for short 'SEBI') under
Section 55A(b) of the Companies Act, 1956 to administer various
provisions relating to issue and transfer of securities to the public
by listed companies or companies which intend to get their securities
listed on any recognized stock exchange in India and also the question
whether Optionally Fully Convertible Debentures (for short 'OFCDs')
offered by the appellants should have been listed on any recognized
stock exchange in India, being Public Issue under Section 73 read with
Section 60B and allied provisions of the Companies Act and whether they
had violated the Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines, 2000 [for short 'DIP Guidelines'] and
various regulations of the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009 [for
short 'ICDR 2009'], and also whether OFCDs issued are securities under
the Securities Contracts (Regulation) Act, 1956 [for short 'SCR Act'].
2. Sahara India Real Estate Corporation Limited (for short
'SIRECL') and Sahara Housing Investment Corporation Limited (for short
'SHICL”), appellants herein (conveniently called Saharas), are the
companies controlled by Sahara Group. Saharas have raised almost
identical issues on facts as well as on questions of law before us and
hence we are disposing off both the appeals by way of a common
judgment.
3. SIRECL was originally incorporated as Sahara India “C” Junxion
Corporation Limited on 28.10.2005 as a public limited company under the
Companies Act and it changed its name to SIRECL on 7.3.2008. As per
the Balance Sheet of the company as on 31.12.2007, its cash and bank
balances were Rs.6,71,882 and its net current assets worth Rs.6,54,660.
Company had no fixed assets nor any investment as on that date.
SIRECL's operational and other expenses for the three quarters ending
31.12.2007 were Rs.9,292 and the loss carried forward to the Balance
Sheet as on that date was Rs.3,28,345.
4. SIRECL, in its Extraordinary General Meeting held on 3.3.2008,
resolved through a special resolution passed in terms of Section 81(1A)
of the Companies Act to raise funds through unsecured OFCDs by way of
private placement to friends, associates, group companies,
workers/employees and other individuals associated/affiliated or
connected in any manner with Sahara Group of Companies (for short
‘Sahara Group’) without giving any advertisement to general public.
Company authorized its Board of Directors to decide the terms and
conditions and revision thereof, namely, face value of each OFCD,
minimum application size, tenure, conversion and interest rate. Board
of Directors, consequently, held a meeting on 10.3.2008 and resolved to
issue unsecured OFCDs by way of private placement, the details of which
were mentioned in the Red Herring Prospectus (for short 'RHP') filed
with the Registrar of Companies (for short “RoC”), Kanpur. SIRECL had
specifically indicated in the RHP that they did not intend to get their
securities listed on any recognized stock exchange. Further, it was
also stated in the RHP that only those persons to whom the Information
Memorandum (for short 'IM') was circulated and/or approached privately
who were associated/affiliated or connected in any manner with Sahara
Group, would be eligible to apply. Further, it was also stated in the
RHP that the funds raised by the company would be utilized for the
purpose of financing the acquisition of townships, residential
apartments, shopping complexes etc. and construction activities would
be undertaken by the company in major cities of the country and also
would finance other commercial activities/projects taken up by the
company within or apart from the above projects. RHP also indicated
that the intention of the company was to carry out infrastructural
activities and the amount collected from the issue would be utilized in
financing the completion of projects, namely, establishing/constructing
the bridges, modernizing or setting up of airports, rail system or any
other projects which might be alloted to the company from time to time
in future. RHP also highlighted the intention of the company to
engage in the business of electric power generation and transmission
and that the proceeds of the current issue or debentures would be
utilized for power projects which would be alloted to the company and
that the money, not required immediately, might be parked/invested,
inter alia, by way of circulating capital with partnership firms or
joint ventures, or in any other manner, as per the decision of the
Board of Directors from time to time. SIRECL, under Section 60B of the
Companies Act, filed the RHP before the RoC, Uttar Pradesh on
13.3.2008, which was registered on 18.3.2008. SIRECL then in April
2008, circulated IM along with the application forms to its so called
friends, associated group companies, workers/employees and other
individuals associated with Sahara Group for subscribing to the OFCDs
by way of private placement. Then IM carried a recital that it was
private and confidential and not for circulation. A brief reference to
the IM may be useful, hence given below:
“PRIVATE & CONFIDENTIAL
(NOT FOR CIRCULATION)
INFORMATION MEMORANDUM FOR PRIVATE PLACEMENT OF OPTIONALLY FULLY
CONVERTIBLE UNSECURED DEBENTURES (OFCD)
This Memorandum of Information is being made by Sahara India Real
Estate Corporation Limited (formerly Sahara India 'C' Junxion
Corporation Limited) which is an unlisted Company and neither its
equity shares nor any of the bonds/debentures are listed or
proposed to be listed. This issue is purely on the private
placement basis and the company does not intend to get these OFCD's
listed on any of the Stock Exchanges in India or Abroad. This
Memorandum for Private Placement is neither a Prospectus nor a
Statement in Lieu of prospectus. It does not constitute an offer
for an invitation to subscribe to OFCD's issued by Sahara India
Real Estate Corporation Limited. The Memorandum for Private
Placement is intended to form the basis of evaluation for the
investors to whom it is addressed and who are willing and eligible
to subscribe to these OFCD's. Investors are required to make their
own independent evaluation and judgment before making the
investment. The contents of this Memorandum for Private Placement
are intended to be used by the investors to whom it is addressed
and distributed. This Memorandum for Private Placement is not
intended for distribution and is for the consideration of the
person to whom it is addressed and should not be reproduced by the
recipient. The OFCD's mentioned herein are being issued on a
private placement basis and this offer does not constitute a public
offer/invitation.” (emphasis added)
5. The RHP, which was issued prior to the IM, had also given the
details and particulars of the three OFCDs issued by SIRECL appended as
Annexure-I, which would give a brief idea of the Tenure of the Bonds
issued, its face value, redemption value etc., a projection of which is
given below:
| |Particulars |Nature of OFCDs |
| |Abode Bond |Real Estate |Nirmaan Bond | |
| | |Bond | | |
|Tenure |120 months |60 months |48 months | |
|Face Value |Rs.5,000/- |Rs.12,000/- |Rs.5,000/- | |
|Redemption Value |Rs.15,530/- |Rs.15,254/- |Rs.7,728/- | |
|Early Redemption |After 60 months|NIL |After 18 months| |
|Conversion |On completion |On completion |On completion | |
| |of 120 months |of 60 months |of 48 months | |
|Minimum |Rs.5,000/- |Rs.12,000/- |Rs.5,000/- | |
|Application Size | | | | |
|Nominee System |Double Nominee |Double Nominee |Double Nominee | |
|Transfer |Yes |Yes |Yes | |
6. I may also indicate that all the bonds stipulated that bond
holders could avail of loan facility as per the terms and conditions of
the application forms. Nirmaan and Real Estate Bonds prescribed an
additional feature of death risk cover as well. Clause 13 of RHP
imposed no restriction on the transfer of the OFCDs.
7. SIRCEL, therefore, floated the issue of the OFCDs as an open
ended scheme and collected an amount of Rs.19400,86,64,200 (Nineteen
thousand four hundred crores, eighty six lacs, sixty four thousand and
two hundred only) from 25.4.2008 to 13.4.2011. Company had a total
collection of Rs.17656,53,22,500 (Seventeen thousand six hundred and
fifty six crores, fifty three lacs, twenty two thousand and five
hundred only) as on 31.8.2011, after meeting the demand for premature
redemption. The above mentioned amounts were collected from
2,21,07,271 investors.
8. SHICL, a member of Sahara Group companies, also convened an
Annual General Meeting on 16.9.2009 to raise funds by issue of OFCDs,
by way of private placement, to friends, associated group companies,
workers/employees and other individuals associated/affiliated or
connected in any manner with the Sahara Group companies.
Consequently, a RHP was filed on 6.10.2009 under Section 60B of the
Companies Act with the RoC, Mumbai, Maharashtra, which was registered
on 15.10.2009. Later, SHICL issued OFCDs of the nature of Housing
Bond; conversion price of Rs.5,000/- for each five bonds, Income Bond,
conversion price of Rs.6,000/- for six bonds; Multiple Bond, conversion
price of Rs.24,000/- for two bonds. Interest accrued on each of the
three types of bonds was to be refunded to the bond holders.
9. SEBI, as already indicated, had come to know of the large scale
collection of money from the public by Saharas through OFCDs, while
processing the RHP submitted by Sahara Prime City Limited, another
Company of the Sahara Group, on 12.1.2010 for its initial public offer.
SEBI then addressed a letter dated 12.1.2010 to Enam Securities
Private Limited, merchant bankers of Sahara Prime City Limited about
the complaint received from one Roshan Lal alleging that Sahara Group
was issuing Housing bonds without complying with
Rules/Regulations/Guidelines issued by RBI/MCA/NHB. Merchant Banker
sent a reply dated 29.1.2010 stating that SIRECL and SHICL were not
registered with any stock exchange and were not subjected to any rule /
regulation / guidelines / notification / directions framed thereunder
and the issuance of OFCDs were in compliance with the applicable laws.
Following the above, another letter dated 26.2.2010 was also sent by
the Merchant Banker to SEBI stating that SIRECL and SHICL had issued
the OFCDs pursuant to a special resolution under Section 81(1A) of the
Companies Act, 1956 passed on 3.3.2008 and 16.9.2009 respectively.
Further, it was also pointed out that they had issued and circulated an
IM prior to the opening of the offer and that RHP issued by SIRECL
dated 13.3.2008 was filed with RoC, U.P. and Uttarakhand and RHP issued
by SIHCL dated 6.10.2009 was filed with RoC, Maharashtra.
10. SEBI on 21.4.2010 addressed a letter to the Regional Director,
Northern and Western Regions of Ministry of Corporate Affairs (for
short 'MCA') enclosing the complaint received in respect of OFCDs
issued by Saharas. SEBI had stated that those companies had solicited
and issued OFCDs violating statutory requirements and that they were
not listed companies and had not filed the RHP with SEBI. SEBI sent a
communication dated 12.5.2010 to Saharas calling for various details
including the details regarding the number of application forms
circulated after filing of RHP with RoC, details regarding the number
of applications received and subscription amount received, date of
opening and closing of subscription list of OFCDs, number and list of
allotees etc.
11. SIRECL on 31.5.2010 addressed a letter to MCA for
guidance/advice as to whether it was SEBI or MCA who had locus standi
in the matter of unlisted companies in view of the provisions of
Section 55A(c) of the Act. MCA, it is seen, had sent a letter dated
17.6.2010 to SIRECL stating that the matter was being examined under
the relevant provisions of the Companies Act, 1956. SIRECL informed
SEBI of the reply they had received from the MCA and that they would
address SEBI after a decision was taken by MCA. Having not received
the details called for from Saharas, SEBI had prima facie felt that
SIRECL was carrying out various transactions in securities in a manner
detrimental to the interests of the investors or to the securities
market and, therefore, issued summons dated 30.8.2010, under Section
11C of the SEBI Act, directing the company to furnish the requisite
information by 15.9.2010. Detailed reply dated 13.9.2010 was sent by
SIRECL to SEBI, wherein it was stated that the company had followed the
procedure prescribed under Section 60B of the Companies Act pursuant to
the special resolution passed under Section 81(1A) in its meeting held
on 3.3.2008 and filed its RHPs under Section 60B with the concerned
RoC. Further, it was pointed out that SIRECL was not a listed company,
nor did it intend to get its securities listed on any recognized stock
exchange in India and that OFCDs issued by the company would not fall
under Sections 55A(a) and/or (b) and hence the issue and/or transfer of
securities and/or non-payment of dividend or administration of either
the company or its issuance of OFCDs, were not to be administered by
SEBI and all matters pertaining to the unlisted company would fall
under the administration of the Central Government or RoC. Further,
it was urged that Regulations 3 and 6 of ICDR 2009 would not apply,
since there was no public issue either in the nature of an initial
public offer or further public offer as defined by Regulation 2(zc),
2(p) and/or 2(n) of ICDR 2009. OFCDs, it was pointed out, were
restricted to a select group (as distinguished from general public),
however large they might be and hence the issuance of OFCDs was not a
public offer to attract the provisions of Regulations 3 and/or 6 of
ICDR 2009. Company had stated that issuance of OFCDs of 2008 was also
not covered by the SEBI (Issue and Listing Securities) Regulations,
2008, since it would apply to non-convertible debt securities, whereas
the OFCDs issued by SIRECL were convertible securities. SIRECL,
therefore, requested SEBI to withdraw the summons issued under Section
11C of the SEBI Act. Summons dated 23.9.2010 was also issued to SHICL,
for which also an identical reply was sent to SEBI.
12. MCA, in the meanwhile, sent a letter dated 21.9.2010 to SIRECL
under Section 234(1) of the Companies Act calling for various details
including the amount collected through private placement, details
regarding the number of investors to whom the allotment had been made,
their names, addresses, utilization of the funds collected, its
purpose, class or classes of persons to whom the allotment had been
made and whether allotments were completed and various other details.
SIRECL was directed to furnish the information within 15 days from the
date of receipt of notice, failing which it was informed that penal
action would be initiated against the company and its directors under
Section 234(4)(a) of the Companies Act.
13. SEBI, in the meanwhile, sent a letter dated 23.9.2010 to SIRECL
reminding that it had not provided information/documents on the issue
of OFCDs. Proceeding issued for appointing the investigating agency
was also forwarded to the company. SIRECL again replied by its letter
dated 30.9.2010 raising the issue of jurisdiction of SEBI in
investigating the affairs of SIRECL. SIRECL, however, replied to the
letter of MCA dated 21.9.2010 on 4.10.2010, stating inter alia that it
would be filing the prospectus on the closure of the issue in
compliance with the provisions of Section 60B(9) of the Companies Act,
stating therein the total capital raised by way of OFCDs and the
related information by filing the prospectus. Further, it was also
pointed out that allotment had been made to persons who were connected
with the Sahara Group and that investors had given a declaration to the
company to that effect in terms of the RHP. MCA then sent a reply
dated 14.10.2010 stating that the points 1 to 3, 5 to 10, 12 to 16, 18
to 22 had been examined and appeared to be satisfactory. With regard
to points 4, 11 and 17, the company was directed to effect compliance
on closure of issue by filing of prospectus as required under Section
60B(9) of the Companies Act.
14. SEBI, in the meanwhile, issued a notice dated 24.11.2010
informing both SIRECL and SHICL that the issuance of OFCDs was a public
issue and, therefore, securities were liable to be listed on a
recognized stock exchange under Section 73 of the Companies Act.
From the preliminary analysis, it was pointed out that the issuance of
OFCDs by Saharas was prima facie in violation of Sections 56 and 73 of
the Act and also various clauses of DIP Guidelines and SHICL had also
prima facie violated Regulations 4(2), 5(1), 6, 7, 16(1), 20(1), 25,
26, 36, 37, 46 and 57 of ICDR 2009. Both the companies were,
therefore, directed to show cause why action should not be initiated
against them including issuance of direction to refund the money
solicited and mobilized through the prospectus issued with respect to
the OFCDs, since they had violated the provisions of the Companies Act,
SEBI Act, erstwhile DIP Guidelines and ICDR 2009.
15. SIRECL had challenged the show-cause-notice dated 24.11.1010
before the Allahabad High Court, Lucknow Bench in W. P. No. 11702 of
2010, which the Court had stayed on 13.12.2010. SEBI took up the
matter before this Court in S.L.P. (Civil) No. 36445 of 2010 and this
Court did not interfere with the interim order, but ordered early
disposal of the writ petition.
16. MCA, following its earlier letter dated 21.9.2010 issued another
notice dated 14.2.2011 directing SIRECL to furnish details on four
specific points, including the details of the number of persons who had
applied in pursuance to the OFCDs issued, the mode of receipt of
payment (Application Register), the name, address, number of persons to
whom OFCDs were allotted (Allotment Register) and also whether the
number of allottees to whom OFCDs were allotted etc. exceeded fifty.
SIRECL replied to the notice on 26.2.2011. SIRECL, it was stated, had
sent a password protected CD along with two separate sheets containing
the procedure and the password to SEBI; the CD contained of investors'
names, serial numbers and amounts invested in OFCDs. SEBI, however,
could not open the CD due to non furnishing of the password. SEBI
pointed out this fact before the High Court and the Court vacated the
interim order dated 13.12.2010. SIRECL took up the matter before this
Court in S.L.P. (Civil) No. 11023 of 2011.
17. SIRECL, in the meanwhile, claimed that it had furnished a
separate CD along with the password vide letter dated 19.4.2011 to SEBI
stating that due to the enormity of the work and time taken in
collating and compiling the data relating to the names and addresses
and the amount invested, the company could only provide the partial
information relating to names, numbers and amount invested by the
investors through the covering letter dated 18.3.2011 in a CD. SIRECL
then moved the High Court on 29.4.2011 to recall the order dated
7.4.2011 on the plea that the details called for by SEBI had been
furnished. The High Court dismissed the application, which led SIRECL
filing SLP (Civil) No. 13204 of 2011 before this Court. This Court on
12.5.2011 passed the following order in SLP (Civil) No. 11023 of 2011
and SLP (Civil) No. 13204 of 2011:
“In this matter the questions as to what is OFCD and the manner
in which investments are called for are very important questions.
SEBI, being the custodian of the Investor's and as an expert body,
should examine these questions apart from other issues. Before we
pass further orders, we want SEBI to decide the application(s)
pending before it so that we could obtain the requisite input for
deciding these petitions. We request SEBI to expeditiously hear
and decide this case so that this Court can pass suitable orders on
re-opening. However, effect to the order of SEBI will not be
given. We are taking this route as we want to protect the interest
of the Investor. In the meantime, the High Court may proceed, if
it so chooses, to dispose of the case at the earliest.”
18. SEBI then issued a fresh notice dated 20.5.2011 stating that
Saharas had not provided any information to SEBI regarding details of
its investors to show that the offer of OFCDs was made to less than
fifty persons. Further, it was pointed out that Saharas though
claimed, that the offer/issue was made on private placement basis, any
offer/issue to fifty or more persons would be treated as public
issue/offer in terms of the first proviso to Sub-section (3) of Section
67 of the Companies Act and the provisions of the Companies Act
governing public issues and the provisions of DIP Guidelines and ICDR
2009 would consequently apply. Further, it was also pointed out in the
notice that the RHP provided along with the letter of SIRCEL dated
15.1.2011 contained untrue statements which attracted the provisions of
Sections 62 and 63 of the Act and hence the offer of OFCDs to public
through the RHP was illegal. Further, it was stated that none of the
disclosure requirements specified by SEBI or the investors protection
measures prescribed for public issues under DIP Guidelines and ICDR
2009 had been complied with and hence there was prima facie violation
of Section 56 of the Companies Act and hence offer of OFCDs of Saharas
to the public was illegal. Notice also indicated that Saharas had
violated the provisions of Section 73 of the Companies Act, by non-
listing of their debentures in a recognized stock exchange. Further,
it was also pointed out that Saharas had not executed any Debenture
Trust Deed for their OFCDs, not appointed any Debenture Trustee and not
created any Debenture Redemption Reserve, which would amount to
violation of Sections 117A, 117B and 117C of the Companies Act. Non-
compliance of furnishing details in Form No. 2A, as required under Rule
4CC of the Companies (Central Government's) General Rules and Forms,
1956 read with DIP Guidelines and ICDR 2009, it was pointed out, had
violated Section 56(3) of the Companies Act.
19. SEBI notice dated 20.5.2011 also highlighted that the CD was
secured in such a manner that no analysis was possible and the
addresses of the OFCDs holders were incomplete or ambiguous. Serious
doubts were also raised with regard to the identity and genuineness of
the investors and the intention of the companies to repay the debenture
holders upon redemption. Notice, therefore, stated that the companies
had prima facie violated the provisions of the Companies Act, SEBI Act,
1992, DIP Guidelines and ICDR 2009 and hence the offer/issue of OFCDs
to public was illegal, and imperiled the interest of investors in such
OFCDs and was detrimental to the interest of the securities market.
Saharas were, therefore, called upon to show cause why directions
contained in the interim order of SEBI dated 24.11.2010 be not issued
under Sections 11(1), 11(4)(B), 11A(1)(b) and 11B of SEBI Act read with
Regulation 107 of ICDR 2009.
20. Saharas then sent a detailed reply dated 30.5.2011 pointing out
that the appellants had made private placement of OFCDs to persons who
were associated with Sahara Group and those issues were not public
issues. Further, it was also urged that OFCDs issued were in the
nature of “hybrid” as defined under the Companies Act and SEBI did not
have jurisdiction to administer those securities since Hybrid
securities were not included in the definition of 'securities' under
the SEBI Act, SCR Act etc. Further, it was also urged that such
hybrids were issued in terms of Section 60B of the Companies Act and,
therefore, only the Central Government had the jurisdiction under
Section 55A(c) of the Companies Act. Further, it was also pointed out
that Sections 67 and 73 of the Companies Act could not be made
applicable to Hybrid securities, so also the DIP Guidelines and ICDR
2009. Further, it was reiterated that the company had raised funds by
way of private placement to friends, associates, group companies,
workers/employees and other individuals associated/affiliated with
Sahara Group, without giving any advertisement to the public. Further,
it was also pointed out that RoC, Kanpur and Maharashtra had registered
those RHPs without any demur and, therefore, it was unnecessary to send
it to SEBI.
21. SEBI passed its final order through its whole-time member (WTM)
on 23.6.2011. SEBI examined the nature of OFCDs issued by Saharas and
came to the conclusion that OFCDs issued would come within the
definition of “securities” as defined under Section 2(h) of SCR Act.
SEBI also found that those OFCDs issued to the public were in the
nature of Hybrid securities, marketable and would not fall outside the
genus of debentures. SEBI also found that the OFCDs issued, by
definition, design and characteristics intrinsically and essentially,
were debentures and the Saharas had designed the OFCDs to invite
subscription from the public at large through their agents, private
offices and information memorandum. SEBI concluded that OFCDs issued
were in fact public issues and the Saharas were bound to comply with
Section 73 of the Companies Act, in compliance with the parameters
provided by the first proviso to Section 67(3) of the Companies Act.
SEBI took the view that OFCDs issued by Saharas should have been listed
on a recognized stock exchange and ought to have followed the
disclosure requirement and other investors' protection norms.
22. SEBI also held that the Parliament has conferred powers on it
under Section 55A(b) of the Companies Act to administer such issues of
securities and Saharas were not justified in raising crores and crores
of rupees on the premise that that OFCDs issued by them, were by way of
private placement. SEBI, therefore, found that the Saharas had
contravened the provisions of Sections 56, 73, 117A, 117B and 117C of
the Companies Act and also various clauses of DIP Guidelines. SEBI
also held that SHICL had not complied with the provisions of
Regulations 4(2), 5(1), 5(7), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46
and 57 of ICDR Regulations. Having found so, SEBI directed Saharas to
refund the money collected under the Prospectus dated 13.3.2008 and
6.10.2009 to all such investors who had subscribed to their OFCDs, with
interest.
23. Appellants, aggrieved by the above mentioned order of SEBI,
filed Appeal Nos. 131 of 2011 and 132 of 2011 before the Tribunal and
the Tribunal passed a common order on 18.10.2011. Before the Tribunal,
Union of India, represented through the Ministry of Company Affairs,
was impleaded. The Tribunal took the view that OFCDs issued were
securities within the meaning of Clause (h) of Section 2 of SCR Act, so
also under SEBI Act. Tribunal also noticed that RHP issued by SIRECL
was registered by the RoC on 18.3.2008, though information memorandum
(IM) was issued later in April 2008 in clear violation of Section 60B
of the Companies Act. Further, it was also noticed that IM was issued
through 10 lac agents and more than 2900 branch offices to more than 30
million persons inviting them to subscribe to the OFCDs which amounted
to invitation to public. Tribunal also found fault with the RoC as it
had failed to forward the draft RHP to SEBI since it was a public issue
and hence violated Circular dated 1.3.1991 issued by the Department of
Company Affairs, Government of India.
24. Tribunal also recorded a finding that Saharas, having made a
public issue, cannot escape from complying with the requirements of
Section 73(1) of the Companies Act on the ground that the companies had
not intended to get the OFCDs listed on any stock exchange. Tribunal
also examined the scope and ambit of Sections 55A of Companies Act read
with Sections 11, 11A and 11B of SEBI Act and took the view that a
plain reading of those provisions would indicate that SEBI has
jurisdiction over the Saharas since OFCDs issued were in the nature of
securities and hence should have been listed on any of the recognized
exchanges of India. SEBI also took the view that the explanation to
Section 55A has to be read harmoniously, and if so read, clearly spells
out the powers of SEBI and the Central Government. Tribunal also
considered the scope of Section 28(1)(b) of the SCR Act and held that
the exclusion in the said Act is not available to OFCDs issued by the
appellants. Tribunal concluded that SEBI has jurisdiction under
Section 55A(b) and the Saharas had flouted the mandatory provisions of
Section 73(1) of the Companies Act and the consequences provided under
Sub-section (2) of Section 73 would, therefore, follow and SEBI had
ample powers under Sections 11, 11A and 11B of the SEBI Act to issue
directions to refund the amounts to the investors with interest.
Aggrieved by the said order, SIRECL filed C.A. No. 9813 of 2011 and
SHICL filed C.A. No. 9833 of 2011 before this Court under Section 15Z
of the SEBI Act which came up for admission on 28.11.2011 and the
direction issued to refund sum of Rs.17,400 crores, on or before
28.11.2011, was extended. This Court also passed the following order:
“By the impugned order, the appellants have been asked by
SAT to refund a sum of Rs.17,400/- crores approximately on or
before 28th November, 2011. We extend that period upto 9th
January, 2012.
In the meantime, we are directing the appellants to put on
affidavit, before the next date of hearing, the following
information:
(a) Application of the funds, which they have collected
from the Depositors;
(b) Networth of the Companies which have received these
deposits;
c) Particulars of assets of the said Companies against
which the liability has been created. For that
purpose, the appellants will produce the requisite
financial statements consisting of the Balance Sheet
and Profit and Loss Account of the year ending 31st
March, 2011 and the Statement of Account upto 30th
November, 2011;
(d) The Affidavit will indicate how the said Compnies
seek to secure the liabilities which the Companies have
incurred and how they will protect the debenture holders;
(e) If returns have been filed under Income Tax Act,
1961, the same may be annexed to the Affidavit to be
filed.”
25. Civil Appeals later came for admission on 9.1.2012 and the
interim order granted was extended. As directed, Additional Affidavit
with certain documents were filed by both the appellants on 20.6.2012,
wherein specific reference was made to the affidavit dated 14.9.2011
filed by Saharas before the SAT, the details of which were given in a
chart form, which is as follows:
| |SIRECL |SHICL |
|Date of |25.4.2008 |Date of |20.11.2009 |
|commencement of | |commencement of | |
|issue | |issue | |
|Total amount |Rs.19,400.87 Crs|Total amount |Rs.6,380.50 Crs |
|collected till | |collected till | |
|April 13, 2011 | |April 13, 2011 | |
|Total | | |Rs.25,781.37 Crs |
|Less: Premature |Rs.1,744.34 Crs |Less: Premature |Rs.7.30 Crs |
|redemption |(11.78 lakh |redemption |(5,306 investors)|
| |investors) | | |
|Total | | |Rs.1,751.64 |
| | | |(11.78 Lakh |
| | | |investors) |
|Balance on |Rs.17,656.53 Crs|Balance on August|Rs.6,373.20 Crs |
|August 31, 2011 | |31, 2011 | |
|Total | | |Rs.24,029.73 Crs.|
| | | | |
|Total no. of investors |
| |Total |Balance| |Total |Balance |
| |till |as on | |till |as on |
| |April |August | |April 13,|August |
| |13, |31, | |2011 ( in|31, 2011 |
| |2011 |2011 | |Lakhs) |(in |
| |(in |(in | | |Lakhs) |
| |lakhs) |Lakhs) | | | |
|Abode Bond |70.94 |70.65 |Income Bond |1.45 |1.44 |
|Nirman Bond |25.44 |14.12 |Multiple Bond |30.46 |30.45 |
|Real Estate Bond|136.47 |136.3 |Housing Bond |43.23 |43.19 |
|Total |232.85 |221.07 |Total |75.14 |75.08 |
| |Total |Balance |
| |till |as on |
| |April 13,|August |
| |2011 (in |31, 2011 |
| |Lakhs) |(in |
| | |Lakhs) |
|Total |307.99 |296.15 |
26. Shri Fali S. Nariman, learned senior counsel appearing for
SIRECL formulated several questions of law which, according to the
senior counsel, arise out of the order passed by the Tribunal. Learned
senior counsel submitted that Section 55A of Companies Act confers no
power on SEBI to administer the provisions of Sections 56, 62, 63 and
73 of the Companies Act of an unlisted company or to adjudicate upon
the alleged violation of those provisions, that too without framing any
regulations under Section 642(4) of the Companies Act. Learned senior
counsel also pointed out that Sections 11, 11A and 11B of the SEBI Act
empower SEBI to protect the interest of investors but not to administer
the provisions of the Companies Act so far as an unlisted public
company is concerned, consequently, when exercising powers under SEBI
Act and/or SEBI Regulations, SEBI is not empowered to administer the
provisions of the Companies Act relating to the issue and transfer of
securities and non-payment of dividends, so far as an unlisted public
company is concerned.
27. Learned senior counsel also submitted that the powers of SEBI to
administer the aforesaid provisions are limited to the listed companies
and public companies which intend to get their securities listed on any
recognized stock exchange in India and, in any other case, the power of
administration of Sections 56, 62, 63 and 73 with respect to OFCDs is
vested only with the Central Government and not with SEBI. Reference
was also placed on the explanation to Section 55A and submitted that
all powers relating to “all other matters” i.e. matters other than
those relating to the issue and transfer of securities and non-payment
of dividends, including the matter relating to prospectus would be
exercised by the Central Government or the RoC and not SEBI.
28. Learned senior counsel also highlighted the conspicuous omission
of Section 60B in Section 55A which, according to the senior counsel,
indicates that SEBI cannot administer in case of any violation of
Section 60B. Even otherwise, learned senior counsel submitted that,
as a matter of legislative drafting, Section 60B could not have been
intended to be included in the parenthetical clause and, therefore,
could not be said to be covered by Section 55A. Learned senior counsel
also submitted that even if Section 60B falls in between under
Sections 59 to 81, Saharas either through their conduct or action
depicted no intention to have their securities listed on any stock
exchange in India so as to fall under Section 55A(b) of the Act.
Learned senior counsel also referred to Section 60B(9) of the Act and
submitted that the same would apply only in the case of listed company.
29. Learned counsel also referred to the Unlisted Public Companies
(Preferential Allotment) Rules, 2003 (for short '2003 Rules') and
submitted that unlisted public companies, for the first time, could
make preferential allotment through private placement pursuant to a
special resolution passed under Sub-section (1A) of Section 81 of the
Companies Act, if authorized by its Article of Association. Section
60B, it was pointed out, contemplated an unlisted company filing a RHP
even though OFCDs were not offered or to be offered to the public.
Further, it was also pointed out that, at best, the present case falls
under Section 55A(c) and it is amenable only to the jurisdiction of the
Central Government and that SEBI has no jurisdiction to administer,
inter alia, the provisions of Sections 56, 62, 63 and 73 of the
Companies Act, so far as unlisted public companies are concerned.
30. Shri Nariman also submitted that SEBI has committed a serious
error in holding that the SIRECL had contravened the provisions of SEBI
Act, DIP Guidelines read with ICDR 2009. Learned senior counsel
pointed out that DIP Guidelines were expressly repealed by ICDR 2009
and even if the DIP Guidelines apply, the same would not cover the
preferential issue of OFCDs by Saharas under 2003 Rules read with
Section 81(1A) of the Companies Act. Learned counsel also pointed
that ICDR 2009 would apply to the OFCDs issued by SIRECL by private
placement and when it comes to regulating preferential allotment by
private placement by unlisted public companies, the same is governed by
2003 Rules and only in case of preferential allotment by listed public
companies, ICDR 2009 would apply.
31. Shri Nariman also contended that there was no statutory
requirement for SIRECL to list OFCDs on any recognized stock exchange
under the provisions of 2003 Rules. Further, it is also contended that
the above rules do not have any deeming provisions for treating any
issue as a public issue on the basis of number of persons to whom
offers were made or on the basis of any other criteria. Learned senior
counsel also submitted that the proviso of Section 67(3) of the
Companies Act, added by the Companies Amendment Act, 2000 (w.e.f.
13.12.2000), was also not attracted to 2003 Rules, hence it was urged
that, in view of the statutory rules of 2003, preferential allotment by
unlisted public companies by private placement was provided for and
permitted without any restriction on numbers as per the proviso to
Section 67(3) and without requiring listing of OFCDs on any recognized
stock exchange. Shri Nariman also pointed out that it is only from
14.12.2011, the 2003 Rules were amended, whereby the definition of
preferential allotment was substituted, without disturbing or amending
Rule 2 of 2003 Rules. Learned senior counsel submitted that by the
amended definition of Preferential Allotment by the Unlisted Public
Companies (Preferential Allotment) Rules, 2011 (for short '2011
Rules’), hybrid instrument stands specifically included. Consequently,
the first proviso to Section 67 of the Companies Act was specifically
made applicable.
32. Learned senior counsel also contended that after the insertion
of the definition of “securities” in Section 2(45AA) as including
hybrid and the definition of “hybrid” in Section 2(19A) of the
Companies Act, the provisions of Section 67 were not applicable to
OFCDs which have been held to be “hybrid”. Various bonds issued by
Saharas, learned senior counsel submitted, were never shares or
debentures but hybrids, a separate and distinct class of securities.
Section 67, it was submitted, speaks only of shares and debentures and
not hybrids and, therefore, Section 67 would not apply to OFCDs issued
by SIRECL.
33. Learned counsel also referred to various terms and conditions of
the Abode Bond, Nirmaan Bond and Real Estate Bond and submitted that
they are convertible bonds falling with the scope of Section 28(1)(b)
of the SCR Act, in view of Section 9(1) and Section 9(2)(m) of that Act
and are not listable securities within the meaning of Section 2(h) of
the SCR Act and hence there is no question of making applications for
listing under Section 73(1) of the Companies Act. Learned senior
counsel also submitted that three Registrars of Companies – West
Bengal, Kanpur, and Mumbai – had, at different point of time,
registered the RHPs at different places over a period of nine years.
Registrars of Companies could have refused registration under Section
60(3) of the Companies Act as well, if there was non-compliance of the
provisions of the Companies Act. Learned counsel pointed out that
having not done so, it is to be presumed that private placement under
Section 60B of the Companies Act was permissible and hence no punitive
action including refund of the amounts is called for and the order to
that effect be declared illegal.
34. Shri Gopal Subramanium, learned senior counsel appearing on
behalf of SHICL submitted that any act of compulsion on Saharas to list
their shares or debentures on a stock exchange would make serious
inroad into their corporate autonomy. Learned senior counsel submits
that the concept of autonomy involves the rights of shareholders, their
free speech, their decision making and all other factors. To highlight
the concept of corporate autonomy, learned senior counsel placed
reliance on the Constitution Bench judgment of this Court in Life
Insurance Corporation of India v. Escorts Ltd. & Ors. (1986) 1 SCC
264. Learned senior counsel submitted that SEBI’s insistence that
Saharas ought to have listed their shares or debentures on a recognized
stock exchange in accordance with Section 73 of the Companies Act would
necessarily expose shareholders and debenture holders to the risks of
trading in shares and would also compel unlisted companies to seek
financial help from investment bankers. Learned senior counsel placed
reliance on the judgment of this Court in Union of India v. Allied
International Products Ltd. & Anr. (1970) 3 SCC 594 and submitted that
Section 73(1) was enacted with the object that the subscribers would be
ensured the facility of easy convertibility of their holdings when they
have subscribed to the shares on the representation in the prospectus
that an application for quotation of shares had been or would be made.
Learned senior counsel also made reference to the Cohen Committee
Report (U.K.) and submitted that the same would bring about the true
purport of Section 73, that it is the obligation on the company which
has promised the members of the public that their shares would be
marketable or capable of being dealt with in the stock exchange.
Learned senior counsel made reference to Section 51 of the Companies
Act, 1948 (U.K.) and the judgment in In re. Nanwa Gold Mines Ltd.
(1955) 1 WLR 1080 and submitted that the object of Section 51 was to
protect those persons who had paid money on the faith or the promise
that their shares would be listed. Learned senior counsel pointed out
that Sub-section (1) of Section 73 is qualified by the term
“intending”, which means Section 73(1) deals with companies that want
to issue new shares or debentures to be listed, and which have declared
to the investors that they intend to have those shares or debentures
dealt with on the stock exchange. In such a case, Section 73(1)
obliges those companies to make an application to one or more
recognized stock exchanges for permission for the shares or debentures
to be dealt with on the stock exchange or each such stock exchange,
before the issue of a prospectus. Learned senior counsel submitted
that the role of Section 73(1) is, therefore, narrow and limited and
those companies which do not intend to list their securities on a stock
exchange are not covered by this provision. Learned senior counsel
submitted that the expression “to be dealt in on stock exchange”
occurring in the heading of Section 73 must be read in the text of that
Section, to reach the understanding that it is not merely the
invitation of shares or debentures to the public which warrants the
application of Section 73, but it is only when such companies intend to
have their shares or debentures listed on the stock exchange that the
prescription under Section 73 shall apply. Learned senior counsel
submitted that the company’s freedom to contract under the Constitution
as well as the Law of Contracts needs to be safeguarded and that
persons who belong to the lower echelons of society, while it is
necessary that they must never be duped, ought not be prevented from
investing in measures which would add to their savings. Learned
senior counsel pointed out that to deprive them of such an opportunity
would be a serious infraction.
35. Learned senior counsel referring to Section 64 of the Companies
Act submitted that the expression “deemed to be prospectus” indicates
that whenever shares or debentures which are allotted can be offered
for sale to the public, such a document is deemed to be a prospectus
and has legal consequences. Section 73, according to the learned
senior counsel, operationalizes the intention of a company which is
allotment of shares with a view to sell to the public as contemplated
in Section 64 of the Act. So, while Section 64 refers to the documents
containing such an offer as a prospectus, Section 73 requires the
company to make an application before the issue of the prospectus.
Learned senior counsel also submitted that mere filing of prospectus is
not reflective of the intention to make a public offer. The purpose of
issue of prospectus is to disclose true and correct statements and it
cannot be characterized as an invitation to the public for subscription
of shares or debentures. Learned senior counsel also pointed out that
the filing of the prospectus or the administration of Section 62 on
account of misstatement in a prospectus will be undertaken by the
Central Government on account of explanation to Section 55A of the
Companies Act. Learned senior counsel submitted that the manner in
which a listed public company will offer its shares would be determined
under the SEBI Act as well as the SEBI Regulations. Learned senior
counsel submitted that Section 60B of the Companies Act, as such, does
not presuppose or prescribes an intention to list. Section 60B enables
a prospectus to be filed where a company is not a listed public
company. Learned senior counsel pointed out that IM or RHPs can be
filed although an offer of shares may be made by way of private
placement or to a section of the public or even to the public, but yet
without intending it to be listed. Learned senior counsel, therefore,
pointed out that the stand of SEBI that where there is an offer of
shares or debentures by way of prospectus, it amounts to an offer of
shares to the general public and, therefore, to be dealt with on a
stock exchange, is completely flawed and that Section 73 cannot be
interpreted to impinge upon the corporate autonomy of the company.
36. Shri Subramanium also submitted that Section 67 of the Companies
Act does not imply that a company’s offer of shares or debentures to
fifty or more persons would ipso facto become a ‘public issue’ or a
‘private offer’. Learned senior counsel submitted that in order to
determine whether an offer is meant for the public at large or by way
of private placement, what is relevant is the intention of the offeror.
In other words, the numbers are irrelevant, submits the counsel, it is
only the intention to offer to a select or identified group which will
make the offer a private placement. Learned senior counsel also
submitted that the proviso to sub-section (3) of Section 67 of the
Companies Act would be appreciated in that background. Learned senior
counsel also submitted that private placement is not authorized by
interpretative provision in Section 67(3) but is in fact the will of
the company reflected in a Special Resolution under Section 81(1A) of
the Companies Act which deals with “preferential allotment”. Learned
senior counsel submitted that when there is a private placement,
irrespective of the number, then the offer of shares need not take
place through a prospectus but can even take place through a letter or
a memorandum.
37. Learned senior counsel submitted that the Central Government
correctly understood the position while framing the 2003 Rules.
Learned senior counsel also submitted that SAT has no jurisdiction over
unlisted public companies either under Section 55A of the Companies Act
or under the SEBI Act. Learned senior counsel referred to the various
provisions conferring powers on SEBI under the SEBI Act as well as the
limited powers conferred on SEBI under the Companies Act. Learned
senior counsel pointed out that SEBI is not concerned with the
securities of all the companies, nor is it responsible for overseeing
the sources of capital in the country, except that which is in the
securities market. Learned senior counsel also pointed out that
compulsory listing of scrips is ‘unheard of’ in any jurisdiction. It
was further submitted that it is impossible to conceive that a
regulator or State or Parliament could actually intend that there would
be a mandatory exposure of business to vicissitudes of fortune being
swept by waves in the stock market.
38. Learned senior counsel elaborately referred to the various
provisions of the SEBI Act in that context. Learned senior counsel
also submitted that the Central Government and SEBI cannot approbate or
reprobate regarding their jurisdiction over the unlisted public
companies. Learned senior counsel pointed out that SEBI has
categorically stated on oath before various Forums that an unlisted
public company was not within its jurisdiction if that company did not
intend to list their shares on the stock exchange. Later, SEBI has
unfairly changed its stand before the other Forums. Learned senior
counsel referred to the stand taken by SEBI before the Bombay High
Court in Kalpana Bhandari v. Securities and Exchange Board of India
(2005) 125 Comp. Cases 804 (Bom.) as well as Delhi High Court judgment
in Society for Consumers and Investment v. Union of India and others
passed in Writ Petition No. 15467 of 2006. Reference was also made to
the judgment of the Kerala High Court in Writ Petition (C) No. 19192 of
2003 [Kunamkulam Paper Mills Ltd. & Ors. V. Securities and Exchange
Board of India & Others] learned senior counsel pointed out that SEBI
has taken contradictory stand in various forums rather than properly
appreciating and applying the provisions of SEBI Act and the Companies
Act.
39. Learned senior counsel also submitted that OFCDs issued by the
Saharas are outside the purview of the SCR Act as well as the SEBI Act.
Learned senior counsel referred to Section 2(19A) of the Companies Act
defining the term “hybrid” and also the definition of “securities”
under Section 2(45AA) and submitted that the legislative intent was to
treat “hybrids” differently from either shares or debentures and thus
exclude from the purview of Section 67, the offer of hybrids. Learned
senior counsel submitted that OFCDs issued by Saharas which are
convertible debentures would fall within the meaning of “any
convertible bond” under Section 28(1)(b) of SCR Act and, therefore,
would stand excluded from the purview of SCR Act.
40. Learned senior counsel also submitted that SEBI has exceeded its
jurisdiction by acting contrary to and beyond this Court’s order dated
12.5.2011 passed in SLP(C) No.11023 of 2011 and SLP(C) No.13024 of 2011
and has conducted itself in a manner prejudicial to Saharas. Learned
counsel pointed out that the conduct of the regulator in the manner in
which proceedings have been conducted raises serious doubts about SEBI
functions. Learned senior counsel pointed out that, apart from
asserting jurisdiction in an erroneous manner, SEBI has no evidence of
credible nature to show that Saharas had attempted to deceive or
collect money from fictitious sources. Further, it was pointed out
that there was no complaint from any investor and it originated on a
complaint by a person who has no interest in Saharas. Learned senior
counsel also submitted that SAT’s direction of refund, in exercise of
its powers under Section 73(2) of the Companies Act, is erroneous.
Learned senior counsel, therefore, submitted that such a direction to
refund the amount with interest is bad in law and liable to be quashed.
41. Shri Arvind P. Dattar, learned senior counsel appearing on
behalf of SEBI, submitted that SEBI as well as SAT were fully justified
in holding that SEBI has jurisdiction to administer the provisions
contained under Section 55A, so far as they relate to the issue and
transfer of securities by Saharas. Learned senior counsel pointed out
that Saharas had paid up share capital of just Rs.10 lakhs and
virtually no assets and the companies had collected about Rs. 27,000
crores from about 3 crore subscribers, through unsecured OFCDs.
Learned senior counsel pointed out that Sections 55A, proviso to
Section 67(3), Section 73 and other related provisions clearly bring
out the intention of the Parliament, i.e. after 13.12.2000, even if an
unlisted public company makes an offer of shares or debentures to fifty
or more persons, it was mandatory to follow all the statutory
provisions that would culminate in the listing of those securities.
Learned senior counsel pointed out that once the number reaches fifty,
proviso to Section 67(3) applies and it is an issue to the public,
attracting Section 73(1) and an application for listing becomes
mandatory and, thereafter the jurisdiction vests with SEBI.
42. Learned senior counsel elaborately argued on the structure of
Section 55A and the purpose and object of the parenthetical clause and
the brackets employed in the sub-section. Learned senior counsel
referred to the word “including” in Section 55A and submitted that the
word has been used to emphasize and to make it abundantly clear that
Sections 68A, 77A and 80A will be administered by SEBI even though they
do not primarily deal with the issue and transfer of securities and non-
payment of dividend. Learned senior counsel pointed out that if
Section 60B is excluded from the main part of Section 55A, it will
stand excluded for listed companies as well which is a consequence
never envisaged or intended by the Legislature. Learned senior counsel
also submitted on a reference to Sections 59 to 81 that Parliament
intended to include all sections in that range. Learned senior
counsel pointed out that Section 55A also applies to companies which
“intend to” get their securities listed and that on a combined reading
of the proviso to Section 67(3) and Section 73(1), since Saharas had
made an offer of OFCDs to more than forty nine persons, the requirement
to make application for listing became mandatory and SEBI has the
necessary jurisdiction even though Saharas had not got their securities
listed on a stock exchange. Learned senior counsel also stated that,
the plea, that Saharas never wanted or intended to list their
securities, hence escaped from the rigor of Sections 55A, 60B, 73 etc.
of the Companies Act, cannot be sustained. Learned senior counsel
submitted that Saharas should be judged by what they did, not what they
intended. Reference was placed on a Privy Counsel judgment in Young v.
Bristol Aeroplane Company Ltd. [1945 PC 163 (HL)]. Learned senior
counsel also made elaborate arguments on the explanation to Section 55A
as well.
43. Shri Dattar also submitted that DIP Guidelines have statutory
force since they are made specifically under the powers granted to SEBI
under Section 11 of the SEBI Act. Learned senior counsel pointed out
that DIP Guidelines were implemented by SEBI with regard to all listed
companies and unlisted companies which made a public offer, until it
was replaced by ICDR 2009. Learned senior counsel submitted that the
issue of OFCDs was in contradiction of Section 73(1) and the applicable
DIP Guidelines/ICDR 2009, consequently, SEBI was obliged to pass orders
for refunding the amount that was collected by Saharas.
44. Learned senior counsel submitted that under Section 11(1) of the
SEBI Act, SEBI is duty bound to protect the interest of investors in
securities either listed or which are required by law to be listed, and
under Section 11B, SEBI has the power to issue appropriate directions,
in the interests of investors in securities and the securities market,
to any person who is associated with securities market. Learned
senior counsel pointed out that 2003 Rules are not applicable after
2003, to any offer or shares or debentures to more than forty nine
persons and the rules were amended in the year 2011 to make explicit
what was already implicit, but the statutory mandate in this regard was
made clear w.e.f. 13.12.2000, and that the 2003 Rules will be subject
to the statutory provisions of the proviso to Sections 67(3) and 73(1).
45. Learned senior counsel also submitted that Saharas' basic
assumption that they are covered by 2003 Rules is erroneous. Learned
counsel pointed out that a public issue would not become a preferential
allotment by merely labeling it as such and the facts on record show
that the issue could not be termed as a preferential allotment.
Preferential allotment, learned counsel submits, is made by passing a
special resolution under Section 81(1A) and is an exception to the rule
of rights issue that requires new shares or debentures to be offered to
the existing members/holders on a pro rata basis. Learned senior
counsel pointed out that once the offer is made to more than forty nine
persons, then apart from compliance with Section 81(1A), other
requirements regarding public issues have to be complied with.
46. Shri Dattar further submitted that after insertion of the
proviso to Section 67(3) in December, 2000, private placement as
allowed under Section 67(3) was restricted up to forty nine persons
only and 2003 Rules were framed keeping this statutory provision in
mind and were never intended for private placement/preferential issue
to more than forty nine persons and the amendments to these rules made
in the year 2011 merely made the said legal position under the 2003
Rules, explicit. Shri Dattar also submitted that OFCDs are debentures
by name and the nature and the definition of 'debenture' as given under
Section 2(12) of the Companies Act includes any other securities.
Learned senior counsel submitted that the securities as defined in
Section 2(45AA) of the Companies Act includes hybrids and, therefore,
hybrids fall in the definition of debentures and are amenable to the
provisions of Sections 67 and 73 of the Companies Act.
47. Shri Dattar also submitted that Section 28(1)(b) of SCR Act does
not apply to convertible debentures and the plea raised by Saharas is
also untenable because the interpretation placed on Section 28(1)(b)
would be in contradiction to the mandatory provisions of Section 73(1)
and the proviso to Section 67(3) of the Companies Act. It was next
submitted that if the convertible debentures are excluded from SCR Act,
it would lead to a paradoxical situation because these debentures are
required to be listed under Section 73(1) but they cannot be listed in
view of Section 28(1)(b). Learned senior counsel submitted that SEBI
has rightly claimed jurisdiction to administer the OFCDs, as it was
obligatory on the part of Saharas to comply with the statutory
requirements of the Companies Act, SEBI Act and SCR Act. Saharas,
learned senior counsel submits, had no right to collect Rs.27,000
crores from three crore investors without complying with any
regulatory provisions, except filing of RHP with RoCs at Kanpur and
Mumbai and that SEBI was justified in directing refunding of amount
with 15% interest.
48. Shri Harin P. Rawal, Additional Solicitor General appearing on
behalf of Union of India placed detailed written submissions,
supporting the stand taken by SEBI. Powers conferred on SEBI under the
SEBI Act as well as the Companies Act have been elaborately dealt with
in the written submissions filed by him, pointing out that there is no
conflict of jurisdiction of SEBI or RoC/MCA while enforcing the
provisions of SEBI Act and the Companies Act. It was pointed out that
there is no overlap, much less any repugnancy or conflict between
provisions of SEBI Act and those of Section 55A of the Companies Act
and the Sections enumerated thereunder. It was pointed out that
Sections 11A and 11B of SEBI Act should be read as provisions
additional to Section 55A. Reference was also made to Section 32 of
the SEBI Act and it was submitted that the provisions of SEBI Act are
“in addition to” and “not in derogation of” the provisions of any other
law, unless the provisions of SEBI Act are wholly inconsistent with the
Companies Act, the provisions of both the SEBI Act and the Companies
Act should be harmonized and both sets of provisions given operation.
Further, it was pointed out that Sections 11, 11A, 11B of SEBI Act are
special law and Section 55A and the enumerated sections of the
Companies Act are general law. It was further pointed out that
Sections 11(2A), 11(4) and 11A of SEBI Act were enacted (or amended) in
2002 and those provisions did not limit SEBI's powers to only
regulating listed companies. Moreover, those provisions were
predicated upon the continued operation of Sections 11 and 11B even to
unlisted companies and, consequently, it cannot be said that the
Parliament intended Section 55A of the Companies Act to impliedly
repeal the powers of SEBI in relation to unlisted companies under
Sections 11 and 11B of SEBI Act.
Supreme Court as a court of appeal
49. Saharas have filed these appeals, under Section 15Z of the SEBI
Act, raising various questions of law which they claim arise out of the
order of the Tribunal. Section 15Z reads as follow:
Appeal to Supreme Court:
“15Z. Any person aggrieved by any decision or order of the
Securities Appellate Tribunal may file an appeal to the Supreme
Court within sixty days from the date of communication of the
decision or order of the Securities Appellate Tribunal to him on
any question of law arising out of such order:
Provided that the Supreme Court may, if it is satisfied that the
applicant was prevented by sufficient cause from filing the
appeal within the said period allow it to be filed within a
further period not exceeding sixty days.”
50. The Securities Appellate Tribunal (for short ‘SAT’) which
exercises powers under Section 15T, it is well settled, is the final
adjudicator of facts. Under Sub-section (3) of Section 15U of SEBI
Act, every proceeding before the Tribunal shall be deemed to be a
judicial proceeding within the meaning of Sections 193 and 228 and for
the purpose of Section 196 IPC. Under Section 15U, the Tribunal, in
exercise of its powers and in discharge of its functions, shall not be
bound by the procedure laid down by the Code of Civil Procedure, but
shall be guided by the principles of natural justice. The Tribunal
has, for the purpose of discharging its functions, the same powers as
are vested in a Civil Court under the Code of Civil Procedure. Broadly
speaking, the Tribunal has trappings of a court in the sense that it
has to determine the appeal placed before it judicially and give a fair
hearing to the parties, to accept evidence and also order for
inspection and discovery of documents, compel attendance of witnesses
and to pass a reasoned order which gives finality to the dispute,
subject to the appeal to Supreme Court under Section 15Z of the Act.
Findings of fact generally fall in the domain of the Tribunal provided
it stays within its jurisdiction. Situations may also be there, where
the evidence taken as a whole is not reasonably capable of supporting
the findings recorded by the Tribunal or the Tribunal could have
reasonably recorded that conclusion. Questions repeatedly posed in
this case before SEBI as well as before SAT, were with regard to the
nature of OFCDs issued by Saharas. RHPs produced had disclosed that
Saharas did not intend the proposed securities to be listed on any
stock exchange and that the issues consisted of unsecured OFCDs with an
option to convert the same to equity shares. Saharas had also
disclosed that the issue was made on a private placement basis and that
OFCDs would be offered also to such persons to whom IM would be
circulated. But the fact remains that it was circulated to more than
three crore people inviting them to subscribe. The same was
circulated through ten lac agents and more than 2900 branch offices and
Saharas had a capital base of only 10 lakhs with no other assets or
reserves and was a loss making company and had collected nearly 27,000
crores by way of private placement through unsecured OFCDs
redeemable/convertible after 48/60/120 months. Fact finding
authorities repeatedly asked for information regarding the names,
addresses of investors in OFCDs and the amounts subscribed by them.
SIRECL claimed that it had furnished to SEBI a separate CD giving the
details of names of investors, the amount invested etc. along with the
password and keys, along with its letter dated 19.4.2011 which,
according to SIRECL, was never opened or checked. SEBI, as already
indicated, has been vested with the powers of a Civil Court under CPC,
as per Sub-section (3) of Section 11 of the SEBI Act. Under Section
11C, the Board has also been vested with the powers to order
investigation to examine whether any person associated with securities
market has violated any provision of the Act or the rules or the
regulations made or direction issued by the Board.
51. Saharas, along with Vol III (additional documents), filed before
this Court, gave certain details of the persons who have invested.
Documents produced before us and before the fact finding authorities do
not show the relationship Sahara Group had with the investors. Claim
of Saharas was that the investors were their friends, associated group
companies, workers/employees and other individuals who were
associated/affiliated or connected with Sahara Group. Saharas, in the
bonds, sought for a declaration from the applicants that they had been
associated with Sahara Group. No details had been furnished to show
what types of association the investors had with Sahara Group. Bonds
also required to name an introducer, whose job evidently was to
introduce the company to the prospective investor. If the offer was
made to those persons related or associated with Sahara Group, there
was no necessity of an introducer and an introduction. Burden of proof
is entirely on Saharas to show that the investors are/were their
employees/ workers or associated with them in any other capacity which
they have not discharged. Fact finding authorities have clearly held
that Saharas had not discharged their burden which is purely a question
of fact. Facts are elaborately discussed by SEBI (WTM) and SAT, hence
we do not want to burden this judgment with those factual details. I
find no perversity or illegality in those findings which call for
interference by this Court sitting under Section 15Z of the SEBI Act.
I, therefore, fully concur with the Tribunal that the money collected
by Saharas through their RHPs dated 13.3.2008 and 6.10.2009, through
the OFCDs, were from the public at large and the same would amount to
collection of money by way of issue of securities to the public, a
finding which calls for no interference by this Court sitting under
Section 15Z of the SEBI Act.
52. I will now examine various questions of laws raised before us.
Following are some of the cardinal issues that have come up for
consideration, apart from other incidental issues and ancillary issues,
which also I may deal with:
QUESTIONS OF LAW FRAMED
a) Whether SEBI has jurisdiction or power to administer the provisions
of Sections 56, 62, 63, 67, 73 and the related provisions of the
Companies Act, after the insertion of Section 55A(b) w.e.f.
13.12.2000, by the Companies (Amendment) Act, 2000, so far as it
relates to issue and transfer of securities by listed public
companies, which intend to get their securities listed on a
recognized stock exchange and public companies which have issued
securities to fifty persons or more without listing their
securities on a recognized stock exchange;
b) Whether the public companies referred in question no. (a) is
legally obliged to file the final prospectus under Section 60B(9)
with SEBI and whether Section 60B, as it is, falls under Section
55A of the Companies Act;
c) Whether Section 67 of the Companies Act implies that the company’s
offer of shares or debentures to fifty or more persons would ipso
facto become a public issue, subject to certain exceptions provided
therein and the scope and ambit of the first proviso to Section
67(3) of the Act, which was inserted w.e.f. 13.12.2000 by the
Companies (Amendment) Act, 2000;
d) What is the scope and ambit of Section 73 of the Companies Act and
whether it casts an obligation on a public company intending to
offer its shares or debentures to the public, to apply for listing
of its securities on a recognized stock exchange once it invites
subscription from fifty or more persons and what legal consequences
would follow, if permission under sub-section (1) of Section 73 is
not applied for listing of securities;
e) What is the scope and ambit of DIP (Guidelines) and ICDR 2009 and
whether Sahara had violated the various provisions of the DIP
(Guidelines) and ICDR 2009, by not complying with the disclosure
requirements or investor protection measures prescribed for public
issue under DIP (Guidelines) and ICDR 2009, thereby violating
Section 56 of the Companies Act;
f) Whether Rules 2003 framed by the Central Government under Section
81(1A) of the Companies Act read with Section 642 of the Act are
applicable to any offer of shares or debentures to fifty or more as
per the first proviso to sub-section (3) of Section 67 of the
Companies Act and what is the effect of UPC (PA) Amendment Rules
2011 and whether it would operate only prospectively making it
permissible for Saharas to issue OFCDs to fifty or more persons
prior to 14.12.2011;
g) Whether after the insertion of the definition of ‘securities’ in
Section 2(45AA) as “including hybrids” and after insertion of the
separate definition of the term “hybrid” in Section 2(19A) of the
Act, the provision of Section 67 would apply to OFCDs issued by
Saharas and what is the effect of the definition clause 2(h) of SCR
Act on it;
h) Whether OFCDs issued by Saharas are convertible bonds falling
within the scope of Section 28(1)(b) of the SCR Act, therefore, not
‘securities’ or, at any rate, not listable under the provisions of
SCR Act;
i) Whether SEBI can exercise its jurisdiction under Sections 11(1),
11(4), 11A(1)(b) and 11B of the SEBI Act and Regulation 107 of ICDR
2009 over public companies who have issued shares or debentures to
fifty or more, but have not complied with the provision of Section
73(1) by not listing its securities on a recognized stock exchange.
j) Scope of Section 73(2) of the Companies Act regarding refund of the
money collected from the Public;
k) Civil and Criminal liability under the various provisions of the
Companies Act.
53. Much of the arguments on either side centered round the scope
and interpretation of various provisions of the Companies Act, SEBI Act
and the rules and regulations framed thereunder, relating to matters
concerning the issue of securities, powers of SEBI, Central Government
(MCA), RoC, which are being discussed hereunder. Powers conferred on
SEBI, Central Government, (MCA), RoC etc. under the Companies Act, SEBI
Act also call for consideration.
Powers of SEBI, Central Government, (MCA), Registrar of Companies under
the companies Act and SEBI Act:
54. The Companies Act, 1956 is a consolidation of the then existing
laws, statutory rules and certain judgments laid down by the Courts in
India and England. This Court in Commissioner of Income Tax, Gujarat
v. Girdhardas and Co. Private Ltd. AIR 1967 SC 795, noticed that the
Companies Act, 1956 substantially incorporated the provisions of the
English Companies Act, 1948. However, there has been considerable
shift of principles and concepts after the formation of 1948 English
Companies Act and those principles and concepts find a place in the
later English Companies Act, 1985, followed by 1989 Act. Indian
Companies Act, 1956 still remains static on various issues. No efforts
have been made to incorporate universally accepted principles and
concepts into our company law, hitherto. Of late, however, some
efforts have been made to carry on few amendments to the Companies Act,
1956, so also in the SEBI Act, 1992 and also by framing rules and
regulations like SEBI Rules, Regulations, so as to keep pace with the
English Companies Act and related legislations. Instances are many
where securities market have collapsed in England, USA, India etc. due
to high-profile corporate fraud cases, leading to legislative
intervention in various countries including India. For example,
England faced a flood of speculative and fraudulent schemes of company
flotation, a classic example is scheme formulated by the South Sea
Company, which collapsed in 1720, which heralded the start of Security
Law in England. Great Crash of New York in 1929 also contributed in
equal measure apart from other high-profile corporate fraud cases in
U.S.A. Various ventures, undertakings by the companies registered
under England Companies Act have their own impact on Securities Law as
well. Prior to 1985, in England, the procedure to be followed by the
companies for the issue of securities were mainly contained in the
Companies Act 1948, the Companies Act 1980 and the Prevention of Fraud
in Investment Act 1958. Later, in England, the Companies Act 2006 was
enacted making detailed and important changes to the legal treatment of
shares. Securities markets now stand controlled by the Financial
Services and Market Act, 2000 (FSMA) in England, which has created the
Financial Service Authority (FSA). Historical facts also show that
fraudulent accounting and non-disclosure of information was root cause
for collapse of Enron, Barings, World Com, BCCI etc. which put the
reforms of corporate governance on the agenda in the United States.
55. India is also not an exception. Harshad Mehta, a Broker, was
charged for diverting funds from the Bank to the tune of Rs.4000 crores
to stock brokers between 1991-92; Ketan Parekh Securities Scam in the
year 2001 in which investors, it was reported, had lost heavily; so
also the Banks in the UTI scam 2001, where it was reported that heavy
funds were collected from small investors and money was used to fund
large business houses and huge amounts were invested in junk bonds;
Satyam Computers Scam of 2008, where it was reported that, over a
number of years, Satyam Computer account was manipulated and money was
raised through shares.
56. Both in England and India, it is well established, that the
range of functions that may be performed by a company incorporated
under the Companies Act is extremely wide. Public companies and
private companies, functioning under the Companies Act 2006 in England,
the Companies Act 1956 in India, have considerable social and economic
importance, but public companies are more highly regulated than private
companies. Private companies are not authorized to offer any
securities to the public. FSMA in England generally deals with issue
of securities to the public, including listing Rules, the Prospectus
Rules, and continuing obligation contained in the Disclosure and
Transparency Rules etc. The Companies Act 1956 in India was enacted
with the object to protect the interests of a large number of
shareholders, safeguard the interests of the creditors to attain the
ultimate ends of social and economic policy of the Government.
Provisions have also been incorporated making provisions for
prospectus, allotment and other matters relating to issue of shares and
debentures etc. Parliament has also enacted the SEBI Act to provide
for the establishment of a Board to protect the interests of investors
in securities and to promote the development of, and to regulate the
securities market. SEBI was established in the year 1988 to promote
orderly and healthy growth of the securities market and for investors'
protection. SEBI Act, Rules and Regulations also oblige the public
companies to provide high degree of protection to the investor’s rights
and interests through adequate, accurate and authentic information and
disclosure of information on a continuous basis.
57. SEBI Act is a special law, a complete code in itself containing
elaborate provisions to protect interests of the investors. Section 32
of the Act says that the provisions of that Act shall be in addition to
and not in derogation of the provisions of any other law.
58. SEBI Act is a special Act dealing with specific subject, which
has to be read in harmony with the provisions of the Companies Act
1956. In fact, 2002 Amendment of the SEBI Act further re-emphasize the
fact that some of the provisions of the Act will continue to operate
without prejudice to the provisions of the Companies Act, qua few
provisions say that notwithstanding the regulation and order made by
SEBI, the provisions of the Companies Act dealing with the same issues
will remain unaffected. I only want to highlight the fact that both
the Acts will have to work in tandem, in the interest of investors,
especially when public money is raised by the issue of securities from
the people at large.
59. Powers and functions of SEBI are dealt with in Chapter IV of the
SEBI Act. Section 11 states that, subject to the provisions of the
Act, it shall be the duty of SEBI to protect the interests of investors
in securities and to promote the development of and to regulate the
securities market. SEBI is also duty bound to prohibit fraudulent and
unfair trade practices relating to securities markets, prohibiting
insider trading in securities etc. Section 11A authorizes SEBI to
regulate or prohibit issue of prospectus, offer document or
advertisement soliciting money for issue of securities which read as
follows:
“11A (1) Without prejudice to the provisions of the Companies
Act, 1956(1 of 1956), the Board may, for the protection of
investors, -
a) specify, by regulations –
i) the matters relating to issue of capital, transfer
of securities and other matters incidental thereto;
and
(ii) the manner in which such matters shall be
disclosed by the companies;
(b) by general or special orders –
(i) prohibit any company from issuing prospectus, any
offer document, or advertisement soliciting
money from the public for the issue of
securities;
(ii) specify the conditions subject to which the
prospectus, such offer document or
advertisement, if not prohibited, may be issued.
(2) Without prejudice to the provisions of section 21 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956), the
Board may specify the requirements for listing and transfer of
securities and other matters incidental thereto."
Section 11B empowers the Board to issue directions which reads as
follows:
“11B. Save as otherwise provided in section 11, if after
making or causing to be made an enquiry, the Board is
satisfied that it is necessary,-
(i) in the interest of investors, or orderly development of
securities market; or
(ii) to prevent the affairs of any intermediary or other
persons referred to in section 12 being conducted in a
manner detrimental to the interest of investors or
securities market; or
iii) to secure the proper management of any such intermediary or
person,
it may issue such directions,-
(a) to any person or class of persons referred to in
section 12, or associated with the securities market;
or
(b) to any company in respect of matters specified in
section 11A, as may be appropriate in the interests of
investors in securities and the securities market.”
60. I find all the above quoted provisions are inter-related and
inter-connected and the main focus is on Investor Protection. Power is
also conferred on SEBI under Section 11C to conduct investigation if
the transactions are being dealt with in a manner detrimental to the
investors or securities market. Mandatory listing of securities in
case of offer to public would cast an obligation on the issuers to
ensure the transparency of information and other continuing obligations
to provide information by means of prospectus and to follow disclosure
provisions.
61. I may, in the above background, examine the various provisions
of the Companies Act which cast a legal obligation on the public
companies which offer securities to the public and the SEBI’s power or
jurisdiction to administer those companies and the legal requirement to
be followed while making offer of securities to the public. When we
interpret and deal with the provisions like Section 55A, 60B, 67, 73
etc. of Companies Act, we have to always bear in mind the various
provisions of the SEBI Act, especially Sections 11, 11A, 11B, 11C, 32
etc. because as we have already indicated, those provisions shall be in
addition to and not in derogation of the provisions of the Companies
Act.
62. I may straightway deal with the first question posed on the
jurisdiction of SEBI over various provisions of the companies Act in
the case of public companies, whether listed or unlisted, when they
issue and transfer securities.
63. Section 55A, the scope of which has been extensively argued, is
given below for easy reference:
“55A. Powers of Securities and Exchange Board of India.— The
provisions contained in sections 55 to 58, 59 to 81, (including
Sections 68A, 77A and 80A)108, 109, 110, 112, 113, 116, 117, 118,
119, 120, 121, 122, 206, 206A and 207, so far as they relate to
issue and transfer of securities and non-payment of dividend
shall,—
(a) in case of listed public companies;
(b) in case of those public companies which intend to get their
securities listed on any recognized stock exchange in India, be
administered by the Securities and Exchange Board of India; and
(c) in any other case, be administered by the Central Government.
Explanation.—For the removal of doubts, it is hereby declared that
all powers relating to all other matters including the matters
relating to prospectus, statement in lieu of prospectus, return of
allotment, issue of shares and redemption of ir-redeemable
preference shares shall be exercised by the Central Government,
Tribunal or the Registrar of Companies, as the case may be.”
64. Section 55A was inserted in the Act by the Companies (Amendment)
Act, 2000 w.e.f. 13.12.2000. Clauses (v) to (x) of the Statement of
Objects and Reasons give an indication of the intention of the
Legislature. Clauses (v) and (x) read as follows:
“Clause (v) - to provide that the Securities and Exchange
Board of India be entrusted with powers with regard to all matters
relating to public issues and transfers including power to
prosecute defaulting companies and their directors.
(x) to provide that any offer of shares or debentures to
more than 50 persons shall be treated as a public issue with
suitable modification in the case of public financial institutions
and non-banking financial companies.”
(emphasis supplied)
65. Legislative intention to entrust the powers with SEBI, with
regard to all matters relating to public issues and transfers including
power to prosecute default companies and their directors, is based on
information derived from past and present experiences. Powers have
been specifically conferred on SEBI because it was established under
the SEBI Act, 1992, in order to protect the interest of investors in
securities and to promote the development of and to regulate the
securities market and for matters connected therewith or incidental
thereto. When we look at Section 55A it is clear that it deals with
the following three categories:
a) Listed public companies
b) Public companies which intend to get their securities listed on
any recognized stock exchange in India; and
c) “in any other case” that is, all other unlisted public
companies, which do not make a public offer of securities and
private companies.
66. Public companies which fall under categories (a) and (b) are to
be administered by SEBI and with regard to various provisions mentioned
in the first part of Section 55A, so far they relate to issue and
transfer of securities and non-payment of dividend and rest of the
matter be administered by the Central Government. Power of
administration of Sections 56, 62, 63 and 73 with respect to issue of
OFCDs lies with SEBI and not with the Central Government since they
relate to issue of securities.
67. We shall now examine the structure of Section 55A and when we do
that, we have to necessarily keep in mind the object and purpose of
that section, the intention of the Legislature and the role and
function to be performed by the specialized forum, SEBI, created by the
SEBI Act. Powers conferred on SEBI under Section 11A to protect the
interest of investors that too without prejudice to the provisions of
the Companies Act, may also be borne in mind when we interpret Section
55A, as already indicated. Provisions which relate to issue and
transfer of securities and non-payment of dividend have to be
administered by SEBI, a legal obligation cast on SEBI. Section 55A
specifically refers to Sections 55 to 58 and Sections 59 to 81 with an
emphasis to Sections 68A, 77A and 80A within brackets. Specific
reference has been made to Sections 108, 109, 110 and Sections 116,
117, 118, 119, 120, 121, 122, 206, 206A and 207. The Original
Companies (Second Amendment) Bill of 1999 [Bill No. 139 of 1999] did
not have the parenthetical clause in Section 55A (i.e. including
Sections 68A, 77A and 80A) which was introduced as corrigendum before
the leave was sought and granted to introduce the Bill in the Lok Sabha
and with this corrigendum the bill was passed in the Lok Sabha on
27.11.2000 and then on 30.11.2000 by the Rajya Sabha and later assented
by the President. Contention was, therefore, raised that when the Bill
was introduced it was provided that Sections 59 to 81 were to be
administered by SEBI, in respect of listed public companies and
companies intended to get their securities listed in a stock exchange.
But, it was pointed out, that Sections in between Sections 59 to 81,
which had letters ‘A’ or ‘B’ as a suffix, were not all intended to be
covered by Section 55A, hence the necessity for the parenthetical
clause added by a corrigendum, i.e. (including Sections 68A, 77A and
80A). Further, it was also contended that where provisions ending with
the suffix ‘A’, ‘AA’ or ‘B’ were intended to be included in Sections 59
to 81, it was specifically so provided. Reference was made to Section
206A which finds a place in Section 55A. For the above, it was
submitted by Saharas that Section 60B could not have been intended to
be included in the parenthetical portions and could not be said to have
covered by Section 55A.
68. All sections falling within Sections 55 to 58 of the Companies
Act will fall under those sections. So far as Section 55A is
concerned, it is the very Section which deals with powers of SEBI,
Central Government, Tribunal, Company Law Board, Registrar of Companies
etc. Reference to Sections 59 to 81 indicated that Parliament
intended to include all sections in that range which takes in Sections
60B, 62, 63, 67, 73 etc. of the Companies Act. Section 67 is also a
section of considerable importance because the expression “offer of
shares or debentures to the public” finds a place in various sections
of the Act, as well as the articles of a company. Further, the first
proviso added to Section 67(3) vide the Companies (Amendment) Act, 2000
w.e.f. 13.12.2000 is also of considerable bearing in determining
whether a public company offering shares or debentures to the public
has to list its securities on a recognized stock exchange. Expression
‘to’ clearly has a meaning i.e. everything in between or destination of
an action. The meaning of the expression ‘to’ came up for
consideration before this Court in Hindustan Lever Ltd. v. Ashok Vishnu
Kate and Ors. (1995) 6 SCC 326. Further, the specific inclusion of
Sections 68A, 77A and 80A in a bracket, would not mean the exclusion of
all sections between in Sections 59 to 81 with suffix ‘A’ or ‘AA’ or
‘B’. The word ‘including’ used in the parenthetical clause is only to
give emphasis to those sections. Lord Watson in Dilworth v.
Commissioner of Stamps (1999) AC 99 said that the word 'include' is
very generally used in interpretation clause in order to enlarge the
meaning of words or phrases occurring in the body of the Statute and,
when it is so used, these words and phrases must be construed as
comprehending, not only things they signify according to their natural
import, but also those things which the interpretation clause declares
that they shall include.” In Delhi Judicial Services Association v.
State of Gujarat AIR 1991 SC 2176, the expression used in Article 129
of the Constitution i.e. including the power to punish for contempt of
itself which was interpreted by the Court stating that the expression
'including' has been interpreted by Courts to extend and widen the
scope of power. Giving emphasis to Sections 68A, 77A and 80A does not
mean the exclusion of all such similar sections.
69. Legislature, in its wisdom, thought some emphasis has to be
given to Sections 68A, 77A and 80A because all those sections provide
certain offences to be punishable with imprisonment. Further clue for
that reasoning, we may get, if we examine the manner in which the
Legislature has used succeeding sections. In Section 55A there is a
specific reference to Section 108, not Sections 108A to I. So also
Section 55A specifically refers to Section 109, not Sections 109A and
B. Legislature wanted inclusion of Sections 108A to I, Section 109A
etc., then it would have said Sections 108 to 110. Further, the
Legislature never wanted the inclusion of Sections 117A to C, hence it
used Section 117 alone, not Sections 116 to 122. If it has used so,
then Sections 117A to C also would have been included. Legislature in
that sequence wanted inclusion of Sections 206 and 206A, hence both the
sections have been included. Hence, when the legislature has used the
expression Sections 59 to 81, 60B which falls in between, stands
included. Further, the entrustment of powers on SEBI, under Section
55A, is in addition to the then existing powers of SEBI under SEBI Act,
1992, which takes Sections 11, 11A and 11B as well.
70. Explanation has been added to Section 55A to harmonize and to
clear up doubts and allay groundless apprehensions. In S. Sundaram
Pillai & Ors. v. V.R. Pattabiraman & Ors. (1985) 1 SCC 591, this Court
has ruled that the purpose of the explanation is to clarify where there
is any obscurity or vagueness in the main enactment and to make it
consistent with the dominant object which it seems to serve. The main
part of Section 55A confers jurisdiction on SEBI with regard to three
categories i.e. issue of securities, transfer of securities and non-
payment of dividend. The expression “all other matters” mentioned in
the explanation would refer to powers other than the above mentioned
categories. Further, it may also be remembered that the explanation
does not take away the powers conferred on SEBI by other sections of
the Companies Act. At the same time, matters relating to prospectus,
statement in lieu of prospectus, return of allotment, issue of shares
and redemption of irredeemable preference shares be exercised by the
Central Government, Tribunal, Company Law Board, Registrars of
Companies, as the case may be. Further, Section 60B(9) clearly
indicates that upon closing of the offer of securities, a final
'prospectus' has to be filed in the case of listed company with SEBI
and Registrar, hence the explanation to Section 55A can never be
constructed or interpreted to mean that SEBI has no power in relation
to the prospectus and the issue of securities by an unlisted public
company, if the securities are offered to more than forty nine persons.
71. I am, therefore, of the view that the mere fact that emphasis
has been given to Sections 68A, 77A and 80A, does not mean the
exclusion of Section 60B from Section 59 to 81. We, therefore, hold
that, so far as the provisions enumerated in the opening portion of
Section 55A of the Companies Act, so far as they relate to issue and
transfer of securities and non-payment of dividend is concerned, SEBI
has the power to administer in the case of listed public companies and
in the case of those public companies which intend to get their
securities listed on a recognized stock exchange in India. In any
other case, i.e. rest of the matters, that is excluding matters
relating to issue and transfer of securities and non-payment of
dividend be administered by the Central Government in the case of
listed public companies and those companies which intend to get their
securities listed on any recognized stock exchange in India.
Explanation to that section further clarifies the position so as to
remove doubts, saying all powers relating to other matters including
the matters relating to prospectus, statement in lieu of prospectus,
return of allotment, issue of shares and redemption of irredeemable
preference shares, should be exercised by the Central Government,
Tribunal or the Registrar of Companies, as the case may be. Section
55A, therefore, makes it clear that SEBI has the power to administer
the above mentioned select provisions of the Companies Act relating to
matters specified therein. Contention raised by Saharas that without
regulations being framed under Section 642(4) of the companies Act,
SEBI cannot exercise powers of administration, is totally unfounded and
is rejected.
PROSPECTUS AND IM
72. Prospectus is the principal medium through which the investors
get information of the strength and weakness of the company, its
creditworthiness, credence and confidence of promoters and the
company’s prospects. Section 55 of the Act provides that a prospectus
issued by or on behalf of a company or in relation to an intended
company shall be dated and that date shall be taken as the date of its
publication. The matters to be stipulated and reports to be set out
are provided under Section 56 of the Act, read with Part 1 of Schedule
11 of the Companies Act, which also calls for the details of the stock
exchange where application was made for listing of issue of securities.
Section 60 of the Act deals with registration of the prospectus.
Section 60(3) specifically states that the Registrar shall not register
a prospectus unless the requirements of Sections 55, 56, 57 and 58 and
sub-sections (1) & (2) of that section have been complied with.
Securities can be listed on a recognized stock only after the
prospectus is prepared and approved by the RoC, SEBI, as the case may
be. Section 62 imposes civil liability for mis-statements in prospectus
and Section 63 criminal liability. Section 68 provides imprisonment
for a term which may extend to five years, or with fine which may
extend to one lakh rupees, or with both, for fraudulently inducing
persons to invest money. In other words, either to offer transferrable
securities for sale to the public or to request the admission of
securities for trading on a regulated market without prospectus, or to
offer transferrable securities for sale to the public, by way of shares
and debentures, in violation of the first proviso to Section 67(3) may
attract civil and criminal liability. Saharas, in this case, published
RHPs with the approval of RoC, but did not get them approved by SEBI or
their securities listed on a recognized stock exchange.
73. Section 60B which was included in the Act by the Companies
Amendment Act, 2000 (Act 53 of 2000) w.e.f. 13.12.2000. 60B(1) reads
as follows:
“60B. Information memorandum.
(1) A public company making an issue of securities may circulate
information memorandum to the public prior to filing of a
prospectus.”
74. Section 60B(1) is an enabling provision which enables a public
company making an issue of securities to circulate information
memorandum (IM) to the public before filing the prospectus. Purpose of
that sub-section is for assessing the demand and the price which the
public would be willing to offer, which is not a mandatory requirement.
Note on Clause 52 of the 1997 Bill explains the object and purpose of
that Section as follows:
“This Section provides for the concepts of ‘book building’ and
‘information memorandum’. This is an international practice and
refers to collecting orders from investment bankers and large
investors based on an indicative price range. This is essentially
a pre-issue exercise which will facilitate the issuers to get
better idea of demand and the final offer price. The directors of
the company, however, will not be permitted to resort to
underwriting on book building.”
75. Section 60B(1), therefore, was introduced to facilitate a pre-
issue exercise to get a better insight of demand and final offer price.
Section 60B(2) of the Act refers to the stage at which the RHPs has to
be filed by the company. The provision clearly states that the company
inviting subscription by an IM shall be bound to file a prospectus
prior to the opening of the subscription lists and the offer as a RHP,
at least three days before the opening of the offer. Section 60B(3)
stipulates that IM and RHPs shall carry the same obligations as are
applicable in the case of prospectus. Explanation clause states, “for
the purpose of Sub-sections (2), (3) and (4), “Red Herring Prospectus”
means a prospectus which does not have complete particulars on the
price of the securities offered and the quantum of securities offered”.
The expression “prospectus” is also defined in the Act vide Section
2(36) of the Companies Act as follows:
“2(36) “Prospectus" means any document described or issued as
a prospectus and includes any notice, circular, advertisement or
other document inviting deposits from the public or inviting offers
from the public for the subscription or purchase of any shares in,
or debentures of, a body corporate. (emphasis supplied)”
Section 60B(9) deals with the final prospectus, which reads as follows:
“60B (9) Upon the closing of the offer of securities, a final
prospectus stating therein the total capital raised, whether by way
of debt or share capital and the closing price of the securities
and any other details as were not complete in the red-herring
prospectus shall be filed in a case of a listed public company with
the Securities and Exchange Board and Registrar, and in any other
case with the Registrar only.”
76. Section 60B(9) deals with two categories of companies i.e.
“listed public company” under one category and the rest of the
companies falling under “any other case” under another category. A
company inviting subscription from public by an IM is bound to file a
prospectus prior to the opening of the subscription lists. That is the
moment a company decides to issue securities to the public, a duty is
cast on it to get its securities listed on a recognized stock exchange.
Section 60B, as already indicated, refers to IM. Section 2(19B) was
inserted by the Companies (Second Amendment) Act, 2002, w.e.f.
1.4.2003, which reads as follows:
“2(19B) "information memorandum" means a process undertaken
prior to the filing of a prospectus by which a demand for the
securities proposed to be issued by a company is elicited, and the
price and the terms of issue for such securities is assessed, by
means of a notice, circular, advertisement or document.”
77. The initiation of the process of offering securities to the
public by a company, therefore, starts with IM, but it is bound to file
a prospectus prior to the opening of subscription lists and the offer
as RHPs and then reaches its final intimation, that is after closing of
the offer of securities with a final prospectus, with the requisite
details and any other details as were not completed in the RHP by
filing the same with SEBI and Registrar of Companies. Therefore, a
company which has made on offer of securities to the public and,
therefore, has applied for listing on a stock exchange, will fall under
the category of listed companies and not in ‘any other case’ under
Section 60B(9) of the Act. Therefore, a reading of Sections 60B(1),
(2) and (3) reveals the stage when IM and RHPs are filed and Section
60B(9) the stage of culmination on closing of the offer of securities
and filing of the prospectus of a listed company with SEBI and RoC and
in any other case with only the RoC. Registration of prospectus is
dealt with in Section 60 of the Act which says, no prospectus shall be
issued by or on behalf of a company or in relation to an intended
company, unless on or before the date of its publication, there has
been delivered to the RoC for Registration a copy thereof, duly signed
and complying with statutory requirements. Registrar shall not
register a prospectus unless the requirements of Sections 55, 56, 57
and 58 and Sub-sections (1) and (2) of Section 60 have been complied
with. Section 56 refers to the matter to be stated and reports to be
set out in the prospectus, and states that every prospectus issued
shall state the matter specified in Part I of Schedule II and set out
reports as specified in Part II of the Schedule, which will have effect
subject to the provisions contained in Part III of that schedule.
General information clause (c) of Part I of Schedule II calls for the
names of recognized stock exchange and other stock exchanges where
application is made for listing. Section 60B(3), as I have already
indicated, says IM and RHPs shall carry same obligations as are
applicable in the case of a prospectus.
78. SEBI, under Section 60B(9), however, as a Regulator is legally
obliged to examine whether, upon the closing of the offer of
securities, a final prospectus giving the details of the total capital
raised, whether by way of debt or share capital and the closing of the
securities and other details as were not complete in RHPs, have been
filed in a case of listed public company with SEBI. This duty is cast
on the Registrar alongwith SEBI in the case of a listed public company
and in any other case only the Registrar.
79. Saharas have taken up the stand that they have only circulated
the IM, by way of private placement, to their associates, group
companies, workers/employees etc. Section 60B(1) , as I have already
indicated, casts no obligation to issue an IM. It is open to a
public company making an issue of securities to circulate the IM to
public before filing a prospectus for assessing the demand and price
which public would be willing to offer. If Saharas were going for a
private placement, then I fail to see why they had elicited all those
details through an IM, since Section 60B(1) deals with issue of IM to
the public alone. But from Saharas’ conduct and action, it is clear,
that their intention was to issue securities to the public under the
garb of private placement. RHPs issued by Saharas indicated that they
did not intend the proposed issue of securities to be listed on a stock
exchange, even though in reality the securities were issued to the
public. Every company which intends to offer shares or debentures to
the public for subscription by way of a prospectus is legally obliged
to make an application on a recognized stock exchange. Let us examine
whether Saharas practiced what they have preached. First, they have
breached the very statutory declaration prescribed in Part 1 of
Schedule II. Statutory declaration reads as follows:
“Declaration: That all the relevant provisions of the Companies
Act, 1956, and the guidelines issued by the Government or the
guidelines issued by the Securities and Exchange Board of India
established under section 3 of the Securities and Exchange Board of
India Act, 1992, as the case may be, have been complied with and no
statement made in prospectus is contrary to the provisions of the
Companies Act, 1956 or the Securities and Exchange Board of India
Act, 1992 or rules made thereunder or guidelines issued, as the
case may be.:
80. RHP issued by Saharas (SIRECL) contains not the declaration
mentioned above, but states as follows:
“All the relevant provision of the Companies Act, 1956 and the
guidelines issued by the Government have been complied with and no
statement made in the prospectus is contrary to the provisions of
the Companies Act, 1956 and the Rules thereunder.”
In the Bond (OFCDs) of Saharas, there is a head “Declaration” which,
inter alia, reads as follows:
“….I confirm that I am/applicant associated with Sahara India
Group. I have been explained everything in the language known to
me and I have given my full consent on terms and conditions
mentioned above.”
Further, at the end of the page containing the terms and conditions of
bond, the following is also given as a declaration, which reads as
follows:
“I have explained everything in the language known to the
applicant/Representative of applicant and he/she has given his/her
full consent on terms and conditions mentioned above. I, hereby
further declare that all declaration made by the Bond
Holder/Representative of Bond Holder and all the
information/personal particulars given above by the Bond
Holder/Representative of Bond Holder are correct and true to the
best of my knowledge and belief. Signature of the Introducer.”
81. I fail to see, if the investors were associated with Sahara
Group, as declared, then where was the necessity of an Introducer and
Introduction. If the offer was made only to persons associated,
related or known to Sahara Group, then they could have furnished those
details before the fact finding authorities. Further, in the IM,
Saharas had stated that if the number of interested parties to the
issue exceeds fifty they should approach the RoC to file RHPs as per
Section 67(3) of the Companies Act, which clearly indicates that
Saharas knew, by virtue of the first proviso to Section 67, if the
number of persons exceeds fifty, then the same would be a public issue.
Facts indicate that, through this dubious method, that SIRECL had
approached more than thirty million investors, out of which 22.1
million have invested in the OFCDs and it had raised nearly 20,000
crores, for which it had utilized the services of its staff in 2900
branches/service centers and utilized the services of more than one
million agents/representatives. Court can, in such circumstances, lift
the veil to examine the conduct and method adopted by Saharas to defeat
the various provisions of the Companies Act, already discussed, read
with the provisions of the SEBI Act.
82. I, in the above facts and circumstances, fully endorse the
findings recorded by SEBI (WTM) and SAT that the placement of OFCDs by
Saharas was nothing but issue of debentures to the public, resultantly,
those securities should have been listed on a recognized stock
exchange.
AID FOR THE CONSTRUCTION
83. Section 67 provides an aid for the construction of the phrase
“offering shares or debentures to the Public”. Section 67 of the Act
gives an indication of the differences between private placement and
public issue. The expression “offer of shares or debentures to
public”, i.e. issue of securities finds a place in several sections of
the Act, like Sections 60B, 73 and those expressions are to be
construed bearing in mind Section 67 as well. For our purpose, it is
useful to reproduce the entire section, which reads as follows:
“67. Construction of references to offering shares or debentures
to the public, etc
1) 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 sub-sections (3) and (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.
2) Any reference in this Act or in the articles of a company to
invitations to 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.
3) No offer or invitation shall be treated as made to the
public by virtue of sub- section (1) or sub- section (2), as
the case may be, if the offer or invitation can properly be
regarded, in all the circumstances-
a) 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
b) 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:
Provided further that nothing contained in the first proviso
shall apply to the non-banking financial companies or public
financial institutions specified in section 4A of the Companies
Act, 1956 (1 of 1956).
(3A) Notwithstanding anything contained in sub-section (3), the
Securities and Exchange Board of India shall, in
consultation with the Reserve Bank of India, by
notification in the Official Gazette, specify the
guidelines in respect of offer or invitation made to the
public by a public financial institution specified under
Section 4A or non-banking financial company referred to in
clause (f) of section 45-I of the Reserve Bank of India
Act, 1934 (2 of 1934).
4) Without prejudice to the generality of sub- section (3), a
provision in a company's articles prohibiting invitations to
the public to subscribe for shares or debentures shall not be
taken as prohibiting the making to members or debenture
holders of an invitation which can properly be regarded in
the manner set forth in that sub- section.
5) The provisions of this Act relating to private companies
shall be construed in accordance with the provisions
contained in sub- sections (1) to (4).”
84. Section 67(1) deals with the offer of shares and debentures to
the public and Section 67(2) deals with invitation to the public to
subscribe for shares and debentures and how those expressions are to be
understood, when reference is made to the Act or in the articles of a
company. The emphasis in Section 67(1) and (2) is on the “section of
the public”. Section 67(3) states that no offer or invitation shall
be treated as made to the public, by virtue of Sub-sections (1) and
(2), that is to any section of the public, if the offer or invitation
is 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 invitations. Section 67(3) is, therefore, an exception to
Sections 67(1) and (2). If the circumstances mentioned in clauses (1)
and (b) of Section 67(3) are satisfied, then the offer/invitation would
not be treated as being made to the public.
85. The first proviso to Section 67(3) was inserted by the Companies
(Amendment) Act, 2000 w.e.f. 13.12.2000, which clearly indicates,
nothing contained in Sub-section (3) of Section 67 shall apply in a
case where the offer or invitation to subscribe for shares or
debentures is made to fifty persons or more. Resultantly, after
13.12.2000, any offer of securities by a public company to fifty
persons or more will be treated as a public issue under the Companies
Act, even if it is of domestic concern or it is proved that the shares
or debentures are not available for subscription or purchase by persons
other than those receiving the offer or invitation. A public company
can escape from the rigor of provisions, if the offer is made by
companies mentioned under Section 67(3A), i.e. by public financial
institutions specified under Section 4A or by non-banking financial
companies referred to in Section 45I(f) of the Reserve Bank of India
Act, 1934.
Following situations, it is generally regarded, as not an offer
made to public.
• Offer of securities made to less than 50 persons;
• Offer made only to the existing shareholders of the company
(Right Issue);
• Offer made to a particular addressee and be accepted only
persons to whom it is addressed;
• Offer or invitation being made and it is the domestic concern of
those making and receiving the offer.
86. Resultantly, if an offer of securities is made to fifty or more
persons, it would be deemed to be a public issue, even if it is of
domestic concern or proved that the shares or debentures are not
available for subscription or purchase by persons other than those
received the offer or invitation.
87. I may, in this connection, point out that the position in
England is almost the same. The Companies Act, 2006 in England also
says that it is unlawful for transferring securities to others, certain
listed securities, such other transferable securities, as may be
specified in prospectus rules, to be offered to the public, unless
approved prospectus has been made available to the public before the
offer is made. For the purpose of the Companies Act, 2006 (Sections
755-760), 'offer to the public' includes an offer to any section of the
public, however, selected. An offer is not regarded as an offer to the
public if (1) it can properly be regarded in all circumstances as not
being calculated to result, directly or individually, in securities of
the company becoming available to persons other than those receiving
the offer; or (2) otherwise being a private concern of the person
receiving it and the person making it: s 756(3). An offer is to be
regarded (unless the contrary is proved) as being a private concern of
the person receiving it and the person making it if (a) it is made to a
person already connected with the company and, where it is made on
terms allowing that person to renounce his rights, the rights may only
be renounced in favour of another person already connected with the
company; or (b) it is an offer to subscribe for securities to be held
under an employees' share scheme and, where it is made on terms
allowing that person to renounce his rights, the rights may only be
renounced in favour of (i) another person entitled to hold securities
under the scheme; or (ii) a person already connected with the company:
s756(4). For these purposes 'person already connected with the
company' means (A) an existing member or employee of the company; (B) a
member of the family of a person who is or was a member or employee of
the company; (C) the widow or widower, or surviving civil partner, of a
person who was a member or employee of the company; (D) an existing
debenture holder of the company; or (E) a trustee (acting in his
capacity as such) of a trust of which the principal beneficiary is a
person within any of heads (A) to (D) above: s756(5). For the purpose
of head (B) above, the members of a person's family are the person's
spouse or civil partner and children (including step-children) and
their descendants: s 756(6). Fur the purposes of Pt 20Ch 1
'securities' means shares or debentures: s. 755(5).
88. Companies Act, 2006, FSMA 2000, Prospectus Regulations, 2005
etc. applicable in England, if read together we get a complete picture
of the securities laws in that country. Indian Companies Act, as I
have already indicated has its foundation on the English Companies Act.
89. Alastair Hudson in his book 'Securities Law' First Edition
(Sweet & Maxwell), 2008 at page 342, refers to 'Restricted Offers' and
noticed that there is no contravention of Section 85 of FSMA 2000, if:
“(b) the offer is made to or directed at fewer than 100 persons, other
than qualified investors, per EEA State”. The purpose underlying that
exemption, the author says, is mainly the fact that the offer is not
being made to an appreciable section of “the public” such that the
policy of the prospectus rules generally is not affected. Further,
the author says that “Self-evidently, while an offer to 99 ordinary
members of the public would be within the literal terms of the
exemption, it would not be the sort of activity anticipated by the
legislation. Moreover, if a marketing campaign were arranged such that
ordinary members of the people were approached in groups of 99 people
at a time in an effort to avoid the prospectus rules, then that would
not appear to be within the spirit of the regulations and might be held
to contravene the core principle that a regulated person must act with
integrity.”
90. I may, therefore, indicate, subject to what has been stated
above, in India that any share or debenture issue beyond forty nine
persons, would be a public issue attracting all the relevant provisions
of the SEBI Act, regulations framed thereunder, the Companies Act,
pertaining to the public issue. Facts clearly reveal that Saharas
have issued securities to the public more than the threshold limit
statutorily fixed under the first proviso to Section 67(3) and hence
violated the listing provisions which may attract civil and criminal
liabilities.
LISTING OF SECURITIES – LEGAL OBLIGATIONS
91. Principles of listing, which I may later on discuss, is intended
to assist public companies in identifying their obligations and
responsibilities, which are continuing in nature, transparent in
content and call for high degree of integrity. Obligations are imposed
on the issuer on an ongoing basis. Public companies who are legally
obliged to list their securities are deemed to accept the continuing
obligations, by virtue of their application, prospectus and the
subsequent maintenance of listing on a recognized stock exchange.
Disclosure is the rule, there is no exception. Misleading public is a
serious crime, which may attract civil and criminal liability. Listing
of securities depends not upon one’s volition, but on statutory
mandate.
92. Section 73, the listing provision, which deals with the
allotment of shares and debentures of which Sub-sections (1), (1A) and
(2) are relevant for our purpose and hence given below:
“73. Allotment of shares and debentures to be dealt in on stock
exchange.-
(1) Every company intending to offer shares or debentures to the
public for subscription by the issue of a prospectus shall, before
such issue, make an application to one or more recognised stock
exchanges for permission for the shares or debentures intending to
be so offered to be dealt with in the stock exchange or each such
stock exchange.
(1A) Where a prospectus, whether issued generally or not, states
that an application under sub-section (1) has been made for
permission for the shares or debentures offered thereby to be dealt
in one or more recognized stock exchanges, such prospectus shall
state the name of the stock exchange or, as the case may be, each
such stock exchange, and any allotment made on an application in
pursuance of such prospectus shall, whenever made, be void, if the
permission has not been granted by the stock exchange or each such
stock exchange, as the case may be, before the expiry of ten weeks
from the date of the closing of the subscription lists:
Provided that where an appeal against the decision of any
recognized stock exchange refusing permission for the shares or
debentures to be dealt in on that stock exchange has been preferred
under section 22 of the Securities Contracts (Regulation) Act, 1956
(42 of 1956), such allotment shall not be void until the dismissal
of the appeal.
(2) Where the permission has not been applied under sub-section (1)
or such permission having been applied for, has not been granted as
aforesaid, the company shall forthwith repay without interest all
moneys received from applicants in pursuance of the prospectus,
and, if any such money is not repaid within eight days after the
company becomes liable to repay it, the company and every director
of the company who is an officer in default shall, on and from the
expiry of the eighth day, be jointly and severally liable to repay
that money with interest at such rate, not less than four per cent
and not more than fifteen per cent, as may be prescribed, having
regard to the length of the period of delay in making the repayment
of such money. (emphasis supplied)”
93. 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. Such companies have no
option or choice but to list their securities on a recognized stock
exchange, once they invite subscription from over forty nine investors
from the public. If an unlisted company expresses its intention, by
conduct or otherwise, to offer its securities to the public by the
issue of a prospectus, the legal obligation to make an application on a
recognized stock exchange for listing starts. Sub-section (1A) of
Section 73 gives indication of what are the particulars to be stated in
such a prospectus. The consequences of not applying for the permission
under sub-section (1) of Section 73 or not granting of permission is
clearly stipulated in sub-section (3) of Section 73. Obligation to
refund the amount collected from the public with interest is also
mandatory as per Section 73(2) of the Act.
94. Listing is, therefore, a legal responsibility of the company
which offers securities to the public, provided offers are made to more
than 50 persons. In view of the clear statutory mandate, the
contention raised, based on Rule 19 of the SCR Rules framed under the
SCR Act, has no basis. Legal obligation flows the moment the company
issues the prospectus expressing the intention to offer shares or
debentures to the public, that is to make an application to the
recognized stock exchange, so that it can deal with the securities.
A company cannot be heard to contend that it has no such intention or
idea to make an application to the stock exchange. Company's option,
choice, election, interest or design does not matter, it is the conduct
and action that matters and that is what the law demands. Law judges
not what is in their minds but what they have said or written or done.
Lord Diplock in Gissing v. Gissing (1971) 1 AC 886, has said, “As in so
many branches of English Law, in which legal rights and obligations
depend upon the intention of each party, the relevant intention of each
party is the intention which was reasonably understood by the other
party to be manifested by that party’s words or conduct notwithstanding
that he did not consciously formulate that intention in his own mind or
even acted with some different intention which he did not communicate
to the other party.” Lord Simon in Crofter Hand Woven Harris Tweed
Co. Ltd. v. Veitch [1942] AC 435, opined that in some branches of law,
‘intention’ may be understood to cover results which may reasonably
flow from what is deliberately done, the principle being that a man is
to be treated intending the reasonable consequences of his acts.
95. The maxim ‘acta exterior indicant interiora secreta’ (external
action reveals inner secrets) applies with all force in the case of
Saharas, which I have already demonstrated on facts as well as on law.
Conduct and actions of Saharas indicate their intention, we have to
judge their so called intention from their subsequent conduct.
Subsequent illegality shows that Saharas contemplated illegality. A
person’s inner intentions are to be read and understood from his acts
and omissions. Whenever, in the application of an enactment, a
person’s state of mind is relevant, the above maxim comes into play.
(Ref. Bennion on Statutory Interpretation, 5th Edn., p. 1104)
96. We have to apply the various provisions of the Companies Act and
SEBI Act and the rules and regulations framed thereunder to Saharas’
conduct and their inner intentions are to be understood from their acts
and omissions, by applying the above maxim. Saharas’ acts and
omissions have clearly violated the provisions of Section 73, their
failure to list the securities offer to the public was, therefore,
intentional and the plea that they did not want their securities
listed, is not an answer, since they were legally bound to do so. The
duty of listing flows from the act of issuing securities to the pubic,
provided such offer is made to fifty or more than fifty persons. Any
offering of securities to fifty or more is a public offering by virtue
of Section 67(3) of the Companies Act, which the Saharas very well
knew, their subsequent actions and conducts unquestionably reveal so.
97. The scope of Section 73 came up for consideration before this
Court in Raymonds Synthetics Ltd. & Ors. v. Union of India & Ors.
(1992) 2 SCC 255 and this Court held through Dr. Justice T. K. Thommen
as follows:
“9. A public limited company has no obligation to have its
shares listed on a recognised stock exchange. But if the company
intends to offer its shares or debentures to the public for
subscription by the issue of a prospectus, it must, before issuing
such prospectus, apply to one or more recognised stock exchanges
for permission to have the shares or debentures intended to be so
offered to the public to be dealt with in each such stock exchange
in terms of Section 73..”
98. The above discussion clearly indicates that from the years 1988
to 2000, private placement of preferential allotment could be made to
fifty or more persons if the requirements of Clauses (a) and (b) of
Section 67(3) are satisfied. However, after the amendment to the
Companies Act, 1956 on 13.12.2000, every private placement made to
fifty or more persons becomes an offer intended for the public and
attracts the listing requirements under Section 73(1). Even those
issues which satisfy Sections 67(3)(a) and (b) would be treated as an
issue to the public if it is issued to fifty or more persons, as per
the proviso to Section 67(3) and as per Section 73(1), an application
for listing becomes mandatory and a legal requirement. Reading of the
proviso to Section 67(3) and Section 73(1) conjointly indicates that
any public company which intends to issue shares or debentures to fifty
persons or more is legally obliged to make an application for listing
its securities on a recognized stock exchange.
99. Saharas, in my view, have not followed any of those statutory
requirements. On a combined reading of the proviso to Section 67(3)
and Section 73(1), it is clear that the Saharas had made an offer of
OFCDs to fifty persons or more, consequently, the requirement to make
an application for listing became obligatory leading to a statutory
mandate which they did not follow.
Unlisted Public Companies (Preferential Allotment) Rules, 2003 and the
Unlisted Public Companies (Preferential Allotment) Amendment Rules 2011
100. Considerable arguments were advanced by Saharas on the
applicability of the provisions of 2003 Rules which, according to them,
did not require the OFCDs to be first listed on a recognized stock
exchange, especially in the light of the promulgation of Unlisted
Public Companies (Preferential Allotment) Amendment Rules 2011 (for
short ‘2011 Rules’). Contention was raised that, in view of 2003
Rules, preferential allotment by unlisted public companies on private
placement was provided for and permitted without any restriction on
numbers as per the proviso to Section 67(3) of the Companies Act and
without requiring listing of such OFCDs on a recognized stock exchange.
Further, it was pointed out that only on and from 14.12.2011, 2003
Rules were amended, whereby the definition of “preferential allotment”
was substituted without in any way disturbing or amending Rule 2 of
2003 Rules. After 14.12.2011, it was pointed out, the definition of
'preferential allotment” was amended prospectively. Further, it was
pointed out that the first proviso to Section 67(3) of the Companies
Act, added by the Companies Amendment Act 53 of 2000 w.e.f. 13.12.2000
(which was earlier not applicable to the 2003 Rules) has now been
expressly made applicable w.e.f. 14.12.2011, so as to limit/restrict
the number of persons to whom the offer on private placement is made,
to only 49 persons, and hence the restriction imposed by the amendment
made in December 2011 to issue of OFCDs by unlisted companies pursuant
to the special resolution under Section 81(1A) is also prospective.
Law, therefore, it was urged, permitted the unlisted companies like
Saharas to issue OFCDs to more than 49 persons prior to December 2011,
on a private placement basis, without requiring the same to be first
listed.
101. I find that no such contention was seen urged either before SEBI
or SAT, nor do I find any substance in that contention. 2003 Rules are
not applicable to any offer of shares or debentures to more than 49
persons. 2003 Rules was framed by the Central Government in exercise
of the powers conferred under Section 81(1A) read with Section 642 of
the Companies Act to provide for rules applicable to the unlisted
public companies. Section 81 of the Companies Act deals with further
issue of securities and only gives pre-emptive rights to the existing
shareholders of the company, so that subsequent offer of securities
have to be offered to them as their “rights”. Section 81(1A), it may
be noted, is only an exception to the said rule, that the further
shares may be offered to any persons subject to passing a special
resolution by the company in their general meeting. Section 81(1A)
cannot, in any view, have an overriding effect on the provisions
relating to public issue. Even if armed with a special resolution for
any further issue of capital to person other than shareholders, it can
only be subjected to the provisions of Section 67 of the Company Act,
that is if the offer is made to fifty persons or more, then it will
have to be treated as public issue and not a private placement. A
public issue of securities will not become a preferential allotment on
description of label. Proviso to Section 67(3) does not make any
distinction between listed and unlisted public companies or between
preferential or ordinary allotment. Even prior to the introduction of
the proviso to Section 67(3), any issue of securities to the public
required mandatory applications for listing to one or more stock
exchanges. After insertion of the proviso to Section 67(3) in December
2000, private placement allowed under Section 67(3) was also restricted
up to 49 persons. 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. 2003 Rules are
only meant to regulate the issue of the shares and debentures by
unlisted public companies and prevent the misuse of the private
placement. Section 81(1A), as I have already indicated, says that a
preferential allotment can be made by passing a special resolution
which is an exception to the rules of rights issue, since that requires
new shares or debentures to be offered to the existing members/holders
on a pro rata basis. But when offer is made to more than 49 persons,
then apart from compliance with Section 81(1A), other requirements
regarding public issue have to be complied with. 2003 Rules, in my
view, cannot override the provisions of Section 67(3) and Section 73.
The definition of “preferential allotment” in 2011 Rules only made what
was implicit in 2003, more explicit. In my view, both 2003 Rules and
2011 Rules are subordinate regulations and are to be read subject to
the proviso to Section 67(3) and 73(1) and other related provisions.
DIP GUIDELINES & ICDR 2009
102. Senior counsels appearing for Saharas also raised a contention
that DIP Guidelines were only departmental instructions, not having the
sanction of law and, therefore, would not apply to the OFCDs issued.
This argument, in my view, has no basis. DIP Guidelines had statutory
force since they were framed by SEBI in exercise of its powers
conferred on it under Sections 11 and 11A of the SEBI Act. Powers have
been conferred on SEBI to protect the interests of the investors in
securities and regulate the issue of prospectus, offer documents or
advertisement soliciting money through the issue of prospectus.
Section 11 of the Act, it may be noted has been incorporated, evidently
to protect the interests of investors whose securities are legally
required to be listed. DIP Guidelines were implemented by SEBI with
regard to the listed and unlisted companies, which made public offer,
until it was replaced by ICDR 2009. Contention was raised by Saharas
that they had issued OFCDs in the year 2008 and no action was taken
under DIP Guidelines and hence ICDR 2009, which came into force only on
26.8.2009, would not apply and have no retrospective operation. In my
view, this contention has no force, especially when Saharas had not
complied with the statutory requirements provided in the DIP
Guidelines.
103. Repeal and Saving Clause under ICDR 2009 would clearly indicate
that the violation under DIP Guidelines was a continuing one.
Regulation 111 of ICDR reads as follows:
“Repeal and Savings
111. (1) On and from the commencement of these regulations,
the Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000 shall stand rescinded.
2) Notwithstanding such rescission;
(a) anything done or any action taken or purported to have
been done or taken including observation made in respect of
any draft offer document, any enquiry or investigation
commenced or show cause notice issued in respect of the said
Guidelines shall be deemed to have been done or taken under
the corresponding provisions of these regulations;
(b) any offer documents, whether draft or otherwise, filed or
application made to the Board under the said Guidelines and
pending before it shall be deemed to have been filed or made
under the corresponding provisions of these regulations.”
104. Regulation 111(1) of ICDR 2009 rescinded the DIP Guidelines from
26.8.2009 and clause (2) of Regulation 111 contains the saving clause.
The expression “anything done” or “any action taken” under Regulation
111(1) are of wide import and would take anything done by the company
omitted to be done which they legally ought to have done. Non-
performance of statutory obligations purposely or otherwise may also
fall within the above mentioned expressions. Failure to take any
action by SEBI under DIP Guidelines, in spite of the fact that Saharas
did not discharge their statutory obligation, would not be a ground to
contend that 2009 Regulations would not apply as also the saving
clause. 2009 Regulations, in my view, will apply to all companies
whether listed or unlisted. Further, in the instant case, SEBI was not
informed of the issuance of securities by the Saharas while the DIP
Guidelines were in force and Saharas continued to mobilize funds from
the public which was nothing but continued violation which started when
the DIP Guidelines were in force and also when they were replaced by
2009 Regulations. Further, it may also be recalled that any
solicitation for subscription from public can be regulated only after
complying with the requirements stipulated by SEBI, in fact, an
amendment was made to Schedule II of the Companies Act vide
notification No. GSR 650(3) dated 17.9.2002 by inserting a declaration
which has to be signed by the directors of the company filing the
prospectus, which reads as under:
“That all the relevant provisions of the Companies Act, 1956, and
the guidelines issued by the Government or the guidelines issued by
the Securities and Exchange Board of India established under
Section 3 of the Securities and Exchange Board of India Act, 1992,
as the case may be, have been complied with and no statement made
in prospectus is contrary to the provisions of the Companies Act,
1956 or the securities and Exchange Board of India Act, 1992 or
rules made there-under or guidelines issued, as the case may be.”
105. I find that Saharas conveniently omitted the reference to SEBI
in the declaration given in the prospectus. OFCDs were, therefore,
issued by Saharas in contravention of the DIP Guidelines, ICDR 2009,
notification dated 17.9.2002 and also overlooking the statutory
requirements stipulated in Section 73(1) of the Companies Act.
Hybrids – SCR Act
106. Saharas also raised a contention that after the insertion of the
definition of “securities” in Section 2(45AA) as “including hybrid” and
after insertion of the separate definition of “hybrid” in Section
2(19A) of the Act, the provisions of Section 67 are not at all
applicable to OFCDs, which have been held to be “hybrid”. Further, it
was also contended that OFCDs issued were convertible bonds falling
within the scope of Section 28(1)(b) of SCR Act and they were not
“securities” or at any rate the provisions of SEBI Act and Section 67
were not at all applicable to OFCDs, which have been found to be
“hybrid”.
107. Saharas mainly canvassed the position that OFCDs issued were
hybrid securities covered by the term securities in the Companies Act
and they do not come under the definition of “securities” under the SCR
Act, hence under the SEBI Act. Further, it was also urged that when
the definition of “securities” was amended to include hybrids in the
Companies Act, no corresponding amendment was made in the SCR Act and
SEBI Act and hence it was contended that SEBI has no jurisdiction or
control over the hybrid securities. Further, it was also pointed out
that hybrid securities at best can come under the regulatory control of
MCA, Government of India. Saharas also contended that even Section 67
speaks only of shares and debentures and does not reflect the change
brought about by the definition Clause 2(19A) ‘hybrid’ or by the
insertion of the definition of “securities” in Section 2(45AA) as
including hybrid even though Section 67(3) of the Act was amended, by
the Amendment Act 53 of 2000, by which the definitions of ‘securities’
and ‘hybrid’ were introduced. It was also pointed out that non-
substitution/non-amendment of Section 67(1) and (2), by not including
the word ‘hybrid’ after the words ‘shares’ and ‘debentures’, is
significant.
108. OFCDs issued by Saharas undoubtedly were unsecured debentures by
name and nature. Section 2(12) of the Companies Act deals with the
definition of the word “debentures” and includes any “other
securities”. The same reads as follows:
“2(12). “Debenture’ includes debenture stock, bonds and
any other securities of a company, whether constituting a charge
on the assets of the company or not.”
The definition of the word “securities’ under Section 2(45AA) of
the Companies Act, reads as follows:
“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.”
Section 2(h) of the SCR Act, 1956 reads as follows:
“2(h) “securities” include—
i) 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;
(ia) derivative;
(ib) units or any other instrument issued by any collective
investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2
of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors
under any mutual fund scheme;
Explanation.- For the removal of doubts, it is hereby
declared that “securities” shall not include any unit
linked insurance policy or scrips or any such instrument or
unit, by whatever name called, which provides a combined
benefit risk on the life of the persons and investment by
such persons and issued by an insurer referred to in clause
(9) of section 2 of the Insurance Act, 1938 (4 of 1938);
(ie) any certificate or instrument (by whatever name called),
issued to an investor by any issuer being a special purpose
distinct entity which possesses any debt or receivable,
including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such
debt or receivable, including mortgage debt, as the case
may be;
ii) Government securities;
(iia) such other instruments as may be declared by the Central
Government to be securities; and
iii) rights or interest in securities.”
109. The word “hybrid” under Section 2(19A) was inserted in the
Companies Act, vide the Companies (Amendment) Act, 2002 w.e.f.
13.12.2000 and reads as follows:
“2(19A). “hybrid” means any security which has the character
of more than one type of security, including their derivatives.”
110. Hybrid securities, therefore, generally means securities, which
have some of the attributes of both debt securities and equity
securities, means a security which, in the term of a debenture,
encompassing the element of indebtness and element of equity stock as
well. The scope of the definition of Section 2(h) of SCR Act came up
for consideration before this Court in Sudhir Shantilal Mehta v.
Central Bureau of Investigation (2009) 8 SCC 1 and the Court stated
that the definition of securities under the SCR Act is an inclusive
definition and not exhaustive. The Court held that it takes within its
purview not only the matters specified therein, but also all other
types of securities, thus it should be given an expansive meaning. In
Naresh K. Aggarwala & Co. v. Canbank Financial Services Ltd. and Anr.
(2010) 6 SCC 178, while referring to the definition of the term
“securities” defined under SCR Act and the applicability of a Circular
issued by the Delhi Stock Exchange, the Court endorsed the view of the
Special Court and noted that the perusal of the above quoted definition
showed that they did not make any distinction between listed securities
and unlisted securities and, therefore, it was clear that the circular
would apply to the securities which were not listed on the stock
exchange.
111. Section 2(h) of the SCR Act gives emphasis to the words “other
marketable securities of a like nature”, which gives a clear indication
of the marketability of the securities and gives an expansive meaning
to the word securities. Any security which is capable of being freely
transferrable is marketable. The definition clause in Section 2(h) of
SCR Act is a wide definition, an inclusive one, which takes in hybrid
also, which I have already indicated, defined vide Section 2(19A) of
the Companies Act.
112. OFCDs issued have the characteristics of shares and debentures
and fall within the definition of Section 2(h) of SCR Act, which
continue to remain debentures till they are converted. In other words,
OFCDs issued by Saharas are debentures in presenti and become shares in
futuro. Even if OFCDs are hybrid securities, as defined in Section
2(19A) of the Companies Act, they shall remain within the purview of
the definition of “securities” in Section 2(h) of SCR Act. Further,
it may be noted that Saharas have treated OFCDs only as debentures in
the IM, RHP, application forms and also in their balance sheet. The
terms “Securities” defined in the Companies Act has the same meaning as
defined in the SCR Act, which would also cover the species of “hybrid”
defined under Section 2(19A) of the Companies Act. Since the
definition of “securities” under Section 2(45AA) of the Companies Act
includes “hybrids”, SEBI has jurisdiction over hybrids like OFCDs
issued by Saharas, since the expression “securities” has been
specifically dealt with under Section 55A of the Companies Act.
OFCDs whether Convertible Bonds – SCR Act
113. Saharas raised yet another contention that OFCDs issued by them
are convertible bonds issued on the basis of the price agreed upon at
the time of issue and, therefore, the provisions of SCR Act are not
applicable in view of Section 28(1)(b) thereof. Further, it was also
contended that convertible bonds having been issued at a price agreed
upon at the time of issue are not listable in view of the exception
granted under Section 28(1) of the SCR Act.
114. Section 28 was inserted by the SCR Act. The object of the
amendment as stated in the Bill was to exempt convertible bonds by
foreign financial institutions that had an option to obtain shares at a
later date. Preamble of SCR Act provided “prohibition on options in
securities” as a mode “to prevent the undesirable transactions in
securities”. Resultantly, Section 28 had to be amended to make so
inapplicable to such options in the bonds and to delete the words “by
prohibiting options in securities” to facilitate such options.
Parliament never intended to take away convertible debentures from the
purview of SCR Act. For easy reference, I may refer to Section 28,
which reads as follows:
“28. Act not to be apply in certain cases.
1) The provisions of this Act shall not apply to-
a) the Government, the Reserve Bank of India, any local
authority or any corporation set-up by a special law or
any person who has effected any transaction with or
through the agency of any such authority as is referred
to in this clause;
b) any convertible bond or share warrant or any option or
right in relation thereto, in so far as it entitles the
person in whose favour any of the foregoing has been
issued to obtain at his option from the company or other
body corporate, issuing the same or from, any of its
shareholders or duly appointed agents shares of the
company or other body corporate, whether by conversion of
the bond or warrant or otherwise, on the basis of the
price agreed upon when the same was issued.
(2) Without prejudice to the provisions contained in sub-
section (1) if the Central Government is satisfied that in the
interests of trade and commerce or the economic development of
the country it is necessary or expedient so to do, it may, by
notification in the Official Gazette, specify any class of
contracts as contracts to which this Act or any provision
contained therein shall not apply, and also the conditions,
limitations or restrictions, if any, subject to which it shall
not so apply.”
Section 28(1)(b) makes it clear that the Act will not apply to the
‘entitlement’ of the buyer, inherent in the convertible bond.
Entitlement may be severable, but does not itself qualify as a security
that can be administered by the SCR Act, unless it is issued in a
detachable format. Therefore, the inapplicability of SCR Act, 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. The
Act is, therefore, inapplicable only to the options or rights or
entitlement that are attached to the bond/warrant and not to the
bond/warrant itself. The expression “insofar as it entitles the
person” clearly indicates that it was not intended to exclude
convertible bonds as a class. Section 28(1)(b), therefore, clearly
indicates that it is only the convertible bonds and share/warrant of
the type referred to therein that are excluded from the applicability
of the SCR Act and not debentures which are separate category of
securities in the definition contained in Section 2(h) of SCR Act.
Section 20 of SCR Act, which was omitted, by Securities Laws
(Amendment) Act, 1995, with effect from 25.1.1995, stated that all
options entered into after the commencement of the Act would be
illegal. The introduction of Sections 28(1)(b) and 28(2) became
necessary because of the provisions of Sections 13, 16 and 20.
Section 20 was deleted in the year 1995, but SEBI notification No. 184
dated 1.3.2000 continued to prohibit options. Consequently, OFCDs
issued by Saharas to the public cannot be excluded from the purview of
listing requirements, any interpretation to the contrary would
contravene the mandatory requirements contained in Section 73(1) and
proviso to Section 67(3) of the Companies Act.
REFUND OF THE MONEY COLLECTED
115. I have found that Saharas having failed to make application for
listing on any of the recognized stock exchange, as provided under
Section 73(1) of the Companies Act, become legally liable to refund the
amount collected from the subscribers in pursuance to their RHPs, along
with interest as provided under Section 73(2) of the Act. Rule 4D of
the Companies (Central Government) General Rules and Forms 1956
prescribes the rates of interest for the purposes of sub-sections (2)
and (2A) of Section 73, which shall be fifteen per cent per annum.
Section 73(2) says that every company and every director of the company
who is an officer in default, shall be jointly and severally liable to
repay that money with interest at such rate, not less than four per
cent and not more than fifteen per cent, as may be prescribed. The
scope of the above mentioned provisions came up for consideration
before this Court in Raymond Synthetics Ltd. & Ors. V. Union of India
(supra), wherein the Court held that in a case where the company has
not applied for listing on a stock exchange, the consequences will flow
from the company’s disobedience of the law, the liability to pay
interest arises as from the date of receipt of the amounts, for the
company ought not to have received any such amount in response to the
prospectus. I am, therefore, of the view that since Saharas had
violated the listing provisions and collected huge amounts from the
public in disobedience of law, SEBI is justified in directing refund of
the amount with interest.
CIVIL AND CRIMINAL LIABILITY
116. I have found, in this case, that Saharas had not complied with
the legal requirements of Section 56 and hence the second proviso to
Section 56(3) may apply and it is also stated in sub-section (6) of
Section 56 that the liability under the General Law has been excluded.
Section 62 casts civil liability for mis-statement in prospectus and
Section 63(1) speaks of criminal liability. Section 68 speaks of
penalty for fraudulently inducing persons to invite, which also leads
to imprisonment and fine. Section 68A prescribes punishment for
violation of what is provided under Sections 68A(1)(a) and (b), with
imprisonment for a term of five years. Section 73(3) also speaks of
imposition of fine. Over and above the penal provisions, Section 628
of the Companies Act also proposes imprisonment and fine, for making
false statements. Further, furnishing false evidence may also attract
punishment with imprisonment for a term which may extend to seven years
and also fine under Section 629 of the Companies Act. The provisions
for imposing civil and criminal liability and refund of the amount with
interest would indicate that, of late, economic offences in India like
the one committed by Saharas be treated with an iron hand, or else we
may land in another security market pandemonium.
I, therefore, answer the questions of law raised as follows:
a) SEBI has the powers to administer the provisions referred to in
the opening part of Section 55A which relates to issue and
transfer of securities and non-payment of dividend by public
companies like Saharas, which have issued securities to fifty
persons or more, though not listed on a recognized stock
exchange, whether they intended to list their securities or not.
b) Saharas were legally obliged to file the final prospectus under
Section 60B(9) with SEBI, failure to do so attracts criminal
liability.
c) First proviso to Section 67(3) casts a legal obligation to list
the securities on a recognized stock exchange, if the offer is
made to fifty or more persons, which Saharas have violated which
may attract the penal provisions contained in Section 68 of the
Act.
d) Section 73 of the Act casts an obligation on a public company to
apply for listing of its securities on a recognized stock
exchange, once it invites subscription from fifty or more
persons, which Saharas have violated and they have to refund the
money collected to the investors with interest.
e) Saharas have violated the DIP Guidelines and ICDR 2009 and by not
complying with the disclosure requirements and investor
protection measures for public, and also violated Section 56 of
the Companies Act which may attract penal provisions.
f) 2003 Rules or the 2011 Rules cannot override the provisions of
Section 67(3) and Section 73, being subordinate legislations,
2003 Rules are also not applilcable to any offer of shares or
debentures to more than forty nine persons and are to be read
subject to the proviso to Section 67(3) and Section 73(1) of the
Companies Act.
g) OFCDs issued by Saharas have the characteristics of shares and
debentures and fall within the definition of Section 2(h) of SCR
Act. The definition of ‘securities’ under Section 2(45AA) of the
Companies Act includes ‘hybrids’ and SEBI has jurisdiction over
hybrids like OFCDs issued by Saharas, since the expression
‘securities’ has been specifically dealt with under Section 55A
of the Companies Act.
h) Section 28(1)(b) of the SCR Act indicates that it is only
convertible bonds and share/warrant of the type referred to
therein, which are excluded from the applicability of the SCR Act
and not debentures, which are separate category of securities in
the definition contained in Section 2(h) of SCR Act. Contention
of Saharas that OFCDs issued by them are convertible bonds issued
on the basis of the price agreed upon at the time of issue and,
therefore, the provisions of SCR Act, would not apply, in view of
Section 28(1)(b) cannot be sustained.
i) SEBI can exercise its jurisdiction under Sections 11(1), 11(4),
11A(1)(b) and 11B of SEBI Act and Regulation 107 of ICDR 2009
over public companies who have issued shares or debentures to
fifty or more, but not complied with the provisions of Section
73(1) by not listing its securities on a recognized stock
exchange.
j) Saharas are legally bound to refund the money collected to the
investors, as provided under Section 73(2) of the Companies Act
read with Rule 4D of the Companies (Central Government's) General
Rules and Forms, 1956 and the SEBI has the power to enforce those
provisions.
k) Saharas’ conduct invites civil and criminal liability under
various provisions like Sections 56(3), 62, 68, 68A, 73(3), 628,
629 and so on.
CONCLUSION
117. The above discussion will clearly indicate that OFCDs issued by
Saharas were public issue of debentures, hence securities. Once there
is an intention to issue shares or debentures to the public, it is/was
obligatory to make an application to one or more recognized stock
exchanges, prior to such issue. Registration of RHPs by the Office of
the Registrar does not mean that the mandatory provisions of Sections
67(3), 73(1) and DIP Guidelines be not followed. Saharas could not
have filed RHP or any prospectus with RoC, without submitting the same
to SEBI under Clauses 1.4, 2.1.1. and 2.1.4 of DIP Guidelines.
Unlisted companies like Saharas when made an offer of shares or
debentures to fifty or more persons, it was mandatory to follow the
legal requirements of listing their securities. Once the number forty
nine is crossed, the proviso to Section 67(3) kicks in and it is an
issue to the public, which attracts Section 73(1) and an application
for listing becomes mandatory which fall under the administration of
SEBI under Section 55A(1)(b) of the Companies Act.
118. SEBI, I have already indicated, has a duty under Section 11A of
the SEBI Act to protect the interests of investors in securities either
listed or which are required to be listed under the law or intended to
be listed. Under Section 11B, SEBI has the power to issue appropriate
directions in the interests of investors in securities and securities
market to any person who is associated with securities market.
119. I have already referred to the power of SEBI under the SEBI Act
in the earlier part of this judgment. SEBI Act, it may be noted, is a
special law, distinct in form, but related to the Company Law, 1956.
Purpose and object behind establishing a body like SEBI under the SEBI
Act has also been highlighted by us. The impugned orders, as already
stated, were issued by SEBI in exercise of its powers conferred under
Sections 11, 11A and 11B of SEBI Act and Regulations 107 of ICDR 2009.
DIP Guidelines, as already indicated, did apply to both listed and
unlisted companies. Clause 2.1.1 of DIP Guidelines had made it
mandatory to file draft prospectus only before SEBI, not before the
Central Government. Obligation was also cast on initial public
offerings by unlisted companies and the issue of OFCDs was a public
issue under Regulation 1.2.1 (xxiii) which also indicated that DIP
Guidelines would apply to Saharas as well. Issuing of convertible
debentures in violation of those guidelines gives ample powers on SEBI
to pass orders under Sections 11A and 11B of the SEBI Act as well as
Regulation 107 of ICDR 2009 and direct refund of the money to
investors.
120. SEBI, in the facts and circumstances of the case, has rightly
claimed jurisdiction over the OFCDs issued by Saharas. Saharas have no
right to collect Rs.27,000 crores from three million (3 crore
investors) without complying with any regulatory provisions contained
in the Companies Act, SEBI Act, Rules and Regulations already
discussed. MCA, it is well known, does not have the machinery to
deal with such a large public issue of securities, its powers are
limited to deal with unlisted companies with limited number of share
holders or debenture holders and the legislature, in its wisdom, has
conferred powers on SEBI. I, therefore, find on facts as well as on
law, no illegality in the proceedings initiated by SEBI and the order
passed by SEBI (WTM) dated 23.6.2011 and SAT dated 18.10.2011 are
accordingly upheld.
……..……………………….........J.
(K.S. Radhakrishnan)
JAGDISH SINGH KHEHAR, J.
1. I have carefully read the order of my learned brother Radhakrishnan,
J. I am however inclined to record my own reasons while dealing with the
propositions canvassed before us. Before examining the issues canvassed,
it is necessary to record some further facts, which constitute the
foundational basis of my order. During the course of hearing learned
counsel had mainly relied on the pleadings in Civil Appeal no.9813 of
2011, accordingly, reference shall be made mainly to the facts narrated
therein. Facts referred to in Civil Appeal no.9833 of 2011 have also been
adverted to when necessary.
2. Sahara India Real Estate Corporation Limited (hereinafter referred to
as “SIRECL”) and Sahara Housing Investment Corporation Limited (hereinafter
referred to as “SHICL”) are a part of Sahara India Group of Companies.
Another company, namely, Sahara Prime City Limited (hereinafter referred to
as “SPCL”) which is also connected to the Sahara India Group of Companies,
filed a Draft Red Herring Prospectus (for short “DRHP”) with the Securities
and Exchange Board of India (hereinafter referred to as “SEBI”) in respect
of its proposed Initial Public Offer (for short “IPO”) dated 30.9.2009.
While the aforesaid DRHP dated 30.9.2009 was under scrutiny, SEBI received
complaints relating to disclosures made in the DHRP. One of the aforesaid
complaints was made by “Professional Group for Investors Protection”. In
the aforesaid complaint of the “Professional Group for Investors
Protection” dated 25.12.2009, it was alleged that SIRECL was issuing
convertible bonds to the public throughout the country for the past several
months. It was alleged that issuing of convertible bonds by SIRECL had not
been disclosed in the DRHP dated 30.9.2009 (filed by SPCL). On similar
lines SEBI received a complaint from one Roshan Lal dated 4.1.2010.
3. In order to probe the authenticity of the allegations levelled in the
aforementioned complaints, SEBI sought information from Enam Securities
Private Limited – the merchant banker for SPCL. Enam Securities Private
Limited responded to the communication received from the SEBI on 21.2.2010.
Enam Securities Private Limited, in its response, asserted on the basis of
an inquiry conducted and legal opinion sought, that it had arrived at the
conclusion, that the optionally fully convertible debentures (for short
OFCDs) issued by SIRECL and SHICL had been issued in conformity with all
applicable laws.
4. On 26.2.2010 lead managers of the two companies (SIRECL and SHICL)
informed SEBI, that both the companies had issued debentures on “tap basis”
i.e., by way of private placement. It was confirmed, that the two
companies had issued an “information memorandum” under section 60B of the
Companies Act, 1956 (hereinafter referred to as the Companies Act), prior
to opening of the offer. It was acknowledged, that SIRECL had also issued
a red herring prospectus (for short “RHP”) with the Registrar of Companies
(Uttar Pradesh and Uttarakhand). Likewise, SHICL had issued a RHP with the
Registrar of Companies, Maharashtra.
5. In the RHPs issued by the two companies it was mentioned, that the
companies did not intend the proposed issue to be listed in any stock
exchange. The RHPs also stated, that only those persons were eligible to
apply, to whom the information memorandum was being circulated. The RHPs
also expressed, that the appellant ought to be associated/affiliated or
connected with the Sahara Group of Companies. The RHP noted, that the
invitation to apply was being extended privately, without issuing any
advertisement to the general public. What had been indicated in the RHPs
was, what had been determined by the SIRECL in its special resolution dated
3.3.2003 i.e., that the OFCDs would be issued by way of private placement
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”.
6. Copies of the terms and conditions of the OFCDs issued by the two
companies reveal, that the appellant-companies issued “bonds” (named as,
Abode Bonds, Nirman Bonds and Real Estate Bonds - by SIRECL; and as,
Multiple Bonds, Income Bonds and Housing Bonds - by the SHICL) of different
face values (varying from Rs.5000 to Rs.24000) and different maturity
periods (varying from 48 months to 180 months). The OFCDs issued by the
two companies contemplated different redemption values and conversion
options.
7. Vide letter dated 22.4.2010, SEBI sought further details from Enam
Securities Private Limited. The details were sought in respect of OFCD’s
issued by SIRECL and SHICL. The particulars on which information was
sought, is being extracted hereunder:
“2. a. details regarding the filing of RHP of the said
companies with the concerned RoC.
b. date of opening and closing of the subscription list.
c. details regarding the number of application forms
circulated after the filing of the RHP with RoC.
d. details regarding the number of applications received.
e. the number of allottees
f. list of allottees.
g. the date of allotment.
h. date of dispatch of debenture certificates etc.
i. copies of application forms, RHP, pamphlets and other
promotional material circulated.”
The aforesaid information sought by SEBI from Enam Securities Private
Limited was never furnished.
8. Thereupon, the same information was sought by SEBI directly from
SIRECL and SHICL, through separate letters dated 12.5.2010. The two
companies responded to the letters dated 12.5.2010 through separate replies
dated 19.5.2010. Instead of furnishing details of the information sought
by SEBI, the two companies required SEBI to furnish them with the
complaints which had prompted it, to seek the information. SEBI again
addressed separate communications to the two companies dated 21.5.2010 yet
again seeking the same information, by making it clear to the two
companies, that non compliance would result in appropriate action under the
Companies Act, the Securities and Exchange Board of India Act, 1992
(hereinafter referred to as the “SEBI Act”), as also, the regulations
framed thereunder. Both the companies, without furnishing details sought
by SEBI, responded through separate letters, dated 24.5.2010 and 26.5.2010.
In their response it was asserted, that since a large number of their staff
members were on summer vacation, the information could not be made
available immediately. In the aforesaid communications, the companies also
informed SEBI, that the OFCDs had been issued by them in compliance with
the provisions of the enactments referred to by the SEBI. Besides the
foresaid, the two companies informed SEBI, that neither of them were listed
public companies, and that, their securities were not being traded through
any exchange in India or abroad. The aforesaid factual position was
pointed out by the two companies to SEBI, with the clear intent to inform
SEBI, that it had no jurisdiction to inquire into the OFCDs issued by them.
Despite the aforesaid response, SEBI addressed separate communications
dated 28.5.2010 to the two companies requiring them to furnish the same
information. Yet again, the companies replied on the lines adopted
earlier. SEBI again repeated its request for information through further
separate communications dated 11.6.2010.
9. In the meantime SIRECL addressed a letter dated 31.5.2010 to the
Union Minister of Corporate Affairs, to inform him of the correspondence
exchanged with the SEBI. Being an unlisted entity, and also there being no
intention to list the companies securities on any stock exchange, it was
pleaded before the Union Minister, that under section 55A of the Companies
Act the company could only be regulated and administered by the Ministry of
Corporate Affairs and not by the SEBI. In the aforesaid view of the matter
SIRECL requested the Union Minister of Corporate Affairs to advise it on
its locus standi, “vis-à-vis our regulatory authority whether the company
is governed by Ministry of Corporate Affairs, or SEBI, in view of the
provisions of section 55A(c) of the Companies Act, 1956”.
10. Through separate letters dated 16.6.2010 the two companies informed
SEBI that they had already sought a clarification on the subject from the
Government. Yet again, vide separate letters dated 28.6.2010 both
companies informed SEBI, that they had received a communication from the
office of the Union Minister of State for Corporate Affairs to the effect
that the matter was being examined by the Ministry. Accordingly, the
companies adopted the stance, that they would file their replies to the
letters addressed to them by SEBI only on receipt of a response from the
Government.
11. It is apparent from the factual position depicted hereinabove, that
SEBI was seeking information from the two companies since May, 2010. Since
the information was not being supplied, SEBI initiated an investigation
into the OFCDs issued by SIRECL and SHICL. Accordingly, summons dated
30.8.2010 and 23.9.2010 were issued to the two companies under section 11C
of the SEBI Act, to provide the following information:
“3. 1. Details regarding filing of prospectus/Red-herring
Prospectus with ROC for issuance of OFCDs.
2. Copies of the application forms, Red-Herring Prospectus,
Pamphlets, advertisements and other promotional materials
circulated for issuance of OFCDs.
3. Details regarding number of application forms circulated,
inviting subscription for OFCDs.
4. Details regarding number of applications and subscription
amount received for OFCDs.
5. Date of opening and closing of the subscription list for
the said OFCDs.
6. Number and list of allottees for the said OFCDs and the
number of OFCDs allotted and value of such allotment against
each allottee’s name;
7. Date of allotment of OFCDs;
8. Copies of the minutes of Board/committee meeting in which
the resolution has been passed for allotment;
9 Copy of Form 2 (along with annexures) filed with ROC, if
any, regarding issuance of OFCDs or equity shares arising out of
conversion of such OFCDs.
10. Copies of the Annual Reports filed with Registrar of
Companies for the immediately preceding two financial years.
11. Date of dispatch of debenture certificate etc.”
12. On receipt of the aforesaid summons, SIRECL and SHICL raised a number
of legal objections to stall the proposed investigation. In respect of the
information sought, their response dated 13.9.2010, interalia expressed as
under:
“17. SIRECL is an unlisted company. The OFCDs of March 2008 were
neither intended to be issued to the public nor were the OFCDs
actually issued to the public, hence, do not come within the purview
of section 55A(a)/(b) of the Companies Act, 1956 conferring
administrative jurisdiction of SEBI. SIRECL had represented to the
Central Government in the Ministry of Corporate Affairs on May 31,
2010 and on June 17, 2010, on which the Ministry, while acknowledging
SIRECL’s representation of May 31, 2010, informed SIRECL that the
matter was being examined in the Ministry under the relevant
provisions of the Companies Act, 1956.
18. In the light of above submission, the company requests you to
kind withdraw the summons dated 30th August, 2010.”
Based on the aforesaid response, the two companies requested SEBI to
withdraw the orders dated 30.8.2010 and 23.9.2010. On 30.9.2010, through
separate letters issued by SIRECL and SHICL, they adopted the stance, that
they did not have complete information sought by the SEBI.
13. It would be relevant to notice, that at the request of the Chief
Financial Officer of the Sahara India Group of Companies, an opportunity of
hearing was granted to him on 3.11.2010, by the SEBI (FTM). During the
course of the aforesaid hearing it was again impressed upon the Chief
Financial Officer, that he should furnish information sought by the SEBI
fully and accurately without any delay. Despite the aforesaid, the Chief
Financial Officer during the course of the said hearing, did not make any
firm commitment to furnish the information sought. It is essential to
note, that the Chief Financial Officer, did not furnish the information
sought.
14. Despite the fact that the companies chose not to provide the
information, SEBI was able to collect some shreds of information, from
details which had been furnished by the companies themselves, to the
concerned Registrar of Companies. This information was obtained by SEBI,
from MCA-21 portal maintained by the Ministry of Corporate Affairs. In
other words, the information which eventually became available with the
SEBI, was not the information furnished by the companies to the SEBI, but
the information furnished by SIRECL to the Registrar of Companies, Uttar
Pradesh and Uttarakhand, and the information furnished by SHICL to the
Registrar of Companies, Maharashtra. The information which became
available to SEBI in respect of SIRECL through the aforesaid source is
being extracted hereinunder:
“9. i. Shareholders Resolution:
Vide resolution passed at the Extraordinary General meeting held
on March 3, 2008 (and filed with RoC), consent of the members of
SIRECL was obtained for issuance of OFCD by way of private
placement basis to friends, associates, group companies,
workers/employees and other individual who are
associated/affiliated or connected in any manner with Sahara
India Group of Companies and RHP of SIRECL was filed with RoC,
Uttar Pradesh and Uttrakhand on March 13, 2008.
ii. Promoters as per the RHP:
SIRECL is a company belonging to the Sahara India Group and is
promoted by Mr.Subrata Roy Sahara, the founder of Sahara India
Group.
iii. Directors as per the RHP:
Mrs.Vandana Bharrgava, Mr.Ravi Shankar Dubey and Mr.Ashok Roy
Choudhary have given consent to include their names as directors
and have signed the RHP as the directors of SIRECL.
iv. Date of opening and closing of the issue:
RHP merely states that date of opening and closing would be as
decided by the Board of Directors.
v. Details of the issue as per the RHP:
The issue consists of OFCDs with option to the holders to
convert the same into Equity Share of Rs.10 each at a premium to
be decided at the time of issue equal to the face value of the
Optionally Fully Convertible Rs.***. Since it is a RHP, the
quantum and the price is to be determined at a future date. (It
is pertinent to note that in the RHP, the total cost of the
project, in which the proceeds of the said issue would be
utilized is mentioned as Rs.20,000 crores).
vi. Objects of the issue as per RHP:
The funds raised shall be utilized for the purpose of financing
the acquisition of lands for the purpose of development of
townships, residential apartments, shopping complexes, etc. The
proceeds shall also be utilized for construction activities
which shall be undertaken by the company in major cities of the
country and also to finance other commercial activities/projects
taken up by the company within or apart from the above projects.
The company also proposes to carry out infrastructure
activities and the amount collected from the current issue shall
be utilized in financing the completion of projects viz.,
establishment/ constructing the bridges, modernization or
setting up of airports, rail system or any other projects which
may be allotted to the company, from time to time future. The
company also proposes to engage into the business of electric
power generation and transmission and the proceeds of the
current issue shall also be used for the power projects which
shall be allotted to the company. The money not required
immediately by the company may be parked/invested inter-alia by
way of circulating capital with partnership firms or joint
ventures or in any other manner as per the decision of the Board
of Directors, from time to time.
vii. Annual results:
As per the recently filed balance sheet of SIRECL (as at June
30, 2009), proceeds from the issuance of OFCDs is shown as
Rs.4843.37 crores.
viii. Eligibility to apply:
It is mentioned in the RHP that only those persons are eligible
to apply to whom the information Memorandum was circulated
and/or approached privately, who are associated/affiliated or
connected in any manner with Sahara Group of Companies, without
giving any advertisement in general public.”
Likewise the information which became available to SEBI in respect of SHICL
is also being extracted hereunder:
“9. i. Shareholders Resolution:
As per the RHP, it is observed that the OFCD issuance by SHICL
was approved by shareholders, vide the resolution (which is more
or less similar to the resolution passed by SIRECL), passed in
the AGM held on September 16, 2009. The RHP was filed with RoC,
Maharashtra on October 6, 2009.
ii. Promoters as per the RHP:
SHICL is a company promoted by Mr.Subrata Roy Sahara, the
founder of Sahara India Group.
iii. Directors as per the RHP:
Mrs.Vandana Bhargava, Mr.Ravi Shankar Dubey and Mr.Ashok Roy
Choudhary have given consent to include their name as directors
and have signed the RHP as directors of SHICL.
iv. Date of opening and closing of the issue:
RHP merely states that date of opening and closing would be as
decided by the Board of Directors.
v. Details of the issue:
The issue consists of Optionally Fully Convertible Unsecured
Debentures with option to the holders to convert the same into
Equity Share of Rs.10 each at a premium of to be decided at the
time of issue equal to the face value of the Optionally Fully
Convertible Unsecured Debentures to be privately placed
aggregating to Rs.*** (since it is a Red Herring Prospectus the
quantum and the price is to be determined at a future date).
(It is pertinent to note that in the RHP, the total cost of the
project, in which the proceeds of the said issue would be
utilized is mentioned as Rs.20,000 crores).
vi. Objects of the issue as per RHP:
The object stated in short is “…. Financing the acquisition of
lands for the purpose of development of townships, residential
apartments, shopping complexes, etc….” The objects mentioned
therein is more or less similar to the “objects of the issue”
mentioned in the RHP of SIRECL.
vii. Annual Report:
Since the Annual Report of SHICL for the concerned period has
not yet been filed with RoC, the amount of the issue proceeds is
not known.
viii. Eligibility to apply:
RHP mentions that only those persons are eligible to apply to
whom the information Memorandum was circulated and/or approached
privately, who are associated/affiliated or connected in any
manner with Sahara Group of Companies, without giving any
advertisement in general public.
ix. Explanatory note to the shareholders resolution:
The explanatory note to the shareholders resolution filed by
SHICL with RoC (Extraordinary General Meeting resolution dated
November 11, 2009 by SHICL) mentions: “The company further
keeping in view that the number of persons to whom the offer of
OFCDs shall be issued might exceed the limits as specified under
Section 67 of the Companies Act, 1956 made an application for
approval of Red herring Prospectus.”
15. On the failure of the two companies to furnish information to SEBI,
its Full Time Member – for short, SEBI (FTM), drew the following
conclusions in his order dated 24.11.2010.
Firstly, neither SIRECL nor SHICL had denied their having issued OFCDs.
Secondly, SIRECL as also SHICL acknowledged having filed RHPs in respect of
the OFCDs issued by them with the concerned Registrar of Companies.
Thirdly, besides the dates of filing the RHPs with the respective Registrar
of Companies, neither of the companies had furnished any other
information/document sought from the companies by SEBI.
Fourthly, the companies had adopted a stance, that they did not have
complete details relating to the securities issued by them. This stance
adopted by the two companies, according to the SEBI, was preposterous.
Fifthly, SEBI had sought details of the number of application forms
circulated, the number of application forms received, the amount of
subscription deposited, the number and list of allottees, the number of
OFCDs allotted, the value of allotment, the date of allotment, the date of
dispatch of debenture certificates, copies of board/committee meetings,
minutes of meetings during which the said allotment was approved.
According to SEBI, since the information sought was merely basic, the
denial of the same by the companies amounted to a calculated and deliberate
denial of information.
Sixthly, information sought by the SEBI depicted at serial number fifthly
hereinabove, was solicited to determine the authenticity of the assertion
made by the companies, that the OFCDs had been issued by way of private
placement. Whereas, it was believed by the SEBI that the companies had
issued the OFCDs to the public.
Seventhly, since the companies had adopted the position, that the OFCDs
were issued by way of private placement to friends, associate group
companies, workers/employees and other individuals who were
associated/affiliated/connected to the Sahara Group of Companies, according
to SEBI it was highly improbable, that the details and particulars of such
friends, associate group companies, workers/employees and other individuals
which were associated/affiliated/connected to the Sahara India Group of
companies, was not available with them (for being passed over to SEBI).
16. Based on the aforesaid, the SEBI (FTM) passed an order dated
24.11.2010. In the aforesaid order various issues were separately
examined. Issue no.1 was framed to determine whether the OFCDs invited by
SIRECL and SHICL had been issued “to the public”. On the instant subject
the SEBI (FTM) expressed the view, that the proviso under section 67(3) of
the Companies Act made the position clear, that any offer/invitation made
by a public company to 50 or more persons was bound to be considered as
having been made “to the public”. Since the OFCDs were issued to persons
far in excess of 50, it was sought to be concluded that the stance adopted
by SIRECL and SHICL to the effect, that the offer of OFCDs was by way of
private placement was not acceptable. The SEBI (FTM) also adopted another
reasoning to determine the issue. According to the information made
available, the subscribed amount as on 30.6.2009 was Rs.4843.37 crores. To
remain out of the purview of the proviso under sub-section (3) of section
67 of the Companies Act, the subscribed amount should have been drawn from
less than 50 persons (i.e., at the most 49 persons). If (according to the
SEBI), the subscribers are assumed to be 49 (which is the maximum
permissible for private placement), then the average subscription would
have been in the range of Rs.98.84 crores (Rs.4843.37 ÷ 49 = 98.8442
crores). According to the SEBI (FTM) since the unit face value of the
OFCDs issued by SIRECL and SHICL varied from Rs.5000/- to Rs.24000/-, it
was unlikely that such an offer was made by less than 50 persons. This
inference was drawn on account of the fact that even high net-worth
investors are not seen to make such huge investments in a single company.
17. The SEBI (FTM) then examined the plea advanced by the companies, that
in view of the resolution passed by the companies under section 81 (1A) of
the Companies Act, they could offer shares to any person, in any manner.
And therefore, their offer to a select set of persons should not be
construed as a public offer. The SEBI (FTM) rejected the aforesaid
submission on the premise, that section 81(1A) of the Companies Act, did
not have an overriding effect over the provisions relating to public issue
under the Companies Act. It was sought to be explained, that further issue
of securities, extended only to existing shareholders of a company.
According to the SEBI (FTM) section 81(1A) was only an exception to the
said rule, subject to the procedural requirements enumerated therein. It
was pointed out, that under the Companies Act further issue of capital,
even pursuant to a resolution made under section 81(1A) of the Companies
Act was subject to the provisions of Part III of the Companies Act, when
an offer was to be made to 50 or more persons. The legal submissions,
advanced on behalf of the companies based on section 81(1A) was,
accordingly rejected.
18. The SEBI (FTM) also examined the issue with reference to section
2(36) of the Companies Act, which defines the term “prospectus” to mean any
document described or issued as a prospectus and includes any notice,
circular, advertisement or other document “inviting, deposits from the
public or inviting offers from the public” for the subscription or purchase
of any shares in, or debentures of a body corporate. Based on the
definition of term “prospectus” and the conduct of the companies in filing
their respective prospectus for their OFCDs, with the concerned Registrar
of Companies, according to SEBI (FTM), would lead to the inference that the
companies intended to mobilize funds through a subscription “to the
public”.
19. Based on the factual and legal aspects of the matter considered by
SEBI (FTM) noticed above, the following summary of inferences were recorded
in the order dated 24.11.2010:
“18. i. The issue of OFCDs by the companies have been made to a
base of investors that are fifty or more in number.
ii. The companies themselves tacitly admit the same as they
have no case that funds have been mobilized from a group smaller
than fifty.
iii. A resolution under section 81(1A) of the Act does not take
away the ‘public’ nature of the issue.
iv. The filing of a prospectus under the Act signifies the
intention of the issuer to raise funds from the public.
Therefore, for the aforesaid reasons, the submission of the
companies that their OFCD issues are made on private placement
and do not fall under the definition of a public issue, is not
tenable. The instances discussed above would prima facie
suggest that the offer of OFCDs made by the companies is
“public” in nature .”
20. According to SEBI (FTM) since the offer was made to the public, as
per the mandate of section 73(1) of the Companies Act, it was obligatory
for the companies issuing shares/debentures through a prospectus, to
compulsorily seek approval for listing in a recognized stock exchange. It
was, therefore, sought to be concluded, that non-compliance of the
mandatory provisions contained in section 73 of the Companies Act, could
not result in drawing a favourable inference. In other wods, because the
companies had wrongfully not sought approval for listing in a recognized
stock exchange, it could not be presumed that the offer made by them was by
way of private placement. With the aforesaid observations, the SEBI (FTM)
concluded its determination on issue no.1, i.e., both SIRECL and SHICL had
sought subscription to the OFCDs, by way of an invitation “to the public”.
21. Issue no.2 was framed to determine whether section 60B of the
Companies Act provided an alternative route, for raising capital without
complying with the procedure contemplated under section 73 of the Companies
Act. For dealing with the second issue, reference was made to section 60
of the Companies Act which postulates the requirement of a company issuing
a prospectus to deliver the same to the Registrar of Companies for
registration. Reference was also made to section 60B(1) of the Companies
Act which permits a company to issue an information memorandum to the
public before filing a prospectus. It was observed, that the object of
issuing an information memorandum, is to elicit the public demand for the
securities proposed to be issued. The information collected, it was
observed, is to enable the concerned company to assess the price and the
terms of the proposed securities. Also taken into consideration was
section 60B(2) of the Companies Act, which it was observed, imposes a
mandatory condition on a public company to file a prospectus “prior to the
opening of the subscription list” after it had issued an information
prospectus. The requirement of filing prospectus, as indicated
hereinabove, it was observed, is preceded with the words “bound” depicting
the mandatory character thereof. The SEBI (FTM) also made a reference to
section 60B(3) of the Companies Act which, it was observed, contemplates
that the “information memorandum” and the “RHP” would carry the same
obligation as are applicable in case of a prospectus.
22. Learned counsel for the appellant-companies had canvassed before the
SEBI (FTM), that necessary particulars had only to be furnished to the
Registrar of Companies and not to SEBI. In so far as the instant aspect of
the matter is concerned, the contention advanced on behalf of the appellant-
companies was sought to be rejected by concluding that the term “any other
case” used in section 60B(9) was bound to be given the same meaning and
effect as was assignable to the said term under section 53A(c) of the
Companies Act. Based on the aforesaid consideration, the SEBI (FTM)
concluded as under:
“24. From the above reasons, section 60B of the Act cannot be read in
isolation, but has to be harmoniously construed with the other
provisions of the Act governing public issues. Therefore, section 60B
of the Act does not prescribe an alternative procedure to provisions
of Sections 67(3) and 73(1) of the Act, as contended by the companies.
Further, vide their letter dated September 30, 2010, the companies
have mentioned that the issue is not yet closed. A prospectus cannot
be kept open perpetually. It is prima facie inferred from such
conduct of the companies that they have taken recourse to the argument
that their issues are covered under section 60B to circumvent the
applicable legal framework laid out elaborately for public issues.
Once an offer is made to fifty or more persons, compliance with
section 60B(filing with RoC) alone cannot be treated as compliance.
The moment the company offers to fifty or more persons, it has to
comply with all the provisions applicable for public issues (Part III
of the Act). Hence, the legal opinion submitted by the companies that
they can issue to fifty or more persons without making an application
to a stock exchange under section 73 of the Act, by following the
procedure under section 60B thereof, seems to be a narrower and a
convenient interpretation. If such an interpretation is accepted it
will pave the way for companies to raise money from the general
public, without following various procedures intended to protect the
interest of investors, in respect of the public issues, prescribed
under the Act and the ICDR Regulations including the requirements for
due diligence, disclosures, credit-rating, etc.”
23. Based on the DIP Guidelines and the ICDR Regulations, the SEBI (FTM)
found that the companies had committed the following violations:
“29 a) failure to file the draft offer document with SEBI;
b) failure to mention the risk factors and provide the
adequate disclosures that is stipulated, to enable the investors
to take a well-informed decision.
c) denied the exit opportunity to the investors.
d) failure to lock-in the minimum promoters contribution.
e) failure to grade their issue.
f) failure to open and close the issue within the stipulated
time limit.
g) failure to obtain the credit rating from the recognized
credit rating agency for their instruments.
h) failure to appoint a debenture trustee
i) failure to create a charge on the assets of the company.
j) failure to create debenture redemption reserve, etc.”
24. Having recorded the aforesaid deliberations and conclusions, the SEBI
(FTM) issued the following directions in its order dated 24.11.2010:
“Therefore, in view of the foregoing reasons, in order to protect the
interest of investors and the integrity of the securities market, I,
in exercise of the powers conferred upon me under section 19 the
Securities and Exchange Board of India Act, 1992 and Sections 11(1),
11(4)(b), 11A and 11B thereof, read with Regulation 107 of the
Securities and Exchange Board of India (issue of Capital and
Disclosure Requirements) Regulations, 2009, pending investigation,
hereby issue the following directions, by way of this ad interim ex-
parte order:
a. Sahara India Real Estate Corporation Limited and Sahara
Housing Investment Corporation Limited are restrained from
mobilizing funds under the Red Herring Prospectus dated March
13, 2008 and October 6, 2009, respectively, filed with the
concerned Registrar of Companies, till further directions. The
said companies are further directed not to offer their equity
shares/OFCDs or any other securities, to the public and invite
subscription, in any manner whatsoever, either directly or
indirectly till further directions.
b. Sahara India Real Estate Corporation Limited and Sahara
Housing Investment Corporation Limited and are persons who are
named as promoters and directors of the said companies in the
Red-Herring Prospectus filed with the concerned Registrar of
Companies, namely, Mr.Subrata Roy Sahara, Ms.Vandana Bharrgava,
Mr.Ravi Shankar Dubey and Mr.Ashok Roy Choudhary, are prohibited
from issuing prospectus, or any offer document, or issue
advertisement for soliciting money from the public for the issue
of securities, in any manner whatsoever, either directly or
indirectly, till further directions.
40. Sahara India Real Estate Corporation Limited and Sahara Housing
Investment Corporation Limited are directed to show cause as to why
action should not be initiated against them including issuance of
directions to refund the money solicited and mobilized through the
prospectus issued with respect to the impugned OFCDs, done prima facie
in violation of the provisions of the Companies Act, 1956, the
Securities and Exchange Board of India Act, 1992, the erstwhile
Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000 and the Securities and Exchange Board of
India (issue of Capital and Disclosure Requirement) Regulations, 2009,
as observed in this order.
41. The entities/persons against whom this order is issued may file
their objections, if any, to this order within thirty days from the
date of this order and, if they so desire, avail of an opportunity of
personal hearing at the Securities and Exchange Board of India, Head
Office, SEBI Bhavan, C-4A, G, Block, Bandra Kurla Complex, Bandra
(East) Mumbai-400051. They may also inspect the relevant documents,
if they so desire, on any working day prior to the hearing, during
office hours at the above mentioned address.
42. Copy of this order is also forwarded to the Ministry of
Corporate Affairs to enable them to take appropriate action as deemed
fit by them, for any violation of the applicable provisions of the
Companies Act, 1956 administered by them.
43. This order is without prejudice to any other action that may be
initiated against the said violations.
44. This order shall come into force with immediate effect.”
Through the aforesaid order of the SEBI (FTM) dated 24.11.2010 SIRECL and
SHICL were also directed to show cause as to why action should not be
initiated against them, including issuance of directions to refund the
money solicited and mobilized through the prospectus issued with respect to
the impugned OFCDs. The instant show cause notice issued by the SEBI (FTM)
dated 24.11.2010 shall hereinafter be referred to as “the first show cause
notice issued by the SEBI.”
25.. SEBI’s order dated 24.11.2010 (the first show cause notice issued by
the SEBI) was challenged before the Lucknow Bench of the High Court of
Judicature at Allahabad (hereafter referred to as the “the High Court”)
through Writ Petition No.11702 (M/B) of 2010 on 29.11.2010. On 13.12.2010,
the High Court stayed the operation of the order dated 24.11.2010 (the
first show cause notice issued by the SEBI). Despite the aforesaid
injunction granted by the High Court, it permitted SEBI to proceed with its
inquiry against both the companies, but restrained SEBI from passing any
final order. SEBI assailed the order dated 13.12.2010 by filing Special
Leave Petition (C) No.36445 of 2010. SEBI’s challenged was declined by
this Court on 4.1.2011.
26. Even though the High Court, in the first instance, was pleased to
stay the operation of the order dated 24.11.2011 (vide an order dated
13.12.2010), yet the High Court vacated the aforesaid interim order dated
13.12.2010 by an order dated 7.4.2011, in furtherance of an application
filed by the SEBI. While vacating the interim order the High Court
observed, that the appellant-companies were expected to cooperate with the
inquiry being conducted by the SEBI. Since the appellant-companies were
found remiss in the matter, the High Court was constrained to vacate the
interim order passed earlier (on 13.12.2010). The appellant-companies
(petitioners before the High Court) then filed an application before the
High Court seeking a restoration of the order passed on 13.12.2010. The
said application was dismissed on 29.11.2011. While dismissing the
aforesaid application, the High Court observed, that those who come to
court were supposed to come with clean hands and bona fide intentions, and
have to abide by orders passed by the court, if assurances given to the
court are not honoured, the court cannot come to the rescue of the party
concerned. It is apparent, that the High Court had denied relief to the
appellant-companies because they had not approached the High Court with
clean hands and because their intentions were not found bona fide.
27. The order passed by the High Court vacating the interim order (passed
on 13.12.2010) dated 7.4.2011 came to be assailed by SIRECL before this
Court through Special Leave Petition (C) No.11023 of 2011. Having
entertained the aforesaid petition filed by SIRECL, this Court on 12.5.2011
passed the following order:
“1. …..In this matter the questions as to what is OFCD and the
manner in which investments are called for are very important
questions. SEBI, being the custodian of the investor’s interest and
as an expert body, should examine these questions apart from other
issues. Before we pass further orders, we want SEBI to decide the
application(s) pending before it so that we could obtain the requisite
input for deciding these petitions. We request SEBI to expeditiously
hear and decide this case so that this Court can pass suitable orders
on re-opening. However, effect to the order of SEBI will not be
given. We are taking this route as we want to protect the interest of
the investor. In the meantime, the High Court may proceed, if it so
chooses, to dispose of the case at the earliest. The Special Leave
Petitions shall stand over to July, 2011.”
28. In compliance with the order extracted hereinabove, SEBI issued
separate show cause notices to the companies on 20.5.2011. For facility of
segregation, the instant show cause notices dated 20.5.2011 shall
hereinafter be referred to as “the second show cause notice issued by the
SEBI”. Through the second show cause notice, the two companies were
required to satisfy the SEBI why the directions contained in the order
dated 24.11.2010 should not be reaffirmed. In response to the second show
cause notice, detailed replies dated 30.5.2011 were filed by the companies
so as to enable the companies to effectively project their respective
claims. An opportunity of hearing was also afforded to the companies on
6.6.2011. During the course of hearing on 6.6.2011 (as well as on the
adjourned dated i.e., 6.8.2011) detailed submissions were advanced through
counsel.
29. In the interregnum SIRECL changed its name to Sahara Commodities
Services Corporation Limited. Be that as it may, while adjudicating upon
the present controversy, to the said company will be referred to as SIRECL.
30. Having issued the second show cause notice dated 20.5.2011 and having
received detailed replies from SIRECL as also from SHICL, and thereupon,
having heard detailed submissions advanced by counsel representing the two
companies, SEBI (FTM) summarized the pleas raised on behalf of the
companies in response to the second show cause notice as under:
“6. …..A. The two companies have made ‘private placements’ of
Optionally Fully Convertible Debentures (OFCDs) to persons related or
associated with the Sahara India Group, and therefore these issuances
are not ‘public’ issues.
B. OFCDs are neither shares nor debentures in its strict sense and
are in the nature of ‘hybrid’ as defined in the Companies Act, 1956
(hereinafter referred to as the Companies Act).
C. SEBI does not have any jurisdiction on such hybrid issues as the
term ‘hybrid’ is not included in the definition of ‘securities’, under
the SEBI Act, or in the Securities Contract (Regulation) Act, 1956
(hereinafter referred to as the SCR Act).
D. Such hybrid securities were issued by the two companies (both
unlisted), in terms of section 60B of the Companies Act and therefore,
the jurisdiction in respect of such issues lies with the Central
Government in terms of Section 55A(c) thereof and not with SEBI.
E. Sections 67 and 73 of the Companies Act are not applicable to
such hybrid securities issued by the two companies.
F. The DIP Guidelines and the ICDR Regulations would not be
applicable to the hybrid securities as neither the SEBI Act nor SCRA
confer jurisdiction on SEBI in respect of such securities.”
31. On the issue whether the SEBI had jurisdiction to deal with the
matter under reference it was imperative for SEBI (FTM) to first ascertain,
whether OFCDs issued by SIRECL and SHICL were “hybrid securities”. If so,
whether “hybrid securities” were covered by the definition of the term
“securities” under the SEBI Act and/or the Securities Contract
(Regulations) Act, 1956 (hereinafter referred to as “the SC(R) Act). The
contention advanced at the behest of the companies on the instant issue was
based on an amendment to the Companies Act in 2000. By the aforesaid
amendment, the term “hybrid” was included in the definition of the term
“securities” in section 45AA of the Companies Act (with effect from
13.12.2000). Since the term “hybrid” was not similarly included within the
definition of term “securities” under the SEBI Act and/or SC(R) Act, the
contention advanced on behalf of the appellant-companies was that SEBI had
no jurisdiction in respect of “hybrid securities”.
32. The SEBI (FTM), on analyzing section 2(k) of the SC(R) Act arrived at
a conclusion that the term “securities” in the SEBI Act as also SC(R) Act
included “other marketable securities of a like nature”, SEBI, according to
the SEBI (FTM), would therefore, have jurisdiction to deal with the matter
under reference.
33. While evaluating the terms and conditions of the bonds issued in
response to the OFCDs (floated by the two companies), it was found that
holders of all the six different kinds of bonds issued by SIRECL and SHICL,
had the liberty to transfer the same to any other person subject to the
terms and conditions incorporated therein and the approval of the
respective company. It was therefore held:
“14.5.6 …I find that firstly, marketability of a security denotes
the ease with which it can be sold, secondly what is freely
transferable is marketable and thirdly what is saleable is also
marketable. Clearly, OFCDs issued by the two companies to such a wide
base of investors who can sell these securities among themselves, if
not to others are evidently ‘marketable’. I have to therefore regard
the OFCDs issued by the two companies as marketable securities.”
34. On the issue whether the OFCDs which are the subject matter of
contention in the present controversy, fell within the definition of term
“debentures”, the decision of the SEBI (FTM) was as under:
“14.6.1 From the nomenclature itself, ‘Optionally Fully Convertible
Debentures’ are ‘Debentures’, as they indeed are named so….. A
succinct eludication of what the test for a “security” under
securities laws may be found in A Ramaiya (XVII Ed. 2010 – Guide to
the Companies Act – page 100). The acid test is whether the scheme
involves an investment of money in a common enterprise with profits to
come solely from the efforts of others so that whenever an investor
relinquishes control over her funds and submits their control to
another for the purpose and hopeful expectation of deriving profits
thereof, she is in fact investing her funds in a security….. Such test
contains three elements: the investment of money; a common enterprise;
and profits or returns solely derived from the efforts of others.
14.6.2 …..In this case, the investor purchasing the OFCD makes an
investment. Both the two companies issuing the OFCDs are common
enterprises, being public limited companies. The investor herself has
absolutely no part in generating profits on her investment – and
therefore, as such, the profits or returns are solely derived from the
efforts of others. Therefore, on the basis of this test, it is amply
evident that OFCDs come well within the scope of securities as defined
in Section 2(h) of the SCR Act.”
In conjunction with the aforesaid, the issue in hand was further evaluated
by the SEBI (FTM) on the following lines:
“14.6.8 In Narendra Kumar Maheshwari vs. Union of India [1990
(Suppl.) SCC 440], the Hon’ble Supreme Court, observed that in the
various guidelines applicable to such instruments, compulsorily
convertible debentures are regarded as ‘equity’ and not as a loan or
debt.” One of the critical considerations adopted by the Hon’ble
Supreme Court of India in concluding so, is that “A compulsorily
convertible debenture does not postulate any repayment of the
principal.” The thinking of the Hon’ble Supreme Court revealed in
this Judgment, not only clarifies the issue, but also provides me with
a touchstone to determine whether the OFCDs issued by the two
companies are more in the nature of shares or debentures. SIRECL has
issued three bonds viz., Abode Bond, Real Estate Bond and Nirmaan
Bond. SHICL has also issued three bonds, viz., Multiple Bond, Income
Bond and Housing Bond. From a plain reading of the summary of their
descriptions at paragraph 9.2 and 9.3 above, it is evident that all
these six bonds postulate a repayment of the principal. The repayment
of the principal will be at the option of the investor. The investor
holds the option, which gives her a right to determine whether she
would like to get her principal back in cash or as equity shares.
Hence, Optionally Fully Convertible Debentures unlike their
counterpart category of Compulsorily Convertible Debentures do not
share the characteristic pointed out by the Hon’ble Supreme Court in
arriving at the conclusion that Compulsorily Convertible Debentures
are more of equity than of debentures. Thus, all the six financial
instruments issued by the two companies share the defining feature of
debentures in that a payment of interest to the investor and a
repayment of the principal, albeit at the option of the investor, is
postulated.”
Based on the aforesaid analysis SEBI (FTM) summarized its conclusions
as under:
“14.10 The following summarises the discussions above:
1. As laid down in the judgment in the matter of Sudhir Shantilal
Mehta vs. CBI (quoted supra), the definition of ‘securities’ in
Section 2(h) of the SCR Act is an inclusive one and not exhaustive,
with adequate latitude to accommodate OFCDs.
2. OFCDs issued by the two companies are marketable scurities.
3. These instruments satisfy all the characteristic features that
identify a security based on clear tests used to identify what a
security under section 2(h) of the SCR Act is.
4. Debenture is a genus and not a species of financial instruments.
This genus includes OFCDs.
5. OFCDs contemplate the repayment of principal, and hence using
the yardstick adopted by the Hon’ble Supreme Court of India in
Narendra Kumar Maheshwari vs. Union of India (quoted supra), these
instruments indeed are debentures.
6. The Companies Act recognizes OFCDs as a composite financial
instrument where an option is attached to a debenture.
7. Design and valuation characteristics of OFCDs, show that it is
the sum of the valuation of the two parts, viz., debenture and option,
where the option is valued as a ‘sweetener’ to improve the pricing and
risk characteristics of the debenture.
8. OFCDs are issued as debentures (Palmer’s Company Law – XXIV Ed.
Page 676).
14.11 From the foregoing discussions, it therefore becomes
abundantly clear that OFCDs belong to the family of debentures covered
by the definition of the term ‘securities’ in section 2(h) of the SCR
Act. That an OFCD is a hybrid therefore does not detract from the
fact that an OFCD is by definition, design and its characteristics,
intrinsically and essentially a ‘debenture’.”
35. Thereupon SEBI (FTM) ventured to make a comparison of the definition
of the term “securities” as under the Companies Act and with reference to
its definition under the SC(R) Act. This comparison was made so as to
determine the veracity of the submissions advanced on behalf of the
appellant-companies that the term “securities”, as defined under SC(R) Act
which had been adopted by the SEBI Act could not be given the same meaning
and effect as the definition of the term “securities” under the Companies
Act for the simple reason that the Companies Act expressly included
“hybrids” within the definition of the term “securities” (in section
2(45AA) of the Companies Act in 2000) whereas no such or similar inclusion
was made in the SC(R) Act. The aforesaid submissions had been advanced in
order to press the plea of the appellant-companies, that OFCDs issued by
SIRECL and SHICL were “hybrids”, and as such were not within the purview of
SEBI Act. The relevant observations recorded by SEBI (FTM) on the instant
subject are being placed below:
“15.1 To reiterate, Section 2(19A) of the Companies Act defines
‘hybrid’ to mean “any security which has the character of more than
one type of security, including their derivatives”. Black’s Law
Dictionary (VIII Ed.) defines hybrid security as: “A security with
features of a debt instrument (such as a bond) and an equity interest
(such as share or stock).” While the Companies Act contemplates that
a hybrid can be any combination of securities – and makes it an
omnibus definition, the more precise definition in Black’s Law
Dictionary is that it is a combination of a debt instrument and an
equity interest….. Section 2(h)(i) of the SCR Act, which specifies
that “securities” includes “shares, scrips, stocks, bonds, debentures,
debenture stock or other marketable securities of a like nature in or
any incorporated company or other body corporate”. In this list of
instruments, the last three viz., bonds, debentures and debenture
stock are debt instruments, and the first three viz., shares, scrips
and stocks are equity instruments. Under the definition, any
marketable security of ‘a like nature’ automatically falls under
section 2(h)(i) of the SCR Act. A hybrid, as long as it is
marketable, regardless of the strength or proportion in which the debt
and equity components are assembled together, bears an unmistakable
likeness to one more of these six instruments. So clearly, any
marketable hybrid, in the way we understand hybrids in India today, is
a marketable security of a ‘like’ nature….
15.2 This is not to say that all hybrids invariably have to
combine debt and equity. Many issuers have sold debt instruments
where the amount of principal payable at maturity is tied to the
performance of a stock or bond index, or a commodity or foreign
currency or even the rate of inflation. Whether in the future,
financial engineering will create newer hybrids as combinations of
other securities that become popular in India is hard to predict – but
today, it is unequivocally true that all marketable hybrids available
in the market neatly fall into the categories “marketable securities
of a like nature”.
On the second issue while dealing with the factual and legal connotations
involved, SEBI (FTM) recorded the following conclusions:
“15.12 Five definite conclusions emerge from the above
discussions.
1. OFCD as a hybrid is a ‘debenture’ under Section 2(h)(i) of
the SCR and is also a marketable security.
2. The import of the expression “and includes” as used in
Section 2(45AA) of the Companies Act has to be appreciated
against the maxim of noscitur a sociis. The term ‘securities’
itself has a very extensive scope. There are no exceptional
circumstances that suggest the need for any deviation from a
normal and common interpretation of such expression. Therefore,
the definition of the term ‘securities’ in section 2(h) of SCR
Act encompasses ‘hybrid’ also and is therefore equivalent to the
definition in section 2(45AA) in the Companies Act.
3. The powers conferred on SEBI under section 55A of the
Companies Act, relate to ‘securities’ defined under that Act,
and not under the SCR Act. So even if one were to assume that
there are differences between the two definitions (even though
there are none) SEBI can regulate all securities (whether hybrid
or not) under Section 55A of the Companies Act.
4. Any assumption, even for argument’s sake, that hybrids are
not covered under the SCR Act, would lead to an untenable
position, with a regulatory vacuum in so far as regulation of
transactions in such hybrids are concerned, once they are
issued.
5. Finally, were “hybrid”, as defined in the Companies Act,
to be treated as distinct from, and falling outside “securities”
under the SCR Act, then this would give rise to an incurable
defect in the very definition of the term “hybrid” itself.”
36. In order to return a finding on the issue whether OFCDs offered by
the two companies were by way of private placement or by way of an offer to
the public”, reliance was placed by the SEBI (FTM) on a series of factual
circumstances, including assertions made in the information memorandum, the
terms and conditions incorporated in the bonds issued by the two companies,
the assertions made in the extraordinary general body meeting of the equity-
holders (accepting the legal position in the eventuality of the subscribers
number exceeded 50), the declaration required to be made by the applicants,
the letters written by the companies seeking assistance from professional
accounting firms for collection and compilation of data, the non
availability of the data with the companies, and such like factual
pointers, to conclude as under:
“17.16 These facts drive home one rather straightforward
inference viz., the issue was marketed to and subscribed by the
general public and it was not a private placement by any stretch of
imagination. Therefore, the OFCD issues by the two companies cannot
be held, even for a moment, to be of a “domestic concern” or “that it
was not subscribed to by others to whom such offer was not made” (as
referred to in Section 67(3) of the Companies Act). Further, it is
the case of SIRECL that they have 6.6 million subscribers. Given the
above circumstances, I do not hesitate in being a tad dismissive of
the argument advanced by the learned counsel, when I say that 6.6
million subscribers is too colossal a pool of persons associated to
the companies, to be labeled ‘private’, particularly in the absence of
any definition of what such an association or relationship is. What
seems to be very obvious is that the two companies are obtaining
subscriptions into its OFCD schemes through mass subscription
solicitation through service centres sprawled across the country. I
have no hesitation in concluding that placements of OFCDs made by the
two companies were indeed made to the public. In fact, unless there
is a database of investors already available with an issuer, the offer
letters under a ‘private placement’ simply cannot be mailed out. The
very absence of a ‘database’, readily available with the two companies
itself is the best indicator that these not by any means ‘private
placements’.
The SEBI (FTM), based on the analysis briefly noticed above, summarized its
findings and conclusions on the issue in hand as under:
“17.20 The above findings are summarized below:
1. The OFCDs in question here constitute an offer to the
public as they have been made to over fifty persons.
2. The manner and the features of fund raising under the bond
issues by the two companies discussed above, suggest these
issues are by no means ‘private’. What seems evident is that
the two companies have been running a mass subscription
solicitation from the public.
3. The two companies do not fall under the entities specified
in the second proviso to section 67(3) which is the only
exemption granted to the ‘Rule of 50’, that defines offer to the
public, under the Companies Act.
I would therefore conclude that the OFCDs issued by the two companies
are public issues, without any ambiguity.”
37. The SEBI (FTM), thereupon, examined the applicability of section 73
of the Companies Act to the controversy in hand. Taking into consideration
the fact that the two companies had issued OFCDs which were debentures
offered to the public through a prospectus, it was held, that compliance
with the requirements expressed in Section 73 of the Companies Act was
imperative. The aforesaid conclusion was sought to be drawn by recording
the following observations:
“18.7 To sum up, for a public issue, whose parameters are set by
the first proviso to Section 67(3) of the Companies Act, the issuer is
bound to proceed to Section 73, and comply with the requirements
stipulated there. In fact, there does not seem to have been any
doubts in the minds of the two companies that they were bound to
comply with Sections 67 and 73 of the Companies Act, as seen from
their statement to the Registrar itself. I also suspect that there
has been a reprehensible attempt to conceal this applicability of the
provisions of laws and the jurisdiction of SEBI on the issue itself,
by making changes in the form and structure of the statutory
declaration filed by the Directors of the two companies.”
xxx xxx xxx
“19.7 Therefore, the intention to list, contemplated in the Companies
Act does not originate from the benevolence and large-heartedness of
the issuer or from a voluntary desire to subject itself to greater
regulatory discipline. It arises because Parliament, in its wisdom,
as explained in the aforesaid observations of the Hon’ble Apex Court,
had decided that listing the shares or debentures of a public company
that issues shares or debentures to the public, on a stock exchange
should be an integral part of the measures for investor protection in
our country. In other words, where the expression “intend to” is used
in the Companies Act, in the matter of listing, the law does not offer
a choice to the issuer, but mandates the same.”
38. The SEBI (FTM), then examined the submission put forward by the two
companies, that section 60B of the Companies Act was the only route
available to the companies to raise capital by way of hybrid securities.
In this behalf, the assertion on behalf of the companies was, that sections
67 and 73 of the Companies Act could not be relied upon to determine the
present controversy because the said provisions were applicable only to
“shares and debentures” and not to “hybrid securities”. Thus viewed, the
contention on behalf of the companies was that SIRECL, as well as, SHICL
were only obliged to file their final prospectus with the Registrar of
Companies under section 60B(9) of the Companies Act. This issue was dealt
with by the SEBI (FTM) by expressing the following logic and analysis:
“20.6 …in the spirit of the Companies Act, an issuer that has
made an offer of securities to the public, and therefore has applied
for listing as legally required, undoubtedly has to sit in the
category of ‘listed public companies’ and not ‘others’ in section
60B(9) of the Companies Act – and would indeed therefore be under the
regulatory umbrella of SEBI, as provided in this sub-section itself.
In other words, had the two companies abided by the requirements set
by law, under section 67(3) and section 73, and applied for listing,
they legitimately should have been dealt with, for the purposes of
Section 60B(9), on par with any listed company. So, even the argument
of the two companies, that they belong to the category of ‘others’
under section 60B(9) is ultra vires of the law, because it is premised
on a violation of two important provisions of the Companies Act –
viz., section 67(3) and 73.
The analysis of the SEBI (FTM) of the process contemplated under section
60B of the Companies Act, was dealt with in the following manner:
“20.9 Thus there are three distinct ‘gates’ that have to be
crossed in the process of raising capital through the ‘information
memorandum’ route – firstly, the issue of the information memorandum
itself [section 60B(1)], secondly the filing of the red-herring
prospectus [Section 60B(2)] and lastly the filing of the final
prospectus [Section 60B(9)]. Evidently, the ‘final prospectus’ is the
last post to be reached. A careful reading of Section 60B(1), (2) and
(3) clearly shows that at the stage, when the information memorandum
and prospectus (red-herring) are filed, the Companies Act directs the
process in the regulatory sense to Section 55 (on the dating of
prospectus) and Section 56 where the matter to be stated and set out
in the prospectus are defined.
20.10 Section 60B of the Companies Act, from a plain reading of
the Act itself, and as also argued by learned counsel, applies to all
securities, and therefore it would apply to ‘shares’ and ‘debentures’
as well. It offers a route to ‘listed public companies’ and ‘public
companies which intend to get their securities listed’ as well. Any
issuer company has to cross the first two gates in the process –
circulation of an information memorandum and a RHP under section
60B(1) and 60B(2). Section 60B(3) places all these documents on par
with a prospectus. Evidently therefore these provisions in the
Companies Act imply that Section 55 and 56 of the same apply in toto.
Parliament, in its wisdom, under section 55A, has decided that SEBI
should administer sections 55 and 56, insofar as it relates to ‘listed
public companies’ and ‘public companies which intend to get their
securities listed’. Therefore, it goes without saying, that as far as
‘listed public companies’ and ‘public companies which intend to get
their securities listed’ are concerned, SEBI is the regulatory
gatekeeper, posted at Sections 60B(1) and 60B(2) of the Companies Act.
In fact this indeed is precisely what happens now, when ‘listed
public companies’ and ‘public companies which intend to get their
securities listed’ file their DRHP and RHP before SEBI.”
Having evaluated the controversy in the aforesaid manner, the SEBI (FTM)
recorded a decision on the issue canvassed, by relying upon section 60B(9)
of the Companies Act, in the manner set out below:
“20.19 To sum up the discussion in this section, the
following conclusions emerge:
*If the offer of OFCDs are ‘private’ in nature, as claimed by the two
companies, then section 60B is not the correct route to traverse for
issuing OFCDs, given that section 60B deals with issue of information
memorandum to the public alone. The two companies cannot, in one
breath, claim that their issues are private placements and at the same
time proceed to use a route, exclusively designed for public issues.
*At the stage of taking recourse to section 60B under the Companies
Act, a public company that proposes to issue securities to the public
should already have applied, as is required under law, for listing on
a stock exchange, and as such can only be treated on par with a
“listed public company” and not in the category of the other group
“and in any other case with the Registrar only” under section 60B(9)
of the Companies Act.
*The argument that they are in the latter category is built on the
presumption that the two companies need not have complied with section
67(3) and section 73. The two companies are required under law to
conform to these applicable legal provisions. Therefore, the
framework for issue of capital under the Companies Act, the SEBI Act
and its Regulations would apply in toto to the OFCD issues of the two
companies.
*Section 60B should not be aligned solely with the expression “and in
any other case with the Registrar only”, but has to be read
progressively, in its context, going from section 60B(1) all the way
to Section 60B(9).
*Section 60B – whether for listed public companies or other companies
– was introduced in the Companies Act, for a specific purpose under
the Companies (Second Amendment) Act, 2002. It was never designed to
create an island of regulatory standards that are distinct from and
contrary to the spirit of various other provisions in the Companies
Act itself, in so far as mobilization of capital from the public or
their investor protection is concerned.
*There are no valid grounds to infer that the expression “and in any
other case with the Registrar only” that appears section 60B(9) was
intended in law to curtail the powers of SEBI conferred on it under
section 55A of the Companies Act. Hence, I am of the considered
opinion that the two companies have violated the legal provisions
under Section 67(3) and 73 of the Companies Act, and have acted ultra
vires of the law, in using section 60B(9) for their OFCDs to bypass
the regulatory framework applicable to them, relying solely on the
expression “and in any other case with the Registrar only” that occurs
in this sub-section.”
39. It was also contended on behalf of the two Companies before the SEBI
(FTM), that the Companies had wrongly been proceeded against by the SEBI
under the SEBI (Disclosure and Investor Protection) Guidelines, 2000
(hereinafter referred to as the “DIP Guidelines”) during the period the
same were not in force. It was further contended, that presently the SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009
(hereinafter referred to as “the ICDR Regulations”) govern the subject
under consideration, as the DIP Guidelines had been repealed by the ICDR
Regulations. Insofar as the ICDR Regulations are concerned, it was pointed
out, that the same being prospective in nature could not be taken into
consideration to determine the validity of the Companies activities, which
had taken place well before the ICDR Regulations came into force (with
effect from 26.8.2009). The instant contention of the companies was
rejected by the SEBI (FTM) by ruling, that the two companies had continued
to mobilize funds from the public under the information memorandum and the
RHP, till they were restrained from doing so by the SEBI (vide its order
dated 24.11.2010). Having considered the aforesaid contention raised on
behalf of the appellant-companies the SEBI (FTM) also expressed the view,
that the ICDR Regulations would be applicable because the violations
committed by the two companies was of a continuing nature, more so, because
the violations had continued even after the enforcement of the ICDR
Regulations (with effect from 26.8.2009). Accordingly, the SEBI (FTM)
expressed the view, that action could be taken against SIRECL, as well as,
SHICL if their activities after 26.8.2009 were found to be in violation of
the ICDR Regulations.
40. Having dealt with the issues raised by the appellant-companies as
have been noticed hereinabove, as well as, certain other trivial matters
not requiring an express mention in the instant order, the SEBI (FTM)
ventured to examine the action of the two Companies on the touchstone of
investor protection in securities, and the responsibilities assigned to
SEBI to regulate the securities marked. Some of the aspects highlighted by
the SEBI (FTM) which demonstrate absolute lack of investor’s safeguards at
the hands of the two companies are being extracted hereunder :
“24.1 The two Companies, as stated in the interim order as well as in
the additional Show Cause Notice, are without doubt, clearly in gross
violation of the provisions of the laws applicable to public companies
making offers of securities to the public. I have referred earlier to
how the two Companies, seem to be unable to furnish even basic data on
the identity of its own investors. The letters sent by SIRECL to
various accounting firms in January 2011, seeking professional
services seem to suggest a woeful lack of compiled and authenticated
data on their investors and the funds. If the identity of the
investors and addresses themselves are not readily available with the
firm – and the compilation and authentication of the data across the
thousands of service centres will have to, as admitted by SIRECL,
require the support of professional accounting firms at this stage,
then I wonder what real safeguards can possibly be there in place for
investor protection.
24.2 I observe here that only one company viz. SIRECL has furnished
information about its investors. SHICL has not, despite reminders
from SEBI, cared to furnish the requisite information. Despite
instructions from the Hon’ble Supreme Court of India and the Hon’ble
High Court of Lucknow directing SIRECL to be forthcoming on the data
on its investors, there still is little clarity in the statements
furnished by it. This is seen particularly in the absence of details
on the actual quantum of funds that has been mobilized. All that has
been declared clearly in the RHP is that both the companies together
need `40000 cr. for their projects. Additionally, I also observe that
the data furnished by SIRECL in the Compact Disk, are in the form of
scanned images, which are not amenable to easy analysis on a Computer.
SIRECL has not supplied the data in standard spreadsheet form or as
regular documents for word processing. Thus, based on what has been
furnished by the Companies, SEBI has little means to find out
cumulative totals of funds mobilized or do further useful analysis on
the data itself, as part of its investigation, should any such future
requirements arise. The Hon’ble High Court of Allahabad, as quoted
supra above, had expressed its displeasure at the rather blatant
unwillingness of SIRECL to comply with its directions and cooperate
with the investigations. There seems to be an unstated resolve on the
part of the two Companies not to part with data in any meaningful
manner. The thrust seems to be on concealment and obfuscation rather
than openness and transparency.
24.3 The Learned Counsel, at one point in the submissions before me,
mentioned the fact that there are no investor complaints at all, from
any investor in the OFCDs raised by the two Companies. Going by the
history of scams in financial markets across the globe, the number of
investor complaints has never been a good measure or indicator of the
risk to which the investors are exposed. Most major `Ponzi’ schemes
in the financial markets, which have finally blown up in the face of
millions of unsuspecting investors, have historically never been
accompanied by a gradual build up of investor complaints. But when
financial catastrophes have indeed finally erupted, they do so with
little warning and lead to major collapses in the financial markets
with disastrous consequences to investors.
24.4 I have examined the copies of the RHPs filed by the two
Companies. Against all the major investor protection measures
contemplated (for e.g. appointment of debenture trustee, credit
rating, underwriting, utilization of funds collected), I see the entry
“Not applicable”. Some of them, as stated therein, are declared
inapplicable because the issue will not be listed. Others are
declared inapplicable, because the issue is not of debentures. If
such vital regulatory requirements themselves have all been declared
superfluous or unnecessary, and have not been complied with on one
pretext or the other, what then exactly are the protective measures
that the two Companies can possibly have in place for its investors?
The records furnished to SEBI shed little light on this. Neither have
the two Companies come forward to allay the legitimate concern of SEBI
as a regulator in this regard, duly reflected in the show cause
notices issued to the two Companies and their promoters and directors.
24.5 SIRECL did not have any distributable profit for the financial
year ending 31st March, 2008. SIRECL had a negative net worth at the
time of the offer and the net worth of SHICL was around `11 lakh. The
subscribed capital of t
