SAHARA CASE – what and why?

Learnings

CONTENTS

• SAHARA

• SEBI

• ABOUT THE CASE

• SAHARA’S CONTENTION

• SEBI’S CONTENTION

• OUTCOME

• SUPREME COURT OBSERVATIONS

• TIMELINE

SAHARA

• Started by Mr. Subrata Roy Sahara in 1978

• Businesses include finance, infrastructure & housing, media & entertainment etc

• Main sponsor of the Indian Cricket Team (apparently withdrawn) and Hockey Team. They own an IPL Team and 42.5% stake in Formula One's Force India F1

• The Brand Trust Report published by Trust Research Advisory, listed Sahara in the top 100 most trusted brands of India.

SEBI

• The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in the year 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992.

• SEBI has to be responsive to the needs of:

the issuers of securities | the investors | the market intermediaries.

• SEBI drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity

ABOUT THE CASE

• Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHIC) issued Optionally Fully Convertible Debentures (OFCDS).

• Raised around Rs.20,000 crores from investors with the purpose to carry out infrastructural activities namely, constructing the bridges, modernizing or setting up of airports, rail system or any other projects which may be allotted to the company

• Filed RHPs to the concerned ROC and specified intention of company not wanting to list the shares on any stock exchanges.

• As per Sahara issue of OFCDS was private placement.

ABOUT THE CASE……Cont’d

• The requirements applicable to the public offerings of securities were not complied with.

• Later, Sahara Prime City Limited intended to raise funds through listing of its shares filed Prospectus to SEBI

ABOUT THE CASE……Cont’d

• SEBI passed an order dated 23rd June, 2011 directing the two companies to refund the money.

• Also restrained the promoters of the two companies including Mr. Subrata Roy from accessing the securities market till further orders.

• Sahara then preferred an appeal before Securities Appellate Tribunal (SAT) against the order. SAT confirmed and maintained the order of the Whole Time Member.

• Subsequently Sahara filed an appeal before the Supreme Court of India against the SAT order.

SAHARA’s CONTENTION

• Issue of Optionally Fully Convertible Debentures (OFCD’s) is

legal.

• Issue of OFCD’s is not a public issue.

• OFDC are neither shares nor Debentures but “Hybrid” Class

• OFCD’s are “Hybrid Instruments” cannot be listed.

• Serious error is committed by SEBI.

SAHARA’s CONTENTION…….Cont’d

• No statutory requirement to list OFCD’s.

• Bonds issued by Sahara are:-

1. Hybrid instruments as per Sec 2(19A) of the Companies Act.

2. Convertible bonds as per Sec 28(1)(b) of the SCR Act & hence

not list-able securities as per Sec 2 (h) of the SCR Act.

• SEBI contention is incorrect and has no credible evidence.

SEBI’s CONTENTION

• OFCD was public issue

• OFCDs were securities transferable

• Violation of section 73 of Companies Act 1956

• Untrue Red Herring Prospectus Not following The Securities Contracts (Regulation) Act, 1956

• The forms issued by the two companies did not enclose an abridged prospectus

• Did not submit Balance Sheet and P&L a/c to the concerned ROC 

OUTCOME

• Aggrieved Sahara appealed to SAT(Securities Appeallet

Tribunal).

• Passed order in favor of SEBI.

• Aggrieved Sahara again moved towards Supreme court.

• Finally, Supreme court of India passed the judgment in favor

of SEBI.

• Ordered Sahara to repay the investors.

SUPREME COURT OBSERVATIONS

Whether the power to investigation and adjudication lies with SEBI in this matter as per Sec 11, 11A, 11B of SEBI Act and or Ministry of Corporate Affairs (MCA) under Sec 55A of the Companies Act.

OBSERVATIONS OF SC:

• SEBI does have power to investigate and adjudicate in this matter.

• SEBI Act is a special legislation bestowing SEBI with special powers to investigate and adjudicate to protect the interests of the investors.

• SEBI has special powers are not derogatory to any other provisions existing in any other law

• There is no conflict of jurisdiction between the MCA and the SEBI in the matters where interests of the investors are at stake.

ISSUE1

SUPREME COURT OBSERVATIONS ISSUE2

Whether the hybrid OFCDs fall within the definition of "Securities" within the meaning of Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate and adjudicate

OBSERVATIONS OF SC:

• OFCDs issued by the two companies are in the nature of "hybrid" instruments but it is "Security" within the meaning of Companies Act, SEBI Act and SCRA.

• Although the definition of "Securities" under section 2(h) of SCRA does not contain the term "hybrid instruments" but it is inclusive definition and covers all "Marketable securities".

• OFCDs were offered to millions of people hence it were marketable.

• The name itself contains the term "Debenture", it is deemed to be a security as per the provisions of Companies Act, SEBI Act and SCRA. 

SUPREME COURT OBSERVATIONS ISSUE3

Whether the issue of OFCDs to millions of persons is a Private Placement and not covered by SEBI Regulations and various provisions of Companies Act.

OBSERVATIONS OF SC:• The issue of OFCDs is not private placement since made to 50 or more [sec

67(3)]• The Supreme Court observed as the companies elicited public demand for the

OFCDs through issue of Information Memorandum which is only meant for Public Issues.

• Actions of both the companies clearly depicts they wanted to issue securities to public in the grab of private placement to bypass various laws and regulations

SUPREME COURT OBSERVATIONS ISSUE4

Whether listing provisions under sec 73 is mandatory for all public issues or depends on ‘Intention of the Company’

OBSERVATIONS OF SC:• Law is clear and unambiguous as to any issue made to more than 49

persons is mandatory to list [u/s 67 (3) of Company’s Act,1956]

• Sec 73(1) casts obligation on every company indenting to make offer securities to public to list its securities.

• Intention can not override Act.

SUPREME COURT OBSERVATIONS ISSUE5

Whether the Public unlisted companies (Preferential Allotment) Rules, 2003 will apply in this case

OBSERVATIONS OF SC:• Supreme court denied any legislative intention of such Rules to override

the provisions of sec 67(3) and held that even those rules has to comply the aforesaid section

• Even if armed with special resolution of Shareholders sec 67 is to be followed

• If the preferential allotment by unlisted companies is public issue, 2003 Rules will not apply

TIMELINE

24th November,

2010

Sebi restricts the promoters and directors of two Sahara group companies from raising any capital through the issue of securities: either equity shares, convertible debentures or any other securities.

13th December,

2010

Lucknow bench of Allahabad High Court stays Sebi order

January 20111. SC turns down Sebi’s plea to stop two

firms from raising money from investors, but empowers it to seek information and issue advertisements to inform investors that the matter is pending investigation.

2. Sebi issues a public notice on its website cautioning investors against the buying debentures of Sahara India Real Estate Corp and Sahara Housing Investment Corp.

3. Sahara India Real Estate sends a legal notice to Sebi.

April 20111. The Lucknow bench of Allahabad High

Court vacates stay

2. Sebi issues a public notice alerting investors about a ban on money mobilization by two Sahara group firms.

3. Sahara Group accuses Sebi of defaming the company & files a petition in the Supreme Court challenging the Allahabad High Court order, which asked it to share full details of investors participating in its fund-raising exercise with Sebi.

May 2011SC directs Sebi to proceed with its investigation into financial instruments used by two Sahara group companies to raise money from the public.

June 2011Sebi directs Sahara firms to immediately refund the money collected through sales of optionally fully convertible debentures (OFCDs) with annual interest of 15 percent.

July 20111. Sahara appeals in SC that Sebi has no

jurisdiction. Seeks notice to Centre.

2. SC directs Sahara to approach SAT against Sebi order on OFCDs

October 2011 SAT upholds Sebi order against Sahara to refund money.

November 2011

SC stays SAT order

January 2012SC gives Sahara group companies 3 weeks’ to choose between -- either to give sufficient bank guarantee or attach properties worth the amount.

31st August, 2012

SC rules in favour of Sebi and orders the two Sahara companies to return to its OFCD investors the full outstanding amount of over Rs 20,000 crore, alongwith 15% interest, within three months.

October 2012Sahara companies file a review petition in the Supreme Court. Sahara claims it sent a truckload of documentation to Sebi within the 10-day limit. But Sebi did not accept it as the documents arrived on the 10th day, after office hours.

19th October, 2012

Sebi approaches Supreme Court alleging Sahara’s non-compliance with the main order.

November 2012

Sebi files a contempt petition against Sahara claiming it had not furnished the investor documents within the court stipulated time.

December 2012

The Sahara Group gets a temporary reprieve from the SC. The apex court grants it more time to repay the money.

January 2013 Sahara misses the repayment deadline set up by SC. The company fails to deposit the second installment amount (Rs.10,000 Cr) with market regulator by January first week.

February 2013 SC refuses to hear a plea asking for extension of deadline to refund investors’ money. Sebi moves in to attach properties of the group and group chief.

March 2013Sahara approaches special appellate tribunal against Sebi move to attach properties. Sebi seeks arrest of Roy. Sebi also says most of records provided by Sahara untraceable, implying several accounts were fictional.

July 2013 Sebi files a contempt petition against Sahara in SC. Says company flouting SC direction to make refund.

November 2013

SC bars Subrata Roy from leaving country. Sahara attacks Sebi, calls it a “sarkari gunda” which is working with political patronage.

February 2014 SC issues non bailable warrant against Roy for failing to appear at a court hearing.

THANK YOUAman Ajmera, Amey Kane, Jayesh

Patel, Joel D’Souza, Pritesh Jaisingh,

Rahul Manghat, Rashmika Mahida,

Saurabh Mishra, Sumeet David,

Swapnil Shrihari