CORPORATE FINANCE ASSIGNMENT

CASE ANALYSIS ON:

SAHARA INDIA REAL ESTATE CORPORATION LIMITED & ORS
V.

SECURITIES AND EXCHANGE BOARD OF INDIA & ANR

SUBMITTED TO:
PROF. ZAKKARIYA. T.H.
VIT SCHOOL OF LAW

SUBMITTED BY,
R. SRI VISVAPRIYA
15BLB1009
  FACTS OF THE CASE

Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment
Corporation Limited (SHICL), are the companies controlled by Sahara group of Companies
(Sahara Group).

SIRECL and SHICL (both unlisted public companies), in March 2008 and September 2009,
respectively, in their general meeting passed a special resolution under Section 81(1A) of the
Companies Act, 1956 to raise funds through unsecured optionally fully convertible
debentures (OFCDs). This was carried on by way of private placement to friends, associates,
group companies, workers and employees and other individuals associated or affiliated or
connected in any manner with Sahara group of companies.

Later, pursuant to their board resolutions, both, SIRECL and SHICL filed their red herring
prospectus (RHP) under Section 60B of the Companies Act with Registrar of Companies,
Kanpur and Mumbai, respectively, both of which got registered.

The RHPs provided that the companies did not intend to get their securities listed on any
recognized stock exchange, and that only those persons to whom the information
memorandum was circulated and those associated with Sahara Group, would be eligible to
apply. The RHPs also provided that the funds raised would be utilized for financing the
acquisition of townships, residential apartments, shopping complexes etc. and to undertake
construction and infrastructure activities.

Post registration of the RHPs, the companies circulated the information memorandum along
with application forms to persons allegedly associated with the Sahara Group through their
network of around 2900 branch offices and 10 lakh agents, and raised monies under an open
ended scheme. The information memorandums stated that the issue of the OFCDs was purely
on a private placement basis and the OFCDs were not intended to be listed on any stock
exchange. The amount which was raised by issue of unsecured through private placement
was 25,781.37 crore rupees.

SEBI became aware of the large scale collection of monies from the public while processing
the draft RHP submitted by Sahara Prime City Limited (another Sahara Group company) in
respect of its proposed initial public offering dated September 30, 2009, and also from two
complaints received by it from investors. It was alleged that Sahara Group was issuing bonds
without complying with rules and regulations.
On further investigation, SEBI passed an order on June 23, 2011 holding the two companies
to be in violation of various provisions of the corporate and securities laws and restrained
them from raising funds in the form of OFCDs. It ordered the two companies to refund back
the money to the investors. Sahara in July 2011, appealed in the Supreme Court stating that
SEBI has no jurisdiction in the case.

An appeal was then filed by the companies against the SEBI Order in the Securities Appellate
Tribunal (SAT) on direction from the Supreme Court, which was decided in favour of SEBI
vide an order dated October 18, 2011. A further appeal was then filed against the SAT Order
in the Supreme Court. The Supreme Court upheld the SAT Order and ordered the companies
to refund the money collected along with 15% interest to its investors.

 KEY ISSUES

The Supreme Court dealt with the following key issues:

I. WHETHER SEBI HAS JURISDICTION? Section 55A of the Companies Act

delegates certain powers relating to issue and transfer of securities a) in case of
listed companies; b) those intending to get their securities listed, to be
administered by SEBI. What would tantamount to 'intending to get listed' was a
question before the SC.

The Appellants argued that they did not intend to list the OFCDs and hence it fell outside the
purview of SEBI. This contention was rejected by the SC. It analyzed the conduct of the
companies and stated that a ‘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’. Since, in
this instant case, the application of issue of the OFCD‘s was distributed to three crore
investors and collected around 25,000 crore rupees from the investors.

The issue of OFCDs was held to be a public issue, which entailed a listing, the SC held that
the companies were seen to have intended to get their securities listed. Thus, SEBI has
jurisdiction under Section 55A.

II. WHETHER THE ISSUE OF OFCDS BY APPELLANTS WAS A PUBLIC ISSUE? The
contention of the Appellants was that the number of allottees or offerees was
immaterial in determining whether an offer was a public issue – it was the
 intention that mattered. The intention to offer to a select or identified group would
make the offer a private placement. The Unlisted Public Companies (Preferential
Allotment) Rules, 2003 do not stipulate a limit to the number of persons that a
preferential allotment may be made.

Section 67 (1) and (2) of the Companies Act provides that an offer to public is one that is
offered to any section of the public. Section 67(3) however excludes from the definition of
‘offer to the public’, an offer or invitation that is (i) 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 (ii) otherwise as being a domestic
concern of the persons making and receiving the offer or invitations; except if made to 50
persons or more.

The SC rejected the arguments of the Appellants and relied on Section 67 to conclude that an
offer to 50 or more persons constitutes a public issue, and hence the issuance of OFCDs by
the Appellants was a public issue. The SC also lifted the veil to examine the conduct and
method adopted by the Appellants and placed reliance on the following to determine that the
issuance of OFCDs was a public issue:

 In the information memorandum circulated by the Appellants, it was stated that if the
number of interested parties to the OFCD issue exceeded 50 they would approach the
Registrar of Companies to file RHP as per Section 67(3) of the Companies Act.
 The Appellants made disclosures that the issue was being made on a private
placement basis and that OFCDs would be offered only to such persons to whom
information memorandum would be circulated. It was circulated to more than three
crore people inviting them to subscribe.
 Although contended, the Appellants could not substantiate their claim that the
investors were friends, associated group companies, workers/employees and other
individuals who were associated or affiliated or connected with Sahara Group.

III. W HETHER OFCDS OFFERED BY THE APPELLANTS SHOULD HAVE BEEN LISTED

AS PER SECTION 73 OF COMPANIES ACT? The Appellants had argued that since
they did not intend to offer the OFCDs to the public, Section 73 should not apply. 
The SC stated that Section 73(1) of the Companies 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 49 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.

Moreover, the companies also bound to comply with the relevant provisions of the SEBI
(Disclosure and Investor Protection) Guidelines, 2000 and various regulations of the SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009 related to an issue to the
public. The SC on the basis of the conduct of the Appellants as discussed in Issue II
concluded that they intended to offer the OFCDs to the public and hence they were obligated
to apply for listing of OFCDs.

IV. W HETHER OFCDS ARE “SECURITIES” UNDER SECURITIES CONTRACTS

(REGULATION) ACT, 1956? The Appellants contended that the definition of the
term 'securities' was modified to include a "hybrid"(dual characteristics of shares
and debentures) instrument, Section 67 of the Companies Act was not amended to
include ‘hybrids’ and continued to refer only to offer of shares or debentures.
Therefore, since OFCDs are hybrids, they should be outside the purview of
Section 67 of the Companies Act.

The Appellants also pointed the difference between the definition of the term 'securities' in
the Companies Act and the Securities Contracts (Regulation) Act, 1956. The term 'hybrid'
had only been inserted in the definition of "securities" in the Companies Act and not the SCR
Act, and the SEBI Act (which is the same as defined under SCR Act). Appellants contended
that SEBI does not have jurisdiction over OFCDs issued by the Appellants which are hybrids.

SC rejected the above contentions and stated that the OFCDs issued by the Appellants were
unsecured debentures by name and nature. Though, are hybrids they continue to remain
debentures till the time they are converted. Further, the SC also stated that the definition of
"debentures" in Companies Act includes 'any other securities', and noted that the Appellants
have treated OFCDs only as debentures in their information memorandum, RHP, application
forms and also in their balance sheet.
On the contention of SEBI’s jurisdiction over OFCDs, the SC stated that the definition of
"securities" in the SCR Act is inclusive and not exhaustive. It also includes any "other
marketable securities of like nature". The SC stated that any security which is capable of
being freely transferable is marketable. Since, the OFCDs issued by the Appellants were
freely transferable, therefore, they fall within the purview of "securities" in the SCR Act.

The SC also stated as Section 55A of the Companies Act, which deals with delegation of
powers to SEBI refers to "securities", and the definition of "securities" in Companies Act
includes "hybrids", therefore, SEBI has jurisdiction over hybrids like OFCDs issued by the
Appellants.

 ANALYSIS

The Sahara Judgement is a very crucial one for SEBI as it reaffirms the role of SEBI as an
institution to promote orderly and healthy growth of the securities market and for the
protection of investors. It not only affirms its jurisdiction and power to administer various
provisions of the Companies Act, but also clarifies that even unlisted companies (whether
private or public) which intend to (by conduct or otherwise) get their securities listed on
any stock exchange fall within the purview of SEBI. It has jurisdiction even over unlisted
companies.  The SC has brought some clarity to the Public Issue v. Private Placement
debate by holding that offer of security to 50 or more persons would qualify as a public
issue, although the intention of the companies was to make the issue of OFCDs look like
a private placement. By clarifying that SEBI has jurisdiction over OFCDs, it has held that
usage of structured financial instruments which are not expressly mentioned in the
definition of 'securities' in the SCR Act to avoid the jurisdiction of SEBI, will not work, if
monies are being raised from the public at large. It has also reaffirmed the fact that a
public issue would mandatorily entail an application for listing on a stock exchange.

 REFERENCES
1. Sahara India Real Estate Corporation Limited & Ors. versus Securities and
Exchange Board of India & Anr., order dated August 31, 2012 in Civil Appeal No.
9813 and 9833 of 2011
2. http://www.nishithdesai.com/information/news-storage/news-details/article/supreme-
court-to-sahara-its-not-private.html
3. https://www.lexology.com/library/detail.aspx?g=1d3db8c8-64d0-4b38-9b11-
6bd6a562ef6c
4. https://www.rna-cs.com/sahara-vs-sebi/