UNIVERSITY INSTITUTE OF LEGAL STUDIES

PANJAB UNIVERSITY, CHANDIGARH

In partial fulfillment of requirements for the syllabus of
B.A.LL.B. Hons. (Semester- 7)
TOPIC OF THE ASSIGNMENT: CASE LAW: Sahara India Real
Estate Corporation Ltd. and Others v. SEBI (2012)

SUBMITTED TO: SUBMITTED BY:

Ms. ATAMBIR ANAMIKA SHARMA

PROFESSOR B.A.LL.B (Hons.)

BUSSINESS LAW 7th SEMESTER (4th Year)

UILS, PU ROLL.NO- 09/21

CHANDIGARH SECTION-A

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 ACKNOWLEDGEMENT

I would like to express my warm gratitude towards almighty that provided me such
a fortunate opportunity to study this respective course in UILS Panjab University. I
will thank my professor who guided me to make this project report on such a
knowledgeable topic.

Secondly, I would like to thank my parents who provided me with the resources
required to complete this project report on time. Also, I would like to thank my
friends who helped me in completing this said project on time.

Anamika Sharma

B.A.LLB Hons.

4th year VII Semester

Section –A

Rollno.- 09/21

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 TABLE OF CONENTS

Sr no. Title Page no.

1. INTRODUCTION 4

2. BACKGROUND OF THE CASE 4

3. FACTS OF THE CASE 5

4. ISSUES RAISED 6

5. ARGUMENTS OF THE PETITIONER 7

6. ARGUMENTS OF THE RESPONDENTS 8

7. SUPREME COURT’S OBSERVATION 8

8. JUDGMENT 9

9. CONCLUSION 10

10. BIBLIOGRAPHY 11

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 SAHARA INDIA REAL ESTATE CORPORATION LTD.
AND OTHERS V. SEBI (2012)
Supreme Court of India

CASE NAME: Sahara India Real Estate Corporation Limited and Others v. Security and
Exchange Board of India (SEBI)

CIVIL APPEAL NO.: 8643 OF 2012

COURT: Supreme Court of India

BENCH: Justice Altamas Kabir, Justice Surinder Singh Nijjar, Justice J.Chelameswar

Date of Judgment: 5th December 2012

INTRODUCTION:
At present our society is a capitalist society and massive corporate development is the highest
ladder of development. But unregulated development in such sector comes with its own kinds of
risks. Such default on part of corporate sectors Socio-economic offences Sahara India investor
fraud is one of a kind. It is also one of the landmark judgments of the Supreme Court, Sahara v.
SEBI, 2012, an arduous five year legal battle between the Sahara Group and the regulatory of
Security and Exchange Board of India.

BACKGROUND OF THE CASE:

Having its headquarters located in Lucknow, India, Sahara India Pariwar is a conglomerate
having interests in manufacturing, information technology, consumer goods retail, media and
entertainment, infrastructure and housing, and finance. Subrata Roy established Sahara India
Pariwar in Gorakhpur in 1978. The organization runs 4,799 businesses under the Sahara India
brand. The conglomerate's subsidiaries, Sahara India Real Estate Corporation Limited (SIRECL)
and Sahara Housing Investment Corporation (SHICL), purchase and develop land for residential
housing projects in India. After a protracted legal struggle with the Securities and Exchange
Board of India, the Supreme Court of India ordered Sahara India Pariwar, managed by Subrata
Roy, to return Rs 24,000 crore plus interest to its investors. This is the subject of the Sahara India

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Pariwar investor fraud case. Previously, on April 25, 2008, SIRECL and SHICL issued an
offering of Optionally Fully Convertible Debentures (OFCDs) and began soliciting investor
subscriptions until April 13, 2011. Over Rs 17,656 crore was collected by the corporation during
this time. Under the pretense of a "Private Placement," the money was obtained from over 30
million investors without adhering to the regulations governing securities public offerings. When
SAHARA claimed to have raised around Rs. 24,000 crores from an estimated 3 crore investors,
using the para-chit banking money procedure, SEBI took control of the company. SAHARA
contentions included that the investors’ money sometimes went from Rs. 2000 to Rs. 20,000.
Meanwhile, SEBI in Nov 2010, had restrained the above two companies from raising funds in
the form of Optionally Fully Convertible Debentures (OFCD).

FACTS OF THE CASE:

In 2008, RBI debarred Sahara India Financial Corporation from raising fresh deposits. The
growth of Sahara‘s empire was always a mystery; many believed it ran a Ponzi scheme by
collecting funds from investors. The group needed continuous flow of fresh funds to keep it
afloat. With RBI closing a door on the group from collecting deposits from the people, the group
needed a financial instrument that would be out of the purview of RBI but still get access to
public funds.

Sahara decided to issue OFCDs by floating two companies – Sahara India Real Estate
Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC). It was the Registrar
of Companies (ROC) that needed to clear these investment vehicles.

Firstly, the sheer size of the issue makes it a public issue. Any company seeking money from
more than 50 persons has to take the approval of SEBI in doing so, in which case the company
would have to make all the disclosures required as per SEBI norms. The Sahara group had
sought money from nearly 30 million investors. Apart from the size and number of investors,
another deliberate error was keeping the issue open ended; ideally such issues should be closed
within six weeks. In fact, a Sahara group company kept an issue of Rs 17,250 crore open for 10
years.

Sahara‘s money-making machine could have continued had it not committed another major
mistake. Sahara decided to tap the stock markets to raise money through Sahara Prime City. In
doing so the company had to file a Red Herring Prospectus and disclose working and financials
of other group companies. This is when K M Abraham spotted SIREC and SHIC and found that
the money raised through OFCDs was camouflaged as private placements.

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Abraham found out that even though the Sahara group companies collected money they did not
have proper records of the identity of its investors. How and to whom would they then return the
money? Even professional agencies were unable to locate the investors.

The two companies, Abraham alleged, intended to rotate money between group companies.
Though the OFCD instruments were issued in the name of the two companies, cheques were
sought in the name of Sahara India.

When SEBI issued its order on the wrongdoings of the Sahara group on June 23, 2011, Sahara
group took the matter with Securities Appellate Tribunal (SAT). But SAT held the SEBI findings
to be correct. SAT in its order said ―Why it (Red Herring Prospectus) did not disclose was the
fact that the information memorandum was being issued to more than 30 million persons inviting
them to subscribe to the OFCDs and there lies the catch…This concealment is, indeed, very
significant and goes to the root of the controversy.

Sahara group then approached the Supreme Court but in August 2012, the honorable court asked
the group to repay an amount of over Rs 24,000 crore to SEBI within 90 days. The regulator will
then distribute the money to bonafide investors. But suddenly Sahara said it had repaid most of
the money over the last one year and an amount of just over Rs 5,000 crore was pending.

In the October hearing Supreme Court had clearly hinted that it was no longer amused by the
delaying tactics of the Sahara group and would detain the group’s officials till the payments are
made. The Supreme Court Bench had said that previous orders not been compiled with and that
was why Roy and the directors have been summoned to explain the delay. Roy did not turn up,
thus the non-bail able warrant with an order to appear before the court on March 4.

ISSUES RAISED
1. Whether SEBI has the power to investigate and adjudicate in this matter as per Sec 11,
11A, 11B of SEBI Act and under Sec 55A of the Companies Act. Or is it the Ministry of
Corporate Affairs (MCA) which has the jurisdiction under Sec 55A (c) of the Companies
Act.

2. 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.

3. Whether the issue of OFCDs to millions of persons who subscribed to the issue is a
Private Placement so as not to fall within the purview of SEBI Regulations and various
provisions of Companies Act.

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 4. Whether listing provisions under Sec 73 mandatorily applies to all public issues or
depends upon the “intention of the company” to get listed.

5. Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 will apply
in this case.

6. Whether OFCDs are Convertible Bonds and whether exempted from application of
SCRA as per the provisions of sec 28(1)(b).

ARGUMENTS OF THE PETITIONER:

The petitioner contended that according to Section 55A of The Companies Act, 1956, SEBI is
empowered to seek information and investigate only in case of those companies which are listed
in the stock market. As the application of Sahara companies was still pending at the time of the
investigation, SEBI has no power to seek any information from these two Sahara Companies.
Sahara argued that listing requirement under Sec 73 of Companies Act is not mandatory and
applies to those companies only who “intend to get listed”, forcing any company to get listed on
a stock exchange is a violation of corporate autonomy. Further, according to Section 60B if any
company files DRHP directly to the Registrar of Companies then that company can directly
collect money from the public and in such case SEBI has no jurisdiction over such company.

The petitioner also argued that OFCDs issued by the two companies were in the nature of hybrid
instrument and here in case of these two companies in question, they were placed privately.
Sahara companies contended that they are exempted under the provisos to Sec 67 (3) since the
Information memorandum specifically mentioned that the OFCDs were issued only to those
related to the Sahara Group and there was no public offer.

The Companies also contended that according to the Unlisted Public Companies (Preferential
Allotment) Rules 2003, preferential allotment by unlisted public companies on private placement
was given authorization without any restriction on numbers according to Section 67(3) of the
Companies Act. Moreover, Section 67(3) is applicable to Preferential Allotment which was made
by unlisted public companies in 2011 by amending the 2003 rules which was with prospective
effect and not with retrospective effect. Therefore, before the 2011 Rules were made there was
liberty to make preferential allotment to more than 50 persons.

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ARGUMENTS OF THE RESPONDENT:
The respondent contented that the confusion that was tried to be created by the Sahara
Companies that SEBI has no jurisdiction according to Section 55A of The Companies Act, 1956,
over the private companies. SEBI being the regulatory board has in fact, jurisdiction over any
kind of company which makes an offer to the public at large.

The OFCDs issued by the two companies are securities within the meaning of companies act,
SEBI and SCRA. As in this case such OFCDs were offered to millions of people so there is no
question about the marketability of such instrument. And the name itself contain ‘debenture’, it is
deemed to be a security as per the provisions of companies act, SEBI and SCRA.

The respondent further argued that according to Section 67(3) of the Companies Act, when any
security is offered to and subscribed by more than 50 persons it will be deemed to be a Public
Offer and therefore SEBI will have jurisdiction in the matter and the issuer will have to comply
with the various provisions of the legal framework for a public issue.

Supreme Court’s Observations and Rulings in Sahara vs SEBI

1. SEBI’s Jurisdiction: The Supreme Court ruled in Sahara vs SEBI that SEBI does indeed
possess the authority to investigate and adjudicate in this matter. It emphasised that
SEBI’s powers are intended to protect the interests of investors and are not in conflict
with the Companies Act. The Court pointed out that SEBI’s powers are supplementary
and should be read harmoniously with existing laws. SEBI has special powers and there
is no jurisdictional conflict between the Ministry of Corporate Affairs (MCA) and SEBI
when it comes to safeguarding investor interests. This ruling underscores the importance
of SEBI’s role in overseeing securities-related matters.

2. Classification of OFCDs as Securities: The Supreme Court held that even though the
Optionally Fully Convertible Debentures (OFCDs) issued by the two companies are
hybrid instruments, they still qualify as securities under the definitions provided by the
Companies Act, SEBI Act and Securities Contracts (Regulation) Act (SCRA). The Court
stressed that the broad offering of OFCDs to millions of individuals confirmed their
marketability as securities and the inclusion of “debenture” in their name solidified their
classification as securities.

3. Deemed Public Offer under Section 67(3): The Supreme Court in Sahara v SEBI further
ruled that when any security is offered to and subscribed by more than 50 persons, it is
deemed to be a public offer under Section 67(3) of the Companies Act. Consequently,
SEBI has jurisdiction in such cases and the issuer must comply with the various
provisions of the legal framework for a public issue. The Sahara companies exceeded the

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 threshold statutory limit set forth in Section 67(3) and thus, they violated listing
provisions, incurring civil and criminal liabilities.

4. Mandatory Listing Requirement: The Supreme Court rejected the petitioner’s argument
in Sahara v. SEBI that the listing requirement under Section 73 of the Companies Act is
not mandatory and applies only to companies that “intend to get listed.” The Court ruled
that as long as the law is clear and unambiguous and securities are issued to more than 49
persons under Section 67(3), the intention of the companies to get listed is irrelevant.
Section 73(1) is a mandatory provision and companies must comply with it, obliging
them to apply for the listing of their securities on a stock exchange.

5. Unlisted Public Companies (Preferential Allotment) Rules 2003: The Supreme Court
clarified that the Unlisted Public Companies (Preferential Allotment) Rules 2003 apply
solely in the context of preferential allotment by unlisted companies. If the preferential
allotment constitutes a public issue, the 2003 Rules do not apply.

6. Nature of OFCDs and Applicability of SCRA: The Supreme Court in Sahara vs SEBI
dismissed the Sahara companies’ argument that OFCDs, being convertible bonds, were
exempt from the Securities Contracts (Regulation) Act (SCRA) under Section 28(1)(b).
The Court clarified that Section 28(1)(b) only excludes convertible bonds and
shares/warrants of a specific type from the applicability of the SCRA, but it does not
exclude debentures, which are a distinct category of securities under Section 2(h) of the
SCRA.

These observations and rulings by the Supreme Court in Sahara versus SEBI provide legal clarity
on the jurisdiction of SEBI, the classification of OFCDs as securities, the implications of
exceeding the threshold for a public offer under Section 67(3) and the mandatory nature of
listing requirements under Section 73 of the Companies Act. The Court’s decisions have
significant implications for regulatory oversight in the financial markets and investor protection.

JUDGMENT:
The Honorable Supreme Court ordered Sahara to refund the entire deposits collected by it with
an interest of 15% till the date of refund. It also authorized SEBI to take legal recourse in case
the appellant that is Sahara fails to comply with the said order. On 24th February court
sanctioned a non- bailable warrant for the arrest of Sahara India Pariwar Chairman and other
members for not complying with the order.

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CONCLUSION:
Sahara v. SEBI is one of the landmark judgments relating to India’s corporate landscape. This
case has been a great example of safeguarding the investors’ interest and money in case of
corporate or share-market scams. The Apex Court, by this judgment, vests SEBI with enormous
powers to investigate into any matter concerning the interest of the investors even if it pertains to
companies which are not listed. It clarifies significant points of law and removes the grey areas
relating to issue of securities by the so called unlisted companies taking advantage of the
loopholes of law. Also, in the matters of jurisdiction, this Judgment has removed the
jurisdictional gap which previously existed between that of the Ministry of Corporate Affairs and
SEBI.

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 BIBLIOGRAPHY

Website Sources

 Aparajita Pande, Corporate Funds in India, Case Studies of Sahara and Saradha,
Sevenpillar Institute (2014), https://sevenpillarsinstitute.org/ last seen on 28/10/24

 Archita Tiwari, Case Study on Subrat Roy Sahara v/s Union of India and Ors. 5, The Law
Brigade Publishing Group 113, 115, (2020), https://thelawbrigade.com/wp-
content/uploads/2020/06/Archita-LPR.pdf , last seen on 28/10/24

 Archita Tiwari, Case Study on Subrat Roy Sahara v/s Union of India and Ors. 5, The Law
Brigade Publishing Group 113, 116, (2020), https://thelawbrigade.com/wp-
content/uploads/2020/06/Archita-LPR.pdf , last seen on 28/10/24

 Sahara India Real Estate … vs Securities & Exch.Board Of India on 5 December, 2012,
Indian Kanoon, https://indiankanoon.org/doc/52860197/ , last seen on 28/10/24

 Sahara vs. SEBI- An In-depth Analysis of the Landmark Supreme Court Ruling,
mondaq.com, https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-
depth-analysis-of-the-landmark-supreme-court-ruling , last seen on 28/10/24

 Supreme Court, SEBI and Sahara India – The Investor Fraud Case, Libertatem Magazine,
https://libertatem.in/featured/supreme-court-sebi-sahara-india-investor-fraud-case/ , last
seen on 28/10/24

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