Supreme Court Judgment: Sahara vs SEBI

The Supreme Court on 31st August, 2012 in its most anticipated judgment of recent times has directed the Sahara Group and its two group companies Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to refund around Rs 17,400 crore to their investors within 3 months from the date of the order with an interest of 15%. The Supreme Court while confirming the findings of the SAT has further asked SEBI to probe into the matter and find out the actual investor base who have subscribed to the Optionally Fully Convertible Debentures (OFCDs) issued by the two group companies SIRECL and SHICL.

Background: Earlier SIRECL and SHICL floated an issue of OFCDs and started collecting subscriptions from investors with effect from 25th April 2008 up to 13th April 2011. During this period, the company had a total collection of over Rs 17,656 crore. The amount was collected from about
3 million investors in the guise of a "Private Placement" without complying with the requirements applicable to the public offerings of securities. The Whole Time Member of SEBI while taking cognizance of the matter passed an order dated 23rd June, 2011 thereby directing the two companies to refund the money so collected to the investors and 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 SAT against the order of the Whole Time Member and after hearing the SAT confirmed and maintained the order of the Whole Time Member by an order dated 18th October, 2011. Subsequently Sahara filed an appeal before the Supreme Court of India against the SAT order.

Issues in Question and Observations of the Supreme Court: The Supreme Court of India while interpreting various provisions of the Companies Act, SEBI Act, SCRA and various Rules and regulations made there under made some interesting observations on the issues raised before it which forms the operative part of the judgment in the form of ratio decided.

The issues raised and the corresponding observations made by the Supreme Court are enumerated below:

Issue 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 MCA which has the jurisdiction under Sec 55A (c) of the Companies Act.

Observations of SC: The Supreme Court held that SEBI does have power to investigate and adjudicate in this matter. It categorically iterated that the SEBI Act is a special legislation bestowing SEBI with special powers to investigate and adjudicate to protect the interests of the investors. It has special powers and its powers are not derogatory to any other provisions existing in any other law and is analogous to such other law and should be read harmoniously with such other provisions and there is no conflict of jurisdiction between the MCA and the SEBI in the matters where interests of the investors are at stake. To support this view, the Supreme Court laid emphasis on the legislative intent and the statement of objectives for the enactment of SEBI Act and the insertion of Section 55A in the Companies Act to delegate special powers to SEBI in matters of issue, allotment and transfer of securities. The Court observed that as per provisions enumerated under Section 55A of the Companies Act, so far matters relate to issue and transfer of securities and non-payment of dividend, 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.

Issue 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.

Observations of SC: The Supreme Court held that although the OFCDs issued by the two companies are in the nature of "hybrid" instruments, it does not cease to be a "Security" within the meaning of Companies Act, SEBI Act and SCRA. It says although the definition of "Securities" under section 2(h) of SCRA does not contain the term "hybrid instruments", the definition as provided in the Act is an inclusive one and covers all "Marketable securities". As in this case such OFCDs were offered to millions of persons there is no question about the marketability of such instrument. And since 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.

Conclusion: The Supreme Court, while confirming the findings of SAT has appointed retired apex court judge Justice BN Aggarwal to oversee the probe by SEBI against the two Sahara companies. On a preliminary analysis of the judgment it appears that this order comes as a big blow to the already reeling Subrata Roy led Sahara India Group and once again confirms and puts a judicial sanction on the myriad powers of SEBI to investigate and adjudicate into any matter potential enough to prejudice the interests of the investors. The Supreme Court at the same time admonished the Sahara group for being casual and not maintaining proper records of the subscribers to the OFCDs despite the amount of money involved is close to 30,000 crore and investor base is about 3 million.

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