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Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHIC),appellants herein are the companies controlled by the Saharas group. The two appellants companies have raised about 19000 crores rupees from investors by issuance of Optionally Fully Convertible Debentures (OFCDS) by passing Special resolution U/S 81(1A). Subsequently they filed RHPs to the concerned ROC and specifically mentioned therein that the company did not intend to list the shares on any stock exchanges. It is 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 allotted to the company from time to time:-

One of the group company Sahara Prime City Limited intends to raise funds through listing of its shares filed Prospectus to SEBI. While processing the prospectus, SEBI received complaint from one Roshan Lal alleging that Sahara group was issuing Housing Bonds without complying with Rule/Regulation/Guideline by RBI/MCA/NHB, SEBI also received complaint from “Professional Group of Investors Protections” dated 25.12.2009 and 4.1.2010 which prompted SEBI to ascertain the correct factual position.

SAHARAS Contention:-

1. The raising of funds through issue of OFCDs adhered all regulatory compliances and is legal.

2. The raising of funds through Optionally Fully Convertible Debenture (OFCDs) was 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 is not a public issue.

3. SEBI has no locus standi to administer compliances of Unlisted public Companies in view of Section 55A of companies 1956.

4. OFCDs are “Hybrid Instruments” cannot be listed comes under the purview of Preferential Allotment rules 2011.

5. SEBI has committed a serious error in holding that SEBI act, DIP guidelines, ICDR 2009 had been contravened while adhering to the issue of OFCDs.

6. There was no statutory requirement to list OFCDs on any recognised stock exchanges under provisions for treating any issue as a public issue on the number and basis of persons to whom offers were made.

7. The provision of Section 55, 67 and 76 was not attracted to preferential allotment rules 2003 by an unlisted company.

8. The appellants companies concluded that the term “Hybrid” is defined in Section 2(19A) of the companies Act and the provisions of of Section 67 were not applicable to OFCDs which have been held as “Hybrid”.

9. Bonds issued by Saharas were never shares and Debentures but “hybrids” a separate and distinct class of securities.

10. The bonds are convertible bonds and falls with the scope of Section 28(1)(b) of the SCR Act and hence not listable Securities within the meaning of Section 2 (h) of SCR Act.

11. OFCDs issued by Saharas are convertible debentures would fall within the meaning of any convertible bonds under provision of Section 28(1)(b) of SCR Act.

12. SEBI jurisdiction in the matter of unlisted company is erroneous and has no credible evidence to show that Sahara had attempted to deceive or collect money from fictitious sources.

SEBI Contention:-

1. Sahara Group was issuing housing bonds without complying with rules /regulations & guidelines.

2. The issue of OFCDs was public issue.

3. Issuance of OFCD was made to more than 50 investors and therefore securities were liable to be listed on a recognised stock exchanges under provision of sec 73 of Companies Act 1956. SEBI also held that the parliament has conferred powers on it under Section 55A to administer issues of securities to public.

4. SEBI analysed and concluded that OFCDs are indeed securities (Transferable hence marketable as provided in terms and conditions in the bond agreement).

5. Sahara’s violated the provision of Section 73 of Companies act 1956 and subsequently its comes under ambit of Provision of Section 55 of companies act 1956 under which listing of instrument was mandatory.

6. Issuance of OFCD by Saharas was prima facie violation of Sec 56 & Sec 73 of the Companies Act 1956.

7. Saharas violated Dip Guidelines & SCR Act regulations.

8. Notice in the RHP Was untrue and illegal.

9. None of the disclosure requirements by the SEBI not followed. Invester protection measures prescribed for under ICDR 209 had not been adhered.

10. Sahara had not executed any Debenture Trust Deed nor appointed any Debenture Trustee also not created any Debenture Redemption Reserve.

11. OFCDs issued by Saharas would comes within the definition of Securities Under Provision of Section 2(h) of SCR ACT.

12. OFCDs are marketable and comes under the meaning of Debentures.

13. Information Memorandum was issued through 10 lacs agents and more than 2900 Branches offices to more than 30 million people inviting them to subscribe to OFCDs which amounted to Inviting to Public.

14. Having made a public issue cannot escape from complying with the requirements of Section 73(1) of Companies Act 1956.

15. Citing provisions based on DIP guidelines and the ICDR Regulations SEBI found that the appellants had ,

- Failed to file the Draft Offer Documents with SEBI,

- Failed to mentioned the risk factors and provide the adequate disclosures,

- Denied the exit opportunity to the investors,

- Failure to lock-in the minimum promoters contribution,

- Failure to grade the issue,

- Failure to open and close the issue within stipulated time,

- Failure to obtain the credit rating,

- Failure to appoint a debenture trustee,

- Failure to create a charge on the asets of the company,

- Failure to create debenture redemption reserves, etc.

16. SEBI alleged 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 appellants companies.

17. SEBI after analysing the stand of the appellants that RHP was filed with concerned ROC before marketing for OFCDs, contemplated that filing of Red Herring Prospectus comes under ambit of provision of Section 60B(2) and concluded that filing of RHP is required for a company going for public issue and is the final stage for the listing of the securities of a company. A careful reading of Section 60B shows that filing of RHP directs the process in the regulatory sense to Section 55 and subsequently SEBI administration on the matter invited.

18. Replying to appellants claims that offer of Securities was private in nature and doest not involve SEBI administration and permission into raising of funds through OFCDs, SEBI concluded that the Filing of RHP under the ambit of Provision of Section 60B is not the correct route to traverse for issuing OFCDs.

19. SEBI concluded that the appellants 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

20. SEBI while analysing the RHPs filed by the appellants companies noticed that investors who had been issued a variety of bonds were absolutely insecure.

- For the above inference SEBI mentioned the facts that the RHPs stated that “”the money not required immediately by the company may be parked interalia by way of circulating capital with partnership firms of joint ventures or in fixed deposits of various banks. Which means that such funds mobilised beyond the pale of law could be potentially diverted to various group companies without any significant reporting requirements.””

- Such diversion in the case of Debentures would not have been permissible under ICDR Regulations.

- In the entry in the RHPs for “MEANS OF FINANCING”, where the total project cost is indicated at Rs.20,000 crores for each of the two companies, it is stated that the projects are being financed partly by this issue as well as with capital, Reserves and other sources of the company` after an examination of the financial statements of the two companies it was discovered that the capital reserves of the two companies are miniscule in proportion to the funds required for the projects.

21. SEBI had prima facie found that SIRECL had issued OFCDs to more than 6.6 million investors and SHICl had not provided any information about the number of investors.

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

23. The two companies continued to solicit subscriptions to their OFCDs in violation of the court’s order vacating the stay imposed on the SEBI order.

24. The balance sheet and profit and loss account of the companies were not filed with the concerned ROC.

25. The sums subscribed in the OFCDs varied from Rs.200, 300, 400/- etc, whereas the minimum application size for the bonds issued by SIREL were Rs.5000/- and Rs.12000/-.

26. After through observation SEBI conclude that subscription money was sought from the general public across the country, without adequately informing them to the risk factors involved.

27. Replying to appellants contention that the issue was a private placement and the appellants have undertake necessary compliance while implementing the issue, SEBI after examining tits and bits of companies Act clearly concluded that the term “Private Placement has not been any where defined under companies act 1956 and presumably coined and conceived at the hands of appellants to divert the erroneous act done by the appellants.

3. Factual Case Summary :-

Sahara aggrieved against the notice of SEBI moved the Allahabad High court and obtained stay. Thereafter SEBI filed petition to Supreme Court which directed for early disposal of the case by the High Court. SEBI again file petition for recall of the earlier order, Allahabad High Court rejected SEBI petition for recall. SEBI again filed petition to Supreme court to consider Sahara case into its Jurisdiction. Thereafter Supreme Court directs SEBI to issue fresh notice to Saharas for non compliance to statutory provisions under Companies Act, SCR Act, ICDR 2009, DIP guidelines.

After continue contentions between the parties Supreme Court was confirmed about the gross violations of rules and regulations mentioned above. Aggrieved against the order of the Supreme Court, Sahara appealed to SAT (Securities Appellate Tribunal). SAT ruled in favour of SEBI and directed in favour of SEBIs order. Again aggrieved by SAT ruling, Saharas approached Supreme Court. Supreme Court upheld the earlier direction to the Saharas and upheld SEBI notice and direction.

4. Observation by Supreme Court:-

- Issue of OFCDs is not a private placement,

- When the above securities are offered to more than 50 persons it to be considered as Public Issue accordingly SEBI has jurisdiction as per section 55A in the matter of unlisted public companies.

- Supreme Court concluded that the appellants companies knowingly issued securities by way of private placement in order to diminish various laws and regulation.

CS Taher


Laxmi Subramanian & Associates,

Corporate Law Advisors,

Chennai, Tamil Nadu.

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