In 2004,
Khitish Kumar Pandey took Rs.10,000 out of his pension and put it into a
savings plan run by India’s embattled Sahara conglomerate. The Sahara agent
told him his money would triple in 10 years. Pandey, a 78-year-old resident of
Patna, said the Sahara agent promised him his money would grow to roughly
Rs.30,000 when the time deposit matured in October of last year (i.e., 2014).
His investment documents contained a sample illustration showing how a
Rs.10,000 deposit would increase to Rs.25,940 over 10 years, or about 10% a
year.
The Sahara
India Pariwar (family) had become one of India’s most successful companies over
the past three decades with this kind of financial alchemy, turning tiny
deposits into dreams for small farmers, rickshaw pullers and food vendors with
little financial knowledge. Humara is a new Sahara fund-raising vehicle with operational ties to the conglomerate.
After
being barred by the country's central bank, the capital market regulator and
the Allahabad high court from raising money from the public, the Sahara group
has moved to a new regulatory territory - the co-operative society. The society
has its headquarters and registered office in Sahara India Bhawan, Lucknow,
where most Sahara group entities are based.
Sahara
agents will now peddle several new investment schemes to raise money under the
name Sahara Credit Co-Operative Society. According
to the Sahara group spokesperson Abhijit Sarkar, "The cooperative has been
developed by around 3,800 workers of the company.”
Circa 2012
The
Supreme Court on 31st August, 2012 in one of its most anticipated judgment of
recent times 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 Securities Appellate Tribunal
(SAT) had further asked SEBI to probe
into the matter and find out the actual investor base who had subscribed to the
Optionally Fully Convertible Debentures[1]
(OFCDs) issued by the two group companies SIRECL and SHICL.
What SIRECL and SHICL had done...
Earlier
SIRECL and SHICL had 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 30
million investors in the guise of a "Private Placement[2]"
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. It was later urged by the Sahara Group that OFCDs were
issued in the nature of "hybrid instruments" as defined u/s 2(19A)
the Act, 1956 and that the SEBI did not have jurisdiction to administer those
securities since Hybrid securities were not included in the definition of
'securities' under the Securities and Exchange Board of India Act, 1992 ("SEBI
Act"), or the Securities Contract Regulation Act, 1956 ("SCRA"),
but would be governed by the Central Government under section 55A(c) of the
Act, 1956.
Issues in Question and Observations of the Supreme Court were
The Honorable
Supreme Court of India while interpreting various provisions of the Companies
Act, SEBI Act, Securities Contract (Regulation) Act,1956, (SCRA) and various
Rules and regulations formulated there-under had made some interesting
observations on the issues raised before it which forms the operative part of
the judgment in the form of ratio decidendi[3].
The
issues raised and the corresponding observations made by the Supreme Court are
enumerated as under:
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 Ministry of Corporate
Affairs (MCA) which has the jurisdiction under Sec 55A (c) of the Companies
Act.
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 are 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.
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 people
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.
Issue 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.
The
Supreme Court went on to hold that although the intention of the companies was
to make the issue of OFCDs look like a private placement, it ceases to be so
when such securities are offered to more than 50 persons. Section 67(3)
specifically mentions that 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. Although the
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 Supreme Court however did not find enough strength in this argument. The
Supreme Court observed as the companies elicited public demand for the OFCDs
through issue of Information Memorandum under Section 60B of the Companies Act,
which is only meant for Public Issues. Supreme Court also observed that since
introducers were needed for someone to subscribe to the OFCDs, it is clear that
the issue was not meant for persons related or associated with the Sahara Group
because in that case an introducer would not be required as such a person is
already associated or related to the Sahara Group.
Thus the Supreme Court
concluded that the actions and intentions on the part of the two companies
clearly show that they wanted to issue securities to the public in the garb of
a private placement to bypass the various laws and regulations in relation to
that. The Court observed that the Sahara Companies have issued securities to
more than the threshold statutory limit fixed under proviso to Section 67(3)
and hence violated the listing provisions attracting civil and criminal
liability. The Supreme Court also observed that issue of OFCDs through
circulation of Information Memorandum to public attracted provisions of Section
60B of the Companies Act, which required filing of prospectus under Section
60B(9) and since the companies did not come out with a final prospectus on the
closing of the offer and failed to register it with SEBI, the Supreme Court
held that there was violation of sec 60B of the Companies Act also.
Issue 4: Whether the Public
Unlisted Companies (Preferential Allotment Rules) 2003 will apply in this case.
The
companies also argued that as per the Unlisted Public Companies (Preferential
Allotment) Rules 2003, preferential allotment by unlisted public companies on
private placement was provided for and permitted without any restriction on
numbers as per the proviso to Section 67(3) of the Companies Act and without
requiring listing of such OFCDs on a recognized stock exchange. They went on to
argue that Sec 67(3) was made applicable to Preferential Allotment made by
unlisted public companies only in 2011 by amending the 2003 rules with
prospective effect and not with retrospective effect. Hence before the 2011
Rules were framed, they were free to make preferential allotment to more than
50 persons also. However, the Supreme Court did not agree and held that the
legislative intent was not so, and such a Rule being a delegated piece of
legislation cannot supersede the statutory provisions of Sec 67(3) and in the
existence of Sec 67(3) it is implied that even the 2003 preferential allotment
rules were required to comply with the requirement of Sec 67(3). The Supreme
Court observed that even if armed with a special resolution for any further
issue of capital to person other than shareholders, it can only be subjected to
the provisions of Section 67 of the Company Act, that is if the offer is made
to fifty persons or more, then it will have to be treated as public issue and
not a private placement. The Court observed that 2003 Rules apply only in the
context of preferential allotment of unlisted companies, however, if the
preferential allotment is a public issue, then 2003 Rules would not apply.
Issue 5: Whether OFCDs are
Convertible Bonds and whether exempted from application of SCRA as per the
provisions of sec 28(1)(b)
The two
Sahara companies also contended that the OFCDs being in the nature of
Convertible bonds issued on the basis of the price agreed upon at the time of
issue and, therefore, the provisions of SCR Act are not applicable in view of
Section 28(1)(b) thereof and therefore SEBI will have no jurisdiction. The
Supreme Court rejected this contention and held that the amendment in the SCRA
was made and subsequently Sec 28 was inserted to exempt convertible bonds by foreign
financial institutions that had an option to obtain shares at a later date. The
Supreme Court further held that the inapplicability of SCRA, as contemplated in
Section 28(1)(b), is not to the convertible bonds, but to the entitlement of a
person to whom such share, warrant or convertible bond has been issued, to have
shares at his option. The Act is, therefore, inapplicable only to the options
or rights or entitlement that are attached to the bond/warrant and not to the
bond/warrant itself. The Supreme Court clarified by saying that
28(1)(b),clearly indicates that it is only the convertible bonds and
share/warrant of the type referred to therein that are excluded from the
applicability of the SCRA and not debentures which are separate category of securities
in the definition contained in Section 2(h) of SCRA.
Implications of the landmark Judgment
therefore...
This
landmark Judgment is undoubtedly a milestone in India's Corporate landscape, as
it not only sanctifies SEBI's absolute power to investigate into the matters of
listed companies, but also into the matters pertaining to the unlisted
companies. It vests SEBI with myriad 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 bridged the jurisdictional gap
which previously existed between that of the Ministry of Corporate Affairs and SEBI.
It is hoped that in future this judgment will be instrumental in preventing
turf war between the MCA and SEBI concerning jurisdictional issues as it
categorically iterates that in the matter of public interest, both SEBI and MCA
will have concurrent jurisdiction. This is a welcome relief, as in the past
many defaulting parties have taken advantage of this jurisdictional lacuna and
have been able to easily get off the hooks. Sahara has already filed a review
petition against this judgment before the Supreme Court. In a public statement
they have also said even if the review petition fails, they will challenge the
same vide a curative petition before the Supreme Court. Whether Sahara gets any
relief in the near future remains to be seen. It however, seems to be a tough
legal battle ahead of them.
When one regulator gets tough, move on to another turf...
Selling
time deposit plans through loosely regulated credit cooperatives is not illegal
in India. Under current laws, the RBI, SEBI and even the RoC cannot regulate
cooperative societies. Only registrars of cooperative societies can look at
such entities, but no state-level registrar really has the financial or
administrative capability to oversee thousands of such societies, especially
when they cross state boundaries, though there is a Multi-State Co-operatives
Act in place.
The
Sahara group now has, with the help of some staffers, initiated a new entity
called Sahara Credit Cooperative Society, which neither the Reserve Bank of
India (RBI) nor SEBI can regulate. Cooperatives are regulated - if one can call
benign neglect regulation - at the state level by the registrar of cooperatives.
The Sahara group has made its next move well before SEBI can close out SIRECL
and SHICL. The credit society, as per news reports, started work as soon as it
became clear that the SIRECL and SHICL game was up, with SEBI going after them
in 2010-11.
Like
Sahara’s now banned 2008-11 scheme, the new deposit plans are sold through the
group’s vast network of agents across the country. They collect deposits from
investors for a fixed period of time and promise to return the money at
interest rates higher than what banks offer. In addition to hunting for new
customers, Sahara agents and branch officials are also trying to get Pandey and
other investors in older Sahara savings plans to switch into the new credit
cooperative schemes.
According
to a complaint filed by the Mumbai-based Investors and Consumer Guidance
Society (ICGS), the Saharas are mobilizing deposits through this credit society
under three schemes: Sahara A Select, Sahara U Golden and Sahara E Shine. Sahara
agents are trying to get investors in older Sahara savings plans to switch into
the new credit cooperative schemes.
Sajan
Poovayya, who has litigated corporate and commercial cases before India’s
Supreme Court and is a founder of Bangalore-based law firm Poovayya and Co.,
says Sahara could be violating the law if it is forcing investors to convert
their maturing deposits into a credit cooperative plan.
“The
minute you actually breach your obligation to pay me, and rather than paying me
force me to get into a cooperative movement, that I think erodes the very ethos
of the cooperative movement on one side and clearly, of course, flouts the law
because there is a contractual violation in you not returning the money.”
All said
and done, Sahara has yet again found a way out to continue its money-raising
activities, albeit under a new legal identity.
Disclaimer / Caveat: Whatever I have stated is publicly available information and does not represent the view of the firm I work for.
(This post is not copyrighted and may be reproduced freely with appropriate attribution of source)
[1] A type of debt security where
the whole value of the debenture is convertible into equity shares at the
issuer's notice
[2] Section 42 of the Companies Act,
2013 defines 'private placement' which can be said in consonance with the
interpretation of the Supreme Court as "any offer of securities or
invitation to subscribe securities to a select group of persons by a company
(other than by way of public offer) through issue of a private placement offer
letter and which satisfies the conditions specified in this section including
the condition that the offer or invitation is made to not more than 50 or such
higher number of persons as may be prescribed (excluding QIB's and employees
offered securities under ESOP) in a financial year".
[3] A Latin phrase meaning "the
reason" or "the rationale for the decision". The ratio decidendi
is "the point in a case that determines the judgment" or "the
principle that the case establishes"
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