Sahara Scam 5b2c2l

Sahara scam

Contents 1. Introduction 2. Sahara V/S SEBI : Facts 3. Sahara‟s Contention 4. SEBI‟s Contention 5. Factual Summary 6. Observations of Supreme Court 7. Latest of the Case 8. Conclusion

Introduction: Sahara India Pariwar • Sahara India Pariwar an Indian conglomerate company headquartered in Lucknow • Diversified business in finance, infrastructure & housing, media & entertainment, consumer merchandise retail venture etc. • Started by Mr. Subrata Roy Sahara in 1978 • Peak of success in very short period, such a success motivating but suspicious • Main sponsor of the Indian Cricket Team (apparently withdrawn and Hockey Team. They own an IPL Team and 42.5% stake in Formula One's Force India F1 • The Brand Trust Report published by Trust Research Advisory, listed Sahara in the top 100 most trusted brands of India. 5

SAHARA V/S SEBI: Facts • Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHIC) issued Optionally Fully Convertible Debentures (OFCDS) through subscriptions from investors with effect from 25th April 2008 up to 13th April 2011. • Raised around Rs.20,000 crores from investors • The purpose of issue was to carry out infrastructural activities namely, constructing the bridges, modernizing or setting up of airports, rail system or any other projects which may be allotted to the company • Filed RHPs to the concerned ROC and specified intention of company not wanting to list the shares on any stock exchanges. • As per Sahara issue of OFCDS was private placement.

• However, amount was collected from about 30 million investors in the guise of a "Private Placement" • The requirements applicable to the public offerings of securities were not complied with. • Later, Sahara Prime City Limited intended to raise funds through listing of its shares filed Prospectus to SEBI • While processing the prospectus, SEBI received complaint from one of the investor and “Professional Group of Investors Protections” on 25.12.09 and 4.01.10 • Complaint alleged Sahara group for issuing Housing Bonds without complying with relevant regulations prompting SEBI to look into matter 7

• The Whole Time Member of SEBI ed an order dated 23rd June, 2011 directing the two companies to refund the money so collected to the investors • 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 Securities Appellate Tribunal (SAT) against the order. 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.

SAHARA‟S CONTENTION • • • • • •

Issue of Optionally Fully Convertible Bonds (OFCD‟s) is legal. Issue of OFCD‟s is not a public issue. OFDC are neither shares nor Debentures but “Hybrid” Class OFCD‟s are “Hybrid Instruments” cannot be listed. Serious error is committed by SEBI. No statutory requirement to list OFCD„

• Bonds issued by Sahara are:• 1. . Hybrid instruments as per Sec 2(19A) of the Companies Act • 2. Convertible bonds as per Sec 28(1)(b) of the SCR Act & hence not list-able securities as per Sec 2 (h) of the SCR Act. • SEBI contention is incorrect and has no credible evidence.

SEBI‟s contention • OFCD was public issue • OFCDs were securities transferable • Violation of section 73 of Companies Act 1956 • Untrue Red Herring Prospectus • Not following The Securities Contracts (Regulation) Act, 1956 • The forms issued by the two companies did not enclose an abridged prospectus • Did not submit Balance Sheet and P&L a/c to the concerned ROC

• • • • •

Aggrieved Sahara appealed to SAT(Securities Appeallet Tribunal). ed order in favor of SEBI. Aggrieved Sahara again moved towards Supreme court. Finally, Supreme court of India ed the judgment in favor of SEBI. Ordered Sahara to repay the investors.

FACTUAL SUMMARY • Sahara aggrieved against the notice of SEBI moved the Allahabad High court and obtained stay. • SEBI filed petition to Supreme Court. • Recall of the earlier order. • Allahabad High Court rejected the recall order. • SEBI again approached Supreme Court • Issue of fresh notice to Sahara by SEBI. • Confirmation of violation of rules and regulations and therefore, order against Sahara was ed.

Observation by supreme Court • The Supreme Court of India interpreted provisions of the Companies Act, SEBI Act, Securities Contract (Regulation) Act,1956, (SCRA) and other related rules to give decisions after considering some issues. • Issue 1. Whether the power to investigation and adjudication lies with SEBI in this matter as per Sec 11, 11A, 11B of SEBI Act and or Ministry of Corporate Affairs (MCA) under Sec 55A of the Companies Act .

• Observations of SC: • SEBI does have power to investigate and adjudicate in this matter. • SEBI Act is a special legislation bestowing SEBI with special powers to investigate and adjudicate to protect the interests of the investors. • SEBI has special powers are not derogatory to any other provisions existing in any other law • There is no conflict of jurisdiction between the MCA and the SEBI in the matters where interests of the investors are at stake.

• 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: • OFCDs issued by the two companies are in the nature of "hybrid" instruments but it is "Security" within the meaning of Companies Act, SEBI Act and SCRA. • Although the definition of "Securities" under section 2(h) of SCRA does not contain the term "hybrid instruments" but it is inclusive definition and covers all "Marketable securities". • OFCDs were offered to millions of people hence it were marketable. • 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 is a Private Placement and not covered by SEBI Regulations and various provisions of Companies Act. Observations of SC: • The issue of OFCDs is not private placement since made to 50 or more [sec 67(3)] • The Supreme Court observed as the companies elicited public demand for the OFCDs through issue of Information Memorandum which is only meant for Public Issues. • Actions of both the companies clearly depicts they wanted to issue securities to public in the grab of private placement to by various laws and regulations

Issue 4: • Whether listing provisions under sec 73 is mandatory for all public issues or depends on ‘Intention of the Company’ Observation of SC: • • Law is clear and unambiguous as to any issue made to more than 49 persons is mandatory to list [u/s 67 (3) of Company‟s Act,1956] • • Sec 73(1) casts obligation on every company indenting to make offer securities to public to list its securities. • • Intention can not override Act.

Issue 5: Whether the Public unlisted companies (Preferential Allotment) Rules, 2003 will apply in this case Obsevations of SC: • Supreme court denied any legislative intention of such Rules to override the provisions of sec 67(3) and held that even those rules has to comply the aforesaid section • Even if armed with special resolution of Shareholders sec 67 is to be followed • If the preferential allotment by unlisted companies is public issue, 2003 Rules will not apply

Latest of the Case • SEBI has began process of refund to investors being verified by it • Refund is being made from Rs. 5,120 crore deposited by Sahara • Non genuine investor details are provided by Sahara, many of which are fake • Refund of estimated amount of Rs. 24,000 crore • SEBI is demanding personal asset details, bank a/c of Subrata Roy • SEBI has demanded arrest of Subrata Roy

Conclusion • Landmark Judgment is milestone in India‟s corporate Landscape • SEBI has myriad powers to investigate listed and unlisted companies into matters relating to the interest of investors • Removes grey areas relating to issue by so called unlisted companies • Forbids them from companies advantages of legislative loopholes • Jurisdictional gap is removed between MCA and SEBI in matters of public interest