Regulations
Supreme Court’s Sahara ruling: Salute to the judges, but a huge question mark before financial regulators

With life savings of millions at stake, the question is—why was the administration sleeping while this Rs20,000 crore was raised through a million agents?

 

The ruling of the Supreme Court in the Sahara Real Estate Corporation (Sahara) case is a landmark ruling, not so much for the technical interpretation of the apparently conflicting or unclear provisions of the Companies Act, Securities Contracts Act or SEBI Act, but on the extremely candid and sharp observations of the judges on the conduct of the appellants. And also for upholding peoples’ pride and faith in the judiciary that legal sophistry cannot obfuscate what is so apparently a gross violation of the regulatory regime of the country.
 
Misplacing private placement
In fact, the details were so stark that the contention of the appellants could have been rubbished at the very outset by common intuition alone. To put in simple words, the appellants contended that they were unlisted companies and were not to be regulated by the Securities and Exchange Board of India (SEBI), and, that they had raised money by issuing “optionally convertible debentures” (OCDs) on a “private placement basis”. For the uninitiated, the concept of private placement of an issue is one where a company offers securities to persons who are associates, friends, relatives, employees, etc, and that the offer will not be available other than to the person to whom it is made. 
 
In the heydays of the initial public offer (IPO) market in India, in 1980s, one would find see whole lot of the so-called private placements where application forms were freely distributed by newspaper vendors on the footpaths and companies got away by calling it a private placement. Obviously, there was no SEBI then—the whole system was managed by the Controller of Capital Issues. Much later, a provision was inserted in Section 67 (3) of the Companies Act to say that if securities were offered to 50 or more persons, the issuer could not call it a private placement. Read this provision with Section 73 of the Companies Act, wherein if it is not a private placement, it has to be a public issue. And, if it is a public issue, it requires the mandatory issue of a prospectus and listing of the securities, thereby bringing the full jurisdiction of SEBI into the picture. 
 
The two Sahara entities (referred to as the ‘Saharas’ in the judgement) contended that theirs was a private placement. Now observe the sheer magnitude of the issuance. 
 
Though correct facts have not been disclosed by the Saharas even before the Supreme Court, the strands of facts are: nearly Rs20,000 crore was raised from 22.1 million investors, using services of nearly a million agents at 2,900 branches. And this is claimed to be a private placement—as if to say these 22.1 million investors were friends, associates, employees or relatives of the company or company directors. If such an outrageous argument could be taken to the highest court of the country, and argued by the best legal brains, all one needs to do is to admire the audacity of the argument. 
 
Vikramaditya lives on
That the court did not allow technicalities to come of upholding what is right helps maintain our tremendous faith in the judiciary. The observations of the judges are a feast for a student of corporate laws. Don’t be put of by the 263 page length, because the details outlined in the judgement are like a fascinating story. 
 
Justice Radhakrishnan takes the reader through a complete background of corporate laws, securities regulations in India and comparing our regulatory scenario with that of England. His words are unburdened by heavy legal arguments and smooth as silk; justice Khebar, on the other hand, is sharp and scathing, when he refers to the almost obstinate resistance of the appellants in avoiding SEBI’s jurisdiction. 
For instance:
• The judge cites the example of an entry in the so-called OFCD register, and says: “One would not like to make any unrealistic remark, but there is no other option but to record that the impression emerging from the analysis of the single entry extracted above is, that the same seems totally unrealistic, and may well be, fictitious, concocted and made up.”
• On the evasive tactics adopted by the Saharas about supplying information to SEBI, the judge says:  “It is not easy to overlook that the financial transactions under reference are not akin to transactions of a street hawker or a cigarette retail made from a wooden cabin. The present controversy involves contributions which approximate Rs40,000 crore, allegedly collected from the poor rural inhabitants of India. Despite restraint, one is compelled to record that the whole affair seems to be doubtful, dubious and questionable. Money transactions are not expected to be casual, certainly not in the manner expressed by the two companies.” Further, “One would therefore, have no hesitation in concluding, that a party which has not been fair, cannot demand a right based on a rule founded on fairness.”
 
Technical issues: The judgement also answers several technical questions raised on certain provisions of the Companies Act, Securities Act and SEBI Act. Regrettably, while many countries have consolidated their securities-related provisions in course of time, in India, the provisions remain scattered partly in the Companies Act, partly under the Securities Act, and now largely under the departmental guidelines issued by the SEBI known as ICDR regulations. In fact, until Section 55A was inserted in the Companies Act, even the administrative control of provisions relating to issue of securities was split between ministry of corporate affairs (MCA) and the SEBI. 
 
The language of Section 55A itself became an issue in Sahara litigation. The section seems to suggest that in case of listed companies, or those that intend to list securities, the jurisdiction shall vest with SEBI, and in other cases, it shall vest with the MCA. The appellants were unlisted companies, and did not intend to list securities—hence claimed that the question of SEBI’s jurisdiction did not arise. Clearly, the language of Section 55A is not sensible, but the Supreme Court supplied meaning to this flawed language by holding that where securities were mandatorily required to be listed in terms of Section 73, the question of the issuer not intending to list them did not arise at all. Hence, the question of SEBI’s jurisdiction was settled. 
 
There were several questions raised about whether an OCD, which is a ‘hybrid’ instrument containing features of equity and debt, was at all covered by the provisions of the Securities Act. These questions have also been answered by harmoniously interpreting the inclusive definition of ‘securities’ under the Securities Act. An OCD is after all a debenture, and hence, it is well covered by the provisions of the Acts. 
 
The appellants also sought shelter under the provisions of the Unlisted Public Companies (Preferential Allotment) Rules 2003, which, prior to their amendment in December 2011, did not contain a restriction on number of allottees as is there in Section 67 of the Act. This was apparently a lapse in the 2003 Rules, which was plugged later. But one would expect the judiciary of today not to be shackled by literal interpretation or be the slave of the flawed language of a law. The court held that after all, the 2003 rules could not have gone beyond the provisions of Section 67. If an issue of securities has been made to 50 or more persons, and is therefore deemed to be a public offer under Section 67 (3), the contention that it is made a preferential issue under the Preferential Allotment rules will not hold any significance. 
 
The apex court also held that DIP and ICDR guidelines of SEBI are statutory instruments and have the force of law. In addition, the ICDR regulations apply to all companies, listed or unlisted. 
 
The ruling supplies meaning to the very flawed language of Section 28 (1) (b) of the Securities Contracts Regulation Act. Section 28 (1) (b) is, in fact, an exception to the prohibition under the SCRA on issue of options. The section intends to exclude the option available to the holder of convertible bonds, but in the flawed language of the section, seems to exempt convertible debentures from the whole of the Act. The apex court has made sense out of this erroneously worded section by holding that Section 28 (1) (b) excludes merely the entitlement of a convertible bondholder to the shares, and does not exempt convertible bonds in toto. 
 
Huge question mark for the regulators
The apex court has delivered what is almost an administration order for the appellants—ordering them to refund all monies raised by the issue of OCDs within three months from the date of the order. A retired judge of the Supreme Court has been appointed to oversee the compliance of the order, and the SEBI full-time member has been tasked with the responsibility of carrying out the liquidation of debentures. 
 
Obvious enough, tens of thousands of crores are not lying liquid with the company, and it would not be easy to liquidate the money. Since even the details about the bondholders have not been supplied in over two years of investigation, fixing all details and repaying all monies will be nearly impossible. It is quite likely that of the 22 million investors, several millions lose their money. Who would these investors be? They could well be daily wage earners, farmers, rural folks, and generally, anyone who could have been enticed with offers of a decent rate of interest.  
 
With life savings of millions at stake, the question is—why was the administration sleeping while this Rs20,000 crore was raised? Obviously enough, this money was not raised overnight. If services of a million agents were utilised, it could not have escaped the notice of the government.  
 
The schemes in question were probably floated in 2008, but it is quite well known that money has been raised through similar schemes over the years. How is it that we let the problem reach to such massive scales, and then have to reach up to the apex court to pass an order which will, in all likelihood, be impossible to execute? The identity of the investors, if presented, will solve at least one mystery.
 
(Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. He has written a book titled “Securitisation, Asset Reconstruction and Enforcement of Security Interests”, published by Butterworths Lexis-Nexis Wadhwa. He can be contacted at vinod@vinodkothari.com. Visit his financial services website at www.vinodkothari.com.)
 

 

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COMMENTS

nagesh kini

5 years ago

Yes, this verdict is indeed a landmark in corporate law.
Do hope the new companies bill will plug all the loopholes now pointed out.

NSriramamurty

5 years ago

SEBI Act & Rules includig Periodical Guidelines - can be combined into One.Similar is with Companies Act&Rules,etc. Then it will be easy for everybody to understand clearly and Scope for Different interpretations . All Acts& Rules are to be riviewed and Comprehensively incorporated then &there,which leads them to be Corrected Properly clearing glaring anomolies.

Sweena Jain

5 years ago

Sahara ruling has come at very appropriate time,one has to go back in1995-98 era when CRB group siphooned off hundreds of crores ,matter was taken to JUDICIARY.Now more than 15 years have passed but no HOPES for petty investors.Court appointd liquidator and SILENCED investors.There are many such cases in which onlyJUSTICE department thrives.

npindia

5 years ago

why govt is not banning the sponsoring of commercial sports teams and sport companies like Cricket & Formula One from the money collected from public in the name of deposits. SAHARA group founder & chief, Mr. Subrata Roy spent more than Rs 300 crore for his son's wedding, from where he got money? who gave the permission to spend this illegally collected public Deposit for his Son's lavish wedding?
from the hundreds of lakhs poor Barber, LaundryWala, skilled labours of UP & Bihar, with a false promises and assurances ..SAHARA Roy looted & spent like his inherited money

REPLY

Vikas Gupta

In Reply to npindia 5 years ago

Each & every Citizen of India has the right to know the sources of spending of more than 300 crores on the Royal Wedding.

MOHAN

In Reply to npindia 5 years ago

300 crores for a wedding - This what is known as "Collective Materialism".

Sunil

5 years ago

wow , for once SEBI has done something that makes ordinary people believe that all is not lost. Wonder of wonders.

Raj

5 years ago

The SEBI and other regulators should investigate where the actual money for Sahara has come from whether it is indeed from people or benamy money from politicians, cricketers and actors.

This is very serious that a company like Sahara is involved in such huge money and involved in real estate and cricket which we all know are the key places where all the black money and corrupt are settled.

REPLY

Vikas Gupta

In Reply to Raj 5 years ago

Mr Raj might be correct as the Employees & Management of Sahara Group Co.s are the most corrupt persons. I personally have experienced the Corrupt Behaviour of Mr. Pandey, Branch Manager, Rohtak(Haryana) of Sahara India currently posted at Charkhi Dadri, Haryana.

P

5 years ago

very soon we will see the subrata roy sahara stadium as the venue for the claim setllement for the millions ofinvestors.... where else can so many peoplewith their documents be entertained and their money refunded ... youneed a stadium to dothe refund process and aliteral bank can be formed withthe 25,000 Crores to be refunded.

REPLY

Vikas Gupta

In Reply to P 5 years ago

RIGHTLY WRITTEN.

P

5 years ago

i think this judgement is the best regulatory work doneinthis country till today ... i wish the oher regulators were alittle proactive and had taken similar steps to check the malpractices in their fields...... anyways all praises for SEBI .... it was their day yesterday ... a literal blue moon judgement .... a rare sense of equity and propriety and justice prevailed.... SEBI keep doing the good work we are with you....

P

5 years ago

Some people are always saying that the Regulator SEBI is always sleeping ... but the Hon'ble Supreme Court Order clearly shows the amount of time, effort, research and the perseverence and patience of the regulator in continuously pursuing the case for the last three years now. ... no doubt SEBI is worthy of praise ... it deserves a salute along with heartfelt thanks to the judiciary of India.

P

5 years ago

sebi is opening a lucknow office very soon as mentioned in the minutes of its board meetings ... it is good news forthe investors of SAHARAwhocan avail the useof Lucknow Office and it would bea nightmareofr the poor fellas posted at Lucknowwhowouldnow have to work day and night.

P

5 years ago

it is high time SEBI opens offices in all the district headquarters of India and Regional Offices in all the state capitals .... this kind of economic frauds and siphoning of money requires large scale action which SEBI Officals won't be able to handle with such asmall work force... after all there are only 500 people working in SEBI today

P

5 years ago

there are more than 10,000 more than ten thousand such companies in eastern india alone.... we all know about the gold companies of rajasthan and haryana belt andthe gold companies of the south .... in the eastern india alone the people are suffering the most ....

P

5 years ago

now it is time for the entire sebi to swing into action and take the corrective steps as fast as possible... after the all the work has only begun and it is only half done ... my salute to the judiciary once again

P

5 years ago

QUDOS TO THE HON'BLE SUPREME COURT OF INDIA. HREE CHEERS FOR SEBI. THIS IS NO DOUBT ONE OF THE MOST PIONEERING EVENTS IN THE CORPORATE LEGAL HISTORY OF INDIA. I WISH THE SAME TREATMENT WERE OFFERED TOMORE THAN 10 LAKHS SIMILAR DUBIOUS CHIT FUNDS SCHEMES EXISTING IN THIS COUNTRY TODAY. THESE CHITS FUNDS HAVE LOTTED NEARLY MORE THAN 90,000 BILLION RUPEES IN THE LAST THREE DECADES AND THEREBY FINANCIALLY DEVASTATING SEVERAL CRORES OF FAMILIES.

TIHARwale

5 years ago

Time and again it is proved regulatory bodies like SEBI and Income Tax Dept don't know their job. it high time As the ghost investors have invested their ill gotten money they are not going to lodge claims. as repaying all monies is impossible what remains un paid after 6 months should be deposited with RBI and as and when any invester claims his deposit after collecting KYC papers the claims may settled.

REPLY

P

In Reply to TIHARwale 5 years ago

QUDOS TO THE HON'BLE SUPREME COURT OF INDIA. HREE CHEERS FOR SEBI. THIS IS NO DOUBT ONE OF THE MOST PIONEERING EVENTS IN THE CORPORATE LEGAL HISTORY OF INDIA. I WISH THE SAME TREATMENT WERE OFFERED TOMORE THAN 10 LAKHS SIMILAR DUBIOUS CHIT FUNDS SCHEMES EXISTING IN THIS COUNTRY TODAY. THESE CHITS FUNDS HAVE LOTTED NEARLY MORE THAN 90,000 BILLION RUPEES IN THE LAST THREE DECADES AND THEREBY FINANCIALLY DEVASTATING SEVERAL CRORES OF FAMILIES.

SC asks Sahara group to refund Rs17,400 crore to investors in three months

The apex court while upholding SAT verdict, also asked SEBI to probe Sahara India Real Estate Corp and Sahara Housing Investment Corp and find out their actual subscriber base

In a big blow to Subrata Roy-led Sahara group, the Supreme Court on Friday asked the group to refund Rs17,400 crore collected from investors within three months with 15% interest. While upholding the verdict given by Securities Appellate Tribunal (SAT), the apex court also asked market regulator Securities and Exchange Board of India (SEBI) to conduct probe against two Sahara group companies and find out their actual subscriber base.

 

A bench of justices KS Radhakrishnan and JS Khehar granted three months time to Sahara India Real Estate Corp (SIRECL) and Sahara Housing Investment Corp (SHICL) to refund the amount. The Supreme Court has appointed retired apex court judge Justice BN Aggarwal to oversee the probe by SEBI against the two Sahara companies.

 

The bench also directed SEBI to take action against these two companies, if they fail to refund the money, while allowing regulators to attach properties and freeze bank accounts of SIRECL and SHICL, if they did not comply with its order.

 

Last year, SEBI had warned investors that Sahara India Real Estate and Sahara Housing Investment have been raising funds without its approval and it will not be able to redress any complaint in this regard. The two Sahara group companies have been raising funds through optionally fully convertible debentures (OFCDs), which SEBI said "were not issued in compliance with the applicable SEBI regulations..."

 

OFCDs are a type of bond with the option to fully convert them into equity at a rate decided by the company.

 

Subsequently, Sahara Group contested SEBI's authority to look into the issue in the Supreme Court, asserting that it was a privately held company and not listed and therefore, was under the jurisdiction of the Ministry of Corporate Affairs (MCA).

 

Earlier, on 27th June, a vacation bench of the apex court, comprising justices P Sathasivam and AK Patnaik had declined to hear the plea of Sahara India Real Estate Corp and asked to list it before the chief justice which has been hearing the case.

 

Following the orders of the Supreme Court, SEBI had on 23rd June passed an order and directed the two Sahara group companies to refund the money raised by them in OFCD citing violation of regulatory norms.

 

As per SEBI's order, the two companies and its promoter Subrata Roy Sahara, and the directors-Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary—jointly and severally, shall refund the money collected, the order said.

 

Besides, the regulator has also restrained the entities from accessing the securities market for raising funds, till the time payments are made to the satisfaction of the SEBI.

 

As per the order of the 12th May order of the apex court, the order of the SEBI order was not to take effect till its further order.

 

During the last hearing on 12th May, the apex court had asked SEBI to proceed with its probe into Sahara group's OFCD scheme by observing that investors may not have any knowledge about these products and might feel cheated like in the Harshad Mehta scam.

 

The court had also allowed Allahabad High Court to proceed with its hearing, where the Sahara group has challenged SEBI's direction to give details of its investors.

 

The group had earlier told the court that it has filed an affidavit explaining that it will protect the interests of 2.3 crore investors who have put in their money in SIRECL and SHICL.

 

According to the affidavits filed by the companies, as on August 2011, SIRECL had an outstanding of Rs17,656 crore to 22.1 million investors and SHICL had an investor base of 7.5 million and an outstanding of Rs6,373 crore.

 

Sahara Real Estate floated an issue of OFCDs and started collecting subscriptions from investors with effect from 25 April 2008 up to 13 April 2011. During this period, the company claimed to have collected over Rs19,400 crore, while up to 31 August 2011, the company had a total collection of over Rs17,656 crore. The amount was collected from over two crore investors. But the surprise was that Sahara claimed that it was not a ‘public’ issue as the OFCDs were offered to only its workers and persons associated with the Sahara group.

User

COMMENTS

megha

5 years ago

It's hard to believe that Sahara Group has been accused of such a
fraudulent. I'm sure this is some kind plot to spoil the image of the company.

Rakesh

5 years ago

Who will he pay to ?

All fake

REPLY

Black Mamba

In Reply to Rakesh 5 years ago

Hon'ble Supreme Court has ordered that in case the invstors are not traceable, that portion will go to Govt. treasury.

Alongwith 'Mr. SAHARA' a lot of his political crony capitalists will bear the brunt.

Hail Apex Court.

Black Mamba

5 years ago

बहोत हो गया इन भ्रष्ट नेता-बाबु-सेठ का तमाशा
Must be a lot of BENAMI. Hon'ble Supreme Court should also order checking the antecedents of the investors and if BENAMI thing comes out in the investigation, that part of the money should be deposited in Govt Treasury by Sahara group.

Black Mamba

5 years ago

He he he !!

I will recommend Ministry of Home Affairs to consider Mr. Subroto Roy Sahara for a Padma Bhushan Award 2013 for this achievement.

SEBI freezes Aastha shares allotted on preferential basis

SEBI investigations found that only part of the proceeds from the preferential allotment were received by Aastha and the same funds were re-circulated as the allotment consideration from the five entities

New Delhi: Market regulator Securities and Exchange Board of India (SEBI) has ordered permanent freezing of 'illegal' shares allotted by Aastha Broadcasting Network about 12 years ago on preferential basis to five of its promoter entities, on charges of fraudulent market dealing, reports PTI.

 

The shares allotted to five entities -- Chneena Impex Pvt Ltd, CEEAN Impex Pvt Ltd, Smitasha Impex Pvt Ltd Prarekha Exim Pvt Ltd and Bicharshil Traders Ltd -- would remain frozen permanently, SEBI said in an order.

 

SEBI said the preferential allotment was 'irregular and illegal'. It added that the allotment itself was found to be 'fraudulent'.

 

According to the regulator, if the "illegally allotted shares" are not frozen permanently, there is every likelihood of those shares being offloaded into the market, which would disturb the equilibrium.

 

In 2000, the company had allotted 93 lakh shares to various entities on preferential basis. Out of the total, 51 lakh shares were given to five entities.

 

BSE found that Aastha issued 93 lakh shares on preferential allotment to various entities, where some of them appeared to be related to each other as well as with Aastha.

 

However, stock exchange BSE was not satisfied with responses of Aastha regarding queries about full consideration from the allottees in respect of preferential allotment.

 

Later, SEBI investigations found that only part of the proceeds from the preferential allotment were received by Aastha and the same funds were re-circulated as the allotment consideration from the allottees.

 

In an interim order in January, 2004, SEBI had prohibited the preferential allottees and other entities -- to whom the shares had been transferred by the allottees -- from buying, selling or dealing in securities of Aastha.

 

SEBI, in its final order in September 2005, prohibited Aastha and other 39 entities from dealing in securities market.

 

"Since these tainted shares are already dematerialised, the circulation of these shares in the market through trading or otherwise transfer can be prevented by freezing them permanently," SEBI said.

 

"If this is not done, the noticees who got the shares fraudulently might offload those shares in the market and reduce the value of the existing shareholders. It will also shake the investor confidence," it added.

 

Formerly known as CMM Broadcasting Network, Aastha broadcasts various spiritual and religious programmes. It broadcasts programmes in Hindi, Gujarati and English.

 

Currently, shares of Aastha are suspended on the BSE due to penal reasons.

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