In this blogpost, Shivam Anand, IIIrd year Student, Damodaram Sanjivayya National Law University has critically examined the Sahara case which is considered as one of the landmark judgments of the Supreme Court with respect to defining powers of SEBI.

Introduction

Securities Exchange Board of India v. Sahara India Real Estate Ltd. is regarded as one of the landmark cases with reference to the power and jurisdiction of SEBI in the case of corporate fundraising. SEBI claimed that in the form of Optionally Fully Convertible Debentures, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited claim to have collected deposits from general public including cobblers, labourers, artisans and peasants. Around 23 million people, mostly from villages and small towns subscribed to this scheme and invested about 24,000 crores rupees. Now before moving on with the main crux of the case, one should understand the term “Optionally Fully Convertible Debentures”.

Optionally Fully Convertible Debentures:

Debenture can be understood as an instrument to raise loan by the company. For example, if a company X requires capital in order to proceed with its new idea or project it can opt to raise capital by taking a loan from the bank, but that would raise the issue of high interest rate and other terms which the company should adhere to. In this case, the company has an option to raise a loan from the public by means of debentures. One of the important aspects of this type of fundraising is that the company has to pay the specified amount with interest, and although the money raised by the debentures becomes a part of the company’s capital, it does not become share capital. The company can issue secured and unsecured debentures. A debenture may be wholly or partially convertible at the time of redemption depending on the fact that whether the special resolution is passed by the shareholders. Now under Optionally Fully Convertible Debentures, it depends on the choice of the investor as when the debt holder wants to convert its debentures into shares. The conversion is good in case the company is about to make a good amount of profit, or the price of the shares of the company is about to increase. Thus, the very fact which should be taken into consideration is that the investor in this case where he has been issued  OFCD should have basic ideas of the performance of the company, market fluctuations and other financial market aspects to gain on the conversion of the debentures.

SAHARA’S MANOEUVRE

One of the noteworthy facts of this case was that Sahara took investment from the people belonging to the lower strata of the society who don’t have much idea about the working of financial institutions, fluctuations in the market and the skill to check the daily performance of the company. Sahara claimed that it was a private placement and only selected clients were intimated about the scheme. SEBI has no jurisdiction with respect to the same as its jurisdiction is restricted only to listed company. It also contended that OFCD’s issued by the company does not fall within the ambit of the definition of the “securities” as provided under the SEBI Act. The main contention raised by the Sahara was that SEBI has no jurisdiction over the unlisted companies and, therefore, objected its interference in the present case on the ground that the said company comes within the ambit of Unlisted Public Companies Rules 2003.

OBJECTIONS RAISED BY SEBI  

As per the provision of Section 55A of the Companies Act, 2013, it paves the path for SEBI’s jurisdiction and also restricts it to listed public company and in this case, the company in question being an unlisted one does not fall within the ambit of SEBI’s jurisdiction. As per the facts of the case if Sahara contends that it was a private placement and only selected clients were asked for investment then the whole task of OFCD should have been wrapped up within 10 days as per rules and regulations and in adherence to the guidelines and also the offer should have been restricted to not more than 50 members. But in this case more than 23 million people invested in the scheme and it went down for more than 2 years which made it an obligation on the company to make it listed as per Section 73 of the Companies Act, 2013 which prohibits private company to take deposits from the public and allows only eligible companies to accept deposits from the public. It must be intimated to the registrar of the company and in such a circumstance brings it within the purview of the SEBI. Therefore, in the light of facts provided and arguments advanced SEBI contented that OFCD scheme is within the purview of the definition of securities as provided by SEBI Act 1992 and Sahara should be obligated to refund the deposits of more than Rs. 24000 crores to its investors as it was taken in contravention of the laws of the land 

SUPREME COURT REMARKS

• Supreme Court finally made an important observation that it was stated by Sahara company that its OFCD scheme was a kind of private placement and included only selective clients yet it failed to prove the same, and it is very well evident that it was a kind of public offer in which more than 23 million people invested over which SEBI has complete authority.
• In the case of private placement, the documents should be submitted by the company that its investors had some relation with the company which in this case was not proved by the Sahara group and thus it does not qualify the claim of the investment being a private placement.

DECISION OF THE CASE

The Hon’ble Supreme Court ordered Sahara to refund the entire deposits collected by it through Red Herring Prospectus at an interest rate of 15% till the date of refund. It also authorised SEBI to take legal recourse in case the appellant i.e. Sahara fails to comply with the said order.

CRITICAL ANALYSIS

I believe that the observation made by the Supreme Court is justified from all perspectives as it emphasized the fact that how Sahara tried to defeat the provisions of various acts like SEBI Act, 1992, Companies Act, 2013 and jeopardized the lives of so many investors who mainly belonged to the lower strata of the society and barely earned enough to keep their body and soul together. It tried to gamble the life of majorly illiterate group of people who have less or no idea of the financial position of a company and thus are ambiguous about harnessing the opportunity to make benefit out of schemes such as OFCD which requires knowledge about performance of the company and basic knowledge about proper time to turn such debentures into shares which will be a profitable for them. Such investors are unaware of the risk that comes along with such luring schemes and out of ignorance they put all their money in one hope given by such unscrupulous managers of these companies. This decision of the Supreme Court in every manner will be a major precedent which will act as a deterrent for them not to involve themselves in such incoherent schemes.