Essay: Private placement – SAHARA CASE SEC.42/62 (Investment Laws)

ABSTRACT
Any business needs funds in order to make it successful or at least run that business. Initially, the money comes from the subscription of the members but as the company grows, it definitely needs more funds. The company then raises funds by various methods. One of them is that of private placement. The Companies Act, 1956 and SEBI (Securities and Exchange Board of India) guidelines and regulations governed the law relating to private placement, but the loopholes present in those laws were extensively misused by companies and their promoters to indulge in malpractices, thereby compromising the interest of shareholders. The Companies Act, 2013 made significant changes in the law relating to private placement and made it water-tight in order to avoid any leakage and prevent the malpractices taking place in the companies. With this new law, the procedure for private placement has become more structured, transparent and time-oriented as compared to the law under 1956 Act. The lacuna in the provisions of the Companies Act, 1956 related to private placement can be very well seen in the case of Sahara India Real Estate Corporation Limited & Ors. vs. SEBI & Anr.
This research paper aims to analyse the landmark judgment given by the Supreme Court in the above case.
KEYWORDS
OFCDs, Private Placement, SEBI, SHICL, SIRECL, SAT
I. INTRODUCTION
A. Private Placement
Explanation II of Sec. 42 of the 2013 Act defines private placement as “any offer of securities or invitation to subscribe securities to select group of persons by a company (other than by way of public offer) through issue a private placement offer letter and which satisfies the condition specified in this section.”
B. Optionally Fully Convertible Debentures (OFCDs)
Debenture can be understood as an instrument to raise loan by the company. 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. Under OFCDs, it depends on the choice of the investor as when the debt holder wants to convert its debentures into shares.
II. BACKGROUND OF THE CASE
Facts
Sahara India floated 2 new companies- Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) in 2005. In the annual meeting held by both the companies, a resolution was passed to raise funds through private placement of OFCDs from the friends, associates and family members of the Board of Directors. Funds were also to be raised through the circulation of an information memorandum to a few trusted investors. The date of commencement of issues of the debentures was 25th April, 2008 and 20th November, 2009 respectively. SIRECL collected Rs. 17,656.53 crores between 2008 and 2011 whereas SHICL collected Rs. 6373.20 crores from 2009 to 2011. Thus both the companies collected Rs. 24,029.73 crores from 30 million investors over a period of 3 years. In 2009, when a red herring prospectus (RHP) for Sahara Prime City (real estate venture of Sahara India) was submitted to SEBI for approval, SEBI noticed unusual fund raising activity in the 2 firms. In January, 2010 SEBI received a complaint from Roshan Lal who alleged that illegal means were being used by the SHICL and SIRECL in issuance of OFCDs. Following this, SEBI launched an investigation against Sahara India, inquiring into the fund raising activities of the firms along with investor information. On receiving stiff resistance from Sahara, SEBI passed an interim order confirming that there was illegal activity with regard to issuance of OFCDs and instructed SHICL and SIRECL to refund the money to the investors with interest. In lieu of this, Sahara filed a petition in Court asking for a stay. Since Sahara was no co-operative with the authorities, the stay order was vacated and a final order was passed by SEBI in June, 2011. Even the Securities Appellate Tribunal (SAT) approved the SEBI order in October, 2011. After this, Sahara appealed the order in the SC questioning their jurisdiction in the matter and alleging a defamatory agenda on part of SEBI to destroy the reputation of Sahara India.
Sahara’s Contention
It also contended that OFCDs issued by the company does not fall within the ambit of the definition of the “securities” as provided under the SEBI Act.
The raising of funds through issue of OFCDs was in compliance with all regulations and was legal.
The raising of funds through issue of OFCDs was by way of private placement to persons who were associated with Sahara Group and those issues were not public issues.
The OFCDs issued were in the nature of “hybrid” as defined under the Companies Act and SEBI did not have jurisdiction to administer those securities since Hybrid securities were not included in the definition of ‘securities’ under the SEBI Act, SCR Act etc.
That such hybrids were issued in terms of Section 60B of the Companies Act and, therefore, only the Central Government had the jurisdiction under Section 55A(c) of the Companies Act.
Sections 67 and 73 of the Companies Act could not be made applicable to Hybrid securities, so also the DIP Guidelines and ICDR 2009.
The company had raised funds by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated with Sahara Group, without giving any advertisement to the public.
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.
SEBI’s Contention
Sahara Group was issuing Housing bonds without complying with the rules/regulations and guidelines.
The issue of OFCDs was public issue.
Issuance of OFCD was made to more than 50 investors and therefore securities were liable to be listed on a recognized stock exchange under Section 73 of Companies Act, 1956. SEBI also held that the parliament had conferred powers on it under Section 55A to administer issue of securities to public.
SEBI analyzed and concluded that OFCDs are indeed securities (Transferable hence marketable as provided in terms and conditions in bond agreement).
Sahara violated the provision of Section 73 of Companies Act, 1956 and subsequently it comes under the ambit of provision of Section 55 of Companies Act, 1956 under which listing of instrument was mandatory.
Issuance of OFCD by Sahara’s was prima facie violation of Sec 56 and Sec 73 of the Companies Act, 1956.
Sahara violated DIP Guidelines & SCR Act regulations.
OFCDs issued by Sahara would come within the definition of Securities under provision of Section 2(h) of SCR Act.
OFCDs are marketable and come under the meaning of debentures.
Having made a public issue, it cannot escape from complying with the requirements of Section 73(1) of the companies Act, 1956.
II. ISSUES
Issue No. 1: Whether SEBI has the power to investigate and adjudicate in this matter under Sec 55A of the Companies Act.
Issue No. 2: Whether the hybrid OFCDs falls 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.
Issue No. 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.
Issue No. 4: Whether listing provisions under Sec 73 mandatorily applies to all public issues or depends upon the “intention of the company” to get listed.
IV. OBESRVATIONS OF THE SUPREME COURT
Issue No. 1
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.
B. Issue No. 2
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.
C. Issue No. 3
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 IM 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.
D. Issue No. 4
Although Sahara argued that listing requirement under Sec 73 of Companies Act is not mandatory and applies to those companies only who “intend to get listed”, no company can be forced to get listed on a stock exchange and in such cases it will be a violation of corporate autonomy. The Supreme Court rejected this contention and held as long as the law is clear and unambiguous, and any issue of securities is made to more than 49 persons as per Sec 67(3) of the Companies Act, the intention of the companies to get listed does not matter at all and Sec 73 (1) is a mandatory provision of law which companies are required to comply with. The Supreme Court observed that Section 73(1) of the Act casts an obligation on every company intending to offer shares or debentures to the public to apply on a stock exchange for listing of its securities. In addition the Supreme Court observed that the maxim ”acta exterior indicant interiora secreta” (external action reveals inner secrets) applies with all force in the case of Saharas. The Court observed that the contention that they did not want their securities listed does not stand. The duty of listing flows from the act of issuing securities to the pubic, provided such offer is made to fifty or more than fifty persons. Any offering of securities to fifty or more is a public offering by virtue of Section 67(3) of the Companies Act, which the Saharas very well knew, their subsequent actions and conducts unquestionably reveal so.
V. SUPREME COURT’S VERDICT
The Supreme Court confirmed the findings of the SAT based on the below observations:
Issue of OFCDs is not a private placement.
When the above securities are offered to more than 50 persons it is to be considered as a public issue and 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 also asked SEBI to probe into the matter and find out the actual investors who had subscribed to the OFCDs.
SC upheld the SEBI order and ordered Sahara to return the money raised to SEBI in 3 installments within 4 months along with investor information. SEBI was then to distribute the money to the investors on behalf of SEBI.
V. CONCLUSION
The SC judgment has once again reaffirmed the role and object of SEBI as a securities market regulator and emphasized upon the inherent jurisdiction of SEBI to oversee matters concerning the public investors at large. By clarifying that SEBI has jurisdiction over OFCDs, it may have in a sense indicated that usage of structured financial instruments which are not expressly mentioned in the definition of ‘security’ in the SCR Act to avoid the jurisdiction of SEBI, may not work, if monies are being raised from the public at large.
Further, ruling that an offer of security to 50 or more persons would tantamount to public issue, has to some extent clarified this issue which has loomed over the industry since long. Questions of what tantamount to ‘offer’ and whether an issuance to more than 50 persons without an offer would still qualify as a public issue are issues that still need to be clarified.
The Sahara Judgement has also reaffirmed the fact that a public issue would mandatorily entail an application for listing on a stock exchange. With this clarity, the market players may now be able to manage their fund raising affairs with more certainty. At the same time, this ruling has also given the ammunition to SEBI to crackdown on those companies which have offered their securities to more than 49 persons without applying for listing and following other requirements. Thus, we may get to see stricter enforcement of these laws now. Having said that, to discover such instances, unless an investor complains or a public filing is made, would still be a challenge.
REFERENCES
Online Articles
INDIA: SAHARA VS. SEBI-AN IN-DEPTH ANALYSIS OF THE LANDMARK SUPREME COURT RULING, 31st October 2012, available at http://www.mondaq.com/india/x/203796/Shareholders/Sahara+vs+SEBIAn+InDepth+Analysis+Of+The+Landmark+Supreme
SAHARA: A LANDMARK CASE THAT BROUGHT FOCUS ON INVESTOR PROTECTION, 10th March 2014, available at https://economictimes.indiatimes.com/opinion/et-commentary/sahara-a-landmark-case-that-brought-focus-on-investor-protection/articleshow/31658922.cms
CRITICAL ANALYSIS OF SAHARA CASE, 2nd January 2016, https://blog.ipleaders.in/analysis-of-sahara-case/
Private Placement of Securities, 5th August 2017, available at http://lawtimesjournal.in/private-placement-securities/#_ftnref2
SC TO SAHARA: IT’S NOT PRIVATE!, 8th September 2012, available at http://thefirm.moneycontrol.com/story_page.php?autono=755420
THE CONCEPT OF PRIVATE PLACEMENT UNDER THE COMPANIES ACT, 2013, 18th January 2016, available at http://corporatelawreporter.com/2016/01/18/the-concept-of-private-placement-under-the-companies-act-2013/#_ftnref14
CASE ANALYSIS: SAHARA INDIA REAL ESTATE LIMITED & ORS. V. SEBI & ANR., 2nd December 2016, available at https://legalvoiceblog.wordpress.com/2016/12/02/case-analysis-sahara-india-real-estate-limited-ors-v-securities-exchange-board-of-india-ors/#_ftnref3