Sahara India Real Estate Corporation v. SEBI (2012): SEBI's refund order upheld, 15% interest

Facts

Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) are companies controlled by the Sahara Group. The Court dealt with their two appeals together because they raised almost identical issues. This summary follows the facts of SIRECL, which the judgment sets out in detail.

SIRECL passed a special resolution at its general meeting on 3 March 2008. It decided to raise money through unsecured Optionally Fully Convertible Debentures (OFCDs). These were to be offered by private placement to friends, associates, group companies, workers and other people connected with the Sahara Group, without any advertisement to the general public. A red herring prospectus was filed with the Registrar of Companies on 13 March 2008 and registered on 18 March 2008. It said the company did not intend to list its securities on any recognised stock exchange. The information memorandum sent out in April 2008 was marked "private and confidential" and described the issue as not being a public offer.

Three kinds of bonds were offered: Abode Bond, Real Estate Bond and Nirmaan Bond. The terms allowed transfer of the bonds, and the prospectus placed no restriction on transfer.

SEBI claimed jurisdiction over the issue. Sahara argued that the bonds were a hybrid product governed by the Registrar of Companies, not SEBI, and that it had already filed its prospectus there. Sahara then appealed to the Supreme Court.

Issues

• Does SEBI have power under Section 55A(b) of the Companies Act, 1956 over the issue and transfer of securities to the public by listed companies, or companies that intend to get listed?
• Were the OFCDs a public issue under Section 73 read with Section 60B of the Companies Act, which should have been listed on a recognised stock exchange?
• Did the companies violate SEBI's DIP Guidelines, 2000 and the ICDR Regulations, 2009?
• Are OFCDs "securities" under the Securities Contracts (Regulation) Act, 1956?

Held

1. The earlier order of the Court that had allowed more time for refunding Rs 17,400 crore was vacated.
2. It was to be deposited in a nationalised bank offering the maximum rate of interest.
3. Within ten days the Saharas had to give SEBI details and supporting documents of any refunds they claimed to have made. They also had to hand over their records, especially the application forms, the approval and allotment of bonds and other documents. SEBI could use investigators and finance experts, and the Saharas would bear the cost.
4. SEBI was to verify the documents and identify the genuine subscribers. It was then to refund them with interest on production of proof of payment. If it doubted a subscriber's genuineness, the Saharas had to be given a chance to prove it, and SEBI's decision on that would be final. Money from subscribers who could not be traced would go to the Government of India.
5. The Court appointed Justice B.N. Agrawal, a retired judge of the Court, to oversee compliance. His remuneration was fixed at Rs 5 lakhs a month, to be borne by SEBI and recovered from the Saharas.
6. If the Saharas failed to comply, SEBI could use all legal remedies, including attaching and selling property and freezing bank accounts.

He expressed the hope that all subscribers were genuine but noted that some might not be. For that reason he considered it necessary to modify the operative part of the SEBI order, so that the law was both satisfied and enforced.

Why it matters

• It confirmed that a company cannot avoid SEBI's oversight just by calling an offer a "private placement", when the bonds were open-ended, transferable and sold to a very large number of people. The Court upheld SEBI's orders on this issue.
• It shows how the Court used its power to protect investors. It set a deadline, an interest rate, a verification process and an independent overseer for the refund.
• The case was far from over after the judgment. Wikipedia reports that disputes over how much had been refunded, and to whom, continued for years.
• The scale shows why regulators watch large fund-raising closely, even where no individual investor has complained.

Exam one-liner

(Sahara India Real Estate Corp. v. SEBI, 2012, 2 judges)

Sources

• Supreme Court of India, judgment text via Indian Kanoon
• Wikipedia: Sahara India Pariwar investor fraud case

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