From Dawn to Dusk: An End of Legendary Corporate Empire

FROM DAWN TO DUSK: AN END OF LEGENDARY CORPORATE EMPIRE

INTRODUCTION:-

Corporate establishments have been the most attractive resorts for every cadre of populations, be it fresh graduates or the leading businessmen. Reliance, Tata, Infosys, Jindal, Airtel, Mahindra, Star group, Times of India, Amazon and many others have been the most famous, kind of landmark corporate entities. But does anyone have ever wondered how such big entities are actually regulating their business? Which are the legal provisions they are everyday facing off? How they are raising their funds? What are the ways of raising funds? What is the role of Companies Act and other Securities provisions in this dynamic corporate environment? This artifact tends to throw light on the corporate organizations, and their way of operating the industry, with special emphasis on ‘Sahara Case’. This commentary,in toto, will discuss the provisions of Companies Act, SEBI Act and SCRA Act, will also analyse the judgment pronounced by the apex court in this case. This piece will also share the history of Sahara Company and Mr. Subrata Roy. ‘Sahara Case’ has turned out to be the landmark case in the corporate arena. What are its implications and the observations will be discussed in this article.

Every business, be it private or public, needs fund to grow and expand its operations. The fund for a company can be raised in two primitive ways, first, by share capital and second, by issuing debts. Every investor which invests by the way of these two options, select his best alternative, only in which return is high, which we normally call as ‘return on investment’ (hereinafter ROI). In debts, ROI is in the form of ‘Interest’ which is fixed, secured and guaranteed. While on the other hand, ROI on Share capital is in the form of ‘dividend’ which depends on the profitability achieved by the company. If there is no profit, no dividend is issued, that is the reason the ROI on Share capital is known as ‘risk capital’. But there is another option present with the investors i.e. the ‘Securities Market’. A security market is a place where the customers can facilitate their financial transactions in form of their ‘Securities’ with a company or an individual. A ‘Security’ is actually a tradable financial asset. It can be divided into three broad categories; debt securities which includes Bank Notes, Bonds, Debentures etc. , Equity securities which includes common stocks and the derivative securities which includes forwards, futures, options and swaps (Fig-1). Basically, a security can be classified on the basis of many factors like the nature of market, period of time etc.

Figure 1

But, when the ‘Security’ is classified on the basis of Debt and Equity, following structure arises (fig-2).

Figure 2

But when the ‘Security’ carries the characteristics of both the debt and equity, third category is created i.e. ‘Hybrid Security’. The common examples of hybrid securities are: Preference Shares, Convertible bonds and Equity warrants.

Manipulation of securities market has proved to be disastrous for the economy. Strong securities market should be the objective of every developing country. It is an important financial institution and should be given an utmost importance. It (security market) is of paramount importance for measuring the economic stability and development of a nation. The structure of a ‘security market’ is regulated with the help of number of legislative pieces which includes the foremost Companies Act of 1956, Securities Contracts (Regulation) Act of 1956, Securities Exchange Board of India act, and Depositories Act of 1996.

Companies Act is the primary law governing all the companies in India. It discuss the basic rules for the issue and transfer of securities by the companies, issue of dividend by the companies, registration of the companies, fund raising of the companies, and many other important provisions related to a company is mentioned in this most basic and important piece of legislature. Central government remains the main regulating authority under this act i.e. the Ministry of Corporate Affairs (hereinafter MHA). Securities Contracts (Regulation) Act (hereinafter SCRA), regulates the dealings in securities and lays down the regulations for setting up of stock exchanges in India. The most primary objective of this act is to prevent the undesirable transactions in the ‘securities market’. Securities Exchange Board of India (hereinafter SEBI) Act, protect investors and regulate the securities market. It issues the rules governing the disclosure requirements for the issue of securities. It prevents the insider trading, takeover and keeps a check on market functionaries like the brokers, agents, merchants and managers.

SAHARA PARIVAAR:-

Mr. Subrata Roy is one of the India’s top corporate conglomerate personality. The Roy’s business worthis about Rs. 682 billion ($ 11 billion). This 65-year old personality was born in Bihar, did his schooling from Kolkata and started its business from Lucknow. He is known as ‘Chief Managing Worker’ or ‘Guardian’ of his organization. Famously known as ‘Sahara Parviaar’ because, have its extensions to every field like finance, housing, manufacturing, aviation, media, sports, entertainment, consumer merchandise and much more, is the India’s leading private sector employer, with the total strength of 1.1 million workers. Sahara was the official sponsor for both the Indian Cricket team and Indian Hockey Team. Sahara was also the proud ownerof the cricket team in Indian Premier League titled as ‘Sahara Pune Warriors” which had the likes of big cricket stars like Yuvraj Singh and Wayne Parnell. The Sahara group owned 42% of shares in Formula 1 racing team-‘Force India’.The ‘eminentiousness’ did not stopped in India only but, expanded to overseas institutions also. The celebrated New York’s Plaza Hotel and legendary London’s Grosvenor House are possessed by Mr. Roy only. Mr. Roy retains two houses out of which one is based on the theme of USA’s ‘White House’ and the other one is the exact replica of UK’s ‘Buckingham Palace’. Mr. Roy owns a fleet of private jets and helicopters not only this; his garage has the galaxy of Bentleys, BMWs, Rolls-Royces, and Mercedes. The friend’s list of Mr. Roy is fanciful with the names of Amitabh Bachan and Ex-British PM Tony Blair popping out of it. In 2004, when the wedding of Mr. Roy’s two sons took place, Lucknow witnessed the presence of big cricketer stars, legendary politicians like Atal Bihari Vajapyee and fashionists, taking the total toll of wedding to 10,000 guests. He is known as one of the most influential person in Lucknow. In 2004, Times Magazine awarded Sahara Group as the 2nd largest employer in India after the Indian Railways. In 2012 India today placed Mr. Roy among the 10 most powerful people of India.

SAHARA INDIA REAL ESTATE CORPORATION LIMITED AND SAHARA HOUSING INVESTEMENT CORPORATION LIMITED v. SECURITIES EXCHANGE BOARD OF INDIA

The “Sahara Case” was between the two entities of Sahara Group and the SEBI i.e. Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) v. Securities Exchange Board of India (SEBI). SIRECL issued Optional Fully convertible debentures (hereinafter OFCDs) for subscriptions to the investors with effect from 25th April 2008 to 13th April 2011. The total amount raised was round about Rs. 24,000 Cr. The amount was raised in the name of infrastructural activities. Shareholders of SIRECL passed a special resolution under section 81(1A) of the Companies Act of 1956. On the basis of that resolution, OFCD’s were based on private placement and were allotted to the employees, friends, and associate groups. SIRECL filed a Red-Herring Prospectus (RHP); RHP is a preliminary prospectus and a document submitted by a company, as part of public offering of securities. It is described under section 60(B) of Companies Act. RHP of SIRECL stated that OFCD’s will not be applied to be listed in the recognized stock exchange. Information Memorandums (IM’s)- IM’s are issued along with the application forms for private placement of OFCDs to various parties- were issued, after registering it with the registrar of Companies. The IM’s contained the notice read as follows “Private and Confidential and not for circulation”.Pari Materia process was followed by the SHICL on 16th September 2009. On 12th January 2010 another RHP by Sahara Prime City Limited, an entity of Sahara Parivaar only, for Initial Public offer was placed. While going through this RHP of Sahara Prime City Limited, SEBI discovered issue of OFCDs by the SIRECL and SHICL. A private complaint was received by the SEBI alleging the SIRECL and SHICL for the violation of various statutory provisions. SEBI circulated the letters to Ministry of Corporate Affairs (MCA). It also tried to seek the permission to investigate the Sahara Group. Sahara Group disputed this investigation under section 55A of the Companies Act. Sahara Group argued that it has complied with the section 60B(9) of the Companies Act to signify the closure of the issue of OFCDs.

On 23 June 2011, SEBI contented that the issue of OFCDs by SIRECL and SHICL was a public issue rather than private issue under the section 67(3) of the Companies Act, including sections 56 and 73. SEBI ordered the SIRECL and SHICL to refund the money generated. The matter was taken to Securities Appellate Tribunal (SAT), where the appeal of SIRECL and SHICLwas quashed down. The matter was then taken further by the Sahara Group to the Hon’ble Supreme Court. The case was heard by Justices K.S. Panicker Radha Krishnan and Jagdish Khehar.

The Hon’ble Supreme Court framed the following issues in Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) v. Securities Exchange Board of India (SEBI) case;

1- Whether the power to investigate and adjudication lies with SEBI in this matter as per Section 11, 11A, 11B of SEBI Act and or Ministry of Corporate Affairs under Section 55A of the Companies Act.

2-  Whether the hybrid OFCDs fall within the definition of “securities” within the meaning of Companies Act, SEBI Act and Securities Contracts (Regulations) Act.

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.

4-  Whether listing provisions under Section 73 is mandatory for all public issues or depends upon the ‘intention of the company’.

5-  Whether the Public Unlisted Companies (Preferential Allotment) Rules, 2003 will apply here or not.

Sahara contended that Issue of OFCDs is legal and it is not a public issue. OFCDs do not fall within the category of neither shares nor debentures.OFCDs fall within the “hybrid instruments”. Therefore, the OFCDs cannot be listed. The Sahara also contended that serious error has been committed by the SEBI. A senior official of Sahara says that “SEBI’s contention is incorrect and there is no credible evidence”. There is no statutory requirement to list the OFCDs in the recognized stock exchanges. The two foremost points that Sahara argues are that;

1-  Bonds issued are hybrid instruments as per Section 2(19A) of the Companies Act.

2-  Bonds issued by Sahara are convertible bonds as per Section 28(1)(b) of the SCRA and not list-able securities as per Section 2(h) of the SCRA.

On the other hand, SEBI contended that issuing of OFCDs was the public issue. Sahara was in violation of Section 73 of the Companies Act of 1956. According to the SEBI, Sahara filed an untrue RHP. It was also resisted by SEBI that Sahara did not followed the provisions of SCRA. Another allegation by the SEBI was that it did not submit the Balance Sheet and Profit and Loss Account to the concerned registrar of Companies.

OBSERVATIONS OF THE HON’BLE SUPREME COURT:-

1-  The issue of OFCDs by SIRECL and SHICL was a public offer:-

The Hon’ble SC decided the most important contention that, Issuing OFCDs by SIRECL and SHICL was public offer by referring to section 67(3) of the Companies Act. The section 67(3)reads as follows;

“No offer or invitation shall be treated as made to the public by virtue of sub-section (1) or sub-section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances -

(a) As not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation ; or

(b) Otherwise as being a domestic concern of the persons making and receiving the offer or invitation:

Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more:

Provided further that nothing contained in the first provision shall apply to the non-banking financial companies or public financial institutions specified in section 4A of the Companies Act, 1956 (1 of 1956).

If one reads this provision carefully, section 67(3) is exception to section 67(1) and section 67(2). Therefore according to the section 67(3) of the Companies Act if an offer of shares or debentures is made to fifty or more persons it would be deemed to be public issue. Further, the court cited the section 114 of the Indian Evidence Act which grants the power of presuming existence of certain facts to the court. With the help of this section, the court raised the presumption that the issue of OFCDs was an offer to public since SIRECL and SHICL had willfully avoided furnishing information that was invited by SEBI on the issue of OFCDs. The deduction therefore was that is these companies had furnished the evidence to SEBI it would be harmful to them. Justice Khehar also concluded that the issue of OFCDs also did not met the requirements of Section 67(3)(a) and Section 67(3)(b), because the issuance of OFCDs did not showed the essence of domestic concern.

Another issue that Hon’ble SC decided was regarding the matter of “Hybrid Securities”. Section 67 of the Companies Act used the term “Shares or Debentures” and therefore, it would not include in its ambit the fiscal instruments like OFCDs, which were issued by the SIRECL and SHICL. The definition of “debenture” mentioned in section 2(12) of the Companies Act says that-“debenture” includes debenture stock, bonds and any other securities of a company, whether consulting a charge on the assets of the company or not; and the definition for “securities” mentioned in companies act is the same mentioned in section 2(h) of the SCRA. The section 2(h) of SCRA reads as follows-

“securities” include—

(i) shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

(ic)security receipt as defined in clause of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

One conclusion that can be observed from this definition of “securities” is that it is inclusive and wide; therefore, the OFCDs would be classified as debentures for the purpose of the companies act. Also, when court observed the IM’s and RHP filed in by the SIRECL and SHICL, it mentioned OFCDs as debentures; this was the last nail on the coffin of the Sahara Group by the Hon’ble Supreme Court. The last option that the Sahara Group was left with was the Preferential Allotment Rules. The preferential allotment rules permitted a private placement of securities by unlisted public companies pursuant to section 81(1A) of the Companies Act without the curb on the number of investors enclosed in section 67(3) of the Companies Act was bereft of importance. The most important provision that was laid down the by the apex court was that the Preferential Allotment Rules are the subordinate legislation and cannot supersede the foremost and prime provisions of the Companies Act.  These rules does not do not apply to the public issue as described in section 67(3) of the Companies Act.

2-   SEBI had the jurisdiction to investigate the matter of OFCDs issued by the SIRECL and SHICL:-

OFCDs which are considered as “hybrid securities” fell within the purview of section 55A of the Companies Act and therefore, the court ordered that the jurisdiction and the power of SEBI in this case cannot be questioned. The Sahara Group argued that the section 60B was outside the ambit of section 55A of the Companies Act. Section 55A of the Companies Act clearly read that it will be applied to all the section from 59 to 81. It was implied that all the provisions will be dominated by the virtue of section 55A irrespective of the bracketed portion. Sahara Group argued that since section 60B was not in the bracketed, therefore, the provision of section 55A will not be applied on it. 

Coming on to the sections 11, 11A and 11B of the SEBI act, since it was proved that it was public issue and the OFCDs will be considered as “securities”, therefore, the SEBI has the full power by the virtue of sections 11, 11A, 11B and 11C to investigate the actions of Sahara because they were directly related to the interests of the investor and the protection of the interests of the investor is the foremost and the basic function of the SEBI. Any act or event which is detrimental to the interest of the investors there SEBI will and can take an appropriate course of action against the company.

3-  The OFCDs must have listed in the recognized stock exchange; it is mandatory and does not depend upon the intention of the company.

The court ruled that SIRECL and SHICL were under the obligation to list the OFCDs in a recognized stock exchange. Under section 73(1) which reads as follows;

73. ALLOTMENT OF SHARES AND DEBENTURES TO BE DEALT IN ON STOCK EXCHANGE

(1) Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange

Ad valorem mentioned in the above-referred section of the Companies Act, a company proposing to offer shares or debentures to the public must apply to a recognized stock exchange for listing before the issue.

Hon’ble Supreme Court thus after all these observations ordered the SIRECL and SHICL to refund the money that was raised. SEBI demanded the arrest of Mr. Subrata Roy.

CONCLUSION:-

Certain lessons that could be learnt from this case are, firstly, the corporate houses should learn one thing that their personal profits at the cost of the fraud with the investors, employees and the regulators will not prosper their future. The cases of Reliance Natural Gas Price Hike, POSCO’s steel Plant issue in Orissa and many others have defaced the picture of big corporates. Secondly, SEBI and other such regulators like Directorate General of Hydrocarbons, Directorate General of Mines, Telecom Regulator Authority of India (TRAI) etc. all have to be active and alert in themselves. They must free themselves from internal loopholes and political influences. They must create an environment where such malpractises could not grow. They must take steps to ensure that proper rules and regulations being laid down for the regulation of their concerned sectors and no breach of it is taking place. Accountability and Transparency should be two principles on which all these private and public companies should place their structure. A strict codification of punishments for these corporate frauds must done and they should be strictly implemented also, “Sahara Case” has turned out to be the best example for it.

“Sahara Case” has proved to be landmark judgment in the corporate arena. Supreme Court has specified the most clear and indisputable judgment ever. This decision by the apex court has kept the faith of lakhs of investors who were the victims of the Sahara Parivaar. Also the SEBI has once again emerged as the “Guardian of the Investors”. SEBI has kept in check such malpractices carried by the large public and private commercial entities. Corporate Business leaders to the some extent have exploited the economy and its resources to its fullest, in such cases SEBI and the apex court has created a proper environment which will have fear for such big business houses. This famous landmark decision by the apex court has been welcomed by the people of India. Investor community of country has taken the sigh of relief and will continue to if SEBI and the apex court continue to take stand for them.

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Written By:-

Rishabh Shrivastava

Associate Editor

UPES Law Review

BA.LLB (Hons.) with specialization in Energy Laws

University of Petroleum and Energy Studies, Dehradun, Uttarakhand

Email: rshiv1695@gmail.com