Sahara: Payback Time!
3 years, 26000 crore rupees and 3 crore investors! Phew...some battle it’s been between market regulator SEBI and the Sahara group! Over days of arguments, lawyers on each side dissected minutely the meanings of dozens of different legal sections. 55, 67, 73 of the Companies Act. 2 and 28 of the SCRA, 11 of the SEBI Act, 2 of DIP guidelines! But at the heart of this battle lay one simple question - can an unlisted, public company use the cover of a private placement to sell debentures to almost 3 crore people and raise over 26000 crore rupees and escape regulation by SEBI?
The Supreme Court said a loud & resounding no! Ordering Sahara to refund the outstanding 17400 crores with 15% interest to its OFCD investors within 3 months via a SEBI run process, paid for by Sahara and supervised by a retired Supreme Court Justice.
Sahara's key arguments as to why SEBI has no jurisdiction
1. OFCDs are not securities as defined by SCRA
2. It was a private placement not public offer
3. No intention to list hence no need to for exchange permission or SEBI regulation
The Supreme Court rejected Sahara's arguments to say
1. OFCDs are hybrid ‘securities’ that come under SCRA & Company Law definitions and within the jurisdiction of SEBI
2. If an offer is made to 50 or more persons listing becomes mandatory – irrespective of the company’s lack of intent to list
3. Listing requires prior permission from exchanges and hence SEBI has jurisdiction
Final Order By SC 2 Judge Bench
1. Sahara Companies to refund Rs 17400 cr with 15% interest
2. Sahara Companies to deposit full amount with SEBI within 3 months
3. SEBI to verify subscribers’ identities. Can use experts help
4. Verification costs to be borne by Sahara Companies
5. If all or any subscribers not found, refunds to go to Governmentt
6. Retired Justice Agarwal to monitor court ordered refund process
7. All costs toward refund process to be borne by Sahara
8. SEBI has recourse to all legal remedies if Sahara fails to comply
This judgment answers many important questions regarding the definition of securities, the compulsion to list and the jurisdiction of SEBI. To discuss these, I am joined by Shardul Shroff of Amarchand, Sanjay Asher of Crawford Bailey and Former SEBI Executive Director J N Gupta.
Doshi: I would like to break this conversation up into two parts. The first part being the impact of this judgment especially on points of law, the three questions I have already raised, the collateral impact on other unlisted companies and the second part of this discussion being the execution of the judgment, the refund order and potential criminal prosecution.
What does this judgment tell you about how a ‘security’ is defined and what kind of securities that definition includes, when it must be mandatorily listed and the jurisdiction of SEBI especially when it comes to unlisted companies?
Gupta: Not only me, the millions of investors of this country would be relieved that the confusion that was tried to be created by the group, that SEBI has no jurisdiction is set aside and it is very clearly constitutionally proved that SEBI has jurisdiction to any company which makes an offer to public at large which is more than 49. Whether it results in 49 shareholders or more it is not the issue. The moment you have approached public at large you come within the jurisdiction of SEBI because it is a public offer.
Doshi: What does this say about what kind of security is on offer? I know Sahara, even at SAT made very length arguments about OFCD and how it doesn’t fall under this definition of security under the SCRA, neither is it debt under the 2008 debt guidelines by SEBI. Hence it is not listable. They had no intent to list hence there would be no SEBI jurisdiction. How does this clear up the definition of security and what instruments come under SEBIs jurisdiction?
Gupta: It has cleared every possible doubt that was raised. I have, right from the beginning believed, that doubts were deliberately created because they also had no belief what they were arguing. The order very clearly says, the Securities as defined in Companies Act is inclusive. It is not exhaustive but it is an inclusive definition and it can be expanded. Second they have said that what the word security defines is that Companies Act will be administered by SEBI under Section 11A as per the public issue 55A provision of the Companies Act is concerned. Third they have also said that the definition of SCRA securities is same as this because they have said it also includes any other security.
Justice Radhakrishnan Concludes
SEBI has powers u/s 55A over issue of securities by public companies such as Saharas
Further they also go to say that section 28(1) (b) as has been alleged that, that inapplicability of SCRA is only on the entitlement part because entitlement results into primary issue. So, SCRA is a secondary market regulation. So, till such time the security is created, SCRA cannot apply. So, that was only for the creation. Lastly when you say the intent, the order very clearly says, that I cannot have intent not to comply with the law. They said that intent is not what you have said, but what it is demonstrated by your action. The action was that they issued securities to millions of investors and they filled information memorandum (IM) and they issued information memorandum to public at large. Then they have also said, you said that it has been issued to friends, relatives and something, they said that, that cannot be accepted because….. (Interrupted)
Doshi: You can’t have that many million friends and relatives. So, you are fairly convinced by what this order says. You don’t fully believe that Sahara’s arguments were not tenable. You did think that Fali’s arguments were tenable and you are little concerned about this order?
Asher: I do conquer with Fali Nariman and with due respect of the Supreme Court judge, the arguments which have been put forth by Fali Nariman on behalf of Sahara surely are tenable.
Doshi: Specifically tell me where do you see the gaps?
Asher: If I don’t intent to list the shares, there are guidelines under which I have issued the shares of an unlisted company.
Doshi: But then don’t issue it or don’t reach out to more than 50 investors. How do you justify your lack of intention to list with the fact that 3 crore people have your instruments, are holders of your instruments?
Asher: True, but at the same time having said that there is a prohibition or there is an embargo of just issuing it to 50 people, if I have to issue it to more than 50 people, I have to file the prospectus. Here what Sahara has done is filing of an information memorandum under the law.
Gupta: Through which law?
Asher: Under Companies Act itself.
Justice Radhakrishnan Concludes
Legal obligation u/s 67 (3) to list securities if offer made to 50 or more persons
Violation of Sec 67 (3) attracts penal provisions u/s 68
If 50 or more subscribers, public company to apply for listing u/s 73
Gupta: Companies Act very clearly states that if it is a public issue, you have a process. The process is not followed by Sahara.
Asher: True, but public issue is not only issuing the shares to general public at large, it is also getting the shares of a company listed on an exchange. Here Sahara clearly informed all the prospective investors, saying that I am not intending to list the shares.
Doshi: But how can that be a good enough argument for not having to follow the process of the law which says clearly if you issue to 50 or more, then you must list those instruments. To list those instruments you need exchange permission; hence you come under SEBI jurisdiction. A very simple linear line of logic.
Asher: True but I don’t subscribe to that logic in as much as that I cannot be forced to list my shares on an exchange, I have a choice.
Doshi: Mr Shroff what do you make of the two divergent views we have on this table and what do you make of the impact this judgment will have on the ability of unlisted companies to raise money in the market out there?
Shroff: I think in my view is that the Supreme Court is resoundingly right and I don’t agree with what Sanjay has articulated, for the reason that if you look at it your intention was clear that you always wanted to make this offer to more than 50 people. Supreme Court on its reading of Section 67 (3) goes on to state that if you are intending to do more than 50 then you don’t have a choice but to list. Once the amendments took place to Section 67 (3), it no longer left the choice open to parties that if you do a placement to more than 50, the obligation is to list. So the argument that I didn’t intend and I told parties that I don’t intend to list the security is not available to either of the two Sahara companies. That puts an end to the argument that is discretion, or is there autonomy. A corporate autonomy is lost; I don’t think that argument is sustainable.
Doshi: I cannot imagine Mr Asher that you are defending Sahara- not with Rs 27,000 crore raised from 3 crore investors- so clearly your concern is beyond that…… (Interrupted)
Shroff: But to be fair to him, I think he is articulating a position which was articulated in the SC- Mr Nariman nor Mr Subramanian are lawyers who are people who’ll put forth an argument which is preposterous. They have done it with intent for the reason that it was a possible view.
Doshi: I am trying to get at that- what is your concern here Mr Asher; it cannot be protecting Sahara because the size is only so big that it is inconceivable to imagine you can do this without SEBI regulation… (Interrupted)
Shroff: Menaka, you must add one more fact which is actually part of the judgment; it says that the authorized and the paid up capital of these two companies is a mere 10 lakh. It raises Rs 27000 crore and it has no assets.
Doshi: If you were to look at this judgment, the collateral impact on the fund raising by unlisted companies, I am guessing that is where your concern lies, what do you think the impact will be?
Asher: If the shares are issued to employees which exceed 50, is it that I cannot issue my shares to more than 50 people? In which event I need to get listed on exchange.
Gupta: In a company which has employees and has a capital of 10 lakh rupees, they will not be employees who will by contributing Rs 27000 crore.
Shroff: There is one more aspect that if a company wants to avoid, I was just doing the math- that if you are trying to approach 22 million people and you are proposing that this is like 49 person offer each time, it would take 4,19,000 ( four lakh and nineteen thousand) fillings or more than that because if you are assuming that every offer is only limited to 49 and you just divide the 22 million by 49, it is almost 4,19,000 proposals. But none of that was done. Only a single information memorandum was filed. That single information memorandum omitted to put in the declaration under Schedule 2, which clearly says that you have to be in compliance with the guidelines of SEBI. So you consciously deleted it which shows mens rea intent.
Gupta: I would like to say a simple thing that why we are arguing that the company cannot issue shares to 23 million people without listing. I am saying let us look into the background why listing is important, why the laws have been created? They have been created for the protection of the investors, for all investors.
Doshi: Of course for investor protection. Nobody disagrees. I am just trying to understand what Mr Asher’s underlying concern is outside of the fact of what happens to Sahara in this case. So is it that you believe that unlisted companies will lose legitimate avenues of raising money because of this judgment?
Asher: They would lose because what will happen is---(Interrupted)
Doshi: But then stick within 50 and the beauty of this process is those 50 can further sell down to 500, who can further sell down to 5000 and you can eventually end up with a million holders of that instrument and yet if you restrict to 49 then you are fine.
Gupta: That is why I have always been arguing that the listing threshold should not be only limited to initial offer or multiple offers of 49 people. It should be a mix of number of shareholders, the capital that is raised and the offers made because you cannot have a company which has got Rs 20,000 cr raised and not listed. Where is the investor protection; where is the disclosure? There is no transparency.
Shroff: To answer the question that Mr Gupta raised that is a good future intent but the Supreme Court has not gone that far. The Supreme Court is only limiting it to the proposition that this is a case where a series of 49 sort of tried to contain that every time this is only 49 and I think the information memorandum argument is just amazing. An information memorandum (IM) is like a book build; you see IM in a book build concept where you are really proposing it to marketing it to on specific name basis. The whole introduction of 60 B, if you look at the legislative history this is because of the book build model it is not intended for this kind of clear public access.
Doshi: I want to move to one quick question before I take a break on this and that is the role of the MCA in all of this. We are all reassured by the reinforcement of the SEBI’s jurisdiction in situations like this. The question I have is that these IMs were filed by the two Sahara companies with the Registrar of Companies (RoCs). The RoCs seem to have not picked up on the size of this issue?
Justice Radhakrishnan Concludes
MCA does not have the machinery to deal with such a large public issue of securities
MCA's powers are limited to deal with unlisted companies with limited number of holders
Shroff: This matter was not even to the notice of SEBI till another sister company of Sahara filed a prospectus. So, it went unnoticed both by SEBI and by MCA.
Doshi: But that’s because there was no filing with SEBI, but there was a filing of an IM with RoC and the RoC did not raised the alarm regarding have you got SEBI clearance?
Shroff: How can you expect the RoC to raise it when no figure is contended, no fact is contended to the effect that this was meant to 49. You can’t blame an RoC because he can’t be predicting what conduct of the …(Interrupted)
Doshi: Do you agree with that?
Gupta: I partly agree with him because as you say that the judgment is very clearly saying that the intent and the conduct of Sahara was not above board. Now when they file with RoC, they file a half baked document, which does not give the full disclosure. One thing is very clear that RoC did not connect what was filed at the time of IM or draft prospectus and the subsequent financial statements, which would have reflected thousands of crore that has been raised. This connection was not there in RoC. So that couldn’t be the fault, but there is no system as this judgment has very clearly brought out that RoC or MCA does not has have any assessment to take care of millions and thousands of investors; that’s why the whole thing has been given to SEBI.
Shroff: So look at it from the one perspective also that the Supreme Court is also recording that not withstanding the fact that 22 million investors are there, there are no adequate records. So what was the RoC expected to collect. They didn’t file even with the SEBI in an enquiry. So if they didn’t file it even in the enquiry, they have not responded to SEBI’s demands, what was the poor RoC going to do?
Doshi: Do you believe that some alertness should have come on the behalf of the RoC?
Asher: Of course by own means because the moment I file an IM with RoC, RoC ought to have asked questions to Sahara as to under what provisions are you filing? Whom have you allotted the OFCDs?
Shroff: If you read the judgment the argument was raised by Mr. Nariman and Mr. Subramaniam that there is a presumption that all is well – that there is a presumption, which flows from section 60 (B) read with 55 (A) that presumption has been displaced by the Supreme Court. That there is no such presumption, subsequent facts have displayed such a presumption. Now if there is a presumption, which was argued by Sahara’s lawyers, then you can’t blame the RoC.
Asher: RoC is very well, as you know, knows as to what is the process when a prospectus is filed. Obviously, RoC takes into account the observations of SEBI. They do ask questions when you lodge the offer document, when you lodge the prospectus with RoC. At that point in time if they see a document like IM obviously RoC should have raised questions.
Doshi: If they had asked SEBI, SEBI would have told them they have no clue of this?
Shroff: You must also appreciate which jurisdictions is the RoC is operating. You are talking of Lucknow, you are not talking of Mumbai.
Doshi: We can’t excuse this because RoC Lucknow won’t be doing an alert (interrupted…).
Shroff: I am saying that the sophistication that is available in a city of Mumbai, Delhi, Kolkata, or Chennai (interrupted…).
Asher: My only point is that at the RoC, there is a mechanism that if RoC does not understand because this is a place which is back or beyond, and therefore regional director is there. If he couldn’t have understood IM, you would have brought it (interrupted…)
Doshi: I thought that the RoC escaped censure in this judgment, which I thought was surprising because if that’s where the original jurisdiction lay, according to Sahara, there should have been more scrutiny, but I will take your point.
Shroff: I don’t think that is also fair to RoCs because this was raised as a question to the MCA; look at the facts in the Supreme Court.
Doshi: How is Sahara going to cough up Rs 17400 crore in three months? You may answer that question buy saying that’s not our problem that is Sahara’s problem. The execution of this judgment will depend on whether Sahara is able to meet this deadline or not and though very robust process has been put in place to ensure that the refunds get to the right people the question is how will Sahara come up with that money. Therefore how effective will this judgment be in returning money to those investors that deemed were unprotected?
Justice Radhakrishnan Concludes
Violation of sec 73 (2) requires refund with 4-15% interest rate
Sahara is legally bound to refund money
Sahara's conduct invites civil & criminal liability u/s 56(3), 62, 68, 68a, 73(3), 628, 629...
Asher: Of course Sahara knows that its going take a while before it can repay this money and therefore they will have to demonstrate their bonafide before the judge who has been appointed, Justice Agarwal, ex-judge of the Supreme Court, for monitoring this particular process. If there are any obstacles which are coming in between surely they will have to go back to the Supreme Court somehow to say that look you require more time. You’ve already taken some steps to pay off some of the investors and you are taking further steps to do it if at all they can get the money from some source.
Shroff: I don’t see the Supreme Court being lenient in such a process when you have caused an injury to almost 22 million people ---- (Interrupted)
Asher: There is no injury here, at best I have not complied maybe with the provisions of Companies Act ---- (Interrupted)
Shroff: This is a classic case where a class action would lie if for example this money is not refunded, what will be the remedy?
Gupta: I am very much in agreement with Shardul.
Shroff: This is an injury to the public that is why SEBIs role is being highlighted in a way- protected the investors. I see a different formulation emerging and probably the Supreme Court should drive that as the solution. If you look this is done by only two Sahara companies. Sahara is a group; Sahara is not only these two companies. The fact that Sahara has approached SEBI for a listing of a another company and that’s where all this got discovered plus the fact that Sahara is buying properties all over the world which are running into billions of pounds and here you are talking of USD 3 billion worth of money… (Interrupted)
Doshi: So what is your alternate remedy?
Shroff: I am pretty sure my alternate remedy is the Supreme Court… (Interrupted)
Asher: There is no point on record which says this money has gone somewhere.
Shroff: It says that there is no asset.
Doshi: Let’s hear Mr. Shroff’s alternate remedy once because I would be out of time in two minutes then.
Shroff: I think alternate remedy is contained in the orders of the Supreme Court itself because what they have said is that if they don’t get this money and realization doesn’t take place then all other avenues including attachments are open. I am saying that they could go further because they have lifted – there are observations in the judgment of lifting the corporate veil- so whoever is behind these two entities and these shareholders, they will strip that. They will go behind the ownerships of these two companies and it will lead up to companies which have real assets. What would then happen is that either the owners, the ultimate layer, because once you start stripping the corporate veil, it goes right up to the individual; the access will be right till the top; wherever the top is.
Doshi: Even for the person at the top, coughing up Rs 17,400 crore in three months is going to be a tall task.
Shroff: Not necessarily. There are enough assets available whether it’s Amby Valley, whether it’s the Peer Hotel or whether it’s the.. (Interrupted)
Asher: Its question of divesting all of that and getting cash in the bank account. It’s not possible to sell off Amby Valley or any of the hotels or any of the property.
Doshi: One can argue this by saying they should have been aware of the consequences.
Shroff: What I am saying is when there is choice between going to jail for violating the provisions of Section 56 and 73 and compounding it by intent because that intent is written all over the Supreme Court judgment, that this is not accidental. This whole scheme is thought out, this was done consciously. I don’t think any three of us can say that the Supreme Court has not observed that in its two judgments. So, if that is the case and you are staring down the barrel of a criminal offence which will affect you across all companies, what is the choice that it leaves to the promoters of Sahara? The only choice that is available to them is therefore to securitize other assets and land up with USD 3 billion because if you don’t pay the consequences are far worse.
Doshi: Even if you do pay, I think that this judgment makes it very clear that there are sufficient grounds for criminal prosecution that could take you to jail. Now the ball seems to be in SEBI’s court?
Shroff: If you pay Rs 27,000 crore and you clean up 22 million investors’ dues, there is an offence…. (Interrupted)
Doshi: The very same intent which you are talking about articulated by both judges cannot go completely ignored and they have laid down the ground for further criminal prosecution.
Shroff: I am not trying to save the crime; all I am saying a case for leniency will come. If you pay up in time, the Supreme Court will be lenient.
Doshi: My question to Mr Gupta is not only is SEBI’s jurisdiction reconfirmed through this judgment but now the ball is in SEBI’s court to go out there and initiate criminal prosecution against these two companies- based on what these judges have observed in terms of intent to bypass SEBI and also in terms of the number of potential fictitious investors in these schemes. So now SEBI must come through on its intent to regulate these two companies by speedily starting or initiating criminal prosecution?
'There can therefore be no hesitation in accepting, that on all three perspectives raised at the behest of the SEBI, to demonstrate that there was a pre-planned attempt at the hands of the SIRECL and SHICL, to bypass the regulatory and administrative authority of the SEBI, does seem to be real. One can only hope, it is not so.'
Gupta: I totally agree with you because the judgment is very clear. Both the judges observed that right from beginning the intent of Sahara was to avoid any regulatory radar and page 123 of Justice Radhakrishnan has recorded that “the provision for imposing civil and criminal liability and refund of the amount with interest would indicate that, of late, economic offences in India like the one committed by Sahara’s be treated with an Iron hand, or else we may land in another security market pandemonium.”
Doshi: Just tell me, you now expect SEBI to initiate criminal proceedings against these companies?
Shroff: My suggestion is that we should not fall in the Harshad Mehta trap or pervious scams where we don’t get the money in first. Let us first get the money in; then let the prosecution go on.
Doshi: Let me ask the remaining panel if they agree with you on that? I want to know whether criminal prosecution should start immediately and how far they can go because questions have also been raised regarding the authenticity of these investors, whether they exists or not and the fact that these two companies have wilfully sort to bypass SEBI? Hence you could see a wide ranging economic offences investigation? Am I correct?
'...it is essential to express, that there may be no real subscribers for the OFCDs issued by the SIRECL or SHICL. Or alternatively, there may be an intermix of real and fictitious subscribers.’
Asher: Absolutely correct, surely SEBI will initiate criminal prosecution but it’s a process, which is going to take while.
Doshi: What I mean is they should do it parallely or should they wait till money is in?
Shroff: Let us be practical; see what has happened in Bhopal type mass injury, you have taken more than 25 years to distribute money. I think it’s high time we as civil society and we as regulators first ensure the money is in the bank.
Asher: I agree with you, there are assets which are available; you can always divest the assets.
Doshi: Mr Shroff all you are saying is wait till the money is in the bank before you initiate criminal proceedings.
Shroff: Get the money in, I am not saying wait till the money is in. I am saying let us use these 30 days, let the money come in so at people are secure, money is on interest earning basis.
Doshi: But you also believe that criminal proceedings must be initiated?
Shroff: As day follows night, it will come. I don’t see a choice.
Doshi: I imagine based on the language of this judgment that those criminal proceedings could be fairly wide and could encapsulate issues of money laundering, all kinds of economic offences.
Shroff: Our response to crisis is always to get into the criminal process which doesn’t lead to final conclusion. Let us go after the money and actually get people back their money.
Doshi: So that is the last word.
For Reader's Reference
Relevant Sections/Clauses Referred to In the Judgment
Section 67 (3), Companies Act
An offer of shares or debentures to 50 or more persons is deemed to be a public issue
Section 73, Companies Act
Offer to the public must be preceded by a listing application
Section 55A, Companies Act
- Public listed companies or companies which intend to get their securities listed shall be governed by SEBI
- Prospectus violations under MCA's jurisdiction
Section 60B (9), Companies Act
On closing of the offer, final prospectus needs to be filed with SEBI
Details in Final Prospectus
• Total capital raised
• Closing price of securities
• Any other detail not mentioned in the RHP
Section 2(h), SCRA
Defines "securities" to include ‘shares, scrips, stocks, bonds, debentures, debenture stock or other marketable Securities….'
Section 28 (1) b, SCRA
SCRA not applicable to any convertible bond or share warrant or any option or right in relation thereto, if pricing is agreed upon upfront
Section 11, SEBI Act
Powers & Functions of SEBI
- Protecting investor interest
- Regulating the business in stock exchanges and any other securities markets
Section 11A, SEBI Act
• Can specify regulations for issue of capital, transfer of securities & other matters
• Can prohibit issue of prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities
Section 11B, SEBI Act
SEBI can issue directions, in investor interest, to any company issuing capital or transferring securities or soliciting money from public for the issue of securities
Clause 2.1.1, DIP Guidelines
"No issuer company shall make any public issue of securities, unless a draft Prospectus has been filed with the Board through a Merchant Banker, at least 30 days prior to the filing of the Prospectus with the Registrar of Companies"
Clause 1.2.1 (xxiii), DIP Guidelines
"Public Issue" means an invitation by a company to public to subscribe to the securities offered through a prospectus