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U/s 73(1) of the Companies Act, organizations have to make an application for SE listing before issuing OFCDs

CLR Editorial NotesThis refers to the OFCD subscription offer made by Sahara Group and the subsequent litigation by SEBI in lieu of non-compliance and intentional bypass of SEBI Guidelines.

The Sahara Companies, issued that the invitation/offer to subscribe to the OFCDs 3 crore persons (expressed as 30 million persons by the SAT), through 10 lakh agents, stationed in more than 2900 branch offices, and claimed that there was no issue of securities to the public that would result in need for compliance of SEBI Regulations and other laws for disclosure, investor protection, etc. The Supreme Court upholding the decision of SEBI held that the issuance of OFCDs was a public issue and, therefore, securities were liable to be listed on a recognized stock exchange Under Section 73 of the Companies Act. Once there is an intention to issue shares or debentures to the public, it is/was obligatory to make an application to one or more recognized stock exchanges, prior to such issue. Unlisted companies like Sahara when made an offer of shares or debentures to fifty or more persons, it was mandatory to follow the legal requirements of listing their securities.

The Supreme Court was of the view that the whole act of the Sahara Companies was their pre-planned intention to bypass the regulatory and administrative authority of SEBI. Since the Sahara Companies had failed to make application for listing on any of the recognized stock exchange, as provided Under Section 73(1) of the Companies Act, they have become legally liable to refund the amount collected from the subscribers in pursuance to their RHPs, along with interest as provided Under Section 73(2) of the Act.

Supreme Court upheld SEBI™s decision and ordered Sahara to refund the amounts collected by issue of OFCDs, along with interest @ 15% per annum.

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Full Case Details

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JUDGMENT

K.S. Panicker Radhakrishnan, J.

1. We are, in these appeals, primarily concerned with the powers of the Securities and Exchange Board of India (for short ‘SEBI’) Under Section 55A(b) of the Companies Act, 1956 to administer various provisions relating to issue and transfer of securities to the public by listed companies or companies which intend to get their securities listed on any recognized stock exchange in India and also the question whether Optionally Fully Convertible Debentures (for short ‘OFCDs’) offered by the Appellants should have been listed on any recognized stock exchange in India, being Public Issue Under Section 73 read with Section 60B and allied provisions of the Companies Act and whether they had violated the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 [for short ‘DIP Guidelines’] and various Regulations of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 [for short ‘ICDR 2009’], and also whether OFCDs issued are securities under the Securities Contracts (Regulation) Act, 1956 [for short ‘SCR Act’].

2. Sahara India Real Estate Corporation Limited (for short ‘SIRECL’) and Sahara Housing Investment Corporation Limited (for short ‘SHICL”), Appellants herein (conveniently called Saharas), are the companies controlled by Sahara Group. Saharas have raised almost identical issues on facts as well as on questions of law before us and hence we are disposing off both the appeals by way of a common judgment.

3. SIRECL was originally incorporated as Sahara India “C” Junxion Corporation Limited on 28.10.2005 as a public limited company under the Companies Act and it changed its name to SIRECL on 7.3.2008. As per the Balance Sheet of the company as on 31.12.2007, its cash and bank balances were Rs. 6,71,882 and its net current assets worth Rs. 6,54,660. Company had no fixed assets nor any investment as on that date. SIRECL’s operational and other expenses for the three quarters ending 31.12.2007 were Rs. 9,292 and the loss carried forward to the Balance Sheet as on that date was Rs. 3,28,345.

4. SIRECL, in its Extraordinary General Meeting held on 3.3.2008, resolved through a special resolution passed in terms of Section 81(1A) of the Companies Act to raise funds through unsecured OFCDs by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with Sahara Group of Companies (for short ‘Sahara Group’) without giving any advertisement to general public. Company authorized its Board of Directors to decide the terms and conditions and revision thereof, namely, face value of each OFCD, minimum application size, tenure, conversion and interest rate. Board of Directors, consequently, held a meeting on 10.3.2008 and resolved to issue unsecured OFCDs by way of private placement, the details of which were mentioned in the Red Herring Prospectus (for short ‘RHP’) filed with the Registrar of Companies (for short “RoC”), Kanpur. SIRECL had specifically indicated in the RHP that they did not intend to get their securities listed on any recognized stock exchange. Further, it was also stated in the RHP that only those persons to whom the Information Memorandum (for short ‘IM’) was circulated and/or approached privately who were associated/affiliated or connected in any manner with Sahara Group, would be eligible to apply. Further, it was also stated in the RHP that the funds raised by the company would be utilized for the purpose of financing the acquisition of townships, residential apartments, shopping complexes etc. and construction activities would be undertaken by the company in major cities of the country and also would finance other commercial activities/projects taken up by the company within or apart from the above projects. RHP also indicated that the intention of the company was to carry out infrastructural activities and the amount collected from the issue would be utilized in financing the completion of projects, namely, establishing/constructing the bridges, modernizing or setting up of airports, rail system or any other projects which might be alloted to the company from time to time in future. RHP also highlighted the intention of the company to engage in the business of electric power generation and transmission and that the proceeds of the current issue or debentures would be utilized for power projects which would be alloted to the company and that the money, not required immediately, might be parked/invested, inter alia, by way of circulating capital with partnership firms or joint ventures, or in any other manner, as per the decision of the Board of Directors from time to time. SIRECL, Under Section 60B of the Companies Act, filed the RHP before the RoC, Uttar Pradesh on 13.3.2008, which was registered on 18.3.2008. SIRECL then in April 2008, circulated IM along with the application forms to its so called friends, associated group companies, workers/employees and other individuals associated with Sahara Group for subscribing to the OFCDs by way of private placement. Then IM carried a recital that it was private and confidential and not for circulation. A brief reference to the IM may be useful, hence given below:

PRIVATE & CONFIDENTIAL
(NOT FOR CIRCULATION)

INFORMATION MEMORANDUM FOR PRIVATE
PLACEMENT of OPTIONALLY FULLY
CONVERTIBLE UNSECURED DEBENTURES
(OFCD)

This Memorandum of Information is being made by Sahara India Real Estate Corporation Limited (formerly Sahara India ‘C’ Junxion Corporation Limited) which is an unlisted Company and neither its equity shares nor any of the bonds/debentures are listed or proposed to be listed. This issue is purely on the private placement basis and the company does not intend to get these OFCD’s listed on any of the Stock Exchanges in India or Abroad. This Memorandum for Private Placement is neither a Prospectus nor a Statement in Lieu of prospectus. It does not constitute an offer for an invitation to subscribe to OFCD’s issued by Sahara India Real Estate Corporation Limited. The Memorandum for Private Placement is intended to form the basis of evaluation for the investors to whom it is addressed and who are willing and eligible to subscribe to these OFCD’s. Investors are required to make their own independent evaluation and judgment before making the investment. The contents of this Memorandum for Private Placement are intended to be used by the investors to whom it is addressed and distributed. This Memorandum for Private Placement is not intended for distribution and is for the consideration of the person to whom it is addressed and should not be reproduced by the recipient. The OFCD’s mentioned herein are being issued on a private placement basis and this offer does not constitute a public offer/invitation.

(Emphasis added)

5. The RHP, which was issued prior to the IM, had also given the details and particulars of the three OFCDs issued by SIRECL appended as Annexure-I, which would give a brief idea of the Tenure of the Bonds issued, its face value, redemption value etc., a projection of which is given below:

Particulars Nature of OFCDs
Abode Bond Real Estate Bond Nirmaan Bond
Tenure 120 months 60 months 48 months
Face Value Rs. 5,000/- Rs. 12,000/- Rs. 5,000/-
Redemption Value Rs. 15,530/- Rs. 15,254/- Rs. 7,728/-
Early Redemption After 60 months NIL After 18 months
Conversion On completion of 120 months On completion of 60 months On completion of 48 months
Minimum Application Size Rs. 5,000/- Rs. 12,000/- Rs. 5,000/-
Nominee System Double Nominee Double Nominee Double Nominee
Transfer Yes Yes Yes

6. I may also indicate that all the bonds stipulated that bond holders could avail of loan facility as per the terms and conditions of the application forms. Nirmaan and Real Estate Bonds prescribed an additional feature of death risk cover as well. Clause 13 of RHP imposed no restriction on the transfer of the OFCDs.

7. SIRCEL, therefore, floated the issue of the OFCDs as an open ended scheme and collected an amount of Rs. 19400,86,64,200 (Nineteen thousand four hundred crores, eighty six lacs, sixty four thousand and two hundred only) from 25.4.2008 to 13.4.2011. Company had a total collection of Rs. 17656,53,22,500 (Seventeen thousand six hundred and fifty six crores, fifty three lacs, twenty two thousand and five hundred only) as on 31.8.2011, after meeting the demand for premature redemption. The abovementionedamounts were collected from 2,21,07,271 investors.

8. SHICL, a member of Sahara Group companies, also convened an Annual General Meeting on 16.9.2009 to raise funds by issue of OFCDs, by way of private placement, to friends, associated group companies, workers/employees and other individuals associated/affiliated or connected in any manner with the Sahara Group companies. Consequently, a RHP was filed on 6.10.2009 Under Section 60B of the Companies Act with the RoC, Mumbai, Maharashtra, which was registered on 15.10.2009. Later, SHICL issued OFCDs of the nature of Housing Bond; conversion price of Rs. 5,000/- for each five bonds, Income Bond, conversion price of Rs. 6,000/- for six bonds; Multiple Bond, conversion price of Rs. 24,000/- for two bonds. Interest accrued on each of the three types of bonds was to be refunded to the bond holders.

9. SEBI, as already indicated, had come to know of the large scale collection of money from the public by Saharas through OFCDs, while processing the RHP submitted by Sahara Prime City Limited, another Company of the Sahara Group, on 12.1.2010 for its initial public offer. SEBI then addressed a letter dated 12.1.2010 to Enam Securities Private Limited, merchant bankers of Sahara Prime City Limited about the complaint received from one Roshan Lal alleging that Sahara Group was issuing Housing bonds without complying with Rules/Regulations/Guidelines issued by RBI/MCA/NHB. Merchant Banker sent a reply dated 29.1.2010 stating that SIRECL and SHICL were not registered with any stock exchange and were not subjected to any rule / Regulation / guidelines / notification / directions framed thereunder and the issuance of OFCDs were in compliance with the applicable laws. Following the above, another letter dated 26.2.2010 was also sent by the Merchant Banker to SEBI stating that SIRECL and SHICL had issued the OFCDs pursuant to a special resolution Under Section 81(1A) of the Companies Act, 1956 passed on 3.3.2008 and 16.9.2009 respectively. Further, it was also pointed out that they had issued and circulated an IM prior to the opening of the offer and that RHP issued by SIRECL dated 13.3.2008 was filed with RoC, U.P. and Uttarakhand and RHP issued by SIHCL dated 6.10.2009 was filed with RoC, Maharashtra.

10. SEBI on 21.4.2010 addressed a letter to the Regional Director, Northern and Western Regions of Ministry of Corporate Affairs (for short ‘MCA’) enclosing the complaint received in respect of OFCDs issued by Saharas. SEBI had stated that those companies had solicited and issued OFCDs violating statutory requirements and that they were not listed companies and had not filed the RHP with SEBI. SEBI sent a communication dated 12.5.2010 to Saharas calling for various details including the details regarding the number of application forms circulated after filing of RHP with RoC, details regarding the number of applications received and subscription amount received, date of opening and closing of subscription list of OFCDs, number and list of allotees etc.

11. SIRECL on 31.5.2010 addressed a letter to MCA for guidance/advice as to whether it was SEBI or MCA who had locus stand in the matter of unlisted companies in view of the provisions of Section 55A(c) of the Act. MCA, it is seen, had sent a letter dated 17.6.2010 to SIRECL stating that the matter was being examined under the relevant provisions of the Companies Act, 1956. SIRECL informed SEBI of the reply they had received from the MCA and that they would address SEBI after a decision was taken by MCA. Having not received the details called for from Saharas, SEBI had prima facie felt that SIRECL was carrying out various transactions in securities in a manner detrimental to the interests of the investors or to the securities market and, therefore, issued summons dated 30.8.2010, Under Section 11C of the SEBI Act, directing the company to furnish the requisite information by 15.9.2010. Detailed reply dated 13.9.2010 was sent by SIRECL to SEBI, wherein it was stated that the company had followed the procedure prescribed Under Section 60B of the Companies Act pursuant to the special resolution passed Under Section 81(1A) in its meeting held on 3.3.2008 and filed its RHPs Under Section 60B with the concerned RoC. Further, it was pointed out that SIRECL was not a listed company, nor did it intend to get its securities listed on any recognized stock exchange in India and that OFCDs issued by the company would not fall Under Sections 55A(a) and/or (b) and hence the issue and/or transfer of securities and/or nonpayment of dividend or administration of either the company or its issuance of OFCDs, were not to be administered by SEBI and all matters pertaining to the unlisted company would fall under the administration of the Central Government or RoC. Further, it was urged that Regulations 3 and 6 of ICDR 2009 would not apply, since there was no public issue either in the nature of an initial public offer or further public offer as defined by Regulation 2(zc), 2(p) and/or 2(n) of ICDR 2009. OFCDs, it was pointed out, were restricted to a select group (as distinguished from general public), however large they might be and hence the issuance of OFCDs was not a public offer to attract the provisions of Regulations 3 and/or 6 of ICDR 2009. Company had stated that issuance of OFCDs of 2008 was also not covered by the SEBI (Issue and Listing Securities) Regulations, 2008, since it would apply to non-convertible debt securities, whereas the OFCDs issued by SIRECL were convertible securities. SIRECL, therefore, requested SEBI to withdraw the summons issued Under Section 11C of the SEBI Act. Summons dated 23.9.2010 was also issued to SHICL, for which also an identical reply was sent to SEBI.

12. MCA, in the meanwhile, sent a letter dated 21.9.2010 to SIRECL Under Section 234(1) of the Companies Act calling for various details including the amount collected through private placement, details regarding the number of investors to whom the allotment had been made, their names, addresses, utilization of the funds collected, its purpose, class or classes of persons to whom the allotment had been made and whether allotments were completed and various other details. SIRECL was directed to furnish the information within 15 days from the date of receipt of notice, failing which it was informed that penal action would be initiated against the company and its directors Under Section 234(4)(a) of the Companies Act.

13. SEBI, in the meanwhile, sent a letter dated 23.9.2010 to SIRECL reminding that it had not provided information/documents on the issue of OFCDs. Proceeding issued for appointing the investigating agency was also forwarded to the company. SIRECL again replied by its letter dated 30.9.2010 raising the issue of jurisdiction of SEBI in investigating the affairs of SIRECL. SIRECL, however, replied to the letter of MCA dated 21.9.2010 on 4.10.2010, stating inter alia that it would be filing the prospectus on the closure of the issue in compliance with the provisions of Section 60B(9) of the Companies Act, stating therein the total capital raised by way of OFCDs and the related information by filing the prospectus. Further, it was also pointed out that allotment had been made to persons who were connected with the Sahara Group and that investors had given a declaration to the company to that effect in terms of the RHP. MCA then sent a reply dated 14.10.2010 stating that the points 1 to 3, 5 to 10, 12 to 16, 18 to 22 had been examined and appeared to be satisfactory. With regard to points 4, 11 and 17, the company was directed to effect compliance on closure of issue by filing of prospectus as required Under Section 60B(9) of the Companies Act.

14. SEBI, in the meanwhile, issued a notice dated 24.11.2010 informing both SIRECL and SHICL that the issuance of OFCDs was a public issue and, therefore, securities were liable to be listed on a recognized stock exchange Under Section 73 of the Companies Act. From the preliminary analysis, it was pointed out that the issuance of OFCDs by Saharas was prima facie in violation of Sections 56 and 73 of the Act and also various clauses of DIP Guidelines and SHICL had also prima facie violated Regulations 4(2), 5(1), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 57 of ICDR 2009. Both the companies were, therefore, directed to show cause why action should not be initiated against them including issuance of direction to refund the money solicited and mobilized through the prospectus issued with respect to the OFCDs, since they had violated the provisions of the Companies Act, SEBI Act, erstwhile DIP Guidelines and ICDR 2009.

15. SIRECL had challenged the show-cause-notice dated 24.11.1010 before the Allahabad High Court, Lucknow Bench in W.P. No. 11702 of 2010, which the Court had stayed on 13.12.2010. SEBI took up the matter before this Court in S.L.P. (Civil) No. 36445 of 2010 and this Court did not interfere with the interim order, but ordered early disposal of the writ petition.

16. MCA, following its earlier letter dated 21.9.2010 issued another notice dated 14.2.2011 directing SIRECL to furnish details on four specific points, including the details of the number of persons who had applied in pursuance to the OFCDs issued, the mode of receipt of payment (Application Register), the name, address, number of persons to whom OFCDs were allotted (Allotment Register) and also whether the number of allottees to whom OFCDs were allotted etc. exceeded fifty. SIRECL replied to the notice on 26.2.2011. SIRECL, it was stated, had sent a password protected CD along with two separate sheets containing the procedure and the password to SEBI; the CD contained of investors’ names, serial numbers and amounts invested in OFCDs. SEBI, however, could not open the CD due to non furnishing of the password. SEBI pointed out this fact before the High Court and the Court vacated the interim order dated 13.12.2010. SIRECL took up the matter before this Court in S.L.P. (Civil) No. 11023 of 2011.

17. SIRECL, in the meanwhile, claimed that it had furnished a separate CD along with the password vide letter dated 19.4.2011 to SEBI stating that due to the enormity of the work and time taken in collating and compiling the data relating to the names and addresses and the amount invested, the company could only provide the partial information relating to names, numbers and amount invested by the investors through the covering letter dated 18.3.2011 in a CD. SIRECL then moved the High Court on 29.4.2011 to recall the order dated 7.4.2011 on the plea that the details called for by SEBI had been furnished. The High Court dismissed the application, which led SIRECL filing SLP (Civil) No. 13204 of 2011 before this Court. This Court on 12.5.2011 passed the following order in SLP (Civil) No. 11023 of 2011 and SLP (Civil) No. 13204 of 2011:

In this matter the questions as to what is OFCD and the manner in which investments are called for are very important questions. SEBI, being the custodian of the Investor’s and as an expert body, should examine these questions apart from other issues. Before we pass further orders, we want SEBI to decide the application(s) pending before it so that we could obtain the requisite input for deciding these petitions. We request SEBI to expeditiously hear and decide this case so that this Court can pass suitable orders on re-opening. However, effect to the order of SEBI will not be given. We are taking this route as we want to protect the interest of the Investor. In the meantime, the High Court may proceed, if it so chooses, to dispose of the case at the earliest.

18. SEBI then issued a fresh notice dated 20.5.2011 stating that Saharas had not provided any information to SEBI regarding details of its investors to show that the offer of OFCDs was made to less than fifty persons. Further, it was pointed out that Saharas though claimed, that the offer/issue was made on private placement basis, any offer/issue to fifty or more persons would be treated as public issue/offer in terms of the first proviso to Sub-section (3) of Section 67 of the Companies Act and the provisions of the Companies Act governing public issues and the provisions of DIP Guidelines and ICDR 2009 would consequently apply. Further, it was also pointed out in the notice that the RHP provided along with the letter of SIRCEL dated 15.1.2011 contained untrue statements which attracted the provisions of Sections 62 and 63 of the Act and hence the offer of OFCDs to public through the RHP was illegal. Further, it was stated that none of the disclosure requirements specified by SEBI or the investors protection measures prescribed for public issues under DIP Guidelines and ICDR 2009 had been complied with and hence there was prima facie violation of Section 56 of the Companies Act and hence offer of OFCDs of Saharas to the public was illegal. Notice also indicated that Saharas had violated the provisions of Section 73 of the Companies Act, by non-listing of their debentures in a recognized stock exchange. Further, it was also pointed out that Saharas had not executed any Debenture Trust Deed for their OFCDs, not appointed any Debenture Trustee and not created any Debenture Redemption Reserve, which would amount to violation of Sections 117A, 117B and 117C of the Companies Act. Non-compliance of furnishing details in Form No. 2A, as required under Rule 4CC of the Companies (Central Government’s) General Rules and Forms, 1956 read with DIP Guidelines and ICDR 2009, it was pointed out, had violated Section 56(3) of the Companies Act.

19. SEBI notice dated 20.5.2011 also highlighted that the CD was secured in such a manner that no analysis was possible and the addresses of the OFCDs holders were incomplete or ambiguous. Serious doubts were also raised with regard to the identity and genuineness of the investors and the intention of the companies to repay the debenture holders upon redemption. Notice, therefore, stated that the companies had prima facie violated the provisions of the Companies Act, SEBI Act, 1992, DIP Guidelines and ICDR 2009 and hence the offer/issue of OFCDs to public was illegal, and imperiled the interest of investors in such OFCDs and was detrimental to the interest of the securities market. Saharas were, therefore, called upon to show cause why directions contained in the interim order of SEBI dated 24.11.2010 be not issued Under Sections 11(1), 11(4)(B), 11A(1)(b) and 11B of SEBI Act read with Regulation 107 of ICDR 2009.

20. Saharas then sent a detailed reply dated 30.5.2011 pointing out that the Appellants had made private placement of OFCDs to persons who were associated with Sahara Group and those issues were not public issues. Further, it was also urged that 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. Further, it was also urged 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. Further, it was also pointed out that Sections 67 and 73 of the Companies Act could not be made applicable to Hybrid securities, so also the DIP Guidelines and ICDR 2009. Further, it was reiterated that 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. Further, it was also pointed out that RoC, Kanpur and Maharashtra had registered those RHPs without any demur and, therefore, it was unnecessary to send it to SEBI.

21. SEBI passed its final order through its whole-time member (WTM) on 23.6.2011. SEBI examined the nature of OFCDs issued by Saharas and came to the conclusion that OFCDs issued would come within the definition of “securities” as defined Under Section 2(h) of SCR Act. SEBI also found that those OFCDs issued to the public were in the nature of Hybrid securities, marketable and would not fall outside the genus of debentures. SEBI also found that the OFCDs issued, by definition, design and characteristics intrinsically and essentially, were debentures and the Saharas had designed the OFCDs to invite subscription from the public at large through their agents, private offices and information memorandum. SEBI concluded that OFCDs issued were in fact public issues and the Saharas were bound to comply with Section 73 of the Companies Act, in compliance with the parameters provided by the first proviso to Section 67(3) of the Companies Act. SEBI took the view that OFCDs issued by Saharas should have been listed on a recognized stock exchange and ought to have followed the disclosure requirement and other investors’ protection norms.

22. SEBI also held that the Parliament has conferred powers on it Under Section 55A(b) of the Companies Act to administer such issues of securities and Saharas were not justified in raising crores and crores of rupees on the premise that that OFCDs issued by them, were by way of private placement. SEBI, therefore, found that the Saharas had contravened the provisions of Sections 56, 73, 117A, 117B and 117C of the Companies Act and also various clauses of DIP Guidelines. SEBI also held that SHICL had not complied with the provisions of Regulations 4(2), 5(1), 5(7), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 57 of ICDR Regulations. Having found so, SEBI directed Saharas to refund the money collected under the Prospectus dated 13.3.2008 and 6.10.2009 to all such investors who had subscribed to their OFCDs, with interest.

23. Appellants, aggrieved by the abovementionedorder of SEBI, filed Appeal Nos. 131 of 2011 and 132 of 2011 before the Tribunal and the Tribunal passed a common order on 18.10.2011. Before the Tribunal, Union of India, represented through the Ministry of Company Affairs, was impleaded. The Tribunal took the view that OFCDs issued were securities within the meaning of Clause (h) of Section 2 of SCR Act, so also under SEBI Act. Tribunal also noticed that RHP issued by SIRECL was registered by the RoC on 18.3.2008, though information memorandum (IM) was issued later in April 2008 in clear violation of Section 60B of the Companies Act. Further, it was also noticed that IM was issued through 10 lac agents and more than 2900 branch offices to more than 30 million persons inviting them to subscribe to the OFCDs which amounted to invitation to public. Tribunal also found fault with the RoC as it had failed to forward the draft RHP to SEBI since it was a public issue and hence violated Circular dated 1.3.1991 issued by the Department of Company Affairs, Government of India.

24. Tribunal also recorded a finding that Saharas, having made a public issue, cannot escape from complying with the requirements of Section 73(1) of the Companies Act on the ground that the companies had not intended to get the OFCDs listed on any stock exchange. Tribunal also examined the scope and ambit of Sections 55A of Companies Act read with Sections 11, 11A and 11B of SEBI Act and took the view that a plain reading of those provisions would indicate that SEBI has jurisdiction over the Saharas since OFCDs issued were in the nature of securities and hence should have been listed on any of the recognized exchanges of India. SEBI also took the view that the explanation to Section 55A has to be read harmoniously, and if so read, clearly spells out the powers of SEBI and the Central Government. Tribunal also considered the scope of Section 28(1)(b) of the SCR Act and held that the exclusion in the said Act is not available to OFCDs issued by the Appellants. Tribunal concluded that SEBI has jurisdiction Under Section 55A(b) and the Saharas had flouted the mandatory provisions of Section 73(1) of the Companies Act and the consequences provided under Sub-section (2) of Section 73 would, therefore, follow and SEBI had ample powers Under Sections 11, 11A and 11B of the SEBI Act to issue directions to refund the amounts to the investors with interest. Aggrieved by the said order, SIRECL filed C.A. No. 9813 of 2011 and SHICL filed C.A. No. 9833 of 2011 before this Court Under Section 15Z of the SEBI Act which came up for admission on 28.11.2011 and the direction issued to refund sum of Rs. 17,400 crores, on or before 28.11.2011, was extended. This Court also passed the following order:

By the impugned order, the Appellants have been asked by SAT to refund a sum of Rs. 17,400/- crores approximately on or before 28th November, 2011. We extend that period upto 9th January, 2012.

In the meantime, we are directing the Appellants to put on affidavit, before the next date of hearing, the following information:

(a) Application of the funds, which they have collected from the Depositors;

(b) Networth of the Companies which have received these deposits;

(c) Particulars of assets of the said Companies against which the liability has been created. For that purpose, the Appellants will produce the requisite financial statements consisting of the Balance Sheet and Profit and Loss Account of the year ending 31st March, 2011 and the Statement of Account upto 30th November, 2011;

(d) The Affidavit will indicate how the said Compnies seek to secure the liabilities which the Companies have incurred and how they will protect the debenture holders;

(e) If returns have been filed under Income Tax Act, 1961, the same may be annexed to the Affidavit to be filed.

25. civil appeals later came for admission on 9.1.2012 and the interim order granted was extended. As directed, Additional Affidavit with certain documents were filed by both the Appellants on 20.6.2012, wherein specific reference was made to the affidavit dated 14.9.2011 filed by Saharas before the SAT, the details of which were given in a chart form, which is as follows:

SIRECL SHICL
Date of commencement of issue 25.4.2008 Date of commencement of issue 20.11.2009
Total amount collected till April 13, 2011 Rs. 19,400.87 Crs Total amount collected till April 13, 2011 Rs. 6,380.50 Crs
Total Rs. 25,781.37 Crs
Less: Premature redemption Rs. 1,744.34 Crs (11.78 lakh investors) Less: Premature redemption Rs. 7.30 Crs (5,306 investors)
Total Rs. 1,751.64 (11.78 Lakh investors)
Balance on August 31, 2011 Rs. 17,656.53 Crs Balance on August 31, 2011 Rs. 6,373.20 Crs
Total Rs. 24,029.73 Crs.

Total no. of investors

Total till April 13, 2011 (in lakhs) Balance as on August 31, 2011 (in Lakhs) Total till April 13, 2011 (in Lakhs) Balance as on August 31, 2011 (in Lakhs)
Abode Bond 70.94 70.65 Income Bond 1.45 1.44
Nirman Bond 25.44 14.12 Multiple Bond 30.46 30.45
Real Estate Bond 136.47 136.3 Housing Bond 43.23 43.19
Total 232.85 221.07 Total 75.14 75.08
Total till April 13, 2011 (in Lakhs) Balance as on August 31, 2011 (in Lakhs)
Total 307.99 296.15

26. Shri Fali S. Nariman, learned Senior Counsel appearing for SIRECL formulated several questions of law which, according to the senior Counsel, arise out of the order passed by the Tribunal. learned Senior Counsel submitted that Section 55A of Companies Act confers no power on SEBI to administer the provisions of Sections 56, 62, 63 and 73 of the Companies Act of an unlisted company or to adjudicate upon the alleged violation of those provisions, that too without framing any Regulations Under Section 642(4) of the Companies Act. learned Senior Counsel also pointed out that Sections 11, 11A and 11B of the SEBI Act empower SEBI to protect the interest of investors but not to administer the provisions of the Companies Act so far as an unlisted public company is concerned, consequently, when exercising powers under SEBI Act and/or SEBI Regulations, SEBI is not empowered to administer the provisions of the Companies Act relating to the issue and transfer of securities and non-payment of dividends, so far as an unlisted public company is concerned.

27. learned Senior Counsel also submitted that the powers of SEBI to administer the aforesaid provisions are limited to the listed companies and public companies which intend to get their securities listed on any recognized stock exchange in India and, in any other case, the power of administration of Sections 56, 62, 63 and 73 with respect to OFCDs is vested only with the Central Government and not with SEBI. Reference was also placed on the explanation to Section 55A and submitted that all powers relating to “all other matters” i.e. matters other than those relating to the issue and transfer of securities and non-payment of dividends, including the matter relating to prospectus would be exercised by the Central Government or the RoC and not SEBI.

28. learned Senior Counsel also highlighted the conspicuous omission of Section 60B in Section 55A which, according to the senior Counsel, indicates that SEBI cannot administer in case of any violation of Section 60B. Even otherwise, learned Senior Counsel submitted that, as a matter of legislative drafting, Section 60B could not have been intended to be included in the parenthetical clause and, therefore, could not be said to be covered by Section 55A. learned Senior Counsel also submitted that even if Section 60B falls in between Under Sections 59 to 81, Saharas either through their conduct or action depicted no intention to have their securities listed on any stock exchange in India so as to fall Under Section 55A(b) of the Act. learned Senior Counsel also referred to Section 60B(9) of the Act and submitted that the same would apply only in the case of listed company.

29. Learned Counsel also referred to the Unlisted Public Companies (Preferential Allotment) Rules, 2003 (for short ‘2003 Rules’) and submitted that unlisted public companies, for the first time, could make preferential allotment through private placement pursuant to a special resolution passed under Sub-section (1A) of Section 81 of the Companies Act, if authorized by its Article of Association. Section 60B, it was pointed out, contemplated an unlisted company filing a RHP even though OFCDs were not offered or to be offered to the public. Further, it was also pointed out that, at best, the present case falls Under Section 55A(c) and it is amenable only to the jurisdiction of the Central Government and that SEBI has no jurisdiction to administer, inter alia, the provisions of Sections 56, 62, 63 and 73 of the Companies Act, so far as unlisted public companies are concerned.

30. Shri Nariman also submitted that SEBI has committed a serious error in holding that the SIRECL had contravened the provisions of SEBI Act, DIP Guidelines read with ICDR 2009. learned Senior Counsel pointed out that DIP Guidelines were expressly repealed by ICDR 2009 and even if the DIP Guidelines apply, the same would not cover the preferential issue of OFCDs by Saharas under 2003 Rules read with Section 81(1A) of the Companies Act. Learned Counsel also pointed that ICDR 2009 would apply to the OFCDs issued by SIRECL by private placement and when it comes to regulating preferential allotment by private placement by unlisted public companies, the same is governed by 2003 Rules and only in case of preferential allotment by listed public companies, ICDR 2009 would apply.

31. Shri Nariman also contended that there was no statutory requirement for SIRECL to list OFCDs on any recognized stock exchange under the provisions of 2003 Rules. Further, it is also contended that the above rules do not have any deeming provisions for treating any issue as a public issue on the basis of number of persons to whom offers were made or on the basis of any other criteria. learned Senior Counsel also submitted that the proviso of Section 67(3) of the Companies Act, added by the Companies Amendment Act, 2000 (w.e.f. 13.12.2000), was also not attracted to 2003 Rules, hence it was urged that, in view of the statutory rules of 2003, preferential allotment by unlisted public companies by private placement was provided for and permitted without any restriction on numbers as per the proviso to Section 67(3) and without requiring listing of OFCDs on any recognized stock exchange. Shri Nariman also pointed out that it is only from 14.12.2011, the 2003 Rules were amended, whereby the definition of preferential allotment was substituted, without disturbing or amending Rule 2 of 2003 Rules. learned Senior Counsel submitted that by the amended definition of Preferential Allotment by the Unlisted Public Companies (Preferential Allotment) Rules, 2011 (for short ‘2011 Rules’), hybrid instrument stands specifically included. Consequently, the first proviso to Section 67 of the Companies Act was specifically made applicable.

32. learned Senior Counsel also contended that after the insertion of the definition of “securities” in Section 2(45AA) as including hybrid and the definition of “hybrid” in Section 2(19A) of the Companies Act, the provisions of Section 67 were not applicable to OFCDs which have been held to be “hybrid”. Various bonds issued by Saharas, learned Senior Counsel submitted, were never shares or debentures but hybrids, a separate and distinct class of securities. Section 67, it was submitted, speaks only of shares and debentures and not hybrids and, therefore, Section 67 would not apply to OFCDs issued by SIRECL.

33. Learned Counsel also referred to various terms and conditions of the Abode Bond, Nirmaan Bond and Real Estate Bond and submitted that they are convertible bonds falling with the scope of Section 28(1)(b) of the SCR Act, in view of Section 9(1) and Section 9(2)(m) of that Act and are not listable securities within the meaning of Section 2(h) of the SCR Act and hence there is no question of making applications for listing Under Section 73(1) of the Companies Act. learned Senior Counsel also submitted that three Registrars of Companies – West Bengal, Kanpur, and Mumbai – had, at different point of time, registered the RHPs at different places over a period of nine years. Registrars of Companies could have refused registration Under Section 60(3) of the Companies Act as well, if there was non-compliance of the provisions of the Companies Act. Learned Counsel pointed out that having not done so, it is to be presumed that private placement Under Section 60B of the Companies Act was permissible and hence no punitive action including refund of the amounts is called for and the order to that effect be declared illegal.

34. Shri Gopal Subramanium, learned Senior Counsel appearing on behalf of SHICL submitted that any act of compulsion on Saharas to list their shares or debentures on a stock exchange would make serious inroad into their corporate autonomy. learned Senior Counsel submits that the concept of autonomy involves the rights of shareholders, their free speech, their decision making and all other factors. To highlight the concept of corporate autonomy, learned Senior Counsel placed reliance on the Constitution Bench judgment of this Court in Life Insurance Corporation of India v. Escorts Limited and Ors. MANU/SC/0015/1985 : (1986) 1 SCC 264. learned Senior Counsel submitted that SEBI’s insistence that Saharas ought to have listed their shares or debentures on a recognized stock exchange in accordance with Section 73 of the Companies Act would necessarily expose shareholders and debenture holders to the risks of trading in shares and would also compel unlisted companies to seek financial help from investment bankers. learned Senior Counsel placed reliance on the judgment of this Court in Union of India v. Allied International Products Limited and Anr. MANU/SC/0043/1970 : (1970) 3 SCC 594 and submitted that Section 73(1) was enacted with the object that the subscribers would be ensured the facility of easy convertibility of their holdings when they have subscribed to the shares on the representation in the prospectus that an application for quotation of shares had been or would be made. learned Senior Counsel also made reference to the Cohen Committee Report (U.K.) and submitted that the same would bring about the true purport of Section 73, that it is the obligation on the company which has promised the members of the public that their shares would be marketable or capable of being dealt with in the stock exchange. learned Senior Counsel made reference to Section 51 of the Companies Act, 1948 (U.K.) and the judgment in In Re. Nanwa Gold Mines Ltd. (1955) 1 WLR 1080 and submitted that the object of Section 51 was to protect those persons who had paid money on the faith or the promise that their shares would be listed. learned Senior Counsel pointed out that Sub-section (1) of Section 73 is qualified by the term “intending”, which means Section 73(1) deals with companies that want to issue new shares or debentures to be listed, and which have declared to the investors that they intend to have those shares or debentures dealt with on the stock exchange. In such a case, Section 73(1) obliges those companies to make an application to one or more recognized stock exchanges for permission for the shares or debentures to be dealt with on the stock exchange or each such stock exchange, before the issue of a prospectus. learned Senior Counsel submitted that the role of Section 73(1) is, therefore, narrow and limited and those companies which do not intend to list their securities on a stock exchange are not covered by this provision. learned Senior Counsel submitted that the expression “to be dealt in on stock exchange” occurring in the heading of Section 73 must be read in the text of that Section, to reach the understanding that it is not merely the invitation of shares or debentures to the public which warrants the application of Section 73, but it is only when such companies intend to have their shares or debentures listed on the stock exchange that the prescription Under Section 73 shall apply. learned Senior Counsel submitted that the company’s freedom to contract under the Constitution as well as the Law of Contracts needs to be safeguarded and that persons who belong to the lower echelons of society, while it is necessary that they must never be duped, ought not be prevented from investing in measures which would add to their savings. learned Senior Counsel pointed out that to deprive them of such an opportunity would be a serious infraction.

35. learned Senior Counsel referring to Section 64 of the Companies Act submitted that the expression “deemed to be prospectus” indicates that whenever shares or debentures which are allotted can be offered for sale to the public, such a document is deemed to be a prospectus and has legal consequences. Section 73, according to the learned Senior Counsel, operationalizes the intention of a company which is allotment of shares with a view to sell to the public as contemplated in Section 64 of the Act. So, while Section 64 refers to the documents containing such an offer as a prospectus, Section 73 requires the company to make an application before the issue of the prospectus. learned Senior Counsel also submitted that mere filing of prospectus is not reflective of the intention to make a public offer. The purpose of issue of prospectus is to disclose true and correct statements and it cannot be characterized as an invitation to the public for subscription of shares or debentures. learned Senior Counsel also pointed out that the filing of the prospectus or the administration of Section 62 on account of misstatement in a prospectus will be undertaken by the Central Government on account of explanation to Section 55A of the Companies Act. learned Senior Counsel submitted that the manner in which a listed public company will offer its shares would be determined under the SEBI Act as well as the SEBI Regulations. learned Senior Counsel submitted that Section 60B of the Companies Act, as such, does not presuppose or prescribes an intention to list. Section 60B enables a prospectus to be filed where a company is not a listed public company. learned Senior Counsel pointed out that IM or RHPs can be filed although an offer of shares may be made by way of private placement or to a section of the public or even to the public, but yet without intending it to be listed. learned Senior Counsel, therefore, pointed out that the stand of SEBI that where there is an offer of shares or debentures by way of prospectus, it amounts to an offer of shares to the general public and, therefore, to be dealt with on a stock exchange, is completely flawed and that Section 73 cannot be interpreted to impinge upon the corporate autonomy of the company.

36. Shri Subramanium also submitted that Section 67 of the Companies Act does not imply that a company’s offer of shares or debentures to fifty or more persons would ipso facto become a ‘public issue’ or a ‘private offer’. learned Senior Counsel submitted that in order to determine whether an offer is meant for the public at large or by way of private placement, what is relevant is the intention of the offeror. In other words, the numbers are irrelevant, submits the counsel, it is only the intention to offer to a select or identified group which will make the offer a private placement. learned Senior Counsel also submitted that the proviso to Sub-section (3) of Section 67 of the Companies Act would be appreciated in that background. learned Senior Counsel also submitted that private placement is not authorized by interpretative provision in Section 67(3) but is in fact the will of the company reflected in a Special Resolution Under Section 81(1A) of the Companies Act which deals with “preferential allotment”. learned Senior Counsel submitted that when there is a private placement, irrespective of the number, then the offer of shares need not take place through a prospectus but can even take place through a letter or a memorandum.

37. learned Senior Counsel submitted that the Central Government correctly understood the position while framing the 2003 Rules. learned Senior Counsel also submitted that SAT has no jurisdiction over unlisted public companies either Under Section 55A of the Companies Act or under the SEBI Act. learned Senior Counsel referred to the various provisions conferring powers on SEBI under the SEBI Act as well as the limited powers conferred on SEBI under the Companies Act. learned Senior Counsel pointed out that SEBI is not concerned with the securities of all the companies, nor is it responsible for overseeing the sources of capital in the country, except that which is in the securities market. learned Senior Counsel also pointed out that compulsory listing of scrips is ‘unheard of’ in any jurisdiction. It was further submitted that it is impossible to conceive that a regulator or State or Parliament could actually intend that there would be a mandatory exposure of business to vicissitudes of fortune being swept by waves in the stock market.

38. learned Senior Counsel elaborately referred to the various provisions of the SEBI Act in that context. learned Senior Counsel also submitted that the Central Government and SEBI cannot approbate or reprobate regarding their jurisdiction over the unlisted public companies. learned Senior Counsel pointed out that SEBI has categorically stated on oath before various Forums that an unlisted public company was not within its jurisdiction if that company did not intend to list their shares on the stock exchange. Later, SEBI has unfairly changed its stand before the other Forums. learned Senior Counsel referred to the stand taken by SEBI before the Bombay High Court in Kalpana Bhandari v. Securities and Exchange Board of India MANU/MH/1065/2003 : (2005) 125 Comp. Cas 804 (Bom.) as well as Delhi High Court judgment in Society for Consumers and Investment v. Union of India and Ors. passed in Writ Petition No. 15467 of 2006. Reference was also made to the judgment of the Kerala High Court in Writ Petition (C) No. 19192 of 2003 [Kunamkulam Paper Mills Limited and Ors. v. Securities and Exchange Board of India and Ors.] learned Senior Counsel pointed out that SEBI has taken contradictory stand in various forums rather than properly appreciating and applying the provisions of SEBI Act and the Companies Act.

39. learned Senior Counsel also submitted that OFCDs issued by the Saharas are outside the purview of the SCR Act as well as the SEBI Act. learned Senior Counsel referred to Section 2(19A) of the Companies Act defining the term “hybrid” and also the definition of “securities” Under Section 2(45AA) and submitted that the legislative intent was to treat “hybrids” differently from either shares or debentures and thus exclude from the purview of Section 67, the offer of hybrids. learned Senior Counsel submitted that OFCDs issued by Saharas which are convertible debentures would fall within the meaning of “any convertible bond” Under Section 28(1)(b) of SCR Act and, therefore, would stand excluded from the purview of SCR Act.

40. learned Senior Counsel also submitted that SEBI has exceeded its jurisdiction by acting contrary to and beyond this Court’s order dated 12.5.2011 passed in SLP(C) No. 11023 of 2011 and SLP(C) No. 13024 of 2011 and has conducted itself in a manner prejudicial to Saharas. Learned Counsel pointed out that the conduct of the regulator in the manner in which proceedings have been conducted raises serious doubts about SEBI functions. learned Senior Counsel pointed out that, apart from asserting jurisdiction in an erroneous manner, SEBI has no evidence of credible nature to show that Saharas had attempted to deceive or collect money from fictitious sources. Further, it was pointed out that there was no complaint from any investor and it originated on a complaint by a person who has no interest in Saharas. learned Senior Counsel also submitted that SAT’s direction of refund, in exercise of its powers Under Section 73(2) of the Companies Act, is erroneous. learned Senior Counsel, therefore, submitted that such a direction to refund the amount with interest is bad in law and liable to be quashed.

41. Shri Arvind P. Dattar, learned Senior Counsel appearing on behalf of SEBI, submitted that SEBI as well as SAT were fully justified in holding that SEBI has jurisdiction to administer the provisions contained Under Section 55A, so far as they relate to the issue and transfer of securities by Saharas. learned Senior Counsel pointed out that Saharas had paid up share capital of just Rs. 10 lakhs and virtually no assets and the companies had collected about Rs. 27,000 crores from about 3 crore subscribers, through unsecured OFCDs. learned Senior Counsel pointed out that Sections 55A, proviso to Section 67(3), Section 73 and other related provisions clearly bring out the intention of the Parliament, i.e. after 13.12.2000, even if an unlisted public company makes an offer of shares or debentures to fifty or more persons, it was mandatory to follow all the statutory provisions that would culminate in the listing of those securities. learned Senior Counsel pointed out that once the number reaches fifty, proviso to Section 67(3) applies and it is an issue to the public, attracting Section 73(1) and an application for listing becomes mandatory and, thereafter the jurisdiction vests with SEBI.

42. learned Senior Counsel elaborately argued on the structure of Section 55A and the purpose and object of the parenthetical clause and the brackets employed in the Sub-section. learned Senior Counsel referred to the word “including” in Section 55A and submitted that the word has been used to emphasize and to make it abundantly clear that Sections 68A, 77A and 80A will be administered by SEBI even though they do not primarily deal with the issue and transfer of securities and non-payment of dividend. learned Senior Counsel pointed out that if Section 60B is excluded from the main part of Section 55A, it will stand excluded for listed companies as well which is a consequence never envisaged or intended by the Legislature. learned Senior Counsel also submitted on a reference to Sections 59 to 81 that Parliament intended to include all sections in that range. learned Senior Counsel pointed out that Section 55A also applies to companies which “intend to” get their securities listed and that on a combined reading of the proviso to Section 67(3) and Section 73(1), since Saharas had made an offer of OFCDs to more than forty nine persons, the requirement to make application for listing became mandatory and SEBI has the necessary jurisdiction even though Saharas had not got their securities listed on a stock exchange. learned Senior Counsel also stated that, the plea, that Saharas never wanted or intended to list their securities, hence escaped from the rigor of Sections 55A, 60B, 73 etc. of the Companies Act, cannot be sustained. learned Senior Counsel submitted that Saharas should be judged by what they did, not what they intended. Reference was placed on a Privy Counsel judgment in Young v. Bristol Aeroplane Company Limited 1945 PC 163 (HL). learned Senior Counsel also made elaborate arguments on the explanation to Section 55A as well.

43. Shri Dattar also submitted that DIP Guidelines have statutory force since they are made specifically under the powers granted to SEBI Under Section 11 of the SEBI Act. learned Senior Counsel pointed out that DIP Guidelines were implemented by SEBI with regard to all listed companies and unlisted companies which made a public offer, until it was replaced by ICDR 2009. learned Senior Counsel submitted that the issue of OFCDs was in contradiction of Section 73(1) and the applicable DIP Guidelines/ICDR 2009, consequently, SEBI was obliged to pass orders for refunding the amount that was collected by Saharas.

44. learned Senior Counsel submitted that Under Section 11(1) of the SEBI Act, SEBI is duty bound to protect the interest of investors in securities either listed or which are required by law to be listed, and Under Section 11B, SEBI has the power to issue appropriate directions, in the interests of investors in securities and the securities market, to any person who is associated with securities market. learned Senior Counsel pointed out that 2003 Rules are not applicable after 2003, to any offer or shares or debentures to more than forty nine persons and the rules were amended in the year 2011 to make explicit what was already implicit, but the statutory mandate in this regard was made clear w.e.f. 13.12.2000, and that the 2003 Rules will be subject to the statutory provisions of the proviso to Sections 67(3) and 73(1).

45. learned Senior Counsel also submitted that Saharas’ basic assumption that they are covered by 2003 Rules is erroneous. Learned Counsel pointed out that a public issue would not become a preferential allotment by merely labeling it as such and the facts on record show that the issue could not be termed as a preferential allotment. Preferential allotment, Learned Counsel submits, is made by passing a special resolution Under Section 81(1A) and is an exception to the rule of rights issue that requires new shares or debentures to be offered to the existing members/holders on a pro rata basis. learned Senior Counsel pointed out that once the offer is made to more than forty nine persons, then apart from compliance with Section 81(1A), other requirements regarding public issues have to be complied with.

46. Shri Dattar further submitted that after insertion of the proviso to Section 67(3) in December, 2000, private placement as allowed Under Section 67(3) was restricted up to forty nine persons only and 2003 Rules were framed keeping this statutory provision in mind and were never intended for private placement/preferential issue to more than forty nine persons and the amendments to these rules made in the year 2011 merely made the said legal position under the 2003 Rules, explicit. Shri Dattar also submitted that OFCDs are debentures by name and the nature and the definition of ‘debenture’ as given Under Section 2(12) of the Companies Act includes any other securities. learned Senior Counsel submitted that the securities as defined in Section 2(45AA) of the Companies Act includes hybrids and, therefore, hybrids fall in the definition of debentures and are amenable to the provisions of Sections 67 and 73 of the Companies Act.

47. Shri Dattar also submitted that Section 28(1)(b) of SCR Act does not apply to convertible debentures and the plea raised by Saharas is also untenable because the interpretation placed on Section 28(1)(b) would be in contradiction to the mandatory provisions of Section 73(1) and the proviso to Section 67(3) of the Companies Act. It was next submitted that if the convertible debentures are excluded from SCR Act, it would lead to a paradoxical situation because these debentures are required to be listed Under Section 73(1) but they cannot be listed in view of Section 28(1)(b). learned Senior Counsel submitted that SEBI has rightly claimed jurisdiction to administer the OFCDs, as it was obligatory on the part of Saharas to comply with the statutory requirements of the Companies Act, SEBI Act and SCR Act. Saharas, learned Senior Counsel submits, had no right to collect Rs. 27,000 crores from three crore investors without complying with any regulatory provisions, except filing of RHP with RoCs at Kanpur and Mumbai and that SEBI was justified in directing refunding of amount with 15% interest.

48. Shri Harin P. Rawal, Additional Solicitor General appearing on behalf of Union of India placed detailed written submissions, supporting the stand taken by SEBI. Powers conferred on SEBI under the SEBI Act as well as the Companies Act have been elaborately dealt with in the written submissions filed by him, pointing out that there is no conflict of jurisdiction of SEBI or RoC/MCA while enforcing the provisions of SEBI Act and the Companies Act. It was pointed out that there is no overlap, much less any repugnancy or conflict between provisions of SEBI Act and those of Section 55A of the Companies Act and the Sections enumerated thereunder. It was pointed out that Sections 11A and 11B of SEBI Act should be read as provisions additional to Section 55A. Reference was also made to Section 32 of the SEBI Act and it was submitted that the provisions of SEBI Act are “in addition to” and “not in derogation of” the provisions of any other law, unless the provisions of SEBI Act are wholly inconsistent with the Companies Act, the provisions of both the SEBI Act and the Companies Act should be harmonized and both sets of provisions given operation. Further, it was pointed out that Sections 11, 11A, 11B of SEBI Act are special law and Section 55A and the enumerated sections of the Companies Act are general law. It was further pointed out that Sections 11(2A), 11(4) and 11A of SEBI Act were enacted (or amended) in 2002 and those provisions did not limit SEBI’s powers to only regulating listed companies. Moreover, those provisions were predicated upon the continued operation of Sections 11 and 11B even to unlisted companies and, consequently, it cannot be said that the Parliament intended Section 55A of the Companies Act to impliedly repeal the powers of SEBI in relation to unlisted companies Under Sections 11 and 11B of SEBI Act.

Supreme Court as a court of appeal

49. Saharas have filed these appeals, Under Section 15Z of the SEBI Act, raising various questions of law which they claim arise out of the order of the Tribunal. Section 15Z reads as follow:

Appeal to Supreme Court:

15Z. Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order:

Provided that the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient cause from filing the appeal within the said period allow it to be filed within a further period not exceeding sixty days.

50. The Securities Appellate Tribunal (for short ‘SAT’) which exercises powers Under Section 15T, it is well settled, is the final adjudicator of facts. Under Sub-section (3) of Section 15U of SEBI Act, every proceeding before the Tribunal shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purpose of Section 196 Indian Penal Code. Under Section 15U, the Tribunal, in exercise of its powers and in discharge of its functions, shall not be bound by the procedure laid down by the Code of Civil Procedure, but shall be guided by the principles of natural justice. The Tribunal has, for the purpose of discharging its functions, the same powers as are vested in a Civil Court under the Code of Civil Procedure. Broadly speaking, the Tribunal has trappings of a court in the sense that it has to determine the appeal placed before it judicially and give a fair hearing to the parties, to accept evidence and also order for inspection and discovery of documents, compel attendance of witnesses and to pass a reasoned order which gives finality to the dispute, subject to the appeal to Supreme Court Under Section 15Z of the Act. Findings of fact generally fall in the domain of the Tribunal provided it stays within its jurisdiction. Situations may also be there, where the evidence taken as a whole is not reasonably capable of supporting the findings recorded by the Tribunal or the Tribunal could have reasonably recorded that conclusion. Questions repeatedly posed in this case before SEBI as well as before SAT, were with regard to the nature of OFCDs issued by Saharas. RHPs produced had disclosed that Saharas did not intend the proposed securities to be listed on any stock exchange and that the issues consisted of unsecured OFCDs with an option to convert the same to equity shares. Saharas had also disclosed that the issue was made on a private placement basis and that OFCDs would be offered also to such persons to whom IM would be circulated. But the fact remains that it was circulated to more than three crore people inviting them to subscribe. The same was circulated through ten lac agents and more than 2900 branch offices and Saharas had a capital base of only 10 lakhs with no other assets or reserves and was a loss making company and had collected nearly 27,000 crores by way of private placement through unsecured OFCDs redeemable/convertible after 48/60/120 months. Fact finding authorities repeatedly asked for information regarding the names, addresses of investors in OFCDs and the amounts subscribed by them. SIRECL claimed that it had furnished to SEBI a separate CD giving the details of names of investors, the amount invested etc. along with the password and keys, along with its letter dated 19.4.2011 which, according to SIRECL, was never opened or checked. SEBI, as already indicated, has been vested with the powers of a Civil Court under Code of Civil Procedure, as per Sub-section (3) of Section 11 of the SEBI Act. Under Section 11C, the Board has also been vested with the powers to order investigation to examine whether any person associated with securities market has violated any provision of the Act or the rules or the Regulations made or direction issued by the Board.

51. Saharas, along with Vol III (additional documents), filed before this Court, gave certain details of the persons who have invested. Documents produced before us and before the fact finding authorities do not show the relationship Sahara Group had with the investors. Claim of Saharas was that the investors were their friends, associated group companies, workers/employees and other individuals who were associated/affiliated or connected with Sahara Group. Saharas, in the bonds, sought for a declaration from the applicants that they had been associated with Sahara Group. No details had been furnished to show what types of association the investors had with Sahara Group. Bonds also required to name an introducer, whose job evidently was to introduce the company to the prospective investor. If the offer was made to those persons related or associated with Sahara Group, there was no necessity of an introducer and an introduction. Burden of proof is entirely on Saharas to show that the investors are/were their employees/ workers or associated with them in any other capacity which they have not discharged. Fact finding authorities have clearly held that Saharas had not discharged their burden which is purely a question of fact. Facts are elaborately discussed by SEBI (WTM) and SAT, hence we do not want to burden this judgment with those factual details. I find no perversity or illegality in those findings which call for interference by this Court sitting Under Section 15Z of the SEBI Act. I, therefore, fully concur with the Tribunal that the money collected by Saharas through their RHPs dated 13.3.2008 and 6.10.2009, through the OFCDs, were from the public at large and the same would amount to collection of money by way of issue of securities to the public, a finding which calls for no interference by this Court sitting Under Section 15Z of the SEBI Act.

52. I will now examine various questions of laws raised before us. Following are some of the cardinal issues that have come up for consideration, apart from other incidental issues and ancillary issues, which also I may deal with:

QUESTIONS of LAW FRAMED

(a) Whether SEBI has jurisdiction or power to administer the provisions of Sections 56, 62, 63, 67, 73 and the related provisions of the Companies Act, after the insertion of Section 55A(b) w.e.f. 13.12.2000, by the Companies (Amendment) Act, 2000, so far as it relates to issue and transfer of securities by listed public companies, which intend to get their securities listed on a recognized stock exchange and public companies which have issued securities to fifty persons or more without listing their securities on a recognized stock exchange;

(b) Whether the public companies referred in question No. (a) is legally obliged to file the final prospectus Under Section 60B(9) with SEBI and whether Section 60B, as it is, falls Under Section 55A of the Companies Act;

(c) Whether Section 67 of the Companies Act implies that the company’s offer of shares or debentures to fifty or more persons would ipso facto become a public issue, subject to certain exceptions provided therein and the scope and ambit of the first proviso to Section 67(3) of the Act, which was inserted w.e.f. 13.12.2000 by the Companies (Amendment) Act, 2000;

(d) What is the scope and ambit of Section 73 of the Companies Act and whether it casts an obligation on a public company intending to offer its shares or debentures to the public, to apply for listing of its securities on a recognized stock exchange once it invites subscription from fifty or more persons and what legal consequences would follow, if permission under Sub-section (1) of Section 73 is not applied for listing of securities;

(e) What is the scope and ambit of DIP (Guidelines) and ICDR 2009 and whether Sahara had violated the various provisions of the DIP (Guidelines) and ICDR, 2009, by not complying with the disclosure requirements or investor protection measures prescribed for public issue under DIP (Guidelines) and ICDR, 2009, thereby violating Section 56 of the Companies Act;

(f) Whether Rules 2003 framed by the Central Government Under Section 81(1A) of the Companies Act read with Section 642 of the Act are applicable to any offer of shares or debentures to fifty or more as per the first proviso to Sub-section (3) of Section 67 of the Companies Act and what is the effect of UPC (PA) Amendment Rules, 2011 and whether it would operate only prospectively making it permissible for Saharas to issue OFCDs to fifty or more persons prior to 14.12.2011;

(g) Whether after the insertion of the definition of ‘securities’ in Section 2(45AA) as “including hybrids” and after insertion of the separate definition of the term “hybrid” in Section 2(19A) of the Act, the provision of Section 67 would apply to OFCDs issued by Saharas and what is the effect of the definition Clause 2(h) of SCR Act on it;

(h) Whether OFCDs issued by Saharas are convertible bonds falling within the scope of Section 28(1)(b) of the SCR Act, therefore, not ‘securities’ or, at any rate, not listable under the provisions of SCR Act;

(i) Whether SEBI can exercise its jurisdiction Under Sections 11(1), 11(4), 11A(1)(b) and 11B of the SEBI Act and Regulation 107 of ICDR 2009 over public companies who have issued shares or debentures to fifty or more, but have not complied with the provision of Section 73(1) by not listing its securities on a recognized stock exchange.

(j)Scope of Section 73(2) of the Companies Act regarding refund of the money collected from the Public;

(k) Civil and Criminal liability under the various provisions of the Companies Act.

53. Much of the arguments on either side centered round the scope and interpretation of various provisions of the Companies Act, SEBI Act and the rules and Regulations framed thereunder, relating to matters concerning the issue of securities, powers of SEBI, Central Government (MCA), RoC, which are being discussed hereunder. Powers conferred on SEBI, Central Government, (MCA), RoC etc. under the Companies Act, SEBI Act also call for consideration.

Powers of SEBI, Central Government, (MCA), Registrar of Companies under the companies Act and SEBI Act:

54. The Companies Act, 1956 is a consolidation of the then existing laws, statutory rules and certain judgments laid down by the Courts in India and England. This Court in Commissioner of Income Tax, Gujarat v. Girdhardas and Company Private Limited MANU/SC/0129/1966 : AIR 1967 SC 795, noticed that the Companies Act, 1956 substantially incorporated the provisions of the English Companies Act, 1948. However, there has been considerable shift of principles and concepts after the formation of 1948 English Companies Act and those principles and concepts find a place in the later English Companies Act, 1985, followed by 1989 Act. Indian Companies Act, 1956 still remains static on various issues. No efforts have been made to incorporate universally accepted principles and concepts into our company law, hitherto. of late, however, some efforts have been made to carry on few amendments to the Companies Act, 1956, so also in the SEBI Act, 1992 and also by framing rules and Regulations like SEBI Rules, Regulations, so as to keep pace with the English Companies Act and related legislations. Instances are many where securities market have collapsed in England, USA, India etc. due to high-profile corporate fraud cases, leading to legislative intervention in various countries including India. For example, England faced a flood of speculative and fraudulent schemes of company flotation, a classic example is scheme formulated by the South Sea Company, which collapsed in 1720, which heralded the start of Security Law in England. Great Crash of New York in 1929 also contributed in equal measure apart from other high-profile corporate fraud cases in U.S.A. Various ventures, undertakings by the companies registered under England Companies Act have their own impact on Securities Law as well. Prior to 1985, in England, the procedure to be followed by the companies for the issue of securities were mainly contained in the Companies Act, 1948, the Companies Act, 1980 and the Prevention of Fraud in Investment Act, 1958. Later, in England, the Companies Act, 2006 was enacted making detailed and important changes to the legal treatment of shares. Securities markets now stand controlled by the Financial Services and Market Act, 2000 (FSMA) in England, which has created the Financial Service Authority (FSA). Historical facts also show that fraudulent accounting and non-disclosure of information was root cause for collapse of Enron, Barings, World Com, BCCI etc. which put the reforms of corporate governance on the agenda in the United States.

55. India is also not an exception. Harshad Mehta, a Broker, was charged for diverting funds from the Bank to the tune of Rs. 4000 crores to stock brokers between 1991-92; Ketan Parekh Securities Scam in the year 2001 in which investors, it was reported, had lost heavily; so also the Banks in the UTI scam 2001, where it was reported that heavy funds were collected from small investors and money was used to fund large business houses and huge amounts were invested in junk bonds; Satyam Computers Scam of 2008, where it was reported that, over a number of years, Satyam Computer account was manipulated and money was raised through shares.

56. Both in England and India, it is well established, that the range of functions that may be performed by a company incorporated under the Companies Act is extremely wide. Public companies and private companies, functioning under the Companies Act, 2006 in England, the Companies Act, 1956 in India, have considerable social and economic importance, but public companies are more highly regulated than private companies. Private companies are not authorized to offer any securities to the public. FSMA in England generally deals with issue of securities to the public, including listing Rules, the Prospectus Rules, and continuing obligation contained in the Disclosure and Transparency Rules etc. The Companies Act, 1956 in India was enacted with the object to protect the interests of a large number of shareholders, safeguard the interests of the creditors to attain the ultimate ends of social and economic policy of the Government. Provisions have also been incorporated making provisions for prospectus, allotment and other matters relating to issue of shares and debentures etc. Parliament has also enacted the SEBI Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. SEBI was established in the year 1988 to promote orderly and healthy growth of the securities market and for investors’ protection. SEBI Act, Rules and Regulations also oblige the public companies to provide high degree of protection to the investor’s rights and interests through adequate, accurate and authentic information and disclosure of information on a continuous basis.

57. SEBI Act is a special law, a complete code in itself containing elaborate provisions to protect interests of the investors. Section 32 of the Act says that the provisions of that Act shall be in addition to and not in derogation of the provisions of any other law.

58. SEBI Act is a special Act dealing with specific subject, which has to be read in harmony with the provisions of the Companies Act, 1956. In fact, 2002 Amendment of the SEBI Act further re-emphasize the fact that some of the provisions of the Act will continue to operate without prejudice to the provisions of the Companies Act, qua few provisions say that notwithstanding the Regulation and order made by SEBI, the provisions of the Companies Act dealing with the same issues will remain unaffected. I only want to highlight the fact that both the Acts will have to work in tandem, in the interest of investors, especially when public money is raised by the issue of securities from the people at large.

59. Powers and functions of SEBI are dealt with in Chapter IV of the SEBI Act. Section 11 states that, subject to the provisions of the Act, it shall be the duty of SEBI to protect the interests of investors in securities and to promote the development of and to regulate the securities market. SEBI is also duty bound to prohibit fraudulent and unfair trade practices relating to securities markets, prohibiting insider trading in securities etc. Section 11A authorizes SEBI to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities which read as follows:

11A (1) Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956), the Board may, for the protection of investors, –

(a)specify, by Regulations –

(i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and

(ii) the manner in which such matters shall be disclosed by the companies;

(b) by general or special orders –

(i) prohibit any company from issuing prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities;

(ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued.

(2) Without prejudice to the provisions of Section 21 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Board may specify the requirements for listing and transfer of securities and other matters incidental thereto.

Section 11B empowers the Board to issue directions which reads as follows:

11B. Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person,

it may issue such directions,-

(a) to any person or class of persons referred to in Section 12, or associated with the securities market; or

(b) to any company in respect of matters specified in Section 11A, as may be appropriate in the interests of investors in securities and the securities market.

60. I find all the above quoted provisions are inter-related and inter-connected and the main focus is on Investor Protection Power is also conferred on SEBI Under Section 11C to conduct investigation if the transactions are being dealt with in a manner detrimental to the investors or securities market. Mandatory listing of securities in case of offer to public would cast an obligation on the issuers to ensure the transparency of information and other continuing obligations to provide information by means of prospectus and to follow disclosure provisions.

61. I may, in the above background, examine the various provisions of the Companies Act which cast a legal obligation on the public companies which offer securities to the public and the SEBI’s power or jurisdiction to administer those companies and the legal requirement to be followed while making offer of securities to the public. When we interpret and deal with the provisions like Section 55A, 60B, 67, 73 etc. of Companies Act, we have to always bear in mind the various provisions of the SEBI Act, especially Sections 11, 11A, 11B, 11C, 32 etc. because as we have already indicated, those provisions shall be in addition to and not in derogation of the provisions of the Companies Act.

62. I may straightway deal with the first question posed on the jurisdiction of SEBI over various provisions of the companies Act in the case of public companies, whether listed or unlisted, when they issue and transfer securities.

63. Section 55A, the scope of which has been extensively argued, is given below for easy reference:

55A. Powers of Securities and Exchange Board of India.– The provisions contained in Sections 55 to 58, 59 to 81, (including Sections 68A, 77A and 80A)108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall,

(a) in case of listed public companies;

(b) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India, be administered by the Securities and Exchange Board of India; and

(c) in any other case, be administered by the Central Government.

Explanation.–For the removal of doubts, it is hereby declared that all powers relating to all other matters including the matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of ir-redeemable preference shares shall be exercised by the Central Government, Tribunal or the Registrar of Companies, as the case may be.

64. Section 55A was inserted in the Act by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000. Clauses (v) to (x) of the Statement of Objects and Reasons give an indication of the intention of the Legislature. Clauses (v) and (x) read as follows:

Clause (v) – to provide that the Securities and Exchange Board of India be entrusted with powers with regard to all matters relating to public issues and transfers including power to prosecute defaulting companies and their directors.

(x) to provide that any offer of shares or debentures to more than 50 persons shall be treated as a public issue with suitable modification in the case of public financial institutions and non-banking financial companies.

(Emphasis supplied)

65. Legislative intention to entrust the powers with SEBI, with regard to all matters relating to public issues and transfers including power to prosecute default companies and their directors, is based on information derived from past and present experiences. Powers have been specifically conferred on SEBI because it was established under the SEBI Act, 1992, in order to protect the interest of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto. When we look at Section 55A it is clear that it deals with the following three categories:

(a) Listed public companies

(b) Public companies which intend to get their securities listed on any recognized stock exchange in India; and

(c) “in any other case” that is, all other unlisted public companies, which do not make a public offer of securities and private companies.

66. Public companies which fall under categories (a) and (b) are to be administered by SEBI and with regard to various provisions mentioned in the first part of Section 55A, so far they relate to issue and transfer of securities and non-payment of dividend and rest of the matter be administered by the Central Government. Power of administration of Sections 56, 62, 63 and 73 with respect to issue of OFCDs lies with SEBI and not with the Central Government since they relate to issue of securities.

67. We shall now examine the structure of Section 55A and when we do that, we have to necessarily keep in mind the object and purpose of that section, the intention of the Legislature and the role and function to be performed by the specialized forum, SEBI, created by the SEBI Act. Powers conferred on SEBI Under Section 11A to protect the interest of investors that too without prejudice to the provisions of the Companies Act, may also be borne in mind when we interpret Section 55A, as already indicated. Provisions which relate to issue and transfer of securities and nonpayment of dividend have to be administered by SEBI, a legal obligation cast on SEBI. Section 55A specifically refers to Sections 55 to 58 and Sections 59 to 81 with an emphasis to Sections 68A, 77A and 80A within brackets. Specific reference has been made to Sections 108, 109, 110 and Sections 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207. The Original Companies (Second Amendment) Bill of 1999 [Bill No. 139 of 1999] did not have the parenthetical clause in Section 55A (i.e. including Sections 68A, 77A and 80A) which was introduced as corrigendum before the leave was sought and granted to introduce the Bill in the Lok Sabha and with this corrigendum the bill was passed in the Lok Sabha on 27.11.2000 and then on 30.11.2000 by the Rajya Sabha and later assented by the President. Contention was, therefore, raised that when the Bill was introduced it was provided that Sections 59 to 81 were to be administered by SEBI, in respect of listed public companies and companies intended to get their securities listed in a stock exchange. But, it was pointed out, that Sections in between Sections 59 to 81, which had letters ‘A’ or ‘B’ as a suffix, were not all intended to be covered by Section 55A, hence the necessity for the parenthetical clause added by a corrigendum, i.e. (including Sections 68A, 77A and 80A). Further, it was also contended that where provisions ending with the suffix ‘A’, ‘AA’ or ‘B’ were intended to be included in Sections 59 to 81, it was specifically so provided. Reference was made to Section 206A which finds a place in Section 55A. For the above, it was submitted by Saharas that Section 60B could not have been intended to be included in the parenthetical portions and could not be said to have covered by Section 55A.

68. All sections falling within Sections 55 to 58 of the Companies Act will fall under those sections. So far as Section 55A is concerned, it is the very Section which deals with powers of SEBI, Central Government, Tribunal, Company Law Board, Registrar of Companies etc. Reference to Sections 59 to 81 indicated that Parliament intended to include all sections in that range which takes in Sections 60B, 62, 63, 67, 73 etc. of the Companies Act. Section 67 is also a section of considerable importance because the expression “offer of shares or debentures to the public” finds a place in various sections of the Act, as well as the articles of a company. Further, the first proviso added to Section 67(3) vide the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000 is also of considerable bearing in determining whether a public company offering shares or debentures to the public has to list its securities on a recognized stock exchange. Expression ‘to’ clearly has a meaning i.e. everything in between or destination of an action. The meaning of the expression ‘to’ came up for consideration before this Court in Hindustan Lever Limited v. Ashok Vishnu Kate and Ors. MANU/SC/0077/1996 : (1995) 6 SCC 326. Further, the specific inclusion of Sections 68A, 77A and 80A in a bracket, would not mean the exclusion of all sections between in Sections 59 to 81 with suffix ‘A’ or ‘AA’ or ‘B’. The word ‘including’ used in the parenthetical clause is only to give emphasis to those sections. Lord Watson in Dilworth v. Commissioner of Stamps (1999) AC 99 said that the word ‘include’ is very generally used in interpretation clause in order to enlarge the meaning of words or phrases occurring in the body of the Statute and, when it is so used, these words and phrases must be construed as comprehending, not only things they signify according to their natural import, but also those things which the interpretation clause declares that they shall include.” In Delhi Judicial Services Association v. State of Gujarat MANU/SC/0478/1991 : AIR 1991 SC 2176, the expression used in Article 129 of the Constitution i.e. including the power to punish for contempt of itself which was interpreted by the Court stating that the expression ‘including’ has been interpreted by Courts to extend and widen the scope of power. Giving emphasis to Sections 68A, 77A and 80A does not mean the exclusion of all such similar sections.

69. Legislature, in its wisdom, thought some emphasis has to be given to Sections 68A, 77A and 80A because all those sections provide certain offences to be punishable with imprisonment. Further clue for that reasoning, we may get, if we examine the manner in which the Legislature has used succeeding sections. In Section 55A there is a specific reference to Section 108, not Sections 108A to I. So also Section 55A specifically refers to Section 109, not Sections 109A and B. Legislature wanted inclusion of Sections 108A to I, Section 109A etc., then it would have said Sections 108 to 110. Further, the Legislature never wanted the inclusion of Sections 117A to C, hence it used Section 117 alone, not Sections 116 to 122. If it has used so, then Sections 117A to C also would have been included. Legislature in that sequence wanted inclusion of Sections 206 and 206A, hence both the sections have been included. Hence, when the legislature has used the expression Sections 59 to 81, 60B which falls in between, stands included. Further, the entrustment of powers on SEBI, Under Section 55A, is in addition to the then existing powers of SEBI under SEBI Act, 1992, which takes Sections 11, 11A and 11B as well.

70. Explanation has been added to Section 55A to harmonize and to clear up doubts and allay groundless apprehensions. In S. Sundaram Pillai and Ors. v. V.R. Pattabiraman and Ors. MANU/SC/0387/1985 : (1985) 1 SCC 591, this Court has ruled that the purpose of the explanation is to clarify where there is any obscurity or vagueness in the main enactment and to make it consistent with the dominant object which it seems to serve. The main part of Section 55A confers jurisdiction on SEBI with regard to three categories i.e. issue of securities, transfer of securities and non-payment of dividend. The expression “all other matters” mentioned in the explanation would refer to powers other than the abovementionedcategories. Further, it may also be remembered that the explanation does not take away the powers conferred on SEBI by other sections of the Companies Act. At the same time, matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of irredeemable preference shares be exercised by the Central Government, Tribunal, Company Law Board, Registrars of Companies, as the case may be. Further, Section 60B(9) clearly indicates that upon closing of the offer of securities, a final ‘prospectus’ has to be filed in the case of listed company with SEBI and Registrar, hence the explanation to Section 55A can never be constructed or interpreted to mean that SEBI has no power in relation to the prospectus and the issue of securities by an unlisted public company, if the securities are offered to more than forty nine persons.

71. I am, therefore, of the view that the mere fact that emphasis has been given to Sections 68A, 77A and 80A, does not mean the exclusion of Section 60B from Section 59 to 81. We, therefore, hold that, so far as the provisions enumerated in the opening portion of Section 55A of the Companies Act, so far as they relate to issue and transfer of securities and non-payment of dividend is concerned, 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. In any other case, i.e. rest of the matters, that is excluding matters relating to issue and transfer of securities and non-payment of dividend be administered by the Central Government in the case of listed public companies and those companies which intend to get their securities listed on any recognized stock exchange in India. Explanation to that section further clarifies the position so as to remove doubts, saying all powers relating to other matters including the matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of irredeemable preference shares, should be exercised by the Central Government, Tribunal or the Registrar of Companies, as the case may be. Section 55A, therefore, makes it clear that SEBI has the power to administer the abovementionedselect provisions of the Companies Act relating to matters specified therein. Contention raised by Saharas that without Regulations being framed Under Section 642(4) of the companies Act, SEBI cannot exercise powers of administration, is totally unfounded and is rejected.

PROSPECTUS and IM

72. Prospectus is the principal medium through which the investors get information of the strength and weakness of the company, its creditworthiness, credence and confidence of promoters and the company’s prospects. Section 55 of the Act provides that a prospectus issued by or on behalf of a company or in relation to an intended company shall be dated and that date shall be taken as the date of its publication. The matters to be stipulated and reports to be set out are provided Under Section 56 of the Act, read with Part 1 of Schedule 11 of the Companies Act, which also calls for the details of the stock exchange where application was made for listing of issue of securities. Section 60 of the Act deals with registration of the prospectus. Section 60(3) specifically states that the Registrar shall not register a prospectus unless the requirements of Sections 55, 56, 57 and 58 and sub-sections (1) and (2) of that section have been complied with. Securities can be listed on a recognized stock only after the prospectus is prepared and approved by the RoC, SEBI, as the case may be. Section 62 imposes civil liability for mis-statements in prospectus and Section 63 criminal liability. Section 68 provides imprisonment for a term which may extend to five years, or with fine which may extend to one lakh rupees, or with both, for fraudulently inducing persons to invest money. In other words, either to offer transferrable securities for sale to the public or to request the admission of securities for trading on a regulated market without prospectus, or to offer transferrable securities for sale to the public, by way of shares and debentures, in violation of the first proviso to Section 67(3) may attract civil and criminal liability. Saharas, in this case, published RHPs with the approval of RoC, but did not get them approved by SEBI or their securities listed on a recognized stock exchange.

73. Section 60B which was included in the Act by the Companies Amendment Act, 2000 (Act 53 of 2000) w.e.f. 13.12.2000. 60B(1) reads as follows:

60B. Information memorandum.

(1) A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus.

74. Section 60B(1) is an enabling provision which enables a public company making an issue of securities to circulate information memorandum (IM) to the public before filing the prospectus. Purpose of that Sub-section is for Assessing the demand and the price which the public would be willing to offer, which is not a mandatory requirement. Note on Clause 52 of the 1997 Bill explains the object and purpose of that Section as follows:

This Section provides for the concepts of ‘book building’ and ‘information memorandum’. This is an international practice and refers to collecting orders from investment bankers and large investors based on an indicative price range. This is essentially a pre-issue exercise which will facilitate the issuers to get better idea of demand and the final offer price. The directors of the company, however, will not be permitted to resort to underwriting on book building.

75. Section 60B(1), therefore, was introduced to facilitate a pre-issue exercise to get a better insight of demand and final offer price. Section 60B(2) of the Act refers to the stage at which the RHPs has to be filed by the company. The provision clearly states that the company inviting subscription by an IM shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as a RHP, at least three days before the opening of the offer. Section 60B(3) stipulates that IM and RHPs shall carry the same obligations as are applicable in the case of prospectus. Explanation clause states, “for the purpose of Sub-sections (2), (3) and (4), “Red Herring Prospectus” means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered”. The expression “prospectus” is also defined in the Act vide Section 2(36) of the Companies Act as follows:

2(36) “Prospectus” means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate.

(Emphasis supplied)

Section 60B(9) deals with the final prospectus, which reads as follows:

60B (9) Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of a listed public company with the Securities and Exchange Board and Registrar, and in any other case with the Registrar only.

76. Section 60B(9) deals with two categories of companies i.e. “listed public company” under one category and the rest of the companies falling under “any other case” under another category. A company inviting subscription from public by an IM is bound to file a prospectus prior to the opening of the subscription lists. That is the moment a company decides to issue securities to the public, a duty is cast on it to get its securities listed on a recognized stock exchange. Section 60B, as already indicated, refers to IM. Section 2(19B) was inserted by the Companies (Second Amendment) Act, 2002, w.e.f. 1.4.2003, which reads as follows:

2(19B) “information memorandum” means a process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited, and the price and the terms of issue for such securities is Assessed, by means of a notice, circular, advertisement or document.

77. The initiation of the process of offering securities to the public by a company, therefore, starts with IM, but it is bound to file a prospectus prior to the opening of subscription lists and the offer as RHPs and then reaches its final intimation, that is after closing of the offer of securities with a final prospectus, with the requisite details and any other details as were not completed in the RHP by filing the same with SEBI and Registrar of Companies. Therefore, a company which has made on offer of securities to the public and, therefore, has applied for listing on a stock exchange, will fall under the category of listed companies and not in ‘any other case’ Under Section 60B(9) of the Act. Therefore, a reading of Sections 60B(1), (2) and (3) reveals the stage when IM and RHPs are filed and Section 60B(9) the stage of culmination on closing of the offer of securities and filing of the prospectus of a listed company with SEBI and RoC and in any other case with only the RoC. Registration of prospectus is dealt with in Section 60 of the Act which says, no prospectus shall be issued by or on behalf of a company or in relation to an intended company, unless on or before the date of its publication, there has been delivered to the RoC for Registration a copy thereof, duly signed and complying with statutory requirements. Registrar shall not register a prospectus unless the requirements of Sections 55, 56, 57 and 58 and Sub-sections (1) and (2) of Section 60 have been complied with. Section 56 refers to the matter to be stated and reports to be set out in the prospectus, and states that every prospectus issued shall state the matter specified in Part I of Schedule II and set out reports as specified in Part II of the Schedule, which will have effect subject to the provisions contained in Part III of that schedule. General information Clause (c) of Part I of Schedule II calls for the names of recognized stock exchange and other stock exchanges where application is made for listing. Section 60B(3), as I have already indicated, says IM and RHPs shall carry same obligations as are applicable in the case of a prospectus.

78. SEBI, Under Section 60B(9), however, as a Regulator is legally obliged to examine whether, upon the closing of the offer of securities, a final prospectus giving the details of the total capital raised, whether by way of debt or share capital and the closing of the securities and other details as were not complete in RHPs, have been filed in a case of listed public company with SEBI. This duty is cast on the Registrar alongwith SEBI in the case of a listed public company and in any other case only the Registrar.

79. Saharas have taken up the stand that they have only circulated the IM, by way of private placement, to their associates, group companies, workers/employees etc. Section 60B(1), as I have already indicated, casts no obligation to issue an IM. It is open to a public company making an issue of securities to circulate the IM to public before filing a prospectus for Assessing the demand and price which public would be willing to offer. If Saharas were going for a private placement, then I fail to see why they had elicited all those details through an IM, since Section 60B(1) deals with issue of IM to the public alone. But from Saharas’ conduct and action, it is clear, that their intention was to issue securities to the public under the garb of private placement. RHPs issued by Saharas indicated that they did not intend the proposed issue of securities to be listed on a stock exchange, even though in reality the securities were issued to the public. Every company which intends to offer shares or debentures to the public for subscription by way of a prospectus is legally obliged to make an application on a recognized stock exchange. Let us examine whether Saharas practiced what they have preached. First, they have breached the very statutory declaration prescribed in Part 1 of Schedule II. Statutory declaration reads as follows:

Declaration: That all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government or the guidelines issued by the Securities and Exchange Board of India established Under Section 3 of the Securities and Exchange Board of India Act, 1992, as the case may be, have been complied with and no statement made in prospectus is contrary to the provisions of the Companies Act, 1956 or the Securities and Exchange Board of India Act, 1992 or rules made thereunder or guidelines issued, as the case may be.:

80. RHP issued by Saharas (SIRECL) contains not the declaration mentioned above, but states as follows:

All the relevant provision of the Companies Act, 1956 and the guidelines issued by the Government have been complied with and no statement made in the prospectus is contrary to the provisions of the Companies Act, 1956 and the Rules thereunder.

In the Bond (OFCDs) of Saharas, there is a head “Declaration” which, inter alia, reads as follows:

…I confirm that I am/applicant associated with Sahara India Group. I have been explained everything in the language known to me and I have given my full consent on terms and conditions mentioned above.

Further, at the end of the page containing the terms and conditions of bond, the following is also given as a declaration, which reads as follows:

I have explained everything in the language known to the applicant/Representative of applicant and he/she has given his/her full consent on terms and conditions mentioned above. I, hereby further declare that all declaration made by the Bond Holder/Representative of Bond Holder and all the information/personal particulars given above by the Bond Holder/Representative of Bond Holder are correct and true to the best of my knowledge and belief. Signature of the Introducer.

81. I fail to see, if the investors were associated with Sahara Group, as declared, then where was the necessity of an Introducer and Introduction. If the offer was made only to persons associated, related or known to Sahara Group, then they could have furnished those details before the fact finding authorities. Further, in the IM, Saharas had stated that if the number of interested parties to the issue exceeds fifty they should approach the RoC to file RHPs as per Section 67(3) of the Companies Act, which clearly indicates that Saharas knew, by virtue of the first proviso to Section 67, if the number of persons exceeds fifty, then the same would be a public issue. Facts indicate that, through this dubious method, that SIRECL had approached more than thirty million investors, out of which 22.1 million have invested in the OFCDs and it had raised nearly 20,000 crores, for which it had utilized the services of its staff in 2900 branches/service centers and utilized the services of more than one million agents/representatives. Court can, in such circumstances, lift the veil to examine the conduct and method adopted by Saharas to defeat the various provisions of the Companies Act, already discussed, read with the provisions of the SEBI Act.

82. I, in the above facts and circumstances, fully endorse the findings recorded by SEBI (WTM) and SAT that the placement of OFCDs by Saharas was nothing but issue of debentures to the public, resultantly, those securities should have been listed on a recognized stock exchange.

AID FOR THE CONSTRUCTION

83. Section 67 provides an aid for the construction of the phrase “offering shares or debentures to the Public”. Section 67 of the Act gives an indication of the differences between private placement and public issue. The expression “offer of shares or debentures to public”, i.e. issue of securities finds a place in several sections of the Act, like Sections 60B, 73 and those expressions are to be construed bearing in mind Section 67 as well. For our purpose, it is useful to reproduce the entire section, which reads as follows:

67. Construction of references to offering shares or debentures to the public, etc

(1) Any reference in this Act or in the articles of a company to offering shares or debentures to the public shall, subject to any provision to the contrary contained in this Act and subject also to the provisions of Sub-sections (3) and (4), be construed as including a reference to offering them to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner.

(2) Any reference in this Act or in the articles of a company to invitations to the public to subscribe for shares or debentures shall, subject as aforesaid, be construed as including a reference to invitations to subscribe for them extended to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner.

(3) 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 proviso shall apply to the non-banking financial companies or public financial institutions specified in Section 4A of the Companies Act, 1956 (1 of 1956).

(3A) Notwithstanding anything contained in Sub-section (3), the Securities and Exchange Board of India shall, in consultation with the Reserve Bank of India, by notification in the Official Gazette, specify the guidelines in respect of offer or invitation made to the public by a public financial institution specified Under Section 4A or non-banking financial company referred to in Clause (f) of Section 45I of the Reserve Bank of India Act, 1934 (2 of 1934).

(4) Without prejudice to the generality of Sub-section (3), a provision in a company’s articles prohibiting invitations to the public to subscribe for shares or debentures shall not be taken as prohibiting the making to members or debenture holders of an invitation which can properly be regarded in the manner set forth in that sub-section.

(5) The provisions of this Act relating to private companies shall be construed in accordance with the provisions contained in Sub-sections (1) to (4).

84. Section 67(1) deals with the offer of shares and debentures to the public and Section 67(2) deals with invitation to the public to subscribe for shares and debentures and how those expressions are to be understood, when reference is made to the Act or in the articles of a company. The emphasis in Section 67(1) and (2) is on the “section of the public”. Section 67(3) states that no offer or invitation shall be treated as made to the public, by virtue of Sub-sections (1) and (2), that is to any section of the public, if the offer or invitation is 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 otherwise as being a domestic concern of the persons making and receiving the offer or invitations. Section 67(3) is, therefore, an exception to Sections 67(1) and (2). If the circumstances mentioned in Clauses (1) and (b) of Section 67(3) are satisfied, then the offer/invitation would not be treated as being made to the public.

85. The first proviso to Section 67(3) was inserted by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000, which clearly indicates, nothing contained in Sub-section (3) of Section 67 shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more. Resultantly, after 13.12.2000, any offer of securities by a public company to fifty persons or more will be treated as a public issue under the Companies Act, even if it is of domestic concern or it is proved that the shares or debentures are not available for subscription or purchase by persons other than those receiving the offer or invitation. A public company can escape from the rigor of provisions, if the offer is made by companies mentioned Under Section 67(3A), i.e. by public financial institutions specified Under Section 4A or by non-banking financial companies referred to in Section 45I(f) of the Reserve Bank of India Act, 1934.

Following situations, it is generally regarded, as not an offer made to public.

¢ Offer of securities made to less than 50 persons;

¢ Offer made only to the existing shareholders of the company (Right Issue);

¢ Offer made to a particular addressee and be accepted only persons to whom it is addressed;

¢ Offer or invitation being made and it is the domestic concern of those making and receiving the offer.

86. Resultantly, if an offer of securities is made to fifty or more persons, it would be deemed to be a public issue, even if it is of domestic concern or proved that the shares or debentures are not available for subscription or purchase by persons other than those received the offer or invitation.

87. I may, in this connection, point out that the position in England is almost the same. The Companies Act, 2006 in England also says that it is unlawful for transferring securities to others, certain listed securities, such other transferable securities, as may be specified in prospectus rules, to be offered to the public, unless approved prospectus has been made available to the public before the offer is made. For the purpose of the Companies Act, 2006 (Sections 755-760), ‘offer to the public’ includes an offer to any section of the public, however, selected. An offer is not regarded as an offer to the public if (1) it can properly be regarded in all circumstances as not being calculated to result, directly or individually, in securities of the company becoming available to persons other than those receiving the offer; or (2) otherwise being a private concern of the person receiving it and the person making it: s 756(3). An offer is to be regarded (unless the contrary is proved) as being a private concern of the person receiving it and the person making it if (a) it is made to a person already connected with the company and, where it is made on terms allowing that person to renounce his rights, the rights may only be renounced in favour of another person already connected with the company; or (b) it is an offer to subscribe for securities to be held under an employees’ share scheme and, where it is made on terms allowing that person to renounce his rights, the rights may only be renounced in favour of (i) another person entitled to hold securities under the scheme; or (ii) a person already connected with the company: s 756(4). For these purposes ‘person already connected with the company’ means (A) an existing member or employee of the company; (B) a member of the family of a person who is or was a member or employee of the company; (C) the widow or widower, or surviving civil partner, of a person who was a member or employee of the company; (D) an existing debenture holder of the company; or (E) a trustee (acting in his capacity as such) of a trust of which the principal beneficiary is a person within any of heads (A) to (D) above: s 756(5). For the purpose of head (B) above, the members of a person’s family are the person’s spouse or civil partner and children (including stepchildren) and their descendants: s 756(6). Fur the purposes of Pt 20Ch 1 ‘securities’ means shares or debentures: Section 755(5).

88. Companies Act, 2006, FSMA, 2000, Prospectus Regulations, 2005 etc. applicable in England, if read together we get a complete picture of the securities laws in that country. Indian Companies Act, as I have already indicated has its foundation on the English Companies Act.

89. Alastair Hudson in his book ‘Securities Law’ First Edition (Sweet & Maxwell), 2008 at page 342, refers to ‘Restricted Offers’ and noticed that there is no contravention of Section 85 of FSMA, 2000, if: “(b) the offer is made to or directed at fewer than 100 persons, other than qualified investors, per EEA State”. The purpose underlying that exemption, the author says, is mainly the fact that the offer is not being made to an appreciable section of “the public” such that the policy of the prospectus rules generally is not affected. Further, the author says that “Self-evidently, while an offer to 99 ordinary members of the public would be within the literal terms of the exemption, it would not be the sort of activity anticipated by the legislation. Moreover, if a marketing campaign were arranged such that ordinary members of the people were approached in groups of 99 people at a time in an effort to avoid the prospectus rules, then that would not appear to be within the spirit of the Regulations and might be held to contravene the core principle that a regulated person must act with integrity.”

90. I may, therefore, indicate, subject to what has been stated above, in India that any share or debenture issue beyond forty nine persons, would be a public issue attracting all the relevant provisions of the SEBI Act, Regulations framed thereunder, the Companies Act, pertaining to the public issue. Facts clearly reveal that Saharas have issued securities to the public more than the threshold limit statutorily fixed under the first proviso to Section 67(3) and hence violated the listing provisions which may attract civil and criminal liabilities.

LISTING of SECURITIES – LEGAL OBLIGATIONS

91. Principles of listing, which I may later on discuss, is intended to assist public companies in identifying their obligations and responsibilities, which are continuing in nature, transparent in content and call for high degree of integrity. Obligations are imposed on the issuer on an ongoing basis. Public companies who are legally obliged to list their securities are deemed to accept the continuing obligations, by virtue of their application, prospectus and the subsequent maintenance of listing on a recognized stock exchange. Disclosure is the rule, there is no exception. Misleading public is a serious crime, which may attract civil and criminal liability. Listing of securities depends not upon one’s volition, but on statutory mandate.

92. Section 73, the listing provision, which deals with the allotment of shares and debentures of which Sub-sections (1), (1A) and (2) are relevant for our purpose and hence given below:

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.

(1A) Where a prospectus, whether issued generally or not, states that an application under Sub-section (1) has been made for permission for the shares or debentures offered thereby to be dealt in one or more recognized stock exchanges, such prospectus shall state the name of the stock exchange or, as the case may be, each such stock exchange, and any allotment made on an application in pursuance of such prospectus shall, whenever made, be void, if the permission has not been granted by the stock exchange or each such stock exchange, as the case may be, before the expiry of ten weeks from the date of the closing of the subscription lists:

Provided that where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock exchange has been preferred Under Section 22 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), such allotment shall not be void until the dismissal of the appeal.

(2) Where the permission has not been applied under Sub-section (1) or such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.

(Emphasis supplied)

93. 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. Such companies have no option or choice but to list their securities on a recognized stock exchange, once they invite subscription from over forty nine investors from the public. If an unlisted company expresses its intention, by conduct or otherwise, to offer its securities to the public by the issue of a prospectus, the legal obligation to make an application on a recognized stock exchange for listing starts. Sub-section (1A) of Section 73 gives indication of what are the particulars to be stated in such a prospectus. The consequences of not applying for the permission under Sub-section (1) of Section 73 or not granting of permission is clearly stipulated in Sub-section (3) of Section 73. Obligation to refund the amount collected from the public with interest is also mandatory as per Section 73(2) of the Act.

94. Listing is, therefore, a legal responsibility of the company which offers securities to the public, provided offers are made to more than 50 persons. In view of the clear statutory mandate, the contention raised, based on Rule 19 of the SCR Rules framed under the SCR Act, has no basis. Legal obligation flows the moment the company issues the prospectus expressing the intention to offer shares or debentures to the public, that is to make an application to the recognized stock exchange, so that it can deal with the securities. A company cannot be heard to contend that it has no such intention or idea to make an application to the stock exchange. Company’s option, choice, election, interest or design does not matter, it is the conduct and action that matters and that is what the law demands. Law judges not what is in their minds but what they have said or written or done. Lord Diplock in Gissing v. Gissing (1971) 1 AC 886, has said, “As in so many branches of English Law, in which legal rights and obligations depend upon the intention of each party, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party’s words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party.” Lord Simon in Crofter Hand Woven Harris Tweed Company Limited v. Veitch (1942) AC 435, opined that in some branches of law, ‘intention’ may be understood to cover results which may reasonably flow from what is deliberately done, the principle being that a man is to be treated intending the reasonable consequences of his acts.

95. The maxim ‘acta exterior indicant interiora secreta’ (external action reveals inner secrets) applies with all force in the case of Saharas, which I have already demonstrated on facts as well as on law. Conduct and actions of Saharas indicate their intention, we have to judge their so called intention from their subsequent conduct. Subsequent illegality shows that Saharas contemplated illegality. A person’s inner intentions are to be read and understood from his acts and omissions. Whenever, in the application of an enactment, a person’s state of mind is relevant, the above maxim comes into play. (Ref. Bennion on Statutory Interpretation, 5th Edn., p. 1104)

96. We have to apply the various provisions of the Companies Act and SEBI Act and the rules and Regulations framed thereunder to Saharas’ conduct and their inner intentions are to be understood from their acts and omissions, by applying the above maxim. Saharas’ acts and omissions have clearly violated the provisions of Section 73, their failure to list the securities offer to the public was, therefore, intentional and the plea that they did not want their securities listed, is not an answer, since they were legally bound to do so. 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.

97. The scope of Section 73 came up for consideration before this Court in Raymonds Synthetics Limited and Ors. v. Union of India and Ors. MANU/SC/0162/1992 : (1992) 2 SCC 255 and this Court held through Dr. Justice T.K. Thommen as follows:

9. A public limited company has no obligation to have its shares listed on a recognised stock exchange. But if the company intends to offer its shares or debentures to the public for subscription by the issue of a prospectus, it must, before issuing such prospectus, apply to one or more recognised stock exchanges for permission to have the shares or debentures intended to be so offered to the public to be dealt with in each such stock exchange in terms of Section 73….

98. The above discussion clearly indicates that from the years 1988 to 2000, private placement of preferential allotment could be made to fifty or more persons if the requirements of Clauses (a) and (b) of Section 67(3) are satisfied. However, after the amendment to the Companies Act, 1956 on 13.12.2000, every private placement made to fifty or more persons becomes an offer intended for the public and attracts the listing requirements Under Section 73(1). Even those issues which satisfy Sections 67(3)(a) and (b) would be treated as an issue to the public if it is issued to fifty or more persons, as per the proviso to Section 67(3) and as per Section 73(1), an application for listing becomes mandatory and a legal requirement. Reading of the proviso to Section 67(3) and Section 73(1) conjointly indicates that any public company which intends to issue shares or debentures to fifty persons or more is legally obliged to make an application for listing its securities on a recognized stock exchange.

99. Saharas, in my view, have not followed any of those statutory requirements. On a combined reading of the proviso to Section 67(3) and Section 73(1), it is clear that the Saharas had made an offer of OFCDs to fifty persons or more, consequently, the requirement to make an application for listing became obligatory leading to a statutory mandate which they did not follow.

Unlisted Public Companies (Preferential Allotment) Rules, 2003 and the Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011

100. Considerable arguments were advanced by Saharas on the applicability of the provisions of 2003 Rules which, according to them, did not require the OFCDs to be first listed on a recognized stock exchange, especially in the light of the promulgation of Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 (for short ‘2011 Rules’). Contention was raised that, in view of 2003 Rules, preferential allotment by unlisted public companies on private placement was provided for and permitted without any restriction on numbers as per the proviso to Section 67(3) of the Companies Act and without requiring listing of such OFCDs on a recognized stock exchange. Further, it was pointed out that only on and from 14.12.2011, 2003 Rules were amended, whereby the definition of “preferential allotment” was substituted without in any way disturbing or amending Rule 2 of 2003 Rules. After 14.12.2011, it was pointed out, the definition of ‘preferential allotment” was amended prospectively. Further, it was pointed out that the first proviso to Section 67(3) of the Companies Act, added by the Companies Amendment Act 53 of 2000 w.e.f. 13.12.2000 (which was earlier not applicable to the 2003 Rules) has now been expressly made applicable w.e.f. 14.12.2011, so as to limit/restrict the number of persons to whom the offer on private placement is made, to only 49 persons, and hence the restriction imposed by the amendment made in December 2011 to issue of OFCDs by unlisted companies pursuant to the special resolution Under Section 81(1A) is also prospective. Law, therefore, it was urged, permitted the unlisted companies like Saharas to issue OFCDs to more than 49 persons prior to December 2011, on a private placement basis, without requiring the same to be first listed.

101. I find that no such contention was seen urged either before SEBI or SAT, nor do I find any substance in that contention. 2003 Rules are not applicable to any offer of shares or debentures to more than 49 persons. 2003 Rules was framed by the Central Government in exercise of the powers conferred Under Section 81(1A) read with Section 642 of the Companies Act to provide for rules applicable to the unlisted public companies. Section 81 of the Companies Act deals with further issue of securities and only gives pre-emptive rights to the existing shareholders of the company, so that subsequent offer of securities have to be offered to them as their “rights”. Section 81(1A), it may be noted, is only an exception to the said rule, that the further shares may be offered to any persons subject to passing a special resolution by the company in their general meeting. Section 81(1A) cannot, in any view, have an overriding effect on the provisions relating to public issue. Even if armed with a special resolution for any further issue of capital to person other than shareholders, it can only be subjected to the provisions of Section 67 of the Company Act, that is if the offer is made to fifty persons or more, then it will have to be treated as public issue and not a private placement. A public issue of securities will not become a preferential allotment on description of label. Proviso to Section 67(3) does not make any distinction between listed and unlisted public companies or between preferential or ordinary allotment. Even prior to the introduction of the proviso to Section 67(3), any issue of securities to the public required mandatory applications for listing to one or more stock exchanges. After insertion of the proviso to Section 67(3) in December 2000, private placement allowed Under Section 67(3) was also restricted up to 49 persons. 2003 Rules apply only in the context of preferential allotment of unlisted companies, however, if the preferential allotment is a public issue, then 2003 Rules would not apply. 2003 Rules are only meant to regulate the issue of the shares and debentures by unlisted public companies and prevent the misuse of the private placement. Section 81(1A), as I have already indicated, says that a preferential allotment can be made by passing a special resolution which is an exception to the rules of rights issue, since that requires new shares or debentures to be offered to the existing members/holders on a pro rata basis. But when offer is made to more than 49 persons, then apart from compliance with Section 81(1A), other requirements regarding public issue have to be complied with. 2003 Rules, in my view, cannot override the provisions of Section 67(3) and Section 73. The definition of “preferential allotment” in 2011 Rules only made what was implicit in 2003, more explicit. In my view, both 2003 Rules and 2011 Rules are subordinate Regulations and are to be read subject to the proviso to Section 67(3) and 73(1) and other related provisions.

DIP GUIDELINES & ICDR, 2009

102. Senior Counsels appearing for Saharas also raised a contention that DIP Guidelines were only departmental instructions, not having the sanction of law and, therefore, would not apply to the OFCDs issued. This argument, in my view, has no basis. DIP Guidelines had statutory force since they were framed by SEBI in exercise of its powers conferred on it Under Sections 11 and 11A of the SEBI Act. Powers have been conferred on SEBI to protect the interests of the investors in securities and regulate the issue of prospectus, offer documents or advertisement soliciting money through the issue of prospectus. Section 11 of the Act, it may be noted has been incorporated, evidently to protect the interests of investors whose securities are legally required to be listed. DIP Guidelines were implemented by SEBI with regard to the listed and unlisted companies, which made public offer, until it was replaced by ICDR, 2009. Contention was raised by Saharas that they had issued OFCDs in the year 2008 and no action was taken under DIP Guidelines and hence ICDR, 2009, which came into force only on 26.8.2009, would not apply and have no retrospective operation. In my view, this contention has no force, especially when Saharas had not complied with the statutory requirements provided in the DIP Guidelines.

103. Repeal and Saving Clause under ICDR, 2009 would clearly indicate that the violation under DIP Guidelines was a continuing one. Regulation 111 of ICDR reads as follows:

Repeal and Savings

111. (1) On and from the commencement of these Regulations, the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 shall stand rescinded.

(2) Notwithstanding such rescission;

(a) anything done or any action taken or purported to have been done or taken including observation made in respect of any draft offer document, any enquiry or investigation commenced or show cause notice issued in respect of the said Guidelines shall be deemed to have been done or taken under the corresponding provisions of these Regulations;

(b) any offer documents, whether draft or otherwise, filed or application made to the Board under the said Guidelines and pending before it shall be deemed to have been filed or made under the corresponding provisions of these Regulations.

104. Regulation 111(1) of ICDR, 2009 rescinded the DIP Guidelines from 26.8.2009 and Clause (2) of Regulation 111 contains the saving clause. The expression “anything done” or “any action taken” under Regulation 111(1) are of wide import and would take anything done by the company omitted to be done which they legally ought to have done. Non-performance of statutory obligations purposely or otherwise may also fall within the abovementionedexpressions. Failure to take any action by SEBI under DIP Guidelines, in spite of the fact that Saharas did not discharge their statutory obligation, would not be a ground to contend that 2009 Regulations would not apply as also the saving Clause 2009 Regulations, in my view, will apply to all companies whether listed or unlisted. Further, in the instant case, SEBI was not informed of the issuance of securities by the Saharas while the DIP Guidelines were in force and Saharas continued to mobilize funds from the public which was nothing but continued violation which started when the DIP Guidelines were in force and also when they were replaced by 2009 Regulations. Further, it may also be recalled that any solicitation for subscription from public can be regulated only after complying with the requirements stipulated by SEBI, in fact, an amendment was made to Schedule II of the Companies Act vide notification No. GSR 650(3) dated 17.9.2002 by inserting a declaration which has to be signed by the directors of the company filing the prospectus, which reads as under:

That all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government or the guidelines issued by the Securities and Exchange Board of India established Under Section 3 of the Securities and Exchange Board of India Act, 1992, as the case may be, have been complied with and no statement made in prospectus is contrary to the provisions of the Companies Act, 1956 or the securities and Exchange Board of India Act, 1992 or rules made there-under or guidelines issued, as the case may be.

105. I find that Saharas conveniently omitted the reference to SEBI in the declaration given in the prospectus. OFCDs were, therefore, issued by Saharas in contravention of the DIP Guidelines, ICDR, 2009, notification dated 17.9.2002 and also overlooking the statutory requirements stipulated in Section 73(1) of the Companies Act.

Hybrids – SCR Act

106. Saharas also raised a contention that after the insertion of the definition of “securities” in Section 2(45AA) as “including hybrid” and after insertion of the separate definition of “hybrid” in Section 2(19A) of the Act, the provisions of Section 67 are not at all applicable to OFCDs, which have been held to be “hybrid”. Further, it was also contended that OFCDs issued were convertible bonds falling within the scope of Section 28(1)(b) of SCR Act and they were not “securities” or at any rate the provisions of SEBI Act and Section 67 were not at all applicable to OFCDs, which have been found to be “hybrid”.

107. Saharas mainly canvassed the position that OFCDs issued were hybrid securities covered by the term securities in the Companies Act and they do not come under the definition of “securities” under the SCR Act, hence under the SEBI Act. Further, it was also urged that when the definition of “securities” was amended to include hybrids in the Companies Act, no corresponding amendment was made in the SCR Act and SEBI Act and hence it was contended that SEBI has no jurisdiction or control over the hybrid securities. Further, it was also pointed out that hybrid securities at best can come under the regulatory control of MCA, Government of India. Saharas also contended that even Section 67 speaks only of shares and debentures and does not reflect the change brought about by the definition Clause 2(19A) ‘hybrid’ or by the insertion of the definition of “securities” in Section 2(45AA) as including hybrid even though Section 67(3) of the Act was amended, by the Amendment Act 53 of 2000, by which the definitions of ‘securities’ and ‘hybrid’ were introduced. It was also pointed out that non-substitution/non-amendment of Section 67(1) and (2), by not including the word ‘hybrid’ after the words ‘shares’ and ‘debentures’, is significant.

108. OFCDs issued by Saharas undoubtedly were unsecured debentures by name and nature. Section 2(12) of the Companies Act deals with the definition of the word “debentures” and includes any “other securities”. The same reads as follows:

2(12). “Debenture’ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.

The definition of the word “securities’ Under Section 2(45AA) of the Companies Act, reads as follows:

2(45AA). “Securities” means securities as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes hybrids.

Section 2(h) of the SCR Act, 1956 reads as follows:

2(h) “securities” include

(i) shares, scrips, 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 (zg) 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;

Explanation.- For the removal of doubts, it is hereby declared that “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in Clause (9) of Section 2 of the Insurance Act, 1938 (4 of 1938);

(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities.”

109. The word “hybrid” Under Section 2(19A) was inserted in the Companies Act, vide the Companies (Amendment) Act, 2002 w.e.f. 13.12.2000 and reads as follows:

2(19A). “hybrid” means any security which has the character of more than one type of security, including their derivatives.

110. Hybrid securities, therefore, generally means securities, which have some of the attributes of both debt securities and equity securities, means a security which, in the term of a debenture, encompassing the element of indebtness and element of equity stock as well. The scope of the definition of Section 2(h) of SCR Act came up for consideration before this Court in Sudhir Shantilal Mehta v. Central Bureau of Investigation MANU/SC/1415/2009 : (2009) 8 SCC 1 and the Court stated that the definition of securities under the SCR Act is an inclusive definition and not exhaustive. The Court held that it takes within its purview not only the matters specified therein, but also all other types of securities, thus it should be given an expansive meaning. In Naresh K. Aggarwala and Company v. Canbank Financial Services Limited and Anr. MANU/SC/0324/2010 : (2010) 6 SCC 178, while referring to the definition of the term “securities” defined under SCR Act and the applicability of a Circular issued by the Delhi Stock Exchange, the Court endorsed the view of the Special Court and noted that the perusal of the above quoted definition showed that they did not make any distinction between listed securities and unlisted securities and, therefore, it was clear that the circular would apply to the securities which were not listed on the stock exchange.

111. Section 2(h) of the SCR Act gives emphasis to the words “other marketable securities of a like nature”, which gives a clear indication of the marketability of the securities and gives an expansive meaning to the word securities. Any security which is capable of being freely transferrable is marketable. The definition clause in Section 2(h) of SCR Act is a wide definition, an inclusive one, which takes in hybrid also, which I have already indicated, defined vide Section 2(19A) of the Companies Act.

112. OFCDs issued have the characteristics of shares and debentures and fall within the definition of Section 2(h) of SCR Act, which continue to remain debentures till they are converted. In other words, OFCDs issued by Saharas are debentures in presenti and become shares in futuro. Even if OFCDs are hybrid securities, as defined in Section 2(19A) of the Companies Act, they shall remain within the purview of the definition of “securities” in Section 2(h) of SCR Act. Further, it may be noted that Saharas have treated OFCDs only as debentures in the IM, RHP, application forms and also in their balance sheet. The terms “Securities” defined in the Companies Act has the same meaning as defined in the SCR Act, which would also cover the species of “hybrid” defined Under Section 2(19A) of the Companies Act. Since the definition of “securities” Under Section 2(45AA) of the Companies Act includes “hybrids”, SEBI has jurisdiction over hybrids like OFCDs issued by Saharas, since the expression “securities” has been specifically dealt with Under Section 55A of the Companies Act.

OFCDs whether Convertible Bonds – SCR Act

113. Saharas raised yet another contention that OFCDs issued by them are convertible bonds issued on the basis of the price agreed upon at the time of issue and, therefore, the provisions of SCR Act are not applicable in view of Section 28(1)(b) thereof. Further, it was also contended that convertible bonds having been issued at a price agreed upon at the time of issue are not listable in view of the exception granted Under Section 28(1) of the SCR Act.

114. Section 28 was inserted by the SCR Act. The object of the amendment as stated in the Bill was to exempt convertible bonds by foreign financial institutions that had an option to obtain shares at a later date. Preamble of SCR Act provided “prohibition on options in securities” as a mode “to prevent the undesirable transactions in securities”. Resultantly, Section 28 had to be amended to make so inapplicable to such options in the bonds and to delete the words “by prohibiting options in securities” to facilitate such options. Parliament never intended to take away convertible debentures from the purview of SCR Act. For easy reference, I may refer to Section 28, which reads as follows:

28. Act not to be apply in certain cases.

(1) The provisions of this Act shall not apply to-

(a) the Government, the Reserve Bank of India, any local authority or any corporation set-up by a special law or any person who has effected any transaction with or through the agency of any such authority as is referred to in this clause;

(b) any convertible bond or share warrant or any option or right in relation thereto, in so far as it entitles the person in whose favour any of the foregoing has been issued to obtain at his option from the company or other body corporate, issuing the same or from, any of its shareholders or duly appointed agents shares of the company or other body corporate, whether by conversion of the bond or warrant or otherwise, on the basis of the price agreed upon when the same was issued.

(2) Without prejudice to the provisions contained in Sub-section (1) if the Central Government is satisfied that in the interests of trade and commerce or the economic development of the country it is necessary or expedient so to do, it may, by notification in the Official Gazette, specify any class of contracts as contracts to which this Act or any provision contained therein shall not apply, and also the conditions, limitations or restrictions, if any, subject to which it shall not so apply.

Section 28(1)(b) makes it clear that the Act will not apply to the ‘entitlement’ of the buyer, inherent in the convertible bond. Entitlement may be severable, but does not itself qualify as a security that can be administered by the SCR Act, unless it is issued in a detachable format. Therefore, the inapplicability of SCR Act, as contemplated in Section 28(1)(b), is not to the convertible bonds, but to the entitlement of a person to whom such share, warrant or convertible bond has been issued, to have shares at his option. The Act is, therefore, inapplicable only to the options or rights or entitlement that are attached to the bond/warrant and not to the bond/warrant itself. The expression “insofar as it entitles the person” clearly indicates that it was not intended to exclude convertible bonds as a class. Section 28(1)(b), therefore, clearly indicates that it is only the convertible bonds and share/warrant of the type referred to therein that are excluded from the applicability of the SCR Act and not debentures which are separate category of securities in the definition contained in Section 2(h) of SCR Act. Section 20 of SCR Act, which was omitted, by Securities Laws (Amendment) Act, 1995, with effect from 25.1.1995, stated that all options entered into after the commencement of the Act would be illegal. The introduction of Sections 28(1)(b) and 28(2) became necessary because of the provisions of Sections 13, 16 and 20. Section 20 was deleted in the year 1995, but SEBI notification No. 184 dated 1.3.2000 continued to prohibit options. Consequently, OFCDs issued by Saharas to the public cannot be excluded from the purview of listing requirements, any interpretation to the contrary would contravene the mandatory requirements contained in Section 73(1) and proviso to Section 67(3) of the Companies Act.

REFUND of THE MONEY COLLECTED

115. I have found that Saharas having failed to make application for listing on any of the recognized stock exchange, as provided Under Section 73(1) of the Companies Act, become legally liable to refund the amount collected from the subscribers in pursuance to their RHPs, along with interest as provided Under Section 73(2) of the Act. Rule 4D of the Companies (Central Government) General Rules and Forms, 1956 prescribes the rates of interest for the purposes of Sub-sections (2) and (2A) of Section 73, which shall be fifteen per cent per annum. Section 73(2) says that every company and every director of the company who is an officer in default, shall be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed. The scope of the abovementionedprovisions came up for consideration before this Court in Raymond Synthetics Limited and Ors. v. Union of India (supra), wherein the Court held that in a case where the company has not applied for listing on a stock exchange, the consequences will flow from the company’s disobedience of the law, the liability to pay interest arises as from the date of receipt of the amounts, for the company ought not to have received any such amount in response to the prospectus. I am, therefore, of the view that since Saharas had violated the listing provisions and collected huge amounts from the public in disobedience of law, SEBI is justified in directing refund of the amount with interest.

CIVIL and CRIMINAL LIABILITY

116. I have found, in this case, that Saharas had not complied with the legal requirements of Section 56 and hence the second proviso to Section 56(3) may apply and it is also stated in Sub-section (6) of Section 56 that the liability under the General Law has been excluded. Section 62 casts civil liability for mis-statement in prospectus and Section 63(1) speaks of criminal liability. Section 68 speaks of penalty for fraudulently inducing persons to invite, which also leads to imprisonment and fine. Section 68A prescribes punishment for violation of what is provided Under Sections 68A(1)(a) and (b), with imprisonment for a term of five years. Section 73(3) also speaks of imposition of fine. Over and above the penal provisions, Section 628 of the Companies Act also proposes imprisonment and fine, for making false statements. Further, furnishing false evidence may also attract punishment with imprisonment for a term which may extend to seven years and also fine Under Section 629 of the Companies Act. The provisions 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 Saharas be treated with an iron hand, or else we may land in another security market pandemonium. I, therefore, answer the questions of law raised as follows:

(a) SEBI has the powers to administer the provisions referred to in the opening part of Section 55A which relates to issue and transfer of securities and non-payment of dividend by public companies like Saharas, which have issued securities to fifty persons or more, though not listed on a recognized stock exchange, whether they intended to list their securities or not.

(b) Saharas were legally obliged to file the final prospectus Under Section 60B(9) with SEBI, failure to do so attracts criminal liability.

(c) First proviso to Section 67(3) casts a legal obligation to list the securities on a recognized stock exchange, if the offer is made to fifty or more persons, which Saharas have violated which may attract the penal provisions contained in Section 68 of the Act.

(d) Section 73 of the Act casts an obligation on a public company to apply for listing of its securities on a recognized stock exchange, once it invites subscription from fifty or more persons, which Saharas have violated and they have to refund the money collected to the investors with interest.

(e) Saharas have violated the DIP Guidelines and ICDR, 2009 and by not complying with the disclosure requirements and investor protection measures for public, and also violated Section 56 of the Companies Act which may attract penal provisions.

(f) 2003 Rules or the 2011 Rules cannot override the provisions of Section 67(3) and Section 73, being subordinate legislations, 2003 Rules are also not applilcable to any offer of shares or debentures to more than forty nine persons and are to be read subject to the proviso to Section 67(3) and Section 73(1) of the Companies Act.

(g) OFCDs issued by Saharas have the characteristics of shares and debentures and fall within the definition of Section 2(h) of SCR Act. The definition of ‘securities’ Under Section 2(45AA) of the Companies Act includes ‘hybrids’ and SEBI has jurisdiction over hybrids like OFCDs issued by Saharas, since the expression ‘securities’ has been specifically dealt with Under Section 55A of the Companies Act.

(h) Section 28(1)(b) of the SCR Act indicates that it is only convertible bonds and share/warrant of the type referred to therein, which are excluded from the applicability of the SCR Act and not debentures, which are separate category of securities in the definition contained in Section 2(h) of SCR Act. Contention of Saharas that OFCDs issued by them are convertible bonds issued on the basis of the price agreed upon at the time of issue and, therefore, the provisions of SCR Act, would not apply, in view of Section 28(1)(b) cannot be sustained.

(i) SEBI can exercise its jurisdiction Under Sections 11(1), 11(4), 11A(1)(b) and 11B of SEBI Act and Regulation 107 of ICDR, 2009 over public companies who have issued shares or debentures to fifty or more, but not complied with the provisions of Section 73(1) by not listing its securities on a recognized stock exchange.

(j) Saharas are legally bound to refund the money collected to the investors, as provided Under Section 73(2) of the Companies Act read with Rule 4D of the Companies (Central Government’s) General Rules and Forms, 1956 and the SEBI has the power to enforce those provisions.

(k) Saharas’ conduct invites civil and criminal liability under various provisions like Sections 56(3), 62, 68, 68A, 73(3), 628, 629 and so on.

CONCLUSION

117. The above discussion will clearly indicate that OFCDs issued by Saharas were public issue of debentures, hence securities. Once there is an intention to issue shares or debentures to the public, it is/was obligatory to make an application to one or more recognized stock exchanges, prior to such issue. Registration of RHPs by the Office of the Registrar does not mean that the mandatory provisions of Sections 67(3), 73(1) and DIP Guidelines be not followed. Saharas could not have filed RHP or any prospectus with RoC, without submitting the same to SEBI under Clauses 1.4, 2.1.1. and 2.1.4 of DIP Guidelines. Unlisted companies like Saharas when made an offer of shares or debentures to fifty or more persons, it was mandatory to follow the legal requirements of listing their securities. Once the number forty nine is crossed, the proviso to Section 67(3) kicks in and it is an issue to the public, which attracts Section 73(1) and an application for listing becomes mandatory which fall under the administration of SEBI Under Section 55A(1)(b) of the Companies Act.

118. SEBI, I have already indicated, has a duty Under Section 11A of the SEBI Act to protect the interests of investors in securities either listed or which are required to be listed under the law or intended to be listed. Under Section 11B, SEBI has the power to issue appropriate directions in the interests of investors in securities and securities market to any person who is associated with securities market.

119. I have already referred to the power of SEBI under the SEBI Act in the earlier part of this judgment. SEBI Act, it may be noted, is a special law, distinct in form, but related to the Company Law, 1956. Purpose and object behind establishing a body like SEBI under the SEBI Act has also been highlighted by us. The impugned orders, as already stated, were issued by SEBI in exercise of its powers conferred Under Sections 11, 11A and 11B of SEBI Act and Regulations 107 of ICDR, 2009. DIP Guidelines, as already indicated, did apply to both listed and unlisted companies. Clause 2.1.1 of DIP Guidelines had made it mandatory to file draft prospectus only before SEBI, not before the Central Government. Obligation was also cast on initial public offerings by unlisted companies and the issue of OFCDs was a public issue under Regulation 1.2.1 (xxiii) which also indicated that DIP Guidelines would apply to Saharas as well. Issuing of convertible debentures in violation of those guidelines gives ample powers on SEBI to pass orders Under Sections 11A and 11B of the SEBI Act as well as Regulation 107 of ICDR, 2009 and direct refund of the money to investors.

120. SEBI, in the facts and circumstances of the case, has rightly claimed jurisdiction over the OFCDs issued by Saharas. Saharas have no right to collect Rs. 27,000 crores from three million (3 crore investors) without complying with any regulatory provisions contained in the Companies Act, SEBI Act, Rules and Regulations already discussed. MCA, it is well known, does not have the machinery to deal with such a large public issue of securities, its powers are limited to deal with unlisted companies with limited number of share holders or debenture holders and the legislature, in its wisdom, has conferred powers on SEBI. I, therefore, find on facts as well as on law, no illegality in the proceedings initiated by SEBI and the order passed by SEBI (WTM) dated 23.6.2011 and SAT dated 18.10.2011 are accordingly upheld.

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Tags: Companies ActIndiaRegistrar of CompaniesSahara CaseSahara India PariwarSEBISecurities & Exchange Board of IndiaSupreme CourtThe Companies Act 1956

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