Dr. Rita Bansal
Dr. Rita Bansal

Published on October, 2021

SAHARA SCAM:  The Failure of Corporate Governance

Introduction: Sahara Real Estate Corporation Limited and Others v. Securities Exchange Board of India[1] is regarded as one of the landmark cases with reference to the power and jurisdiction of Security Exchange Board of India (SEBI) in the case of corporate fundraising. This landmark judgment was passed on 31-08-2012 by the Hon’ble Supreme Court of India wherein Sahara India had lost an appeal at the Securities Appellate Tribunal (SAT) against the order of SEBI.  The appellant had approached the Hon’ble Supreme Court of India challenging the decision of the Tribunal.  The decision cleared major loopholes in the Companies Act, 1956 and the SEBI Act of 1992, by providing proper interpretation and larger scope to provisions at dispute.  The main issues cleared were regarding “Hybrid Securities”, “Public Offers of Securities”, “Jurisdiction of SEBI”, etc[2].  Sahara India Parivar was founded in 1978 by Subrata Roy.  It is one of the largest conglomerates of the country.  Its businesses range from media to housing projects[3].  Sahara Scam is mainly associated with the two companies of Sahara Group i.e.,  Sahara India floated two new companies by the name SIRECL & SHICL in 2005 by registering them under the Companies Act, 1956.  SIRECL was registered with the Registrar of Companies (ROC) in Kanpur and SHICL was registered with the ROC in Maharashtra.  The companies, wanted to raise capital, as such in the Annual Meetings held by both the companies, a special resolution in the meeting of the shareholders was passed to raise funds through Private Placement of “Optionally Fully Convertible Debentures” (OFCD’s) from the friends, associates and family members of the Board of Directors (BOD), by way of an “Information Memorandum”.  To run the business of a Private Limited Company, sufficient money /working capital is an essential component. Lack of funds is the main reason for the failure of many business in India.  A private company cannot raise funds from the public and finds limited sources to infuse funds to run its business. On the other hand, when a company (listed company) raises money for the first time via the stock market, then it is called Initial Public Offering (IPO) and that is preceded by seeking approval from SEBI.  For this purpose, a company has to submit a Draft Red Herring Prospectus (DRHP) to SEBI.  DRHP is a kind of biodata of a company that contains almost all the details about a company. After this, SEBI analyses the DRHP of the company and decides whether to grant approval to that company or not[4]Private Placement” means any offer of securities or invitation to subscribe securities (equity or securities that convert to equity) to a select group of persons by a company, other than by way of public offer, through issue of a private placement offer letter.  Through private placement SIRECL collected Rs.17,656.53 crores (net value) and SHICL collected Rs. 6,373.20 crores (net value), so in all both the companies collected around Rs. 24,029.73 crores from 30 million investors over a period of 3 years in the guise of a “Private Placement”[5].  In 2009, a red-herring prospectus for the IPO of Sahara Prime City (a real estate venture of Sahara India) was submitted to SEBI for approval and while analysing the DRHP, SEBI noticed unusual fund-raising activity in the SHICL & SIRECL.  In the meantime, during 2009 & in early 2010, a whistle was blown regarding these irregularities in both the companies and that SHICL and SIRECL used illegal means at the time of issuance of OFCD’s.  Now, due to these complaints, SEBI’s doubts were proven right.  Consequently, SEBI started investigating these two companies and asked Sahara India Group for clarification regarding their method of fundraising.  That’s when SEBI learnt that SHICL & SIRECL have raised around Rs. 24,029.73 crores from 30 million investors via OFCD.  SEBI claimed its jurisdiction and objected on why Sahara has not taken permission from it.  Sahara claimed that the said Bonds are “Hybrid” Product, thus does not come under the jurisdiction of SEBI, instead it is governed by the ROC under Ministry of Corporate Affairs (MCA), from which the two companies of Sahara has already taken permission and submitted the DRHP with ROC before issuing the bonds. SEBI claimed that in the form of OFCD, SHICL & SIRECL have collected deposits from general public including cobblers, labourers, artisans and peasants. Around 23 million people, mostly from villages and small towns who had subscribed to this scheme and invested about 24,000 crores rupees and that none of these investors had any connection with the Company. [Optionally Fully Convertible Debentures:  Debenture can be understood as an instrument to raise loan by the company. For example, if a company “X” requires capital in order to proceed with its new idea or project then it can opt to raise capital by taking a loan from the bank, but that would raise the issue of high interest rate and other terms which the company should adhere to. In this case, the company has an option to raise a loan from the public by means of debentures. One of the important aspects of this type of fundraising is that the company has to pay the specified amount with interest, and although the money raised by the debentures becomes a part of the company’s capital, it does not become share capital. The company can issue secured and unsecured debentures. A debenture may be wholly or partially convertible at the time of redemption depending on the fact that whether the special resolution is passed by the shareholders. Now under OFCD, it depends on the choice of the investor as to when the debt holder wants to convert its debentures into shares. The conversion is good in case the company is about to make a good amount of profit, or the price of the shares of the company is about to increase. Thus, the very fact which should be taken into consideration is that the investor in this case, where he has been issued OFCD should have basic ideas of the performance of the company, market fluctuations and other financial market aspects to gain on the conversion of the debentures. Consequently, SEBI started investigating these two companies and asked Sahara India Group for clarification regarding their method of fundraising.  SEBI launched an investigation against Sahara India, inquiring into the fund-raising activities of SHICL and SIRECL along with investor information.  On a show cause notice, the companies could not justify this inflow of money. As per their own prospectus, the two companies were raising huge chunks of money from the public through OFCD.  SEBI then passed an Order thereby directing the two companies to refund the money to the investors within three months from the date of the Oder with an interest of 5% per annum and conjointly restrained the promoters of the two companies including Mr. Subrata Roy from accessing the Securities Market till further orders.  Sahara then appealed before Securities Appellate Tribunal (SAT) against the Order of SEBI.  After hearing the appeal, SAT confirmed and maintained the Order of SEBI.  Subsequently, Sahara then appealed in the Hon’ble Supreme Court against the SEBI Orders scrutinizing their jurisdiction in the issue[6].  The Hon’ble Supreme Court while interpreting various provisions of the Companies Act, SEBI Act, Securities Contract (Regulation) Act 1956 (SCRA) and various Rules and Regulations formulated thereunder, made some interesting observations on the issues raised before it which forms the operative part of the judgment in the form of ratio decidendi[7]. Issues:
  1. Whether SEBI has power to investigate and adjudicate in this matter U/s 11m 11A & 11B of SEBI Act and U/s 55A of the Companies Act or is it the MCA which has the jurisdiction U/s 55A (c) of the Companies Act?
  The Hon’ble Supreme Court held that SEBI does have power to investigate and adjudicate in this matter.  It categorically iterated that the SEBI Act is a special legislation bestowing SEBI with special powers to investigate and adjudicate to protect the interests of the investors.  It has special powers, and its powers are not derogatory to any other provisions existing in any other law and are analogous to such other law and should be read harmoniously with such other provisions and there is no conflict of jurisdiction between the MCA and the SEBI in the matters where interests of the investors are at stake.  To support this view, the Hon’ble Supreme Court laid emphasis on the legislative intent and the statement of objectives for the enactment of SEBI Act and the insertion of Section 55A in the Companies Act to delegate special powers to SEBI in matters of issue, allotment and transfer of securities.  The Court observed that as per provisions enumerated U/s 55A of the Companies Act, so far matters relate to issue and transfer of securities and non-payment of dividend, SEBI has the power to administer in the case of listed public companies and in the case of those public companies which intend to get their securities listed on a recognized Stock Exchange in India[8]
  1. Was the issuance of OFCD a Public Issue?
Section 67(3) provides that if offer is made to more than 50 people, the offer becomes Public Offer.  So, does Sec. 67(3) of the Companies Act make an offer of Shares and Debentures ipso facto, a Public Issue? OR Whether the issue of OFCDs to millions of persons who subscribed to the issue is a “Private Placement” so as not to fall within the purview of SEBI Regulations and various provisions of Companies Act?  In the case of private placement, the documents should have been submitted by the company stating that its investors had some relation with the company which in this case was not provided by the Sahara group and thus it did not qualify the claim of the investment being a private placementThe Hon’ble Supreme Court went on to hold that although the intention of the Companies was to make the issue of OFCDs look like a Private Placement, it ceases to be so when such securities are offered to more than 50 persons.  Section 67(3) specifically mentions that when any security is offered to and subscribed by more than 50 persons it will be deemed to be a Public Offer and therefore SEBI will have jurisdiction in the matter and the issuer will have to comply with the various provisions of the legal framework for a public issue.  Although the Sahara companies contended that they are exempted under the provisions of Sec. 67(3) since the “Information Memorandum” specifically mentioned that the OFCDs were issued only to those related to the Sahara Group and there was no Public Offer, the Supreme Court however did not find enough strength in this argument.  The Supreme Court observed as the Companies elicited public demand for the OFCDs through issue of “Information Memorandum” U//s 60B of the Companies Act, which is only meant for Public Issues.  Supreme Court also observed that since introducers were needed for someone to subscribe to the OFCDs, it is clear that the issue was not meant for persons related or associated with the Sahara Group because in that case an introducer would not be required as such a person is already associated or related to the Sahara Group.  Thus, the Supreme Court concluded that the actions and intentions on the part of the two companies clearly show that they wanted to issue securities to the public in the garb of a “Private Placement” to bypass the various laws and regulations in relation to that.  The Court observed that the Sahara Companies have issued securities to more than the threshold statutory limit fixed under proviso to Sec. 67(3) and hence violated the listing provisions attracting Civil and Criminal Liability.  The Supreme Court also observed that issue of OFCDs through circulation of “Information Memorandum” to public attracted provisions of Sections 60B of the Companies Act, which required filing of Prospectus U/s 60B (9) and since the Companies did not come out with a final prospectus on the closing of the offer and failed to register it with SEBI, the Supreme Court held that there was violation of Sec. 60B of the Companies Act also.  Apart from this, the companies also argued that as per the Unlisted Public Companies (Preferential Allotment) Rules 2003, 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. They went on to argue that Sec 67(3) was made applicable to Preferential Allotment made by unlisted public companies only in 2011 by amending the 2003 rules with prospective effect and not with retrospective effect. Hence before the 2011 Rules were framed, they were free to make preferential allotment to more than 50 persons also. However, the Supreme Court did not agree and held that the legislative intent was not so, and such a Rule being a delegated piece of legislation cannot supersede the statutory provisions of Sec 67(3) and in the existence of Sec 67(3) it is implied that even the 2003 preferential allotment rules were required to comply with the requirement of Sec 67(3). The Supreme Court observed that 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. The Court observed that 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[9].
  1. Whether listing provisions U/s 73 mandatorily applies to all public issues or depends upon the “intention of the Company” to get listed?
Although Sahara argued that listing requirement U/s 73 of Companies Act is not mandatory and applies to those companies only who “intend to get listed”, no Company can be forced to get listed on a Stock Exchange and in such cases, it will be a violation of corporate autonomy.  The Hon’ble Supreme Court rejected this contention and held as long as the law is clear and unambiguous, and any issue of Securities is made to more than 49 persons as per Sec. 67(3) of the Companies Act, the intention of the Companies to get listed does not matter at all and Sec. 73(1) is a mandatory provision of law which companies are required to comply with.  The Hon’ble Supreme Court observed that Section 73(1) of the Act casts an obligation on every company intending to offer shares or debentures to the public to apply on a Stock Exchange for listing of its Securities.  In addition, the Hon’ble Supreme Court observed that the maxim “acta exterior indicant interiora secreta” (external action reveals inner secrets) applies with all force in the case of Sahara.  The Court observed that the contention that they did not want their securities listed does not stand.  The duty of listing flows from the act of issuing securities to the public, provided such offer is made to fifty or more than 50 persons.  Any offering of securities to 50 or more is a public offering by virtue of Sec. 67(3) of the Companies Act, which Sahara very well knew, their subsequent actions and conducts unquestionably reveal so[10].
  1. Do the acts not cover the issue related to “Hybrid Securities”?
The Hon’ble Supreme Court held that although the OFCDs issued by the two companies are in the nature of “Hybrid Instruments”, it does not cease to be a “Security” within the meaning of the Companies Act, SEBI Act and SCRA. IT says although the definition of “Securities” U/s 2(h) of SCRA does not contain the term “Hybrid Instruments”, the definition as provided in the Act is an inclusive one and covers all “Marketable Securities”.  As in this case such OFCDs were offered to millions of people there is no question about the marketability of such instrument and since the name itself contains the term “Debenture”, it is deemed to be a security as per the provisions of the Companies Act, SEBI Act and SCRA.  Moreover, the two Sahara companies also contended that the OFCDs being in the nature of 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 and therefore SEBI will have no jurisdiction. The Supreme Court rejected this contention and held that the amendment in the SCRA was made and subsequently Sec 28 was inserted to exempt convertible bonds by foreign financial institutions that had an option to obtain shares at a later date. The Supreme Court further held that the inapplicability of SCRA, 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 Supreme Court clarified by saying that 28(1)(b), 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 SCRA and not debentures which are separate category of securities in the definition contained in Section 2(h) of SCRA[11] Apart from these issues, the Court also dealt with other criminal liabilities provided under the Companies act and refund of money collected as U/s 72(2).  It also dealt with Statues such as Unlisted Public Companies (Preferential Allotment) Rules, 2003, Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009[12]. By the end of year 2009, liability of the company had gone up to Rs. 20,000 Crore. The Reserve Bank of India barred the company from issuing any further debentures and asked it to start proceedings for winding up. That’s from where the real issue started. To sum it up, the company was charged for fraud and money laundering. So, in August 2012, the Supreme Court asked both the companies to deposit the money of OFCD holders with 15% interest within 3 months, with SEBI. They were also asked to submit all the details of OFCD holders to SEBI so that SEBI can assure that the money reaches the investors.  During 2013, Sahara sent 127 trucks containing cartons full of details about OFCD holders to SEBI office. SEBI rejected the second batch of files because the trucks reached after office hours, which as per Sahara contained 25% of the investor information. SEBI realised that the files do not contain proper and complete details about the investors. It was doubted to be a case of money laundering.  Sahara failed to submit money with SEBI with 15% interest within 3 months. Supreme Court ordered Sahara Group to make payment in 3 instalments. Sahara paid the 1st instalment of Rs. 5120 Crores, but not the other 2 instalments and claimed that they’ve already made payment to the investors.  Among 2-2.5 Crore investors, only 4600 came forward to claim their money. Upon which, Sahara India said that the other investors did not come forward to claim as they’ve already been repaid. Upon being asked for evidence to prove so, Sahara India could not provide any such proof. Neither did they mention any source of income of the money repaid[13].  By this time, both the Supreme Court and SEBI started considering it a case of money laundering. In November 2017, Enforcement Directorate charged Sahara Group with the case of money laundering. Sahara Group has had a shady business for a long time[14].  Consequently, they started freezing the bank accounts of Sahara India along with their assets. The Supreme Court dismissed the appeal and maintained the orders passed by SEBI and SAT.  It appointed Mr. Justice B N Aggarwal to administer the activities for the effective implementation of the directions of the court. It ordered Sahara to refund the whole amount collected with an interest of 15% till the date of refund. Such a refund amount be deposited an interest-bearing deposit a/c with a nationalized bank and approved SEBI to take a legitimate plan of action if Sahara fails to comply with the directions.  Securities and Exchange Board of India barred Sahara India Pariwar chief Mr. Subrata Roy and two of its companies – Sahara India Real Estate Corp (SIREC) and Sahara Housing Investment Corp (SHIC) – from raising money from the public as they had raised several thousand crores through optionally fully convertible debentures (OFCDs) that SEBI deemed illegal. In February 2014, Subrata Roy got arrested by Uttar Pradesh police for failure to appear before the Supreme Court. In March 2014, he along with two other directors of Sahara was sent to Tihar jail. Thereafter in March 2015, SEBI cancelled the license of Sahara’s mutual fund business[15]. Conclusion: This landmark Judgment is undoubtedly a milestone in India’s Corporate landscape, as it not only sanctifies SEBI’s absolute power to investigate into the matters of listed companies, but also into the matters pertaining to the unlisted companies. It vests SEBI with myriad powers to investigate into any matter concerning the interest of the investors even if it pertains to companies which are not listed. It clarifies significant points of law and removes the grey areas relating to issue of securities by the so-called unlisted companies taking advantage of the loopholes of law[16]. The Hon’ble Supreme Court ordered Sahara to refund the entire deposits collected at an interest rate of 15% till the date of refund. It also authorised SEBI to take legal recourse in case the appellant i.e., Sahara fails to comply with the said order. While discussing any corporate fraud, we see it as an isolated happening with no direct repercussions in our lives. What we often forget to notice is the serious ethical considerations and significant implication which it brings in the life of a common man. Many of these scams include taxpayer’s money that would have otherwise been invested for improving amenities for citizens of the country. In a country like India where more than 250 million people live in abject poverty, corruption exists from top to grassroots level and the economy relies heavily on the corporate sector, the rising financial scams should definitely bother us. The Sahara scandal represents the antithesis of all business ethics.  The ramifications of the actions of a few conniving businessmen and politicians affect the entire nation. On an international level, it makes foreign companies lose interest in investing in India which adversely hits us in ways more than one[17].   [1] (2012) 174 Comp Cas 154 (India) [2] https://thecompany.ninja/sahara-real-estate-corporation-limited-and-others-v-securities-exchange-board-of-india-and-anr/ [3] https://legalvoiceblog.wordpress.com/2016/12/02/case-analysis-sahara-india-real-estate-limited-ors-v-securities-exchange-board-of-india-ors/ [4] https://www.finlearnclub.com/blog/sahara-scam-full-story-explained [5] https://legaldesire.com/sahara-india-real-estate-corporation-ltd-ors-vs-securities-exchange-board-of-india-sebi-anr/ [6] https://legaldesire.com/sahara-india-real-estate-corporation-ltd-ors-vs-securities-exchange-board-of-india-sebi-anr/ [7] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [8] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [9] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [10] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [11] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [12] https://thecompany.ninja/sahara-real-estate-corporation-limited-and-others-v-securities-exchange-board-of-india-and-anr/ [13] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [14] https://www.finlearnclub.com/blog/sahara-scam-full-story-explained [15] https://legaldesire.com/sahara-india-real-estate-corporation-ltd-ors-vs-securities-exchange-board-of-india-sebi-anr/ [16] https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling [17] https://thecompany.ninja/sahara-scam/
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