The Supreme Court order on Friday directing the Sahara group companies to approach the Securities Appellate Tribunal (SAT) against market regulator Securities and Exchange Board of India's (SEBI) order asking the entities to return the money they had raised from investors through the Optionally Fully Convertible Debenture (OFCD) scheme is a significant one as the issue is whether non-listed companies can raise funds from the public without following appropriate regulatory norms.
A three-member bench, headed by Chief Justice S. H. Kapadia, also directed SAT to decide on the appeal of one of the Sahara Group companies against the SEBI order within eight weeks and asked it not to take any adjournments.
The SEBI order was passed on June 23, in compliance with the order and directions of the Supreme Court on May 12 in the matter of issuance of OFCDs by Sahara India Real Estate Corporation Ltd (now known as Sahara Commodity Services Corporation Ltd) and Sahara Housing Investment Corporation Ltd.
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“In this matter the questions as to what is an OFCD and the manner in which investments are called for are important questions. SEBI, being the custodian of the investor's interest 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 are taking this route as we want to protect the interest of the Investor,” the Supreme Court said while directing SEBI to examine the case.
SEBI examined the issues and summarised that: The OFCDs in question here constitute an offer to the public as they have been made to over 50 persons; the manner and the features of fund raising under the bond issues by the two companies suggest these issues are by no means ‘private'. What seems evident is that the two companies have been running a mass subscription solicitation from the public and the two companies do not fall under the entities specified in the second proviso to Sec. 67(3) which is the only exemption granted to the ‘Rule of 50' that defines offer to the public under the Companies Act.
“I would therefore conclude that the OFCDs issued by the two companies are public issues, without any ambiguity,” K. M. Abraham, SEBI whole-time member wrote in his order.
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One of the main arguments purported by the Shahara Group was that the two companies have made ‘private placements' of OFCDs to persons related or associated with the Sahara India Group, and therefore these issuances are not ‘public' issues.
Further, it said OFCDs are neither shares nor debentures in its strict sense and are in the nature of ‘hybrid' as defined in the Companies Act, 1956.
It also argued that SEBI does not have any jurisdiction on such hybrid issues as the term ‘hybrid' is not included in the definition of ‘securities' under the SEBI Act or in the Securities Contracts (Regulation) Act, 1956 (SCR Act). However, SEBI concluded that OFCDs belong to the family of debentures covered by the definition of the term ‘securities' in Sec. 2(h) of the SCR Act. That an OFCD is a hybrid therefore does not detract from the fact that an OFCD is by definition, design and its characteristics, intrinsically and essentially a ‘debenture'.
It is also pertinent to note that Sahara India Financial Corporation Limited (SIFCL), a residuary non-banking company (RNBC) registered since December 8, 1998, has been directed by the Reserve Bank of India (RBI) on June 17, 2008, not to accept any new deposits which mature beyond June 30, 2011, and also stop accepting instalments of existing deposits, with a road map prescribed to bring down its aggregate liability towards depositors (ALD) to zero on or before June 30, 2015.
The RBI found that deposit taking activities of this company were not in conformity with prudent practices and violated norms issued by them.
The Sahara group approached the Supreme Court against SEBI order.
The apex court promptly asked the group companies to approach SAT, clearly indicating that the matter of raising funds from public through the OFCD was a securities market-related issue than just a corporate affairs matter.