Sunday, October 21, 2012

Analysis of the Sahara case Judgment of the Supreme Court of India and the standard set by the International Organization of Securities Commissions

The Supreme Court of India on 31st August, 2012 in the case of Sahara India Real Estate Corporation Limited & Ors. .. Appellants versus Securities and Exchange Board of India & Anr. .. Respondents held that the SEBI has power to regulate even unlisted securities.
The regulatory responsibility of the securities market is vested in the SEBI, the RBI, and two government agencies—Ministry of Corporate Affairs and Department of Economic Affairs.  Investigative agencies such as Serious Fraud Investigation Office (SFIO), Economic Offences Wing of the government and consumer grievance redressal forums also play a role. The Ministry is primarily concerned with the administration of the Companies Act, 1956, other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with law. The SEBI, established under the SEBI Act, is the apex regulatory body for the securities market which works in coordination with Ministry of Corporate Affairs. Besides regulation, the SEBI's mandate includes responsibilities for ensuring investor protection and promoting orderly growth of the securities market. The RBI, on the other hand, is responsible for regulation of a certain well-defined segment of the securities market. To ensure operational independence and accountability in the exercise of functions and powers by the regulators, SEBI and RBI have been constituted as autonomous bodies and are established under separate Acts of the Parliament.  Both regulators are accountable to the Parliament through Central Government and the regulations framed by them are required to be laid before Parliament by the Central Government. There is also a system of independent judicial review of the decisions of SEBI and RBI. Although the SEBI and the RBI are operationally independent, the government can issue directions to both in policy matters.
The member agencies of the International Organization of Securities Commissions have resolved, through its permanent structures: to cooperate in developing, implementing and promoting adherence to internationally recognised and consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks; to enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries; and to exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation.
The Section 55A of the Companies Act gives SEBI enough powers to regulate unlisted companies if such entities have a public offer and dressed up as a private placement. And have raised funds from the public. In those situations intention of the legislature is very important to interpret private placements as public offer.
If an instrument is a security under the Securities Contract Regulations Act 1956, then it comes under the SEBI Act. And if it comes under the SEBI Act, then SEBI has jurisdiction. SEBI can (therefore) pass a special order to regulate unlisted companies.
 If it is a public issue, they should have gone to the stock exchange, and so Section 73(2) of the Companies Act follows. The necessary consequence is a refund of the money under Section 73(2). But who will give such a direction to refund in an important question of law.
Section 55-A of the Companies Act will have the answer as to who can issue such a direction. The Section 73 (1) of the Companies Act ought to be read in consonance with Section 55-A Clause B, which deals with intention of the company, under Section 245 AA of the Companies Act, securities include “hybrid” financial instrument.
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.
The court has decided as followse:
1. Saharas (SIRECL & SHICL) would refund the amounts collected through RHPs dated 13.3.2008 and 16.10.2009 along with interest @ 15% per annum to SEBI from the date of receipt of the subscription amount till the date of repayment, within a period of three months from today, which shall be deposited in a Nationalized Bank bearing maximum rate of interest.
2. Saharas are also directed to furnish the details with supporting documents to establish whether they had refunded any amount to the persons who had subscribed through RHPs
dated 13.3.2008 and 16.10.2009 within a period of 10 (ten) days from the pronouncement of this order and it is for the SEBI (WTM) to examine the correctness of the details furnished.
3. The court made it clear that if the documents produced by Saharas are not found genuine or acceptable, then the SEBI (WTM) would proceed as if the Saharas had not refunded any amount to the real and genuine subscribers who had invested money through RHPs dated 13.3.2008 and 16.10.2009.
4. Saharas are directed to furnish all documents in their custody, particularly, the application forms submitted by subscribers, the approval and allotment of bonds and all other documents to SEBI so as to enable it to ascertain the genuineness of the subscribers as well as the amounts deposited, within a period of 10 (ten) days from the date of pronouncement of this order.
5. SEBI (WTM) shall have the liberty to engage Investigating Officers, experts in Finance and Accounts and other supporting staff to carry out directions and the expenses for the same will be borne by Saharas and be paid to SEBI.
6. SEBI (WTM) shall take steps with the aid and assistance of Investigating Authorities/Experts in Finance and Accounts and other supporting staff to examine the documents produced by Saharas so as to ascertain their genuineness and after having
ascertained the same, they shall identify subscribers who had invested the money on the basis of RHPs dated 13.3.2008 and 16.10.2009 and refund the amount to them with interest on their production of relevant documents evidencing payments and after counter checking the records produced by Saharas.
7. SEBI (WTM), in the event of finding that the genuineness of the subscribers is doubtful, an opportunity shall be afforded to Saharas to satisfactorily establish the same as being legitimate and valid. It shall be open to the Saharas, in such an eventuality to associate the concerned subscribers to establish their claims. The decision of SEBI (WTM) in this behalf will be final and binding on Saharas as well as the subscribers.
8. SEBI (WTM) if, after the verification of the details furnished, is unable to find out the whereabouts of all or any of the subscribers, then the amount collected from such subscribers will be appropriated to the Government of India.
9. The court also appointed Mr. Justice B.N. Agrawal, a retired Judge of this Court to oversee whether directions issued by this Court are properly and effectively complied with by the SEBI (WTM) from the date of this order. Mr. Justice B.N. Agrawal would also oversee the entire steps adopted by SEBI (WTM) and other officials for the effective and proper implementation of the directions issued by this Court. We fix an amount of Rs.5 lakhs towards the monthly remuneration payable to Mr. Justice B.N. Agrawal, this will be in addition to travelling, accommodation and other expenses, commensurate with the status of the office held by Justice B.N. Agrawal, which shall be borne by SEBI and recoverable from Saharas. Mr. Justice B.N. Agrawal is requested to take up this assignment without affecting his other engagements. We also order that all administrative expenses including the payment to the additional staff and experts, etc. would be borne by Saharas.
10. We also make it clear that if Saharas fail to comply with these directions and do not effect refund of money as directed, SEBI can take recourse to all legal remedies, including attachment and sale of properties, freezing of bank accounts etc. for realizations of the amounts.
11. The court also directed SEBI(WTM) to submit a status report, duly approved by Mr. Justice B.N. Agrawal, as expeditiously as possible, and also permit SEBI (WTM) to seek further directions from the Court, as and when, found necessary. Appeals are accordingly dismissed subject to the above directions.
This judgment is a good one and as per the standard norms set by the International Organization of Securities Commissions.  But even if the cash is recovered, there’s still the tricky question of why such a huge mobilization of funds was allowed to take place. Why the authorities missed opportunities to take immediate measures in time. Now the question is how to better serve India’s rural investors. The Sahara case highlights that there is a large amount of cash in rural India looking for a safe harbor. One positive development could be the proposed introduction of a unique identity number for every Indian, which could allow more investors to open a bank account and boost confidence in them.