SAHARA INDIA REAL ESTATE CORPORATION LIMITED V. SECURITIES AND EXCHANGE BOARD OF INDIA,THE SUPREME COURT OF INDIA,CIVIL APPEAL No. 9813 of 2011

SAHARA INDIA REAL ESTATE CORPORATION LIMITED V. SECURITIES AND EXCHANGE BOARD OF INDIA 

THE SUPREME COURT OF INDIA,CIVIL APPEAL No. 9813 of 2011 

FACTS

• Two unlisted companies belonging to the Sahara Group of Companies - Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL), sought to raise funds by issuing optional fully convertible debentures (OFCDs) on a private placement basis.
• The Red Herring prospectus filed by Sahara companies provided that the Sahara companies did not intend to list these securities on any recognized stock exchange.
• Further, the Red Herring Prospectus provided that only those persons to whom the information memorandum was distributed and/or friends, associated group companies, workers/employees and other individuals associated with Sahara Group were eligible to apply for the issue of these OFCDs.
• Since the OFCDs were not intended to be listed, it was the opinion of the Sahara companies that the prospectus would only be required to be filed before the Registrar of Companies and not the Securities and Exchange Board of India.
• The information memorandum, as a pre-cursor to the prospectus, was issued through approximately a million agents and three thousand branch offices to more than thirty million persons, inviting them to subscribe to the OFCD.
• The SEBI was of the opinion that this amounted to a public offer and took cognizance of the distribution of the information memorandum while processing the draft Red Herring Prospectus (DRHP) submitted by Sahara Prime City Limited, another Sahara group company, for its initial public offering.
• At the time, Sahara Prime City Limited had sought to raise up to INR 30 billion through the IPO in order to raise funds for its various housing projects across the country.
• As part of its draft red herring prospectus, it was required to disclose fundraising details of its group Upon the issue and notification of the draft red herring prospectus, SEBI invited comments and objections from the general public.
• Complaints were received. These complaints alleged that SIRECL and SHICL were issuing convertible bonds to the public throughout the country for many months and the same was not disclosed in the Sahara Prime City Limited draft Red Herring Prospectus.
• In spite of SEBI seeking clarifications on the issue of the OFCDs from the Sahara companies on a number of occasions, the Sahara companies did not furnish the details sought by SEBI.
• There evidently seemed to be reluctance on the part of the companies in providing the relevant details as sought by SEBI, which would enable SEBI to decide whether the OFCD issuances made by them are in compliance with the relevant provisions of the Act and applicable laws administered by SEBI.
• Eventually, SEBI initiated an investigation and passed a final order on June 23, SEBI concluded that neither SIRECL nor SHICL had issued OFCDs by way of “private placement” and that the issue of the OFCDs did in fact, amount to a public issue, over which SEBI would have jurisdiction. The Sahara companies appealed first before the Securities Appellate Tribunal, and when the appeal was dismissed, to the Supreme Court of India.

ISSUES 

Whether the optional fully convertible debentures issued by SIRECL and SHICL were by way of “private placement”- as claimed by the Sahara Companies on appeal, or by way of an invitation “to the public” - as counter claimed by the SEBI?

 

CONTENTIONS

 

• Sahara contended that they were not bound by the Companies Act or the ICDR since theirs was not a public The Red Herring Prospectus explicitly stated that the OFCD was open to only those to whom the information memorandum was circulated or to those who were affiliated with the Sahara Group or were affiliated to people affiliated with the Sahara Group.
• Further their securities were unlisted in the stock exchange and would continue to remain so subsequent to their placement.

HELD

• Firstly, the Supreme Court considered Section 67 of the Act which deals with the issue of shares and debentures to the Public.
  • Section 67 (1) deals with the offering of shares and debentures to the
  • Section 67(2) deals with what constitutes an invitation to the public to subscribe for shares and
  • Section 67 (3) deals with the circumstances when the offer or invitation would not be deemed to be made to the public.
• However, the court held that proviso to Section 67 (3) clearly elucidated that any offer made to 50 persons or more would be deemed to be a public offer and outside the purview of section 67 (3).
• Further, the Court pointed out that private placement is any offer or invitation to subscribe to securities to less than fifty persons or as per the provisions of Section 67 (3) of the Companies
• The court then considered the persons to whom the OFCD’s were It observed that people who were not affiliated to the Sahara group were permitted to subscribe to the shares provided they were introduced by people affiliated with the Sahara Group.
• The court held that ‘private placement connotes the issue of securities to close and associated people without issuing any advertisements with such conditions in which circumstances; the offering may not be construed as “offering securities to the public or invitation to public to subscribe for those securities. In this instance introduction would be required only by those not affiliated with the Appellant’s Companies; in other words the general public’.
• Secondly, the court also held that the since the issue had been made to the public through the use of the information memorandum, provisions of Section 60B(9) requiring the filing of prospectus of the SEBI were attracted. The Sahara companies’ conduct of issuing the information memorandum through approximately a million agents and three thousand branch offices to more than thirty million persons was indeed a public issue and therefore sufficient in order to attract the provisions of Section 73. The Court accepted SEBI’s contention that the OFCDs issued by SIRECL and SHICL was by way of an invitation “to the public”.
• Lastly, after establishing that the securities were offered to the public, the Court took into account, the provisions of Section 73 of the Companies Act which provided for the mandatory listing of the securities in a recognized stock exchange when offered to the public.