2011 (10) TMI 734 - AT - Companies Law

Summary

Issues Involved:
1. Whether the Optionally Fully Convertible Debentures (OFCDs) issued by the appellants are public issues required to be compulsorily listed on a stock exchange.
2. Whether OFCDs are "securities" as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA).
3. Whether the Securities and Exchange Board of India (SEBI) has jurisdiction to regulate OFCDs.
4. The effect of Section 55A of the Companies Act, 1956 on SEBI's powers to regulate unlisted companies.
5. Whether the appellants made true and complete disclosures in the Red Herring Prospectus (RHP).
6. Whether SEBI's actions violated principles of natural justice.
7. Whether the appellants violated the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
8. Whether SEBI's order directing the appellants to refund the money collected from investors was valid.

Issue-wise Detailed Analysis:

1. Public Issue and Mandatory Listing:
The Tribunal held that the OFCDs issued by the company were public issues requiring mandatory listing. According to Section 67(3) of the Companies Act, any offer to fifty persons or more constitutes a public issue. The company had issued OFCDs to millions of investors, thus making it a public issue. The company was required to comply with Section 73(1) of the Companies Act, which mandates that a public issue must be listed on a recognized stock exchange. The company's claim of private placement was rejected based on the scale of the issue and the number of investors involved.

2. Definition of Securities:
OFCDs were determined to be "securities" within the meaning of the Sebi Act read with SCRA. The Tribunal noted that the term "securities" includes shares, scrips, stocks, bonds, debentures, debenture stock, and other marketable securities. The OFCDs issued by the company were a form of debentures, thus falling within the definition of securities. The argument that OFCDs were hybrids and not securities was rejected, as hybrids are also considered securities under the Companies Act.

3. SEBI's Jurisdiction:
The Tribunal affirmed that SEBI has jurisdiction to regulate OFCDs. Sections 11, 11A, and 11B of the Sebi Act empower SEBI to regulate all securities and companies, whether listed or unlisted, to protect investors' interests and regulate the securities market. The Tribunal emphasized that SEBI's powers are not limited to listed companies and that the Sebi Act is a standalone enactment for regulating the securities market.

4. Effect of Section 55A of the Companies Act:
Section 55A of the Companies Act, which delineates SEBI's regulatory powers over listed companies and companies intending to list, does not restrict SEBI's jurisdiction under the Sebi Act. The Tribunal held that the company intended to get its OFCDs listed, thus falling under SEBI's regulatory purview. The Tribunal clarified that SEBI's powers under the Sebi Act are not limited by Section 55A of the Companies Act.

5. Disclosures in the RHP:
The Tribunal found that the company had concealed significant facts in the RHP, misleading the Registrar of Companies (RoC) and investors. The company did not disclose that the information memorandum was issued to millions of investors, which would have indicated a public issue. The Tribunal held that the disclosures made in the RHP were not true and fair.

6. Principles of Natural Justice:
The Tribunal acknowledged that SEBI had violated principles of natural justice by relying on findings from an investigation that were not shared with the appellants. However, it held that this violation did not vitiate the impugned order, as there was sufficient independent evidence to conclude that the issue was a public issue.

7. Violation of Guidelines and Regulations:
The Tribunal upheld SEBI's finding that the company violated the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000, and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. The company had not complied with the necessary investor protection norms and disclosure requirements.

8. Validity of SEBI's Refund Order:
The Tribunal validated SEBI's order directing the appellants to refund the money collected from investors. Section 73(2) of the Companies Act requires a company to refund money collected from the public if it fails to list the securities. SEBI's direction was deemed appropriate to protect investors' interests.

Conclusion:
The appeals were dismissed, and the impugned order was upheld, requiring the appellants to refund the money collected from investors within six weeks. The Tribunal confirmed SEBI's jurisdiction and the applicability of the regulations to both listed and unlisted companies.