9911796707
TMI Blog2012 (9) TMI 559X X X X Extracts X X X X X X X X Extracts X X X X ..... tion between the MCA and the SEBI in the matters where interests of the investors are at stake. 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 under Section 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. The Supreme Court held that SEBI does have power to investigate and adjudicate in this matter. Hybrid OFCDs - Whether it falls within the definition of "Securities" within the meaning of Companies Act, SEBI Act and SCRA to grant SEBI jurisdiction to investigate and adjudicate ? - 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 Companies Act, SEBI Act and SCRA. It mentions t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues or depends upon the intention of the company to get listed ? - Held that:- 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. Section 73(1) of the Act levies 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. 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 pubic, provided such offer is made to fifty or more than fifty persons. Thus after the amendment to the Companies Act, 1956 on 13.12.2000, every private placement made to fifty or more persons becomes an offer intended for the public and attracts the listing requirements under Section 73(1). Public Unlisted Companies (Preferential Allotment Rules) 2003 - Whether it will apply in this case? - Held that:- And in the existence of Sec 67(3) it is implied that even the 2003 preferential allotment rules were require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or companies which intend to get their securities listed on any recognized stock exchange in India and also the question whether Optionally Fully Convertible Debentures (for short 'OFCDs') offered by the appellants should have been listed on any recognized stock exchange in India, being Public Issue under Section 73 read with Section 60B and allied provisions of the Companies Act and whether they had violated the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 [for short 'DIP Guidelines'] and various regulations of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 [for short 'ICDR 2009'], and also whether OFCDs issued are securities under the Securities Contracts (Regulation) Act, 1956 [for short 'SCR Act']. 2. Sahara India Real Estate Corporation Limited (for short 'SIRECL') and Sahara Housing Investment Corporation Limited (for short 'SHICL ), appellants herein (conveniently called Saharas), are the companies controlled by Sahara Group. Saharas have raised almost identical issues on facts as well as on questions of law before us and hence we are disposing off both the appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the intention of the company was to carry out infrastructural activities and the amount collected from the issue would be utilized in financing the completion of projects, namely, establishing/constructing the bridges, modernizing or setting up of airports, rail system or any other projects which might be alloted to the company from time to time in future. RHP also highlighted the intention of the company to engage in the business of electric power generation and transmission and that the proceeds of the current issue or debentures would be utilized for power projects which would be alloted to the company and that the money, not required immediately, might be parked/invested, interalia, by way of circulating capital with partnership firms or joint ventures, or in any other manner, as per the decision of the Board of Directors from time to time. SIRECL, under Section 60B of the Companies Act, filed the RHP before the RoC, Uttar Pradesh on 13.3.2008, which was registered on 18.3.2008. SIRECL then in April 2008, circulated IM along with the application forms to its so called friends, associated group companies, workers/employees and other individuals associated with Sahara Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.15,530/- Rs.15,254/- Rs.7,728/- Early Redemption After 60 months NIL After 18 months Conversion On completion of 120 months On completion of 60 months On completion of 48 months Minimum Application Size Rs.5,000/- Rs.12,000/- Rs.5,000/- Nominee System Double Nominee Double Nominee Double Nominee Transfer Yes Yes Yes 6. I may also indicate that all the bonds stipulated that bond holders could avail of loan facility as per the terms and conditions of the application forms. Nirmaan and Real Estate Bonds prescribed an additional feature of death risk cover as well. Clause 13 of RHP imposed no restriction on the transfer of the OFCDs. 7. SIRCEL, therefore, floated the issue of the OFCDs as an open ended scheme and collected an amount of Rs.19400,86,64,200 (Nineteen thousand four hundred crores, eighty six lacs, sixty four thousand and two hundred only) from 25.4.2008 to 13.4.2011. Company had a total collection of Rs.17656,53,22,500 (Seventeen thousand six hundred and fifty six crores, fifty three lacs, twenty two thousand and fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010 addressed a letter to the Regional Director, Northern and Western Regions of Ministry of Corporate Affairs (for short 'MCA') enclosing the complaint received in respect of OFCDs issued by Saharas. SEBI had stated that those companies had solicited and issued OFCDs violating statutory requirements and that they were not listed companies and had not filed the RHP with SEBI. SEBI sent a communication dated 12.5.2010 to Saharas calling for various details including the details regarding the number of application forms circulated after filing of RHP with RoC, details regarding the number of applications received and subscription amount received, date of opening and closing of subscription list of OFCDs, number and list of allotees etc. 11. SIRECL on 31.5.2010 addressed a letter to MCA for guidance/advice as to whether it was SEBI or MCA who had locus standi in the matter of unlisted companies in view of the provisions of Section 55A(c) of the Act. MCA, it is seen, had sent a letter dated 17.6.2010 to SIRECL stating that the matter was being examined under the relevant provisions of the Companies Act, 1956. SIRECL informed SEBI of the reply they had received from the MCA and that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious details including the amount collected through private placement, details regarding the number of investors to whom the allotment had been made, their names, addresses, utilization of the funds collected, its purpose, class or classes of persons to whom the allotment had been made and whether allotments were completed and various other details. SIRECL was directed to furnish the information within 15 days from the date of receipt of notice, failing which it was informed that penal action would be initiated against the company and its directors under Section 234(4)(a) of the Companies Act. 13. SEBI, in the meanwhile, sent a letter dated 23.9.2010 to SIRECL reminding that it had not provided information/documents on the issue of OFCDs. Proceeding issued for appointing the investigating agency was also forwarded to the company. SIRECL again replied by its letter dated 30.9.2010 raising the issue of jurisdiction of SEBI in investigating the affairs of SIRECL. SIRECL, however, replied to the letter of MCA dated 21.9.2010 on 4.10.2010, stating inter alia that it would be filing the prospectus on the closure of the issue in compliance with the provisions of Section 60B(9) of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whom OFCDs were allotted etc. exceeded fifty. SIRECL replied to the notice on 26.2.2011. SIRECL, it was stated, had sent a password protected CD along with two separate sheets containing the procedure and the password to SEBI; the CD contained of investors' names, serial numbers and amounts invested in OFCDs. SEBI, however, could not open the CD due to non furnishing of the password. SEBI pointed out this fact before the High Court and the Court vacated the interim order dated 13.12.2010. SIRECL took up the matter before this Court in S.L.P. (Civil) No. 11023 of 2011. 17. SIRECL, in the meanwhile, claimed that it had furnished a separate CD along with the password vide letter dated 19.4.2011 to SEBI stating that due to the enormity of the work and time taken in collating and compiling the data relating to the names and addresses and the amount invested, the company could only provide the partial information relating to names, numbers and amount invested by the investors through the covering letter dated 18.3.2011 in a CD. SIRECL then moved the High Court on 29.4.2011 to recall the order dated 7.4.2011 on the plea that the details called for by SEBI had been furnished. The High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a recognized stock exchange. Further, it was also pointed out that Saharas had not executed any Debenture Trust Deed for their OFCDs, not appointed any Debenture Trustee and not created any Debenture Redemption Reserve, which would amount to violation of Sections 117A, 117B and 117C of the Companies Act. Noncompliance of furnishing details in Form No. 2A, as required under Rule 4CC of the Companies (Central Government's) General Rules and Forms, 1956 read with DIP Guidelines and ICDR 2009, it was pointed out, had violated Section 56(3) of the Companies Act. 19. SEBI notice dated 20.5.2011 also highlighted that the CD was secured in such a manner that no analysis was possible and the addresses of the OFCDs holders were incomplete or ambiguous. Serious doubts were also raised with regard to the identity and genuineness of the investors and the intention of the companies to repay the debenture holders upon redemption. Notice, therefore, stated that the companies had prima facie violated the provisions of the Companies Act, SEBI Act, 1992, DIP Guidelines and ICDR 2009 and hence the offer/issue of OFCDs to public was illegal, and imperiled the interest of investors in such OFCDs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to comply with Section 73 of the Companies Act, in compliance with the parameters provided by the first proviso to Section 67(3) of the Companies Act. SEBI took the view that OFCDs issued by Saharas should have been listed on a recognized stock exchange and ought to have followed the disclosure requirement and other investors' protection norms. 22. SEBI also held that the Parliament has conferred powers on it under Section 55A(b) of the Companies Act to administer such issues of securities and Saharas were not justified in raising crores and crores of rupees on the premise that that OFCDs issued by them, were by way of private placement. SEBI, therefore, found that the Saharas had contravened the provisions of Sections 56, 73, 117A, 117B and 117C of the Companies Act and also various clauses of DIP Guidelines. SEBI also held that SHICL had not complied with the provisions of Regulations 4(2), 5(1), 5(7), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 57 of ICDR Regulations. Having found so, SEBI directed Saharas to refund the money collected under the Prospectus dated 13.3.2008 and 6.10.2009 to all such investors who had subscribed to their OFCDs, with interest. 23. Appellants, agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts to the investors with interest. Aggrieved by the said order, SIRECL filed C.A. No. 9813 of 2011 and SHICL filed C.A. No. 9833 of 2011 before this Court under Section 15Z of the SEBI Act which came up for admission on 28.11.2011 and the direction issued to refund sum of Rs.17,400 crores, on or before 28.11.2011, was extended. This Court also passed the following order: By the impugned order, the appellants have been asked by SAT to refund a sum of Rs.17,400/- crores approximately on or before 28th November, 2011. We extend that period upto 9th January, 2012. In the meantime, we are directing the appellants to put on affidavit, before the next date of hearing, the following information: (a) Application of the funds, which they have collected from the Depositors; (b) Networth of the Companies which have received these deposits; (c) Particulars of assets of the said Companies against which the liability has been created. For that purpose, the appellants will produce the requisite financial statements consisting of the Balance Sheet and Profit and Loss Account of the year ending 31st March, 2011 and the Statement of Account upto 30th November, 2011; (d) The Affidavit wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 55A of Companies Act confers no power on SEBI to administer the provisions of Sections 56, 62, 63 and 73 of the Companies Act of an unlisted company or to adjudicate upon the alleged violation of those provisions, that too without framing any regulations under Section 642(4) of the Companies Act. Learned senior counsel also pointed out that Sections 11, 11A and 11B of the SEBI Act empower SEBI to protect the interest of investors but not to administer the provisions of the Companies Act so far as an unlisted public company is concerned, consequently, when exercising powers under SEBI Act and/or SEBI Regulations, SEBI is not empowered to administer the provisions of the Companies Act relating to the issue and transfer of securities and non-payment of dividends, so far as an unlisted public company is concerned. 27. Learned senior counsel also submitted that the powers of SEBI to administer the aforesaid provisions are limited to the listed companies and public companies which intend to get their securities listed on any recognized stock exchange in India and, in any other case, the power of administration of Sections 56, 62, 63 and 73 with respect to OFCDs is vested only with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re expressly repealed by ICDR 2009 and even if the DIP Guidelines apply, the same would not cover the preferential issue of OFCDs by Saharas under 2003 Rules read with Section 81(1A) of the Companies Act. Learned counsel also pointed that ICDR 2009 would apply to the OFCDs issued by SIRECL by private placement and when it comes to regulating preferential allotment by private placement by unlisted public companies, the same is governed by 2003 Rules and only in case of preferential allotment by listed public companies, ICDR 2009 would apply. 31. Shri Nariman also contended that there was no statutory requirement for SIRECL to list OFCDs on any recognized stock exchange under the provisions of 2003 Rules. Further, it is also contended that the above rules do not have any deeming provisions for treating any issue as a public issue on the basis of number of persons to whom offers were made or on the basis of any other criteria. Learned senior counsel also submitted that the proviso of Section 67(3) of the Companies Act, added by the Companies Amendment Act, 2000 (w.e.f. 13.12.2000), was also not attracted to 2003 Rules, hence it was urged that, in view of the statutory rules of 2003, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act was permissible and hence no punitive action including refund of the amounts is called for and the order to that effect be declared illegal. 34. Shri Gopal Subramanium, learned senior counsel appearing on behalf of SHICL submitted that any act of compulsion on Saharas to list their shares or debentures on a stock exchange would make serious inroad into their corporate autonomy. Learned senior counsel submits that the concept of autonomy involves the rights of shareholders, their free speech, their decision making and all other factors. To highlight the concept of corporate autonomy, learned senior counsel placed reliance on the Constitution Bench judgment of this Court in Life Insurance Corporation of India v. Escorts Ltd. Ors. (1986) 1 SCC 264. Learned senior counsel submitted that SEBI s insistence that Saharas ought to have listed their shares or debentures on a recognized stock exchange in accordance with Section 73 of the Companies Act would necessarily expose shareholders and debenture holders to the risks of trading in shares and would also compel unlisted companies to seek financial help from investment bankers. Learned senior counsel placed reliance on the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om to contract under the Constitution as well as the Law of Contracts needs to be safeguarded and that persons who belong to the lower echelons of society, while it is necessary that they must never be duped, ought not be prevented from investing in measures which would add to their savings. Learned senior counsel pointed out that to deprive them of such an opportunity would be a serious infraction. 35. Learned senior counsel referring to Section 64 of the Companies Act submitted that the expression deemed to be prospectus indicates that whenever shares or debentures which are allotted can be offered for sale to the public, such a document is deemed to be a prospectus and has legal consequences. Section 73, according to the learned senior counsel, operationalizes the intention of a company which is allotment of shares with a view to sell to the public as contemplated in Section 64 of the Act. So, while Section 64 refers to the documents containing such an offer as a prospectus, Section 73 requires the company to make an application before the issue of the prospectus. Learned senior counsel also submitted that mere filing of prospectus is not reflective of the intention to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution under Section 81(1A) of the Companies Act which deals with preferential allotment . Learned senior counsel submitted that when there is a private placement, irrespective of the number, then the offer of shares need not take place through a prospectus but can even take place through a letter or a memorandum. 37. Learned senior counsel submitted that the Central Government correctly understood the position while framing the 2003 Rules. Learned senior counsel also submitted that SAT has no jurisdiction over unlisted public companies either under Section 55A of the Companies Act or under the SEBI Act. Learned senior counsel referred to the various provisions conferring powers on SEBI under the SEBI Act as well as the limited powers conferred on SEBI under the Companies Act. Learned senior counsel pointed out that SEBI is not concerned with the securities of all the companies, nor is it responsible for overseeing the sources of capital in the country, except that which is in the securities market. Learned senior counsel also pointed out that compulsory listing of scrips is unheard of in any jurisdiction. It was further submitted that it is impossible to conceive that a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SLP(C) No.13024 of 2011 and has conducted itself in a manner prejudicial to Saharas. Learned counsel pointed out that the conduct of the regulator in the manner in which proceedings have been conducted raises serious doubts about SEBI functions. Learned senior counsel pointed out that, apart from asserting jurisdiction in an erroneous manner, SEBI has no evidence of credible nature to show that Saharas had attempted to deceive or collect money from fictitious sources. Further, it was pointed out that there was no complaint from any investor and it originated on a complaint by a person who has no interest in Saharas. Learned senior counsel also submitted that SAT s direction of refund, in exercise of its powers under Section 73(2) of the Companies Act, is erroneous. Learned senior counsel, therefore, submitted that such a direction to refund the amount with interest is bad in law and liable to be quashed. 41. Shri Arvind P. Dattar, learned senior counsel appearing on behalf of SEBI, submitted that SEBI as well as SAT were fully justified in holding that SEBI has jurisdiction to administer the provisions contained under Section 55A, so far as they relate to the issue and transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of Sections 55A, 60B, 73 etc. of the Companies Act, cannot be sustained. Learned senior counsel submitted that Saharas should be judged by what they did, not what they intended. Reference was placed on a Privy Counsel judgment in Young v. Bristol Aeroplane Company Ltd. [1945 PC 163 (HL)]. Learned senior counsel also made elaborate arguments on the explanation to Section 55A as well. 43. Shri Dattar also submitted that DIP Guidelines have statutory force since they are made specifically under the powers granted to SEBI under Section 11 of the SEBI Act. Learned senior counsel pointed out that DIP Guidelines were implemented by SEBI with regard to all listed companies and unlisted companies which made a public offer, until it was replaced by ICDR 2009. Learned senior counsel submitted that the issue of OFCDs was in contradiction of Section 73(1) and the applicable DIP Guidelines/ICDR 2009, consequently, SEBI was obliged to pass orders for refunding the amount that was collected by Saharas. 44. Learned senior counsel submitted that under Section 11(1) of the SEBI Act, SEBI is duty bound to protect the interest of investors in securities either listed or which are required by l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 47. Shri Dattar also submitted that Section 28(1)(b) of SCR Act does not apply to convertible debentures and the plea raised by Saharas is also untenable because the interpretation placed on Section 28(1)(b) would be in contradiction to the mandatory provisions of Section 73(1) and the proviso to Section 67(3) of the Companies Act. It was next submitted that if the convertible debentures are excluded from SCR Act, it would lead to a paradoxical situation because these debentures are required to be listed under Section 73(1) but they cannot be listed in view of Section 28(1)(b). Learned senior counsel submitted that SEBI has rightly claimed jurisdiction to administer the OFCDs, as it was obligatory on the part of Saharas to comply with the statutory requirements of the Companies Act, SEBI Act and SCR Act. Saharas, learned senior counsel submits, had no right to collect Rs.27,000 crores from three crore investors without complying with any regulatory provisions, except filing of RHP with RoCs at Kanpur and Mumbai and that SEBI was justified in directing refunding of amount with 15% interest. 48. Shri Harin P. Rawal, Additional Solicitor General appearing on behalf of Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevented by sufficient cause from filing the appeal within the said period allow it to be filed within a further period not exceeding sixty days. 50. The Securities Appellate Tribunal (for short SAT ) which exercises powers under Section 15T, it is well settled, is the final adjudicator of facts. Under Sub-section (3) of Section 15U of SEBI Act, every proceeding before the Tribunal shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purpose of Section 196 IPC. Under Section 15U, the Tribunal, in exercise of its powers and in discharge of its functions, shall not be bound by the procedure laid down by the Code of Civil Procedure, but shall be guided by the principles of natural justice. The Tribunal has, for the purpose of discharging its functions, the same powers as are vested in a Civil Court under the Code of Civil Procedure. Broadly speaking, the Tribunal has trappings of a court in the sense that it has to determine the appeal placed before it judicially and give a fair hearing to the parties, to accept evidence and also order for inspection and discovery of documents, compel attendance of witnesses and to pass a reasoned or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relationship Sahara Group had with the investors. Claim of Saharas was that the investors were their friends, associated group companies, workers/employees and other individuals who were associated/affiliated or connected with Sahara Group. Saharas, in the bonds, sought for a declaration from the applicants that they had been associated with Sahara Group. No details had been furnished to show what types of association the investors had with Sahara Group. Bonds also required to name an introducer, whose job evidently was to introduce the company to the prospective investor. If the offer was made to those persons related or associated with Sahara Group, there was no necessity of an introducer and an introduction. Burden of proof is entirely on Saharas to show that the investors are/were their employees/ workers or associated with them in any other capacity which they have not discharged. Fact finding authorities have clearly held that Saharas had not discharged their burden which is purely a question of fact. Facts are elaborately discussed by SEBI (WTM) and SAT, hence we do not want to burden this judgment with those factual details. I find no perversity or illegality in those fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iolated 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) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , leading to legislative intervention in various countries including India. For example, England faced a flood of speculative and fraudulent schemes of company flotation, a classic example is scheme formulated by the South Sea Company, which collapsed in 1720, which heralded the start of Security Law in England. Great Crash of New York in 1929 also contributed in equal measure apart from other high-profile corporate fraud cases in U.S.A. Various ventures, undertakings by the companies registered under England Companies Act have their own impact on Securities Law as well. Prior to 1985, in England, the procedure to be followed by the companies for the issue of securities were mainly contained in the Companies Act 1948, the Companies Act 1980 and the Prevention of Fraud in Investment Act 1958. Later, in England, the Companies Act 2006 was enacted making detailed and important changes to the legal treatment of shares. Securities markets now stand controlled by the Financial Services and Market Act, 2000 (FSMA) in England, which has created the Financial Service Authority (FSA). Historical facts also show that fraudulent accounting and non-disclosure of information was root cause for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d disclosure of information on a continuous basis. 57. SEBI Act is a special law, a complete code in itself containing elaborate provisions to protect interests of the investors. Section 32 of the Act says that the provisions of that Act shall be in addition to and not in derogation of the provisions of any other law. 58. SEBI Act is a special Act dealing with specific subject, which has to be read in harmony with the provisions of the Companies Act 1956. In fact, 2002 Amendment of the SEBI Act further reemphasize the fact that some of the provisions of the Act will continue to operate without prejudice to the provisions of the Companies Act, qua few provisions say that notwithstanding the regulation and order made by SEBI, the provisions of the Companies Act dealing with the same issues will remain unaffected. I only want to highlight the fact that both the Acts will have to work in tandem, in the interest of investors, especially when public money is raised by the issue of securities from the people at large. 59. Powers and functions of SEBI are dealt with in Chapter IV of the SEBI Act. Section 11 states that, subject to the provisions of the Act, it shall be the duty of SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on SEBI under Section 11C to conduct investigation if the transactions are being dealt with in a manner detrimental to the investors or securities market. Mandatory listing of securities in case of offer to public would cast an obligation on the issuers to ensure the transparency of information and other continuing obligations to provide information by means of prospectus and to follow disclosure provisions. 61. I may, in the above background, examine the various provisions of the Companies Act which cast a legal obligation on the public companies which offer securities to the public and the SEBI s power or jurisdiction to administer those companies and the legal requirement to be followed while making offer of securities to the public. When we interpret and deal with the provisions like Section 55A, 60B, 67, 73 etc. of Companies Act, we have to always bear in mind the various provisions of the SEBI Act, especially Sections 11, 11A, 11B, 11C, 32 etc. because as we have already indicated, those provisions shall be in addition to and not in derogation of the provisions of the Companies Act. 62. I may straightway deal with the first question posed on the jurisdiction of SEBI ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto. When we look at Section 55A it is clear that it deals with the following three categories: (a) Listed public companies (b) Public companies which intend to get their securities listed on any recognized stock exchange in India; and (c) in any other case that is, all other unlisted public companies, which do not make a public offer of securities and private companies. 66. Public companies which fall under categories (a) and (b) are to be administered by SEBI and with regard to various provisions mentioned in the first part of Section 55A, so far they relate to issue and transfer of securities and non-payment of dividend and rest of the matter be administered by the Central Government. Power of administration of Sections 56, 62, 63 and 73 with respect to issue of OFCDs lies with SEBI and not with the Central Government since they relate to issue of securities. 67. We shall now examine the structure of Section 55A and when we do that, we have to necessarily keep in mind the object and purpose of that section, the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, Company Law Board, Registrar of Companies etc. Reference to Sections 59 to 81 indicated that Parliament intended to include all sections in that range which takes in Sections 60B, 62, 63, 67, 73 etc. of the Companies Act. Section 67 is also a section of considerable importance because the expression offer of shares or debentures to the public finds a place in various sections of the Act, as well as the articles of a company. Further, the first proviso added to Section 67(3) vide the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000 is also of considerable bearing in determining whether a public company offering shares or debentures to the public has to list its securities on a recognized stock exchange. Expression to clearly has a meaning i.e. everything in between or destination of an action. The meaning of the expression to came up for consideration before this Court in Hindustan Lever Ltd. v. Ashok Vishnu Kate and Ors. (1995) 6 SCC 326. Further, the specific inclusion of Sections 68A, 77A and 80A in a bracket, would not mean the exclusion of all sections between in Sections 59 to 81 with suffix A or AA or B . The word including used in the parenthetical clause is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the explanation is to clarify where there is any obscurity or vagueness in the main enactment and to make it consistent with the dominant object which it seems to serve. The main part of Section 55A confers jurisdiction on SEBI with regard to three categories i.e. issue of securities, transfer of securities and non-payment of dividend. The expression all other matters mentioned in the explanation would refer to powers other than the above mentioned categories. Further, it may also be remembered that the explanation does not take away the powers conferred on SEBI by other sections of the Companies Act. At the same time, matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of irredeemable preference shares be exercised by the Central Government, Tribunal, Company Law Board, Registrars of Companies, as the case may be. Further, Section 60B(9) clearly indicates that upon closing of the offer of securities, a final 'prospectus' has to be filed in the case of listed company with SEBI and Registrar, hence the explanation to Section 55A can never be constructed or interpreted to mean that SEBI has no power in relation to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 of the Companies Act, which also calls for the details of the stock exchange where application was made for listing of issue of securities. Section 60 of the Act deals with registration of the prospectus. Section 60(3) specifically states that the Registrar shall not register a prospectus unless the requirements of Sections 55, 56, 57 and 58 and subsections (1) (2) of that section have been complied with. Securities can be listed on a recognized stock only after the prospectus is prepared and approved by the RoC, SEBI, as the case may be. Section 62 imposes civil liability for mis-statements in prospectus and Section 63 criminal liability. Section 68 provides imprisonment for a term which may extend to five years, or with fine which may extend to one lakh rupees, or with both, for fraudulently inducing persons to invest money. In other words, either to offer transferrable securities for sale to the public or to request the admission of securities for trading on a regulated market without prospectus, or to offer transferrable securities for sale to the public, by way of shares and debentures, in violation of the first proviso to Section 67(3) may attract civil and criminal liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. (emphasis supplied) Section 60B(9) deals with the final prospectus, which reads as follows: 60B (9) Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of a listed public company with the Securities and Exchange Board and Registrar, and in any other case with the Registrar only. 76. Section 60B(9) deals with two categories of companies i.e. listed public company under one category and the rest of the companies falling under any other case under another category. A company inviting subscription from public by an IM is bound to file a prospectus prior to the opening of the subscription lists. That is the moment a company decides to issue securities to the public, a duty is cast on it to get its securities lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Part I of Schedule II calls for the names of recognized stock exchange and other stock exchanges where application is made for listing. Section 60B(3), as I have already indicated, says IM and RHPs shall carry same obligations as are applicable in the case of a prospectus. 78. SEBI, under Section 60B(9), however, as a Regulator is legally obliged to examine whether, upon the closing of the offer of securities, a final prospectus giving the details of the total capital raised, whether by way of debt or share capital and the closing of the securities and other details as were not complete in RHPs, have been filed in a case of listed public company with SEBI. This duty is cast on the Registrar alongwith SEBI in the case of a listed public company and in any other case only the Registrar. 79. Saharas have taken up the stand that they have only circulated the IM, by way of private placement, to their associates, group companies, workers/employees etc. Section 60B(1) , as I have already indicated, casts no obligation to issue an IM. It is open to a public company making an issue of securities to circulate the IM to public before filing a prospectus for assessing the demand and pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d he/she has given his/her full consent on terms and conditions mentioned above. I, hereby further declare that all declaration made by the Bond Holder/Representative of Bond Holder and all the information/personal particulars given above by the Bond Holder/Representative of Bond Holder are correct and true to the best of my knowledge and belief. Signature of the Introducer. 81. I fail to see, if the investors were associated with Sahara Group, as declared, then where was the necessity of an Introducer and Introduction. If the offer was made only to persons associated, related or known to Sahara Group, then they could have furnished those details before the fact finding authorities. Further, in the IM, Saharas had stated that if the number of interested parties to the issue exceeds fifty they should approach the RoC to file RHPs as per Section 67(3) of the Companies Act, which clearly indicates that Saharas knew, by virtue of the first proviso to Section 67, if the number of persons exceeds fifty, then the same would be a public issue. Facts indicate that, through this dubious method, that SIRECL had approached more than thirty million investors, out of which 22.1 million have i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be, if the offer or invitation can properly be regarded, in all the circumstances- (a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation; or (b) otherwise as being a domestic concern of the persons making and receiving the offer or invitation. Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more: Provided further that nothing contained in the first proviso shall apply to the non-banking financial companies or public financial institutions specified in section 4A of the Companies Act, 1956 (1 of 1956). (3A) Notwithstanding anything contained in subsection (3), the Securities and Exchange Board of India shall, in consultation with the Reserve Bank of India, by notification in the Official Gazette, specify the guidelines in respect of offer or invitation made to the public by a public financial institution specified under Section 4A or nonbanking financial company referred to in clause (f) of section 45-I of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 67(3A), i.e. by public financial institutions specified under Section 4A or by non-banking financial companies referred to in Section 45I(f) of the Reserve Bank of India Act, 1934. Following situations, it is generally regarded, as not an offer made to public. Offer of securities made to less than 50 persons; Offer made only to the existing shareholders of the company (Right Issue); Offer made to a particular addressee and be accepted only persons to whom it is addressed; Offer or invitation being made and it is the domestic concern of those making and receiving the offer. 86. Resultantly, if an offer of securities is made to fifty or more persons, it would be deemed to be a public issue, even if it is of domestic concern or proved that the shares or debentures are not available for subscription or purchase by persons other than those received the offer or invitation. 87. I may, in this connection, point out that the position in England is almost the same. The Companies Act, 2006 in England also says that it is unlawful for transferring securities to others, certain listed securities, such other transferable securities, as may be specified in prospectus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on the English Companies Act. 89. Alastair Hudson in his book 'Securities Law' First Edition (Sweet Maxwell), 2008 at page 342, refers to 'Restricted Offers' and noticed that there is no contravention of Section 85 of FSMA 2000, if: (b) the offer is made to or directed at fewer than 100 persons, other than qualified investors, per EEA State . The purpose underlying that exemption, the author says, is mainly the fact that the offer is not being made to an appreciable section of the public such that the policy of the prospectus rules generally is not affected. Further, the author says that Self-evidently, while an offer to 99 ordinary members of the public would be within the literal terms of the exemption, it would not be the sort of activity anticipated by the legislation. Moreover, if a marketing campaign were arranged such that ordinary members of the people were approached in groups of 99 people at a time in an effort to avoid the prospectus rules, then that would not appear to be within the spirit of the regulations and might be held to contravene the core principle that a regulated person must act with integrity. 90. I may, therefore, indicate, subject to what h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted by the stock exchange or each such stock exchange, as the case may be, before the expiry of ten weeks from the date of the closing of the subscription lists: Provided that where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock exchange has been preferred under section 22 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), such allotment shall not be void until the dismissal of the appeal. (2) Where the permission has not been applied under subsection (1) or such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted with some different intention which he did not communicate to the other party. Lord Simon in Crofter Hand Woven Harris Tweed Co. Ltd. v. Veitch [1942] AC 435, opined that in some branches of law, intention may be understood to cover results which may reasonably flow from what is deliberately done, the principle being that a man is to be treated intending the reasonable consequences of his acts. 95. The maxim acta exterior indicant interiora secreta (external action reveals inner secrets) applies with all force in the case of Saharas, which I have already demonstrated on facts as well as on law. Conduct and actions of Saharas indicate their intention, we have to judge their so called intention from their subsequent conduct. Subsequent illegality shows that Saharas contemplated illegality. A person s inner intentions are to be read and understood from his acts and omissions. Whenever, in the application of an enactment, a person s state of mind is relevant, the above maxim comes into play. (Ref. Bennion on Statutory Interpretation, 5th Edn., p. 1104) 96. We have to apply the various provisions of the Companies Act and SEBI Act and the rules and regulations framed thereun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application for listing its securities on a recognized stock exchange. 99. Saharas, in my view, have not followed any of those statutory requirements. On a combined reading of the proviso to Section 67(3) and Section 73(1), it is clear that the Saharas had made an offer of OFCDs to fifty persons or more, consequently, the requirement to make an application for listing became obligatory leading to a statutory mandate which they did not follow. Unlisted Public Companies (Preferentia l Allotment) Rules, 2003 and the Unlisted Public Companies (Preferentia l Allotment) Amendment Rules 2011 100. Considerable arguments were advanced by Saharas on the applicability of the provisions of 2003 Rules which, according to them, did not require the OFCDs to be first listed on a recognized stock exchange, especially in the light of the promulgation of Unlisted Public Companies (Preferential Allotment) Amendment Rules 2011 (for short 2011 Rules ). Contention was raised that, in view of 2003 Rules, 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or more, then it will have to be treated as public issue and not a private placement. A public issue of securities will not become a preferential allotment on description of label. Proviso to Section 67(3) does not make any distinction between listed and unlisted public companies or between preferential or ordinary allotment. Even prior to the introduction of the proviso to Section 67(3), any issue of securities to the public required mandatory applications for listing to one or more stock exchanges. After insertion of the proviso to Section 67(3) in December 2000, private placement allowed under Section 67(3) was also restricted up to 49 persons. 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. 2003 Rules are only meant to regulate the issue of the shares and debentures by unlisted public companies and prevent the misuse of the private placement. Section 81(1A), as I have already indicated, says that a preferential allotment can be made by passing a special resolution which is an exception to the rules of rights issue, since that requires new shares or de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken or purported to have been done or taken including observation made in respect of any draft offer document, any enquiry or investigation commenced or show cause notice issued in respect of the said Guidelines shall be deemed to have been done or taken under the corresponding provisions of these regulations; (b) any offer documents, whether draft or otherwise, filed or application made to the Board under the said Guidelines and pending before it shall be deemed to have been filed or made under the corresponding provisions of these regulations. 104. Regulation 111(1) of ICDR 2009 rescinded the DIP Guidelines from 26.8.2009 and clause (2) of Regulation 111 contains the saving clause. The expression anything done or any action taken under Regulation 111(1) are of wide import and would take anything done by the company omitted to be done which they legally ought to have done. Non-performance of statutory obligations purposely or otherwise may also fall within the above mentioned expressions. Failure to take any action by SEBI under DIP Guidelines, in spite of the fact that Saharas did not discharge their statutory obligation, would not be a ground to contend that 2009 Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aras mainly canvassed the position that OFCDs issued were hybrid securities covered by the term securities in the Companies Act and they do not come under the definition of securities under the SCR Act, hence under the SEBI Act. Further, it was also urged that when the definition of securities was amended to include hybrids in the Companies Act, no corresponding amendment was made in the SCR Act and SEBI Act and hence it was contended that SEBI has no jurisdiction or control over the hybrid securities. Further, it was also pointed out that hybrid securities at best can come under the regulatory control of MCA, Government of India. Saharas also contended that even Section 67 speaks only of shares and debentures and does not reflect the change brought about by the definition Clause 2(19A) hybrid or by the insertion of the definition of securities in Section 2(45AA) as including hybrid even though Section 67(3) of the Act was amended, by the Amendment Act 53 of 2000, by which the definitions of securities and hybrid were introduced. It was also pointed out that non-substitution/non-amendment of Section 67(1) and (2), by not including the word hybrid after the words shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment) Act, 2002 w.e.f. 13.12.2000 and reads as follows: 2(19A). hybrid means any security which has the character of more than one type of security, including their derivatives. 110. Hybrid securities, therefore, generally means securities, which have some of the attributes of both debt securities and equity securities, means a security which, in the term of a debenture, encompassing the element of indebtness and element of equity stock as well. The scope of the definition of Section 2(h) of SCR Act came up for consideration before this Court in Sudhir Shantilal Mehta v. Central Bureau of Investigation (2009) 8 SCC 1 and the Court stated that the definition of securities under the SCR Act is an inclusive definition and not exhaustive. The Court held that it takes within its purview not only the matters specified therein, but also all other types of securities, thus it should be given an expansive meaning. In Naresh K. Aggarwala Co. v. Canbank Financial Services Ltd. and Anr. (2010) 6 SCC 178, while referring to the definition of the term securities defined under SCR Act and the applicability of a Circular issued by the Delhi Stock Exchange, the Court endorsed the view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 114. Section 28 was inserted by the SCR Act. The object of the amendment as stated in the Bill was to exempt convertible bonds by foreign financial institutions that had an option to obtain shares at a later date. Preamble of SCR Act provided prohibition on options in securities as a mode to prevent the undesirable transactions in securities . Resultantly, Section 28 had to be amended to make so inapplicable to such options in the bonds and to delete the words by prohibiting options in securities to facilitate such options. Parliament never intended to take away convertible debentures from the purview of SCR Act. For easy reference, I may refer to Section 28, which reads as follows: 28. Act not to be apply in certain cases. (1) The provisions of this Act shall not apply to- (a) the Government, the Reserve Bank of India, any local authority or any corporation set-up by a special law or any person who has effected any transaction with or through the agency of any such authority as is referred to in this clause; (b) any convertible bond or share warrant or any option or right in relation thereto, in so far as it entitles the person in whose favour any of the foregoing has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, OFCDs issued by Saharas to the public cannot be excluded from the purview of listing requirements, any interpretation to the contrary would contravene the mandatory requirements contained in Section 73(1) and proviso to Section 67(3) of the Companies Act. REFUND OF THE MONEY COLLECTED 115. I have found that Saharas having failed to make application for listing on any of the recognized stock exchange, as provided under Section 73(1) of the Companies Act, become legally liable to refund the amount collected from the subscribers in pursuance to their RHPs, along with interest as provided under Section 73(2) of the Act. Rule 4D of the Companies (Central Government) General Rules and Forms 1956 prescribes the rates of interest for the purposes of sub-sections (2) and (2A) of Section 73, which shall be fifteen per cent per annum. Section 73(2) says that every company and every director of the company who is an officer in default, shall be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed. The scope of the above mentioned provisions came up for consideration before this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aras were legally obliged to file the final prospectus under Section 60B(9) with SEBI, failure to do so attracts criminal liability. (c) First proviso to Section 67(3) casts a legal obligation to list the securities on a recognized stock exchange, if the offer is made to fifty or more persons, which Saharas have violated which may attract the penal provisions contained in Section 68 of the Act. (d) Section 73 of the Act casts an obligation on a public company to apply for listing of its securities on a recognized stock exchange, once it invites subscription from fifty or more persons, which Saharas have violated and they have to refund the money collected to the investors with interest. (e) Saharas have violated the DIP Guidelines and ICDR 2009 and by not complying with the disclosure requirements and investor protection measures for public, and also violated Section 56 of the Companies Act which may attract penal provisions. (f) 2003 Rules or the 2011 Rules cannot override the provisions of Section 67(3) and Section 73, being subordinate legislations, 2003 Rules are also not applilcable to any offer of shares or debentures to more than forty nine persons and are to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1.4 of DIP Guidelines. Unlisted companies like Saharas when made an offer of shares or debentures to fifty or more persons, it was mandatory to follow the legal requirements of listing their securities. Once the number forty nine is crossed, the proviso to Section 67(3) kicks in and it is an issue to the public, which attracts Section 73(1) and an application for listing becomes mandatory which fall under the administration of SEBI under Section 55A(1)(b) of the Companies Act. 118. SEBI, I have already indicated, has a duty under Section 11A of the SEBI Act to protect the interests of investors in securities either listed or which are required to be listed under the law or intended to be listed. Under Section 11B, SEBI has the power to issue appropriate directions in the interests of investors in securities and securities market to any person who is associated with securities market. 119. I have already referred to the power of SEBI under the SEBI Act in the earlier part of this judgment. SEBI Act, it may be noted, is a special law, distinct in form, but related to the Company Law, 1956. Purpose and object behind establishing a body like SEBI under the SEBI Act has also been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to as SIRECL ) and Sahara Housing Investment Corporation Limited (hereinafter referred to as SHICL ) are a part of Sahara India Group of Companies. Another company, namely, Sahara Prime City Limited (hereinafter referred to as SPCL ) which is also connected to the Sahara India Group of Companies, filed a Draft Red Herring Prospectus (for short DRHP ) with the Securities and Exchange Board of India (hereinafter referred to as SEBI ) in respect of its proposed Initial Public Offer (for short IPO ) dated 30.9.2009. While the aforesaid DRHP dated 30.9.2009 was under scrutiny, SEBI received complaints relating to disclosures made in the DHRP. One of the aforesaid complaints was made by Professional Group for Investors Protection . In the aforesaid complaint of the Professional Group for Investors Protection dated 25.12.2009, it was alleged that SIRECL was issuing convertible bonds to the public throughout the country for the past several months. It was alleged that issuing of convertible bonds by SIRECL had not been disclosed in the DRHP dated 30.9.2009 (filed by SPCL). On similar lines SEBI received a complaint from one Roshan Lal dated 4.1.2010. 3. In order to probe the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e values (varying from Rs.5000 to Rs.24000) and different maturity periods (varying from 48 months to 180 months). The OFCDs issued by the two companies contemplated different redemption values and conversion options. 7. Vide letter dated 22.4.2010, SEBI sought further details from Enam Securities Private Limited. The details were sought in respect of OFCD s issued by SIRECL and SHICL. The particulars on which information was sought, is being extracted hereunder: 2. a. details regarding the filing of RHP of the said companies with the concerned RoC. b. date of opening and closing of the subscription list. c. details regarding the number of application forms circulated after the filing of the RHP with RoC. d. details regarding the number of applications received. e. the number of allottees f. list of allottees. g. the date of allotment. h. date of dispatch of debenture certificates etc. i. copies of application forms, RHP, pamphlets and other promotional material circulated. The aforesaid information sought by SEBI from Enam Securities Private Limited was never furnished. 8. Thereupon, the same information was sought by SEBI directly from SIRECL and SHICL, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter SIRECL requested the Union Minister of Corporate Affairs to advise it on its locus standi, vis- -vis our regulatory authority whether the company is governed by Ministry of Corporate Affairs, or SEBI, in view of the provisions of section 55A(c) of the Companies Act, 1956 . 10. Through separate letters dated 16.6.2010 the two companies informed SEBI that they had already sought a clarification on the subject from the Government. Yet again, vide separate letters dated 28.6.2010 both companies informed SEBI, that they had received a communication from the office of the Union Minister of State for Corporate Affairs to the effect that the matter was being examined by the Ministry. Accordingly, the companies adopted the stance, that they would file their replies to the letters addressed to them by SEBI only on receipt of a response from the Government. 11. It is apparent from the factual position depicted hereinabove, that SEBI was seeking information from the two companies since May, 2010. Since the information was not being supplied, SEBI initiated an investigation into the OFCDs issued by SIRECL and SHICL. Accordingly, summons dated 30.8.2010 and 23.9.2010 were issued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted the stance, that they did not have complete information sought by the SEBI. 13. It would be relevant to notice, that at the request of the Chief Financial Officer of the Sahara India Group of Companies, an opportunity of hearing was granted to him on 3.11.2010, by the SEBI (FTM). During the course of the aforesaid hearing it was again impressed upon the Chief Financial Officer, that he should furnish information sought by the SEBI fully and accurately without any delay. Despite the aforesaid, the Chief Financial Officer during the course of the said hearing, did not make any firm commitment to furnish the information sought. It is essential to note, that the Chief Financial Officer, did not furnish the information sought. 14. Despite the fact that the companies chose not to provide the information, SEBI was able to collect some shreds of information, from details which had been furnished by the companies themselves, to the concerned Registrar of Companies. This information was obtained by SEBI, from MCA-21 portal maintained by the Ministry of Corporate Affairs. In other words, the information which eventually became available with the SEBI, was not the information furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o carry out infrastructure activities and the amount collected from the current issue shall be utilized in financing the completion of projects viz., establishment/ constructing the bridges, modernization or setting up of airports, rail system or any other projects which may be allotted to the company, from time to time future. The company also proposes to engage into the business of electric power generation and transmission and the proceeds of the current issue shall also be used for the power projects which shall be allotted to the company. The money not required immediately by the company may be parked/invested inter-alia by way of circulating capital with partnership firms or joint ventures or in any other manner as per the decision of the Board of Directors, from time to time. vii. Annual results: As per the recently filed balance sheet of SIRECL (as at June 30, 2009), proceeds from the issuance of OFCDs is shown as Rs.4843.37 crores. viii. Eligibility to apply: It is mentioned in the RHP that only those persons are eligible to apply to whom the information Memorandum was circulated and/or approached privately, who are associated/affiliated or connected in any manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in general public. ix. Explanatory note to the shareholders resolution: The explanatory note to the shareholders resolution filed by SHICL with RoC (Extraordinary General Meeting resolution dated November 11, 2009 by SHICL) mentions: The company further keeping in view that the number of persons to whom the offer of OFCDs shall be issued might exceed the limits as specified under Section 67 of the Companies Act, 1956 made an application for approval of Red herring Prospectus. 15. On the failure of the two companies to furnish information to SEBI, its Full Time Member for short, SEBI (FTM), drew the following conclusions in his order dated 24.11.2010. Firstly, neither SIRECL nor SHICL had denied their having issued OFCDs. Secondly, SIRECL as also SHICL acknowledged having filed RHPs in respect of the OFCDs issued by them with the concerned Registrar of Companies. Thirdly, besides the dates of filing the RHPs with the respective Registrar of Companies, neither of the companies had furnished any other information/document sought from the companies by SEBI. Fourthly, the companies had adopted a stance, that they did not have complete details relating to the securities issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the issue. According to the information made available, the subscribed amount as on 30.6.2009 was Rs.4843.37 crores. To remain out of the purview of the proviso under sub-section (3) of section 67 of the Companies Act, the subscribed amount should have been drawn from less than 50 persons (i.e., at the most 49 persons). If (according to the SEBI), the subscribers are assumed to be 49 (which is the maximum permissible for private placement), then the average subscription would have been in the range of Rs.98.84 crores (Rs.4843.37 49 = 98.8442 crores). According to the SEBI (FTM) since the unit face value of the OFCDs issued by SIRECL and SHICL varied from Rs.5000/- to Rs.24000/-, it was unlikely that such an offer was made by less than 50 persons. This inference was drawn on account of the fact that even high net-worth investors are not seen to make such huge investments in a single company. 17. The SEBI (FTM) then examined the plea advanced by the companies, that in view of the resolution passed by the companies under section 81 (1A) of the Companies Act, they could offer shares to any person, in any manner. And therefore, their offer to a select set of persons should not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not fall under the definition of a public issue, is not tenable. The instances discussed above would prima facie suggest that the offer of OFCDs made by the companies is public in nature . 20. According to SEBI (FTM) since the offer was made to the public, as per the mandate of section 73(1) of the Companies Act, it was obligatory for the companies issuing shares/debentures through a prospectus, to compulsorily seek approval for listing in a recognized stock exchange. It was, therefore, sought to be concluded, that non-compliance of the mandatory provisions contained in section 73 of the Companies Act, could not result in drawing a favourable inference. In other wods, because the companies had wrongfully not sought approval for listing in a recognized stock exchange, it could not be presumed that the offer made by them was by way of private placement. With the aforesaid observations, the SEBI (FTM) concluded its determination on issue no.1, i.e., both SIRECL and SHICL had sought subscription to the OFCDs, by way of an invitation to the public . 21. Issue no.2 was framed to determine whether section 60B of the Companies Act provided an alternative route, for raising capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... September 30, 2010, the companies have mentioned that the issue is not yet closed. A prospectus cannot be kept open perpetually. It is prima facie inferred from such conduct of the companies that they have taken recourse to the argument that their issues are covered under section 60B to circumvent the applicable legal framework laid out elaborately for public issues. Once an offer is made to fifty or more persons, compliance with section 60B(filing with RoC) alone cannot be treated as compliance. The moment the company offers to fifty or more persons, it has to comply with all the provisions applicable for public issues (Part III of the Act). Hence, the legal opinion submitted by the companies that they can issue to fifty or more persons without making an application to a stock exchange under section 73 of the Act, by following the procedure under section 60B thereof, seems to be a narrower and a convenient interpretation. If such an interpretation is accepted it will pave the way for companies to raise money from the general public, without following various procedures intended to protect the interest of investors, in respect of the public issues, prescribed under the Act and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rar of Companies, namely, Mr.Subrata Roy Sahara, Ms.Vandana Bharrgava, Mr.Ravi Shankar Dubey and Mr.Ashok Roy Choudhary, are prohibited from issuing prospectus, or any offer document, or issue advertisement for soliciting money from the public for the issue of securities, in any manner whatsoever, either directly or indirectly, till further directions. 40. Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited are directed to show cause as to why action should not be initiated against them including issuance of directions to refund the money solicited and mobilized through the prospectus issued with respect to the impugned OFCDs, done prima facie in violation of the provisions of the Companies Act, 1956, the Securities and Exchange Board of India Act, 1992, the erstwhile 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 Requirement) Regulations, 2009, as observed in this order. 41. The entities/persons against whom this order is issued may file their objections, if any, to this order within thirty days from the date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were expected to cooperate with the inquiry being conducted by the SEBI. Since the appellant-companies were found remiss in the matter, the High Court was constrained to vacate the interim order passed earlier (on 13.12.2010). The appellant-companies (petitioners before the High Court) then filed an application before the High Court seeking a restoration of the order passed on 13.12.2010. The said application was dismissed on 29.11.2011. While dismissing the aforesaid application, the High Court observed, that those who come to court were supposed to come with clean hands and bona fide intentions, and have to abide by orders passed by the court, if assurances given to the court are not honoured, the court cannot come to the rescue of the party concerned. It is apparent, that the High Court had denied relief to the appellant-companies because they had not approached the High Court with clean hands and because their intentions were not found bona fide. 27. The order passed by the High Court vacating the interim order (passed on 13.12.2010) dated 7.4.2011 came to be assailed by SIRECL before this Court through Special Leave Petition (C) No.11023 of 2011. Having entertained the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies have made private placements of Optionally Fully Convertible Debentures (OFCDs) to persons related or associated with the Sahara India Group, and therefore these issuances are not public issues. B. OFCDs are neither shares nor debentures in its strict sense and are in the nature of hybrid as defined in the Companies Act, 1956 (hereinafter referred to as the Companies Act). C. 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 Contract (Regulation) Act, 1956 (hereinafter referred to as the SCR Act). D. Such hybrid securities were issued by the two companies (both unlisted), in terms of section 60B of the Companies Act and therefore, the jurisdiction in respect of such issues lies with the Central Government in terms of Section 55A(c) thereof and not with SEBI. E. Sections 67 and 73 of the Companies Act are not applicable to such hybrid securities issued by the two companies. F. The DIP Guidelines and the ICDR Regulations would not be applicable to the hybrid securities as neither the SEBI Act nor SCRA confer jurisdiction on SEBI in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6.1 From the nomenclature itself, Optionally Fully Convertible Debentures are Debentures , as they indeed are named so .. A succinct eludication of what the test for a security under securities laws may be found in A Ramaiya (XVII Ed. 2010 Guide to the Companies Act page 100). The acid test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others so that whenever an investor relinquishes control over her funds and submits their control to another for the purpose and hopeful expectation of deriving profits thereof, she is in fact investing her funds in a security .. Such test contains three elements: the investment of money; a common enterprise; and profits or returns solely derived from the efforts of others. 14.6.2 ..In this case, the investor purchasing the OFCD makes an investment. Both the two companies issuing the OFCDs are common enterprises, being public limited companies. The investor herself has absolutely no part in generating profits on her investment and therefore, as such, the profits or returns are solely derived from the efforts of others. Therefore, on the basis of this test, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titude to accommodate OFCDs. 2. OFCDs issued by the two companies are marketable scurities. 3. These instruments satisfy all the characteristic features that identify a security based on clear tests used to identify what a security under section 2(h) of the SCR Act is. 4. Debenture is a genus and not a species of financial instruments. This genus includes OFCDs. 5. OFCDs contemplate the repayment of principal, and hence using the yardstick adopted by the Hon ble Supreme Court of India in Narendra Kumar Maheshwari vs. Union of India (quoted supra), these instruments indeed are debentures. 6. The Companies Act recognizes OFCDs as a composite financial instrument where an option is attached to a debenture. 7. Design and valuation characteristics of OFCDs, show that it is the sum of the valuation of the two parts, viz., debenture and option, where the option is valued as a sweetener to improve the pricing and risk characteristics of the debenture. 8. OFCDs are issued as debentures (Palmer s Company Law XXIV Ed. Page 676). 14.11 From the foregoing discussions, it therefore becomes abundantly clear that OFCDs belong to the family of debentures covered by the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tically falls under section 2(h)(i) of the SCR Act. A hybrid, as long as it is marketable, regardless of the strength or proportion in which the debt and equity components are assembled together, bears an unmistakable likeness to one more of these six instruments. So clearly, any marketable hybrid, in the way we understand hybrids in India today, is a marketable security of a like nature . 15.2 This is not to say that all hybrids invariably have to combine debt and equity. Many issuers have sold debt instruments where the amount of principal payable at maturity is tied to the performance of a stock or bond index, or a commodity or foreign currency or even the rate of inflation. Whether in the future, financial engineering will create newer hybrids as combinations of other securities that become popular in India is hard to predict but today, it is unequivocally true that all marketable hybrids available in the market neatly fall into the categories marketable securities of a like nature . On the second issue while dealing with the factual and legal connotations involved, SEBI (FTM) recorded the following conclusions: 15.12 Five definite conclusions emerge from the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rather straightforward inference viz., the issue was marketed to and subscribed by the general public and it was not a private placement by any stretch of imagination. Therefore, the OFCD issues by the two companies cannot be held, even for a moment, to be of a domestic concern or that it was not subscribed to by others to whom such offer was not made (as referred to in Section 67(3) of the Companies Act). Further, it is the case of SIRECL that they have 6.6 million subscribers. Given the above circumstances, I do not hesitate in being a tad dismissive of the argument advanced by the learned counsel, when I say that 6.6 million subscribers is too colossal a pool of persons associated to the companies, to be labeled private , particularly in the absence of any definition of what such an association or relationship is. What seems to be very obvious is that the two companies are obtaining subscriptions into its OFCD schemes through mass subscription solicitation through service centres sprawled across the country. I have no hesitation in concluding that placements of OFCDs made by the two companies were indeed made to the public. In fact, unless there is a database of investors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, contemplated in the Companies Act does not originate from the benevolence and large-heartedness of the issuer or from a voluntary desire to subject itself to greater regulatory discipline. It arises because Parliament, in its wisdom, as explained in the aforesaid observations of the Hon ble Apex Court, had decided that listing the shares or debentures of a public company that issues shares or debentures to the public, on a stock exchange should be an integral part of the measures for investor protection in our country. In other words, where the expression intend to is used in the Companies Act, in the matter of listing, the law does not offer a choice to the issuer, but mandates the same. 38. The SEBI (FTM), then examined the submission put forward by the two companies, that section 60B of the Companies Act was the only route available to the companies to raise capital by way of hybrid securities. In this behalf, the assertion on behalf of the companies was, that sections 67 and 73 of the Companies Act could not be relied upon to determine the present controversy because the said provisions were applicable only to shares and debentures and not to hybrid securities . Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which intend to get their securities listed as well. Any issuer company has to cross the first two gates in the process circulation of an information memorandum and a RHP under section 60B(1) and 60B(2). Section 60B(3) places all these documents on par with a prospectus. Evidently therefore these provisions in the Companies Act imply that Section 55 and 56 of the same apply in toto. Parliament, in its wisdom, under section 55A, has decided that SEBI should administer sections 55 and 56, insofar as it relates to listed public companies and public companies which intend to get their securities listed . Therefore, it goes without saying, that as far as listed public companies and public companies which intend to get their securities listed are concerned, SEBI is the regulatory gatekeeper, posted at Sections 60B(1) and 60B(2) of the Companies Act. In fact this indeed is precisely what happens now, when listed public companies and public companies which intend to get their securities listed file their DRHP and RHP before SEBI. Having evaluated the controversy in the aforesaid manner, the SEBI (FTM) recorded a decision on the issue canvassed, by relying upon section 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legal provisions under Section 67(3) and 73 of the Companies Act, and have acted ultra vires of the law, in using section 60B(9) for their OFCDs to bypass the regulatory framework applicable to them, relying solely on the expression and in any other case with the Registrar only that occurs in this sub-section. 39. It was also contended on behalf of the two Companies before the SEBI (FTM), that the Companies had wrongly been proceeded against by the SEBI under the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (hereinafter referred to as the DIP Guidelines ) during the period the same were not in force. It was further contended, that presently the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (hereinafter referred to as the ICDR Regulations ) govern the subject under consideration, as the DIP Guidelines had been repealed by the ICDR Regulations. Insofar as the ICDR Regulations are concerned, it was pointed out, that the same being prospective in nature could not be taken into consideration to determine the validity of the Companies activities, which had taken place well before the ICDR Regulations came into force (with effect from 26.8.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r investor protection. 24.2 I observe here that only one company viz. SIRECL has furnished information about its investors. SHICL has not, despite reminders from SEBI, cared to furnish the requisite information. Despite instructions from the Hon ble Supreme Court of India and the Hon ble High Court of Lucknow directing SIRECL to be forthcoming on the data on its investors, there still is little clarity in the statements furnished by it. This is seen particularly in the absence of details on the actual quantum of funds that has been mobilized. All that has been declared clearly in the RHP is that both the companies together need ₹ 40000 cr. for their projects. Additionally, I also observe that the data furnished by SIRECL in the Compact Disk, are in the form of scanned images, which are not amenable to easy analysis on a Computer. SIRECL has not supplied the data in standard spreadsheet form or as regular documents for word processing. Thus, based on what has been furnished by the Companies, SEBI has little means to find out cumulative totals of funds mobilized or do further useful analysis on the data itself, as part of its investigation, should any such future requiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SHICL was around ₹ 11 lakh. The subscribed capital of the two Companies is very small in comparison to the liabilities on their balance sheets. OFCDs raised are of the order of at least a few thousand crore of rupees, with the requirements for funds indicated at ₹ 40000 cr. To compound these concerns, all the OFCDs are unsecured there is no charge on either the assets of the companies or on the revenue streams from the various projects undertaken by the two Companies. Given the large scale of fund raising that has been resorted to by the two Companies, and the fact that particulars about these funds and their utilization are not available with SEBI, at this stage one can, for the sake of the investors, merely fervently hope that the two Companies have taken some other reasonable measures, albeit not very evident to me, for protecting its investors. 41. The SEBI (FTM) then went on to record the investor protection measures violated by the two Companies. The measures found to have been violated in the aforesaid order are being extracted hereunder : 24.7 In this case, the salient investor protection measures that two Companies have not conformed with are listed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts without a prior public issue of equity shares, the promoters should bring in a contribution of at least 20% of the project cost in the form of equity shares, subject to contributing at least 20% of the issue size from their own funds in the form of equity shares. Promoters contribution shall be computed on the basis of the post-issue expanded capital assuming full proposed conversion of convertible securities into equity shares. The remaining pre-issue capital should also be locked in for a period of one year from the date of listing. 4. Credit Rating: Companies making public issue of convertible debt instruments or nonconvertible debt instruments, should obtain a credit rating from at least one credit rating agency (CRA) registered with the SEBI and disclose the rating in the offer document. A credit rating is a professional opinion regarding the issuer s ability to make timely payment of interest and principal on a debt instrument, given after studying all available information at a particular point of time. It is reviewed periodically during the tenure of the debt instrument. CRAs are specialized independent bodies registered and regulated by SEBI. SEBI specifies the eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d debenture trustee, amongst other things, contains the information required under the Regulations. 7. Creation of debenture redemption reserve: Under Section 117C of the Companies Act, 1956 and SEBI Guidelines/Regulations, where a company issues debentures, it should create a debenture redemption reserve for the redemption of such debentures, into which adequate amounts should be credited, from out of its profits every year, until such debentures are redeemed. 8. Appointment of Monitoring Agency: The SEBI Guidelines/Regulations stipulates, that if the issue size exceeds 500 cr., the issuer should appoint one public financial institution or scheduled commercial banks, named in the offer document as bankers of the issuer, as a monitoring agency, to monitor the use of proceeds of the issue. The monitoring agency should submit its report to the issuer in the specified format on a half yearly basis, till the proceeds of the issue have been fully utilized. Such monitoring report should be placed before the Audit Committee. This mechanism is in built-in to avoid siphoning of the funds by the Promoters by diverting the proceeds of the issue later-on to some other objects, other th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernal and beyond the control of the issuer company, offering details, details of capital structure, promoters build-up, details of shares to be locked-in, details of business of the company, basis of issue price, accounting ratios, comparison with peer group, history and corporate structure, management and board of directors, direct or indirect interest of promoters, directors, key managerial personnel in the company or in the issue, financial information, details of the promoters, their photographs, Permanent Account Number (PAN), details regarding their driving license, passport etc. their background, Management Discussion and Analysis of Financial Statements, details of group companies, pending approvals, outstanding litigations etc. Further, the offer document should also contain elaborate disclosures pertaining to the object of the issue, details of the projects in which the investment is to be made, funding plan for the project, schedule of implementation etc. Further, as per Section 56(3) of the Companies Act, no one should issue any form of application for shares in or debentures of a company, unless the form is accompanied by an abridged prospectus, containing details spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting requirements. Equally important is the elaborate protection measures that are available to the investor after the issue is closed and listed on a Stock Exchange. Transactions in the securities carried out on stock exchange are transparent with a well settled price discovery process. Information including quarterly results, shareholder details, and annual report are periodically made available to shareholders. All price sensitive information is disseminated through Stock Exchanges. Transactions carried out on stock exchanges are guaranteed by Stock Exchanges and these are under the vigilant surveillance of concerned stock exchange and SEBI. Stock Exchanges have Investors Protection funds which protects investor against default by brokers and there are well laid out mechanisms for the redressing investors grievance. 16. Other miscellaneous requirements: -Issuer should, after registering the red herring prospectus, with the Registrar of Companies, make a pre-issue advertisement in one English national daily newspaper with wide circulation, Hindi national daily newspaper with wide circulation and one regional language newspaper with wide circulation at the place where the regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were also highlighted by the SEBI (FTM). These are also being extracted hereunder : ..During investigations into the same, SEBI had prima facie found that a. SIRECL had issued OFCDs to more than 6.6 million investors and that SHICL had not provided any information about the number of investors of the OFCDs issued by it. b. The RHPs of SIRECL and SHICL contained untrue statement and mis-statements. c. SIRECL and SHICL have not executed debenture trust deed; not appointed debenture trustee and have not created any debenture redemption reserve. d. The forms issued by the two companies did not enclose an abridged prospectus. e. The two companies continued to solicit subscriptions to their OFCDs in violation of the Court s order in vacating the stay imposed on the SEBI Order. f. The balance sheets and profit and loss accounts (for the relevant period) of the companies were not filed with the concerned RoC. g. The sums subscribed in the OFCDs varied from ₹ 200/-, 300/-, 400/- etc. whereas the minimum application size for the bonds issued by SIRECL were 5000/- (for Abode and Nirmaan Bonds) and ₹ 12,000/- for the Real Estate Bond. h. From the list of accredi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies have not executed debenture trust deeds for securing the issue of debenture; failed to appoint a debenture trustee; and failed to create a debenture redemption reserve for the redemption of such debentures. 7. The two Companies have failed to appoint a monitoring agency (a public financial institution or a scheduled commercial bank) when their issue size exceeded ₹ 500 cr., for the purposes of monitoring the use of proceeds of the issue. This mechanism is put in place to avoid siphoning of the funds by the promoters by diverting the proceeds of the issue. 8. The two companies failed to enclose an abridged prospectus, containing details as specified, along with their forms. 9. The companies have kept their issues open for more than three years/two years, as the case may be, in contravention of the prescribed time limit of ten working days under the regulations. 10. The two companies have failed to apply for and obtain listing permission from recognized stock exchanges. 45. Based on the aforesaid salient conclusions the SEBI (FTM) arrived at the determination, that both SIRECL and SHICL had violated various provisions of the Companies Act, the requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I order dated 23.6.2011 by preferring an appeal under section 15T of the SEBI Act. While disposing of the aforesaid special leave petition, this Court recorded the statement of the learned counsel for the appellant-companies (herein), that they would not invite any further deposits pending the hearing and final disposal of the proposed appeals. In view of the aforesaid statement, this Court restrained SEBI from giving effect to the order dated 23.6.2011 till the disposal of the appeal. Pursuant to the order passed by this Court on 15.7.2011 the appellant-companiess herein withdrew Writ Petition no.11702 (M/B) of 2010 from the High Court and preferred Appeal no.131 of 2011 (by SIRECL) and Appeal no.132 of 2011 (by SHICL) before the Securities Appellate Tribunal (for short SAT ). 47. After having narrated the facts relevant to the controversy, the SAT while adjudicating upon the appeals preferred by the two companies first dealt with the issue whether the appellant-companies had made full and complete disclosure of facts in the RHP. Learned counsel representing the appellant-companies before the SAT, placed reliance on the resolutions passed by the company and the projections made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Accordingly the SAT observed, that the intention of the companies and its promoters from the very beginning, was not bonafide; that the companies concealed vital facts from its shareholders, from its investors and from the respective Registrars of Companies. As such, the SAT felt, that it would be improper to infer legitimacy in the actions of the two companies, merely from the fact that their RHPs had been registered by the Registrars of Companies. 48. While dealing with the registration of RHPs by the Registrars of Companies, the SAT also expressed the view, that the conduct of the respective Registrars of Companies was also inappropriate, inasmuch as, the Registrars of Companies on examination of the facts disclosed by the appellant-companies, ought to have made further enquiries. Such additional enquiries would have disclosed, that the companies were actually making a public issue. Whenever a company desires to make a public issue, a copy of the RHP is to be submitted to the SEBI. Appropriate handling of the matter at the hands of the Registrar of Companies would have resulted in requiring both companies to furnish copies of their RHPs to the SEBI. If that had been done, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make any distinction between listed and unlisted companies, and, therefore, measures for regulating securities in section 11, 11A and 11B of the SEBI Act, were applicable to listed, as well as, unlisted companies. Based on the aforesaid, the SAT held that the two companies would fall within the regulatory jurisdiction of SEBI de hors the provisions of any other law. The SAT, therefore, rejected the submission of the learned counsel for the appellant-companies, that since the two companies were unlisted, their securities could not be regulated by the SEBI. The SAT also expressed the view, that on the subject of protecting investors interest in securities, as well as, on the subject of regulating the securities market, the SEBI Act was a stand alone enactment. The SAT also concluded, that SEBI s powers under the SEBI Act were not fettered by any other law including the Companies Act. According to the SAT, the SEBI Act, the SC(R) Act and the Depositories Act, 1996, were cognate statutes, as they dealt with different aspects of securities and the securities market, and they alone governed the capital market. 51. The SAT thereafter examined the question whether the invitation of O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to the SAT, had either the prescribed tangible assets or the stipulated distributable assets or even the prescribed net worth. It was pointed out (by the SAT), that for bringing out a public issue, an unlisted company s promoters should contribute not less than 20% of the postissue capital, which is required to be locked-in for a period of three years. Public companies making a public issue, were also required to obtain their credit rating from at least one credit rating agency registered with the SEBI. Such credit rating agency, is required to rate the public issue proposed to be brought by the concerned company. In case the public issue is debentures, the concerned company is precluded from issuing a prospectus till it appoints a debenture trustee, and it creates a debenture redemption reserve. Additionally, a public company, according to the SAT, is required to obtain pre-approval, for listing of its securities, from one or more recognized stock exchange(s). According to the SAT, none of the aforestated requirements were complied with, by either of the companies. The SAT therefore felt, that it was appropriate and justified for the SEBI to have taken action against both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies in matters of issue of capital and ensuring capital protection, right from its inception in 1988. According to the SAT, the insertion of section 55A in the Companies Act did not in any way affect the powers of SEBI under the SEBI Act. All the same, the SAT concluded, that both SIRECL and SHICL actually intended to get their OFCDs listed, although they professed to the contrary. The SAT held, that the companies having gone to the public by circulating an information memorandum could not be heard to say, that they did not intend to get their securities listed. The SAT, therefore, was of the view, that both companies had the intention in law, to get their securities listed, and therefore, would fall within clause (b) of section 55A of the Companies Act, so as to be administered by the SEBI. The instant issue was examined by the SAT from various other angles as well, whereupon the contention advanced at the hands of the appellant-companies that SEBI did not have jurisdiction on the subject matter under consideration, was rejected. 56. The SAT then considered the submission of the appellant-companies based on the DIP Guidelines and ICDR Regulations. The submission on behalf of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isposal of the appeals by the SAT. As noticed above, the appeals preferred before the SAT by SIRECL and SHICL came to be dismissed on 18.10.2011. The common order passed by the SAT dated 18.10.2011 was separately assailed by SIRECL (through Civil Appeal no. 9813 of 2011) and by SHICL (through Civil Appeal no. 9833 of 2011). While entertaining the aforesaid appeals on 28.11.2011, this Court interalia passed the following interim order:- By the impugned order, the appellants have been asked by SAT to refund a sum of Rs.17,400 crores approximately on or before 28.11.2011. We extend the period upto 9.1.2012 . On the following date of hearing, i.e. on 9.1.2012, this Court extended the interim order passed on 28.11.2011 by observing as under:- Interim order granted by this Court on 28.11.2011 shall continue to be operative . In the aforesaid view of the matter, the order passed by the SEBI (FTM) on 23.6.2011, which on the dismissal of the appeals (preferred by SIRECL and SHICL) before the SAT on 18.10.2011, was required to be given effect to within a period of six months, has remained unimplemented in view of the interim order passed by this Court awaiting this Court s decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, whereas the latter s complaint to the SEBI was dated 4.1.2010. During the course of examining the DRHP of SPCL in respect of its proposed IPO dated 30.9.2009, SEBI suspected that SPCL had not made a complete and full disclosure. Enam Securities Private Limited responded to the queries raised by the SEBI, both in respect of SIRECL and SHICL, by asserting that on legal opinion sought, as well as, on having conducted an inquiry, it was in a position to confirm that the OFCDs issued by SIRECL and SHICL were in conformity with all applicable laws. The reply of Enam Securities Private Limited did not incorporate any response to the express queries raised by SEBI. On 26.2.2010 Lead Managers of SIRECL and SHICL informed SEBI, that both the companies had issued debentures on tap basis, thus asserting, that the OFCDs under consideration had been issued by way of private placement . The Lead Managers, however, could not deny the issuance of an information memorandum, as well as, RHPs by the two companies. Despite the aforesaid acknowledgement, the details sought by the SEBI were not furnished by the Lead Managers of the appellant-companies. On 22.4.2010 SEBI sought further details from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2010. One would like to extract herein a relevant portion of the communication in question, as it is difficult to believe, that the companies could have made such an inconsiderate excuse, to avoid furnishing the particulars sought by SEBI. An extract of the reply is being reproduced hereunder: In the months of May and June, in the year, most of the staff remains on long holidays with their children due to summer holidays of schools/colleges. In our case also concerned officials are on vacation and gone out of station with their children. One wonders whether the appellant-companies were running a kindergarten, where their staff were expected to be unavailable during the summer. The impression which the aforesaid communication project is, that the two companies had no respect whatsoever for SEBI. Inspite of the fact that SEBI was responsible for the development and regulation of the securities market, the appellant-companies could brush aside the SEBI s demand for information in such a brash and audacious manner, is quite frankly difficult to comprehend. In response to one of the SEBI s communications, the two companies adopted the stance, that they did not have complete deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith both, and also with a further fine which may extend to five lakh rupees for each day after the first, during which the failure or refusal continues. 63. It is interesting to note, from the narration of facts recorded hereinabove, that SEBI was seeking information from the appellant-companies since May, 2010. Since the information sought by SEBI was not being supplied, SEBI eventually took upon itself the task of investigation into the issuance of OFCDs by SIRECL and SHICL. For this, summons dated 30.8.2010 and 23.9.2010 were issued to the two companies requiring them to furnish various factual details in respect of the OFCDs issued by them. Interestingly, in response to the aforesaid summons both companies filed detailed replies, raising a large number of legal objections. Importantly, none of the particulars sought by SEBI, were furnished by either of the companies. Even at this late stage, the Chief Financial Officer of the Sahara India Group of Companies was afforded an opportunity of hearing, when a request was made by him (on 3.11.2010). It was impressed on him, during the course of hearing, that complete and correct information sought by the SEBI, should be furnished. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.2010. The appellant-companies then filed an application before the High Court, praying for the restoration of the order dated 13.12.2010. The instant application also came to be dismissed on 29.11.2011. While dismissing the aforesaid application, the High Court observed: 5. ..A person, who comes to the court, is supposed to come with clean hands and bona fide intentions, and has to abide by the orders passed by the court, more so in a case where the parties counsel agree for certain actions to be undertaken. If some assurance is given by any person to the Court, as has been done in the present case, and the said assurance/understanding is not honoured, the court would not come to his rescue. The application is, therefore, rejected. A perusal of the aforesaid extract of the order of the High Court reveals, that the High Court expressed the view, that those who seek relief from a court must come with clean hands and with bona fide intentions, they must also abide by the orders passed by the concerned court. If assurances given to the court are not honoured, the court cannot come to the rescue of the party. Since the application filed by the appellant-companies was dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 18.10.2011, upheld the order passed by SEBI (FTM) dated 26.8.2011. 69. The order passed by the SAT is now subject matter of challenge before us. Even before this Court, the position remains unaltered. During the course of hearing we were informed by learned counsel representing the SIRECL, that a compact disc with a key had been furnished to the SEBI (FTM) with complete particulars. What was placed before the SEBI (FTM) in the said compact disc, we were informed, has now been made available to this Court as a hard copy. During the course of an examination of the hard copy, it was not possible to persuade oneself to travel beyond the first page of the voluminous compilation. The reason therefor is being expressed hereinafter. For facility of reference extracted hereunder are details of Kalawati , one of the investor s disclosed in the hard copy: S.No. Investor s name Investor s particular s Amount Introducer s Agent name Introducer s Agent Code Investor s/ agent s address 6603675 Kalawati Uchahara S.K. Nagar, U.P 1600 Haridwar 107511425 Bani Road, Semeriyawa Sant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by putting the data together in a consistent format and doing the necessary authentication of the same, given the fact that the data is voluminous and is spread across thousands of service centre. (emphasis supplied) Clearly, the OFCDs are issued, admittedly to various people all over the country. The compilation of the data is not available with the firm. The data is unauthenticated and the fund mobilization is spread across thousands of service centres . It seems the two companies collected money from investors, without any sense of responsibility to maintain records, pertaining to funds received. It is not easy to overlook, that the financial transactions under reference are not akin to transactions of a street hawker or a cigarette retail made from a wooden cabin. The present controversy involves contributions which approximate Rs.40,000/- crores, allegedly collected from the poor rural inhabitants of India. Despite restraint, one is compelled to record, that the whole affair seems to be doubtful, dubious and questionable. Money transactions are not expected to be casual, certainly not in the manner expressed by the two companies. 71. The consequence of the foregoing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be unfavorable to him; xxx xxx xxx But the Court shall also have regard to such facts as the following, in considering whether such maxims do or do not apply to the particular case before it - As to illustration (g) - A man refuses to produce a document which would bear on a contract of small importance on which he is sued, but which might also injure the feelings and reputation of his family; As to illustration (h) - A man refuses to answer a question which he is not compelled by law to answer, but the answer to it might cause loss to him in matters unconnected with the matter in relation to which it is asked; xxx xxx xxx Based on section 114 of the Indian Evidence Act, and more particularly the illustrations extracted above, SEBI ought to have drawn the obvious presumption against the appellant-companies. The material sought by the SEBI from the appellant-companies, thought available with them, must be deemed to have been consciously withheld, as the same if disclosed, would have been unfavourable to the appellant-companies. Details sought by the SEBI from the appellantcompanies included particulars of the application forms circulated, the number of application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner. (3) No offer or invitation shall be treated as made to the public by virtue of sub-section (1) or sub-section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances (a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchased by, persons other than those receiving the offer or invitation; or (b) otherwise as being a domestic concern of the persons making and receiving the order or invitation; Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more; Provided further that nothing contained in the first proviso shall apply to the non-banking financial companies or public financial institutions specified in section 4A of the Companies Act (1 of 1956). (3A) Notwithstanding anything contained in sub-section (3), the Securities and Exchange Board of India shall, in consultation with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as an invitation or offer to the public . And clause (b) of section 67(3) similarly provides, that an invitation/offer made as a matter of a domestic arrangement, between the persons making and receiving the invitation/offer, would also not be considered as an invitation/offer to the public . The first proviso under section 67(3) of the Companies Act, limits the instant exceptions, contemplated under clauses (a) and (b) of section 67(3) only to situations where the invitation/offer is made to less than 50 person. Even though, clauses (a) and (b) of sub-section (3) of section 67 of the Companies Act, are an exception to sub-sections (1) and (2) of section 67 thereof, yet it must be clearly understood, that a mere fulfillment of the yardstick defining the exception (under clauses (a) and (b), aforesaid) would not bring the issue under reference out of the scope of the term to the public . For that, it is essential to also satisfy the requirement of the proviso under section 67(3) i.e., the number of subscribers should not exceed 49. Only on the satisfaction of the twin requirements, delineated above, the issue/offer will not be treated as having been made to the public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ECL; and Multiple Bonds, Income Bonds and Housing Bonds, in case of SHICL). The RHPs issued by the two companies clearly expressed, that the subscribers could transfer the same to any other person, subject to the terms and conditions and the approval of the concerned company. In sum and substance, therefore, the OFCDs/bonds under reference were transferable, whereas, to satisfy the requirement under clause (a) of section 67(3) the shares/debentures should be non-transferable. Clearly, the OFCDs/bonds issued by the appellant-companies did not fall within the scope of clauses (a) or (b) of section 67(3) of the Companies Act. Therefore, per-se the contention of the appellant-companies, that invitation to subscribers to the OFCDs was by way of private placement is unacceptable. Even if for arguments sake, it is assumed that the OFCDs in question fall in one or the other exempted categories, defined through clauses (a) or (b) of section 67(3), still in so far as the present controversy is concerned, the same would not constitute an exception to sub-sections (1) and (2) of section 67 of the Companies Act, because the invitation/offer of OFCDs, in the present controversy, was admittedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel, similarly issued OFCDs in 1998 by way of private placement (and continued to issue the OFCDs till 30.6.2008). SICCL an unlisted public company, according to learned counsel, had filed its RHP on 29.6.2001, indicating that SICCL had no intention to list its OFCDs on a recognized stock exchange. According to learned counsel, the aforesaid RHP, as in the instant case, was duly approved and registered by the concerned Registrar of Companies, despite the fact that subscribers exceeded 50 (total subscribers indicated as 1,98,39,939). It was submitted, that in furtherance of the OFCDs issued by the SICCL, a subscription sum in excess of Rs.14,106 crores was collected. It was then contended, that no action whatsoever was initiated by the SEBI against the SICCL. It was submitted, that inspite of the fact that the appellant-companies are similarly situated as SICCL, they have been picked up arbitrarily, for unfair and discriminatory treatment. Secondly, SIRECL filed its special resolution dated 30.3.2008 with the Registrar of Companies, Uttar Pradesh and Uttarkhand. SIRECL then filed its RHP on 13.3.2008 before the Registrar of Companies. In the said RHP, SIRECL clearly exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso introduced the limit of less than 50 subscribers, in case of private placement , whereas SICCL (according to the appellant-companies own showing) had commenced its OFCD issue in 1988, i.e., well before the aforesaid proviso, introducing the outer limit of less than 50 persons, came into existence. The first of the two submissions is therefore clearly unsustainable. In so far as the second contention is concerned, abundance of material was gathered by SEBI to show, that the specifications/conditions/terms indicated in the documents relied upon by the appellant-companies were clearly fallacious and misleading. Therefore, on the basis of the factual position recorded above (in the opening paragraph, under the third perspective), there can be no doubt, that SAT was fully justified in drawing its conclusions, by taking into consideration the number of persons to whom the invitation/offer to subscribe to the OFCDs was extended, the number of agents associated by the appellant-companies to solicit subscriptions and the number of branch offices established for the purpose. If one were to add to the aforesaid consideration, the number of subscribers and the amount of subscription col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order where the whole time member has placed reliance on the facts collected by the investigating authority behind the back of the appellants. This is what the whole time member has observed in these paragraphs: 17.9 I note that the Investigating Authority had, as directed by me, made enquiries with two of the subscribers (who are residing in Mumbai) to such OFCDs made by the companies. These investors had stated that their investments in such instruments were made on the basis of the representations made by the local agents (employed by the companies) and that they had no connection, whatsoever, with the two companies themselves or to the Sahara India Parivar .. For the purpose of my own understanding, I had directed the Investigating Authority to do a snap verification of any four addresses from a randomly selected locality in Mumbai itself (as the learned counsel had submitted that complete addresses are given in respect of investors in urban areas). Out of four investors, the Investigating team tried to identify, even after strenuous efforts with the Post Office, two of them were simply not traceable. As to the two investors who were identified, both of them investe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the whole time member to look into the findings of the investigating officer which were recorded behind the back of the appellants. Moreover, on the facts of this case, it is a legal issue based upon the interpretation of the provisions of the Companies Act. We have ignored the observations made in the two paras of the impugned order while recording our findings in the earlier part of the order that the issue was a public issue. In view of our findings, the observations made in the aforesaid two paragraphs of the impugned order are of no consequences. (emphasis is mine) 80. What needs to be kept in mind while applying the rules of natural justice is, that the same are founded on principles of fairness. Two cardinal principles of fairness are incorporated in the rules of natural justice. Firstly, the person against whom action is contemplated, is liable to be informed of the basis on which the proposed action is to be taken (i.e., the affected party is required to be put to notice). And secondly, before taking any adverse action, the affected party is liable to be afforded an opportunity to present his defence (i.e., an opportunity to be heard, under the tenent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it not amount to putting a premium on their non-cooperative and unfair stance? Do the rules of natural justice have any limitations? Whether fair or not, must the concerned party always enjoy the advantage of procedural prescriptions under the rules of natural justice? It is in respect of these propositions, that an answer is being attempted. In so far as the present controversy is concerned, opportunities were repeatedly provided by SEBI, to the appellant-companies, but they remained adamant and obstinate. Based on one excuse or the other, they declined to furnish the information sought. What needs to be noticed in the present controversy is, that the appellant-companies did not dispute the factual position (recorded by the SEBI (FTM) from the details furnished by the Investigating Authority) before the SAT. The two companies could have easily done so by providing the details available with them. Even before the SAT, they did not come out with the correct factual position. The material sought by SEBI from the two companies, would have constituted a valid basis to decipher and unravel the true factual position. Interestingly, to get over the crisis, emerging from the facts discover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justice has been recorded, in the background of the facts of the present controversy. Whether OFCDs issued by SIRECL and SHICL which are admittedly hybrids , are securities? I f not so, whether they would be amenable to the jurisdiction of the SEBI? The first perspective : 83. The submissions advanced at the hands of the learned counsel for the appellant-companies to support their contention, that the SEBI has no jurisdiction over hybrids is rather simple. To canvass the aforesaid claim, our attention was first invited to the definition of the term securities in section 2(1)(i) of the SEBI Act. The same is being extracted hereunder: 2(1) (i) securities has the meaning assigned to it in section 2 of the Securities Contracts (Regulation) Act, 1956. For a complete and effective understanding of section 2(1)(i) extracted above, reference is liable to be made to section 2(h) of the SC(R) Act. The same is therefore being reproduced hereunder: 2(h) securities include i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; ia) derivative; ib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds and includes hybrids . 85. Based on the legal position recorded in the foregoing two paras, it is the contention of the learned counsel for the appellant-companies, that the definition of the term securities under the Companies Act includes hybrids (consequent upon the amendment made in 2000), whereas, an identical definition of the term securities under the SEBI Act, does not provide for such inclusion. Based on the aforesaid provisions, it is the submission of the learned counsel for the appellant-companies, that hybrids would be treated as securities within the meaning of the Companies Act, but cannot be treated as securities within the meaning of the SEBI Act. Founded on the aforesaid statutory interpretation, it is the contention of the learned counsel for the appellant-companies, that SEBI has no jurisdiction, either in matters of administration or in matters of regulation, over hybrids . It is important to keep in mind, that the aforesaid submission was canvassed to overcome, the contention of SEBI, that it had a clearly defined administrative role on the subject of securities under section 55A of the Companies Act. 86. The submission advanced at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to the administrative powers assigned to SEBI thereunder, would include hybrids . The aforesaid conclusion constitutes a clear answer to the query posed above, with reference to section 55A of the Companies Act. The second perspective : 87. An attempt shall now be made to determine whether hybrids can also be included in the definition of the term securities for the purposes of the SEBI Act. For the aforesaid analysis reference may first be made to section 2(19A) of the Companies Act which is being extracted hereunder: 2(19A) hybrid means any security which has the character of more than one type of security, including their derivatives; The term hybrid is not defined under the SEBI Act, and consequently it may be appropriate to accept the same, as it has been defined in the Companies Act, specially with reference to an issue arising in respect of a public company. Ofcourse, it would not have been apt to rely on section 2(19A) of the Companies Act, if the term hybrid had also been defined in the SEBI Act or had even been defined in the SC(R) Act on the Depositories Act, 1996, because section 2(2) of the SEBI Act postulates, that words and expressions u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term securities defined in section 2(h) of the SC(R) Act (and therefore also, section 2(1)(i) of the SEBI Act). The OFCDs/bonds issued by appellant-companies were also clearly marketable, because the RHPs issued by the two companies provided, that the subscribers would be at liberty to transfer the OFCDs/bonds, to any other person. Although, the transfer of OFCDs/bonds was to be subject to the terms and conditions prescribed, and the approval of the appellant-companies. In the absence of any prescribed terms and conditions barring transfer, the OFCDs/bonds were clearly transferable, and therefore, marketable . The term marketable simply means, that which is capable of being sold. Allowing the liberty to subscribers to transfer the OFCDs/bonds made them marketable . There is therefore, no room for any doubt, that the term hybrid , as defined in the Companies Act, would squarely fall within the term securities as defined under section 2(1) (i) of the SEBI Act (i.e., Section 2(h) of the SC(R) Act). 88. In view of the above it is clear, that hybrids are included within the term securities not only for the purposes of Companies Act, but also, under the SEBI Act. SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (4) above shall be individually intimated to the persons invited to subscribe to the issue of securities. (6) In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or postdated cheques or stock-invest, the company or such underwriters or bankers to the issue shall not encash such subscription moneys or postdated cheques or stock-invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid. (7) The applicant or proposed subscriber shall exercise his right to withdraw from the application on any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters. (8) Any application for subscription which is acted upon by the company or underwriters or bankers to the issue without having given enough information of any variations, or the particulars of withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having made any false or incorrect disclosure, or for having not complied with the procedure prescribed in section 60B of the Companies Act. Since both the companies categorically adopted the stance, that they did not intend to be listed on any recognized stock exchange(s), according to learned counsel, there was no express or implied requirement for the appellant-companies, to approach the SEBI, in respect of the issue in hand. It was also submitted, that the registration of the respective RHPs issued by the two companies, by the respective Registrars of Companies, substantiates due compliance of the prescribed procedure. It was also contended, that having chosen to remain unlisted, the appellant-companies even during the course of proceedings before the SEBI and SAT respectively, were not accused of having contravened any of the substantive or procedural requirements of section 60B of the Companies Act. It is therefore sought to be canvassed, that the appellantcompanies having chosen the section 60B option, could not be compelled/persuaded to have their OFCDs listed in one or more recognized stock exchange(s). 91. In order to counter the contentions advanced at the hands of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange or stock exchanges for dealing in any shares or debentures in such stock exchange or each such stock exchange and the moneys received from applicants for shares or debentures are in excess of the aggregate of the application moneys relating to the shares or debentures in respect of which allotments have been made, the company shall repay the moneys to the extent of such excess forthwith without interest, and if such money is not repaid within eight days, from the day the company becomes liable to pay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent as may be prescribed, having regard to the length of the period of delay in making the repayment of such money. 2B. If default is made in complying with the provisions of sub-section (2A), the company and every officer of the company who is in default shall be punishable with fine which may extend to fifty thousand rupees, and where repayment is not made within six months from the expiry of the eighth day, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion shall be construed accordingly; and (iii) for the reference in sub-section (3) to the company and every officer of the company who is in default, there shall be substituted a reference to any person by or through whom the offer is made and who is knowingly guilty of, or willfully authorizes or permits, the default. 7. No prospectus shall start that application has been made for permission for the shares or debentures offered thereby to be dealt in on any stock exchange, unless it is a recognized stock exchange. According to the learned counsel presenting SEBI, a perusal of sub-section (1) of section 73 reveals, that a company intending to offer shares/debentures to the public by issue of a prospectus, must apply to one or more recognized stock exchange(s) for permission, that its shares or debentures be dealt with by such recognized stock exchange(s). With reference to the term prospectus depicted in sub-section (1) of section 73 of the companies Act, our attention was invited to sub-sections (2) and (3) of section 60B of the Companies Act, which requires a company inviting subscription by way of an information memorandum to file a prospectus prior to the opening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moniously. This is so, because the Companies Act does not postulate and overriding effect of one over the other. The contentions advanced on behalf of the rival parties will have to be examined in a manner, that the purpose and meaning assigned by the legislature to both provisions, is not lost. 93. Section 60B has been provided with heading information memorandum . The term information memorandum stands defined in section 2(19B) of the Companies Act as under: 2(19B) information memorandum means a process undertaking prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited, and the price and the terms of issue for such securities is assessed, by means of a notice, circular, advertisement or document; In terms of the aforesaid definition, an information memorandum is a means/process adopted by a company, to elicit a demand for the securities proposed to be issued, as also, to determine the price at which they could be offered. Stated differently, through an information memorandum a company assesses a demand for the proposed securities in the market, and the price which the public would be willing to offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that a public company making an invitation/offer to the public can do so only by a process of listing in one or more recognized stock exchange(s). The aforesaid mandate of law is imperative and cannot be relaxed at the discretion of the concerned public company. 96. Having recorded the aforesaid conclusion, it is also essential to notice, that the aforesaid determination has a bearing on the query being dealt with immediately hereinafter. That is so, because learned counsel representing the rival parties are agreed, that the requirement of listing automatically brings in the jurisdiction of the SEBI, as it transforms a public company into a listed public company . Whether SEB I had the jurisdiction to regulate the OFCDs issued by SIRECL and SHICL (as is the case o f the SEBI) , or is i t tha t SEB I has no jurisdiction over the OFCDs issued by the two companies (as is the case o f appellant-companies) ? The first perspective 97. It is the vehement contention of the learned counsel for the appellant companies that the jurisdiction of SEBI is limited to administration of listed public companies, as also such public companies which intend to get their securities liste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also has been, that it is futile to assume to the contrary, what the appellant-companies have repeatedly expressed in writing. Thus viewed, the contention of the learned counsel for the appellant-companies was, that SEBI had no jurisdiction to administer the affairs of the appellant-companies even in matters relating to issue and transfer of securities and non payment of dividends . 98. On a thoughtful consideration to the submissions advanced on behalf of the appellant-companies on the subject of jurisdiction, based on the interpretation of section 55A of the Companies Act, it emerges that clause (b) of section 55A of the Companies Act uses the term intend . And what is intended is a matter of the mind. Therefore, unless actions speak for themselves, no presumption can be drawn on the intent of a party. Intent as one commonly understands is something aimed at or wished as a goal; it is something that one resolves to do; it is a will to achieve as an end; it is a direction as one s course; it is planning towards something to be brought about; it is something that an individual fixes the mind upon; it is a design for a particular purpose. When a party expresses its desig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem, as also the registration of the said RHPs by the respective Registrars of Companies, the said companies must be deemed to satisfy the requirements of clause (b) of section 55A of the Companies Act. The obvious consequence thereof would be, that the power of administration in the present set of circumstances lies in the hands of the SEBI. 99. It would be relevant to notice, for the benefit of the learned counsel representing the appellant-companies, that certain ancillary submissions were also advanced on the basis of section 55A of the Companies Act. As for instance, a reference was made to the sections specifically incorporated in section 55A of the Companies Act. It was submitted, that SEBI could have jurisdiction only on matters arising out of provisions expressly mentioned in the said section, and under no other provision of the Companies Act. It was canvassed, that provision which were relied upon by the appellant-companies to canvass their claims before us, particularly section 60B, does not fall within the administrative control of SEBI, as the same is not expressly mentioned therein. To advance the aforesaid contention, learned counsel placed reliance on the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was decided to vest SEBI with statutory powers, so as to enable it to deal effectively with all matters relating to the capital market. In the first instance, as Parliament was not in session, keeping in view the urgency of the matter, the President promulgated the Securities and Exchange Board of India Ordinance, 1992 on 30.1.1992. The same was substituted by the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956. After the aforesaid legislative enactments remained in force for a few years, experience revealed, a need to amend the original enactments in respect of certain categories of intermediaries, persons associates with the securities markets and companies; on matters relating to issue of capital and transfer of securities. The original SEBI Act was accordingly amended in 1995. A relevant extract of the statement of objects and reasons recorded for the aforesaid amendment is being extracted hereunder: xxx xxx xxx 2. On the basis of past experience of the Board, a need has been felt to amend the said Acts in respect of certain categories of intermediaries, persons associated with the securities market and companies on m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the Act or the rules or the regulations. However, the SEBI has no jurisdiction to prohibit issue of securities or preventing siphoning of funds or assets stripping by any company. While the SEBI can call for information from intermediaries, it cannot call for information from any bank and other authority or board or corporation established or constituted by or under any Central, State or Provincial Act. The SEBI cannot retain books of accounts, documents, etc., in its custody. Under the existing provisions contained in the Securities and Exchange Board of India Act, 1992, the SEBI cannot issue commissions for the examination of witnesses or documents. Further, the SEBI has pointed out that existing penalties are too low and do not serve as effective deterrents. At present, under section 209-A of the Companies Act, 1956, the SEBI can conduct inspection of listed companies only for violations of the provisions contained in sections referred to in section 55-A of that Act but it cannot conduct inspection of any listed public company for violation of the SEBI Act or rules or regulations made thereunder. 3. In addition, growing importance of the securities markets in the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion; (iii) regulating or prohibiting for the protection of investors, issue of prospectus, offer document or advertisement soliciting money for issue of securities; (iv) directing any person to investigate the affairs of intermediary or person associated with the securities market and to search and seize books, registers, other documents and records considered necessary for the purposes of the investigation, with the prior approval of a Magistrate of the first class. (v) passing an order requiring any person who has violated or is likely to violate, any provision of the SEBI Act or any rules or regulations made thereunder to cease and desist for committing any causing such violation; (c) prohibiting manipulative and deceptive devices, insider trading, fraudulent and manipulative trade practices, market manipulation and substantial acquisition of securities and control; (d) crediting sums realized by way of penalties to the Consolidated Fund of India; (e) amending the composition of the Securities Appellate Tribunal from one person to three persons; (f) changing the qualifications for appointment as Presiding Officer and members of the Securities Appellate Tribunal; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation and training of intermediaries of securities markets; (g) prohibiting insider trading in securities; (h) regulating substantial acquisition of shares and take-over of companies; (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market intermediaries and self-regulatory organizations in the securities market; (ia) calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board; (j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956(42 of 1956), as may be delegated to it by the Central Government; (k) levying fees or other charges for carrying out the purposes of this section; (l) conducting research for the above purposes; (la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der on an application made for approval, by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached; (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in subsection (2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (ia) to sub-section (2). Sub-section (2A) of section 11 of the SEBI Act, extends to the SEBI, the power to inspect (in addition to power already delineated in sub-section (2) of section 11 referred to above) books, registers or other documents or records of any listed public company or a public company which intends to get its securities listed on any recognized stock exchange . Sub-section (3) of section 11 of the SEBI Act, vests with the SEBI, the same powers as are conferred with a civil court, in the matter of discovery and production of books of accounts and other documents, summoning and enforcing the attendance of persons and examining them on oath, inspection of any books, registers or other documents. The power aforementioned specifically governs matters relating to calling for information already referred to hereinabove (under clauses (i) and (ia) of sub-section (2), and sub-section (2A) of section 11). In the interest of investors protection or the securities market, sub-section (4) of section 11 of the SEBI s Act vests the SEBI with powers to pass interim directions in the nature of suspending the trading of any security in a recognized stock exchange, restrai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which are delineated in clauses (a) to (m) thereof (of sub-section (2) of section 11 of the SEBI Act). The use of the words may provide for besides indicating the discretion vested in the SEBI, demonstrates that, the measures depicted in clauses (a) to (m) are illustrative and not exhaustive, more so, because subclause (2) of section 11 of the SEBI Act does not dilute the power vested in the SEBI under sub-section (1) thereof. While interpreting sub-section (1) of section 11 of the SEBI Act, it has already been concluded hereinabove, that the measures to be adopted by the SEBI in carrying out its obligations are couched in open-ended terms having no pre-arranged limits, to the discretion of the SEBI. Likewise, sub-sections (2A) and (4) of section 11 of the SEBI Act, commence with the words without prejudice to the provisions contained in sub-section (2) . This establishes the legislative intent i.e., that sub-section (2A) and (4) are subservient to sub-section (2) of section 11. But it has already been concluded above, that sub-section (2) is subservient to sub-section (1) of section 11. Therefore both sub-sections (2A) and (4) will inferentially be subservient to subsection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to clauses (d), (e) and (f) of sub-section (4), the legislature likewise limited the authority of SEBI, to listed companies or public companies which intend to get their securities listed on a recognized stock exchange. Therefore, in complete agreement with the determination by the SAT, it is concluded, that sub-section (2A) and sub-section (4) of section 11 of the SEBI s Act should not be misunderstood, as having limited the power of SEBI, so as to enable it to regulate only listed public company or such public companies which intend to get its securities listed on a recognized stock exchange. Accordingly, it is clear, that the limitation expressed in sub-sections (2A) and (4) of section 11 of the SEBI Act, would extend to the area/field of authority referred to above. Therefore, but for the aforesaid limited area/expanse, referred to above, SEBI s power would extend to all kinds of companies dealing with securities. The said power, as already noticed above, clearly emerges from the words by such measures as it thinks fit expressed in sub-section (1) of section 11 of the SEBI Act. For the reasons recorded above, the SAT was fully justified in concluding, that the functions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the securities to contend, that SEBI does not have the jurisdiction or the authority in respect to the subject of issue of prospectus, offer document or advertisement soliciting money for securities. 106. The importance and relevance of section 11 and 11A of the SEBI Act in the foregoing paras, has been highlighted above. Of equal importance are sections 11B and 11C of the SEBI Act. The same are being extracted hereinunder: 11B. Power to issue directions- Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions,- (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on whose behalf the books, registers, other documents and record are produced requires certified copies of the books, registers, other documents and record produced before the Investigating Authority, it shall give certified copies of such books, registers, other documents and record to such person or on whose behalf the books, registers, other documents and records were produced. (5) Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before him personally. (6) If any person fails without reasonable cause or refuses (a) to produce to the Investigating Authority or any person authorized by it in this behalf any book, register, other document and record which is his duty under sub-section (2) or sub-section (3) to produce; or (b) to furnish any information which is his duty under sub-section (3) to furnish; or (c) to appear before the Investigating A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn the same to the company or the other body corporate, or, as the case may be, to the managing director or the manager or any other person, from whose custody or power they were seized and inform the Magistrate of such return: Provided that the Investigating Authority may, before returning such books, registers, other documents and record as aforesaid, place identification marks on them or any part thereof. (11) Save as otherwise provided in this section, every search or seizure made under this section shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to searches or seizures made under that Code. Neither of the aforesaid provisions need a detailed analysis. A bare perusal of the aforesaid provisions brings to the fore, the extensive powers vested with the SEBI to issue directions and to make investigations. The power vested with SEBI, is not limited in any manner, and shall therefore, be deemed to extend to both listed and unlisted public companies. 107. From a collective perusal of sections 11, 11A, 11B and 11C of the SEBI Act, the conclusions drawn by the SAT, that on the subject of regulating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements of this section, or purporting to affect him with notice for any contract, document or matter not specifically referred to in the prospectus, shall be void. (3) No one shall issue any form of application for shares in or debentures of a company, unless the form is accompanied by a memorandum containing such salient features of a prospectus as may be prescribed which complies with the requirements of this section: Provided that a copy of the prospectus shall, on a request being made by any person before the closing of the subscription list be furnished to him: Provided further that this sub-section shall not apply if it is shown that the form of application was issued either (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares or debentures; or (b) in relation to shares or debentures which were not offered to the public. If any person acts in contravention of the provisions of this subsection, he shall be punishable with fine which may extend to fifty thousand rupees. (4) A director or other person responsible for the prospectus shall not incur any liability by reason of any non-compliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in 2002, requiring the company issuing a prospectus, to make a declaration. The declaration contemplated by the aforesaid amendment is being extracted hereunder: That all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government or the guidelines issued by the Securities and Exchange Board o f India established under section 3 of the Securities and Exchange Board of India Act, 1992, as the case may be, have been complied with and no statemen t made in prospectus is contrary to the provisions o f the Companies Act , 1956 or the Securities and Exchange Board of India Act , 1992 or rules made thereunder or guidelines issued, as the case may be. (emphasis is mine) It is pointed out by the learned counsel representing SEBI, that in the RHPs filed by SIRECL and SHICL, the declaration introduced in 2002 was not filed. Instead, the two companies filed the following declaration: All the relevant provisions of the Companies Act, 1956 and the guidelines issued by the Government have been complied with and no statement made in the prospectus is contrary to the provisions of the Companies Act, 1956 and rules thereunder. It is apparent from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the unilateral and arbitrary violation of the declaration referred to by the learned counsel representing the SEBI. It is also apparent, that in the declaration made by the two companies, they had clearly avoided references to the SEBI and accordingly circumvented adherence to the provisions of the SEBI Act, rules and guidelines. The appellant-companies have likewise avoided, the provisions of the Companies Act (which are under the administrative control of the SEBI), as is apparent from the deliberations recorded above. There is, therefore, merit in the contention advanced by the learned counsel representing SEBI. Even though it is not possible for one to record a clear finding, whether or not the declaration under reference was altered with a pre-planned intention to bypass the regulatory and administrative authority of SEBI, there can be no hesitation to recording, that it certainly seems so. The second perspective 112. Learned counsel representing the SEBI invited our my attention to an allegedly arbitrary procedure adopted by the appellant-companies. For this reference was made to the factual position pertaining to SIRECL. In this behalf it was submitted, that SIRECL i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el representing SEBI also invited our attention to the attempt at the hands of the appellant-companies in withholding information from the SEBI. Details in this behalf have already been recorded under the first perspective, while debating the issue whether the invitation to subscribe to the OFCDs issued by SIRECL and SHICL was by way of private placement . The aforesaid details are accordingly not being narrated again for reasons of brevity. I shall therefore, merely summarise the sequence of facts relevant for determining the willingness of the appellant-companies to disclose information sought by the SEBI. In this behalf, it is clear that the appellant-companies did not disclose information to SEBI despite its repeated requests. Not even, in the response to the summons (dated 30.8.2010 and 23.9.2010) issued by the SEBI containing threats of taking penal action and initiation of criminal prosecution. All this, failed to prompt the appellant-companies to divulge the facts solicited. Thereafter on 24.11.2010 the SEBI (FTM) passed far reaching directions against the appellant-companies. The Lucknow Bench of the High Court of Judicature at Allahabad on 13.12.2010 first stayed (whereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equence thereof, if correct, would be shocking. 115. There can therefore be no hesitation in accepting, that on all three perspectives raised at the behest of the SEBI, to demonstrate that there was a pre-planned attempt at the hands of the SIRECL and SHICL, to bypass the regulatory and administrative authority of the SEBI, does seem to be real. One can only hope, it is not so. But having so concluded, it is essential to express, that there may be no real subscribers for the OFCDs issued by the SIRECL or SHICL. Or alternatively, there may be an intermix of real and fictitious subscribers. The issue that would emerge in the aforesaid situation (which one can only hope, is untrue) would be, how the subscription amount collected, should be dealt with, specially when the impugned orders passed by the SEBI, SAT are to be affirmed. Even though I hope that all the subscribers are genuine, and so also, the subscription amount, it would be necessary to modify the operative part of the order issued by the SEBI which came to be endorsed by the SAT, so that the purpose of law is not only satisfied but is also enforced. O R D E R We, therefore, find, on facts as well as on law, no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We also appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
