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TMI Blog2011 (10) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... o appeals. Appeal no.131 of 2011 has been filed by Sahara India Real Estate Corporation Limited and its directors/shareholders and Appeal no.132 of 2011 has been filed by Sahara Housing Investment Corporation Limited and its directors/shareholders and these companies shall be referred to hereinafter as the company and housing company respectively. Both the companies are group companies and these appeals involve identical questions of law and fact. Since the main arguments were addressed in Appeal no.131 of 2011, the facts are being taken from this case. The decision in this appeal shall govern the other appeal as well. 2. The company was originally incorporated as Sahara India "C" Junxion Corporation Limited on October 28, 2005 as a public limited company under the Companies Act and it changed its name to the present one on March 7, 2008. It is unlisted, that is, its shares are not listed on any stock exchange. Its issued, subscribed and paid-up capital as stated in its Red Herring Prospectus (for brevity RHP) is one lac equity shares of ₹ 10 each amounting to ₹ 10 lacs. Presently, it has three directors, namely, Vandana Bharrgava, Ravi Shankar Dubey and Ashok Roy Chou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue equal to the face value of the Optionally Fully Convertible Unsecured Debentures to be privately placed aggregating to Rs. **** since it is a Red Herring prospectus the quantum and the price is to be determined at a future date Terms of the present issue were also stated in the RHP and it is not in dispute that the company has issued three different types of OFCDs labelling them as Abode Bonds, Real Estate Bonds and Nirmaan Bonds and a gist of their particulars was appended as annexure I to the RHP in a tabular form and the same is reproduced hereunder for facility of reference: Particulars Nature of OFCDs Abode Bond Real Estate Bond Nirmaan Bond Tenure months months months Face Value Rs.5,000/- Rs.12,000/- Rs.5,000/- Redemption Value 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 The total project costs were stated to be around ₹ 20,000 crores (Rupees twenty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the bonds/debentures are listed or proposed to be listed. This issue is purely on the private placement basis and the company does not intend to get these OFCD's listed on any of the Stock Exchanges in India or Abroad. This Memorandum for Private Placement is neither a Prospectus nor a Statement in Lieu of prospectus. It does not constitute an offer for an invitation to subscribe to OFCD's issued by Sahara India Real Estate Corporation Limited. The Memorandum for Private Placement is intended to form the basis of evaluation for the investors to whom it is addressed and who are willing and eligible to subscribe to these OFCD's. Investors are required to make their own independent evaluation and judgment before making the investment. The contents of this Memorandum for Private Placement are intended to be used by the investors to whom it is addressed and distributed. This Memorandum for Private Placement is not intended for distribution and is for the consideration of the person to whom it is addressed and should not be reproduced by the recipient. The OFCD's mentioned herein are being issued on a private placement basis and this offer does not constitute a public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the company. All the three bonds enable the bond holders to avail of loan facility as per the terms and conditions in the application forms. Nirmaan Bond and Real Estate Bond have an additional feature of death risk cover. The nominees(s) of the deceased bond holders are entitled to receive the death risk cover amount as enumerated in the terms and conditions of their issue. It is pertinent to mention here that as per clause 13 of the RHP, as reproduced in para 3 above, there was no restriction imposed on the transfer of the OFCDs whereas in the terms and conditions enumerated in the application forms, the transfer has been made subject to the approval of the company. This fact is being noticed here since much was said on behalf of the appellants that the fetter imposed on the transfer of OFCDs made them non-marketable as a result whereof they were not 'securities'. We shall deal with this aspect later. 5. The issue of OFCDs floated by the company is an open ended scheme and it started collecting subscriptions from the investors with effect from April 25, 2008 and till April 13, 2011, the company had collected ₹ 19400,86,64,200 (nineteen thousand four hundred c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a view to prevent the company from collecting further funds from the public, Sebi passed an ex-parte order on November 24, 2010 restraining the company from mobilizing funds under the RHP. The company was directed not to offer its OFCDs or any other securities to the public or invite subscription in any manner whatsoever till further directions. A similar direction was issued to the housing company as well. The ex-parte order was treated as a show cause notice and proceedings were initiated against both the companies. Feeling aggrieved by the ex-parte order, the company filed a writ petition before the Lucknow Bench of the High Court of Allahabad. The writ petition was admitted and the operation of the order impugned therein was stayed. Sebi then challenged the order of the Allahabad High Court by filing special leave petition before the Hon'ble Supreme Court. There was some further litigation between Sebi and the company and it is not relevant for us to go into the details thereof. However, during the pendency of the proceedings before the Hon'ble Supreme Court and in pursuance to the directions issued by it, Sebi passed a final order holding that the company and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. He also argued that in view of the fetters imposed on their transferability, they were not marketable and hence not securities. He contended that OFCD is a 'hybrid' as defined in section 2(19A) of the Companies Act and not having been included in the definition of securities in SCRA, it cannot be regarded as a security so as to be regulated by Sebi. It was also argued by Mr. Nariman, that the issue of OFCDs was not a public issue and that these were offered to the investors on private placement basis and, therefore, they were not required to be mandatorily listed. He pointed out that the company had made its intention clear from the beginning in the RHP wherein it stated that it did not intend to get the issue listed on any stock exchange. The learned senior counsel then argued that assuming OFCDs were securities, these had been issued by an unlisted company which did not intend to get them listed and by virtue of the provisions of section 55A(c) of the Companies Act, it was the Central Government which could administer the company and the issue of OFCDs. According to the learned senior counsel, Sebi had no jurisdiction in the matter. Mr. Nariman, then argued that Sebi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the fact that transfer of OFCDs from one investor to another had been made subject to the approval of the issuer company and this fetter on their transferability, according to him, makes them non marketable as a result whereof they cease to be securities. He took us through the impugned order and pointed out that the whole time member had violated the principles of natural justice in as much as he has placed reliance on certain facts which were collected behind the back of the appellants which were never put to them. In particular, he referred to paras 17.9 and 26.7 of the impugned order wherein reliance has been placed on some enquiries made by the investigating authority on the instructions of the whole time member and the result of those enquiries, though relied upon, was never put to the appellants. It was also argued by Mr. Sarkar that action has been taken against the housing company for violating some of the provisions of the regulations which, according to him, apply only to listed companies. The argument is that the housing company, being an unlisted company, is not governed by the regulations. He also questioned the direction issued by the whole time member under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellants that in view of the earlier stand taken by Sebi while dealing with some complaints and the one taken in an affidavit filed in the Bombay High Court, it could not lightly change its stand. The learned senior counsel for Sebi contended that there can be no estoppel against law and that the circumstances in which the affidavit was filed in the Bombay High Court were altogether different. 11. Mr. Darius Khambata, the learned Additional Solicitor General appearing on behalf of Ministry of Corporate Affairs, Government of India (respondent no.2) also made his submissions on the question of jurisdiction of Sebi to pass the impugned order. He supported Mr. Datar and contended that Sebi alone had the jurisdiction in the matter and that the impugned order does not suffer from lack of jurisdiction. He vehemently argued that OFCDs were securities and, therefore, Sebi has the jurisdiction to regulate the issue and also the issuer company. He referred to the provisions of the Sebi Act to contend that Sebi had wide powers therein to protect the interests of investors in securities and, according to him, it did not matter whether the securities or the issuer companies were listed or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the project cost which was around ₹ 20,000 crores and the projects were to be financed partly by this issue and partly with the capital reserves and other resources of the company. Since the capital reserves and other sources of the company as disclosed in the RHP were very meagre, it is expected that the company will collect around ₹ 20,000 crores from the investors. The learned senior counsel also highlighted that the company had made it clear from the beginning that it was not approaching the public and that the OFCDs were being offered to the investors on a private placement basis. He also pointed out from the RHP that OFCDs would be offered only to those persons "to whom the Information Memorandum was circulated and/or approached privately who are associated/affiliated or connected in any manner with Sahara Group of Companies, without giving any advertisement in general public." After referring to the RHP and the resolutions passed by the company, the learned senior counsel strenuously argued that true, full and faithful disclosures had been made in the RHP and nothing had been concealed therein and it is on this count that the RoC registered the RHP on March 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that it intended to issue the information memorandum to millions of investors. The fact that the invitation to subscribe to OFCDs was going to be made to more than fifty persons was carefully camouflaged in the RHP as a result whereof the RoC was misled. Had it been disclosed that the offer was being made to millions of investors, perhaps the RoC would not have registered the RHP and, in any case, he would have raised several queries in this regard and would not have treated the issue as one made on private placement basis. This concealment is, indeed, very significant and goes to the root of the controversy. Having got the RHP registered on March 18, 2008, the company circulated the information memorandum to the prospective investors in April 2008. The information memorandum, if at all was to be circulated, should have been circulated prior to the filing of the RHP as is the requirement of section 60B of the Companies Act. It may be mentioned that the information memorandum and the RHP carry the same obligations as are applicable in the case of a prospectus. It was in the information memorandum that the company disclosed to the prospective investors that "if the number of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the company and its promoters from the very beginning was not bonafide. In this view of the matter, we cannot but hold that the appellants concealed some very vital facts from the RoC and from its shareholders and also from the investors and we are satisfied that the disclosures made in the RHP were not true and fair. 15. Even the conduct of the RoC leaves much to be desired. We say so because when the RHP was presented to him, the fact that the company had a capital base of only ten lacs with no other assets or reserves and was a loss making company and was going to collect ₹ 20,000 crores by private placement, should have alerted him and he should have made necessary queries in this regard. It is reasonable to assume that he knew that an offer/invitation made to fifty or more persons would make it a public issue and he ought to have enquired as to the number of persons to whom OFCDs were proposed to be offered and their particulars. The appellants tell us that no such queries were made. Had he made such a query he would have known that the offer would be made to more than fifty persons which would have made the issue of OFCDs a public issue. In that event he would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; ................................ ................................ It is also necessary to reproduce sub-section (2) of section 2 of the Sebi Act which reads thus: 2(2) Words and expressions used and not defined in this Act but defined in the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Depositories Act, 1996 (22 of 1996) shall have the meanings respectively assigned to them in that Act. Definition of the term 'securities' was inserted in the Companies Act for the first time by adding clause (45AA) in section 2 by the Amendment Act of 2000 with effect from December 13, 2000 and this is how it reads: (45AA) "securities" means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes hybrids. The term 'hybrid' was also introduced in the Companies Act by the same amendment by inserting clause (19A) in section 2 which reads as under: (19A) "hybrid" means any security which has the character of more than one type of secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enior counsel took us to the terms and conditions contained in the application forms that were issued to the investors and pointed out that a restriction had been imposed on their transferability. He specifically referred to condition no.9 of Nirmaan Bonds which imposes a fetter on the bond holder in the matter of transfer. The condition imposed is this "Bond Holder can transfer the bond to any other person, subject to the terms and conditions and approval of the company." Similar condition is there in the other OFCDs as well. Shri Nariman argued that since the transfer of the OFCDs was subject to the approval of the company, these were not freely transferable and hence not marketable. On this ground as well, the learned senior counsel contended that OFCDs were not securities within the meaning of SCRA. 17. We have given our thoughtful consideration to the aforesaid submissions made on behalf of the appellants and regret our inability to accept the same. In our opinion, reference to the definition of 'securities' in the Companies Act is wholly misplaced and impermissible. Sebi Act is a self contained code which deals with all matters pertaining to securities and the securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h) of section 2 in SCRA gives an inclusive meaning to the term securities which has to be bodily lifted and read into the Sebi Act. When we do this, securities include, among others, shares and debentures. The word 'debenture' has not been defined in the Sebi Act and by virtue of sub-section (2) of section 2 of that Act, we can look to the definition only if given in SCRA or in the Depositories Act. This term has not been defined in those Acts either. In this view of the matter, the word 'debenture' will have to be understood in the manner as it is understood in the securities market or by those connected therewith. A debenture as understood in the capital market is a debt security issued by a company called the issuer which offers to pay interest in lieu of the money borrowed for a certain period. In essence, it represents a loan taken by the issuer who pays an agreed rate of interest during the life time of the instrument and repays the principal normally, unless otherwise agreed, on maturity. Unlike other fixed income instruments such as fixed deposits, bank deposits etc., they can be transferred from one party to another. The securities market recognises differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instruments. They generally combine both debt and equity characteristics and are heavily influenced by the price movement of the underlying stocks into which they are convertible. New types of hybrids are being introduced all the time in the developed markets to attract investors as these are modern means adopted by companies to raise capital. The definition of 'hybrid' as introduced in the Companies Act in the year 2000 is no different from what the term is understood in the market. The OFCDs issued by the company being fully convertible debentures have the characteristics of debt and equity. The Nirmaan Bonds and the Real Estate Bonds have an additional element of insurance namely, death risk cover. The learned counsel for the appellants mentioned during the course of the hearing that the insurance component was quite minimal in the bonds and has now been given up. However, the fact remains that the OFCDs are a combination of debt instrument and equity interest and in this view of the matter they are 'hybrids'. A mere look at the definition of securities in clause (h) of section 2 of SCRA would make it clear that the first three types of instruments namely, share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that transfer of OFCDs was subject to the approval of the company was subsequently put in the application forms that were sent to the investors. We are also of the view that any restriction on the transfer of shares or debentures issued by a company is not permissible in view of the provisions of section 111A(2) read with sections 9 and 82 of the Companies Act. Even if one were to assume that a condition that transfer of OFCDs was subject to the approval of the company could be imposed, such a condition, in our view, does not take away the marketability of the instrument. The word 'marketable' would imply that a product is capable of being bought and sold in the market. There need not be an actual sale. Moreover, in the present case, OFCDs could be transferred to persons other than those to whom they were offered. The plea that OFCDs were not marketable had been forcefully argued during the course of the hearing but when clause 13 of the RHP read with annexure I thereto was pointed out, the learned senior counsel had no answer. It is interesting to note that in the written submissions filed on the conclusion of the hearing, this plea does not find mentioned therein. It appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (m) performing such other functions as may be prescribed. Parliament noticed some shortcomings in the Sebi Act and felt that the provisions of section 11 as they originally stood were not enough to enable Sebi to effectively carry out its duties. There was no provision to enable Sebi to deal with certain intermediaries and persons associated with the securities market and with companies in regard to matters relating to issue of capital and transfer of securities. Sebi Act then came to be amended by Act 9 of 1995 with a view to enable Sebi to function in a more effective manner so that it could, among others, regulate companies regarding matters relating to issue of capital, transfer of securities and other matters incidental thereto. With this end in view, sections 11A and 11B came to be added with effect from January 25, 1995 and they are reproduced hereunder for facility of reference: A. Matters to be disclosed by the companies.- Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956), the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, or register, or other document or record 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 any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. ............................ (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:- (a) suspend the trading of any security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to which the prospectus, such offer document or advertisement, if not prohibited, may be issued. (2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act, 1956(42 of 1956), the Board may specify the requirements for listing and transfer of securities and other matters incidental thereto. From the aforesaid legislative amendments it can be seen that Sebi was being conferred with wide powers from time to time to enable it to carry out its duties more effectively. The 1995 amendments introducing sections 11A and 11B to the Sebi Act specifically gave powers to it to regulate companies in regard to issue of capital, transfer of securities and other matters incidental thereto and it could also provide for the manner in which companies would make the necessary disclosures. While inserting section 11A in the year 1995, Sebi was empowered to specify by regulations matters relating to issue of capital, transfer of securities etc., the amendment to section 11A in the year 2002 gave powers to it to prohibit by general or special orders as well, any company from issuing prospectus, any offer document or advertisement soliciting money from the publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Sebi Act. The scope of these provisions had recently come up for our consideration in Parsoli Corporation Ltd. and others vs. Securities and Exchange Board of India, Appeal no.146 of 2010 decided on August 12, 2011 and we observed as under: The Board is a statutory body established under section 3 of the Act and section 11 thereof enjoins a duty on it to protect the interests of investors in securities and to promote the development of and to regulate the securities market. Parliament in its wisdom has left it to the Board to take such measures as it thinks necessary to carry out these duties. The powers of the Board in this regard are, indeed, very wide and it can do anything and take any action/step in order to perform its functions/duties. Howsoever wide the powers be, every action of the Board has to be judged on the twin tests of investor protection and development and regulation of the securities market. In other words, the Board may be free to do anything but whatever it does has to be for the protection of the interests of investors or for the development and regulation of the securities market. It has the freedom to play only within these parameters. Having left it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or connected in any manner with Sahara India Group of Companies without giving any advertisement to the general public. RHP issued by the company in this regard and the resolutions passed by it and its board of directors have already been referred to in the earlier part of the order. The respondents including Sebi seriously dispute that the issue of OFCDs was by way of private placement and it is their case that it was a public issue. The consequences of an issue by way of private placement are distinct from the consequences when shares or debentures are offered to the public. In the case of a public issue, the provisions of the Companies Act relating to prospectus are applicable whereas these do not apply to a private placement. The question that we need to consider is whether the present issue is one of private placement as claimed by the appellants or a public issue as alleged by the respondents. The answer to this question is found in section 67 of the Companies Act. This section tells us when can an offer made by a company be construed as an offer to the public. The relevant part of this section as it stood prior to its amendment by the Amending Act 53 of 2000 is reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to whom it is made. In other words, an offer/invitation without the right of renunciation in favour of others cannot be termed as an offer or invitation to the public. This then being the position of law, it came to the notice of the Government of India as is clear from its press note dated July 6, 1992 a copy of which was produced by the learned senior counsel for Sebi that some companies were misusing the aforesaid provisions by making an offer to a large number of persons but not giving them a right of renunciation in favour of others and superscribing their brochures/advertisements by the captions "Confidential/For Private Circulation only". In such eventualities the offer/invitation did not become a public offer even though the same was made to any number of persons. With a view to curb this menace, Parliament added a proviso to section 67 (3) of the Companies Act by the Amending Act 53 of 2000 with effect from December 13, 2000 and it reads as under: 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 ............................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-sections (2), (3) and (4), "redherring prospectus" means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered. (5) to (9) ............................... Clause (19B) was also inserted in section 2 of the Companies Act by the same amending Act defining information memorandum and it reads as under: (19B) "information memorandum" means a process undertaken 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; Information memorandum, according to the aforesaid definition, is a process undertaken by a company to elicit the demand for the securities proposed to be issued and the price at which those could be offered. In other words, the company by issuing an information memorandum tries to assess the demand for the proposed securities in the market and the price which the public would be willing to offer for the 'securities'. When a company is trying to assess the demand for its securities and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued by Sebi have to be incorporated by the merchant banker in the offer document. Again, an unlisted issuer like the company becomes eligible for making a public issue only if it has net tangible assets of atleast ₹ 3 crores in each of the preceding three full years. It must also have distributable profits in atleast three of the immediately preceding five years. Its net worth should be of atleast ₹ 1 crore in each of the preceding three years. The law further enjoins that in a public issue by an unlisted company, the promoters should contribute not less than 20 per cent of the post issue capital which should be locked in for a period of three years. Companies coming out with a public issue are required to obtain a credit rating from atleast one credit rating agency registered with Sebi. Even the public issue has to be graded by such an agency. In case the public issue pertains to debentures, as is the case before us, the issuer cannot even come out with a prospectus till it appoints a debenture trustee and creates a debenture redemption reserve for the redemption of such debentures. Apart from these requirements, the issuer is required to make several disclosures in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our 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. (2A) to (7)........................ A plain reading of section 73(1) makes it clear that a company intending to offer shares or debentures to the public has to do so by issue of a prospectus and before that is issued, it must make an application to one or more recognized stock exchange(s) for permission for the shares and debentures to be dealt with in the stock exchange(s). The company has breached every requirement of this sub-section. Referring to the words "company intending to offer shares or debentures to the public" appearing in this sub-section, it contends that it never intended to offer the OFCDs to the public and, therefore, it was not necessary for it to either come out with a prospectus or make an application to any recognized stock exchange seeking permission for listing. The learned senior counsel for the appellants referred to the recitals in the RHP and the information memorandum and argued that the company from the beginning had no intention to offer the debentures to the public which, according to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter any provision of the Companies Act nor could it deal with any of its violations. The learned senior counsel also contended that this section has for the first time introduced the concept of listed public companies and unlisted public companies and demarcated the powers of Sebi and the Central Government in regard to their regulation. His argument is that now listed public companies and those public companies which intend to get their securities listed are to be administered by Sebi to the limited extent referred to in the section and the unlisted public companies by the Central Government. According to the learned senior counsel, the company before us being an unlisted public company, Sebi had no power to administer it and consequently the impugned order is without jurisdiction. Strong reliance was placed on a Division Bench judgment of the Bombay High Court in Kalpana Bhandari and others vs. Securities and Exchange Board of India, 125 Comp Cas 804 wherein the provisions of section 55A of the Companies Act had come up for consideration and a similar view was taken. He argued that the decision in Kalpana Bhandari's case, being one of a jurisdictional High Court, was binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation Ltd. vs. Collector of Central Excise, Baroda - 2007 (13) SCC 803. 28. Since the answer to the aforesaid contentions raised on behalf of the appellants depends upon the interpretation and scope of section 55A of the Companies Act, it is necessary to refer to the provisions of this section. Section 55A was inserted in the Companies Act by the Amending Act 53 of 2000 with effect from December 13, 2000. It reads thus: A. Powers of Securities and Exchange Board of India.- The provisions contained in sections 55 to 58, 59 to 81,(including sections 68A, 77A and 80A) 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall,- (a) in case of listed public companies; (b) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India, be administered by the Securities and Exchange Board of India; and (c) in any other case, be administered by the Central Government. Explanation.-For removal of doubts, it is hereby declared that all powers relating to all other matters including the matters relating to prosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of matters enumerated in section 55A. Even prior to the insertion of section 55A in the year 2000, Sebi had powers under section 11A of the Sebi Act which was introduced in January 1995 to regulate companies in regard to matters relating to issue of capital, transfer of securities and other matters incidental thereto. It is pertinent to mention that Sebi was established in the year 1988 through a Government resolution for the purpose of regulating the securities market and for protecting the interests of investors and even before it assumed a statutory status, it was regulating the securities market and taking steps to protect the interests of investors by administrative measures. One such measure was through its circular dated December 16, 1991 which pertained to "INVESTOR GRIEVANCES - RIGHTS AND REMEDIES". Reference to this circular was made during the course of hearing by the learned senior counsel for the appellants. This circular deals with matters relating to issue of capital and investor protection. Sebi has been regulating companies in matters of issue of capital and ensuring investor protection right from its inception. It is, therefore, incorrect to say that Seb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the company could not take the section 60B route to mobilise funds because on the one hand it claims that OFCDs have been issued by private placement and on the other it has issued an information memorandum which is only meant for the public. The argument is that it was the Central Government which could object to this route being adopted and not Sebi. There is no basis for this argument. A mere perusal of section 55A of the Companies Act would reveal that, among others, sections 59 to 84 have been enumerated therein which, beyond doubt, would include section 60B which is an independent section. It would, thus, follow that Sebi can administer this section as well and its criticism of the route followed by the company to raise funds is not without merit. 31. We may now deal with the argument of Mr. Nariman that the company being an unlisted company which does not intend to get its securities listed on any recognized stock exchange falls under clause (c) of section 55A of the Companies Act and, therefore, it could be regulated only by the Central Government. We have given our serious consideration to this argument and are unable to accept the same. The company though unlisted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amenable only to the regulatory jurisdiction of Sebi. Now coming to the two cases cited on behalf of the appellants. As already noticed, strong reliance was placed on Kalpana Bhandari's case (supra). We are of the view that this judgment is of no help to the appellants. That case pertains to preferential allotment that was made in the year 1993 when the proviso to section 67(3) of the Companies Act had not been inserted. Section 67(3) as it then stood permitted such preferential allotment to more than 30,000 investors as was made in Kalpana Bhandari's case without being treated as a public issue so as to attract the provisions of section 73(1) of the Companies Act. The proviso now makes an issue a public issue if the offer is made to fifty or more persons. Since the learned judges of the Bombay High Court were not called upon to deal with the proviso to section 67(3), the decision is not applicable to the facts of the present case. Moreover, the Bombay High Court also did not deal with the provisions of the Sebi Act and the powers of Sebi under sections 11, 11A and 11B of this Act as those did not come up for their consideration. For this reason as well, the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the main provisions. The declaration has been made in regard to powers of the Central Government relating to "all other matters". These words when read with the main provision would mean matters other than issue and transfer of securities and non-payment of dividend. When we read the Explanation harmoniously with the main provision, it would mean that even with regard to matters contained in a prospectus, Sebi would exercise powers in regard to the aforesaid three subjects and with regard to all other subjects in the prospectus, it would be the Central Government or the RoC. In other words, a prospectus, to the extent it deals with issue and transfer of securities and non-payment of dividend, would be regulated by Sebi. It must be remembered that a long list of matters referred to in Schedule II to the Companies Act have to be set out in a prospectus some of which may relate to issue and transfer of securities and non-payment of dividend. It is only in regard to these matters that Sebi will regulate the prospectus and in regard to "all other matters", the Central Government. In this view of the matter, we cannot agree with the learned senior counsel that Sebi could not take ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tending to get its shares listed on any recognized stock exchange in so far as they relate to issue and transfer of securities. It was argued by Mr. Nariman that there is no justifiable reason available on record which may necessitate Sebi to change its consistent stand with regard to jurisdiction over unlisted companies being with the Central Government. We are unable to accept this argument of the learned senior counsel. The press note relied upon does not in any way advance the case of the appellants. The then Department of Company Affairs was receiving a number of complaints from the general public relating to companies and also investor complaints and by the press note dated July 2, 2001, the Department laid down the broad guidelines for dealing with and disposing of those complaints. It was through this press note that the general public was informed that investors' complaints of unlisted companies would be dealt with by the Department of Company Affairs. This press note was not interpreting either the provisions of the Sebi Act or of the Companies Act and, in any case, this press note is not the source from where Sebi draws its powers. We are also of the view that by let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment having accepted the Tribunal's interpretation of the notification in one case was precluded from taking an inconsistent stand in the other. This decision does not advance the case of the appellants. In Birla Corporation's case, Indian Oil Corporation's case and Jayaswals NECO's case cited by the appellants, the position was similar. In the case before us, Sebi had only forwarded the complaints pertaining to unlisted companies to the Central Government as per the press note issued by the Government. The case law relied upon by the appellants is nowhere close to the facts of the present case. 35. The next argument of the learned senior counsel for the appellants is that OFCDs issued by the company are convertible bonds which had been issued on the basis of the price agreed upon at the time of issue and, therefore, the provisions of SCRA are not applicable in view of section 28(1)(b) thereof. He relied upon the opening words of section 28(1) "The provisions of this Act shall not apply to...'' to contend that the whole of SCRA does not apply to the bonds including section 9(m) thereof and, therefore, the provisions relating to listing of securities sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SCRA under Section 28(1)(b) are convertible bonds and not debentures. It is pertinent to mention here that the company itself in the RHP and in the information memorandum has described the instruments as "Optionally Fully Convertible Debentures". It follows that the exclusion under section 28(1)(b) of SCRA is not available to the OFCDs issued by the company. 36. Learned senior counsel on both sides argued at length on the amendments carried out in section 28 of SCRA, more particularly in relation to the insertion of clause (b) in section 28(1) in regard to the convertible bonds and share warrants. It is not necessary to go into the details of the amendments as the language of section 28(1)(b) is unambiguous and leaves no room for doubt that it is only the convertible bonds and share warrants of the type referred to therein that are excluded from the applicability of SCRA and not debentures which are a separate category of securities in the definition given in section 2(h) thereof. 37. We shall now deal with the argument of the learned senior counsel for the appellants that the whole time member violated the principles of natural justice. He argued that during the course of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of OFCDs was a public issue or one by way of private placement. The appellants have been contending throughout that it was a private issue and that they had not approached the public and that the OFCDs were being offered only to their friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected with Sahara group of companies. In order to find out whether this fact was true, the whole time member directed the investigating authority to find out on a random check whether the company had approached members of the public or their own associates as claimed. The investigating authority appears to have recorded the statements of some persons to whom OFCDs have been offered and concluded that they were not the associates of the company. The whole time member relied upon these conclusions to hold that the issue was a public issue. We agree with the learned senior counsel for the appellants that the whole time member could not rely upon the conclusions arrived at by the investigating authority without furnishing his report to the appellants which they were entitled to controvert. We are, therefore, satisfied that the principles of na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elines came to be rescinded on the promulgation of the regulations with effect from August 26, 2009, Sebi could not issue the show cause notice under the regulations alleging violation of the guidelines. According to the learned senior counsel, the regulations do not have any retrospective operation and they cannot apply to the wrongful acts, if any, committed by the company in the year 2008. It is argued that regulation 111 of the regulations which deals with repeal and savings does not save the omission on the part of Sebi to proceed against the company when the guidelines were in force. It is submitted that if Sebi had taken any action or issued the show cause notice when the guidelines were in force, its action could continue but that is not the case here. We do not find any merit in this contention also. Let us first turn to the provisions of regulation 111 of the regulations to see how untenable the argument is. This regulation reads thus: "Repeal and Savings 111. (1) On and from the commencement of these regulations, the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 shall stand rescinded. (2) Notwithstanding such rescission: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the direction pertaining to the refund of monies collected through the OFCDs could, if at all, be given by the Central Government and that Sebi could not direct the appellants to make the refund. We have no hesitation in rejecting this contention as well. Section 73 is one of the enumerated provisions referred to in section 55A of the Companies Act and Sebi has to administer the same in so far as it relates to issue of securities by companies which intend to get their securities listed. We have already recorded a finding that the company flouted the mandatory provisions of section 73(1) the consequences of which are referred to in sub-section (2) which requires the issuer company to refund forthwith the money collected from the investors. In view of this provision of law we cannot find any fault with the direction. In any case, Sebi has ample power under sections 11, 11A and 11B of the Sebi Act to issue such a direction which is obviously meant to protect the interests of investors. 41. We may now notice an argument that was raised by Mr. Sudipto Sarkar learned senior counsel in the appeal filed by the housing company (Appeal no.132 of 2011). He strenuously argued that the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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