SAHARA INVESTOR FRAUD CASE

Submitted To Submitted By

Dr Vikas Gupta Varun Pandit

A3221516159
BBA LLB(H)
Section- C
Batch -2016-21
Amity Law School
 SAHARA INDIA PARIWAR INVESTOR FRAUD
CASE

Introduction

Sahara India has two companies SIRECL ( Sahara India Real

Estate Corporation Limited ) and SHICL ( Sahara Housing
Investment Corporation Limited )that issued OFCD ( Optionally
Fully Convertible Debenture ) through subscriptions from
investors and raised Rs 24000 crore. As per the company the
OFCD issued were private placement1. In 2010, CA Roshan Lal
from Indore found that bonds that had been used to investors had
not been issued as per the rules and he made the complaint with
National Housing Bank who directed the case to SEBI.
Director of SEBI, reviewed the Draft Red Herring Prospectus
(DRHP) which disclosed SIRECL and SHICL that raise huge
amount of money from public through OFCD. On 23rd June 2011,
SEBI ordered both the companies to refund the money to the
investors and also restrained both the companies including Subrata
Roy to access the securities market till further orders.
Sahara appealed at Securities Appellate Tribunal (SAT) against
SEBI order but SAT also confirmed SEBI’s order on 18th October
2011.
Subsequently Sahara filled an appeal in Supreme Court of India
against SAT order dated 18th October 2011. The Supreme Court
directed the company to refund Rs 24000 crore to the investors2,
but company claimed that it had repaid around 93% of the money
to its investors. The court ordered the company to give
information to SEBI about the investors to whom the money had
been returned foe verification. The company sent 3 trucks load of

1 https://en.wikipedia.org/wiki/Sahara_India_Pariwar_investor_fraud_case
2 https://economictimes.indiatimes.com/news/company/corporate-trends/sebi-sahara-
case-supreme-court-exempts-sahara-group-chief-subrata-roy-from-personal-
appearance/articleshow/73587382.cms
information to SEBI headquarters and a retired Judge BN
Aggarwal was appointed to oversee SEBIs action.
The company contested that issue of OFCD is legal and it is not a
public issue and also claimed that OFCD are hybrid instrument
which cannot be listed and there is no statutory requirement to list
OFCD. Whereas, SEBIs contention were that OFCD were public
issue and are transferable security and a violation of Section 67 of
the Companies Act. The Supreme Court of India passed the order
in favour of SEBI and ordered Sahara to repay Rs 24000 crore
with 15% interest in 3 instalments as follows 120 crores
immediately, 10000 crores in January 2013 and rest in February
2013. But company failed t pay second and third instalment and
SEBI by getting an order from the SC froze all bank and demat
accounts and properties of Subrata Roy and 2 other directors. In
2017, almost all money was repaid by Sahara to SEBI.

Problems been observed

Whether the hybrid OFCDs fall within the definition of

Securities in purview of Companies Act,SEBI Act and SCRA so
as to vest SEBI jurisdiction to investigate.

OFCD ( Optionally Fully Convertible Debenture ) is a kind of a

security which can be converted into shares at expiry at
predetermined price on wishes of investor3.
OFCD are hybrid in nature and are defined under section 2(19A)
of Companies Act,1956 and states hybrid as securities which has
character of more than one type of security, including derivates.

Solution to the problem

3 http://www.thepriest.in/2011/09/optional-fully-convertible-debenture.html
OFCD being hybrid security it can be said that it falls under
section 2(h) of Securities Contract ( Regulation ) Act,1956 and
under section 2(45AA) of Companies Act 1956, as characteristic
of debenture and share at a later stage if converted by investor is
seen in OFCD. Therefore SEBI has power to administrate the
same.
Under Companies Act,1956 section 81(1A) says that, a company
cannot allot by private placement of OFCD to large number of
people. The company is bound to comply with the other applicable
laws as once the number 49 is crossed, the proviso to Section
67(3) of Companies Act becomes effective and it is considered to
be an issue to the public, which attracts Section 73(1) of
Companies Act and an application for listing of such securities on
any recognized stock exchange in India becomes mandatory which
fall under the administration of SEBI under section 55A(1)(b) of
the Companies Act. Moreover the company is also bound to
comply with the relevant provisions of the SEBI (Disclosure and
Investor Protection) Guidelines, 2000 ['DIP Guidelines'] and
various regulations of the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 ['ICDR 2009'] related to an
issue to the public4.

Conclusion

OFCD or in fact any other security issued by any company

whether listed or unlisted, made an issue to public exceeds forty
nine under SEBIs jurisdiction then proviso to Section 67(3) of
Companies Act,1956 becomes effective and attracts section 73(1)
of the act and comes under the administration of SEBI under
section 55A(1)(b) of the Companies Act.
Similarly, in the Sahara Case it can been seen that OFCD issued as
private placement to public exceeds the number 49 which brings
4 https://www.lexology.com/library/detail.aspx?g=1d3db8c8-64d0-4b38-9b11-
6bd6a562ef6c
administration of SEBI under section 55A(1)(b) of the Companies
Act and moreover since hybrid security is also a security defined
under section 2(h) of the Companies Act,1956. Keeping in view of
the above SEBI has rightful jurisdiction to try the matter against
Sahara as they issued OFCD exceeding the number 49 prescribed
under section 81(1A) of the Companies Act and it had to follow
certain rules if they exceed the limit.
My suggestion, to the problem will be that, even if the company is
issuing OFCD through private placement and is not exceeding the
limit mentioned under section 81(1A) of the Companies Act,1956,
administration of SEBI under section 55(1)(b) should be attracted
and there should be more stringent rules that should be applicable
to companies while issuing OFCD through private placement. The
details of investors to whom OFCD are issued should be sent to
SEBI for records irrespective of the limit mentioned under Section
81(1A) of the Companies Act and SEBI should have jurisdiction
to call for any details at any time from any company for security
of the investors.