DISHONOUR OF

CHEQUE

TABLE OF CONTENTS
 Introduction
 What is a cheque
 Dishonour of cheque

o Reasons for the dishonour of cheque

o Essential ingredients to constitute an offence under

Section 138

 Legally enforceable debt or other liability

 Presentment within three months

 Return of cheque due to insufficiency of funds
 What to do if cheque gets dishonoured

o 30 days notice to the drawer

o Failure of the drawer to make payment within 15 days

of receipt of notice 
o Filing of complaint with magistrate under Section 142
 Offence by companies
 Punishment and penalty
 Case laws

o Dashrath Rupsingh Rathod v. the State of Maharashtra

& Anr (2014)
 o Dalmia Cement (Bharat) Ltd. v. M/S. Galaxy Trades &
Agencies Ltd. (2001)
o M/S Meters and Instruments Private Limited & Anr. v.
Kanchan Mehta (2017)
o Canara Bank v. Canara Sales Corporation (1987)
o Dayawati v. Yogesh Kumar Gosain (2017)
 Conclusion
 References

Introduction
In India, cheques are issued for a variety of transactions, the majority of which
are commercial dealings. It is common practice for business owners to issue
post-dated cheques to their distributors or service providers; moreover, it does
happen that a cheque gets dishonoured when delivered to the bank caused by a
lack of finances. Cheques are often used in roughly all payments, including loan
repayment, payment of fees, payment of bills, salary payment, and so on.
Regularly, banks process and clear the wide proportion of the cheques that come
through their doors. Cheques are issued to obtain documentation of payment.
The introduction of cheques into the economy has provided a novel path for the
financial industry and commercial world, as well as for individuals. Individuals
now wish to hold and undertake a slip of paper known as a cheque instead of
having cash in their pockets. Transactions involving checks are essential and
significant not just in the banking industry, but also in the fields of trade and
commerce, as well as in the overall national economy. However, the increase in
the use of cheques has also increased the practice of granting cheques to people
who have no purpose of honouring them.
If the sum of money of the cheque is given to the payee by the bank, the cheque
is deemed to have been honored by that bank. If the bank denies paying the sum
of money of the cheque, the cheque is deemed to be dishonoured and is
returned to the sender. As a result, a dishonoured cheque indicates that the
bank has refused to pay the sum of the amount of the cheque to the payee. The
drawer draws an e-cheque without complying with the norms and legislation of
issuing a cheque, or the drawer draws the cheque with a balance over the bank
account’s available funds. Section 138 of the Negotiable Instruments Act 1881 is
intended to curb malpractice on the part of the drawer by causing him or her to
draw a cheque without adequate money in his or her account managed by him
or her in a bank and to provoke the payee to respond on the cheque in the
proper course of events. The primary goal of this statute is to impart confidence
in the productivity of financial transactions as well as the robustness of
transactions involving negotiable instruments in the general public.

What is a cheque
A cheque is considered to be a negotiable instrument. It is governed by Section 6
under the Negotiable Instruments Act of 1881. In the financial world, a ‘cheque’
is a bill of exchange drawn on a definite banker and not expressly stated to be
payable except on demand. It also involves a computerized picture of a
compressed cheque and a cheque in digital format. In layman’s terms, a cheque
is a paper that is drawn by one individual for the benefit of another individual to
whom he has consented to pay a specific amount of money within a specific time
frame. There are three parties to a cheque:

Drawer- The drawer is the individual who is responsible for issuing the cheque.

Drawee- In the case of a cheque, the banker on whom the cheque is drawn is
indeed the person who receives the cheque.
Payee- The individual to whom the cheque is to be made payable.

The number of commercial transactions is increasing at an alarming rate. As a

result, it is hard for an individual to hand over liquid money to some other
individual. In such circumstances, a cheque serves as a means of transferring
money from one individual to another, ensuring that the transfer of money is
secure and that both parties benefit from the savings in time that the cheque
provides. While there are numerous advantages of using a cheque:

Some protocols must be pursued when money is transferred through the use of
a cheque. A crossed cheque ensures that only the payee can obtain the funds.

It also ensures that the drawer has a bank account; the cheque must be given
some obligations to the recipient (payee); and, in form of finance, there must be
adequate funds in the drawer’s bank account for the cheque to be Issued and
not to be dishonoured due to inadequacy of funds.

Most pertinently, it ensures that only the payee can obtain the funds.

Dishonour of cheque
As the number of individuals conducting commercial transactions grows daily,
the consistency of retaining a positive bank balance has fluctuated in response to
the people’s monetary requirements. If an individual issues a cheque to another,
it is possible that he or she is not cognizant of the actual bank balance, and as a
result, the cheque may be rejected. In such cases, the drawer of the cheque is
provided a 30-day grace period to pay back the amount to the payee. However,
if the drawer does not agree to pay the amount within that time, the payee has
the alternative to file a lawsuit against the drawer seeking payment of the sum
of money of the cheque and also an amount of interest as remuneration for the
default induced by the drawer.
Cheques are deemed to have been honored when the payee’s bank transfers
payment of their portion of the cheque amount to the drawee bank. On the
other hand, when a bank refuses to pay the sum of the amount of a cheque to
the payee, the cheque is referred to as being “dishonoured.” A cheque may be
returned unpaid by the drawee bank for a variety of factors, one of which is
insufficient money in drawee’s checking or savings account. When a cheque is
returned unpaid, the drawee’s bank immediately issues a ‘Cheque Return
Memo’, which details the causes for the cheque’s non-payment. At this point,
the payee has the alternative of furthering legal claims for dishonour as soon as
possible or resubmitting the cheque for realization after receiving confirmation
from the drawer that the cheque will be honored the second time around. It is
critical, after all, that any legal action can be taken if the cheque is presented to
the bank after the validity period of 3 months or 90 days.

Reasons for the dishonour of cheque

In the following cases the cheque gets dishonoured:

If there is an overwriting or if the signatures do not complement.

If there is any reason to think about the authenticity of the cheque.

A discrepancy in the account number may even result in a cheque being bounced
or a cheque being dishonoured.

The customer’s insanity, bankruptcy, and death as a result of providing a cheque

at the incorrect branch are all possibilities.

The bank will dishonour the cheque if the drawer has requested the bank to stop
payment and not pay for the cheque already issued.
If the payment is made to the bank after three months from the date which is
written on the cheque then the cheque will be dishonoured due to the expiry of
that period and this type of cheque is known as a stale cheque.

When the government or the court will order the bank to freeze all the accounts
of that individual and thereafter the cheque pertaining to that individual’s
account will be dishonoured.

In case the drawer closes his account before a cheque is presented to the bank
then the cheque will be dishonoured. If the drawer doesn’t have adequate funds
to pay the amount mentioned in the cheque then the cheque will be
dishonoured. What happens when the cheque is dishonoured by the bank

According to the Negotiable Instruments Act, 1881, the dishonour of a check is a

criminal offence, and the person in whose favor the cheque is issued can seek
both civil and criminal redress. An individual who has obtained a cheque in
exchange for services provided or for other obligations will incur financially if the
very instrument that guarantees to honor the payment in the mode of a cheque
is not honored. When a cheque is dishonoured, the law contains regulations that
ensure the payee is not left without recourse in form of money that he is lawfully
authorized to and emotional trauma that he has been subjected to, and he must
take specific measures, which involve sending a legitimate demand notice to the
drawer or filing a lawsuit if the drawer fails to honor the cheque after receiving
such a demand notice. Dishonouring certain cheques has been made an offence
under Section 138 of Negotiable Instrument Act, 1881 punishable by
imprisonment for up to two years, a pecuniary fine, or both. To put this into
impact, the Public Financial Institutions, Banking, and Negotiable Instruments
Laws (Amendment) Act, 1988, was passed, which amended the Negotiable
Instruments Act, 1881. The Negotiable Instruments Act was amended to include
a new Chapter VII, consisting of Sections 138 to 147. Sections 143 to 147 of the
Negotiable Instruments (Amendment) Act, 2002, have been incorporated into
the same Chapter.
According to Section 138, if an individual draws a cheque from an account
managed and maintained by the same individual with a banker with an intention
of the repayment for his debt or other liability to another individual from that
account wholly or partially, and then it is reverted by the bank unpaid either due
to the sum of money standing to the credit of that account had inadequacy of
money in the account or it exceeds the sum of money which had to be paid from
his account through an agreement signed between the bank and the individual,
such individual would be considered to have committed an offence and shall be
liable for that offence without any bias to any other provision of this act and
shall be punished for an extended term of 2 years of imprisonment, or with a
fine which can be more than twice the amount of the cheque, or shall be liable
for both imprisonment and fine

Essential ingredients to constitute an offence under Section 138

Legally enforceable debt or other liability

If the drawer intended to use the cheque to discharge a legally enforceable debt
or other liability, the drawer should have issued the cheque to the payee in full
or in proportion. The repercussions of dishonouring a cheque when it is provided
as a gift to a private person, or as a charity or donation to a charitable
organization, or even as an unexpected cost or reward, are not addressed by
Section 138 of the Act, as determined by the Supreme Court in the case of
Uplanche Mallikarjun and Ors. V. Raj Kanti Vimala and Anr. (1997). Even if the
cheque is issued as a safety or as a discharge of liability as a guarantor,
provisions of Section 138 of the Act apply in these cases.

Presentment within three months

The cheque should have been addressed to the bank by the payee within the
time specified on the cheque. Normally, a cheque’s time frame is three months
from the date of issue; however, if a shorter period prescribed (for example, less
than three months) is stipulated on the cheque, that time frame is taken into
consideration.

Return of cheque due to insufficiency of funds

In this case, the cheque should have been given back to the drawer by the bank
because the sum of money standing to the credit of the account is inadequate or
surpasses the amount of money organized to be paid from that account. When
we say “money standing to the credit of the account,” we refer to the resources
available in the account that can be used to honor the cheque issued by the
drawer. Unless otherwise specified, the phrase “amount organized” relates to
the money that is currently in the drawer’s account plus any funds that have
been organized by the drawer with the banker, whether through an overdraft
agreement or other means. A stop payment will be considered to have been
dishonoured for inadequacy unless a valid reason for the stop payment can be
demonstrated.

What to do if cheque gets dishonoured

30 days notice to the drawer

As soon as a payee or an account holder learns that a cheque has been

dishonoured due to a lack of funds in the drawer’s account, he or she must send
a notice to that drawer requesting that the cheque amount be paid within 30
days of receiving notice of dishonour from their bank. It is not possible to give
notice under Section 138 of the Act verbally. The notice may be provided in any
written form, as well as by fax, email, or any other electronic means of
communication.

Failure of the drawer to make payment within 15 days of receipt of notice

The person who received the aforementioned cheque should have failed to
make payment within 15 days of receiving the notice from the payee, as
stipulated in the agreement. It is important to consider that the holder does not
have access to the cause of action at the time the cheque is dishonoured. When
the holder receives notice of a dishonoured cheque and transmits a notice
seeking payment of the cheque amount within 30 days of receiving notice of the
dishonoured cheque, and the drawer fails to pay the exact thing within 15 days
of receiving the said notice, the situation is then called for.

Filing of complaint with magistrate under Section 142

When an individual provides a cheque or payment that is not honored, the

banker notifies the individual that the cheque has been dishonoured. Following
that, he delivers a notice to the drawer, requesting that the amount of the
cheque be paid within 30 days of receiving notice of dishonouring the check.
After the notice is issued to the drawer, and if the payee does not make the
payment within 15 days of receiving the notice, an offence is committed under
Section 138. The drawer’s cause of action for filing a complaint emerges on the
16th day following receipt of the notice, which is when the complaint is filed.
Section 142 talks about the cognizance of offences.

Offence by companies
Everything about commercial transactions, especially the efficient and timely
governance of cheques as instruments, is dependent on the credibility and
sincerity of the parties involved in the transaction. There is no denying that a
bank’s failure to honor a cheque causes the payee irreparable loss, damage, and
discomfort and that the complete validity of business transactions conducted
within and out of the country suffers a sharp downturn as a result. As a
corporation, is an independent entity formed by law, a corporation operates
through its board of directors and officers, who are accountable for the overall
operation of the corporation. Criminal liability for cheque dishonour is mainly
imposed on the drawer company, but it may also be imposed on officers of the
company. Generally speaking, in cases that involve criminal liability, the rule
against vicarious liability applies, which means that no one can be held criminally
liable for the actions of another. This general rule, however, is subject to an
exception which makes the drawer vicariously liable under Section 138 of the
Negotiable Instrument Act, 1881, but the drawer will only be held liable if the
drawer itself is a corporation or a firm or an association of people, and at the
commencement of that offence, all such persons were involved in that offence
and were held guilty for that offence under Section 138 of Negotiable Instrument
Act, 1881. Companies are subject to the provisions of Section 141 of the
Negotiable Instruments Act, 1881.

Punishment and penalty

The court will issue a summons and hold a hearing on the particular matter after
obtaining the complaint of the alleged crime, as well as an affidavit and all
relevant documentation. The defaulter may be penalized with a monetary
punishment that is twice the amount of the cheque in issue, or he may be
imprisoned for a term that can last up to two years, or he may be prosecuted
with a combination of the two. In addition, the bank has the authority to
suspend the defaulter’s access to his or her checkbook and to close the account
if the defaulter has a history of bounced checks. Unless the drawer fails to make
payment on the disputed cheque within 15 days of receiving the notice, the
drawer is not considered to have committed an offence. Alternatively, the payee
may file a complaint in the court of a jurisdictional magistrate within one month
of the date on which the 15 days specified in the notice was completed.

Case laws
Dashrath Rupsingh Rathod v. the State of Maharashtra & Anr (2014)
Because of the above-mentioned groundbreaking Supreme Court decision, the
foundational standard for filing criminal complaints about cheque dishonour
under Section 138 of the Negotiable Instruments Act, 1881 has been altered.
Initially, a case under Section 138 could only be brought by the person who
received the cheque at his or her business premises or residential, but this has
changed. According to the above-mentioned verdict, the complaint must be filed
in the county where the branch of the bank on which a cheque was drawn is
situated, and the judgment will be applied retroactively, i.e., lakhs of cases
currently pending in numerous courts across the nation will be subjected to an
interstate transfer of cheque bouncing cases and dishonouring of cases under
the verdict.

Dalmia Cement (Bharat) Ltd. V. M/S. Galaxy Trades & Agencies Ltd. (2001)

It was in this case that the Supreme Court delivered a milestone decision, in
which the rationale behind the implementation of Section 138 of the Negotiable
and Instruments Act, 1881, was laid out. The facts of the case begin and end
around the non-payment of a cheque, for which a notice was issued to the
convicted to inform him of his rights. When the complainant obtained the
complaint, the time limit for filing the complaint was extended until that point.
The exact thing happened a second time, with the suspect failing to give the
required sum of money. Based on the current facts, the court held that Section
138 of the Act was created to protect against any sort of violation of a person’s
legal rights who have not received payment and that if a scenario comes up that
makes it extremely difficult for the person to receive payment, then Section 138
should operate as it has been legislated to maintain the person’s legal rights. As
a result, in this case, the court ordered that actions be taken against the
respondent following the Act.

M/S Meters and Instruments Private Limited & Anr. V. Kanchan Mehta (2017)
In this case, the Supreme Court took into consideration the object linked with
Section 138, as well as other existing laws stipulated in Chapter XVII of the
Negotiable Instruments Act, 1881, and decided on whether Section 138 was
constitutionally valid.

On the grounds of a pre-existing agreement between the two parties, the

complainant Kanchan Mehta filed a complaint against the plaintiff under Section
138 of the Act, alleging that the latter had failed to pay a sum to the complainant
every month as stipulated in that agreement. The court dismissed the complaint.
The company had issued a check to the complainant, thereby discharging their
legal obligations to that person or entity. The inadequate funds were handed
back to the sender because there were inadequate funds on hand. Legal notices
were served on the company for them to complete their payment, but the
company failed to comply, and as a result, the company was held liable for the
violation of Section 138 of the relevant Act of Parliament. Furthermore, when
the company’s director expressed a willingness to pay the complainant, the
demand draft was rejected by the company’s legal department on their end. As a
result, the company filed a lawsuit against the complainant under Section 147 of
the Act, which provided for the prosecution of compoundable offences. The
complaint was dismissed by the concerned High Court because the complainant
had not given his assent to the holding that the offence was compounding in
character.

The Supreme Court of India has ruled that all of the crimes listed under Section
138 are civilmen’s. In addition, the Negotiable Instruments (Amendments and
Miscellaneous Provisions Act, 2002 contains a statute for compoundable
offences, which requires the assent of both parties in the transaction in question
to be effective. Because the company agreed to remunerate the complainant,
the court, in the interest of appropriate administration of justice, considered
discharging the accused because the complainant had been compensated with
the amount that was required to be given in the first place.

Canara Bank v. Canara Sales Corporation (1987)

This case provides a foundation for understanding the relationship held in

common between a bank and its customers, which is bound together by strands
of responsibilities and justice, particularly in the event of negligence on the part
of either party or involvement in deceitful actions on the part of either party. As
a result of this investigation, the respondent was found to have a bank account
with the plaintiff’s bank, which was later discovered to have been linked to illegal
transactions because the cheques that were cashed did not bear the initials of
their managing director, the respondents. As a result, fraud occurred in the
particular instance. The respondents have filed a lawsuit to be compensated for
the money they believe they have lost. The Court noted that there was
negligence on the part of both the creditor and the debtor, but that the
equilibrium of negligence tipped more in favor of the banker than in favor of the
company. In this case, the bank’s simple negligence cannot be used as a
justification for not utilizing the service. The court ultimately determined that
the company is entitled to compensation, and the case was dismissed as a result.

Dayawati v. Yogesh Kumar Gosain (2017)

The Delhi High Court’s decision in 2017 opened the door to a new avenue known
as the alternate dispute resolution mechanism for deciding crimes classified
under Section 138 of the Act that is criminally compoundable by nature. This
decision not only signaled a shift in the way the Act was dealt with, but it also
signaled a shift in the Indian judicial system. It went on to say that because the
offences listed under the Negotiable Instruments Act, 1881 are distinct from
other criminal offences, they can be given a priority to be remedied distinctly
and more expeditiously than other criminal offences
Conclusion
When it comes to the crime of dishonouring checks, the element of motive, or
‘mens rea,’ which is a vital aspect of all criminal offences, is not pertinent in this
case. When cheques are dishonoured because there are insufficient funds in the
drawer’s account, Section 138 of the Negotiable Instruments Act makes it a
statutory offence, and the situations in which the dishonor occurred are
insignificant. However, the law only takes into consideration the fact that a check
has been dishonoured and does not take into consideration the numerous
causes that led to it.

The dishonour of a cheque is one of the most common problems that parties
encounter when moving funds through negotiable instruments. Even though the
drawer was ignorant of the inadequacy of the funds in his account within a
recommended period, he will be held liable. However, the law itself offers them
a decent length of time to reimburse the money to the payee. The mistake that
occurs after such a time frame must be treated as a criminal offence because it
entails the illegal intention of not repaying the money which is due to the party
in the first place. As a result, the law makes it evident that the parties signing a
cheque must be cognizant of the amount of money in their respective banks at
the time of signing.

References
https://www.scconline.com/blog/post/2019/05/07/dishonour-of-cheque-s-138-
ni-act-and-allied-sections/

https://www.lawctopus.com/academike/dishonour-of-cheques/

http://racolblegal.com/dishonour-of-cheque-scope-justifiability-and-
punishment.com
FEATURES OF SEBI ACT

TABLE OF CONTENT
INTRODUCTION
SEBI is also known as the Security and Exchange Board of India was
established on 12 April 1992 through the SEBI Act, 1992. It was a non-
statutory body established to regulate the securities market. The
headquarters of the board is situated in Bandra Kurla Complex, Mumbai.
SEBI helps in regulating the Indian Capital Market by protecting the
interest of investors and establishing the rules and regulations for the
development of the capital market. 

SEBI
SEBI or the Security and Exchange Board of India is a regulatory body
controlled by the Government of India to regulate the capital and security
market. Before the Security and Exchange Board of India, the Controller
of Capital Issues was the regulating body to regulate the market which
was controlled by the Capital Issues (Control) Act, 1947. 

Majorly, SEBI controls the issuers of securities, the investors and the
market intermediaries. The Board draft regulations and statutes under its
legislative authority, also pass rulings and orders under its judicial
capacity and operate investigations in its executive limits. SEBI works as
a barrier to avoid malpractices related to the stock market by
establishing a code of conduct and promoting the healthy functioning of
the stock exchange. Initially, SEBI didn’t have the authority to regulate
the stock exchange, but in 1992 the Union Government gave statutory
powers to SEBI through the SEBI Act, 1992. 

Reasons for the Establishment of SEBI

During the fall of the 1970s and the rise of the 1980s, the people of India
were preferring to work in the Capital Market as the market was
trending. Without any authority, problems like unofficial private
placements, the rigging of prices, unofficial self-styled merchant bankers
started violating the rules and regulations of the stock exchange which
caused delays in the delivery of shares. 

The Government felt an immediate need to establish a regulatory body to

regulate its working and to find solutions for all the problems the market
was going through, as the people were losing interest in the market. This
led to the establishment of the Security and Exchange Board of India. 

Purpose and Role of SEBI

SEBI helps in creating a healthy environment to facilitate an effective
mobilization between the market participants and investors. It helps in
locating the resources with the help of the securities market. SEBI
establish rules and regulations, policy framework and infrastructure to
meet the needs of the market. 

The financial market majorly comprises of three groups:

The Issuer of Securities 

Issuers are the group that works in the corporate department to easily
raise funds from the various sources of the market. So, SEBI helps the
issuers by providing them a healthy and open environment to work
efficiently. 

Investors 
The investors are the soul of the market as they keep the market alive by
providing accurate supplies, correct information, and protection to the
people on a daily basis. SEBI helps investors by creating a malpractice
free environment to attract and protect the money of the people who
invested in the market. 
Financial Intermediaries
The intermediaries are the people who act as middlemen between the
issuers and the investors. SEBI helps in creating a competitive
professional market which gives a better service to the issuers and the
investors. They also provide efficient infrastructure and secured financial
transactions. 

 by intermediaries such as brokers, underwriters and other

people. 

Features of SEBI
SEBI IS AN ORGANIZATION THAT IS RESPONSIBLE FOR
MAINTAINING AN ENVIRONMENT THAT IS FREE FROM
MALPRACTICES TO RESTORE THE CONFIDENCE OF THE GENERAL
PUBLIC WHO INVEST THEIR HARD-EARNED MONEY IN THE
MARKET. SEBI CONTROLS THE BYLAWS OF EVERY STOCK
EXCHANGE IN THE COUNTRY. SEBI KEEPS AN EYE ON ALL THE
BOOKS OF ACCOUNTS RELATED TO THE STOCK EXCHANGE AND
FINANCIAL INTERMEDIARIES TO CHECK THEIR IRREGULARITIES.
THE FEATURES OF THE SECURITY AND EXCHANGE BOARD OF
INDIA ARE GIVEN BELOW: 

 Quasi-Judicial 
SEBI IS ALLOWED TO CONDUCT HEARINGS AND CAN PASS
JUDGMENTS ON UNETHICAL CASES AND FRAUDULENT TRADE
PRACTICES. THIS FEATURE OF SEBI HELPS TO PROTECT
TRANSPARENCY, ACCOUNTABILITY, RELIABILITY, AND FAIRNESS
IN THE CAPITAL MARKET. 

 Quasi-Legislative
SEBI IS ALLOWED TO DRAFT LEGISLATURES WITH RESPECT TO
THE CAPITAL MARKET. SEBI DRAFTS RULES AND REGULATIONS
TO PROTECT THE INTERESTS OF THE INVESTORS. FOR EG: SEBI
LODR OR LISTING OBLIGATION AND DISCLOSURE
REQUIREMENTS. THIS HELPS IN CONSOLIDATING AND
STREAMLINING THE PROVISIONS OF EXISTING LISTING
AGREEMENTS FOR SEVERAL SEGMENTS OF THE FINANCIAL
MARKET LIKE EQUITY SHARES. THIS HELPS IN PROTECTING THE
MARKET FROM MALPRACTICES AND FRAUDULENT TRADING
ACTIVITIES HAPPENING AT THE BAY. 

 Quasi-Executive 
SEBI COVERS THE IMPLEMENTATION OF THE LEGISLATION. THEY
ARE ALLOWED TO FILE A COMPLAINT AGAINST ANY PERSON
WHO VIOLATES THEIR RULES AND REGULATIONS. THEY ALSO
HAVE THE POWER TO INSPECT ALL THE BOOKS AND RECORDS TO
CHECK FOR WRONGDOINGS.

There were many issues raised while the Supreme Court was interpreting
the various provisions of the SEBI Act, the Companies Act, and the
Securities Contract (Regulation) Act, 1956. The issues were:

 The first issue was that, whether SEBI has its jurisdiction over
this matter under Section 11, 11A, 11B of SEBI Act and Section
55A of the Companies Act or this matter comes under the
Ministry of Corporate Affairs. 

 The second issue was that, whether the hybrid Optionally Fully
Convertible Debentures comes under the category of ‘Securities’
as defined in the Companies Act, SEBI Act, and SCRA to allow
SEBI to have jurisdiction to investigate the case. 

 The third issue was that the OFCDs subscribed by the people is a
private placement or not. If not then who has jurisdiction over
the matter. 

 The fourth issue was that, whether the provisions given under
Section 73 of the Companies Act is applied over the case or not.

 The fifth issue was that, whether the provisions provided under
the Public Unlisted Companies, 2003 will have jurisdiction over
this case.
Arguments and Supreme Court Judgments
In this case, the Supreme Court held that SEBI has no jurisdiction to
investigate or adjudicate this matter as the SEBI Act allows SEBI with
special powers to protect the interest of the investors. The powers given
to SEBI can not supersede other regulations provided under different
laws which means SEBI must respect the provisions of other laws and
must not conflict with the Ministry of Corporate Affairs where the
interests of investors are at stake. The Supreme Court also laid down
objectives for the enactment of the SEBI Act and inserted Section 55A in
the Companies Act to provide special powers to SEBI in the matters
related to the transfer of securities. So, the Supreme Court advised that
SEBI has the jurisdiction to administer the listed public companies in
matters related to the transfer of securities and also in those public
companies where there is intended to obtain the securities which are
listed under the Stock Exchange of India. 

The Supreme Court stated that the OFCDs issued by the companies are
in the nature of ‘hybrid’ instruments, so it doesn’t come under ‘security’
within the definition provided by the Companies Act, SEBI Act, and SCRA.
As the definition of ‘Securities’ provided under Section 2(h) of SCRA
contains ‘marketable security’ rather ‘hybrid instruments’. So, the Court
can not question the marketability of the instrument as it was offered to
millions of people and debentures came under security as described by
the provisions of SEBI Act, the Companies Act, and SCRA. 

The Supreme Court described the intentions of the companies was to

show OFCDs as the public placement but they don’t act like that when
offered to more than 50 people. Section 67(3) states that any security
which is offered and subscribed by more than 50 persons will be
considered as a public offer which gives the jurisdiction to SEBI and the
companies have to comply with all the legal provisions related to this
matter. 

Sahara argued that the Companies Act is not applicable as it is applied to

only listed companies and no company can be forced to get listed on the
stock exchange. The Supreme Court rejected this argument and stated
that the law is clear and impartial. The Supreme Court also observed that
Section 73(1) of the Act provides a restriction on every company
intending to offer shares and debentures to the public.

Conclusion
So, SEBI strongly believes that the investors are the soul of the securities
market and they need to protect the interests of investors for the
development of the capital market. SEBI deals with all the policies and
regulations of the market. SEBI also signed a contract with the
International Organization of Securities Commission and allowed its
members to maintain a regular check for cross border misconduct in their
respective jurisdictions. This case is considered as the landmark
judgment in India’s Corporate Landscape as it helped in preventing war
between MCA and SEBI.