The Supreme Court of India , Civil Appeal No.

9813 of 2011

Facts of the case –

From 25th April 2008 to 13th April 2011, Sahara India Real
Estate Corporation Limited (SIRECL) and Sahara Housing
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Investment Corporation Limited (SHICL) floated an issue of
Optionally Fully Convertible Debentures (OFCDs) and started
collecting subscriptions from investors.
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The company had over Rs. 17,656 crore during that period. In
the guise of “Private Placement”, the amount was collected
from about 30 million investors. This act was performed
without complying with the requisites relevant to the public
offerings of the securities. The Whole Time Member of SEBI
was taking cognizance of the act.

On June 23rd ,2011 they passed an order. The order directed

two companies to refund the money to the investors which
was collected from the them. Additionally, the promoters of
the two companies along with Mr. Subrata Roy were
restrained from accessing the securities market until further
orders. An appeal was made before the Securities Appellate
Tribunal (SAT) by the Sahara. This appeal was against the
order of the Whole Time Member.

After hearing, on 18th Oct, 2011 the SAT confirmed and

maintained the order of the Whole Time Member.
Subsequently an appeal was made by Sahara before the
Supreme Court of India against the order of the SAT.
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Issue 1. Whether SEBI has the power to adjudicate and
investigate in the given matter according to Section 11, 11A,
11B of SEBI Act and under Section 55A of the Companies Act.
Or whether the jurisdiction under Section 55A (c) of the
Companies Act is with the Ministry of Corporate Affairs
(MCA).

Issue 2. Whether the hybrid OFCDs comes under the

definition of “Securities” within the meaning of SEBI Act,
Companies Act and The Securities Contracts (Regulation) Act

 (SCRA) for vesting SEBI with the jurisdiction to adjudicate and
investigate.

Issue 3. Whether the issue of the OFCDs to millions of

persons who had subscribed to that issue is a Private
Placement so that not to come within the scope of SEBI
Regulations and various other provisions of Companies Act.
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Issue 4. Whether listing of the provisions under Section 73

compulsorily applies to all the public issues or it only
depends on the “intention of the company” for getting listed.

Issue 5. Whether the Public Unlisted Companies (Preferential

Allotment Rules) 2003 will be applied in this case or not.

Issue 6. Whether OFCDs are Convertible Bonds and whether

they are exempted from application of SCRA as per the
provisions of Section 28(1)(b).

Judgments
Judgment for issue 1–
In the present matter the

Supreme Court held that SEBI have power to adjudicate and

investigate. Also the SC said that according to the SEBI Act,
the SEBI has special powers for doing investigation and
adjudication to protect the interests of the investors.

This special power of the SEBI do not show disrespectful

attitude to any provisions which are present in any law. They
are an analogous to other law and it should be read in
harmonious manner with other provisions. In the present
matter where the interests of the investors are at stake, there
is no conflict of jurisdiction between the SEBI and the MCA.

Also check: Delivery of the good

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For supporting this view, the Supreme Court gave special

importance to the legislative intent, and also to the
statement of objectives for enacting the SEBI Act and the 
 inserting Section 55A in the Companies Act to authorize
special powers to SEBI in the matters of issue, allotment and
transfer of the securities.

The SC observed that according to provisions mentioned

under Section 55A of the Companies Act, so far matters
connected to issue and transfer of the securities and non-
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payment of the dividend, the SEBI has the power to
administer in the case of listed public companies and also in
the case of those public companies which intended of
getting their securities listed on a recognized and identified
stock exchange in India.

Judgment for issue 2-

The OFCDs issued two companies which are in the nature of
“hybrid” instruments. The Supreme Court held that even
though the OFCDs had issued that, it do not cease to be a
“Security” within the meaning of the SEBI Act, Companies Act,
and SCRA.

It says in spite of having the definition of “Securities” under

section 2(h) of SCRA, it doesn’t contain the term “hybrid
instruments”. The definition which is provided in the Act is
covering all the “Marketable securities”.

In this case such OFCDs were offered to number of people,

so the question about the marketability of such instrument
do not arise. Additionally, since the name itself was comprise
of the term “Debenture”, it is considered as a security
according to the provisions of the SEBI Act, Companies Act
and SCRA.

Judgment for issue 3-

The Supreme Court held that even though the intention of
the companies was of making the issue of OFCDs look as a
private placement, but when such securities are given to
more than 50 persons, it ceases to be so.

This is specifically mentioned in Section 67(3). Hence the SEBI

will have jurisdiction in that matter. Here, the issuer has to act
in accordance with the provisions of the legal framework for
a public issue. Although Sahara companies opposed that they

 do not fall under the provisos to Sec 67 (3) as the Information
memorandum mentioned that OFCDs were issued only to
those belonging to Sahara Group.

No public offer was present, but the SC held that as the

companies elicited public demand for OFCDs via issue of
Information Memorandum under Sec 60B of the Companies
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Act, is only meant for Public Issues. Additionally, observed
that the issue was not for persons associated to the Sahara
Group as introducers were required for someone to subscribe
to OFCDs and in the present case introducer will not be
needed because a person is already associated to Sahara
Group.

Hence, the SC concluded that it can be clearly noticed from

the intension and actions of the two companies that they
desired to issue securities to public in the garb of a private
placement for bypassing various laws and regulations in
relation to that. Moreover, SC observed, Sahara companies
had violated the provisions of Sec 67(3) as they had issued
securities to more than the statutory limit.

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and Criminal Breach of Trust - 403-409 IPC
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Hence attracting civil and criminal liability. Also, the Supreme

Court held that the violation of sec 60B of the Companies Act
had took place. Because issue of OFCDs by circulation of IM
to public had attracted provisions of Section 60B of the
Companies Act, which are required in filing prospectus under
Sec 60B(9) and companies had not given a final prospectus
on closing of the offer and also can’t manage to register it
with SEBI.

Judgment for issue 4-

The Sahara argued that listing requirement under Section 73
of Companies Act is optional and it applies only to those
companies who “intend to get listed”, and no company can
be forced for getting listed on a stock exchange or else it will 
be violation of corporate autonomy.
 However, the SC refused this and held that, Sec 73 (1) is a
compulsory provision of law which companies should comply
with and any issue of securities exceeds 49 persons according
to Sec 67(3) of the Companies Act, the intention of
companies to get listed do not matter at all.

Section 73(1) of the Act puts obligation on every company

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who is intending to offer debentures or shares to public for
applying on a stock exchange to list its securities. Also, the
maxim ”acta exterior indicant interiora secreta” i.e external
action reveals inner secrets applies in this case of Saharas.

The court also held that, if securities to fifty or more are

offered, it is a public offering as per Section 67(3) of the
Companies Act.

Judgment for issue 5-

According to the Unlisted Public Companies (Preferential
Allotment) Rules 2003, preferential allotment by unlisted
public companies on private placement was given
authorization without any restriction on numbers according
to Section 67(3) of the Companies Act, argued by the
companies.

Moreover, Sec 67(3) is applicable to Preferential Allotment

which was made by unlisted public companies in 2011 by
amending the 2003 rules which was with prospective effect
and not with retrospective effect. Therefore, before the 2011
Rules were made there was freedom to make preferential
allotment to more than 50 persons also.

Nevertheless, the SC disagreed and observed that 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.

Judgment for issue 6-

Here the Supreme Court held that 28(1)(b), accurately points
out that only the convertible bonds and share or warrant of
the type referred here are excluded from applicability of


 SCRA and not debentures which are another category of
securities in definition which is present in Section 2(h) of
SCRA.

Conclusion-
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The judgment not only consecrates SEBI’s absolute power to
investigate in the matters of listed companies, but also in
matters pertaining to unlisted companies. It removes the grey
areas of securities issues by the unlisted companies taking
advantage of loopholes of the law. This is a landmark
judgement in India’s corporate landscape.

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