Sahara companies show the way
Dr SD Israni
As a student of corporate law, my understanding has been that when making a public issue, a company has to issue a prospectus and comply with requirements about disclosures as stipulated by SEBI (the Securities and Exchange Board of India). Unless it is a rights/preferential issue or a private placement, making an issue of securities to 50 or more persons amounts to making a public issue with all its attendant obligations. The intention behind such disclosures is to protect the interests of the public.
However, two companies belonging to the Sahara group have attempted to show us a way of making a public issue without issuing any prospectus and avoid disclosing requisite information. These are optionally fully convertible debentures (OFCDs) issued by Sahara India Real Estate Corporation Ltd (‘Sahara Real Estate’) and Sahara Housing Investment Corporation Ltd (‘Sahara Housing’).
Sahara Real Estate floated an issue of OFCDs and started collecting subscriptions from investors with effect from 25 April 2008 up to 13 April 2011. During this period, the company claimed to have collected over Rs19,400 crore, while up to 31 August 2011, the company had a total collection of over Rs17,656 crore. The amount was collected from over two crore investors. But the surprise was that Sahara claimed that it was not a ‘public’ issue as the OFCDs were offered to only its workers and persons associated with the Sahara group.
When this information came to the notice of the capital market regulator, it started its investigation and passed an ex-parte order on 24 November 2010 restraining the company from mobilising funds under a red herring prospectus (RHP). The order was treated as a show-cause notice and proceedings were initiated against both the Sahara companies.
Feeling aggrieved, the company filed a writ petition before the Bombay High Court which stayed SEBI’s order. The market watchdog then challenged the High Court order before the Supreme Court. In the meantime, SEBI passed an order dated 23 June 2011 that was placed before the Supreme Court, which asked both the Sahara companies to withdraw their writ petitions from the Bombay High Court with a direction to appeal before the Securities Appellate Tribunal (SAT).
The senior advocates for the Sahara companies strongly contended that the OFCD issues were a private placement. They also claimed that OFCDs were not securities and that even if the issue of OFCDs was deemed to be in violation of the provisions of the Companies Act, 1956, SEBI had no power to investigate or pass any order. Their defence was that the issuer companies never intended to have the OFCDs listed.
SAT, after hearing both the sides, refused to buy Sahara’s line that SEBI had no power, and upheld SEBI’s order. SAT remarked, “We are unable to agree with the learned senior counsel and are of the view that the company has concealed more than what it has revealed in the RHP. What it did not disclose was the fact that the information memorandum was being issued to more than 30 million persons inviting them to subscribe to the OFCDs—and therein lies the catch. The fact that the invitation to subscribe to OFCDs was going to be made to more than 50 persons was carefully camouflaged in the RHP as a result of which the RoC (Registrar of Companies) was misled. This concealment is, indeed, very significant and goes to the root of the controversy.” SAT also observed that “It is, therefore, evident that the intention of the company and its promoters from the very beginning was not bonafide.”
It is amazing that right under the nose of the capital market regulator a company can collect thousands of crores—from crores of investors—and still claim that it was a private placement and that SEBI would have no power to take any action against it. While it is good that this ridiculous contention has been thrown out by SAT, the last word is yet to be heard when the Supreme Court delivers its verdict in the matter.
SD Israni is a corporate lawyer. Email: [email protected]