SEBI’s Further Order in the Sahara Case

SEBI yesterday issued a detailed and well-reasoned order in the case involving the offering of optionally fully convertible debentures (OFCDs) by two Sahara companies. It found that the Sahara companies had offered OFCDs to millions of investors in the garb of a ‘private offering” without complying with the requirements applicable to a public offering of securities.

Although the order itself is 99 pages long, it contains a useful summary of conclusions (at para 27.2), which is extracted below:

1. OFCDs are hybrid instruments, and are ‘debentures’.

2. The definition of ‘securities’ under Section 2(h) of the SCR Act is an inclusive one, and can accommodate a wide class of financial instruments. The OFCDs issued by the two Companies fall well within this definition.

3. The issue of OFCDs by the two Companies is public in nature, as they have been offered and issued to more than fifty persons, being covered under the first proviso to Section 67(3) of the Companies Act. The manner and the features of fund raising under the OFCDs issued by the two Companies further show that they cannot be regarded to be of a domestic concern or that only invitees have accepted the offer.

4. Section 60B deals with the issue of information memorandum to the public alone. Therefore the same cannot be used for raising capital through private placements as the said provision is exclusively designed for public book built issues. When a company files an information memorandum under Section 60B, it should apply for listing and therefore has to be treated as a listed public company for the purposes of Section 60B(9) of the Companies Act. Further, Section 60B has to be read together with all other applicable provisions of the Companies Act and cannot be adopted as a separate code by itself for raising funds, without due regard to the scheme and purpose of the Act itself. The same evidently has never been the intention of the Parliament.

5. The two companies, in raising money from the public, in violation of the legal framework applicable to them, have not complied with the elaborate investor protection measures, explained in Paragraph 25 above. This, inter alia, also means that the rigorous scrutiny carried out by SEBI Registered intermediaries on any public issue by a public company have been subverted in the mobilization of huge sums of money from the public, by the two Companies.

6. The two Companies have not executed debenture trust deeds for securing the issue of debenture; failed to appoint a debenture trustee; and failed to create a debenture redemption reserve for the redemption of such debentures.

7. The two Companies have failed to appoint a monitoring agency (a public financial institution or a scheduled commercial bank) when their issue size exceeded `500 cr., for the purposes of monitoring the use of proceeds of the issue. This mechanism is put in place to avoid siphoning of the funds by the promoters by diverting the proceeds of the issue.

8. The two companies failed to enclose an abridged prospectus, containing details as specified, along with their forms.

9. The companies have kept their issues open for more than three years/two years, as the case may be, in contravention of the prescribed time limit of ten working days under the regulations.

10. The two companies have failed to apply for and obtain listing permission from recognized stock exchanges.

Although the case involved an egregious set of facts, the SEBI order leaves no stone unturned in establishing the case of violation on the part of the Sahara companies. Despite being an order of first instance by a regulatory authority, it is replete with in-depth judicial analysis of various concepts under corporate and securities laws, including the meaning and scope of financial instruments such as OFCDs, debentures and hybrid securities, and the interpretation of various provisions of the Companies Act and Securities Contracts (Regulation) Act, all of which have been supported by relevant case law.