(This post has been contributed by Amit Agrawal, a legal practitioner practicing before Rajasthan High Court, Jaipur and an alumnus of the National Law School of India University, Bangalore)The Securities Appellate Tribunal (SAT) delivered its judgment yesterday in the case involving issue of securities by certain companies within the Sahara group.
The judgment has come after many rounds of legal proceedings before different fora. It may be recalled that Sahara had first challenged the interim order of SEBI passed in November 2010 before the Allahabad High Court. The Allahabad High Court stayed the operation of SEBI’s order in December 2010, which thereby permitted the Sahara entities to continue raising monies from investors. This stay order was challenged before the Supreme Court which however refused to interfere with the interim order of High Court on 4 January 2011 but requested the High Court to expedite the hearing. The matter however could not be disposed in the expected time frame. Subsequently, the Allahabad High Court vacated its previous stay order in April 2011 due to the evasive conduct of Sahara in the matter. Such order vacating the stay was again challenged before the Supreme Court which on 12 May 2011 directed SEBI to complete the inquiry and pass the final order to enable the Supreme Court to pass further orders. SEBI then passed its order in June 2011 confirming its interim order. The Supreme Court thereafter did not examine the merits of the contentions. Through its order dated 15 July 2011 (in Special Leave to Appeal (Civil) No. 11023/2011 with 13204/2011) it directed the parties to appear before SAT. Though the reasons were not expressly recorded for relegating the parties to SAT (where they should in fact have been in the first place) perhaps such an order was passed for the following reasons:
- Any expression of the opinion on the merits of the matter, while hearing an appeal emanating from an interim order (though confirmed in due course), would have prejudicially affected the interests of the parties.The matter was thereafter argued for several days before SAT. In comparison to the lengthy submissions made before SAT, its order is rather concise. The order focuses on the arguments raised rather than attempting to be an encyclopedia of judicial or academic authorities.
- Adjudication by the Supreme Court on merits would have deprived the parties to appeal to any other forum.
- The Supreme Court, consistent with its view noted in Clariant International AIR 2004 SC 4236 (“….without meaning any disrespect to the judges of the High Court, we think neither the High Court nor the Supreme Court would in reality be appropriate appellate forums in dealing with this type of factual and technical matters”), felt hesitant to decide the matter without having the benefit of opinion of the expert tribunal. For the same reason, it thought that the pending writ petition before the Allahabad High Court should be withdrawn.
Permitting a loss making company with a capital base of Rs. 10 lakhs only to gather approximately Rs. 20,000 crores through use of about 2900 branch offices and ten lakh agents would have been a mockery of the securities law framework – is the thought, not an incorrect one, which underpins the SAT’s order. Important findings of SAT in the matter are:
- A private placement is made to a handful of known persons whose number is less than 50 and therefore an issue to more than such a number is a public issue.Whilst the conclusions drawn by SAT on each of the points contended are correct yet the reasoning at times is unclear. The analysis of definition of ‘security’ in particular is arguably open to questioning, in my view. The approach to determining the meaning of an expression for the purposes of SEBI Act, 1992 (which is not defined therein) by looking at the SCRA or Depositories Act only and by refusing to consider the Companies Act, 1956 is highly debatable for corporate laws which are otherwise quite inter-woven. The approach of SEBI as compared to SAT on this point is rather more instructive.
- Optionally fully convertible debentures (OFCDs) are “securities” within the meaning of the Securities Contracts (Regulation) Act, 1956 (SCRA) and consequently SEBI Act, 1992.
- Disclosures made in red herring prospectus (RHP) were not true and fair. Contents of the RHP camouflaged the key issue and concealed more than they disclosed. The fact that millions of investors will be approached was not disclosed.
- Proclamations on paper that the companies did not intend to get listed were not material for ascertaining whether company in fact did not intend to get listed. Their conduct and scheme of operation showed otherwise.
- The companies in fact made a public issue by approaching thirty million investors but by avoiding the rigours of law.
- Untrue statements and misstatements in the RHP can be questioned by SEBI also. This view has also been taken previously by SAT that investor protection is an overlapping concern between the Companies Act and SEBI and is not in the zone of one to the exclusion of another.
- SEBI has jurisdiction over unlisted companies too as long as the same can be said to be ‘persons associated with securities market’. This position has been taken by SAT in its various judgments and also by the Bombay High Court in Price Waterhouse & Co.
- SEBI can change its stand on the questions of law in particular with regard to jurisdiction over unlisted companies.
As regards jurisdiction, an issue which the Supreme Court also considered quite central to the controversy, SAT records: “Whether Sebi has the power to deal with such companies or whether they are to be regulated by the Central Government are complicated and important questions of law pertaining to jurisdiction which are to be decided on the interpretation of the provisions of the SEBI Act and the Companies Act”. But its treatment to this particular aspect is quite cursory in nature.
Also, the issue pertaining to the lack of estoppel against the law has not been fleshed out in as much detail. It observed: “There is no principle of administrative law that statutory bodies like SEBI cannot be permitted to alter their interpretation of a provision of a statute particularly when the matter pertains to jurisdiction.” Could a mistake committed once bind one for eternity, was the question it should have answered with greater clarity in the context.
The order of SAT will perhaps be agitated soon before the Supreme Court. Given that all the contentions pertain to questions of law (with no disputed facts) the entire matter is likely to be re-argued before the Supreme Court.
However, two points which follow from the order of SAT are:
- Is any further action likely to ensue in the wake of finding that disclosures made in the RHP were not true and fair?- Amit Agrawal
- Will an attempt, citing SAT’s observations on jurisdiction (and taking cue from Swedish Match AIR 2004 SC 4219), be made to dodge the penalty proceedings (if any) by requesting the Supreme Court to exercise its extra-ordinary powers under Article 142?