AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2011 (10) TMI 734
X X X X Extracts X X X X
X X X X Extracts X X X X
....or our consideration in these two appeals. Appeal no.131 of 2011 has been filed by Sahara India Real Estate Corporation Limited and its directors/shareholders and Appeal no.132 of 2011 has been filed by Sahara Housing Investment Corporation Limited and its directors/shareholders and these companies shall be referred to hereinafter as the company and housing company respectively. Both the companies are group companies and these appeals involve identical questions of law and fact. Since the main arguments were addressed in Appeal no.131 of 2011, the facts are being taken from this case. The decision in this appeal shall govern the other appeal as well. 2. The company was originally incorporated as Sahara India "C" Junxion Corporation Limited on October 28, 2005 as a public limited company under the Companies Act and it changed its name to the present one on March 7, 2008. It is unlisted, that is, its shares are not listed on any stock exchange. Its issued, subscribed and paid-up capital as stated in its Red Herring Prospectus (for brevity RHP) is one lac equity shares of Rs. 10 each amounting to Rs. 10 lacs. Presently, it has three directors, namely, Vandana Bharrgava, Ravi Shanka....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e time of issue equal to the face value of the Optionally Fully Convertible Unsecured Debentures to be privately placed aggregating to Rs. **** since it is a Red Herring prospectus the quantum and the price is to be determined at a future date Terms of the present issue were also stated in the RHP and it is not in dispute that the company has issued three different types of OFCDs labelling them as Abode Bonds, Real Estate Bonds and Nirmaan Bonds and a gist of their particulars was appended as annexure I to the RHP in a tabular form and the same is reproduced hereunder for facility of reference: Particulars Nature of OFCDs Abode Bond Real Estate Bond Nirmaan Bond Tenure months months months Face Value Rs.5,000/- Rs.12,000/- Rs.5,000/- Redemption Value Rs.15,530/- Rs.15,254/- Rs.7,728/- Early Redemption After 60 months NIL After 18 months Conversion On completion of 120 months. On completion of 60 months On completion of 48 months Minimum Application Size Rs.5,000/- Rs.12,000/- Rs.5,000/- Nominee System Double Nominee Double Nominee Double Nominee Tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of Information is being made by Sahara India Real Estate Corporation Limited (formerly Sahara India 'C' Junxion Corporation Limited) which is an unlisted Company and neither its equity shares nor any of the bonds/debentures are listed or proposed to be listed. This issue is purely on the private placement basis and the company does not intend to get these OFCD's listed on any of the Stock Exchanges in India or Abroad. This Memorandum for Private Placement is neither a Prospectus nor a Statement in Lieu of prospectus. It does not constitute an offer for an invitation to subscribe to OFCD's issued by Sahara India Real Estate Corporation Limited. The Memorandum for Private Placement is intended to form the basis of evaluation for the investors to whom it is addressed and who are willing and eligible to subscribe to these OFCD's. Investors are required to make their own independent evaluation and judgment before making the investment. The contents of this Memorandum for Private Placement are intended to be used by the investors to whom it is addressed and distributed. This Memorandum for Private Placement is not intended for distribution and is for the consideratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... option is exercised after 47 months i.e. one month prior to redemption. This bond is also transferable to any other person with the approval of the company. All the three bonds enable the bond holders to avail of loan facility as per the terms and conditions in the application forms. Nirmaan Bond and Real Estate Bond have an additional feature of death risk cover. The nominees(s) of the deceased bond holders are entitled to receive the death risk cover amount as enumerated in the terms and conditions of their issue. It is pertinent to mention here that as per clause 13 of the RHP, as reproduced in para 3 above, there was no restriction imposed on the transfer of the OFCDs whereas in the terms and conditions enumerated in the application forms, the transfer has been made subject to the approval of the company. This fact is being noticed here since much was said on behalf of the appellants that the fetter imposed on the transfer of OFCDs made them non-marketable as a result whereof they were not 'securities'. We shall deal with this aspect later. 5. The issue of OFCDs floated by the company is an open ended scheme and it started collecting subscriptions from the investors....
X X X X Extracts X X X X
X X X X Extracts X X X X
....res and without conforming to the investor protection norms governing public issues. With a view to protect the interests of investors and with a view to prevent the company from collecting further funds from the public, Sebi passed an ex-parte order on November 24, 2010 restraining the company from mobilizing funds under the RHP. The company was directed not to offer its OFCDs or any other securities to the public or invite subscription in any manner whatsoever till further directions. A similar direction was issued to the housing company as well. The ex-parte order was treated as a show cause notice and proceedings were initiated against both the companies. Feeling aggrieved by the ex-parte order, the company filed a writ petition before the Lucknow Bench of the High Court of Allahabad. The writ petition was admitted and the operation of the order impugned therein was stayed. Sebi then challenged the order of the Allahabad High Court by filing special leave petition before the Hon'ble Supreme Court. There was some further litigation between Sebi and the company and it is not relevant for us to go into the details thereof. However, during the pendency of the proceedings before....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as OFCDs issued by the company are not 'securities' within the meaning of Sebi Act read with SCRA and section 2(45AA) of the Companies Act. He also argued that in view of the fetters imposed on their transferability, they were not marketable and hence not securities. He contended that OFCD is a 'hybrid' as defined in section 2(19A) of the Companies Act and not having been included in the definition of securities in SCRA, it cannot be regarded as a security so as to be regulated by Sebi. It was also argued by Mr. Nariman, that the issue of OFCDs was not a public issue and that these were offered to the investors on private placement basis and, therefore, they were not required to be mandatorily listed. He pointed out that the company had made its intention clear from the beginning in the RHP wherein it stated that it did not intend to get the issue listed on any stock exchange. The learned senior counsel then argued that assuming OFCDs were securities, these had been issued by an unlisted company which did not intend to get them listed and by virtue of the provisions of section 55A(c) of the Companies Act, it was the Central Government which could administer the comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... companies rests only with the Central Government and not with Sebi. He referred to the provisions of section 2(h) of SCRA and argued that in view of the fact that transfer of OFCDs from one investor to another had been made subject to the approval of the issuer company and this fetter on their transferability, according to him, makes them non marketable as a result whereof they cease to be securities. He took us through the impugned order and pointed out that the whole time member had violated the principles of natural justice in as much as he has placed reliance on certain facts which were collected behind the back of the appellants which were never put to them. In particular, he referred to paras 17.9 and 26.7 of the impugned order wherein reliance has been placed on some enquiries made by the investigating authority on the instructions of the whole time member and the result of those enquiries, though relied upon, was never put to the appellants. It was also argued by Mr. Sarkar that action has been taken against the housing company for violating some of the provisions of the regulations which, according to him, apply only to listed companies. The argument is that the housing c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....how cause notice but also in passing the impugned order issuing necessary directions to the appellants. He also refuted the argument on behalf of the appellants that in view of the earlier stand taken by Sebi while dealing with some complaints and the one taken in an affidavit filed in the Bombay High Court, it could not lightly change its stand. The learned senior counsel for Sebi contended that there can be no estoppel against law and that the circumstances in which the affidavit was filed in the Bombay High Court were altogether different. 11. Mr. Darius Khambata, the learned Additional Solicitor General appearing on behalf of Ministry of Corporate Affairs, Government of India (respondent no.2) also made his submissions on the question of jurisdiction of Sebi to pass the impugned order. He supported Mr. Datar and contended that Sebi alone had the jurisdiction in the matter and that the impugned order does not suffer from lack of jurisdiction. He vehemently argued that OFCDs were securities and, therefore, Sebi has the jurisdiction to regulate the issue and also the issuer company. He referred to the provisions of the Sebi Act to contend that Sebi had wide powers therein to pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e portions thereof where the company had made it clear that it did not intend the proposed issue to be listed on any stock exchanges(s). He also referred to the project cost which was around Rs. 20,000 crores and the projects were to be financed partly by this issue and partly with the capital reserves and other resources of the company. Since the capital reserves and other sources of the company as disclosed in the RHP were very meagre, it is expected that the company will collect around Rs. 20,000 crores from the investors. The learned senior counsel also highlighted that the company had made it clear from the beginning that it was not approaching the public and that the OFCDs were being offered to the investors on a private placement basis. He also pointed out from the RHP that OFCDs would be offered only to those persons "to whom the Information Memorandum was circulated and/or approached privately who are associated/affiliated or connected in any manner with Sahara Group of Companies, without giving any advertisement in general public." After referring to the RHP and the resolutions passed by the company, the learned senior counsel strenuously argued that true, full and faithf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w that it was going to collect an amount of about Rs. 20,000 crores as its own capital and reserves as disclosed in the RHP were negligible and that it intended to issue the information memorandum to millions of investors. The fact that the invitation to subscribe to OFCDs was going to be made to more than fifty persons was carefully camouflaged in the RHP as a result whereof the RoC was misled. Had it been disclosed that the offer was being made to millions of investors, perhaps the RoC would not have registered the RHP and, in any case, he would have raised several queries in this regard and would not have treated the issue as one made on private placement basis. This concealment is, indeed, very significant and goes to the root of the controversy. Having got the RHP registered on March 18, 2008, the company circulated the information memorandum to the prospective investors in April 2008. The information memorandum, if at all was to be circulated, should have been circulated prior to the filing of the RHP as is the requirement of section 60B of the Companies Act. It may be mentioned that the information memorandum and the RHP carry the same obligations as are applicable in the ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces is nothing but advertisement to the public. This vital fact was withheld from all concerned. It is, therefore, evident that the intention of the company and its promoters from the very beginning was not bonafide. In this view of the matter, we cannot but hold that the appellants concealed some very vital facts from the RoC and from its shareholders and also from the investors and we are satisfied that the disclosures made in the RHP were not true and fair. 15. Even the conduct of the RoC leaves much to be desired. We say so because when the RHP was presented to him, the fact that the company had a capital base of only ten lacs with no other assets or reserves and was a loss making company and was going to collect Rs. 20,000 crores by private placement, should have alerted him and he should have made necessary queries in this regard. It is reasonable to assume that he knew that an offer/invitation made to fifty or more persons would make it a public issue and he ought to have enquired as to the number of persons to whom OFCDs were proposed to be offered and their particulars. The appellants tell us that no such queries were made. Had he made such a query he would have known t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sive definition of the term 'securities', the relevant part of which reads as under: (h) "securities" include- (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; ................................ ................................ It is also necessary to reproduce sub-section (2) of section 2 of the Sebi Act which reads thus: 2(2) Words and expressions used and not defined in this Act but defined in the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Depositories Act, 1996 (22 of 1996) shall have the meanings respectively assigned to them in that Act. Definition of the term 'securities' was inserted in the Companies Act for the first time by adding clause (45AA) in section 2 by the Amendment Act of 2000 with effect from December 13, 2000 and this is how it reads: (45AA) "securities" means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes hybrids. The term 'hybrid' was also ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be marketable in the market, namely, the stock exchange, the shares of a company must be capable of being sold and purchased without any restrictions. After referring to the definition of securities, the learned senior counsel took us to the terms and conditions contained in the application forms that were issued to the investors and pointed out that a restriction had been imposed on their transferability. He specifically referred to condition no.9 of Nirmaan Bonds which imposes a fetter on the bond holder in the matter of transfer. The condition imposed is this "Bond Holder can transfer the bond to any other person, subject to the terms and conditions and approval of the company." Similar condition is there in the other OFCDs as well. Shri Nariman argued that since the transfer of the OFCDs was subject to the approval of the company, these were not freely transferable and hence not marketable. On this ground as well, the learned senior counsel contended that OFCDs were not securities within the meaning of SCRA. 17. We have given our thoughtful consideration to the aforesaid submissions made on behalf of the appellants and regret our inability to accept the same. In our opin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n to deal with or regulate such an instrument. It is in this context that the appellants have questioned the jurisdiction of Sebi by contending that the OFCDs issued by the company are not 'securities'. Clause (h) of section 2 in SCRA gives an inclusive meaning to the term securities which has to be bodily lifted and read into the Sebi Act. When we do this, securities include, among others, shares and debentures. The word 'debenture' has not been defined in the Sebi Act and by virtue of sub-section (2) of section 2 of that Act, we can look to the definition only if given in SCRA or in the Depositories Act. This term has not been defined in those Acts either. In this view of the matter, the word 'debenture' will have to be understood in the manner as it is understood in the securities market or by those connected therewith. A debenture as understood in the capital market is a debt security issued by a company called the issuer which offers to pay interest in lieu of the money borrowed for a certain period. In essence, it represents a loan taken by the issuer who pays an agreed rate of interest during the life time of the instrument and repays the principal no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The word 'hybrid' has neither been used nor defined in the Sebi Act and not even in SCRA. It has to be understood as it is commonly understood in the capital market. A hybrid security is a security that combines two or more different financial instruments. They generally combine both debt and equity characteristics and are heavily influenced by the price movement of the underlying stocks into which they are convertible. New types of hybrids are being introduced all the time in the developed markets to attract investors as these are modern means adopted by companies to raise capital. The definition of 'hybrid' as introduced in the Companies Act in the year 2000 is no different from what the term is understood in the market. The OFCDs issued by the company being fully convertible debentures have the characteristics of debt and equity. The Nirmaan Bonds and the Real Estate Bonds have an additional element of insurance namely, death risk cover. The learned counsel for the appellants mentioned during the course of the hearing that the insurance component was quite minimal in the bonds and has now been given up. However, the fact remains that the OFCDs are a combination o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany itself had stated in clause 13 as noticed in paragraph 3 of our order that there was no restriction on the transferability of the shares/debentures. How can the company be now heard to say that there was a fetter on their transfer. The condition that transfer of OFCDs was subject to the approval of the company was subsequently put in the application forms that were sent to the investors. We are also of the view that any restriction on the transfer of shares or debentures issued by a company is not permissible in view of the provisions of section 111A(2) read with sections 9 and 82 of the Companies Act. Even if one were to assume that a condition that transfer of OFCDs was subject to the approval of the company could be imposed, such a condition, in our view, does not take away the marketability of the instrument. The word 'marketable' would imply that a product is capable of being bought and sold in the market. There need not be an actual sale. Moreover, in the present case, OFCDs could be transferred to persons other than those to whom they were offered. The plea that OFCDs were not marketable had been forcefully argued during the course of the hearing but when clau....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nquiries and audits of the stock exchanges and intermediaries and self- regulatory organisations in the securities market; (j) performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 (29 of 1947) and the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government; (k) levying fees or other charges for carrying out the purposes of this section; (l) conducting research for the above purposes; (m) performing such other functions as may be prescribed. Parliament noticed some shortcomings in the Sebi Act and felt that the provisions of section 11 as they originally stood were not enough to enable Sebi to effectively carry out its duties. There was no provision to enable Sebi to deal with certain intermediaries and persons associated with the securities market and with companies in regard to matters relating to issue of capital and transfer of securities. Sebi Act then came to be amended by Act 9 of 1995 with a view to enable Sebi to function in a more effective manner so that it could, among others, regulate companies regarding matters rela....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stigations and enforcement so that it is better equipped to carry out its duties enjoined by section 11. By Amending Act 59 of 2002, Sebi Act was further amended comprehensively and section 11, among others, was amended and section 11A was substituted to give more powers to Sebi to discharge its functions more effectively. Sub-sections (2A) and (4) which were inserted in section 11 and the substituted section 11A read as under: (2A) Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, or register, or other document or record of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. ............................ (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of inve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oard may, for the protection of investors, - (a) specify, by regulations - (i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and (ii) the manner in which such matters shall be disclosed by the companies; (b) by general or special orders - (i) prohibit any company from issuing prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities; (ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued. (2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act, 1956(42 of 1956), the Board may specify the requirements for listing and transfer of securities and other matters incidental thereto. From the aforesaid legislative amendments it can be seen that Sebi was being conferred with wide powers from time to time to enable it to carry out its duties more effectively. The 1995 amendments introducing sections 11A and 11B to the Sebi Act specifically gave powers to it to regulate companies in regard to issue of c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in these provisions are of wide amplitude and having regard to the fact that we are dealing with a growing capital market where new economic trends including financial instruments are emerging on a regular basis, widest possible interpretation needs to be given to the provisions of the Sebi Act subject, of course, to the two parameters enumerated in section 11(1) namely, protection of the interests of the investors in securities and promotion and regulation of the securities market. Such an interpretation alone would advance the object of the Sebi Act. The scope of these provisions had recently come up for our consideration in Parsoli Corporation Ltd. and others vs. Securities and Exchange Board of India, Appeal no.146 of 2010 decided on August 12, 2011 and we observed as under: The Board is a statutory body established under section 3 of the Act and section 11 thereof enjoins a duty on it to protect the interests of investors in securities and to promote the development of and to regulate the securities market. Parliament in its wisdom has left it to the Board to take such measures as it thinks necessary to carry out these duties. The powers of the Board in this regard are, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....including the Companies Act. Sebi Act, SCRA and the Depositories Act, 1996 are cognate statutes as they deal with different aspects of 'securities' and the securities market and they alone govern the capital market. Whether the issue of OFCDs is a public issue requiring mandatory listing 22. As noticed earlier, the company issued OFCDs to raise funds approximating to Rs. 20,000 crores purporting to be by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies without giving any advertisement to the general public. RHP issued by the company in this regard and the resolutions passed by it and its board of directors have already been referred to in the earlier part of the order. The respondents including Sebi seriously dispute that the issue of OFCDs was by way of private placement and it is their case that it was a public issue. The consequences of an issue by way of private placement are distinct from the consequences when shares or debentures are offered to the public. In the case of a public issue, the provisions of the Companies Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... will be said to have been invited to subscribe to the shares or debentures of a company if the invitation is extended to any section thereof whether they are members or debenture holders or clients of the issuer company. Sub-section (3) then is in the form of an exception to the aforesaid two sub-sections and it lays down that no invitation or offer shall be an offer to the public if it cannot be made to persons other than those receiving the invitation/offer. To put it differently, an offer or an invitation shall be to the public if the same can be passed on to persons other than those to whom it is made. In other words, an offer/invitation without the right of renunciation in favour of others cannot be termed as an offer or invitation to the public. This then being the position of law, it came to the notice of the Government of India as is clear from its press note dated July 6, 1992 a copy of which was produced by the learned senior counsel for Sebi that some companies were misusing the aforesaid provisions by making an offer to a large number of persons but not giving them a right of renunciation in favour of others and superscribing their brochures/advertisements by the capti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....morandum to the public prior to filing of a prospectus. (2) A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as a red-herring prospectus, at least three days before the opening of the offer. (3) The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus. (4) Any variation between the information memorandum and the redherring prospectus shall be highlighted as variations by the issuing company. Explanation.- For the purposes of sub-sections (2), (3) and (4), "redherring prospectus" means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered. (5) to (9) ............................... Clause (19B) was also inserted in section 2 of the Companies Act by the same amending Act defining information memorandum and it reads as under: (19B) "information memorandum" means a process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... public. 25. Before we proceed further, we may refer to the implications that flow from a public issue. It is the requirement of law that every issuer making a public issue of securities, as has been done by the company, has to file a draft offer document with Sebi through a registered merchant banker. Not only is a merchant banker to be appointed but also a registrar to the issue and they are independent market intermediaries having separate roles to play. The draft offer document is then put up for public comments and Sebi examines the same making sure that all investor protection measures have been complied with. The directions, if any, issued by Sebi have to be incorporated by the merchant banker in the offer document. Again, an unlisted issuer like the company becomes eligible for making a public issue only if it has net tangible assets of atleast Rs. 3 crores in each of the preceding three full years. It must also have distributable profits in atleast three of the immediately preceding five years. Its net worth should be of atleast Rs. 1 crore in each of the preceding three years. The law further enjoins that in a public issue by an unlisted company, the promoters should c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ge or each such stock exchange. (1A) ........................... (2) Where the permission has not been applied under sub-section (1) or such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money. (2A) to (7)........................ A plain reading of section 73(1) makes it clear that a company intending to offer shares or debentures to the public has to do so by issue of a prospectus and before that is issued, it must make an application to one or more recognized stock exchange(s) for permission for the shares and debentures to be dealt with ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nies Act. We have no hesitation in upholding the findings of the whole time member in this regard. The effect of section 55A of the Companies Act on the powers of Sebi to regulate unlisted companies. 27. Referring to the provisions of section 55A of the Companies Act, Mr. Nariman, learned senior counsel for the appellants forcefully argued that the company being an unlisted company which did not intend to get its securities listed falls in clause (c) of section 55A and, therefore, it could be regulated only by the Central Government and that Sebi had no jurisdiction in this regard. He further argued that before the introduction of section 55A, Sebi had no power to administer any provision of the Companies Act nor could it deal with any of its violations. The learned senior counsel also contended that this section has for the first time introduced the concept of listed public companies and unlisted public companies and demarcated the powers of Sebi and the Central Government in regard to their regulation. His argument is that now listed public companies and those public companies which intend to get their securities listed are to be administered by Sebi to the limited ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....now, without any justifiable reasons, change its stand and exercise jurisdiction over the company which is unlisted. He referred to several judgments of the Supreme Court where the learned Judges had observed that statutory authorities having taken a particular stand in the past cannot suddenly take a different and inconsistent stand as that would result in the law being in a state of confusion. Reliance was placed on Collector of Central Excise vs. Tata Engineering and Locomotive - 2003 (11) SCC 193; Birla Corporation Ltd. vs. Commissioner of Central Excise, Baroda - 2005 (6) SCC 95; Jayaswals NECO Ltd. vs. Commissioner of Central Excise, Nagpur - 2007 (13) SCC 807 and Indian Oil Corporation Ltd. vs. Collector of Central Excise, Baroda - 2007 (13) SCC 803. 28. Since the answer to the aforesaid contentions raised on behalf of the appellants depends upon the interpretation and scope of section 55A of the Companies Act, it is necessary to refer to the provisions of this section. Section 55A was inserted in the Companies Act by the Amending Act 53 of 2000 with effect from December 13, 2000. It reads thus: A. Powers of Securities and Exchange Board of India.- The provisions co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arket regulator. The entrustment of this power to Sebi is in addition to the powers it already has under sections 11, 11A and 11B of the Sebi Act and does not whittle down its powers under these provisions. The statement of objects and reasons of the Amending Act makes it clear that Parliament brought about changes in the Companies Act to provide for good corporate governance and for protection of investors. The provisions in so far as they relate to investor protection were entrusted to Sebi for regulation including their enforcement. We are unable to agree with the learned senior counsel for the appellants that prior to the insertion of section 55A in the Companies Act, Sebi had no power to deal with companies in respect of matters enumerated in section 55A. Even prior to the insertion of section 55A in the year 2000, Sebi had powers under section 11A of the Sebi Act which was introduced in January 1995 to regulate companies in regard to matters relating to issue of capital, transfer of securities and other matters incidental thereto. It is pertinent to mention that Sebi was established in the year 1988 through a Government resolution for the purpose of regulating the securities ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....curities listed on any recognized stock exchange in so far as they relate to matters regarding issue and transfer of securities and non-payment of dividend and in all other cases those provisions would be administered by the Central Government. The insertion of section 55A in the Companies Act does not in any way affect the powers of Sebi under the Sebi Act whereunder it can deal with both listed and unlisted companies. 30. We are also unable to accept the contention of Mr. Nariman that section 60B has not been included in section 55A of the Companies Act and, therefore, Sebi has no jurisdiction to administer this provision. It may be recalled that the whole time member has, in the impugned order, recorded a finding that the company could not take the section 60B route to mobilise funds because on the one hand it claims that OFCDs have been issued by private placement and on the other it has issued an information memorandum which is only meant for the public. The argument is that it was the Central Government which could object to this route being adopted and not Sebi. There is no basis for this argument. A mere perusal of section 55A of the Companies Act would reveal that, amon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the issue listed was only to bypass the mandatory provisions of the Companies Act and an effort to get out of the clutches of the market regulator. It must be remembered that listing is an admission of a security to dealings on a recognized stock exchange and gives a valuable right to the investor to trade which alone can provide liquidity. If an issue is a public issue, investors cannot be deprived of this right to trade. How can a company go to the public issuing securities and not get the security listed. This is unheard of in the securities market and impermissible in law. In view of our findings that the company intended to get its OFCDs listed, it has to be held that it falls in clause (b) of section 55A and is amenable only to the regulatory jurisdiction of Sebi. Now coming to the two cases cited on behalf of the appellants. As already noticed, strong reliance was placed on Kalpana Bhandari's case (supra). We are of the view that this judgment is of no help to the appellants. That case pertains to preferential allotment that was made in the year 1993 when the proviso to section 67(3) of the Companies Act had not been inserted. Section 67(3) as it then stood permitted s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d are unable to accept the same. We have already discussed the provisions of section 55A of the Companies Act in the earlier part of our order observing that Sebi has been given the power to administer the enumerated provisions therein in regard to listed public companies and those public companies which intend to get their securities listed on any recognized stock exchange in so far as they relate to three matters namely, issue of securities, transfer of securities and non-payment of dividend. The Explanation to section 55A is a declaration made by Parliament for the removal of doubts. It has to be read harmoniously with the main provisions of the section and it cannot be read in a manner which takes away the powers given by the main provisions. The declaration has been made in regard to powers of the Central Government relating to "all other matters". These words when read with the main provision would mean matters other than issue and transfer of securities and non-payment of dividend. When we read the Explanation harmoniously with the main provision, it would mean that even with regard to matters contained in a prospectus, Sebi would exercise powers in regard to the aforesaid t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing company to the Ministry of Company Affairs for examination and necessary action as both these companies are unlisted. Reference was also made to the letter dated June 23, 2010 by which complaints relating to unlisted companies of the Reliance group of Industries were also forwarded to the Ministry of Corporate Affairs. It was argued by the learned senior counsel that since Sebi has not been dealing with the complaints relating to unlisted companies, it cannot acquire jurisdiction over the company. Reference was also made to the affidavit filed by Sebi in the Bombay High Court in Kalpana Bhandari's case (supra) where it had been stated that Sebi had the power to regulate listed public companies and public companies intending to get its shares listed on any recognized stock exchange in so far as they relate to issue and transfer of securities. It was argued by Mr. Nariman that there is no justifiable reason available on record which may necessitate Sebi to change its consistent stand with regard to jurisdiction over unlisted companies being with the Central Government. We are unable to accept this argument of the learned senior counsel. The press note relied upon does not in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted to alter their interpretation of a provision of a statute particularly when the matter pertains to jurisdiction. We are in agreement with the learned senior counsel for the respondents that the case law cited on behalf of the appellants is of no help to them. In Tata Engineering and Locomotive's case (supra), the Central Excise Department had accepted an earlier decision of the Tribunal in the case of Bajaj Auto in regard to the interpretation of a notification. No appeal was filed in the case of Bajaj Auto whereas an appeal was filed in the case of Tata Engineering and Locomotive Company where the Tribunal followed its earlier view. It was on these facts that the learned judges of the Supreme Court held that the Department having accepted the Tribunal's interpretation of the notification in one case was precluded from taking an inconsistent stand in the other. This decision does not advance the case of the appellants. In Birla Corporation's case, Indian Oil Corporation's case and Jayaswals NECO's case cited by the appellants, the position was similar. In the case before us, Sebi had only forwarded the complaints pertaining to unlisted companies to the Ce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s different from the other. Had they been the same, there would have been no need for the Parliament to include all. Bonds and debentures have been separately included and, therefore, they are different from each other. We have already held in the earlier part of our order that OFCDs issued by the company are debentures. As they are debentures, they are different from bonds though they both fall in the category of debt securities. In a loose sense, the terms 'bonds' and 'debentures' are sometimes used interchangeably in the securities market but legally these cannot be understood as same financial instruments because the Parliament has included them separately in the definition of securities. What has been excluded from the provisions of SCRA under Section 28(1)(b) are convertible bonds and not debentures. It is pertinent to mention here that the company itself in the RHP and in the information memorandum has described the instruments as "Optionally Fully Convertible Debentures". It follows that the exclusion under section 28(1)(b) of SCRA is not available to the OFCDs issued by the company. 36. Learned senior counsel on both sides argued at length on the amendme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mply not traceable. As to the two investors who were identified, both of them invested in the OFCDs, just because they were approached by the Agents in their locality. They had no prior association with the issuer or the Sahara Group. Evidently, on the face of it, the OFCDs are subscribed to, not by persons belonging to the Sahara India Parivar as claimed, but by the public, and such subscriptions are solicited through the usual marketing efforts that are typically needed to canvass deposit business from the general public. Both of them had hardly any awareness of the convertibility in these instruments. There is merit in the contention of the appellants. As already observed, one of the primary questions that arose before the whole time member was whether the issue of OFCDs was a public issue or one by way of private placement. The appellants have been contending throughout that it was a private issue and that they had not approached the public and that the OFCDs were being offered only to their friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected with Sahara group of companies. In order to find out whether this fact wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s the issue of OFCDs a public issue but the company flouted every requirement of section 73(1) of the Companies Act and did not comply with any of the investor protection norms as prescribed by law. In this view of the matter, the argument of the appellants has only to be rejected. 39. The learned senior counsel for the appellants then challenged the show cause notice dated May 20, 2011 to the company and other appellants on the ground that the same was without jurisdiction. It was pointed out that OFCDs were issued by the company in the year 2008 and it is alleged in the show cause notice that the company had violated different clauses of the guidelines pertaining to investor protection and disclosures and since no action was taken by Sebi till the time the guidelines came to be rescinded on the promulgation of the regulations with effect from August 26, 2009, Sebi could not issue the show cause notice under the regulations alleging violation of the guidelines. According to the learned senior counsel, the regulations do not have any retrospective operation and they cannot apply to the wrongful acts, if any, committed by the company in the year 2008. It is argued that regulation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ongful acts committed by the company prior to the promulgation of the regulations could be the subject matter of a show cause notice issued after the promulgation of the regulations. We cannot agree with the learned senior counsel for the appellants that by issuing the impugned show cause notice, retrospective effect is given to the provisions of the regulations. We do not find any infirmity in the show cause notice on this score and the whole time member was right in holding the company guilty of violating the guidelines read with the regulations. 40. The regulations, therefore, apply to all public issues by all companies whether they are listed or unlisted. Challenging the direction issued by the whole time member, the learned senior counsel for the appellants contended that the direction pertaining to the refund of monies collected through the OFCDs could, if at all, be given by the Central Government and that Sebi could not direct the appellants to make the refund. We have no hesitation in rejecting this contention as well. Section 73 is one of the enumerated provisions referred to in section 55A of the Companies Act and Sebi has to administer the same in so far as it relate....