The Securities Appellate Tribunal (SAT), on 18th October, 2011, passed an order which could have wide ramifications for the entire corporate sector. It has directed Sahara Group Companies, its promoter and directors as jointly and severally responsible to return amounts collected (mentioned as ` 19400,86,64,200/- in the order) from investors along with interest @ 15% per annum from the date of receipt of money till date of payment on the issuance of Optionally Fully Convertible Debentures (‘OFCDs’) by unlisted companies. The SAT was disposing appeals in the case of Sahara India Real Estate Corporation Ltd and Ors v. SEBI and Anr., Appeal No. 131 of 2011 along with Sahara Housing Investment Corporation Ltd and Ors v. SEBI and Anr., Appeal No. 132 of 2011. The issues are discussed herein below.
Two unlisted companies of Sahara India Group raised funds through unsecured OFCDs without any intention of listing the proposed issue in any stock exchange for the purposes of financing acquisition of lands, development of townships etc. A Red Herring Prospectus was filed with the RoC wherein it was mentioned that the companies do not intend the proposed issue to be listed in any stock exchange. Subsequently an information memorandum was filed for private placement to the friends, associates, group companies, workers/employees and other individuals connected with the Sahara Group. SEBI found that by issuing the OFCDs, Sections 56, 73, 117A, 117B and 117C of the Companies Act had been contravened.
(1) OFCDs are ‘Securities’
It was argued that the OFCDs are not securities for the purposes of the SEBI Act and hence, SEBI does not have the jurisdiction to regulate them. SAT conclusively ruled that the SEBI Act is a complete code in itself pertaining to securities and securities market and the reference to the definition of securities under the Companies Act cannot be used to determine the scope of securities under SEBI Act. It was held that OFCDs are commonly understood as debentures in the securities market or by those connected therewith and are ‘securities’ for the purposes of the SEBI Act. Furthermore, SAT held that OFCDs being a combination of debt instrument and equity instrument and, therefore, a hybrid security would also qualify as ‘securities’ under SEBI Act.
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(The author is a Consultant, Corporate Division, Lakshmikumaran & Sridharan, New Delhi.)