Securities Exchange Board of India v. Sahara India Real Estate Ltd. is regarded as a key case in terms of SEBI’s power and jurisdiction in corporate fundraising. SEBI stated that Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited gathered deposits from the general population, including cobblers, labourers, craftsmen, and peasants, in the form of Optionally Fully Convertible Debentures. This plan was subscribed to by around 23 million individuals, the most of them were from rural and small towns, who invested over 24,000 crores rupees. Before getting into the meat of the argument, it’s important to grasp the term “Optionally Fully Convertible Debentures.”
A debenture is an instrument used by a firm to raise funds. For example, if a firm X needs funds to move forward with a new concept or project, it can seek funding from a bank, but this raises the issue of high interest rates and other restrictions that the company must follow. In this instance, the corporation can raise a loan from the public using debentures. One significant component of this method of fundraising is that the firm is required to pay the set amount with interest, and while the money generated through debentures becomes part of the company’s capital, it does not become share capital.
Debentures, both secured and unsecured, can be issued by the corporation. Depending on whether the special resolution is passed by the shareholders, a debenture may be fully or partially convertible at the time of redemption. When it comes to Optionally Fully Convertible Debentures, it is up to the investor to decide when the debt holder wishes to convert its debentures into shares. The conversion is advantageous if the firm is poised to generate a significant profit or if the price of the company’s shares is set to rise. Thus, the point that should be considered is that the investor, in this scenario where he has been given OFCD, should have a fundamental understanding of the company’s and market trends
One notable aspect of this case was that Sahara accepted investment from persons from the lower strata of society who had little knowledge of the workings of financial institutions, market volatility, and the ability to monitor the company’s daily performance. Sahara stated that the programme was a private placement and that only a few clients were informed about it. SEBI has no authority over the matter because its jurisdiction is limited to listed companies. It further claimed that the company’s OFCDs do not fit within the definition of “securities” as defined by the SEBI Act. The Sahara’s principal point was that SEBI has no authority over unlisted firms and so opposed to its intervention in the current matter on the grounds that the aforementioned company is under the purview of the Unlisted Public Companies Rules 2003.
According to Section 55A of the Companies Act of 2013, it lays the way for SEBI’s authority while also limiting it to listed public companies, and in this case, the firm in issue, being unlisted, does not fall within SEBI’s jurisdiction. According to the facts of the case, if Sahara contends that it was a private placement and that only selected clients were asked for investment, then the entire task of OFCD should have been completed within 10 days, in accordance with the rules and regulations, and the offer should have been limited to no more than 50 members.
However, in this case, more than 23 million people invested in the scheme, and it was suspended for more than two years, requiring the company to list it under Section 73 of the Companies Act, 2013, which prohibits private companies from accepting public deposits and allows only eligible companies to accept public deposits. It must be sent to the company’s registrant, which brings it under the scrutiny of the SEBI. As a result, based on the facts presented and the arguments advanced, SEBI concluded that the OFCD scheme falls within the definition of securities as defined by the SEBI Act 1992, and Sahara should be obligated to refund the deposits of more than Rs. 24000 crores to its investors because it was taken in violation of the laws of the land.
The Supreme Court finally made an important observation, stating that while Sahara company claimed that its OFCD scheme was a type of private placement that included only select clients, it failed to prove the same, and it is very clear that it was a type of public offer over which SEBI has complete authority.
In the event of a private placement, the firm should produce records proving that its investors had some relationship with the company, which in this case was not proven by the Sahara group, and so the allegation of the investment being a private placement does not qualify.
The Supreme Court finally made an important observation, stating that while Sahara company claimed that its OFCD scheme was a type of private placement that included only select clients, it failed to prove the same, and it is very clear that it was a type of public offer over which SEBI has complete authority.
In the case of a private placement, the firm should present records indicating that its investors had some contact with the company, which in this case was not proved by the Sahara group, and so the charge of the investment being a private placement does not qualify.