India: Optionally Fully Convertible Debentures – Whether Securities Or Not?

Last Updated: 27 June 2013
Article by Yogesh Malhan

Most Read Contributor in India, September 2016

The Supreme Court on 31st August, 2012 in Sahara India Real Estate Corporation Limited ('SIRECL') and Sahara Housing Investment Corporation Limited ('SHICL"), & Ors., (the Appellants) vs. Securities and Exchange Board of India & Anr. ('SEBI'), (the respondents) had passed a landmark judgment wherein, the Hon'ble Court ordered business conglomerate and leading sports sponsor Sahara to refund all the money together with interest which it collected from millions of small investors.

The matter came into the picture when SEBI, in November 2010, had restrained the two companies from raising funds in the form of Optionally Fully Convertible Debentures (OFCD), against which, Sahara got SEBI order in December 2010, stayed in Allahabad High Court. The Allahabad High Court in April 2011, ordered Sahara to approach the apex Court. In May 2011, the Supreme Court directed SEBI to continue its OFCD probe.

In June 2011, SEBI ordered the two companies to refund back the money to the investors, in response to which Sahara in July 2011, appealed in the Supreme Court stating that SEBI has no jurisdiction in the case. The Supreme Court, however, ordered Sahara to approach the Securities Appellate Tribunal (SAT). In October 2011, SAT upholds the SEBI order. In November 2011, Sahara challenges the order passed by SAT and obtains stay. But, finally on 31st August, 2012 the Hon'ble Supreme Court delivers the verdict against Sahara and ordered the companies to pay the collected amount i.e. Rs 24, 400 Crore + 15% interest to its 2.21 crore investors.

  • To analyze the powers of the SEBI u/s 55A(b) of the Companies Act, 1956 to administer various provisions relating to issue and transfer of securities to the public by listed companies or companies which intend to get their securities listed on any recognized stock exchange in India
  • Whether appellants had violated the SEBI (Disclosure and Investor Protection) Guidelines, 2000 [ 'DIP Guidelines'] and various regulations of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ['ICDR 2009'],
  • Whether Optionally Fully Convertible Debentures ('OFCDs') offered by the appellants should have been listed on any recognized stock exchange in India, being Public Issue u/s 73 read with Section 60B and allied provisions of the Companies Act
  • Whether OFCDs issued are securities under the Securities Contracts (Regulation) Act, 1956 ['SCR Act'].
DEFENCES BY SAHARA GROUP SIRECL and SHICL had issued the OFCDs pursuant to a special resolution under Section 81(1A) of the Companies Act, 1956 passed on 3.3.2008 and 16.9.2009 respectively.

  • They had issued and circulated an Information Memorandum ('IM') prior to the opening of the offer and that Red Herring Prospectus ('RHP') issued by SIRECL dated 13.3.2008 was filed with RoC, U.P. and Uttarakhand and RHP issued by SIHCL dated 6.10.2009 was filed with RoC, Maharashtra.
  • OFCDs issued by the company would not fall under Sections 55A(a)
  • Company has specifically indicated in the RHP that they did not intend to get their securities listed on any recognized stock exchange
  • It was urged that Regulations 3 and 6 of ICDR 2009 would not apply, since there was no public issue either in the nature of an initial public offer or further public offer
  • It was also urged that OFCDs issued were in the nature of "hybrid" as defined u/s 2(19A) the Companies Act and SEBI did not have jurisdiction to administer those securities since Hybrid securities were not included in the definition of 'securities' under the SEBI Act, SCR Act etc.
  • It was also urged that such hybrids were issued in terms of u/s 60B of the Companies Act and, therefore, only the Central Government had the jurisdiction under Section 55A(c) of the Companies Act. Further, it was also pointed out that Sections 67 and 73 of the Companies Act could not be made applicable to Hybrid securities, so also the DIP Guidelines and ICDR 2009.
  • SIRECL, in its Extraordinary General Meeting held on 3.3.2008, resolved through a special resolution passed u/s 81(1A) of the Companies Act to raise funds through unsecured OFCDs by way of private placement. " Company authorized its Board of Directors to decide the terms and conditions and revision thereof, namely, face value of each OFCD, minimum application size, tenure, conversion and interest rate.
  • Board of Directors, consequently, held a meeting on 10.3.2008 and resolved to issue unsecured OFCDs by way of private placement, the details of which were mentioned in the RHP filed with the Registrar of Companies ( "RoC"), Kanpur.
  • SIRECL had specifically indicated in the RHP that they did not intend to get their securities listed on any recognized stock exchange
  • It was also stated in the RHP that only those persons to whom the IM was circulated and/or approached privately who were associated/affiliated or connected in any manner with Sahara Group, would be eligible to apply
  • SIRECL, under Section 60B of the Companies Act, filed the RHP before the RoC, Uttar Pradesh on 13.3.2008, which was registered on 18.3.2008.
  • In April 2008, circulated IM along with the application forms to its so called friends, associated group companies, workers/employees and other individuals associated with Sahara Group for subscribing to the OFCDs by way of private placement
  • IM carried a recital that it was private and confidential and not for circulation.
  • To carry out infrastructural activities and the amount collected from the issue would be utilized in financing the completion of projects, namely, establishing/constructing the bridges, modernizing or setting up of airports, rail system or any other projects which might be allotted to the company from time to time in future
  • Intention of the company to engage in the business of electric power generation and Transmission
  Abode Bond Real Estate bond Nirmaan Boand
Tenure 120 months 60 months 48 months
Face Value Rs. 5000/- Rs. 12000/- Rs. 5000/-
Redemption Value Rs. 15530/- Rs. 15254/- Rs. 7728/-
Early Redemption After 60 months NIL After 18 months
Conversion Conversion On completion of 120 months On completion of 60 months On completion of 60 months On completion of 48 months
Min. Application Size Rs. 5000/- Rs. 12000/- Rs. 5000/-
Nominee System Double Nominee Double Nominee Double Nominee
Transfer Yes Yes Yes
  • Company floated the issue of the OFCDs as an open ended scheme
  • Collected an amount of Rs.19400.87 Crores from 25.4.2008 to 13.4.2011.
  • Company had a total collection of Rs.17656.53 Crores as on 31.8.2011, after meeting the demand for premature redemption
  • The above mentioned amounts were collected from 2,21,07,271 investors
  • SHICL, a member of Sahara Group companies, also convened an Annual General Meeting on 16.9.2009 to raise funds by issue of OFCDs, by way of private placement
  • RHP was filled on 6.10.2009 u/s 60B of the Companies Act with the RoC,Mumbai, Maharashtra, which was registered on 15.10.2009.
  • OFCDs of the nature of Housing Bond; conversion price of Rs.5,000/- for each five bonds
  • OFCDs of the nature of Income Bond, conversion price of Rs.6,000/- for six bonds;
  • OFCDs of the nature of Multiple Bond, conversion price of Rs.24,000/- for two bonds.
  • Interest accrued on each of the three types of bonds was to be refunded to the bond holders.
  • Collected an amount of Rs.6,380.50 crores till 13.4.2011.
  • Company had a total collection of Rs.6,373.20 crores as on 31.8.2011, after meeting the demand for premature redemption
  • The above mentioned amounts were collected from 11.78 lakhs investors
  • Issue was subjected to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with Sahara Group of Companies (for short 'Sahara Group') without giving any advertisement to general public.
  • SEBI, had come to know of the large scale collection of money from the public by Saharas through OFCDs, while processing the RHP submitted by Sahara Prime City Limited, another Company of the Sahara Group, on 12.1.2010 for its initial public offer.
  • SEBI then addressed a letter dated 12.1.2010 to Enam Securities Private Limited, merchant bankers of Sahara Prime City Limited about the complaint received from one Roshan Lal alleging that Sahara Group was issuing Housing bonds without complying with Rules/Regulations/Guidelines issued by RBI/MCA/NHB.
  • SEBI issued a show cause notice dated 24.11.2010 informing both SIRECL and SHICL that issuance of OFCD's are public issue and therefore liable to be listed u/s 73 of Companies Act and also directed to refund the money solicited and mobilized through the prospectus issued with respect to the OFCDs, since they had violated the provisions of the Companies Act, SEBI Act, erstwhile DIP Guidelines and ICDR 2009.
  • SIRECL had challenged the show-cause-notice dated 24.11.1010 before the Allahabad High Court, Lucknow Bench which the court had stayed on 13.12.2010 but it permitted SEBI to proceed with its against both the companies.
  • SEBI took up the matter before this Court in S.L.P. (Civil) No. 36445 of 2010 and this Court did not interfere with the interim order, but ordered early disposal of the writ petition.
  • SEBI pointed out the fact before the High Court, that SIRECL is not supplying the necessary information as desired and after considering the facts the Court vacated the interim order dated 13.12.2010.
  • SEBI passed its final order through its whole-time member on 23.6.2011 and upheld its previous order.
  • Appellants, aggrieved by the above mentioned order of SEBI, filed Appeal Nos. 131 of 2011 and 132 of 2011 before the Securities Appellant Tribunal (SAT) and the Tribunal passed a common order on 18.10.2011.
  • Appellants, aggrieved by the order of SEBI, filed an appeal before the Securities Appellate Tribunal (SAT) and the Tribunal passed a common order on 18.10.2011 directing Sahara to refund the money to the investors.
  • Aggrieved by the order of SAT, SIRECL and SHICL filed an appeal before this Court u/s 15Z of the SEBI Act which came up for admission on 28.11.2011
  • OFCDs issued by Saharas were public issue of debentures, hence securities
  • If there is an intention to issue shares or debentures to the public, it is/was obligatory to make an application to one or more recognized stock exchanges, prior to such issue.
  • Registration of RHPs to ROC does not mean that the mandatory provisions of Sections 67(3), 73(1) and DIP Guidelines be not followed.
  • Saharas could not have filed RHP or any Prospectus with RoC, without submitting the same to SEBI under Clauses 1.4, 2.1.1. and 2.1.4 of DIP Guidelines
  • Unlisted companies like Saharas when made an offer of shares or debentures to fifty or more persons, it was mandatory to follow the legal requirements of listing their securities.
  • Once the number 49 is crossed, the proviso to Section 67(3) becomes effective and it is an issue to the public, which attracts Section 73(1) and an application for listing becomes mandatory which fall under the administration of SEBI u/s 55A(1)(b) of the Companies Act.
  • SEBI u/s 11A of SEBI Act has a duty to protect the interests of investors in securities either listed or which are required to be listed under the law or intended to be listed. U/S 11B, SEBI has the power to issue appropriate directions in the interests of investors in securities and securities market to any person who is associated with securities market.
  • SEBI, in the facts and circumstances of the case, has rightly claimed jurisdiction over the OFCDs issued by Saharas. Saharas have no right to collect Rs.27,000 crores from three million (3 crore investors) without complying with any regulatory provisions contained in the Companies Act, SEBI Act, Rules and Regulations already discussed.
  • Supreme Court on 19.10.2012 declined the application filled by the appellants for interlocutory orders in respect of the judgment dated 31.08.2012.
  • Supreme Court in dated 08.01.2013 also dismissed the review petition filled by the appellants.
  • Supreme Court in dated 02.05.2013 has stayed all further proceedings pending before the Securities Appellate Tribunal, Mumbai and before the High Court of Judicature at Allahabad, Lucknow Bench, in order to verify if the appellants have complied with the various conditions stipulate in its order dated 31.08.2012.
  • On 08.05.2013 it was held that the money so far deposited by appellants to be refunded to the genuine investors, with interest, after verifying the genuineness of the documents.
  • The next date of hearing regarding the matter has been fixed on 17.07.2013


  • The Optionally Fully Convertible Debentures ('OFCDs') issued by the SAHARA Group were hybrid in nature and as defined u/s 2(19A) of Companies Act, 1956 "hybrid" means any security which has the character of more than one type of security, including their derivatives. The Optionally Fully Convertible Debenture is a kind of debenture which can be converted into shares at the expiry of a certain period at a predetermined price, if the debt holder (investor) wishes to do so. The "securities" as defined u/s 2(45AA) of Companies Act means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, and includes hybrids.

The "securities" as defined u/s 2 (h) of Securities Contract (Regulation) Act, 1956 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;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

(id) units or any other such instrument issued to the investors under any mutual fund scheme;]

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;

Hence after analyzing the above definitions of "OFCD", "hybrid" and "securities" it could be rightly concluded that an OFCD being a hybrid security falls under the definition of "securities" as defined u/s 2 (h) of Securities Contract (Regulation) Act, 1956 and u/s 2(45AA) of Companies Act, 1956 as it inherits the characteristics of debentures initially and also that of the shares at a later stage if the option to convert the securities into shares being exercised by the security holder. Therefore the Securities Exchange Board of India has the powers to administer the same.

  • Passing of Special Resolution u/s 81(1A) of Companies Act, 1956 for preferential allotment by Private Placement of OFCDs does not confers the right to the company to issue such securities to large number of people. The company is bound to comply with the other applicable laws as once the number 49 is crossed, the proviso to Section 67(3) of Companies Act becomes effective and it is considered to be an issue to the public, which attracts Section 73(1) of Companies Act and an application for listing of such securities on any recognized stock exchange in India becomes mandatory which fall under the administration of SEBI u/s 55A(1)(b) of the Companies Act. Moreover the company is also bound to comply with the relevant provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 ['DIP Guidelines'] and various regulations of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ['ICDR 2009'] related to an issue to the public.
  • The submission of Information Memorandum ('IM') and that Red Herring Prospectus ('RHP') u/s 60B of the Companies Act with Registrar of Companies ("ROC") doesn't implies that the company has complied with all the provisions of the said act. The company also needs to file the same to the SEBI for its scrutiny on the ground of being an issue to the public and the involvement of the stake of large number of people.


In the light of the above, it can be concluded that the Optionally Fully Convertible Debentures or any other security issued by any company no matter whether it is listed or unlisted, private or public if issued to the public whether by way of public issue or private placement or any other manner would come under the jurisdiction of Securities Exchange Board of India if the number of the persons to whom allotment is made exceeds 49 (forty nine) as the proviso to Section 67(3) becomes effective which attracts Section 73(1) and an application for listing becomes mandatory which fall under the administration of SEBI u/s 55A(1)(b) of the Companies Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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