India: Between The Lines... August, 2017

Last Updated: 22 August 2017
Article by Vaish Associates Advocates

Highlights

  1. SAT rules on SEBI's power to lift corporate veil, dismisses Sahara's appeal
  2. "The Moratorium has no application on the properties beyond the ownership of the Corporate Debtor": NCLT
  3. SAT stays SEBI communication on shell companies
  4. SC uses its extra-ordinary powers to allow parties to withdraw insolvency application after admission

I. SAT rules on SEBI's power to lift corporate veil, dismisses Sahara's appeal

The Securities Appellate Tribunal ("SAT") in the matter of Sahara Asset Management Company Private Limited ("Sahara AMC") and Others vs. Securities and Exchange Board of India ("SEBI") (decided on July 28, 2017) held that SEBI has the power to lift corporate veil in the interest of investors.

Mutual fund framework

It is pertinent to take note of the mutual fund framework in India as existing under the SEBI (Mutual Funds) Regulations, 1996 ("MF Regulations") in order to understand the facts of the case in proper perspective. Mutual fund structure consists of: (i) Asset Management Company; (ii) Trust; and (iii) Sponsor. Under the MF Regulations, sponsor applies for a license and if the eligibility criteria under the MF Regulations is met, SEBI grants registration certificate. One of the conditions is that the applicant and the asset management company must be a 'fit and proper person' as defined under the MF Regulations read with the SEBI (Intermediaries) Regulations, 2008 ("IM Regulations"). Other conditions include informing SEBI of any material change in the information or particulars previously furnished, which can have a bearing on the approval granted by it. For the definition of 'fit and proper person', we need to look under Schedule II of the IM Regulations, as under:

"Criteria for determining a 'fit and proper person'

For the purpose of determining as to whether an applicant or the intermediary is a 'fit and proper person' the Board may take account of any consideration as it deems fit, including but not limited to the following criteria in relation to the applicant or the intermediary, the principal officer and the key management persons by whatever name called –

  1. integrity, reputation and character;
  2. absence of convictions and restraint orders;
  3. competence including financial solvency and networth."

Thus, key managerial persons or key persons who control the affairs of sponsor are also required to be 'fit and proper person'.

Facts

SEBI had passed an order dated June 23, 2011 against Sahara India Real Estate Corporation Limited ("SIRECL") and Sahara Housing Investment Corporation Limited ("SHICL") and some of their directors in relation to refund of sums collected from investors and certain restraint orders were passed. When this matter reached the Supreme Court of India, the apex court directed SIRECL, SHICL and Mr. Subrata Roy Sahara to refund the money of investors.

The orders as mentioned above triggered investigations against other Sahara group entities. The Designated Authority appointed by SEBI for enquiry found that Sahara Mutual Fund ("SMF"), Sahara AMC, Sahara India Financial Corporation Limited ("Sahara Sponsor") and the trustees were not 'fit and proper person' to carry on the mutual fund business and recommended cancellation of SMF's registration certificate. Consequent to the findings of the Designated Authority and after considering the reply to show cause notice, etc., SEBI cancelled the certificate of registration of SMF by its order dated July 28, 2015. This order of SEBI was in appeal before SAT.

Arguments

Appellants argued that SEBI was wrong in piercing the corporate veil in this matter by disregarding the corporate identity of Sahara Sponsor and Sahara AMC to look at their shareholders/promoters. According to the Appellants, Sahara Sponsor and Sahara AMC were to be 'fit and proper person' and not its promoters and directors. It was further argued that the requirement of 'fit and proper person' was applicable to Sahara Sponsor only for the purposes of making the application for registration and the role of a sponsor of mutual fund is limited after the asset management company and trust are setup.

Appellants pointed out that Mr. Subrata Roy Sahara was only a non-executive director of Sahara Sponsor and his role in the day to day management of Sahara AMC, Sahara Sponsor and SMF was negligible. In relation to the observations of the Supreme Court of India in the case involving SIRECL and SHICL with respect to the offence of Mr. Subrata Roy Sahara, Appellants contended before SAT that they were not parties to these cases and therefore, involvement of Mr. Sahara in SIRECL and SHICL could not be transfixed to the appellant companies in this case. Appellants submitted, "In any case there is no order against Mr. Sahara finding him to be guilty of any offence involving moral turpitude or any economic offence. His detention order by the Hon'ble Supreme Court is only in relation to the issue of non-refund of the amounts ordered to be repaid by SIRECL and SHICL having no bearing in the present matter."

According to Respondent SEBI, the order of the Supreme Court against Mr. Sahara clearly made a dent on his integrity, reputation and character. The counsel for SEBI then pointed out that the shareholding of Mr. Subrata Roy Sahara and his wife in Sahara Sponsor was more than 87%(eighty seven percent). Therefore, as Mr. Sahara was in absolute position to control Sahara Sponsor by virtue of his shareholding and as he was not a 'fit and proper person' consequent to Supreme Court orders against him, it was submitted that consequently the Sahara Sponsor also was no longer a 'fit and proper person'.

With respect to the argument of Appellants on the limited liability of a sponsor after registration of mutual fund, SEBI countered by submitting that the liability of a sponsor is continuous as sponsor has to keep on fulfilling certain responsibilities under the MF Regulations even after the registration of the mutual fund.

With regard to lifting of the corporate veil, SEBI's counsel contended that SEBI, as a guardian of investor interests, is statutorily empowered to lift the corporate veil in cases where it is required to establish real corporate identity in terms of ownership and control.

Observations of SAT

SAT noted that under various provisions of the MF Regulations, the obligations of a sponsor are continuous and the obligations of a sponsor are not limited only to the stage of registration. SAT pointed out several provisions of the MF Regulations which supported its view like the provision under the MF Regulations requiring disclosures to be made by a sponsor to SEBI from time to time, continuous liability of a sponsor for compensating the affected investors, etc.

SAT made a reference to the observations of the Supreme Court of India in its order dated May 6, 2014, in which, the apex court had observed that Mr. Subrata Roy Sahara was in absolute charge of all the group companies and nothing in the companies of Sahara group moved without Mr. Sahara's active involvement. Noting these findings of the apex court, SAT took the view that he had absolute control over the affairs of Sahara Sponsor in which he also held a majority stake.

SAT made certain important observations regarding lifting of corporate veil by SEBI. Appellants had cited several judgments before SAT to support their argument that corporate veil cannot be lifted except in matters where the incorporation of the company itself is to perpetuate fraud or to carry out a fraudulent objective. However, SAT distinguished such judgments cited by Appellants on facts. SAT noted that no judgments cited by the Appellants were issued in the context of the securities market wherein the SEBI Act, 1992 and regulations thereunder were examined.

SAT took the view that SEBI is empowered to take actions in investor interest under the SEBI Act, 1992 and for that purpose, SEBI can lift the corporate veil to identify the persons who control an entity. SAT observed that without such a power, SEBI will be a mute spectator to many of the corporate misdeeds which may jeopardize the interests of investors. Lastly, SAT noted that the Reserve Bank of India ("RBI") had cancelled the registration certificate of Sahara Sponsor to carry on activities of a Non-Banking Financial Company and winding up steps were initiated under the RBI Act, 1934.

Decision

SAT dismissed the appeal. A stay on the operation of the order was granted for 6 weeks on the oral prayer of Appellants to enable them to prefer an appeal in the Supreme Court.

VA View

This order of SAT is an important pronouncement on SEBI's powers to lift the corporate veil. In SAT's view, SEBI can look beyond an entity to look at the persons who are in control of it. In cases where SEBI has to determine whether an entity is a'fit and proper person' to carry on a particular business in the securities market, it might also look at the 'fit and proper person' status of persons who control such an entity. SAT has opined that the purpose of such power is to protect the interest of investor community.

This is a deviation from the general view that corporate veil can be lifted only in respect of matters where the incorporation of the company itself is to perpetuate fraud or to carry out a fraudulent objective. SAT has held that such judgments are not in the sphere of securities market, indicating that lifting of corporate veil by SEBI in the securities market is the need in certain cases to safeguard investor interest.

To read this Newsletter in full, please click here.

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Vaish Associates Advocates
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions