India: Between The Lines... August, 2017

Last Updated: 22 August 2017
Article by Vaish Associates Advocates


  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'.


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.


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.


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.

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© 2016, Vaish Associates Advocates,
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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.

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