India:
Optionally Fully Convertible Debentures – Whether Securities Or Not?
27 June 2013
S&A Law Offices
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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.
ISSUES RAISED/ COVERED UNDER SC JUDJEMENT |
- 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.
|
DETAILS OF THE ISSUE BY "SIRECL" |
- 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.
|
PURPOSE FOR WHICH MONEY RAISEDBY "SIRECL" |
- 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
|
NATURE OF SECURITIES ISSUED BY "SIRECL"
` |
Particulars |
Nature of OFCD's |
|
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 |
DETAILS OF MONEY RAISED BY "SIRECL" |
- 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
|
DETAILS OF THE ISSUE BY "SHICL" |
- 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.
|
NATURE OF OFCD'S ISSUED BY "SHICL" |
- 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.
|
DETAILS OF MONEY RAISED BY "SHICL" |
- 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
|
PERSONS TO WHOM ISSUE WAS MADE BY "SIRECL" &
"SHICL" |
- 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.
|
INTRODUCTION OF SEBI & SAT INTO THE MATTER |
- 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.
|
INTRODUCTION OF SUPREME COURT INTO THE MATTER |
- 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
|
SUPREME COURT JUDGEMENTAS ON 31.08.2012 |
- 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.
|
OTHER UPDATES |
- 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
|
OBSERVATION
- 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.
CONCLUSION
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
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