Further Observations on SEBI’s Order in the Sahara Case

(The following post has been contributed by Vijay Kumar, a lawyer and a company secretary by qualification, who is practising as an Advocate in the Chennai High Court with the law firm of Iyer and Thomas)

Further to the earlier post on this Blog, a few aspects that emerge from the order are as follows:

(a) SEBI has come to the conclusion that OFCDs issued by SIRECL and SHICL are securities issued to the public and therefore such issue has to be in accordance with SEBI (ICDR) Regulations. SEBI has come to this conclusion on the presumption that the offer has been made to more than 50 members at a time and hence this constitutes a public offer.

However, a careful reading of the proviso to Section 67(3) gives rise to another point of view. For the sake of ready reference I am reproducing the proviso to Section 67(3):

“Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more.”

Use of the expression “the” becomes very important from the perspective of interpretation. It suggests that ‘each offer shall not be made to 50 persons or more’ such that the offer is a private offer and not public offer. Therefore, the number of persons which is 50 or more must be read in the context of each and every offer made by the Company. If a Company makes an offer on a daily (regular) basis, each offer could arguably be a separate offer and such offer if made to less than 50 persons would not make such issue to be a public issue. Where shares are offered based on a single information memorandum of an even date, then an offer made to 50 or more persons would constitute it as an offer to the public.

(b) From the order passed by SEBI, it is understood that SIRECL and SHICL have wrongly submitted that private placement of debentures made under Section 81(1A) of the Companies Act, 1956 means that such issue of debentures is not a public issue. Section 81(1A) as rightly held by SEBI prescribes the procedure for issue of shares to persons other than existing shareholders of the company. It has nothing to do with determining whether the issue is public issue or private placement. In fact, sub section (3) of Section 81 states that provisions of Section 81(1A) are not applicable to increase of subscribed capital of a public company caused by an exercise of an option attached to the debentures issued by the Company to convert such debentures into shares in the Company.

The proviso to Section 81(3) states that the terms of issue of such debentures include a term providing for such option and such term has been approved by the Central Government before issue of debentures or the issue of such debentures is in conformity with the rules laid down by the Government, which rules are Public Companies (Terms of issue of debentures and Raising of Loans With Option to Convert Such Debentures or Loans to Shares) Rules, 1977. After the advent of SEBI under Section 55A, now SEBI (ICDR) regulations also need to be complied with.

(c) Further, Section 60B does not provide an alternate route for issue of securities. In fact the information memorandum as prescribed in Section 2(19B) is a method adopted for determining the demand available in the market for the securities proposed to be issued to enable the Company fix price a band for the securities proposed to be issued. The moment offer is made to 50 or more persons, the provisions of public issue in the Companies Act and SEBI (ICDR) Regulations are attracted.

(d) Section 55A also makes it amply clear that SEBI has jurisdiction in respect of matters pertaining to Sections 55 to 58, 59 to 81 etc. which includes Section 60B, Section 67 and Section 73. As per sub section (3) of Section 60B, all obligations as applicable to prospectus are applicable to information memorandum and to red herring prospectus. As per Section 73, every company intending to offer shares or debentures to the public for subscription by issue of prospectus shall, before making such issue, make an application to one or more recognized stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange.

(e) Section 73 states that if the issue (shares or debentures) is made to the public, the application to the Stock exchanges for listing is mandatory and there is no option left open to the Company to escape from the provisions of listing of these shares/debentures. Therefore, by virtue of Section 73(1), the moment shares/debentures are issued to the public it is presumed that they are intended to be listed on the stock exchanges. In such a scenario, Section 55A is automatically invoked granting jurisdiction to SEBI to monitor such issues and to ensure that such issues of shares/debentures are in accordance with SEBI (ICDR) Regulations.

From the information based on which SEBI has passed the order it seems that the issue of OFCDs by SIRECL and SHICL is a public issue which is within the jurisdiction of SEBI entitling it to monitor and exercise control over such issues.

– Vijay Kumar

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • I am not sure if such an elevated importance is to be accorded to the use of "the". If indeed such an importance/meaning was intended the legislature would have said "the offer or THE invitation to subscribe". The absence of the second "the" seems telling. Further, the presence of the first "the" is arguably merely on account of linguistic/grammatical necessity.

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