Offering of Debentures: SEBI’s Order in the Sahara Case

Earlier this week, SEBI issued an order restraining two entities of the Sahara group as well as certain promoters and directors from accessing the capital markets. While Sahara Prime City Limited had filed its draft red herring prospectus (DRHP) with SEBI in connection with its proposed IPO, SEBI received complaints that its group companies Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corportion Limtied (SHICL) were issuing optionally fully convertible debentures (OFCDs) to the public and that was not disclosed in the DRHP. The company argued that the OFCDs were being offered only to friends/associates/employees and that they were being issued pursuant to an information memorandum filed with the Registrar of Companies (ROC).

The key questions were whether such offering of the OFCDs was within the purview of SEBI, and if so whether they should have been offered pursuant to an offering document registered with SEBI. On the merits, SEBI concluded as follows:

1. Any offering of securities to 50 persons or more is a public offering by virtue of Section 67(3) of the Companies Act, 1956. It does not matter whether the offerees are all identified or whether they belong to a close group of associates.

2. The mere fact that the offering is supported by a special resolution of the issuing company’s shareholders under Section 81(1A) of the Act does not override the requirement to comply with the provisions regarding public offering and registration of prospectus.

3. The fact that the issuer has filed a red herring prospectus with the ROC indicates that the OFCDs were intended to be offered to the public.

4. Every company offering securities to the public is required to seek approval for listing of the securities on one or more recognised stock exchanges. SEBI observed: “The requirement of listing in respect of a public issue is to ensure that the subscribers to the shares or debentures have a facility to approach a stock exchange for having their holdings converted into cash, whenever they desire and to provide liquidity and exit opportunity to the investors, especially in case when the offer is made to large number of investors (50 or more).”

5. Section 60B of the Companies Act (dealing with information memorandum) does not prescribe an alternate procedure that enables issuers to overcome the obligation to comply with provisions of the Act relating to public offering.

In arriving at its conclusion, SEBI refused to accept the contrary position adopted by the company, which was supported by legal opinions. SEBI’s order observes:

Given this background, I note that the issuances of securities by the said companies, ostebsibly by an interpretation of the phrase in Section 60B of the Act, as discussed previously, challenges the basic fabric of how a company can access funds from the public. If left unchecked, it leads to further unbridled solicitation of money from the public at large, without complying with the statutory requirements, without adequately disclosing the risks involved, and without adhering to other checks and balances built-in to protect the interest of the investors.

The contentions given by the companies are prima facie devoid of any merit. I have little hesitation in observing that these merely are put forward to defeat the whole purpose of the statutes that govern public issues and other incidental requirements. … If companies are allowed to go ahead in such a manner and raise vast sums of capital in the guise of private placement, it would be a mockery of the entire capital market framework and all established mechanisms to protect investor’s interest.

It is hard to disagree with SEBI’s conclusion and reasoning. Although there was previously some ambiguity on what constitutes a public offering of shares, that was put to rest with the Companies (Amendment) Act, 2000 which introduced the numerical test of offering to 50 persons or more in order to constitute a public offering. This test may be criticized as being too rigid and inflexible, but it is clearly an objective test leaving little room for ambiguity.

(Update – December 2, 2010: It has been reported that the Sahara Group has filed a petition before the Allahabad High Court challenging SEBI’s order)

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.


  • I think the SEBI should look into the balance sheets of a number of NBFCs, especially the ones who are dominant in "Loan against Gold" and micro finance segments. This is the standard modus operandi such NBFCs to mop up funds from the public. They offer their asset side customers such debentures (convertible/ secured, in order to beat NBFC Deposits regulations) over the counter. Obviously, the number of such subscribers exceeds 50. I hope both the RBI and SEBI take cognisance of such cases. Also, it would be interesting to notice if the RBI and the SEBI have a turf war on jurisdictional issues!

  • With respect to comments 2 and 3, the second proviso to S. 67 exempts NBFCs (if listed in S. 4A) from the 50 rule doesn't it? So even if the no. of subscribers is more than 50 but the mode of offer is still not public, it will not be a public offer imo.

  • I believe in Sahara, and the fact that they can’t cheat their own investors. They will honour the court’s order and return the money of its depositors on time.

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