Professional Documents
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chief Subrata Roy along with his two firms and their directors for not
complying with its order for refunding Rs 24,000 crore to investors.
Mr. Dattar sought maximum punishment for Roy and others under Section 12
of Contempt of Court Act which provides maximum punishment of six
months jail term.
There can not be a clearer case of contempt. Non payment of funds amounts
to contempt, he said, adding that the companies have violated not one but
three orders of the apex court.
The market regulator contended that the companies have not complied with
apex court orders passed on August 31, December 5 last year on the issue of
refunding the amount.
During the argument, the bench asked whether the amount can be recovered
from other companies of the group.
SEBI contended that action can be taken against other companies as the
money collected were invested in other companies of the group which is
being headed by the same promoter.
The court was hearing three contempt petitions filed against Roy, the two
firms and their directors who will present their case on the next date of
hearing on August 6.
The apex court had on August 31 last year directed the Sahara group to refund
the amount by November end. The deadline was further extended and
companies were directed to deposit Rs 5120 crore immediately and Rs 10,000
crore in first week of January and remaining amount in first week of
February.
The group, which had handed over the draft of Rs 5,120 crore on December
5, has failed to pay the rest of the amount, SEBI told the court.
The apex court had on August 31 last year directed the two Sahara group
companies to refund the money to their investors within three months with 15
per cent interest per annum. It had also said that SEBI can attach properties
and freeze bank accounts of the companies if they fail to refund the amount.
The two companies, their promoter Roy and directors Vandana Bhargava,
Ravi Shankar Dubey and Ashok Roy Choudhary were told to refund the
collected money to the regulator.
SEBI said the Sahara group had also published advertisement in newspapers
on September 3 last year giving its view on the apex courts judgement, which
also amounts to contempt.
The bench after going through the content of the advertisement said in a
lighter vein that nothing in it amounts to contempt and the point raised in it
pertains to SEBI.
This is not contempt. Expression used in the advertisement is for you, the
bench told SEBI.
Background: Earlier SIRECL and SHICL floated an issue of OFCDs and started collecting
subscriptions from investors with effect from 25th April 2008 up to 13th April 2011. During this
period, the company had a total collection of over Rs 17,656 crore. The amount was collected
from about 30 million investors in the guise of a "Private Placement" without complying with the
requirements applicable to the public offerings of securities. The Whole Time Member of SEBI
while taking cognizance of the matter passed an order dated 23rd June, 2011 thereby directing
the two companies to refund the money so collected to the investors and also restrained the
promoters of the two companies including Mr. Subrata Roy from accessing the securities market
till further orders. Sahara then preferred an appeal before SAT against the order of the Whole
Time Member and after hearing the SAT confirmed and maintained the order of the Whole Time
Member by an order dated 18th October, 2011. Subsequently Sahara filed an appeal before the
Supreme Court of India against the SAT order.
Issues in Question and Observations of the Supreme Court: The Supreme Court of India
while interpreting various provisions of the Companies Act, SEBI Act, Securities Contract
(Regulation) Act,1956, (SCRA) and various Rules and regulations formulated there-under made
some interesting observations on the issues raised before it which forms the operative part of
the judgment in the form of ratio decidendi.
The issues raised and the corresponding observations made by the Supreme Court are
enumerated below:
An Analysis of Hon'ble Supreme Court Judgement dated 31.08.2012 in the matter of Sahara India Real
Estate Corporation Ltd. & Others vs. SEBI
Garima Soni Singh analysis the Apex Court's decision in the matter of Sahara India Real
Estate Corporation Ltd. & Others vs. SEBI
Introduction
Earlier Sahara India Real Estate Corporation Limited ("SIRECL") and Sahara Housing Investment
Corporation Limited ("SHICL") floated an issue of OFCDs and started collecting subscriptions from
investors with effect from 25th April 2008 up to 13th April 2011. During this period, the company had
a total collection of over Rs 17,656 crore. The amount was collected from about 3 million investors in
the guise of a "Private Placement" without complying with the requirements applicable to the public
offerings of securities. The Whole Time Member of SEBI while taking cognizance of the matter passed
an order dated 23rd June, 2011 thereby directing the two companies to refund the money so collected
to the investors and also restrained the promoters of the two companies including Mr. Subrata Roy
from accessing the securities market till further orders. Sahara then preferred an appeal before
Securities Appellate Tribunal ("SAT") against the order of the Whole Time Member and after hearing,
the SAT confirmed and maintained the order of the Whole Time Member by an order. Subsequently
Sahara filed an appeal before the Supreme Court of India against the SAT order.
The Supreme Court on 31st August, 2012 in one of its most anticipated judgment of recent times has
directed the Sahara Group and its two group companies SIRECL and SHICL to refund around Rs 17,400
crore to their investors within 3 months from the date of the order with an interest of 15%. The
Supreme Court while confirming the findings of the SAT has further asked SEBI to probe into the
matter and find out the actual investor base who have subscribed to the Optionally Fully Convertible
Debentures (OFCDs) issued by the two group companies SIRECL and SHICL.
Following are the key issues which were debated and decided upon by the SC:
Issues 1: Whether SEBI has the power to investigate and adjudicate in this matter as per
Sec 11, 11A, 11B of SEBI Act and under Sec 55A of the Companies Act or is it the Ministry
of Corporate Affairs (MCA) which has the jurisdiction under Sec 55A (c) of the Companies
Act?
In order to address this issue the Hon'ble SC applied the following two rules of statutory interpretation:
i. Legislative intent
In law, the judiciary may attempt to assess legislative intent where legislation is ambiguous, or does
not appear to directly or adequately address a particular issue, or when there appears to have been a
legislative drafting error. Section 55A was inserted in the Companies Act 1956 by the Companies
(Amendment) Act, 2000 w.e.f. 13.12.2000. The Statement of Objects and Reasons give an indication of
the intention of the Legislature read as follows:
"to provide that the Securities and Exchange Board of India be entrusted with powers with regard to
all matters relating to public issues and transfers including power to prosecute defaulting companies
and their directors."
Therefore, from above it is clear that the legislative intent behind incorporation of Section 55A, of the
legislature, was to vest SEBI with powers to investigate and adjudicate in all the matter related to the
public issue of securities.
The purpose of the rule is to clarify where there is any obscurity or vagueness in the main enactment
then in order to make it consistent with the dominant object which it seems to serve, the statutes
must be read in harmony with each other.
In Sundaram Pillai & Ors. v. V.R. Pattabiraman & Ors., the Honble Supreme Court of India
observed that the main part of Section 55A confers jurisdiction on SEBI with regard to three categories
i.e. issue of securities, transfer of securities and non-payment of dividend. The expression "all other
matters" mentioned in the explanation would refer to powers other than the above mentioned
categories. Further, it may also be remembered that the explanation does not take away the powers
conferred on SEBI by any other sections of the Companies Act. Therefore, by virtue of the above two
rules, the Apex Court concluded that SEBI has powers to investigate and adjudicate the matter under
SEBI Act 1992 and The Companies Act 1956.
Issue 2. Whether the hybrid OFCDs fall within the definition of "Securities" within the
meaning of Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to
investigate and adjudicate?
To resolve this question, it is first necessary to understand the nature of hybrid securities themselves.
Section 2(19A) of the Companies Act defines hybrid as to mean "any security which has the
character of more than one type of security, including their derivatives". (Introduced through the
Amendment Act No.53 of 2000). Section 2(45AA) of the Companies Act defines securities as defined
in clause (h) of section 2 of the SCR Act and includes hybrids. Blacks Law Dictionary defines hybrid
security as follows a security with features of a debt instrument (such as bond) and an equity interest
(such as share or stock) , which can be exchanged for shares in the issuing corporation and is subject
to stock-price fluctuations.
A Ramayia sheds light on hybrid securities, and the features that distinguish them from other
securities. Hybrid Securities means securities which have some of the attributes of both debt
securities and equity securities. A type of security which, in the form of a debenture, contains
elements of indebtedness and elements of equity stock also is an example of a hybrid. In the matter
of Sudhir Shantilal Mehta vs. Central Bureau of Investigation commenting on the scope of securities
encompassed by the definition of the term in Section 2(h) of the SCR Act, the Honourable Supreme
Court of India, observed that the definition of 'securities' is an inclusive one and not exhaustive. It
takes within its purview not only the matter specified therein but also all other types of securities as
commonly understood. The term 'securities', thus, should be given an expansive meaning."
The relation between transferability and marketability of the securities is also an important factor to
address this issue. To explain this we may refer to the case of Dahiben Umedbhai Patel v. Norman
James Hamilton and Others, the Bombay High Court observed:
"If one goes through the provisions of the Act, the scheme of the Act makes it clear that no restrictive
interpretation can be placed on the terms used in the Act. If the provisions of the Act are looked at, it
is clear that it relates not merely to securities which are listed but it also relates to securities which
may not be listed in any stock exchange. All that is required is that there must be "marketability". It
cannot be said that any security which is not listed on any recognised stock exchange is not
"marketable". As laid down by the Single Judge and the Division Bench (in the judgments set out
above) "marketability" implies ease of selling and includes any security which is capable of being sold
in the market. This does not mean that it must be sold in the market. All bonds of Government
companies are freely and easily transferable. Normally, shares of public limited companies are also
freely transferable. Any security which is capable of being freely transferable is marketable.As is seen,
the definition of the word "security" under Section 2(h) is an inclusive definition. It is very wide. Thus
all securities which are marketable and which have an ease or facility of selling and/or which have a
high degree of liquidity and/ or are capable of being sold in a market i.e. stock exchange, are included.
." (Emphasis supplied)
Based on the guidance of the Honourable High Court outlined above, I would like to conclude that
firstly, marketability of a security denotes the ease with which it can be sold, secondly what is freely
transferable is marketable and thirdly what is saleable is also marketable. Hence, clearly the OFCDs
issued by the two Companies to such a wide base of investors who can transfer / sell these securities
among themselves, if not to others are evidently marketable .Also the OFCDs issued by the two
Companies as marketable securities and fall within the definition of "Securities" under Companies Act,
SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate and adjudicate.
Issue 3. Whether the issue of OFCDs to millions of persons who subscribed to the issue is a
Private Placement so as not to fall within the purview of SEBI Regulations and various
provisions of Companies Act?
In the matter of Toubro Infotech and Industries Limited and Another vs. SEBI , the Honble SAT
observed that "an invitation to subscription made to 50 or more persons ceases to be a private
placement."
Also first proviso to section 67(3) says that if an offer of securities is made to more than 49
persons then, it will not be a private placement and such offer is public offer. But it is instructive to
examine, whether the Companies Act provides any exemption from this rule. The second proviso to
Section 67(3) is the following:
"Provided further that nothing contained in the first proviso shall apply to the non-banking financial
companies or public financial institutions specified in section 4A of the Companies Act, 1956."
Therefore, what this implies is that other than non banking financial companies or public financial
institutions under Section 4A of the Companies Act, no other entity is exempted from the Rule of 50.
Also, the Supreme Court observed as the companies in the Sahara matter elicited public demand for
the OFCDs through issue of Information Memorandum under Section 60B of the Companies Act, which
is only meant for public issues. Thus the Supreme Court concluded that the actions and intentions on
the part of the two companies clearly show that they wanted to issue securities to the public in the
garb of a private placement to bypass the various laws and regulations in relation to that. The Court
observed that the Sahara Companies have issued securities to more than the threshold statutory limit
fixed under proviso to Section 67(3) and hence violated the listing provisions attracting civil and
criminal liability. The Apex Court also observed that issue of OFCDs through circulation of Information
Memorandum to public attracted provisions of Section 60B of the Companies Act, which required filing
of prospectus under Section 60B(9) and since the companies did not come out with a final prospectus
on the closing of the offer and failed to register it with SEBI, the Supreme Court held that there was
violation of Section 60B of the Companies Act attracting civil and criminal liability.
Issue 4: Whether listing provisions under Sec 73 mandatorily applies to all public issues or
depends upon the "intention of the company" to get listed?
Although Sahara argued that listing requirement under Section 73 of Companies Act is not mandatory
and applies to those companies only who "intend to get listed", no company can be forced to get
listed on a stock exchange and in such cases it will be a violation of corporate autonomy. The Supreme
Court held as long as the law is clear and unambiguous, and any issue of securities is made to more
than 49 persons as per Sec 67(3) of the Companies Act, the intention of the companies to get listed
does not matter at all and Sec 73 (1) is a mandatory provision of law which companies are required to
comply with. The Supreme Court observed that Section 73(1) of the Act casts an obligation on every
company intending to offer shares or debentures to the public to apply on a stock exchange for listing
of its securities. In addition the Supreme Court observed that the maxim " acta exterior indicant
interiora secreta" (external action reveals inner secrets) applies with all force in the case of Saharas.
The Court observed that the contention that they did not want their securities listed does not stand.
The duty of listing flows from the act of issuing securities to the pubic provided such offer is made to
fifty or more than fifty persons. Any offering of securities to fifty or more is a public offering by virtue
of Section 67(3) of the Companies Act, which the Saharas very well knew, their subsequent actions
and conducts unquestionably reveal so.
Additionally, Schedule II of the Companies Act prescribes the matters to be specified in the
prospectus. Paragraph 22 of this Schedule prescribes the final Declaration to be signed by the
Directors of the Company and reads as follows:
"Declaration: That all the relevant provisions of the Companies Act, 1956, and the guidelines issued
by the Government or the guidelines issued by the Securities and Exchange Board of India established
under section 3 of the Securities and Exchange Board of India Act, 1992, as the case may be, have
been complied with and no statement made in prospectus to the provisions of the Companies Act,
1956 or the Securities Exchange Board of India Act, 1992 or rules made thereunder or guidelines
issued as the case may be. Signatures of directors"
Saharas conveniently omitted the reference to SEBI in the declaration given in the prospectus.
Issue 5. Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003 will
apply in this case?
The Public Unlisted Companies (Preferential Allotment Rules) 2003 Rules were framed by the Central
Government in exercise of the powers conferred under Section 81(1A) read with Section 642 of the
Companies Act to provide for rules applicable to the unlisted public companies. Section 81 of the
Companies Act deals with further issue of securities and only gives pre-emptive rights to the existing
shareholders of the company, so that subsequent offer of securities have to be offered to them as
their "rights". Section 81(1A), it may be noted, is only an exception to the said rule, that the further
shares may be offered to any persons subject to passing a special resolution by the company in their
general meeting.
The Hon'ble Supreme Court observed that Section 81(1A) cannot, in any view, have an overriding
effect on the provisions relating to public issue. Even if armed with a special resolution for any further
issue of capital to person other than shareholders, it can only be subjected to the provisions of Section
67 of the Company Act, that is if the offer is made to fifty persons or more, it will have to be treated as
public issue and not a private placement. A public issue of securities will not become a preferential
allotment on description of label. The Proviso to Section 67(3) does not make any distinction between
listed and unlisted public companies or between preferential or ordinary allotment. Even prior to the
introduction of the proviso to Section 67(3), any issue of securities to the public required mandatory
applications for listing to one or more stock exchanges. After insertion of the proviso to Section 67(3)
in December 2000, private placement allowed under Section 67(3) was also restricted up to 49
persons. 2003 Rules apply only in the context of preferential allotment of unlisted companies.
However, if the preferential allotment is a public issue, then 2003 Rules would not apply.
Issue 6. Whether OFCDs are Convertible Bonds and whether exempted from application of
SCRA as per the provisions of sec 28(1)(b)?
The inapplicability of SCR Act, as contemplated in Section 28(1)(b), is not to the convertible bonds, but
to the entitlement of a person to whom such share, warrant or convertible bond has been issued, to
have shares at his option. The Act is, therefore, inapplicable only to the options or rights or
entitlement that are attached to the bond/warrant and not to the bond/warrant itself. The expression
"insofar as it entitles the person" clearly indicates that it was not intended to exclude convertible
bonds as a class. Section 28(1)(b), therefore, clearly indicates that it is only the convertible bonds and
share/warrant of the type referred to therein that are excluded from the applicability of the SCR Act
and not debentures which are separate category of securities in the definition contained in Section
2(h) of SCR Act.
In Narendra Kumar Maheshwari vs. Union of India, the Honourable Supreme Court observed that in the
various guidelines applicable to such instruments, compulsorily convertible debentures are regarded
as equity and not as a loan or debt. One of the critical considerations adopted by the Supreme Court
of India in arriving at such a conclusion is that a compulsorily convertible debenture does not
postulate any repayment of the principal. It is evident that all these six bonds issued by Sahara
postulate a repayment of the principal. The repayment of the principal will be at the option of the
investor. The investor holds the option, which gives her a right to determine whether she would like to
get her principal back in cash or as equity shares. Hence, Optionally Fully Convertible Debentures
unlike their counterpart category of Compulsorily Convertible Debentures do not share the
characteristic pointed out by the Honourable Supreme Court in arriving at the conclusion that
Compulsorily Convertible Debentures are more of equity than of debentures. Thus, all the six financial
instruments issued by the two Companies share the defining feature of debentures in that a payment
of interest to the investor and a repayment of the principal, albeit at the option of the investor are
postulated.
In the matter of Yogesh M. Bhansali (HUF) and others vs. SEBI , the SAT held that the SEBI DIP
Guidelines of 2000 were statutory in nature.
In the matter of Kimsuk Krishna Sinha vs SEBI and Ors, (W.P.(C) 7976 of 2007 & CM APPL No.
15084/07), the Honble Delhi High Court observed that "It hardly needs to be stated that the SEBI
(DIP) Guidelines are of statutory character. They are enforceable as such."
In the matter of Toubro Infotech and Industries Limited and Another vs. SEBI, the SAT observed
that: "DIP Guidelines had statutory force since they were framed by SEBI in exercise of its powers
conferred on it under Sections 11 and 11A of the SEBI Act. Powers have been conferred on SEBI to
protect the interests of the investors in securities and regulate the Pageissue of prospectus, offer
documents or advertisement soliciting money through the issue of prospectus."
Regulation 111(1) of the SEBI (ICDR) Regulations, 2009 rescinded the DIP Guidelines from 26.8.2009
and clause (2) of Regulation 111 contains the saving clause. The expression "anything done" or "any
action taken" under Regulation 111(1) are of wide import and would take anything done by the
company omitted to be done which they legally ought to have done. Non-performance of statutory
obligations purposely or otherwise may also fall within the above mentioned expressions. Failure to
take any action by SEBI under DIP Guidelines, in spite of the fact that the Sahara companies did not
discharge their statutory obligation, would not be a ground to contend that 2009 Regulations would
not apply as also the saving clause. The aforesaid ICDR Regulations will apply to all companies
whether listed or unlisted. Further, in the instant case, SEBI was not informed of the issuance of
securities by the Saharas while the DIP Guidelines were in force and the Sahara companies continued
to mobilize funds from the public which was nothing but continued violation which started when the
DIP Guidelines were in force and also when they were replaced by 2009 Regulations. Analysis:
1. End of road for Sahara?: This judgment may not be the end of road for the Sahara Group. It can
be reviewed by a review petition, and on dismissal of a review petition, further by a curative petition.
However, the grounds for admitting such petitions are very limited, like for admitting a review petition,
there should be a discovery of new and important matter of evidence, or some mistake or error
apparent on the face of the record. Similarly, for a curative petition, which is ought to be treated as a
rarity, there should be a gross miscarriage of justice resulting from violation of principles of natural
justice as mentioned in the case of Rupa Hurra vs. Ashok Hurra & Another (AIR 2002 SC 177), or the
judgment should adversely affect a person and he should not be a party to the dispute, or if he was a
party, he should not have been served with notice of the proceedings and the matter should have
proceeded as if he had notice.
2. Jurisdiction of SEBI versus ROC: This judgment is a very crucial one for SEBI as it not only
affirms its jurisdiction and power to administer various provisions of the Companies Act, but also
clarifies that even unlisted companies (whether private or public) which intend to (by conduct or
otherwise) get their securities listed on any stock exchange now fall within the radar of SEBI. Thus, the
general perception that SEBI can only monitor listed companies and it does not have jurisdiction over
unlisted companies may not be entirely correct. Also, the role of ROC in such cases may now be
limited.
3. The Public Issue vs. Private Placement debate: By clarifying that the offer of security to 50 or
more persons would qualify as a public issue, the SC has brought some clarity to this long standing
debate. Earlier, there was an ambiguity as to whether an offer of security to more than 49 persons
would ipso facto become a public issue or not. Though the Statement of Objects and Reasons for the
Companies (Amendment) Act, 2000 provided that 'any offer of shares or debentures to more than 50
persons shall be treated as a public issue with suitable modification in the case of public financial
institutions and non-banking financial companies, however, the Section 67 of the Companies Act does
not expressly mention so.
Having said the above, there is still an ambiguity as to whether multiple offers of security by any
company at reasonable intervals of time, with each offer being to less than 49 persons but in
aggregate more than 49 persons, would qualify as public issue or not. Also, so far the emphasis has
always been on an 'offer' to 50 or more persons. What constitutes 'offer' has not been addressed by
the Court in the Sahara Judgement. For instance, does just addressing a gathering of persons
constitute an offer / invitation, or is it the actual act of distributing an IM which constitutes an offer /
invitation. Further, it is not clear as to what happens when a company does not make an offer or
invitation to the public, but only issues its securities to more than 49 persons at their instance. Though
unlikely, but whether such cases would fall outside the purview of public issue is yet to be seen.
4. Transferable means marketable: Though, not a ratio decidendi in this case, however, the SC has
stated that any security which is capable of being freely transferable is marketable. This may have
some implications, especially, in case of stamp duty. For instance, the Indian Stamp Act, 1899 defines
the term 'marketable' as 'security of such a description as to be capable of being sold in any stock
market in India or in the United Kingdom. Sans the above statement from the SC, one possible
interpretation could be that unless the security is not listed, it cannot be sold in any stock market, and
hence only listed securities should fall within the purview of marketable securities. However, as per
the statement of the SC, the moment a security is a transferable, it becomes marketable. Hence, there
arises an ambiguity as to whether an unlisted transferable security would also be considered 'capable
of being sold in a stock market' and hence 'marketable' for the purpose of the stamp duty.
5. Criminal sanctions: No criminal sanction has been imposed on the Appellants or the promoters /
directors in the instant case. However, the SC has directed the Appellants to furnish details with
supporting documents to SEBI. SEBI has been asked to ascertain the genuineness of the subscribers
with the help of investigating officers / experts in finance and accounts. If the event, SEBI suspects the
genuineness of the subscribers, they are required to give the Appellants a hearing. However, the SC
has directed that the decision of SEBI (WTM) in this behalf shall be final and binding on the Appellants
as well as the subscribers.
Under the SEBI Act, SEBI has inter-alia been granted with powers to impose imprisonment up to 10
years. Though, this power is used sparingly by SEBI, however, they have not been shy when the case
demands. For instance, in the past, SEBI has imposed criminal sanctions against the managing
director of VR Mathur Mass Communications Limited under Sections 63 and 68 of Companies Act for
material mis-statements in the prospectus of the company during its public issue of shares. It has also
in case of Gold star Teak Forest India Ltd. & others, as well as Angel Green Forest Ltd. & others,
imposed rigorous imprisonment of 6 months on the accused for violation under the SEBI (Collective
Investment Schemes) Regulations, 1999.
If SEBI finds the information submitted by the Appellants about the applicants or refunds already
made, to be fictitious or concocted, SEBI may be at liberty to use its powers to impose sanctions as it
may deem fit.
Conclusion:
This landmark Judgment is undoubtedly a milestone in India's Corporate landscape, as it not only
sanctifies SEBI's absolute power to investigate into the matters of listed companies, but also into the
matters pertaining to the unlisted companies. It vests SEBI with myriad powers to investigate into any
matter concerning the interest of the investors even if it pertains to companies which are not listed. It
clarifies significant points of law and removes the grey areas relating to issue of securities by the so
called unlisted companies taking advantage of the loopholes of law. Also, in the matters of jurisdiction,
this Judgment has bridged the jurisdictional gap which previously existed between that of the Ministry
of Corporate Affairs ("MCA") and SEBI. It is hoped that in future this judgment will be instrumental in
preventing turf war between the MCA and SEBI concerning jurisdictional issues as it categorically
iterates that in the matter of public interest, both SEBI and MCA will have concurrent jurisdiction. This
is a welcome relief, as in the past many defaulting parties have taken advantage of this jurisdictional
lacuna and have been able to easily get off the hooks. Sahara has already filed a review petition
against this judgment before the Supreme Court. In a public statement they have also said even if the
review petition fails, they will challenge the same vide a curative petition before the Supreme Court.
Whether Sahara gets any relief in the near future remains to be seen. It however, seems to be a tough
legal battle ahead of them.
Note: The Supreme Court, while confirming the findings of SAT has appointed retired apex court judge
Justice BN Aggarwal to oversee the probe by SEBI against the two Sahara companies. On a preliminary
analysis of the judgment it appears that this order comes as a big blow to the already reeling Subrata
Roy led Sahara India Group and once again confirms and puts a judicial sanction on the myriad powers
of SEBI to investigate and adjudicate into any matter potential enough to prejudice the interests of the
investors. The Supreme Court at the same time admonished the Sahara group for being casual and
not maintaining proper records of the subscribers to the OFCDs despite the amount of money involved
is close to 30,000 crore and investor base is about 3 million.
Brief facts of the case- The Saharas sought to raise funds through Optionally Fully
Convertible Debentures (OFCDs). They filed/circulated an information memorandum/ Red
Herring Prospectus with the Registrar of Companies but no documents with SEBI. It took a
view that issue of shares to a group of people described in an extremely broad manner
did not amount to an issue to the public requiring compliance with the provisions of the
Companies Act, 1956, the SEBI Act and Regulations, etc. that dealt with public issues. The
Saharas, however, appointed about 10,00,000 agents, opened 2900 branches and offered
the OFCDs to crores of people, and issued the OFCDs to some 66 lakhs people (it appears
actual figures may be even higher). Contrast this with the maximum limit of 49 offerees
permitted under Section 67(3) of the Companies Act, 1956, beyond which the offer would
become a public offer.
SAT (Securities Appellate Tribunal) & SEBI Decision- Both SAT & SEBI held that offer of
OFCDs by the Saharas was an issue to the public and not a private placement. The
OFCDs offered to the persons turned out to be 3 crores in number. It was held that in view
of the first proviso to Section 67(3), offer to more than 49 persons would be deemed to be
an offer to the public. The fact that the offer was clearly made to more than 49 persons
attracted this provision. Thus, the SAT & SEBI ordered the two Sahara companies to refund
the amount with 15 % interest.
Supreme Court judgment- The Supreme Court upheld the judgment of the SAT & the
SEBI. It ordered the Saharas to refund the amount collected to the tune of 24,000 cr.
Strengthening of SEBIs power- To stop this fraudulent raising of deposits and money
from the public, Securities Law Amendment Ordinance, 2013 was promulgated. This
ordinance has granted SEBI wide regulatory and enforcement power to tackle fraudulent
schemes as witnessed in Sahara case. Further, Supreme courts judgment has laid down a
definitive ruling on the following points of law concerning the jurisdiction of the SEBI-
i. Issue involving 50 or more people to be public issues.
ii. All public issues should go through Sebi framework.
iii. Just disclaimers cant ward away Sebi.
iv. Conduct, not statements, determines whether an issue is public.
Aditya Marwah
Civil and criminal complaints had been lodged against two Sahara firms and their top
executives in the Securities and Exchange Board of India (SEBI)-Sahara case, a
metropolitan magistrate in Mumbai had asked them to appear before it for 'violation' of
regulations. Following the Supreme Court order against Sahara for refund of more than Rs
24,000 crore to their bondholders , SEBI had filed criminal complaints against Sahara India
Real Estate Corp Ltd and Sahara Housing Investment Corp Ltd and their top officials for
violation of various provisions of the Companies Act and the SEBI Act. After looking into the
complaints, the magistrate passed orders to issue an order against the two companies and
their top officials under the Companies Act and the SEBI Act. The order means that the
court has taken cognisance of the complaint and has sought appearance of the accused
parties before it. Supreme Court upheld the judgment of the SAT & the SEBI. t ordered the
Saharas to refund the amount collected to the tune of 24,000 crore.
SEBI made a forceful plea to the Supreme Court to punish Sahara chief Subrata Roy along
with his two firms and their directors for not complying with its order for refunding Rs 24,000
crore to investors. Refuting the contention of Roy who had submitted that he cannot be
penalised for non-refund of the money by Sahara India Real Estate Corp Ltd (SIREC) and
Sahara India Housing Investment Corp Ltd (SHIC), the market regulator said that the
business tycoon held 70 per cent stake in the companies and liable for contempt of court
punishable upto to six months imprisonment or fine.
Sahara India Pariwar investor fraud case is the case of the failure of Subrata Roy-led Sahara
India Pariwar to return Rs 24,000 crore plus interests to its investors as directed by the Supreme
Court of India, after a prolonged legal battle with the Securities and Exchange Board of India.
Summary[edit]
On 26 February 2014, the Supreme Court of India ordered the arrest of Subrata Roy, chairman and
founder of Sahara India Pariwar, for failing to appear in court in connection with the Rs. 24,000 crore
deposits his company failed to refund to its investors as per a Supreme Court order, after a legal
dispute with the Indian market regulator SEBI (Securities and Exchange Board of India).[1] He was
eventually arrested on 28 February 2014 by Uttar Pradesh police on a Supreme Court warrant.[2] In a
statement after the arrest, his lawyer said Subrata's 92-year-old mother was in poor health and
needed her eldest son by her side, and hence he failed to appear at the court. [3] He was granted
interim bail by the Supreme Court on 26 March 2014 on the condition that he would deposit Rs
10,000 crore with SEBI.[4] Subrata was eventually taken into judicial custody and sent to Tihar jail,
along with two other Sahara directors, on 4 March 2014 for failing to deposit Rs 10,000 crore with
SEBI.[5] In Tihar jail, Subrata unsuccessfully tried to sell some of his hotel properties to raise Rs
10,000 crore for his bail bond.[6] He remained in Tihar jail for more than two years, and was released
on parole in May 2016 to attend the last rites of his deceased mother.[7]
Timeline of events[edit]
The unravelling of this fraud case started in 2010 and it is still in process in the Supreme Court of
India as of 2016.[8][9][10]
November 2010 - Securities and Exchange Board of India barred Sahara India
Pariwar chief Subrata Roy and two of its companies Sahara India Real Estate Corp (SIREC)
and Sahara Housing Investment Corp (SHIC) - from raising money from the public as they had
raised several thousand crores through optionally fully convertible debentures (OCFDs) that
SEBI deemed illegal.[11]
December 2010 - Sahara appealed in the Allahabad High Court, which ordered SEBI not to
take any action until a court order is passed.[12]
January 2011 - Delhi High Court issued a warrant against Sahara India
Pariwar chairman Subrata Roy and four other officials of the group on a complaint that it
deceived investors in a proposed housing project of Rs. 25,000 crore. [13]
February 2011 - Delhi High Court stays proceedings against Sahara India
Pariwar chairman Subrata Roy and four other officials of the group on a complaint that it
deceived investors in a proposed housing project. [14]
May 2011 - Supreme Court of India asked Sahara India Real Estate (SIREC) to furnish the
format of the application for its optionally fully convertible debenture (OFCD) scheme and a list
of accredited agents that raised money on the company's behalf.[15]
June 2011 - SEBI ordered Sahara firms to immediately refund the money collected through
its sale of OFCDs.
October 2011 - Securities Appellate Tribunal (SAT), set up by the Supreme Court, ordered
two unlisted Sahara group companies to refund within six weeks about Rs. 17,656.53 crore with
15% interest, which it had raised through OFCDs.[16]
November 2011 - Sahara India Pariwar moved the Supreme Court against SAT's order and
the Supreme Court stayed the SAT order, and asked the two companies to refund Rs. 17,400
crores to their investors and asked the details and liabilities of the companies. [17][18]
January 2012 - Supreme Court gives three weeks time to Sahara India Pariwar to choose
between options to return investments made by public in its OFCD scheme. Sahara to either to
give sufficient bank guarantee or attach properties worth the amount raised through OFCDs. [19]
May 2012 - Supreme Court is informed by senior counsel Fali Nariman of Sahara India Real
Estate Corp that SEBI could not have taken up this issue of Sahara Group of companies raising
funds through OFCD as there was no complaint from any investor.[20]
June 2012 - SEBI informed the Supreme Court that the real estate division of Sahara India
Pariwar had no right to mobilize Rs. 27,000 crore from investors through OFCD without
complying to the norms of the market regulator - SEBI.[21]
August 2012 - Supreme Court directed Sahara India Real Estate Corporation Ltd. (SIRECL)
and the Sahara Housing Investment Corporation Ltd. (SHICL) to refund over Rs. 24,400 crore to
its investors.[22]
February 2014 - Subrata Roy arrested by Uttar Pradesh police for failure to appear before
the Supreme Court.
March 2014 - Subrata Roy, along with two other directors of Sahara, sent to Tihar jail.
March 2015 - Supreme Court stated that the total dues from Sahara have gone up to Rs
40,000 crore with the accretion of interest.[23]
July 2015 - SEBI cancelled the licence of Saharas mutual fund business. [24]
15.04.2013
2013
INTRODUCTION
Corporate personality has been described as the most pervading of the fundamental principles of
company law. It constitutes the bedrock principle upon which company is regarded as an entity distinct
from the shareholders constituting it. When a company is incorporated it is treated as a separate legal
entity distinct from its promoters, directors, members, and employees; and hence the concept of the
corporate veil, separating those parties from the corporate body, has arisen. The issue of lifting the
corporate veil has been considered by courts and commentators for many years and there are instances
in which the courts have negated from the strict application of this doctrine. This doctrine has been
established for business efficacy, necessity and as a matter of convenience.
In the doctrine of Lifting the Corporate Veil, the law goes behind the mask or veil of incorporation in order
to determine the real person behind the mask for the purpose of holding them liable.
But for clarity as to Lifting of the Corporate Veil, an understanding of the corporate personality of a
company is required, along with study of the provisions of Indian law that pave the way for courts to pierce
the corporate veil. Various grounds for piercing of the corporate veil and elements of lifting of corporate
veil analyzed through the lens of leading case laws and judgements form the crux of this project report.
The company as a separate entity was firmly established in the landmark decision in Salomon v. Salomon
& Co. Ltd. Salomon, a sole trader, sold his manufacturing business to Salomon & Co. Ltd. (a company he
incorporated) in consideration for all but six shares in the company, and received debentures worth 10
thousand pounds. The other subscribers to the memorandum were his wife and five children who each
took up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the
debentures held, as a secured creditor. The liquidator argued that Salomon could not rank ahead of other
creditors because, in fact, the company and Mr. Salomon were one and the sameor alternatively, that the
company carried on business on Salomons behalf.
On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts of the
corporation were not the debts of Mr. Salomon because they were two separate legal entities; and that
once the artificial person has been created, it must be treated like any other independent person with its
rights and liabilities appropriate to itself.
In Macaura v. Northern Assurance Co. Ltd. the House of Lords decided that insurers were not liable under a
contract of insurance on property that was insured by the plaintiff but owned by a company in which the
plaintiff held all the fully-paid shares. The House of Lords held that only the company as the separate legal
owner of the property, and not the plaintiff, had the required insurable interest. The plaintiff, being a
shareholder, did not have any legal or beneficial interest in that property merely because of his
shareholding. In Lee v. Lees Air Farming, the Privy Council held that Lee, as a separate and distinct entity
from the company which he controlled, could be an employee of that company so that Lees wife could
claim workers compensation following her husbands death.
In Hobart Bridge Co. Ltd. v. FCT relying on the judgment by Lord Sumner in Gas Lighting Improvement Co.
Ltd. v. IRC, Kitto .J summarizes the position in the following manner:
Between the investor, who participates as a shareholder, and the undertaking carried on, the law imposes
another person, real though artificial, the company itself, and the business carried on is the business of
that company, and the capital employed is its capital and not in either case the business or the capital of
the shareholders. Assuming, of course, that the company is duly formed and is not a sham
More recently, the High Court in Industrial Equity v. Blackburn has held that the principle operates to
prevent a holding company from treating a wholly-owned subsidiarys profits as its own. Therefore, it can
be seen that there has been, and still is, the highest authority for the separate entity concept.
However, consideration has to be given to the limitations of the separate entity principle which completely
denies the efficacy of the corporate entity as a legal person separate from its founders, shareholders or
management. Judgements as early as the Salomon case have indicated the recognition of exceptions to
the principle of separate entity by the courts. Recognition of the separate entity is possible provided there
is no fraud and no agency and if the company was a real one and not a fiction or myth. According to Lord
Denning in Littlewoods Mail Order Stores Ltd. v. IRC, incorporation does not fully cast a veil over the
personality of a limited company through which the courts cannot see. The courts can, and often do, pull
off the mask. They look to see what really lies behind. A corporation will be looked upon as a legal entity
as a general rule but when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime the law will regard the corporation as an association of persons.
The two significant reasons as to why exceptions to the separate entity principle exist is that firstly,
although a corporation is a legal person, it cannot always be treated like any other independent person.
For example, a corporation is not capable of committing a tort or a crime requiring proof of mens rea
unless courts disregard the separate entity and determine the intention held by the directors and/or
shareholders of the corporation. Secondly, strict recognition of the principle may lead to an unjust or
misleading outcome if interested parties can hide behind the shield of limited liability. Judicial discretion
and also legislative action allows the separate entity principle to be disregarded where some injustice is
intended, or would result, to a third party (either internal or external to the company) with whom the
company is dealing.
Lifting or piercing the veil is corporate laws most widely used doctrine to decide when a shareholder or
shareholders will be held liable for obligations of the corporation. Lifting the veil doctrine exists as a check
on the principle that, in general, investor shareholders should not be held liable for the debts of their
corporation beyond the value of their investment. The corporate evil is said to be lifted when the court
ignores the company and concerns itself directly with the members or the managers. It is impossible to
ascertain the factors which operate to break down the corporate insulation. The matter is largely in the
discretion of the courts and will depend upon the underlying social, economic and moral factors as they
operate in and through the corporation. It can be said that adherence to the Solomon principle will not
be doggedly followed where this would cause an unjust result. One of the grounds for lifting of the
corporate veil is fraud. The courts have pierced the corporate veil when it feels that fraud is or could be
perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of
fraud. The two classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne in which Mr.
Horne was an ex-employee of The Gilford motor company and his employment contract provided that he
could not solicit the customers of the company. In order to defeat this he incorporated a limited company
in his wifes name and solicited the customers of the company. The company brought an action against
him. The Court of appeal was of the view that the company was formed as a device, a stratagem, in order
to mask the effective carrying on of business of Mr. Horne. In this case it was clear that the main purpose
of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded it as a
mere sham to cloak his wrongdoings.
In the second case of Jones v. Lipman a man contracted to sell his land and thereafter changed his mind in
order to avoid an order of specific performance he transferred his property to a company. Russel J
specifically referred to the judgments in Gilford v. Horne and held that the company here was a mask
which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of equity he
awarded specific performance both against Mr. Lipman and the company. Under no circumstances will the
court allow any form of abuse of the corporate form and when such abuse occurs the courts will step in.
The second ground for piercing of corporate veil covers group enterprises. Sometimes in the case of group
of enterprises the Solomon principal may not be adhered to and the court may lift the veil in order to look
at the economic realities of the group itself. In the case of D.H.N. Food products Ltd. v. Tower Hamlets
London Borough Council it has been said that the courts may disregard Solomons case whenever it is just
and equitable to do so. The court of appeal thought that the present case where it was one suitable for
lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same
economic entity or group and were entitled to compensation. Lord Denning has remarked that we know
that in many respects a group of companies are treated together for the purpose of accounts, balance
sheet, and profit and loss accounts. The nature of shareholding and control would be indicators whether
the court would pierce the corporate veil. In the case of Woolfsan the House of Lords held that there was
no basis consonant with the principle upon which on the facts of this case the corporate veil can be
pierced to the effect of holding Woolfson to be the true owner of Campbells business or the assets of
Solfred, the two subsidiary companies that were jointly claiming compensation for the value of the land
and disturbance of business. The House of Lords in the above mentioned case had remarked properly
applied the principle that it is appropriate to pierce the corporate veil only where special circumstances
exist indicating that it is a mere facade concealing the true facts In the figurative sense facade denotes
outward appearance especially one that is false or deceptive and imports pretence and concealment. That
the corporator has complete control of the company is not enough to constitute the company as a mere
facade rather that term suggests in the context the deliberate concealment of the identity and activities of
the corporator. The separate legal personality of the company, although a technical point is not a matter
of form it is a matter of substance and reality and the corporator ought not, on every occasion, to be
relieved of the disadvantageous consequences of an arrangement voluntarily entered into by the
corporator for reasons considered by the corporator to be of advantage to him. In particular the group
enterprise concept must obviously be carefully limited so that companies who seek the advantages of
separate corporate personality must generally accept the corresponding burdens and limitations.
The third ground for piercing the corporate veil is agency. In the case of Solomon v. Solomon Justice
Vaughan Williams expressed that the company was nothing but an agent of Solomon. That this business
was Mr. Solomons business and no one elses; that he chose to employ as agent a limited company; that
he is bound to indemnify that agent the company and that this agent, the company has lien on the
assets However on appeal to the House of Lords it was held that a company did not automatically
become an agent of the shareholder even if it was a one man company and the other shareholders were
dummies.
A company having power to act as an agent may do so as an agent for its parent company or indeed for all
or any of the individual members if it or they authorize it to do so. If so the parent company or the
members will be bound by the acts of its agent so long as those acts are within actual or apparent scope
of the authority. But there is no presumption of any such relationship in the absence of an express
agreement between the parties it will be difficult to establish one. In Cape case attempt to do so failed. In
cases where the agency agreement holds good and the parties concerned have expressly agreed to such
an agreement them the corporate veil shall be lifted and the principal shall be liable for the acts of the
agent.
The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of
Abbey and Planning the court lifted the corporate veil. In this case a school was run like a company but the
shares were held by trustees on educational charitable trusts. They pierced the veil in order to look into
the terms on which the trustee held the shares.
Sometimes tax legislations warrant the lifting of the corporate veil. The courts are prepared to disregard
the separate legal personality of companies in case of tax evasions or liberal schemes of tax avoidance
without any necessary legislative authority.
There are three components that the complainant must prove in order to pierce the corporate veil. Those
elements are as follows
1. Control and domination: Control and determination part of the test determines the relationship
between the shareholder and the corporation. Generally, mere majority stock ownership will be insufficient
to satisfy this element. Instead, one must show complete domination, not only of finances, but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction has no separate mind, will or existence of its own. To determine the existence of complete
domination, courts usually require the plaintiff to produce evidence of inadequate capitalization or
undercapitalization, failure to follow corporate formalities, commingling of funds, diversion of funds or
assets for non-corporate purposes, etc.
2. Improper purpose or use: This test requires the plaintiff to show that the control exercised by the
parent company or dominant stockholder was used by the defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal right. Thus, this second inquiry focuses on the relationship between the
plaintiff and the corporation. It is an explicit recognition that some improper conduct must have occurred
beyond establishing that the corporation was controlled and dominated.
3. Resulting damage or harm: In this test the plaintiff must show that the defendants control, exerted
in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. In other words, the
plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendants exercise of control and improper use of the corporate form and, thereby, suffer damages.
Therefore, the most important thing for the courts to remember while lifting the corporate veil is to
exercise care to balance the competing goals of incorporation and protecting creditors.
The Companies Act provides for circumstances when corporate veil will be lifted and the individual
members/directors will be made liable for certain transactions. The statutory provisions are as follows:
1. Reduction of membership below statutory minimum (Section 45 of the Act): This section provides that if
the number of member of a company is reduced below 7 in the case of public company or below 2 in the
case of private company and the company continues to carry on the business for more than 6 months,
while the number is so reduced, every person who knows this fact and is a member of the company is
severally liable for the debts of the company contracted during that time.
2. Improper use of name (Section 147of the Act): Under sub-section (4) of this section, an officer of a
company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the
company is not mentioned in the prescribed manner, such officer can be held personally liable to the
holder of the bill of exchange, hundi etc. unless it is duly paid by the company.
3. Liability for fraudulent conduct of business (Section 542 of the Act): If in the course of the winding up of
a company, it appears that any business of the company has been carried on with intent to defraud the
creditors of the company or any other person or for any fraudulent purpose, the persons who were
knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally
responsible, without any limitation of liability for all or any of the debts or other liabilities of the company,
as the court may direct.
CONCLUSION
The doctrine of piercing the corporate veil is not subject to any bright line tests. Courts have struggled for
years to develop and refine their analysis of these claims. However, each new action brings a different set
of facts and circumstances into the equation and a separate determination must be made as to whether
the plaintiff has adduced sufficient evidence of control and domination, improper purpose, or use and
resulting damage. The decision whether to pierce the corporate veil may be assisted, at least in part, upon
the opinion of qualified experts. In particular, expert testimony would be helpful to the trier of fact in
determining whether the corporation has been adequately capitalized for its intended purpose. Ultimately,
however, the judgment whether to disregard the corporate entity will be based upon a balancing of
various factors all or some of which are necessary but may not be sufficient to pierce the veil. The
Judgment of the Court Of Appeal in the Adams case can be said to be the current law, which is nothing
more than a reiteration of the law laid down by the House of Lords in Solomons case. The bottom line
being only the court will lift the veil in the face of grave abuse of the corporate form and not otherwise.
Also the trend regarding the increase or decrease in the judicial pronouncement regarding lifting of veil of
a corporate entity cannot be ascertained as each the courts view on lifting of corporate veil depends on
the facts of each case.
NTRODUCTION
The Hon'ble Supreme Court of India ("SC") in its recent judgment1 ("Sahara Judgment") has directed Sahara India
Rea1 Estate Corporation Limited ("SIRECL") and Sahara Housing Investment Corporation Limited ("SHICL") (both
collectively referred to as the "Appellants") to refund to SEBI the ~USD 3.16 billion1 they had raised along with an
interest of 15% by November 30, 2012, and also to furnish details, along with the application forms etc., of the ~
6.6million subscribers from whom the Appellants had raised the monies.
The Sahara Judgment while upholding the Securities Exchange Board of India ("SEBI") and Securities Appellate
Tribunal ("SAT") order3 has also clarified ambiguities in certain provisions of law used by India Inc. to raise public
monies without intervention from SEBI. We have herein below in this article, discussed and analyzed some of the key
issues which have been decided by the SC.
SIRECL and SHICL (both unlisted public companies), in March 2008 and September 2009, respectively, in their
general meeting resolved through a special resolution under Section 81(1A) of the (Indian) Companies Act, 1956
("Companies Act") to raise funds through unsecured optionally fully convertible debentures ("OFCDs") by way of
private placement to friends, associates, group companies, workers/employees and other individuals
associated/affiliated or connected in any manner with Sahara group of companies ("Sahara Group").
Later, pursuant to their board resolutions, both, SIRECL and SHICL filed red herring prospectus ("RHP") under
Section 60B of the Companies Act with registrar of companies ("ROC"), Kanpur and Mumbai, respectively, both of
which got registered.
The RHPs provided that the Appellants did not intend to get their securities listed on any recognized stock exchange,
and that only those persons to whom the information memorandum ("'IM") was circulated and/or those associated
with Sahara Group, would be eligible to apply. The RHPs also provided that the funds raised would be utilised for
financing the acquisition of townships, residential apartments, shopping complexes etc. and to undertake construction
and infrastructure activities.
Post registration of the RHPs, the Appellants circulated the IMs along with application forms to persons allegedly
associated with the Sahara Group through their network of around 2900 branch offices and 10 lakh agents, and
raised monies under an open ended scheme. The IMs stated that the issue of the OFCDs was purely on a private
placement basis and the OFCDs were not intended to be listed on any stock exchange.
S E B I A N D S AT R U L I N G
SEBI became aware of the large scale collection of monies from the public by the Appellants while processing the
draft RHP submitted by Sahara Prime City Limited (another Sahara Group company) in respect of its proposed initial
public offering dated September 30, 2009, and also from two complaints received by it from investors. On further
investigation and multiple correspondences later, SEBI passed an order on June 23, 2011 ("SEBI Order") holding the
Appellants to be in violation of various provisions of the corporate and securities laws, dealt with later in this article.
An appeal was then filed by the Appellants against the SEBI Order in the SAT, which was decided in favour of SEBI
vide an order dated October 18, 2011 ("SAT Order"). A further appeal was then filed by the Appellants against the
SAT Order in the SC.
Although contended, the Appellants could not substantiate their claim that the investors were friends, associated
group companies, workers/employees and other individuals who were associated/affiliated or connected with Sahara
Group.Issues
Following are the key issues which were debated and decided upon by the SC:
1. Jurisdiction of SEBI: What companies does the SEBI have the jurisdiction to administer so far as it relates to
issue and transfer of securities?
Section 55A of the Companies Act delegates certain powers relating to issue and transfer of securities to SEBI. It
reads as follows:
The provisions contained in Sections 55 to 58, 59 to 81 (including sections 206, 206A and 207, so far as they relate to
issue and transfer of securities and non-payment of dividend shall, --
Explanation For the removal of doubts, it is hereby declared that all powers relating to all other matters including the
matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of
irredeemable preference shares shall be exercised by the Central Government, Tribunal or the Registrar of
Companies, as the case may be."
From the aforementioned it can be gathered that (i) listed companies and (ii) those intending to get listed are
companies subject to the jurisdiction of SEBI. What would tantamount to 'intending to get listed' was a question before
the SC. The SC while answering this question described in great detail the role of SEBI as an institution to promote
orderly and healthy growth of the securities market and for investors protection. Against this backdrop, the SC
analyzed the contentions of the Appellants and the relevant laws.
The Appellants argued that they never intended to list the OFCDs, and hence the issuance fell outside the purview of
SEBI. This contention was rejected by the SC. The SC in analyzing this aspect went by the conduct of the Appellants
and stated that a company's option, choice, election, interest or design does not matter, it is the conduct and action
that matters and that is what the law demands. Since, in this instant case, the issue of OFCDs was held to be a public
issue, which entailed a listing, the SC held that the Appellants were seen to have intended to get their securities
listed. This rationale of the SC for holding the issue of the OFCDs to be a public issue has been discussed below.
2. Public issue versus private placement: Whether Section 67 of the Companies Act implies that a companys offer
of shares or debentures to 50 or more persons would ipso facto become a public issue, subject to certain exceptions
provided therein?
As stated above, only if the Applicants issue of OFCDs was held to be a 'public issue' would the same be subject to
SEBI jurisdiction. It was not in dispute that there were more than 50 offerees or subscribers to the issue of OFCDs by
the Appellants. The contention of the Appellants was that the number of allottees or offerees was immaterial in
determining whether an offer was a public issue it was the intention that mattered. The intention to offer to a select
or identified group would make the offer a private placement. To support their argument the Appellants relied on the
Unlisted Public Companies (Preferential Allotment) Rules, 2003 which do not stipulate a limit to the number of
persons that a preferential allotment may be made.
Section 67 of the Companies Act is an aid to interpreting what offering shares or debentures to the public means.
Section 67 (1) and (2) provides that an offer to public is one that is offered to any section of the public. Section 67(3)
however excludes from the definition of offer to the public, an offer or invitation that is (i) not being calculated to result
directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other
than those receiving the offer or invitation, or (ii) otherwise as being a domestic concern of the persons making and
receiving the offer or invitations; except if made to 50 persons or more.
The SC rejected the arguments of the Appellants and relied on Section 67 to conclude that an offer to 50 or more
persons constitutes a public issue, and hence the issuance of OFCDs by the Appellants was a public issue. To arrive
at this conclusion, the SC also lifted the veil to examine the conduct and method adopted by the Appellants and
placed reliance on inter-alia the following to determine that even in spirit the issuance by the Appellants was a public
issue:
In the IM circulated by the Appellants, it was stated that if the number of interested parties to the OFCD issue
exceeded 50 they would approach the ROC to file RHP as per Section 67(3) of the Companies Act;
The Appellants made disclosures that the issue was being made on a private placement basis and that
OFCDs would be offered only to such persons to whom IM would be circulated. But the fact remains that it was
circulated to more than three crore people inviting them to subscribe;
Although contended, the Appellants could not substantiate their claim that the investors were friends,
associated group companies, workers/employees and other individuals who were associated/affiliated or connected
with Sahara Group.
3. Listing in case of public issue: In terms of Section 73, is every company making an offer of securities to 50 or
more persons required to apply for listing of its securities on a stock exchange?
The SC stated that Section 73(1) of the Companies Act casts an obligation on every company intending to offer
shares or debentures to the public to apply on a stock exchange for listing of its securities. Such companies have no
option or choice but to list their securities on a recognized stock exchange, once they invite subscription from over 49
investors from the public. If an unlisted company expresses its intention, by conduct or otherwise, to offer its securities
to the public by the issue of a prospectus, the legal obligation to make an application on a recognized stock exchange
for listing starts.
The Appellants had argued that since they did not intend to offer the OFCDs to the public, this provision should not
apply. However, as mentioned above, the SC on the basis of the conduct of the Appellants concluded that they
intended to offer the OFCDs to the public and hence they were obligated to apply for listing of OFCDs.
4. Securities include hybrid: Are hybrid instruments also with the ambit of the SEBI to regulate?
The Appellants had contended that whereas pursuant to the Companies Amendment Act the definition of the term
'securities' was modified to include a "hybrid" instrument Section 67 of the Companies Act was not amended to
include hybrids and continued to refer only to offer of shares or debentures. Therefore, since OFCDs are hybrids,
they should be outside the purview of Section 67 of the Companies Act.
The Appellants also pointed the difference between the definition of the term 'securities' in the Companies Act and the
Securities Contracts (Regulation) Act, 1956 ("SCR Act") in that the term 'hybrid' had only been inserted in the
definition of "securities" in the Companies Act and not the SCR Act, and consequently not in the SEBI Act as well
(which draws its definition of 'securities' from the SCR Act). Consequently, the Appellants contended that SEBI does
not have jurisdiction over OFCDs issued by the Appellants which are hybrids.
However, the SC rejected the above contentions. It stated that the OFCDs issued by the Appellants undoubtedly were
unsecured debentures by name and nature. Though, they have the dual characteristics of shares and debentures, as
defined by the term "hybrids", however, they continue to remain debentures till the time they are converted. In other
words, OFCDs issued by the Appellants are debentures in presenti and become shares in futuro. Further, the SC also
stated that the definition of "debentures" in Companies Act includes 'any other securities', and noted that the
Appellants have treated OFCDs only as debentures in the IM, RHP, application forms and also in their balance sheet.
Further, on the contention of SEBIs jurisdiction over OFCDs, the SC stated that the definition of "securities" in the
SCR Act is an inclusive definition and not exhaustive. Further, the definition of securities in the SCR Act includes
any "other marketable securities of like nature". The SC stated that any security which is capable of being freely
transferable is marketable. Since, the OFCDs issued by the Appellants were freely transferable, therefore, they fall
within the purview of "securities" in the SCR Act.
The SC also stated as Section 55A of the Companies Act, which deals with delegation of powers to SEBI refers to
"securities", and the definition of "securities" in Companies Act includes "hybrids", therefore, SEBI has jurisdiction
over hybrids like OFCDs issued by the Appellants.
5. Convertible bonds: Whether OFCDs issued by the Appellants are convertible bonds falling within the scope of
Section 28(1)(b) of the SCR Act, and therefore, not "securities" or, at any rate, not listable under the provisions of
SCR Act?
Section 28(1)(b) of the SCR Act provides that the provision of the SCR Act shall not apply to 'any convertible bond or
share warrant or any option or right in relation thereto, insofar as it entitles the person in whose favour any of the
foregoing has been issued to obtain at his option from the company or other body corporate, issuing the same or from
any of its shareholders or duly appointed agents' shares of the company or other body corporate, whether by
conversion of the bond or warrant or otherwise, on the basis of the price agreed upon when the same was issued.'
It was contended by the Appellants that the OFCDs issued were convertible bonds falling within the scope of Section
28(1)(b) of SCR Act and hence were excluded from the purview of the SCR Act. However, the SC rejected this
contention and stated that Section 28(1)(b) makes it clear that the SCR Act will not apply to the 'entitlement' of the
buyer, inherent in the convertible bond. Entitlement may be severable, but does not itself qualify as a security that can
be administered by the SCR Act, unless it is issued in a detachable format. Therefore, the inapplicability of SCR Act,
as contemplated in Section 28(1)(b), is not to the convertible bonds, but to the entitlement of a person to whom such
share, warrant or convertible bond has been issued, to have shares at his option. The expression "insofar as it entitles
the person" clearly indicates that it was not intended to exclude convertible bonds as a class.
A N A LY S I S
1. End of road for Sahara?: This SC judgment may not be the end of road for Sahara Group. A judgment of the SC
can be reviewed by a review petition, and on dismissal of a review petition, further by a curative petition. However, the
grounds for admitting such petitions are very limited, like for admitting a review petition, there should be a discovery of
new and important matter of evidence, or some mistake or error apparent on the face of the record; similarly, for a
curative petition, which is ought to be treated as a rarity, there should be a gross miscarriage of justice resulting from
violation of principles of natural justice as mentioned in another SC case of Rupa Hurra vs. Ashok Hurra & Another,
AIR 2002 SC 177, or the judgment should adversely affect a person and he should not be a party to the dispute, or if
he was a party, he should not have been served with notice of the proceedings and the matter should have proceeded
as if he had notice.
2. Jurisdiction of SEBI versus ROC: This judgment is a very crucial one for SEBI as it not only affirms its jurisdiction
and power to administer various provisions of the Companies Act, but also clarifies that even unlisted companies
(whether private or public) which intend to (by conduct or otherwise) get their securities listed on any stock exchange
now fall within the radar of SEBI. Thus, the general perception that SEBI can only monitor listed companies and it
does not have jurisdiction over unlisted companies may not be entirely correct. Also, the role of ROC in such cases
may now be limited.
3. Public issue vs. private placement debate: By clarifying that offer of security to 50 or more persons would qualify
as a public issue, the SC has brought some clarity to this long standing debate. Earlier, there was an ambiguity as to
whether an offer of security to more than 49 persons would ipso facto become a public issue or not. Though the
Statement of Objects and Reasons for the Companies (Amendment) Act, 2000 provided that 'any offer of shares or
debentures to more than 50 persons shall be treated as a public issue with suitable modification in the case of public
financial institutions and non-banking financial companies, however, the Section 67 of the Companies Act does not
expressly mention so.
Having said the above, there is still an ambiguity as to whether multiple offers of security by any company at
reasonable intervals of time, with each offer being to less than 49 persons but in aggregate more than 49 persons,
would qualify as public issue or not.
Also, so far the emphasis has always been on an 'offer' to 50 or more persons. What constitutes 'offer' has not been
addressed by the SC in the Sahara Judgement. For instance, does just addressing a gathering of persons constitute
an offer / invitation, or is it the actual act of distributing an IM which constitutes an offer / invitation. Further, it is not
clear as to what happens when a company does not make an offer or invitation to the public, but only issues its
securities to more than 49 persons at their instance. Though unlikely, but whether such cases would fall outside the
purview of public issue is yet to be seen.
4. Transferable means marketable: Though, not a ratio decidendi in this case, however, the SC has stated that any
security which is capable of being freely transferable is marketable. This may have some implications, especially, in
case of stamp duty. For instance, the Indian Stamp Act, 1899 defines the term 'marketable' as 'security of such a
description as to be capable of being sold in any stock market in India or in the United Kingdom. Sans the above
statement from the SC, one possible interpretation could be that unless the security is not listed, it cannot be sold in
any stock market, and hence only listed securities should fall within the purview of marketable securities. However, as
per the statement of the SC, the moment a security is a transferable, it becomes marketable. Hence, there arises an
ambiguity as to whether an unlisted transferable security would also be considered 'capable of being sold in a stock
market' and hence 'marketable' for the purpose of the stamp duty.
5. Criminal sanctions: No criminal sanction has been imposed on the Appellants or the promoters / directors in the
instant case. However, the SC has directed the Appellants to furnish details with supporting documents to SEBI on
the subscribers and the refunds which have been made to the subscribers, by September 10, 2012. SEBI has been
asked to ascertain the genuineness of the subscribers with the help of investigating officers / experts in finance and
accounts. If the event, SEBI suspects the genuineness of the subscribers, they are required to give the Appellants a
hearing. However, the SC has directed that the decision of SEBI (WTM) in this behalf shall be final and binding on the
Appellants as well as the subscribers.
Under the SEBI Act, SEBI has inter-alia been granted with powers to impose imprisonment up to 10 years. Though,
this power is used sparingly by SEBI, however, they have not been shy when the case demands. For instance, in the
past, SEBI has imposed criminal sanctions against the managing director of VR Mathur Mass Communications
Limited under Sections 63 and 68 of Companies Act for material misstatements in the prospectus of the company
during its public issue of shares.4 It has also in case of Goldstar Teak Forest India Ltd. & others, as well as Angel
Green Forest Ltd. & others, imposed rigorous imprisonment of 6 months on the accused for violation under the SEBI
(Collective Investment Schemes) Regulations, 1999.5
If SEBI finds the information submitted by the Appellants about the applicants or refunds already made, to be fictitious
or concocted, SEBI may be at liberty to use its powers to impose sanctions as it may deem fit.
CONCLUSION
The SC judgment has once again reaffirmed the role and object of SEBI as a securities market regulator and
emphasized upon the inherent jurisdiction of SEBI to oversee matters concerning the public investors at large. By
clarifying that SEBI has jurisdiction over OFCDs, it may have in a sense indicated that usage of structured financial
instruments which are not expressly mentioned in the definition of 'security' in the SCR Act to avoid the jurisdiction of
SEBI, may not work, if monies are being raised from the public at large.
Further, ruling that an offer of security to 50 or more persons would tantamount to public issue, has to some extent
clarified this issue which has loomed over the industry since long. Questions of what tantamounts to 'offer' and
whether an issuance to more than 50 persons without an offer would still qualify as a public issue are issues that still
need to be clarified.
The Sahara Judgement has also reaffirmed the fact that a public issue would mandatorily entail an application for
listing on a stock exchange. With this clarity, the market players may now be able to manage their fund raising affairs
with more certainty. At the same time, this ruling has also given the ammunition to SEBI to crackdown on those
companies which have offered their securities to more than 49 persons without applying for listing and following other
requirements. Thus, we may get to see stricter enforcement of these laws now. Having said that, to discover such
instances, unless an investor complains or a public filing is made, would still be a challenge.
Corporative Legislation has been actively debated subject, particularly during post
independence period. In India, the framers of Corporative Legislation laid down certain
board basic norms for the formation of Cooperative Societies and their functioning.
While moving to the Cooperative Credit Societies Bill of 1904 in the Central Legislative
Assembly, Sir Denzil Lbbeston said;
Certain broad principles must be laid down and certain precautions must be insisted
upon, but within those principles and subject to those precautions, the people must be
left to work out their own Salvation on their own lines, the functions of government
being confined to herty sympathy assistance and advice.
However, in India since Cooperation has not developed on the initiative of people.,
approach to Cooperative Legislation has facilitated the State partnership in the
Cooperative Institution, notwithstanding the significance of self-regulation based on the
principle of democratic management. In other words, the Cooperative Legislation gave
ample power to the State for regulation and control. The increasing diversification of
State activity as a consequence of State aid has led to acceleration and strengthening
cooperative movement as an instrument of economic upliftment of rural and urban
masses. Therefore, different States of India have enacted Legislations with a view to
simplifying, rationalizing and modernizing the management of Cooperative Societies,
though there is a broad similarity of provision in Cooperative Laws of the States.
Corporate Governance
The root of the word Governance is from Gubernate, which means to steer. Corporate
Governance would mean to steer an organization in the desired direction. The
responsibility to steer lies with the board of directors/governing board. Governance is
concerned with the intrinsic nature, purpose, integrity and identity of an organization
with primary focus on the entitys relevance, continuity and fiduciary aspects.
Kautilyas Arthashastra maintains that for good governance, all administrators, including
the king were considered servants of the people. Good governance and stability were
completely linked. There is stability if leaders are responsive, accountable and
removable. These tenets hold good even today.
ii) Vridhi literally means growth, in the present day context can be equated to
stakeholder value enhancement.
iii) Palana literally means maintenance/compliance, in the present day context it can
be equated to compliance to the law in letter and spirit.
The substitution of the state with the corporation, the king with the CEO or the board of
the corporation, and the subjects with the shareholders, bring out the quintessence of
corporate governance, because central to the concept of corporate governance is the
belief that public good should be ahead of private good and that the corporations
resources cannot be used for personal benefit.
Standard & Poors has defined Corporate Governance as the way a company is
organized and managed to ensure that all financial stakeholders (shareholders and
creditors) receive their fair share of a companys earnings and assets.
(v) Proper compliance with all the applicable legal and regulatory requirement.
In United States v. Milwaukee Refrigerator Co. it was held that, A corporation will
be looked upon as a legal entity as a general rule but when the notion of legal entity is
used to defeat the public convenience, justify wrong, protect fraud or defend crime, will
regard the corporation as an association of persons.
Role of Companies
In a Corporate World, Companies play on important role in country's economy and make
a great contribution to national progress. Company generally means on association of
people formed to carry some common purpose with a view to take profit. From the date
of its incorporation company becomes in law a different person from the members who
compose it.Thus an incorporate company has its legal personality distinct from that of
its members from the date of its incorporation.
The advantages of incorporation are to be enjoyed only by those who want to make an
honest use of the company. In case of dishonest and fraudulent use of the facility of
incorporation the law lifts the corporate veil and identifies the person who is behind the
scene and is responsible of fraud.
Types of Companies
There are various types of companies, which may be better understood by the following
chart:
COMPANY
Incorporated
Unincorporated
Charted companies
Registered companies
Statutory companies
Limited Companies
Private
Public
Private
Public
Private
Public
Management of Company
The company is an artificial being, does not possess the body of natural person. It has
to act through same human agency, namely, the directors, officers, etc. The
management of the company can be divided under two heads:
1) Internal management;
2) External management
Internal Management
Internal Management
Memorandum of Association
Article of Association
Name Clause
Objects Clauses
Liability Clause
Subscription Clauses
Capital Clause
Business Ethics
Business ethics (also corporate ethics) is a form of applied ethics or professional ethics
that examines ethical principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct and is relevant to the conduct
of individuals and entire organizations.
Business ethics has normative and descriptive dimensions. As a corporate practice and
a career specialization, the field is primarily normative. Academics attempting to
understand business behavior employ descriptive methods. The range and quantity of
business ethical issues reflects the interaction of profit-maximizing behavior with non-
economic concerns. Interest in business ethics accelerated dramatically during the
1980s and 1990s, both within major corporations and within academia. For example,
most major corporations today promote their commitment to non-economic values
under headings such as ethics codes and social responsibility charters. Adam Smith
said, "People of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the public, or in some
contrivance to raise prices. Governments use laws and regulations to point business
behavior in what they perceive to be beneficial directions. Ethics implicitly regulates
areas and details of behavior that lie beyond governmental control. The emergence of
large corporations with limited relationships and sensitivity to the communities in which
they operate accelerated the development of formal ethics regimes.
Business Ethics
Attracting and retaining talent
Customer Satisfaction
Investor Loyalty
1. Attracting and retaining talent People aspire to join organizations that have high
ethical values. Companies are able to attract the best talent and an ethical company
that is dedicated to taking care of its employees will be rewarded with employees being
equally dedicated in taking care of the organization. The ethical climate matter to the
employees. Ethical organization create an environment that is trustworthy, making
employees willing to rely, take decisions and act on the decisions and actions of the co-
employees. In such a work environment, employees can expect to be treated with
respect and consideration for their colleagues and superior.
2. Investors Loyalty Investors are concerned about ethics, social responsibility and
reputation of the company in which they invest. Investors are becoming more and more
aware that an ethical climate provides a foundation for efficiency, productivity and
profits. Relationship with any stakeholders, including investors based on dependability,
trust and commitment results in sustained loyalty.
These are the major statutes in their respective field that are devoid of necessary legal
aspects. On the other hand, law has also developed to an extent with regard to certain
other statutes and their respective penal provisions wherein a fine has been imposed on
the corporations when they are found to be guilty. Some such examples are:
Section 141 of the Negotiable Instruments Act, 1862
Section 7, Essential Commodities Act
Section 276-B of the Income Tax Act
Under statutory provisions of the Indian law, the liability prescribed, at least for
economic or strict liability offences committed by a company is threefold, as per the
express provisions of the statutes .Firstly, the person who was in charge of and was
responsible to the company for the conduct of its business is held liable, unless he can
prove that the offence was committed without his knowledge or despite his exercising
due diligence to prevent the offence. Secondly, if it is proved that an offence under such
statutes has been committed with the consent or connivance of, or is attributable to
neglect on the part of a director, manager, secretary or other officer of the company,
such individual shall also be held liable. Lastly, the company of course, is held liable,
irrespective whether any individual is pinned with liability too. The law on corporate
criminal liability is however, not confined to the general criminal law in the penal code
but it is, in fact, scattered over a plethora of statutes with specific provisions for the
same.
Mens rea is an essential element for majority, if not all, of offenses that would entail
imprisonment or other penalty for its violation. Zee Tele films Ltd. v. Sahara India
Co. Corp. Ltd., the court dismissed a complaint filed against Zee under Section 500 of
the IPC. The complaint alleged that Zee had telecasted a program based on falsehood
and thereby defamed Sahara India. The court held that mens rea was one of the
essential elements of the offense of criminal defamation and that a company could not
have the requisite mens rea. Recently, the Supreme Court of India, through a landmark
judgment Iridium India Telecom Ltd v Motorola Incorporated & ors, has added a new
dimension to the jurisprudence relating to corporate criminal liability in India with
respect to offences requiring mens rea or criminal intent, holding that despite being a
legal fiction, a company can be said to possess mens rea required to commit a crime.
Further in India, Confusion prevails as to whether a company can be convicted for an
offence where the punishment prescribed by the statute is imprisonment and fine.
However after few cases, The 41st Law Commission gave a report suggesting
amendment in the penal provisions and providing for substitution of imprisonment with
fine in case of offender being a body corporate. But the authorities are, till date sitting
on that report and no such changes have been made to the penal legislation.
Corporate Frauds/Crimes
Corporate frauds/crime is viewed as illegal acts or omissions, punishable by the State
under administrative, civil or criminal law, which are the result of deliberate decision
making or culpable negligence within a legitimate formal organization.' Corporate
crimes also refer to criminal practices by individuals that have the legal authority to
speak for a corporation or company. These can include Presidents, managers, directors
and chairmen, sales people, agents, or anyone within a company that has authority to
act on behalf of the firm. Examples of corporate criminal behaviour in most jurisdictions
include: antitrust violations, fraud, damage to the environment in violation of
environmental legislation, exploitation of labour laws, and failure to maintain a fiduciary
responsibility towards shareholders.
Corporate fraud can be difficult to prevent and to catch. By creating effective policies, a
system of checks and balances and physical security, a company may limit the extent
to which fraud can take place. It is considered a white collar crime.
Rajus departure was followed by the resignation of Srinivas Vadlamani, Satyams chief
financial officer, and the appointment of Ram Mynampati as the interim CEO. In a press
conference held in Hyderabad on January 8, Mynampati told reporters that the
companys cash position was not encouraging and that our only aim at this time is to
ensure that the business continues. A day later, media reports noted that Raju and his
brother Rama (also a Satyam co-founder) had been arrested and the government of
India disbanded Satyams board. Though control of the company will pass into the
hands of a new board, the government stopped short of a bailout it has not offered
Satyam any funds. Meanwhile, a team of auditors from the Securities and Exchange
Board of India (SEBI), which regulates Indian public companies, has begun an
investigation into the fraud. Since Satyams stocks or American Depository Receipts
(ADRs) are listed on the Bombay Stock Exchange as well as the New York Stock
Exchange, international regulators could swing into action if they believe U.S. laws have
been broken. At least two U.S. law firms have filed class-action lawsuits against Satyam,
but given the companys precarious finances, it is unclear how much money investors
will be able to recover.
According to experts from Wharton and elsewhere, the Satyam debacle will have an
enormous impact on Indias business scene over the coming months. The possible
disappearance of a top IT services and outsourcing giant will reshape Indias IT
landscape. Satyam could possibly be sold in fact, it had engaged Merrill Lynch to
explore strategic options, but the investment bank has withdrawn following the
disclosure about the fraud. It is widely believed that rivals such as HCL, Wipro and TCS
could cherry pick the best clients and employees, effectively hollowing out Satyam.
Another possible impact could be on the trend of outsourcing to India, since Indias IT
firms handle sensitive financial information for some of the worlds largest enterprises.
The most significant questions, however, will be asked about corporate governance in
India, and whether other companies could follow Satyams Raju in revealing skeletons in
their own closets.
A special court under Indias Central Bureau of Investigation (CBI) on April 10 held the
founders and former officials of outsourcing firm, Satyam Computer Services, guilty in
an accounting scam worth Rs 7,000 crore ($1.1 billion). B Ramalinga Raju, the
companys former chairman, has been sentenced to seven years in jail.
The case, which is also called the Enron of India, dates back to 2009. Six years ago, Raju
wrote a letter to the Securities and Exchange Board of India (SEBI) and his companys
shareholders, admitting that he had manipulated the companys earnings, and fooled
investors. Nearly $1 billionor 94% of the cashon the books was fictitious.
In an immediate reaction to the confession, investors lost as much as Rs 14, 000 crore
($2.2 billion) as Satyams shares tanked.
Raju explained his reasons for inflating earning in the letter thus: As the promoters held
a small percentage of equity, the concern was that poor performance would result in a
takeover, thereby exposing the gap.
What started as a marginal gap between actual operating profit and the one reflected
in the books of accounts continued to grow over the years, Raju said in the letter. It
has attained unmanageable proportions as the size of the company operations grew
significantly.
Raju was once the poster boy of Indias IT revolutionrubbing shoulders with top CEOs
and politicians across the world, including Bill Clinton.
1987: Thirty three-year-old Raju establishes Satyam Computer with his brother and a
brother-in-law in Hyderabad.
1991: The company is listed on the Bombay Stock Exchange, where its initial public
offering is oversubscribed by as much as 17 times.
1993: Satyam Computer signs a deal with US-based Dun & Bradstreet to set up Dun &
Bradstreet Satyam Software. Satyam holds 24% stake in the venture, while Dun &
Bradstreet holds the remaining. In 1996, Satyam sells its stake to Dun & Bradstreet,
ahead of a restructuring, and the new company is called Cognizant Technologies.
1999: Satyam Info way, a subsidiary of Satyam Computer, becomes the first Indian
information and communication technology company to be listed on Nasdaq, and
Satyam expands footprint to 30 countries.
2006: Satyams revenues cross $1 billion. Raju becomes the chairman of industry body,
The National Association of Software and Services Companies.
2007: Raju is named Ernst & Young Entrepreneur of the Year. The company bags
contract to be the official IT services provider of the FIFA World Cups in 2010 and 2014.
2008: Satyams revenues cross $2 billion. In December, the company decides to buy out
Maytas Infraowned by Rajus sonsfor $1.6 billion. The deal falls through after
investors and board members object, and in a span of four days, four directors of the
company quit. (Maytas is Satyam spelt backwards.)
January 2009: Satyam is barred from doing business with the World Bank for eight
years. The World Bank alleges that Satyam was involved in data thefts and staff bribery.
Shares fall to record low in four years. Satyam employees receive a letter from Raju
admitting to the fraud, following which he resigns as chairman.
Raju and his younger brother B Rama Raju are arrested by police, while the Indian
government steps in and disbands Satyam board.
June 2009: Tech Mahindra, owned by the Mahindra Group, and Satyam merge to form
Indias fifth largest IT exports company. The merged entity is called Mahindra Satyam.
November 2011: Raju gets bail from Indias Supreme Court after the CBI fails to file
charge-sheet.
October 2013: Indias enforcement directorate files a charge-sheet against Raju and 212
others under money-laundering charges.
July 2014: Indias market regulator SEBI bars Raju from the capital markets for 14 years,
and also seeks Rs 1,849 crore as fine.
April 2015: The special CBI court holds Raju and nine other officials guilty of cheating.
Among those held guilty are two former partners at PwC. We are disappointed with this
verdict given by the court of the Additional Chief Metropolitan Magistrate at
Hyderabad, accounting firm PwC said in a statement.
Raju, who also has to pay a fine of about $800,000 (Rs5 crore), has served 32 months in
prison so far.
The 2G Scam
Mobile and allied networks work on specific frequencies allotted to each operator in a
band of frequencies known as a spectrum. . Any particular mobile network will operate
only on the frequencies its been allotted. The Government is responsible for such
allocation. One such allocation in the 2G network spectrum took place in India in the
year 2008 under the able tutelage of the then Telecom Minister A. Raja, which today
we all identify as the 2G spectrum scam. The scam is so magnanimous that today, the
TIME magazine lists it as the 2ndWorst Abuse of Power right next to the Water Gate
Scam of the United States. There are certain pertinent facts about it which exactly show
as to what the scam actually is all about.
One thing to be noted is that the loss of Rs. 1.76 Lakh Crore we hear, is the revenue
that the Government would have generated had it done proper auction of the
spectrum frequencies rather than it being a loss in literal terms. Nevertheless, the
exchequer is 1.76 lakh croreless than what it should have been.
The first fallacy that came to light in the procedure of auction was the fact that the
frequencies were allotted in the year 2008 at prices supposed to be in the year 2001. In
2001, the customer base of mobile phone companies was a mere 4 million, where in
2008, it grew to a staggering 350 million. It can be easily concluded that the basic loss
that has been incurred has been through this faulty and fraudulent auction. Taking
example of two companies, one Unitech and the other Swan Telecom. They were
allotted frequencies at a paltry (yes, thats what this amount of money was) Rs. 1661
crore and Rs 1537 Crores respectively. And after this, these companies sold off their
60% and 45 % shares at staggering Rs. 6200 Crores and Rs 4200 Crores.
This was only the first nail in the coffin. The number of deliberate inconsistencies that
have been played into this matter are alarmingly appalling. Next is the open way in
which these companies (there are a total of nine in number) were unduly favoured. The
Government has been following system of auction based on first come, first serve
policy ever since 1994 in the process of allocation of resources this has been recently
affirmed by the Supreme Court through its Advisory Jurisdiction (Special Reference No.1
of 2012, 27th September 2012). This was blatantly violated. There was a cut-off date till
which the interested companies could apply for licenses citing their particulars and
other requisites. This date was preponed arbitrarily and the website of the Department
of Telecommunications (DoT) stated that those who applied between the time 15:30hrs
till 16:30hrs would be given the licenses. So the companies like Unitech and Swan, who
allegedly had a tip-off regarding the same amendment to the procedure, kept their
documents ready in line, and eventually got the licenses.
Both Unitech and Swan Telecommunications are companies without any prior
experience and of these, Swan could not even fulfil the eligibility criteria. But still, both
were preferred.
The first question that comes to mind is as to what gratification did the then
Telecommunications Minister A. Raja get, and how?
The question is not yet answered as clearly and convincingly, but of what is known, he
has been said to have received a kickback, or bribe, in simple words, of Rs. 214 Crores.
Now here comes the role of Ms.Kanimozhi. Shes not in any telecom business, but owns
around 80% of stake in the channel Kalaignar TV, which inturn was used by Raja and his
associates to route the money that he was to obtain.
The entire conspiracy behind this scam, is only partly unfolded. A. Raja might just be a
pawn in the army of the lead conspirators. The myriad of millions that have been lost as
a result cannot be said to benefit only Raja. It is obvious that there are many more
beneficiaries to this, though they will remain under the veil, as they did during all other
scams we have ever known, be it Bofors or the Tatra Truck scam.
Tatra Scam
Tatra deal was signed around the same time as Bofors. Although Bofors scam was
unearthed within a few years, the Tatra defence scam continued to loot India for around
15 years until an honest Chief of Staff of Indian army, General V K Singh raised it and
tried to stop the loot. Top officials of BEML Limited, a Bangalore-based company, and
the defence ministry have siphoned off at least Rs750 crore in bribes and commissions
over the past 15 years in the purchase of components for Tatra trucks, backbone of the
armys artillery and transportation wings.
While Rajiv Gandhi and VRS Natarajan is suspected of active involvement, Sonia Gandhi
and Antony is accused of trying to keep the scam under wraps and taking no action to
stop the scam even after brought to their notice.
Scam
The deal opting for Tatra trucks was signed in 1986 when Rajiv Gandhi was prime
minister as well as defence minister. Businessman Ravi Rishi who got the deal to
purchase the high-technology Tatra trucks was believed to be a close friend of Gandhi.
Surprisingly another scam of same time the Bofors scam had Ottrovio Quottrocchi who
was a close friend of Sonia Gandhi, Rajiv Gandhi's wife
The Indian Army uses Tatra all-terrain vehicles to mount guided missile launchers and
haul heavy artillery. It also uses these vehicles to transport personnel, supplies, tanks,
ammunition, bailey bridges, and the like. Flouting defence ministry guidelines, BEML,
formerly Bharat Earth Movers Limited, a Rs3,500 crore company in which the
government of India is the majority shareholder, has been buying components for the
6x6 and 8x8 trucks from a middleman in London.
The defence procurement guidelines clearly say all purchases should be made only from
the original equipment manufacturer (OEM). But DNAs investigations show that BEML,
nodal production agency for the family of Tatra trucks, has been dealing with Tatra Sipox
(UK) Ltd, which is neither the OEM nor a subsidiary of the OEM.
This racket has been in operation since 1997. A former employee who held a senior
position in BEML said that so far the company has completed transactions worth
Rs5,000 crore with Tatra Sipox (UK) Limited, purported British subsidiary of Tatra Sipox
as (Slovakia), with at least Rs750 Crore having been paid as kickbacks to BEML and
defence ministry officials.
If a written complaint is what it takes to act, why didnt Antony or his ministry react
when Ghulam Nabi Azad, a senior Congress party colleague and then health minister,
wrote to him on behalf of Sonia Gandhi requesting necessary action in the Tatra
matter? DNA has a copy of Azads letter dated October 5, 2009.
The defence ministrys department of defence production replied on October 22, 2009,
stating that the matter (Tatra trucks deal) is under investigation. I would like to inform
you that the matter is being examined in this ministry the examination may take
some time. As such, the minister [Azad] will be communicated after detailed
examination of the case at appropriate level. It has been over two years since and no
formal investigation followed that initial response.
The letter enclosed a detailed submission from Ashok SN, then assistant general
manager of BEMLs Trucks Division, that clearly established how BEML, the nodal
agency appointed by the government to procure trucks for the Indian army, violated
defence procurement guidelines in the purchase of Tatra trucks. DNA has a copy of this
submission.
I met Sonia Gandhi and defence minister Antony personally to hand over the complaint
and they told me that necessary action will be taken. However, until today, I have not
received any response on what happened to my complaint, said Dr Hanumanthappa.
Azad then forwarded the letter to the defence ministry on behalf of the Congress
president. Azad later commented on the letter, he said did not recollect its contents or
the context in which he had written it and wouldnt be able to comment unless shown
the letter. I wrote several letters after that, also specifically mentioning about the Tatra
truck scam, but these leaders did not respond, said Dr Hanumanthappa.
Besides Antony, even law minister Veerappa Moily was apprised of the scam. Replying
to a similar letter from Dr Hanumanthappa dated September 2, 2009, Moily said: I am
taking up the matter with the ministry concerned . He also failed to do so.
Conclusion
At the end it can be concluded that, the world has become a borderless global village.
The spirit to implement internationally accepted norms of corporate governance
standards found expression in private sector, public sector and the Government
thinking. The framework for corporate governance is not only an important component
affecting the long-term prosperity of companies, but it is critical in terms of National
Governance.
Editors Note: The fundamental attribute of corporate personality, from which all other
consequences flow if that the corporation is a legal entity distinct from its members.This
doctrine has been established for business efficacy, necessity and convenience. In the
doctrine of Lifting the Corporate Veil, the law goes behind the mask or veil of
incorporation in order to determine the real person behind the mask of a company. It is
one of the most widely used doctrines to decide when a shareholder or shareholders
will be held liable for obligations of the corporation and continues to be the most
litigated and most discussed doctrines in all of corporate law. Therefore, a study of the
same through the lens of leading case laws and judgements as done by the authors
would be highly beneficial.
Introduction
Corporate personality has been described as the most pervading of the fundamental
principles of company law. It constitutes the bedrock principle upon which company is
regarded as an entity distinct from the shareholders constituting it. When a company is
incorporated, it is treated as a separate legal entity distinct from its promoters, directors,
members, and employees; and hence the concept of the corporate veil, separating
those parties from the corporate body, has arisen. The issue of lifting the corporate veil
has been considered by courts and commentators for many years and there are
instances in which the courts have deviated from the strict application of this doctrine.
This doctrine has been established for business efficacy, necessity and convenience. In
the doctrine of Lifting the Corporate Veil, the law goes behind the mask or veil of
incorporation in order to determine the real person behind the mask of a company. One
of the main motivations for forming a corporation or company is the limited liability it
offers its shareholders. By this doctrine of limited liability, a shareholder can only lose
only what he or she has contributed as shares to the corporate entity and nothing more.
But for clarity as to Lifting of the Corporate Veil, an understanding of the corporate
personality of a company is required, along with study of the provisions of Indian law
that pave the way for courts to pierce the corporate veil. In this project, we have
attempted to study and analyze the concept of separate legal entity, the various grounds
for piercing of the corporate veil and elements of lifting of corporate veil analyzed
through the lens of leading case laws and judgements.
The fundamental attribute of corporate personality, from which all other consequences
flow if that the corporation is a legal entity distinct from its members. Hence, it is capable
of enjoying rights and of being subjects to duties which are not the same as those
enjoyed or borne by its members. In other words, it has a legal personality and is often
described as an artificial person in contrast with a human being, a natural person. [i] For
centuries, there was a heated controversy over the applicability of the doctrine of
separate legal entity and further to limit the theory of limited liability which is often
metaphorically termed as lifting the corporate veil.[ii] It has also been defined as
piercing the corporate veil: the judicial act of imposing liability on otherwise immune
corporate officers, directors, and shareholders for the corporations wrongful acts.[iii]
Corporate personality became an attribute of the normal joint stock company only at a
comparatively late stage in its development, and it was not until Solomon v. Solomon &
Co.[iv] at the end of the nineteenth century that its implications were fully grasped even
by the courts. Solomon had for many years carried on a sole trader a prosperous
business as a leather merchant. In 1892, he decided to convert it into a limited company
and for this purpose Solomon & Co. Ltd. was formed by Solomon, his wife and five of
his children as members and Solomon as managing director. The company purchased
the business as a going concern for 39,000 which was a sum which represented the
expectations of a fond owner rather than anything that can be called businesslike or a
reasonable estimate of value. The price was satisfied by 10,000 in debentures,
conferring a charge over all the companys assets, 20,000 in fully paid 1shares and
the balance in cash. The result was that Solomon held 20,001 of the 20,007 shares
issued and each of the remaining six shares was held by a member of his family each,
apparently as a nominee for him. The company almost immediately ran into difficulties
and only a year later the then holder of debentures appointed a receiver and the
company went into liquidation. Its assets were sufficient to discharge the debenture but
nothing was left for the unsecured creditors. In these circumstances, Vaughan Williams
J. and a strong Court of Appeal held that the whole transaction was contrary to the true
intent of the Companies Act and that the company was a mere sham, and an alias,
trustee or nominee for Solomon who remained the real proprietor of the business. As
such, he was liable to indemnify the company against its trading debts. But the House of
Lords unanimously reversed this decision. They held that the company has been validly
formed since the Act merely required seven members holding at least one share each. It
said nothing about their independent, or that they should take a substantial interest in
the undertaking, or that they should have a mind and will of their own, or that there
should be anything like a a balance of power in the constitution of the company. Hence,
the business belonged to the company and not to Solomon and Solomon was its agent.
Thus, this case established that provided the formalities of the Act are complied with, a
company will be validly incorporated, even if it is a one person company and the courts
will be reluctant to treat a shareholder as personally liable for the debts of the company
by piercing the corporate veil. Thus, the court held that there was no fraud since the
shareholders were fully conversant with what was being done.
As most of the provisions of Indian Law were borrowed from the English Law, it more or
less resembles the English Law. Solomons case has been the authority ever since in
the decisions of the doctrine in Indian company cases.
Likewise, in Macaura v. Northern Assurance Co. Ltd.[v] the House of Lords decided that
insurers were not liable under a contract of insurance on property that was insured by
the plaintiff but owned by a company in which the plaintiff held all the fully-paid shares.
The House of Lords held that only the company as the separate legal owner of the
property, and not the plaintiff, had the required insurable interest. The plaintiff, being a
shareholder, did not have any legal or beneficial interest in that property merely because
of his shareholding. Support for the doctrine has been exhibited more recently in Lee v.
Lees Air Farming[vi]. The Privy Council held that Lee, as a separate and distinct entity
from the company which he controlled, could be an employee of that company so that
Lees wife could claim workers compensation following her husbands death.
The Supreme Court in Tata Engineering Locomotive Co. Ltd v. State of Bihar & Ors.
[vii]stated: the corporation in law is equal to a natural person and has a legal entity of
its own. The entity of corporation is entirely separate from that of its shareholders; it
bears its own names and has seal of its own; its assets are separate and distinct from
those of its members; the liability of the members of the shareholders is limited to the
capital invested by them; similarly, the creditors of the members have no right to the
assets of the corporation. In some of the cases, judicial decisions have no doubt lifted
the veil. Gower has summarized the position with the observation that in a number of
cases the legislature has rented in many respects, the veil woven by Solomons case.
According to Gower, the courts have only construed the statutes as cracking open the
corporate shell when compelled to do so by the clear words of the statute. Thus, even
in India it can be seen that at present, the consensus is that cracking open the veil is
somewhat cautious and circumspect.
The term piercing the corporate veil has also been described as, the Courts
unwillingness to permit corporate presence and action to divert judicial course of
applying law to ascertain facts. When this principle is invoked, it is permissible to show
[ix]
that the individual hiding behind the corporation is liable to discharge the obligations
ignoring the concept of corporation as a separate entity. Generally, an incorporated
company is liable as a juristic person. It is different from its shareholders and Board of
directors of Company. The acts of malfeasance and misfeasance and acts of
misdemeanor by the shareholders and directors of a corporation (company), do not
always bind the company as such. However so as to apply law to ascertained facts,
judicial process can ignore juristic personality of the company and haul-up the directors
and in certain cases even shareholders to discharge the legal obligations. When the
corporate veil is lifted/pierced, it only means that the Court is assuming that the
corporate entity of a concern is a sham to perpetuate the fraud, to avoid liability, to avoid
effect of statute and to avoid obligations under a contract.[x]
In Skipper Construction Company (Private) Ltd. , the Supreme Court referred to the
[xi]
principle of lifting corporate veil. After referring Palmers Company Law as well as
Modern Company Law by Gower, it was observed as under:-
The concept of corporate entity was evolved to encourage and promote trade and
commerce but not to commit illegalities or to defraud people. The corporate veil
indisputably can be pierced when the corporate personality is found to be opposed to
justice, convenience and interest of the revenue or workman or against public interest.
In LIC of India v. Escorts Ltd.[xii], Justice O.Chinnapa Reddy had stressed that the
corporate veil should be lifted where the associated companies are inextricably
connected as to be in reality, part of one concern. After the Bhopal Gas leak disaster
case, the lifting of corporate veil has been escalated. Furthermore in State of UP v.
Renusagar Power Company[xiii], the Supreme court lifted the veil and held that
Hindalco, the holding company and its subsidiary, Renusagar company should be
treated as one concern and that the Power Plant of Renusagar must be treated as the
own source of generation of Hindalco and on that basis, Hindalco would be liable to pay
the electric duty. After the decision in Renusagar case, the doctrine has been
considered in several other cases.
Just as in the case of Jones v. Lipman[xv] the corporation must be the device through
which the impropriety is conducted, impropriety alone will not suffice.
The circumstances under which the Courts may lift the corporate veil may broadly be
grouped under the following two heads:
Under section 45 of the Companies Act, when the number of members of a company
are reduced below 7 in case of a public company and below 2 in case of a private
company and the company continues to carry on its business for more than 6 months
while the number is so reduced, every person who is a member of such company,
knows this fact, is severally liable for the debts of the company contracted during that
time.
Section 147(4) provides that an officer of a company who signs any Bill of Exchange,
Hundi, Promissory note, cheque, wherein the name of the company is not mentioned in
the prescribed manner, such officer shall be held personally liable to the holder of such
Bill of exchange, hundi, promissory note or cheque as the case may be; unless it is duly
paid by the company.
Fraudulent conduct
The directors of a company are jointly and severally liable to repay the application
money with interest, if the company fails to refund the application money of those
applicants who have not been allotted shares within 130 days from the date of issue of
the prospectus.[xviii]However, this does not in any way affect the very existence of the
company or indeed its subsequent independent personality and other features.
Misrepresentation in prospectus
For facilitating the task of an inspector to investigate the affairs of the company
The Central Government may appoint one or more inspectors to investigate and report
on the membership of any company for the purpose of determining the true persons
who are financially interested in the company and who control its policy or materially
influence it.
Directors and other officers of a company will be personally liable for all those acts
which they have done on behalf of a company if the same are ultra vires the company.
Protection of revenue
In Sir Dinsaw Maneckjee Petit, the assessee was a millionaire earning a huge income
by way of dividend and interest. He formed four private companies and transferred his
investments to each of these companies in exchange for their shares. The dividends
and interest income received by the company was handed back to Sir Dinshaw as a
pretend loan. It was held that the company was formed by the assessee purely as a
means of avoiding tax and companies thus formed were nothing more than the assesee
himself. It did no business and was created as a legal entity simply to extend pretend
loans to Sir Dinshaw. In the case of CIT v. Sri Meenakshi Mills Ltd.,[xxiii] where the veil
had been used as means of tax evasion, the court upheld the piercing of the veil to look
at the real transaction.
Where the medium of a company has been used for committing fraud or improper
conduct, courts have lifted the veil and looked at the reality of the situation. The two
classic cases of the fraud exception are Gilford Motor Company Ltd v.
Horne [xxiv]
and Jones v. Lipman. In the first case, Mr. Horne was an ex-employee of The
Gilford motor company and his employment contract provided that he could not solicit
the customers of the company. In order to defeat this he incorporated a limited company
in his wifes name and solicited the customers of the company. The company brought an
action against him. The Court of appeal was of the view that the company was formed
as a device, a stratagem, in order to mask the effective carrying on of business of Mr.
Horne. In this case it was clear that the main purpose of incorporating the new
company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham
to cloak his wrongdoings. In the second case of Jones v. Lipman a man contracted to
sell his land and thereafter changed his mind in order to avoid an order of specific
performance he transferred his property to a company. Russel J specifically referred to
the judgments in Gilford v. Horne and held that the company here was a mask which
(Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of
equity he awarded specific performance both against Mr. Lipman and the company.
In times of war the court is prepared to lift the corporate veil and determine the nature of
shareholding as it did in the Daimler Co. Ltd. v. Continental Tyre and Rubber Co.,
[xxv] where a company was incorporated in London for the purpose of selling German
tyres manufactured by a German company. Its majority shareholders and all its directors
were German. The English Courts held it to be an enemy company on lifting the veil and
trading with this company was held to amount to trading with the enemy.
Group enterprises
Sometimes in the case of group of enterprises the Solomon principal may not be
adhered to and the court may lift the veil in order to look at the economic realities of the
group itself. In the case of D.H.N. Food products Ltd. v. Tower Hamlets London Borough
Council[xxvi] it has been said that the courts may disregard Solomons case whenever
it is just and equitable to do so. The court of appeal thought that the present case where
it was one suitable for lifting the corporate veil. Here the three subsidiary companies
were treated as a part of the same economic entity or group and were entitled to
compensation. Lord Denning has remarked that we know that in many respects a group
of companies are treated together for the purpose of accounts, balance sheet, and profit
and loss accounts. The nature of shareholding and control would be indicators whether
the court would pierce the corporate veil. The House of Lords in the above mentioned
case had remarked properly applied the principle that it is appropriate to pierce the
corporate veil only where special circumstances exist indicating that it is a mere facade
concealing the true facts In the figurative sense facade denotes outward appearance
especially one that is false or deceptive and imports pretence and concealment. That
the corporator has complete control of the company is not enough to constitute the
company as a mere facade rather that term suggests in the context the deliberate
concealment of the identity and activities of the corporator. The separate legal
personality of the company, although a technical point is not a matter of form it is a
matter of substance and reality and the corporator ought not, on every occasion, to be
relieved of the disadvantageous consequences of an arrangement voluntarily entered
into by the corporator for reasons considered by the corporator to be of advantage to
him. In particular the group enterprise concept must obviously be carefully limited so
that companies who seek the advantages of separate corporate personality must
generally accept the corresponding burdens and limitations.
In Santanu Ray v. Union of India,[xxviii]it was held that in case of economic offences, a
court is entitled to lift the veil and pay regard to the economic realities behind the legal
faade.
When the court finds that company is a mere cloak or sham and is used for some illegal
or improper purpose, it may lift veil. In the leading case of P.N.B. Finance v. Shital
Prasad[xxix], where a person borrowed money from a company and invested it into
three different companies, the lending company was advised to bring together the
assets of all the three companies, as they were created to do fraud with the lending
company. The meaning of a sham was defined by Diplock LJ in Snook v London and
West Riding Investments Ltd.[xxx], thus: it means acts done or documents executed by
the parties to the sham which are intended by them to give to third parties or to the
court the appearance of creating between the parties legal rights and obligations
different from the actual legal rights and obligation (if any) which the parties intend to
create.butfor acts or documents to be a sham , with whatever legal consequences
follow from this, all the parties thereto must have a common intention that the acts or
documents are not to create the legal rights and obligations which they give the
appearance of creating
Control and determination part of the test determines the relationship between the
shareholder and the corporation. Generally, mere majority stock ownership will be
insufficient to satisfy this element. Instead, one must show complete domination, not
only of finances, but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction has no separate mind, will or
existence of its own. To determine the existence of complete domination, courts
usually require the plaintiff to produce evidence of inadequate capitalization or
undercapitalization, failure to follow corporate formalities, commingling of funds,
diversion of funds or assets for non-corporate purposes.[xxxi]
This test requires the plaintiff to show that the control exercised by the parent company
or dominant stockholder was used by the defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiffs legal right. This inquiry focuses on the relationship
between the plaintiff and the corporation. It is an explicit recognition that some improper
conduct must have occurred, establishing that the corporation was controlled and
dominated.[xxxii]
In this test the plaintiff must show that the defendants control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it, caused the harm suffered. In other words,
the plaintiff must prove that, unless the corporate veil is pierced, it will have been treated
unjustly by the defendants exercise of control and improper use of the corporate form
and, thereby, suffer damages.[xxxiii]
Corporations play a significant role not only in creating and managing business but also
in common lives of most people. That is why most modern criminal law systems foresee
the possibility to hold the corporation criminally liable for the perpetration of a criminal
offence. The doctrine of corporate criminal liability turned from its infancy to almost a
prevailing rule. [xxxiv]
In India, the need for industrial development has led to the establishment of a number of
plants and factories by the domestic companies and under-takings as well as by
Transnational Corporations. Many of these industries are engaged in hazardous or
inherently dangerous activities which pose potential threat to life, health and safety of
persons working in the factory, or residing in the surrounding areas. Though working of
such factories and plants is regulated by a 614 number of laws of our country, there is
no special legislation providing for compensation and damages to outsiders who may
suffer on account of any industrial accident. [xxxv]
Earlier, Indian courts were of the opinion that corporations could not be criminally
prosecuted for offenses requiring mens rea as they could not possess the requisite
mens rea. Mens rea is an essential element for majority, if not all, of offenses that would
entail imprisonment or other penalty for its violation. Indian courts held that corporations
could not be prosecuted for offenses requiring a mandatory punishment of
imprisonment, as they could not be imprisoned.
There is uncertainty over whether a company can be convicted for an offence where the
punishment prescribed by the statute is imprisonment and fine. This controversy was
first addressed in MV Javali v. Mahajan Borewell & Co and Ors [xxxviii]
where the Supreme
Court held that mandatory sentence of imprisonment and fine is to be imposed where it
can be imposed, but where it cannot be imposed ,namely on a company then fine will be
the only punishment.
In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd , the court dismissed a complaint
[xxxix]
filed against Zee under Section 500 of the IPC. The complaint alleged that Zee had
telecasted a program based on falsehood and thereby defamed Sahara India. The court
held that mens rea was one of the essential elements of the offense of criminal
defamation and that a company could not have the requisite mens rea. In another
case, Motorola Inc. v. Union of India , the Bombay High Court quashed a proceeding
[xl]
against a corporation for alleged cheating, as it came to the conclusion that it was
impossible for a corporation to form the requisite mens rea, which was the essential
ingredient of the offense. Thus, the corporation could not be prosecuted under section
420 of the IPC.
This is the landmark case in which the apex court overruled the all other laid down
principles. In this case, Standard Chartered Bank was being prosecuted for violation of
certain provisions of the Foreign Exchange Regulation Act, 1973. Ultimately, the
Supreme Court held that the corporation could be prosecuted and punished, with fines,
regardless of the mandatory punishment required under the respective statute.
The Court did not go by the literal and strict interpretation rule required to be done for
the penal statutes and went on to provide complete justice thereby imposing fine on the
corporate. The Court looked into the interpretation rule that that all penal statutes are to
be strictly construed in the sense that the Court must see that the thing charged as an
offence is within the plain meaning of the words used and must not strain the words on
any notion that there has been a slip that the thing is so clearly within the mischief that it
must have been intended to be included and would have included if thought of. [xli]
the question whether a corporate body should or should not be liable for criminal action
resulting from the acts of some individual must depend on the nature of the offence
disclosed by the allegations in the complaint or in the charge-sheet, the relative position
of the officer or agent, vis-a-vis, the corporate body and the other relevant facts and
circumstances which could show that the corporate body, as such, meant or intended to
commit that act
The Supreme Court also pointed out that, as to criminal liability, the FERA statute does
not make any distinction between a natural person and corporations. Further, the Indian
Criminal Procedure Code, dealing with trial of offenses, contains no provision for the
exemption of corporations from prosecution when it is difficult to sentence them
according to a statute. The court held that the FERA statute was clear: corporations are
vulnerable to criminal prosecution, and allowing corporations to escape liability based
on the difficulty in sentencing would do violence to the statute. The Court did not
develop its reasoning far enough so as to specifically hold that a corporation is capable
of forming mens rea and acting pursuant to it. However, the Court held that corporations
are liable for criminal offenses and can be prosecuted and punished, at least with fines.
Many of the offenses, punishable by fines, however do have mens rea as a necessary
element of the offense. By implication, it can be said that post Standard Chartered
decision, corporations are capable of possessing the requisite mens rea. As in
prosecution of other economic crimes, intention could very well be imputed to a
corporation and may be gathered from the acts and/or omissions of a corporation.
that a corporation is virtually in the same position as any individual and may be
convicted under common law as well as statutory offences including those requiring
mens rea. The criminal liability of a corporation would arise when an offence is
committed in relation to the business of the corporation by a person or body of persons
in control of its affairs and relied on the ratio in Standard Chartered Bank Case.
The apex court held that corporations can no longer claim immunity from criminal
prosecution on the grounds that they are incapable of possessing the necessary mens
rea for the commission of criminal offences. The notion that a corporation cannot be
held liable for the commission of a crime had been rejected by adopting the doctrine of
attribution and imputation . [xliv]
In another judgment in July 2011 of CBI v. M/s Blue-Sky Tie-up Ltd and Ors , the apex
[xlv]
court reiterated the position of law held that companies are liable to be prosecuted for
criminal offences and fines may be imposed on the companies.
International Scenario
Germany
A basic principle of German law is societas delinquere non potest, which means that a
corporate body cannot be liable for a criminal offence. The argument is that the human
element is missing and that the creation and operation of slush funds, as well as giving
bribes, are all human acts and not the acts of the company itself. [xlvi]
But Germany has
developed an elaborate structure of administrative sanctions, which includes provisions
on corporate criminal liability. These so-called Ordnungswidrigkeiten are handed down
by administrative bodies. The key provision for sanctioning the corporation is Section 30
Ordnungswidrigkeitengesetz, which calls for the imposition of fines on corporate entities.
[xlvii]
Australia
The criminal sanctions are quite high and criminal liability of a company is recognized by
the Australian Legislation . Moreover, the Australian legislature has introduced criminal
[xlviii]
liability of directors.
France
France had also not recognized corporate criminal liability since the French Revolution,
the new Code Pnal of 1992 makes specific mention of this concept in section 121(2).
The resistance to not including corporate criminal liability in the criminal code had
increased over the years, and in 1982 the Conseil Constitutionnel had made it clear
that the French Constitution did not prohibit the imposition of fines on a corporation. [l]
International Conferences
The Seventh United Nations Congress on the Prevention of Crime and the Treatment of
Offenders of 1985 in Milan mentioned that due consideration should be given by
Member States to making criminally responsible not only those persons who have acted
on behalf of an institution, corporation or enterprise, or who are in a policy-making or
executive capacity, but also the institution, corporation or enterprise itself, by devising
appropriate measures that could prevent or sanction the furtherance of criminal
activities.
[lii]
In 1998, the Council of Europe passed the Convention on the Protection of the
Environment through Criminal Law, which stipulated in Article 9 that either criminal or
administrative, sanctions or measures could be taken in order to hold corporate entities
accountable. [liii]
Lifting the Corporate Veil in Taxation matters
The doctrine of piercing or lifting of the veil of a Corporate Personality makes a change
in the attitude of law as originally adopted towards the concept of separate legal
personality or entity of the corporation. In Ansuman Singh v. State of U.P. , the court [liv]
held that in suitable cases, the court will lift the corporate veil.
It may happen that the corporate personality of the company is used to commit frauds or
improper or illegal acts like tax evasion. Thus, the concept of piercing or lifting the
corporate veil holds significance. A corporate veil may be pierced either through
statutory provisions or by judicial interpretation. Piercing the corporate veil in taxation
matters is an outcome of judicial decisions. The court has the power to disregard the
corporate entity if used for tax evasion or to circumvent tax obligation. [lv]
The veil has also been lifted after finding that a corporation is merely an adjunct,
business conduit or alter ego of another corporation or person. When the veil is pierced,
the other entity, or the directors, officers, stockholders or members of the corporation,
could be held solitarily and personally liable for corporate obligations. [lvi]
When any private company is wound up any tax assessed on the company whether
before or in course of liquidation, in respect of any previous year cannot be recovered,
every person who was director of that company at any time during the relevant previous
year shall be jointly and severally be liable for payment of tax.
A company transferred its business to another company which was not taxable, but the
company was carrying on some other business which was taxable. The company
remained liable to pay the tax applicable to such business and lifting of Corporate Veil
was permitted even in the absence of any statutory provision in this regard. [lvii]
In the case of Richer Holding Ltd. (RHL) , the issue before the High Court was whether
[lviii]
RHL was obliged to withhold tax on the consideration paid for acquisition of 60% of the
shares in a UK company that held a majority stake in an Indian Company. The High
Court rejected the petition filed by RHL against the show cause notice by the Tax
Authority since it was premature it was premature at this stage to arrive at a conclusion
that there is no avoidance of tax obligations and RHL was not liable to tax on capital
gains. The High Court also observed that it may be necessary for the Tax Authority to lift
the Corporate Veil as well as examine the extent of powers the majority shareholder had
in the interest/assets of the Indian Company to look into the real nature of the
transaction.
company) held 100% shares of CGP Investments Holdings Ltd. (non-resident company)
which in turn held 67% shares in the Indian company Hutchinson-Essar. The question
which arose was, whether the income accruing to Hutchinson as a result of the
transaction could be deemed to accrue or arise in India by virtue of Sec. 9 of the Income
Tax Act. In Vodafone, the High Court answered all issues against Vodafone. However,
final and concrete conclusions cannot be drawn as the judgment was not dealing with
the taxability of the transaction.
In Santanu Ray v. UOI , it was held that in case of economic offences the court is
[lx]
entitled to lift the corporate veil and pay regard to the economic realities behind the legal
faade. The court held that the veil of corporate entity could be lifted by the adjudicating
authorities so as to determine as to which of the directors were concerned with the
evasion of excise duty by reason of fraud, concealment or wilful misstatement or
contravention of the provisions of the Act.
generally treated as separate entities for tax purposes, no matter how closely they may
be affiliated, as in the case of a parent and wholly owned subsidiary. Only in [lxii]
exceptional circumstances will courts ignore the separate existence of Corporations. [lxiii]
must be satisfied: relations with the corporation`s principal must not be dependent on
the fact that it is owned by the principal, and its business purpose must be carried on of
normal duties of an agent. Where a corporation qualifies as a non-taxable agent,
[lxvi]
When the owner of one directs and controls the operations of the other, and the
payments effected or received by one are for the accounts due from or payable to the
other; or
When the properties or products of one are all sold to the other, which, in turn,
immediately sells them to the public.
In this case, the sole proprietor was held liable for tax liabilities of the corporation after
finding overwhelming evidence supporting the piercing of the corporate veil. Such
evidence consists of several admissions by the sole proprietor and his wife, and
documents presented in evidence showing that the identities of the sole proprietorship
and the corporation are interchangeable.
It is also worth noting that corporate fiction is pierced not only on the basis of fraud but
also in alter-ego cases where a dummy corporation serves no business purpose other
than as a blind. In at least two cases, the Supreme Court disregarded the veils of
corporate fiction after finding that while the organization of a separate corporation was
not to perpetuate fraud, the clear intention was to minimize taxes.
Whether or not a corporation a separate entity form the individual who created the
corporation is not the same question as whether it was an alter ego for the purpose of
piercing the corporate veil and holding the individual liable for its taxes; and a finding of
separate taxable entity does not preclude personal assessment against the individual. [lxix]
A corporation is subject to federal corporate income tax liability as long as it continues to
do business in the corporate manner, despite the fact that its recognized legal status
under state law is voluntarily or involuntarily terminated; and a valid corporation will be
[lxx]
disregarded for federal tax purposes only after the state has revoked its charter. [lxxi]
A
liquidating corporation continues its federal tax existence so long as it retains valuable
assets.
The new Direct Tax Code (hereafter DTC) replaced the Income Tax Act, 1961 with effect
from 1st April, 2012, the basic objective behind its enactment being simplification of the
language so as to enable better comprehension thereby reducing the number of law
suits. Significant among the provisions that it introduced, are the provisions aimed at
tackling the problem of tax avoidance since this has been resulting in a major loss of
revenue for the government. Certain legislative amendments had been made earlier to
counter this particular problem but did not prove very effective since the tax payers
found sophisticated methods to get passed them thereby necessitating further changes.
The current Income Tax Act 1961 marks a difference between Tax avoidance and tax
evasion. Tax evasion refers to a situation where a person tries to reduce his tax liability
by deliberately suppressing the income or by inflating the expenditure. An assessee
guilty of tax evasion is punishable under the relevant laws. On the other hand tax
avoidance refers to any planning, though done strictly according to legal requirements
but destroys the basic intention of the statute; the assessee will be punishable under
such circumstances only in the event of colourable device. [lxxii]
Conclusion
The doctrine of piercing the corporate veil is not subject to any bright line tests. Courts
have struggled for years to develop and refine their analysis of these claims. However,
each new action brings a different set of facts and circumstances into the equation and
a separate determination must be made as to whether the plaintiff has adduced
sufficient evidence of control and domination, improper purpose, or use and resulting
damage. The decision whether to pierce the corporate veil may be assisted, at least in
part, upon the opinion of qualified experts. In particular, expert testimony would be
helpful to the trier of fact in determining whether the corporation has been adequately
capitalized for its intended purpose. Ultimately, however, the judgment whether to
disregard the corporate entity will be based upon a balancing of various factors all or
some of which are necessary but may not be sufficient to pierce the veil.
The act of piercing the corporate veil until now remains one of the most controversial
subjects in corporate law. There are categories such as fraud, agency, sham or facade,
unfairness and group enterprises, which are believed to be the most peculiar basis
under which the Law Courts would pierce the corporate veil. But these categories are
just guidelines and by no means far from being exhaustive.
As has been widely reported, the Supreme Court rejected all the contentions of the two Sahara
companies (Saharas) against the order of SAT which in turn was against the order of SEBI. The matter
of course is far more complex than being a linear sequence of orders and appeals and has several
detours to Allahabad and other courts but, in essence, it is sufficient to consider this series of Orders only.
The decision of the Supreme Court covers many important issues and, to clarify at the outset, this is only
to highlight some important aspects of the decision. The decision covers many important areas of
powers of SEBI, of what constitutes an issue to the public, of the sanctity of Guidelines of SEBI and so
on. There are concerns about the dubious role that the Registrar of Companies performed. The Supreme
Court also appears to have endorsed the possibility of criminal action against the Saharas. These and
other issues may need separate legal analysis as to its scope and implications. Further, the progress of
implementation of the order of the Supreme Court in terms of payment of refund monies into the
designated bank, identification of the OFCDs holders, etc. will have to be seen. There are reports that the
Saharas may pursue further litigation and hence this matter may develop even further.
The essential facts are summarized in a simplified manner below. However, one preliminary thought
comes to mind. The facts are quite glaring and extreme. The Saharas offered their Optionally Fully
Convertible Debentures (OFCDs) to crores of people, hiring lakhs of agents through thousands of
branches and raised tens of thousands of crores of rupees. And then they claimed, clearly on technical
grounds, that there was no issue of securities to the public that would result in need for compliance of
SEBI Regulations and other laws for disclosure, investor protection, etc. Further, they refused to provide
information to SEBI and adopted delaying tactics. In face of such facts, one wonders whether the decision
which rejects every contention of the Saharas and even removing several creases and gaps in law in
the process could be interpreted to some extent as restricted to the facts of the case.
To come to the facts, the Saharas, as the Supreme Court records, sought to raise funds through
Optionally Fully Convertible Debentures (OFCDs). They filed/circulated an information memorandum/
Red Herring Prospectus with the Registrar of Companies but no documents with SEBI. It took a view that
issue of shares to a group of people described in an extremely broad manner did not amount to an
issue to the public requiring compliance with the provisions of the Companies Act, 1956, the SEBI Act and
Regulations, etc. that dealt with public issues. The Saharas, however, appointed about 10,00,000 agents,
opened 2900 branches and offered the OFCDs to crores of people, and issued the OFCDs to some 66
lakhs people (it appears actual figures may be even higher). Contrast this with the maximum limit of 49
offerees permitted under Section 67(3) of the Companies Act, 1956, beyond which the offer would
become a public offer.
When the Sahara Group filed an offer document through merchant banker for a public issue of shares of
another group company, SEBI, having come to know through this offer document of the earlier issues of
OFCDs, made preliminary inquiries with the merchant banker. The merchant banker essentially replied,
relying on legal opinions, that the earlier issues of OFCDs were in compliance of law but did not provide
more details. When SEBI pursued the matter further with the Saharas, they insisted that SEBI had no
jurisdiction and that they had complied with the law and would respond only to the Registrar of
Companies. In what was seen to be further delaying tactics, they claimed that the issue as to whether
they are liable to provide information to SEBI was pending determination before the Law Ministry and
SEBI should wait till the matter was resolved. This resulted in gathering of information by SEBI from ROC
documents and passing of certain orders by SEBI, petitions before High Court, etc. and finally, the Order
by SEBI which, alongwith the Order on appeal by SAT was upheld by the Supreme Court.
Several issues were raised before the Supreme Court. The rulings of the Supreme Court and their
implications would need far more detailed analysis and at this stage, some important of these issues and
rulings are highlighted below.
Was the offer of OFCDs by the Saharas a private placement or an issue to the public?
It was noted that the offer was made to friends, associates, group companies, workers/ employees and
other individuals associated/affiliated or connected in any manner with Sahara India Group of
Companies. These persons in reality turned out to be nearly 3 crores in number. When finally details of
the allottees were provided, the Supreme Court was dissatisfied with the details and noted that the front
page was enough to cast doubt on the genuineness of the persons. An allottee was named merely
Kalavati and the person introducing her was named Haridwar. No details were provided how the
allottees even formed part of the group described above.
It was held that in view of the first proviso to Section 67(3), offer to more than 49 persons would be
deemed to be an offer to the public. The fact that the offer was clearly made to more than 49 persons
attracted this provision. Apart from the offer to more than 49 conditions, another preceding that the offer
should have been made as a matter of domestic concern between the persons making and receiving the
offer was also not satisfied in view of the extremely broad description of the offerees. Further, since the
OFCDs were transferable, yet another preceding condition that the offer should not be calculated to be
received by persons other than the offerees was also not satisfied.
Thus, the offer was clearly a offer to the public under Section 67(3) of the Companies Act, 1956.
Whether there was violation of rules of natural justice in the Order of SEBI (FTM) as held by SAT?
This issue was not pursued before the Supreme Court though held against SEBI by SAT. However, the
Supreme Court still felt it appropriate to consider this issue.
SEBI, on basis of certain investor data made available, had approached randomly four of the investors. It
found that two of the investors were not traceable. The other two stated that they had invested because
agents approached them. SEBI held that thus this showed that the offer was made to the public and not
even to the broadly described group. SAT held that relying on such findings without providing them to the
Saharas and giving them an opportunity to rebut them amounted to violation of the rules of natural justice.
The Supreme Court held that this was not correct. The rules of natural justice were available only to a
party which has itself been fair, and therefore, deserves to be treated fairly. The Saharas had not at all
cooperated with SEBI in providing the data despite having been provided with several opportunities.
Further, instead of countering the findings of SEBI with correct data, it merely contested this issue on the
basis that the rules of natural justice were violated.
Thus, it was held that the Order of the SAT on this aspect could not be sustained.
Whether the OFCDs which admittedly were hybrids, were securities and hence amenable to jurisdiction
of SEBI?
The Saharas contrasted the definition of securities under the SEBI Act/SCRA and the Companies Act,
1956 to submit that the term securities under the SEBI Act/SCRA did not cover hybrids while that under
the Companies Act, 1956, covered it. Reliance was placed on the definition under the Companies Act,
1956, which reads:-
2(45AA) securities means securities as defined in clause (h) of section 2 of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), and includes hybrids; (emphasis supplied)
Thus, it was argued by Saharas that since hybrids were specifically included as an addition, it showed
that the basic definition of securities under SCRA could not have included hybrids. Thus, in short, the
OFCDs, being hybrids were governed only by the Companies Act, 1956, and SEBI who obtained
jurisdiction under the SEBI Act/SCRA, could not govern issue of securities.
The Supreme Court first held that since under Section 55A, SEBI had powers to administer various
specified provisions of the Companies Act, 1956, in matters of issue of securities and since securities
specifically included hybrids, SEBI did have jurisdiction to that extent.
Then, the Supreme Court examined the definition of hybrid under the Companies Act, 1956, and noted
that it covered any security that had the character of more than one type of security including their
derivatives. The definition under SCRA defines securities inclusively and not exhaustively. Since, by
definition, a hybrid is a security, it is covered by definition of securities under SCRA. Further, securities
under SCRA included other marketable securities of a like nature and thus hybrids would be once again
be covered. It was particularly noted that the OFCDs were transferable, i.e., marketable as understood
in this context.
Thus, hybrids were held to be securities under SCRA too and hence SEBI was held to have jurisdiction
over them.
It is submitted that this does not fully explain why the definition under the Companies Act, 1956,
specifically included hybrids.
The Saharas argued that under Section 60B, there was clear demarcation of listed and unlisted
companies and unlisted companies were required to file the RHP only with the Registrar of Companies.
The Saharas were neither listed nor intended to be listed. SEBI countered that Section 73 clearly requires
that a company seeking to offer securities to the public has to apply for listing to the stock exchanges.
The Supreme Court read Section 60B and Section 73 harmoniously and held that it was concluded by it
earlier that the offer was indeed an offer to the public. In view of this, there was no option left in manner of
applying for listing. Listing was an inevitable consequence of such an offer and thus not optional but
mandatory. Requirement of listing automatically brings in the jurisdiction of the SEBI, as it transforms a
public company into a listed public company and thus covered by Section 60B too.
Whether Section 55A gave powers to SEBI to administer specific provisions on unlisted companies that
did not intend to get their securities listed?
Section 55A gives powers to SEBI to administer certain provisions in case of listed companies and
unlisted companies that intended to get their securities listed on recognized stock exchanges. The
Saharas were neither listed nor, they claimed, they intended to get listed. This was even clearly specified
in various documents.
The Supreme Court held that intention could not be grasped and determined out of context of the actions
of the Saharas. The Saharas did make an issue to the public. Such a public issue necessarily resulted in
their being mandatorily required to get such securities listed. Thus, there is a deemed intention since they
could not carry out acts which require listing and then claim that they do not intend to list their securities.
Even otherwise, the Supreme Court held, Section 11 of the SEBI Act was wide enough to give powers to
SEBI to protect the interest of investors in securities and to regulate the securities markets by such
measures as it thinks fit. This is wide enough to give powers to SEBI under the present facts. Later
provisions of the Act do state that SEBI has certain powers over other persons associated with the
securities markets and public companies which intend to get their securities listed on recognized stock
exchanges. Even if these are taken to be restrictions for those sections and purposes, they do not apply
to the former provisions. Thus, SEBI has adequate powers to govern the unlisted Saharas.
Furthermore, Section 11A is even more specific in matters of issue of prospectus, etc. Section 11B/11C
reinforce this conclusion that SEBI has powers to govern listed and unlisted companies. Being a stand
alone statute, the SEBI Act cannot be limited even by the provisions of the Companies Act, 1956.
Thus SEBI had jurisdiction to regulate and administer the unlisted Saharas.
Whether the SEBI DIP Guidelines had statutory force or were mere departmental instructions?
The Supreme Court held that the DIP Guidelines did have statutory force and that the OFCDs were
issued in contravetion of the DIP Guidelines as also of the SEBI ICDR Regulations that succeeded them.
Whether there was a pre-planned attempt by the Saharas to by pass the regulatory and administrative
authority of SEBI in respect of issue of OFCDs?
It was pointed out by SEBI that the Saharas had modified the explicit format of declaration required to be
given in the prescribed format. The prescribed format required the companies issuing a prospectus to
state, inter alia, that the guidelines of SEBI have been complied with and no statement is made contrary
to the provisions of the SEBI Act or rules made thereunder or guidelines issued thereunder. The Saharas
omitted these declarations. There was further attempt to misguide by stating that the offer was by way of
private placement when the invitation was extended to approximately 3 crores persons. The Supreme
Court said that it certainly seemed so that there was a pre-planned intention to bypass the regulatory and
administrative authority of SEBI.
The manner of issuing the information memorandum/RHP showed that the procedure adopted was
obviously topsy-turvy and contrary to the recognized norms in company affairs. All this made, the
Supreme Court said, the entire approach of the Saharas calculated and crafty.
Their repeated refusals to share information and their non-cooperation, the unrealistic and possibly
fictitious information provided and other similar factors made the Supreme Court to also state that the
whole affair was doubtful, dubious and questionable.
Accordingly, the Supreme Court upheld the proceedings initiated by SEBI and the Orders of SEBI and
SAT. It upheld the Order of SAT for refund of the amounts collected by issue of OFCDs alongwith interest
@ 15% per annum. Mechanism was laid down to ensure this including deposit of the amounts with a
nationalized bank, appointment of a retired Judge of the Supreme Court to oversee the process and
several other directions for safeguarding various interests.
List of abbreviations:-
Saharas the two Sahara Companies (i) Sahara India Real Estate Corporation Limited and (ii) Sahara
Housing Investment Corporation Limited.
SEBI ICDR Regulations Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements), 2009
SEBI DIP Guidelines Securities and Exchange Board of India (Disclosure and Investor Protection)
Guidelines 2000