Supreme Court, SEBI & Sa­hara In­dia: The In­vestor Fraud Case

Libertatem Magazine - - Contents - By Khushbu Shah

The SEBI v. Sa­hara In­dia Case, on­go­ing case since 2009, is one of the most riv­et­ing cor­po­rate cases in re­cent times. What be­gan as an in­nocu­ous let­ter point­ing out a dis­crep­ancy in the Draft Red Her­ring Prospec­tus (here­inafter re­ferred to as DRHP) of Sa­hara, soon snow­balled into un­cov­er­ing il­le­gal scheme of pub­lic of­fer­ing made by the com­pany. Then be­gan a tor­rent of fee­ble de­fenses and a per­pet­ual scram­ble for loop-holes which were fi­nally shut off by the Supreme Court of In­dia by its judge­ments. Not just one but mul­ti­ple Courts and Govern­ment author­i­ties were en­gaged in this high-pro­file saga. How­ever, with the re­cently held auc­tion Sa­hara’s flag­ship project, Aamby Val­ley, the end does not seem to be any­where around the corner.


Sa­hara Pari­var on 29th Septem­ber, 2009 of­fi­cially filed a DRHP with the Regis­trar of Com­pa­nies for its real es­tate com­pany Sa­hara Prime City Ltd (here­inafter re­ferred to as SPCL). The act of rais­ing money from pub­lic through the in­stru­ment of shares is known as Ini­tial Pub­lic Of­fer­ing (IPO). It is per­mit­ted to be un­der­taken only by listed com­pa­nies un­der the su­per­vi­sion of SEBI. SEBI be­ing a reg­u­la­tory author­ity, scru­ti­nizes de­tails of the pub­lic is­sue, the sound rea­son, and looks into the fi­nan­cial po­si­tion be­fore any com­pany is al­lowed to roll out its IPO in share mar­ket. This is a stan­dard reg­u­lat­ing prac­tice of the Apex mar­ket reg­u­lat­ing body of In­dia. The main ob­jec­tive is to keep in check the mal­prac­tices and safe­guard the in­ter­est of the in­vestors.

The DRHP sub­mit­ted to SEBI is not a con­fide­tial agree­ment and is up­loaded on its web­site. It is read­ily made avail­able to the pub­lic. The ra­tio­nale is that SEBI, be­ing the sole cap­i­tal mar­ket reg­u­lat­ing body, can­not pur­sue these doc­u­ments alone. The prospec­tus at times runs into thou­sands of pages. It is in­deed, a her­culean task. Ad­di­tion­ally, even if it ac­ci­den­tally misses out on any fact, de­tail or fig­ure, it is jeop­ar­diz­ing in­ter­est of mil­lions of in­vestors. To pre­clude from any un­to­ward in­ci­dent, it up­loads the prospec­tus on its of­fi­cial web­site. Fur­ther­more, it opens win­dow for the pub­lic to raise con­cerns about the ac­counts of fi­nan­cial sit­u­a­tion. It aids the reg­u­lat­ing body in its func­tion. This pro­ce­dure has been in prac­tice since 1995-96.

The DRHP of Sa­hara Prime City Ltd was no ex­cep­tion. It was up­loaded and was open to the pub­lic. It is a 779-page long doc­u­ment con­tain­ing rel­e­vant fi­nan­cial, le­gal and other in­for­ma­tion about the com­pany. How­ever, the DRHP of Sa­hara Prime City Ltd was unique in the sense that on its page 640, in 49th para, was tucked away a sim­ple piece of in­for­ma­tion which changed the en­tire fate of the com­pany as well as its par­ent com­pany, Sa­hara In­dia Pari­var.

This was first pointed out by Roshan Lal of In­dore on 4th Jan­uary, 2010. In a 1.5 page long let­ter ad­dressed to the Na­tional Hous­ing Bank, Lal brought to light the de­tails on 640th page of DRHP. The same was pointed out in an­other in­stance. This time by the Pro­fes­sional Group for In­vestors Pro­tec­tion, Ahmedabad

It stated that Sa­hara, be­ing an un­listed com­pany, was rais­ing huge pub­lic money. It was done by the means of the Op­tion­ally Fully Con­vert­ible Deben­tures (here­inafter re­ferred to as the OFCD). These are hy­brid deben­tures, whereby ini­tially the in­vestor is a debtor of the com­pany but, can own a part of the com­pany by be­com­ing the share­holder. How­ever, this can oc­cur only within a stip­u­lated time. He/she has an op­tion to con­vert their deben­ture bond into shares of the com­pany. Af­ter that they can en­joy all rights a share­holder has.

The 640th page of the DRHP stated that there ex­isted a pend­ing dis­pute be­tween the In­come Tax De­part­ment and Sa­hara for col­lect­ing pub­lic money by the way of OFCD. The mat­ter is pend­ing be­fore the Com­mis­sioner of In­come Tax (Ap­peals), New Delhi.

This alerted SEBI against il­le­gal and unau­tho­rized rais­ing of money from the pub­lic. SEBI was not only ver­i­fy­ing and look­ing into the depth of the is­sue but also de­cid­ing on the fate of Sa­hara Prime City Ltd in grant­ing them the author­ity to legally raise money from the pub­lic.

Af­ter a few months, SEBI banned the Com­pany from is­su­ing any share or rais­ing any money from the pub­lic. It also de­manded the Com­pany to co-op­er­ate with the in­ves­ti­ga­tion and furnish any de­tail re­quired. Sa­hara now at­tempted to evade an­swer­ing the SEBI and wade their ju­ris­dic­tion.

In the en­su­ing tus­sle, Sa­hara made a suc­cess­ful at­tempt by get­ting a stay or­der on the SEBI’S or­der from the Allahabad High Court on 13th De­cem­ber, 2010. Sa­hara also re­fused to delve ei­ther any in­for­ma­tion or to co-op­er­ate with SEBI. The Com­pany has based its ar­gu­ments on Sec­tion 55A and Sec­tion 60 B of the Com­pa­nies Act, 1956.

Sec­tion 55A of the Com­pa­nies Act, 1956 which dis­cusses the spe­cial pow­ers states that SEBI is em­pow­ered to seek in­for­ma­tion only from the listed com­pa­nies. Since the ap­pli­ca­tion of Sa­hara Prime City Ltd to go Pub­lic and get listed is still pend­ing, SEBI has no right to seek an­swers or any in­for­ma­tion from the Sa­hara Prime City Ltd. Sec­tion 60B states that if the Com­pany files the prospec­tus with the Regis­trar of Com­pa­nies, it can raise money of which SEBI has no ju­ris­dic­tion.

How­ever, this vic­tory was short lived as the judg­ment was over­turned on 4th Jan­uary, 2010. While over­turn­ing the judge­ment, the Supreme Court of In­dia rep­ri­manded the Allahabad High Court for its judge­ment which was in­un­dated with bi­ases and ex­tra­ne­ous con­sid­er­a­tion. The Supreme Court of In­dia laid down a land­mark and com­mend­able prece­dent.

The is­sue con­cern­ing the ju­ris­dic­tion of SEBI over a non-listed com­pany was ad­dressed in the light of Sec­tion 55A (c) of Com­pa­nies Act. The Court stated that this sec­tion gave spe­cial pow­ers to SEBI. It em­pow­ers SEBI to in­ves­ti­gate and ad­ju­di­cate mat­ters on se­cu­ri­ties wherein in­vestor’s in­ter­est is at stake. Em­pha­sis was laid down on leg­isla­tive in­tent be­hind the sec­tion and thus, SEBI had ju­ris­dic­tion over mat­ter of listed pub­lic com­pa­nies to get their se­cu­ri­ties listed.

How­ever, this alone would not em­power SEBI to get the ju­ris­dic­tion in Sa­hara case, as it was im­per­a­tive for ex­change, is­sue or trans­fer of se­cu­ri­ties. The Supreme Court stated that OFCDS is­sued by the com­pany, claimed to be pri­vately placed, were se­cu­ri­ties. Sec­tion 67(3) of the Com­pa­nies Act speaks briefly that when any se­cu­rity is of­fered to and sub­scribed by more than 50 per­sons, it will be deemed to be a Pub­lic Of­fer. The ar­gu­ment of Sa­hara that the OFCDS were pri­vately placed and only peo­ple re­lated to the Com­pany were in­vestors, could not sus­tain. The com­pany was held in vi­o­la­tion of the Sec­tion 67(3) of the Com­pa­nies Act as it trans­gressed the statu­tory limit as­cer­tained un­der the Sec­tion. This vi­o­la­tion at­tracted civil as well as crim­i­nal li­a­bil­ity. Sec­tion 73 man­dates that all pub­lic of­fer­ing shall oc­cur only through the chan­nel of a rec­og­nized Stock Ex­change. Since, the OFCDS is­sued by Sa­hara were not of­fered through the pre­scribed le­gal chan­nel, they were deemed il­le­gal.

Supreme Court of In­dia widened the am­bit in­ter­pret­ing the mean­ing of “se­cu­ri­ties”. It in­ter­preters the word so as to in­clude hy­brid in­ter­ments like OFCD along with the con­ven­tional in­stru­ments. Thus, SEBI

This judge­ment was land­mark in the re­gard that it cleared the air re­gard­ing the con­flict­ing ju­ris­dic­tion of Cor­po­rate of Min­istry and SEBI. It also filled the grey area con­cern­ing ju­ris­dic­tion of the se­cu­ri­ties of Un­listed Com­pany. Both, Min­istry of Cor­po­rate Af­fairs and SEBI had con­cur­rent ju­ris­dic­tion over mat­ters in­volv­ing pub­lic in­ter­est.

Sa­hara landed in deep trou­ble as SEBI asked her to refund all money col­lected through the OFCD, along with 15% in­ter­est. This de­ci­sion of SEBI was re­it­er­ated by the Supreme Court of In­dia on 31st Au­gust, 2012.

Not only had SICCL raised money through OFCD, but also Sa­hara Hous­ing Investment Corp. Ltd (here­inafter re­ferred to as SHICL) pro­lif­er­ated the num­ber of in­vestors which came close to 30 Mil­lion and the to­tal fund was around Rs. 24,000 Crores. Both the com­pa­nies were or­dered to re­turn the money col­lected through the OFCDS.

The Com­pany was or­dered to refund Rs. 17,500 Crores with 15% in­ter­est within the pe­riod of 90 days. The Com­pany claimed that it had re­turned fund to 90% of its in­vestors. SEBI was asked to look into cred­i­bil­ity of the claim and also en­sure that the rest of the in­vestors re­ceived their money back. The Com­pany was to pro­vide de­tails with sup­port­ing doc­u­ments to SEBI about the sub­scribers and in­vestors. The pro­claimed re­funds were made to the in­vestors, within ten days i.e by Septem­ber 10, 2012. No crim­i­nal sanc­tions were is­sued against the pro­mot­ers, direc­tors or the Com­pany. The dead­line fixed for re­fund­ing the money col­lected from the pub­lic by two Sa­hara com­pa­nies un­der the OFCD scheme was Novem­ber 30, 2012.

The Court stated if SEBI did not find the sup­port­ing doc­u­ments claim­ing the re­turn to the in­vestors, it would be pre­sumed that the money was not re­turned. If the in­vestors were not found to be gen­uine, the money owed to the Com­pa­nies would be trans­ferred to the Con­sol­i­dated Fund of In­dia. The Court had ap­pointed re­tired judge Jus­tice BN Agrawal to over­see the en­tire mat­ter of re­turn­ing the funds. Also, the court em­pow­ered SEBI to take suit­able ac­tions to re­cover money from Sa­hara in case it de­faulted.

Sa­hara did com­ply with the or­der of the Hon’ble Supreme Court. Septem­ber 10, 2012, which was the last day for send­ing doc­u­ments and pro­vid­ing in­for­ma­tion to SEBI, was quite phe­nom­e­nal, event­ful and more­over a dra­matic day. The doc­u­ments from Sa­hara had reached SEBI’S head­quar­ters lo­cated in Mum­bai on this day. They ar­rived, loaded in 127 Trucks, piled up in 31,000 car­tons car­ry­ing in­for­ma­tion of all 30 mil­lion sub­scribers of the OFCD. The reg­u­lat­ing body was in­un­dated with 120 tonnes of doc­u­ments.

Ir­re­spec­tive of the mo­tive, in­ten­tion and agenda be­hind the act, Sa­hara ended up pay­ing the en­tire ex­pense of stor­ing, pro­cess­ing and dig­i­tiz­ing the data. This was a Court or­der. SEBI, in or­der to process, store and

scru­ti­nize these doc­u­ments had to en­gage the ser­vices of Stock Hold­ing Cor­po­ra­tion of In­dia Ltd (SHCIL) for their ware­house fa­cil­ity. It had in­curred an ex­pense of about Rs. 41 Crores.

It was only af­ter the ver­i­fi­ca­tion be­gan, rep­e­ti­tion of names, in­com­plete ad­dress and other dis­crep­an­cies in the in­for­ma­tion of the sub­scribers came to light. As re­ported by NDVT in 2013, around 45-50 peo­ple, with 80 scan­ning ma­chines were em­ployed to ex­pe­di­tiously study and an­a­lyse the doc­u­ments. The ex­pense of their salary too was borne by Sa­hara.

In or­der to clar­ify the claims of Sa­hara of al­ready re­turn­ing the money to in­vestors, SEBI wrote to 20,000 of the sub­scribers. In the let­ter, they were asked to ap­ply for refund. As­ton­ish­ingly, only 68 of them replied. The doc­u­ments con­tained around 1,433 Anirudh Singhs, 5,984 Kal­watis and 13,000 Atal Bi­hari Va­j­pay­ees.

How­ever, the main concern of the Supreme Court was that, Sa­hara was ap­proach­ing var­i­ous fo­rums for re­lief and ap­peal­ing against its or­ders. A bench com­pris­ing by Jus­tices KS Rad­hakr­ish­nan and JS Khe­har rep­ri­manded Sa­hara for ap­proach­ing Allahabad High Court against the or­der of the Apex Court in April, 2013. The or­der de­manded at­tach­ing prop­erty of two Com­pa­nies in case they failed to de­posit Rs. 24,000 crores with SEBI. Also, Sa­hara had ap­proached SEBI and Se­cu­ri­ties Ap­pel­late Tri­bunal (SAT), re­quest­ing for ex­ten­sion for dead­line. “You are ma­nip­u­lat­ing court which is go­ing on,” said the bench. The com­pany was held in con­tempt of SEBI’S or­der and the in­for­ma­tion pro­vided on 10th Septem­ber, 2012 was found vague.

Fi­nally, the bench made it very clear that is wasn’t the job of SEBI to search for doc­u­ments, it was the obli­ga­tion of Sa­hara to pro­vide the de­tails of the sub­scribers. If the Sa­hara failed to ful­fil the obli­ga­tion, the money was to be re­mit­ted to the cen­tral govern­ment.

SEBI was at­tach­ing the per­sonal prop­erty of Sa­hara’s Di­rec­tor, Subrata Roy, as he was a party to the case. Giv­ing para­mount im­por­tance to the money of the in­vestors, the bench stated that it was not con­cerned with the par­ties. This is a clear in­stance of pierc­ing the Cor­po­rate veil, though not ex­plic­itly stated.

Civil Ap­peal No. 8643 of 2012 was filed in the Supreme Court for the con­tempt. It was al­leged by SEBI that Sa­hara did not com­ply with the Court or­ders de­mand­ing refund of the pub­lic fund. When the mat­ter was heard on 5th De­cem­ber, 2012, Court mod­i­fied its ear­lier or­der. Tak­ing cog­nizance of the enor­mity of the amount, Court or­dered the two com­pa­nies to re­pay the amount in 3 in­stal­ments. The first in­stal­ment of Rs. 5,120 crores was to be im­me­di­ately de­posited through de­mand drafts. Fur­ther di­rec­tion was given to de­posit the bal­ance amount of Rs. 17,400 crores to­gether with in­ter­est @ 15% per an­num with SEBI in two in­stal­ments. The first in­stal­ment amount, of Rs. 10,000 crores, was to be de­posited with SEBI within the first week of Jan­uary, 2013 and bal­ance amount along with in­ter­est by first week of Fe­bru­ary, 2013.

Sa­hara de­faulted to de­posit the last two in­stal­ments of Jan­uary and Fe­bru­ary, 2014. As a strict ac­tion against Sa­hara, SEBI first froze all ac­counts and seized the prop­er­ties of the SIREC and SPCL on 6th Fe­bru­ary, 2013 and filed for con­tempt pro­ceed­ings in the Supreme Court. The reg­u­lat­ing body or­dered freez­ing of the bank ac­counts, De­mat ac­counts of all move­able and im­mov­able prop­er­ties in the name of Subrata Roy and three other direc­tors, namely Van­dana Bhar­gava, Ravi Shanker Dubey and Ashok Roy Choud­hary. The am­bi­tious Aam­bey Val­ley project of Sa­hara Group was one among the var­i­ous seized prop­er­ties.

The con­tempt hear­ing was heard on 4th March, 2014, wherein Subrata Roy and two other direc­tors, namely Ravi Shanker Dubey and Ashok Roy Choud­hary were sent to Ti­har jail for the con­tempt of the court. Some con­sid­er­a­tions were made for the di­rec­tor wo­man, Van­dana Bhar­gava who wasn’t sent to jail.

On 26th March, 2014, Court granted bail to the con­tem­n­ers with an ex­tra­or­di­nary bail amount of Rs. 10,000 Crores, Rs.5,000 Crores in bank guar­an­tee and Rs.5,000 Crores in cash.

The point to con­sider here is that a world-renowned busi­ness­man and di­rec­tor of a multi-mil­lion dol­lar busi­ness con­glom­er­ate was sent to the largest jail in South Asia for a crime of which pun­ish­ment, un­der the Sec­tion 12 in the Con­tempt of Courts Act, 1971 is sim­ple im­pris­on­ment for up to six months, or a fine of two thou­sand ru­pees, or both. Is there a need for such har­ness?

One needs to look at the case a whole from the be­gin­ning and take into con­sid­er­a­tion the depth of the mat­ter. The de­ci­sion and the re­quired stern­ness of the Court has been elab­o­rately and re­mark­ably jus­ti­fied by the Jus­tice Sikri, in his judge­ment of 19th June, 2015. In this judge­ment, he granted bail to the con­tem­n­ers, on the con­di­tion that owed amount of Rs. 36,000 Crores to be re­paid in 9 in­stal­ments within a pe­riod of 18 months. Rs. 3,000 Crores were payable, ev­ery two months. And the last in­stal­ment shall be of the re­main­ing amount. It states that the Court was very well aware and con­cerned that the con­dem­n­ers were de­prived of their civil lib­er­ties. How­ever, this ex­treme ac­tion was need of the hour in the light of the stub­born at­ti­tude, re­lent­less de­fi­ance of the Court or­ders and the huge amount of Rs. 36,000 Crores (in­clud­ing in­ter­est) owed to the poor­est of poor In­di­ans. From the be­gin­ning, Sa­hara has claimed to have at­tracted investment from gen­eral pub­lic who ma­jorly in­clude cob­blers, labour­ers, ar­ti­sans, peas­ants etc. Safe­guard­ing the in­ter­est of in­vestors has been the fo­cal point of the case since its very in­cep­tion. Le­gal re­al­ism was at the core of the de­ci­sion. While ac­knowl­edg­ing the case has been be­set with com­plex­ity, he cites the ju­rispru­den­tial the­ory pro­pounded by Ron­ald Dworkin. Dworkin is a 21st cen­tury Amer­i­can philoso­pher and jurist.

In his var­i­ous works, he urges use of pub­lic stan­dards while de­riv­ing right le­gal an­swers. Ac­cord­ing to him, law can­not rest on an of­fi­cial con­sen­sus. Reach­ing the right de­ci­sion in com­plex cases is never easy. In the case at hand, the over­whelm­ing pub­lic in­ter­est pre­vailed over the rights of the con­tem­n­ers. Also, the unau­tho­rised scheme was jeop­ar­dis­ing hard earned money of the blue-col­lar work­ers of In­dia. Fur­ther­more, this step was re­quired to com­mand com­pli­ance of the Sa­hara Group.

“Mak­ing the law work” was at the core of the ap­proach adopted by the Supreme Court. For the most fun­da­men­tal ob­jec­tive of any court is to en­sure that the law is obeyed and im­plied with. Sa­hara, at time and again flouted the di­rec­tions of Court. There­fore, the ex­treme step of the Court was re­quired and it ser­viced as a wake-up call for the Direc­tors of Sa­hara. It re­it­er­ated the se­ri­ous con­cerns of the Court about the pub­lic money and no com­pany or any per­son would get away with­out fac­ing ram­i­fi­ca­tion. Even in 2017, amount owed to the in­vestors was in ar­rears. A bench of Di­pak Misra, Ran­jan Go­goi and Dr. A.K. Sikri, JJ or­dered Sa­hara to furnish two post-dated cheques of Rs.1500 crores dated, payable on 15th June 2017 and the sec­ond one was of Rs.552.21 crores payable on 15th July 2017. The cheques if bounced, would send Subrata Roy back in cus­tody. The apex court also warned Roy that he might be sent to jail again if the amount was not paid. He has been granted pa­role till 19th June, 2017. The Supreme Court on 17th April, 2017 auc­tioned the am­bi­tious Aam­bey Val­ley.


Thus, this case has been a great ex­am­ple in es­tab­lish­ing the fact that safe­guard­ing the in­ter­est and the money of the in­vestors is the pri­mary concern of Supreme Court in cor­po­rate scams and share-mar­ket scams. It would not con­done any reck­less or unau­tho­rized use of pub­lic money by the Cap­i­tal­ists. Thus, in the wake of the wait­ing King­fisher Scam trail, this acts as a prece­dent wherein the Supreme Court does not shy away from be­com­ing the de­fender of pub­lic in­ter­est and pierc­ing the cor­po­rate veil.

Sa­hara Group Owned In­ter­na­tional Ho­tels - Grosvenor House Ho­tel, Lon­don(on Left) and The Plaza Ho­tel, New York (On Right)

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