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The Indian supreme court on the scope of jurisdiction of the indian capital market regulator

The Indian supreme court on the scope of jurisdiction of the indian capital market regulator

Recently, the Indian Supreme Court ruled on the scope of jurisdiction of the Indian capital market regulator, the Securities and Exchange Board of India (SEBI), over an issue of securities by a public company in India. In Sahara India Real Estate Corporation Ltd. and Others v. Securities and Exchange Board of India and Another.[1], two unlisted public companies of the Sahara Group, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) had issued and allotted unsecured Optionally Fully Convertible Debentures (OFCDs) to approximately 30 million investors on a private placement basis and collected an amount of approximately INR 240 billion from such investors. SIRECL and SHICL had issued the OFCDs based on an information memorandum (IM) circulated to the investors and a red herring prospectus (RHP) filed and registered with the Registrar of Companies. These companies had not met the filing, disclosure and investor protection requirements of Indian securities law that would apply to a public issue of securities on the ground that the issue was a private placement. SEBI ordered SIRECL and SHICL to refund the investment amount to the investors with interest of 15% per annum under Indian securities laws on the ground that the issue of OFCDs was a public issue and the statutory requirements for such an issue had not been met. SEBI’s order was upheld by the Securities Appellate Tribunal. SIRECL and SHICL appealed to the Supreme Court. Dismissing the appeal, a two judge bench of the Supreme Court, held that under Indian securities laws:

(i)                  an offer of securities made to more than 49 persons would be a public offer. Therefore, the issue of OFCDs by SIRECL and SHICL was a public offer;

(ii)                a company making a public offer is required by law to list the securities on a recognized stock exchange and meet the filing, disclosure and investor protection requirements of a public issue. SIRECL and SHICL had not met these requirements and had not applied for listing;

(iii)               SEBI would have jurisdiction over a public offer by a company since the “intention to list” is manifest in the mandatory requirement under law to list such an issue;

(iv)              SEBI was justified in ordering SIRECL and SHICL to refund the investment amount to the investors with interest of 15% per annum.

This judgment clarifies that SEBI’s jurisdiction cannot be questioned if a company makes a public offer of securities. Under Indian law, a private placement requires (i) an offer or invitation to less than 50 persons; and (ii) the offer or invitation should either be non-transferable or the domestic concern of the offeror and offeree. If any of these conditions are not met, the issue of securities by the company would be a public offer.

This decision is welcome since it recognizes the importance of SEBI in an issue of securities to the public. Tasked with the duty to protect investors and regulate the securities market, a purposive interpretation is critical to ensure that SEBI’s authority to regulate a public issue of securities is not undermined by a technical interpretation of Indian securities laws. This judgment makes such a purposive interpretation.

 


[1] MANU/SC/0702/2012; (2012) 8 SCALE 101.

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