If the Sahara-SEBI matter goes to the Supreme Court after the SAT ruling in the case last week (and Sahara has announced that it will take the matter to the Apex court), it will entail a tough decision between law and facts, said legal analysts.

Last week, the Securities Appellate Tribunal ruled that SEBI had jurisdiction over the Optionally Fully Convertible Debentures (OFCDs) that two Sahara companies had issued.

It upheld SEBI's order of June this year that the OFCDs constituted a public issue that required mandatory listing which Sahara had not done. It asked that Sahara refund the entire proceeds of its OFCDs to investors with 15 per cent interest as SEBI had ordered.

Jurisdiction

It had been Sahara's argument that its group companies that had issued OFCDs were not listed companies and that the OFCDs too were not intended to be listed on any exchange. Therefore, under Section 55A of the Companies Act , it was the Central government, and not SEBI, that had jurisdiction over them.

Under Section 55A, several specified provisions under specified Sections in the Companies Act shall be administered by SEBI in the case of listed public companies and in the case of public companies which intend to get their securities listed on any recognised stock exchange.

SAT ruled that since the OFCDs had been offered to more than 50 persons, it constituted a public issue. It also upheld SEBI's argument that the intention (to list its instruments) of a company as referred to in Sections 55A and 73 of the Companies Act was not to be inferred from what the company professes in its Red Herring Prospectus but the same had to be judged from its actions. Therefore, Sahara fell under the category of “public companies which intend to get their securities listed”.

Moot question

“The facts of the case are so blatant that they appear to overwhelm law,” said a senior partner with a large law firm. “The moot question is whether a shell company with almost no assets and reserves can raise Rs 20,000 crore from two crore persons and claim that it is a private placement.”

The numbers involved are so ridiculously large that it becomes difficult to ignore the facts, he said. “The rule is that issue to over 50 persons makes it a public issue. It is not that they raised even Rs 100 crore from 100 persons, but thousands of crore from millions of people.”

However, facts cannot overrule law, he pointed out. And it will still be open to argument that the interpretation of Section 55A has been rather liberal in the SAT ruling, he said. Whether OFCDs can be considered securities, whether there was intention to list, and whether the entire matter falls under the jurisdiction of SEBI or the Central government would still be open to debate.

“It would be a tough decision between law and facts,” he said.

The scale of the issue will have the facts working against the Sahara group, agreed another lawyer, who also said that the matter of jurisdiction was still entirely arguable.

SAT has also referred to Sections of the Companies Act which are corporate laws and not securities laws, he said. The biggest point is the overlap of jurisdiction of the central government and SEBI. And it will be interesting to see how the debate continues. After all, regulation is an ever-evolving matter, he said.

“It is a bold decision by SAT and I think it is pretty much clear that law makes listing of the OFCDs mandatory. But as a matter of law, the SAT ruling will be challenged by Sahara of course,” said Mr Sandeep Parekh, head of Finsec Law Advisors.

“The magnitude of public interest (in the Sahara case) is such that the matter cannot go unregulated,” said Mr Anoop Narayanan, Founder of ANA Law Group. “SEBI is doing its duty by protecting investors. Of course, the matter is still open to interpretation.”

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