The Supreme Court’s order against the two Sahara Group firms on Friday has reinforced the authority of the market regulator, Securities and Exchange Board of India (Sebi), on a number of questions of law.
The judgment sets a precedent and empowers Sebi to crack down on similar cases in the area of fund-raising from the public and bolsters confidence in the system, say experts.
M S Sahoo, Mumbai-based advocate and former member of Sebi, said, “It has reinforced the jurisdiction of Sebi over the issue of securities to the public, irrespective of the kind of company and the nature of securities.”
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He said the order will facilitate fund-raising by providing regulatory comfort as public issues cannot be passed on in the garb of private placement. “It has reinforced that intention comes from conduct, i.e, what one does and one omits to do, not what he says,” he said.
Fund-raising activity depends on the confidence of the fund-giver/investor. This order has ruled in favour of a well-regulated market that would improve confidence of fund-givers, which will in turn foster healthy growth of the capital market and aid the economy, experts said.
Diljeet Titus of Delhi-based legal firm Titus & Co said the judgment has eliminated the possibility of default. “Any such default would have been a huge blow to the system,” he said.
Sahara had challenged Sebi’s powers on three major grounds. It contended under Section 55A of the Companies Act, Sebi had jurisdiction over such companies that are either listed or intending to list. By giving disclaimer that they do not intend to list, the Sahara companies argued they were outside Sebi's jurisdiction.
The companies argued optionally fully convertible debentures (OFCDs) are not ‘securities’ under Securities Contract Regulation Act, and are hence, out of Sebi purview.
They further said an issue made to three crore people can be considered a ‘private placement’, justifying their neglect of Sebi’s Issue of Capital and Disclosure Requirements Regulation.
Each of the above argument, had it been held up, would have blown a hole in Sebi’s investor protection framework, leading to several copycats, say experts.
However, the Supreme Court duly dismissed these arguments and upheld the supremacy of Sebi in the public issue market.
“The combined reading of the proviso to Section 67(3) and Section 73(1), makes it is clear the Sahara firms had made an offer of OFCDs to 50 people or more, consequently, the requirement to make an application for listing became obligatory leading to a statutory mandate which they did not follow,” Judge K S Radhakrishnan said in the order.
The court reiterated Sebi has unlimited powers at its disposal to protect interests of investors.
The court said, “Sub-section (1) of Section 11 of the Sebi Act casts an obligation on Sebi, to protect the interest of investors in securities, to promote the development of the securities market and to regulate the securities market, 'by such measures as it thinks fit'. It is, therefore, apparent that the measures to be adopted by Sebi in carrying out its obligations are couched in open-ended terms, having no pre-arranged limit.”
The court said the extent of the nature and the manner of the measures, which can be adopted by Sebi for giving effect to the functions assigned to it, have been left to the discretion and wisdom of the regulator.
The judgment observed under the various provisions of Companies Act, the Sebi Act are “inter-connected and the main focus is on investor protection.” Power is also conferred on Sebi under Section 11C to conduct investigation if the transactions are being dealt with in a manner detrimental to the investors or securities market. “Mandatory listing of securities in case of offer to public would cast an obligation on the issuers to ensure the transparency of information and other continuing obligations to provide information by means of prospectus and to follow disclosure provisions.”
