Libertatem Magazine

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

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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 confidential 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 one-and -half 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 was endowed with the jurisdiction over the matter to seek all relevant information from Sahara.

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.


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