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SEBI can regulate unlisted firms if they raise public funds
September, 09th 2011

The markets watchdog SEBI today told SAT that Section 55 A of the Companies Act gives it enough powers to regulate unlisted companies if such entities have raised funds from the public.

"Does SEBI have powers under Section 55A? My answer is yes. If OFCD is a security under the Securities Act, then it comes under the SEBI Act. And if it comes under the SEBI Act, then Sebi has jurisdiction. SEBI can (therefore) pass a special order to regulate unlisted companies," SEBI Counsel Arvind P Datar told the Securities Appellate Tribunal (SAT).

Datar was contesting Sahara Group's claim that its OFCD (optionally fully convertible debentures) were not a public issue and therefore cannot be regulated by SEBI.

Sahara had been ordered by the SEBI to refund the money its two group companies had raised from the public through an OFCD issue; the company has challenged SEBI order at the SAT.

Datar further argued that Sahara companies OFCDs were issued to the public and that it was actually "a public offer dressed up as a private placement".

Pointing out that even the legal provisions which Sahara took recourse to were meant for a public issue, Datar said, Sahara has taken recourse to Section 60B of the Companies Act, a provision meant for a public issue.

Once it is a public issue then listing becomes mandatory under Section 73 (1) of the Companies Act.

Datar further said if an OFCD can indeed be defined as a Security, then under the SEBI Act, the SEBI has jurisdiction.

"They can only come under Section 55 A, Clause B. If one goes by a literal interpretation of this provision, then that would be very absurd, and the appellant may argue that this does not cover them," Datar said.

"We must understand why this provision was introduced in the first place. It was introduced, because Parliament wanted to give SEBI all powers," Datar said.

"Intention does not matter because under this provision, listing becomes mandatory. Merely because the appellant gives it the tag of a private issue does not make it one. After all, Section 73 (1) of the Companies Act makes it mandatory for the appellant (Sahara) to seek the approval of the stock exchange," he said.

"A literal interpretation of Section 55 A would defeat the intention of Parliament....Intention of a company is not a decision itself, but the three-fold test of conduct, circumstances of the case as well as terms of the contract,
is. If the company knew it would cross the limit of 50 investors, then it ought to have listed," the SEBI counsel said.

Broadly concurring, SAT's presiding officer NK Sodhi observed that "if it is a public issue, they should have gone to the  stock exchange, and so Section 73 (2) of the Companies Act follows. The necessary consequence is a refund of the money under Section 73 (2). But who will give such a direction to refund? Should it be the SEBI?"

The SEBI counsel replied that Section 55 A of the Companies Act will have the answer as to who can issue such a direction.

Sodhi then observed that consequence could be that Sahara's public issue will go out of listing and 66 lakh investors will not be able to trade their securities.

Arguing that Section 73 (1) of the Companies Act ought to be read in consonance with Section 55 A Clause B, which deals with intention of the company, Datar said under Section 245 AA of the Companies Act, securities include "hybrid" financial instruments. According to Section 55 A, the word 'securities' also includes future financial instruments which are yet to evolve, Datar added.

To this, Sodhi asked Datar what is the consequence of calling OFCD a security, and pointed out that Sahara had submitted to the Allahabad High Court that SEBI could not regulate it because the instrument was a "hybrid" and that under the Securities Contract Regulation Act, an OFCD is not a

SAT will resume hearing next Monday. Incidentally, the Supreme Court's deadline for the case is October 5.

The SAT has directed Sahara to file an affidavit by Monday, specifying from which date it began mobilising funds from investors. Further, it also asked the appellant to specify the total amount of funds mobilised till date, the number of investors involved, as well as the mode of fund mobilisation.

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