INTRODUCTION

The controversial Netflix documentary, which has stirred interest in the notorious Sahara scam case due to its portrayal of massive financial crime in India, will be released in October 2020. In reality, for the business community to function properly, corporate governance and corporate ethics are essential, and their absence would result in a rise in corporate fraud. Sahara recently petitioned the Supreme Court, alleging that SEBI is demanding Rs 62,000 crore. Furthermore, they filed a contempt case against SEBI in the Honourable Supreme Court, requesting that the highest court penalise the accused SEBI officials for their actions. SEBI's application for a deposit of Rs. 62,602 crores by Sahara, according to Sahara, is completely incorrect, and SEBI has committed contempt of court.

The purpose of this research paper is to evaluate SEBI's position and jurisdiction in light of the Supreme Court's rationale in Sahara v SEBI[1]. This paper also presents the loopholes revealed by Sahara's convoluted case. SEBI's primary responsibility is to oversee and regulate the Indian securities market while also guaranteeing that investors' interests are protected. As a result, SEBI has jurisdiction. However, after seeing the current investor situation, the upcoming challenge to the implementation of the court judgement is making the matter more complex.

Investor protection is a subject that comes up in several scenarios, causing us to think about the reality of investor protection. The Sahara questioned the authorities in this matter, citing the reasons for the lack of SEBI clearance. They further argued that the company's bonds are hybrid securities and hence outside of SEBI's jurisdiction. They are instead governed by the ROC and MCA .

The case of Subrata Roy exemplifies the state's inadequate management of financial resources in our neoliberal economy. The imprisonment of Sahara organizations obscures crucial concerns, like the state's accountability and the failure to manage capitalism through liberal democracy. It must also be clear that the financial regulator, SEBI, will collaborate with the courts to guarantee good corporate governance. In recent years, though, the public has sensed the undercurrents of a precarious relationship between them.

The objective of this paper is to show how SEBI plays a role in corporate fraud in order to safeguard investors. Furthermore, recent examples of investor protection in the context of corporate fraud would bolster the argument.

PART I: (SEBI's position and jurisdiction in light of the Supreme Court's rationale in Sahara v SEBI)

Background

SIRECL and SHICL had previously launched an issue of OFCDs and began collecting subscriptions from investors from 2008 until 2011. During this time, the business collected nearly Rs 17,656 crore in total. Under the cover of a "Private Placement," the money was gathered from over 30 million investors without complying with the rules that govern public securities offerings. While taking cognizance of the matter, the Whole Time Member of SEBI issued an order dated June 23, 2011, directing the two companies to refund the money collected to the investors and prohibiting the two companies' promoters, including Mr Subrata Roy, from accessing the securities market until further orders. Sahara then appealed to the SAT, which, does not interfere with the ruling of SEBI. Finally, the Supreme Court of India then heard Sahara's appeal against the SAT verdict.

Jurisdiction of SEBI

Two concerns relating to clause 55A and the hybrid aspect will be examined in this section. Sahara has questioned SEBI's jurisdiction over the matter, despite the fact that SHICL and SIRECL are not publicly traded companies and have stated in their prospectus that they do not intend to list their securities on any Indian stock exchange in the future, in accordance with compliance with S.55A of the companies act.

According to Section 55A of the Companies Act, 2013, which sets the way for SEBI's jurisdiction and limits it to listed public companies, the company in issue does not fall under SEBI's jurisdiction because it is an unlisted one. According to the facts of the case, if Sahara claims that it was a private placement in which only a few clients were asked to invest, then the entire task of OFCD should have been completed within 10 days, following the rules and regulations, and the offer should have been limited to no more than 50 members. However, in this case, more than 23 million people invested in the scheme, and it was down for more than two years, requiring the company to list it under Section 73 of the Companies Act, 2013, which prohibits private companies from accepting public deposits and allows only eligible companies to accept public deposits. It must be reported to the company's registrar, which brings the situation under the SEBI's jurisdiction. As a result, based on the facts and arguments presented, SEBI concluded that the OFCD scheme falls within the definition of securities as defined by the SEBI Act 1992 and that Sahara should be required to refund deposits totalling more than Rs. 24000 crores to its investors because they were taken in violation of the law.

In response to the issue of hybrid security, Sahara identified the optionally fully convertible debentures (OFCDs) as hybrid securities when it came to the subject of hybrid securities. While hybrid securities were included in the definition of the term "securities" in the Companies Act through the 2003 Amendment, the SEBI and the Security Contract Regulation (SCR) Act did not get the same treatment. The SCR Act, on the other hand, states that any marketable security falls within the definition of "securities." The marketability of the OFCDs can not be questioned, given that they were issued to 30 million investors.  Furthermore, OFCDs are a form of the debenture. As a result, we may claim that OFCDs are marketable securities and therefore fall under the scope of S. 2 (h) of the SCR Act. [2]

The court held that SEBI has the authority to analyse and adjudicate in this situation, according to the Supreme Court. Section 55A of the Companies Act 1956 gives SEBI unique powers in the area of security issues, allocation, and transfer. Despite the fact that the OFCDs issued by business entities are hybrid instruments, they are indeed securities under the Companies Act, SEBI, and SCRA. Because such OFCDs were distributed to millions of consumers in this situation, there is no doubt about their marketability. Because of the term debenture, it is considered a security under the laws of the Companies Act, SEBI, and SCRA.

There was no encroachment at all. According to SEBI, the problem was distributed to more than 50 people, making it a public issue. As a result, there was a listing requirement that was not met, and SEBI derived its power as a result. Taking the lead from the Bombay High Court's decision in the case of PWC and Ors. v SEBI & Ors[3], where it was stated that SEBI's general domain extends to protecting investors of listed companies and the securities markets, it can be concluded that SEBI, in order to protect the interests of investors of listed companies in Sahara, has taken the necessary action. The court ruled that the number of people who can purchase a security in a private placement is limited to 50. Even though all 30 million investors got information to buy, the offering of OFCDs did not qualify as a private placement.

PART II: (Loopholes revealed by Sahara's convoluted case)

This case raises several issues that must be addressed in order to develop an effective method for combating corporate fraud.

Investor protection

Consumers are investors. Security is intangible, whether it has actual or potential value. The consumer may never view the proof of the security itself, particularly if the transaction is made through a dealer or other intermediary. This consumer, on the other hand, is focused on converting a purchase into a profitable investment. When a large number of people purchase and sell securities, a capital market forms.

The regulation of the new issue market is particularly important from the standpoint of investor protection for various reasons. The fresh issue market attracts a large number of small investors. These investors are easy prey for unscrupulous firm promoters and other nefarious groups. Every year, it is expected that the number of investors who subscribe to new issues will be double that of those who buy on the secondary market.[4] However, investor protection can not be the sole answer; investor knowledge is also an important component in resolving the problem.

Investor awareness

The 'agency theory' acknowledges that managing the agent's behaviour and tendency to maximise his utility is difficult. Much of the problem stems from asymmetric knowledge, in which only the agent (manager) is aware of the enterprise's reality and profit potential, but the investors are unaware of these factors and so can not control the problem of moral hazard on the manager's part.

Amendment brought after this case

The societal impact of the Sahara fraud must be considered in light of the regulatory context and, of course, from the investor's perspective. The word "private placement" had not been defined in the Companies Act prior to the Sahara Scam. Only the circumstances under which an offer would not be considered a "public offer" were defined. Section 42 of the Companies (Amendment) Act, 2013, was added in response to SEBI's proposal, and defines private placement as "an issue of securities by a listed or unlisted public company to 49 or fewer people where individual invitations to buy them are sent to the investors." However, there is still room for development. One strategy to enhance India's corporate governance effectiveness is to focus on investor education rather than enacting new rules, because the problem is a lack of enforcement, despite the fact that the legislation is strict on paper, which has to be addressed.

Political players in Corporate Fraud

In this regard, Sahara is not exceptional. Many analysts say that if Subrata Roy had not been offered political promises, he would not have had the audacity to defy Supreme Court rulings so flagrantly. Former SEBI member KM Abraham addressed a whistle-blowing letter to India's Prime Minister in June 2011, accusing the Finance Ministry. He stated that then-Finance Minister and his advisor were attempting to compel SEBI Chairman to "handle" high-profile cases, such as Sahara, even though both the Finance Ministry and Sinha refuted this accusation.

Impact of Corporate Fraud on General Public

The considerable impact that it has on the average person's life needs to be considered. The Sahara crisis exemplifies everything that is wrong with corporate ethics. The consequences of a few devious businesses and politicians have far-reaching consequences for the entire country. On a global scale, it causes foreign corporations to lose interest in investing in India, which has a negative impact on us in several ways.

Corporate governance

Another facet of the new legislation that needs to be addressed is the governance of new firms seeking to access the capital market. Many of these businesses would have been run by family members.

In industrialized nations, stock markets are increasingly requiring listed businesses to have good governance, including audit committees and financial controls to prevent senior executives from abusing their positions. This has been a topic of continuing debate in management and economic publications in several nations. The Cadbury Committee Report (1992) on financial elements of corporate governance has gotten a lot of attention in the UK. The recommendations of the committee led to the creation of a Code of Best Practice for corporate directors. The London Stock Exchange has made compliance with the code essential for all of its businesses, including those trading in unlisted securities. 

Various aspects of corporate governance brought up in this case, such as money laundering, unlawful share issuance, perhaps fictitious investors, the dubious position of the company registrar, and so on, require our reconsideration.[5]

 

CONCLUSION

Financial regulation is more than just the use of administrative authority. Good regulation necessitates a thorough understanding of the desired changes and directions. It also requires a deep understanding of how financial markets work in practice, as well as a detailed understanding of how finance interacts with the real economy and a sharp eye on financial innovations and developments. This has an influence on the SEBI's governing body's structure and staffing pattern.

The SEBI's jurisdictional problem is unclear due to ambiguities from various judgement, as evidenced by earlier judgements such as the Sahara case[6] (Conflict between the Ministry of Corporate Affairs and SEBI), Pan Asia case (concerning adjudication of GDR containing fraud) [7]and Price Waterhouse vs. SEBI[8] (Auditor Professionals and SEBI). This issue requires our attention to develop an effective market regulation system.

At the same time, we need to consider the other side of the case: the controversial existence of all or any of the approximate 30 million Saharan subscribers may be "fictitious." There may be no real subscribers, or the fictional subscribers are mixed up with the current subscribers. And still, amid newspaper ads and other strenuous measures, the market regulator has not been able to locate most investors. If the Sahara investors are fake, SEBI does not have a role to play as it is supposed to deal with actual investors, and any other entity should look into the situation. The Sahara convoluted theory makes the matter worse and makes us ponder about the role of legislator and governing bodies. However, the idea for mobilising money by the Sahara was deliberately planned to bypass the rules, to take advantage of the loopholes in the formulation of the various laws and to manipulate the gaps in the jurisdictions of the RBI, SEBI and the Department of Company Affairs that need to be investigated.

An organization's governing board serves as a tool of responsibility within the organisation. The pressing question is about SEBI's efficacy, decision-making quality, and accountability. Many issues are undeniably complicated, requiring not just a detached perspective but also the board members' combined insight and knowledge. In any human institution, there must be a system of checks and balances. It is much more critical for a regulatory body that deals with financial markets to deal with frauds that have a huge impact on society at large.

 

[1] Sahara Real Estate Corporation Limited and Others v. Securities Exchange Board of India, (2012) 174 Comp Cas 154

[3] Price Waterhouse & Co. v. SEBI (2010) 160 ComCas324

[4] L. C. Gupta, ‘Challenges before Securities and Exchange Board of India’ (1996) 31(12) Economic and Political Weekly

[5] Nancy Rao, 'A case study of Sahara India Parivar scandal’ (2015)5(3)IJRCM

[6] (n 1)

[7] SEBI v. Pan Asia Advisors Limited, (2015) 14 SCC 71

[8] (n 3)

About the Author: This Legal Article is prepared by Ms. Akangsha Dogra, an LL.M. student at the National Law School of India University, Bengaluru, and is an intern at MyLawman. She can be reached at akangsha.ad@gmail.com


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