This paper presents an analysis towards one of the most famous judgments in the corporate law: ‘Sahara India Real Estate Corporation Ltd. & Ors v. Securities and Exchange Board of India & anr’[1]. “The facts of the case are as follows: Sahara group issued Optionally Fully Convertible Debentures(OFCDs) to the public through their two companies: Sahara India Real Estate Corporation Limited (‘SIRECL’) and Sahara Housing Investment Corporation Limited (SHICL). They issued OFCDs to a 30 million investors and raised 25,000 crores of funds from them. Securities and Exchange Board of India(SEBI) received complaints from two investors about the money that was being raised by Sahara.

When SEBI investigated the matter, it came across a huge money laundering activity and started proceedings against the Sahara group. Sahara Group’s chairman Subrata Roy was held guilty.”[2] After this case, government drafted new laws to prevent such frauds. The research question of this paper is whether the recent developments in the law leave a room for such frauds again. In order to deal with this issue in a specific manner, I would be analysing the laws pertaining to private placement and investor protection under section 42 of The Companies Act, 2013. The latter part of the paper will highlight the improved corporate governance in India due to occurrence of such frauds.

PART A: This segment of the paper discusses Sahara’s Arguments in the court and the intention behind putting them. It also includes the counterarguments given by SEBI which were accepted by the court.

Sahara group had consciously misused the loopholes in the law. The counsel for Sahara twisted the rules and regulations into their own favour. “Under s. 67(3) of Companies Act, 1956, if the company offers securities to not more than 50 persons individually and specifically, such an issue would be private placement.”[3] “Sahara claimed that it was a private placement as they gave these offers to 30 million investors and contended that they all were their ‘friends, family and associates’. Sahara also said that the ‘number of investors’ is irrelevant. However, the court observed that it is humanly impossible to know a 30 million investors and offer them shares individually. When the court asked for the data of all the investors, the Sahara group failed to present it. In fact, the details put forth were fake and repetitive. In a private placement, the issuer has to keep a record of the details of the investor. Additionally, Sahara’s information memorandum said that in case the number of investors crossed 50, they would approach the Registrar to file a Red Herring Prospectus. This means that they ignored the 50 investors rule wilfully.”[4]

“Furthermore, Sahara argued that there was no need to adhere to the mandatory listing procedure in the stock exchange as per ‘s. 73(1)’[5] and file a prospectus with SEBI as per ‘s. 60B’[6] as they never made a public issue. They emphasized that they have a ‘corporate autonomy’ to list themselves which a regulator cannot force upon them. However, the court observed that it is a public issue and hence, both listing and filing prospectus with SEBI becomes an important legal obligation.”[7]

PART B: This part mainly deals with the analysis drawn from Sahara’s arguments and also presents some crucial arguments mentioned by Sahara and SEBI. In the latter part of this section, I will highlight the developments brought in the law due to the Sahara case.

“Section 67(3) of Companies Act, 1956 covers private placement of ‘shares and debentures’.”[8] “Sahara’s arguments in the Supreme Court were such that they wilfully removed OFCDs from the purview of ‘shares and debentures’ under section 67(3) by contending that they were hybrid securities. They said that the definition of ‘hybrid securities’ and ‘securities’ are mentioned separately under the Companies Act which implies that legislature intended to treat the two differently. However, SEBI indicated that OFCDs(hybrid securities) were debentures at the time of issuance. Additionally, Sahara themselves have referred to OFCDs as debentures in their IM, Prospectus and application form.”[9] This points out that Sahara was trying its best to claim the issue as private placement so as to remain outside the scanner of SEBI.

The court was very intelligible in not conferring with the Sahara’s argument, as in that case, the lacuna in the law would have widened. Sahara placed all of its arguments in such a manner that it either took away the jurisdiction of SEBI or made the issue of securities a private placement. However, the court realised that the law was being exploited and decided in favour of SEBI.

The law of private placement was being manipulated as there was no clear reference about the number of investors who could be given the invitation to buy the shares in a financial year. “The only law was under section 67(3) which said that not more than 50 investors can be issued the securities under one issue. The Sahara counsel interpreted private placement as only providing invitation to buy shares with the number of investors being irrelevant in a financial year. They issued OFCDs to millions of investors for about 3 years. Later, court observed that by virtue of providing debentures to more than 50 investors, the issue becomes public.”[10] This law was also introduced in the Companies Act, 2013 under section 42. “Section 42(2) of the new act clearly mentions that the number of investors should not be more than a fifty in one issue and more than 200 persons in a financial year.”[11]  

“The Explanation 4 under section 42(3) explicitly mentions that if an issue does not strictly construe with the standards of private placement, it would be a public issue and hence, under the jurisdiction of SEBI.”[12] This demonstrates the legislature’s utter stand on keeping the definition of ‘private placement’ straightforward. The clarity and specificity in the definition is required as ‘private placement’ was being used as a legal route to hide the money laundering activities conducted by Sahara.

PART C: This section of the paper will continue to explain the recent developments in the laws of private placements by connecting it with investor protection mechanisms employed by the legislature.

Another inseparable aspect of this case is the failure of SEBI to protect the investors. There were no such laws under Companies Act, 1956 which mandated keeping a record of the details of the investors in a private placement. “Under section 42(3) of The Companies Act 2013, names and addresses of the investors must be recorded by the company.”[13] This will improve transparency and ensure investor protection. “Under section 42(4), the subscription money has to be paid through a banking mode only and not by cash.”[14] “This was necessary because when Sahara got an order from SEBI to refund all the subscription money to its investors, it failed to showcase the proof of repayment by claiming that some people had made cash payments and did not have bank accounts.”[15] Paying for subscription through cash can provide anyone a route to escape the refunds. Absence of such a law can also increase the circulation of black money in the market. “Till date, Sahara has not been able to repay all its investors.”[16] Hence, a law deciding upon the channel of transaction becomes of essence.

Under section 42, a proper procedure has also been established to privately place the shares and debentures. “Firstly, the private placement offer letter has to be sent to the recognized persons and their details have to be recorded. Secondly, a special resolution has to be passed by the company. Thirdly, unlisted company has to get the approval from Registrar(RoC) and a listed company from both RoC and SEBI. Within 60 days of receipt of money, the company has to allot the securities to the respective shareholders. If it fails to do this, it has to return the subscription amount. The RoC has to be updated with the information of the shareholders and if the money has been returned by the company, then, that information has to be updated with the RoC.”[17]

It is quite noticeable that a company has to notify the authorities with the status of the allotment and the information of their shareholders. These stringent requirements were not present under the Companies Act earlier. Such laws ensure easy control by the Registrar and SEBI.

PART D: The Sahara presented such arguments in the court which forced the court to reiterate the powers of SEBI. By enabling SEBI with such powers, the corporate governance in India ameliorated.

Apart from the issues of private placement, this case also strengthened the regulatory power of SEBI which bolstered the corporate governance in India. As is pretty evident from the case, Sahara was trying to prove the issue as private placement only to escape the procedures in the law which require SEBI’s approval. “Sahara did not get its Prospectus approved by SEBI in the name of it being ‘private placement’. The counsel for Sahara also claimed that the ‘hybrid securities’ were added to the Companies Act after the amendment however, this definition was not added to the Securities and Exchange Board of India Act, 1992(SEBI Act) or The Securities Contract (Regulation) Act, 1956(SCR Act) intentionally, thereby removing SEBI from adjudging issues dealing with hybrid securities.”[18]

“In response, the court said that OFCDs are debentures. And since, both the SEBI and SCR Act include the definition of debentures, OFCDs can be governed by the SEBI. Additionally, SEBI derives its power from ‘S. 55A of Companies Act’[19] which authorises SEBI with sufficient power to regulate public issues and transfers. Hence, even though SEBI or SCR Act does not mention ‘hybrid securities’, the fact that s. 55A mentions ‘securities’, SEBI has a jurisdiction over hybrid securities. Hence, the securities that come under the ambit of Companies Act will be a part of the SCR Act and will be governed by SEBI.”[20] “SEBI also derives its statutory power from section 11 of the SEBI Act.”[21]

It can be culled out from the arguments of Sahara that it was interpreting the law in a haphazard manner. Sahara constantly claimed that SEBI has jurisdiction over listed companies only and since Sahara is an unlisted company, SEBI cannot exercise any power over it. Hence, the court by affirming SEBI’s jurisdiction in the trading of securities clarified SEBI’s real power. One more thing which can be observed in the judgement is that the court is clarifying the intention of all the legislations. It distinctly asserted that SEBI has jurisdiction over all kinds of public issue of securities. Such an affirmation reduces the risk of further debates on SEBI’s power which will also save the time and energy of the court. It also implies that any fraud committed under the blanket of issuing securities to public can be dealt by SEBI. “SEBI is a quasi-judicial body and has power to regulate public issue of securities and protect the interest of investors.”[22]


Before 2013, government had failed to lay down clear and transparent laws which created limitations and doubts about SEBI’s jurisdiction. It is the duty of the government and regulatory agencies to furnish laws for every area of business so that there is no scope left for fraudulent activities. “Many researchers claim that the scam could have been avoided by proper coordination of RBI, SEBI, IRDAI, and other institutions.”[23] However, owing to overlapping and ambiguous laws, the integration and communication could not be accomplished. While SEBI’s regulatory power was always present, the frauds committed in the 1990s and 2000s indicated the escapes within the law. By bringing these frauds in light, the laws, techniques, practices and principles of corporate governance got clarified. SEBI was quite successful in tackling the scam because of its excellent surveillance. “SEBI also has a power to hold the wrongdoers civilly and criminally liable under the provisions of the Companies Act, 2013.”[24] “This corporate criminal liability points out the wide powers empowered with SEBI.”[25]

Despite these powers, SEBI is not allowed to exercise deep control over unlisted companies. However, the government is constantly trying to improve its governance. “In Report of Companies Law Committee, the introduction itself mentions the legislature’s motive to make laws which strengthen the corporate governance of India.”[26] “SEBI has also included corporate governance principles that are in line with the Organisation for the Economic Cooperation and Development in its SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015. In addition to this, SEBI has formed a committee for corporate governance chaired by Uday Kotak. These changes have been incorporated only to avoid any further frauds.”[27]

The recent laws and regulations do not leave a room for these corporations to commit any fraud. The compliances and approvals that the companies have to adhere to empowers the authorities to keep a check upon the companies and investors. The concerned authorities such as RBI, IRDAI, SEBI etc have also remained quite active for a while. The power with SEBI to hold someone civilly and criminally liable has also embedded a fear amongst the companies. They are quite aware that they owe a duty towards their investors and have to protect them or else they may end up getting imprisoned. “The Chairman of Sahara Group, Subrata Roy was held both civilly and criminally liable. A fine was imposed on him as per section 73(3) and 628 of the Companies Act, 1956.  He was also granted imprisonment for 5 years as per sections 68(1)(a) and 68(1)(b) of the same act. However, he has been on a parole since 2016.”[28]

Despite, the powers with SEBI to adjudicate the matter, there are certain gaps which could not be filled. One, SEBI failed to provide refund to all the investors as it does not have their details. Two, even after having the power to imprison the guilty, the Chairman of Sahara is out on bail. This creates a doubt upon SEBI’s real power to punish the offender. The fact that SEBI has a noteworthy vigilance skill in not debatable but, when it comes to providing justice through punishment or through reimbursement to the investors, we notice a shortcoming in the law. If the punishment is possible only on papers and not in reality, then, the law needs to be corrected.

In the future, authorities need to be more proactive in editing and transforming the laws so that frauds do not find a way. Continuous, sincere and coordinated efforts by them will provide the companies and investors a healthy atmosphere to develop. Regardless of all the flaws and gaps in the system, India has managed to raise its bars of corporate governance.

[1] Sahara India Real Estate Corporation & Ors. Ltd. V. SEBI & Anr. (2013) 1 SCC 1 (2013) 1 SCC(Civ) 1 (2013) 1 SCC (Cri) 257.

[2] Ibid.

[3] Section 67(3) of The Companies Act, 1956.

[4] Sahara India Real Estate Corporation & Ors. Ltd. V. SEBI & Anr. (2013) 1 SCC 1 (2013) 1 SCC(Civ) 1 (2013) 1 SCC (Cri) 257.

[5] Section 73(1) of The Companies Act, 1956.

[6] Section 60B of The Companies Act, 1956.

[7] Ibid.

[8] Section 67(3) of The Companies Act, 1956.

[9] Sahara India Real Estate Corporation & Ors. Ltd. V. SEBI & Anr. (2013) 1 SCC 1 (2013) 1 SCC(Civ) 1 (2013) 1 SCC (Cri) 257.

[10] Ibid.

[11] Section 42(2) of The Companies Act, 2013.

[12] Section 42(3) of The Companies Act, 2013.

[13] Section 42(3) of The Companies Act, 2013.

[14] Section 42(4) of The Companies Act, 2013.

[15] Sahara India Real Estate Corporation & Ors. Ltd. V. SEBI & Anr. (2013) 1 SCC 1 (2013) 1 SCC(Civ) 1 (2013) 1 SCC (Cri) 257.

[16] Press Trust of India, SEBIs Refund to Sahara’s Investors Inches Up to Rs 129 crores in 9 years, Business Standard(August 5, 2021, 16:48 IST) https://www.business-standard.com/article/markets/sebi-s-refund-to-sahara-investors-inches-up-to-rs-129-crore-in-9-years-121080500907_1.html#:~:text=Sahara%20has%20given%20all%20original,it%20said%20in%20a%20statement.

[17] Section 42 of The Companies Act, 2013.

[18] Sahara India Real Estate Corporation & Ors. Ltd. V. SEBI & Anr. (2013) 1 SCC 1 (2013) 1 SCC(Civ) 1 (2013) 1 SCC (Cri) 257.

[19] Section 55A of The Companies Act, 1956.

[20] Ibid.

[21] Section 11 of Securities and Exchange Board of India Act, 1992.

[22] Section 11 of Securities and Exchange Board of India Act, 1992.

[23] Deepika Kulhari, Examination of Historical Advancement of Corporate Governance in India- Contemporary Issues and Way Forward, Qubahan Academic Journal, 14, 16-17 (2020).

[24] The Companies Act, 1956 and 2013.

[25] Ibid.

[26] Government of India, Ministry of Corporate Affairs, Report of The Companies Law Committee, 7-8(2016).

[27] Deepika Kulhari, Examination of Historical Advancement of Corporate Governance in India- Contemporary Issues and Way Forward, Qubahan Academic Journal, 14, 16-17 (2020).

[28] Sahara India Real Estate Corporation & Ors. Ltd. V. SEBI & Anr. (2013) 1 SCC 1 (2013) 1 SCC(Civ) 1 (2013) 1 SCC (Cri) 257.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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