08 January 2011

Sahara versus SEBI

Note: I assume you are following the SEBI-Sahara controversy and therefore am not giving a background.

SEBI's stance about Sahara is blindingly obvious right? If you make an offer to the public, you have to go to SEBI and get your prospectus approved and then list, right? I was one of the people who thought this was a clear language of the Companies Act and it is in fact the consistent position of SEBI over the past nearly two decades.

Unfortunately, there is a fly in the ointment; and that fly is known as Kalpana Bhandari vs SEBI, a Bombay High Court ruling. In that case, an unlisted company Sesa Industries raised money from 31,000 small investors by making an offer of shares and on the (oral) promise that the shares would be listed. On not being listed, the shareholders complained to SEBI and then filed a writ in the High Court. SEBI however, opposed the shareholders' pleas and said it had no jurisdiction over the issue as the company was unlisted even though it had made an offer to over 50 persons and thus was obliged to list.  Really, this would be a double violation of SEBI's mandate.

The High Court accepted the argument of SEBI then:
"First, there is substance in the submission of SEBI that as Sesa Industries is not listed company nor have they made any application to any recognised Stock Exchange manifesting intention of getting their securities listed and, therefore, they have no jurisdiction in the matter."

Though both the SEBI position then and the court's ruling based on SEBI's stand are clearly wrong and contrary to express provisions of the Companies Act, it does become both difficult and embarrassing for SEBI to take the opposite stand now in the Sahara matter, where the securities are convertibles rather than shares and there is not even a promise to list. If I were at SEBI, I wouldn't know how to resolve this disturbing conflict, specially given that SEBI would have stated its previous position in an affidavit on oath.

The Sahara ruling has attracted some other comments - see Indian Corporate Law's post which gives the background of the case and thinks the Allahabad High Court should have not have disturbed SEBI's order. Of course now, the Supreme Court too has not disturbed the High Courts stay on SEBI's order.

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