sebi with subrato roy case

SECURITIES AND EXCHANGE SECURITIES AND EXCHANGE BOARD OF INDIABOARD OF INDIA

A CRITICAL ANALYSISA CRITICAL ANALYSIS

FLOW OF PRESENTATIONFLOW OF PRESENTATION• A Brief HistoryA Brief History• IntroductionIntroduction• SEBI - PreambleSEBI - Preamble• ObjectivesObjectives• FunctionsFunctions• ContributionsContributions• SummarySummary

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2SEBI- A Critical Analysis

A BRIEF HISTORYA BRIEF HISTORYPrior to SEBI the security markets and stock exchange were regulated Prior to SEBI the security markets and stock exchange were regulated by several Acts, which were:by several Acts, which were:

• The Bombay Securities Contracts Control Act, 1925The Bombay Securities Contracts Control Act, 1925• The Capital Issues (Control) Act, 1947The Capital Issues (Control) Act, 1947• The Securities Contracts (Regulation) Act, 1956The Securities Contracts (Regulation) Act, 1956• Registrar of Companies (The Indian Companies Act, 1956)Registrar of Companies (The Indian Companies Act, 1956)

For a healthy growth of capital markets and to prevent malpractices in For a healthy growth of capital markets and to prevent malpractices in trading, the Government subsequently decided to “set up a separate trading, the Government subsequently decided to “set up a separate board for the regulation and orderly functioning of Stock Exchange and board for the regulation and orderly functioning of Stock Exchange and the securities industry”the securities industry”

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A BRIEF HISTORY A BRIEF HISTORY (CONTD…)(CONTD…)

• In July 1987, the Cabinet Committee on Economic Affairs approved the In July 1987, the Cabinet Committee on Economic Affairs approved the broad features of SEBI and process of establishment of SEBI was broad features of SEBI and process of establishment of SEBI was commencedcommenced

• The statement of Purpose and Approach outlined twin objectives of SEBI as,The statement of Purpose and Approach outlined twin objectives of SEBI as,- promoting healthy and orderly development of securities markets andpromoting healthy and orderly development of securities markets and- ensuring adequate investor protection and emphasized the developmental ensuring adequate investor protection and emphasized the developmental

philosophy with which SEBI would operate philosophy with which SEBI would operate

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INTRODUCTIONINTRODUCTION

• SEBI was established as a statutory authority through an Ordinance SEBI was established as a statutory authority through an Ordinance promulgated on promulgated on 30.01.199230.01.1992 by the President of India by the President of India

• SEBI is the SEBI is the regulatorregulator for the Securities Market in India for the Securities Market in India

• It is managed by a Board comprising of It is managed by a Board comprising of nine members nine members including the chairmanincluding the chairman

• Paradoxically this is a positive outcome of the Harshad Mehta Securities Scam Paradoxically this is a positive outcome of the Harshad Mehta Securities Scam of 1990-91of 1990-91

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SEBI - PREAMBLESEBI - PREAMBLE

The Preamble of the Securities and Exchange Board of India describes the basic The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as functions of the Securities and Exchange Board of India as

"...to protect the interests of investors in securities and to promote the "...to protect the interests of investors in securities and to promote the

development of, and to regulate the securities market and for matters connected development of, and to regulate the securities market and for matters connected

therewith or incidental thereto"therewith or incidental thereto"

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SEBI- A Critical Analysis

PURPOSE AND ROLE OF SEBIPURPOSE AND ROLE OF SEBI• SEBI was set up with the main purpose of keeping a check on SEBI was set up with the main purpose of keeping a check on

malpractices and protect the interest of investors. It was set up to malpractices and protect the interest of investors. It was set up to meet the needs of three groupsmeet the needs of three groups

• Issuers:Issuers:• For issuers it provides a market place in which they can raise finance fairly and For issuers it provides a market place in which they can raise finance fairly and

easilyeasily• Investors:Investors:

• For investors it provides protection and supply of accurate and correct For investors it provides protection and supply of accurate and correct informationinformation

• Intermediaries:Intermediaries:• For intermediaries it provides a competitive professional marketFor intermediaries it provides a competitive professional market

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BASIC OBJECTIVESBASIC OBJECTIVES

• To protect the interests of investors in securitiesTo protect the interests of investors in securities

• To promote the development of Securities MarketTo promote the development of Securities Market

• To regulate the securities market andTo regulate the securities market and

• For matters connected therewith or incidental theretoFor matters connected therewith or incidental thereto

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POWERS OF SEBIPOWERS OF SEBI

• Powers relating to stock exchanges and intermediaries: Powers relating to stock exchanges and intermediaries:

• SEBI has wide powers regarding the stock exchanges and intermediaries dealing in SEBI has wide powers regarding the stock exchanges and intermediaries dealing in securitiessecurities

• It can ask information from the stock exchanges and intermediaries regarding their It can ask information from the stock exchanges and intermediaries regarding their business transactions for inspection/scrutiny and other purposesbusiness transactions for inspection/scrutiny and other purposes

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POWERS OF SEBI POWERS OF SEBI (CONTD…)(CONTD…)

• Powers relating to monetary penalties: Powers relating to monetary penalties:

• SEBI’ has been empowered to impose monetary penalties on capital market SEBI’ has been empowered to impose monetary penalties on capital market intermediaries and other participants for a range of violationsintermediaries and other participants for a range of violations

• It can even impose suspension of their registration for a short periodIt can even impose suspension of their registration for a short period

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POWERS OF SEBI POWERS OF SEBI (CONTD…)(CONTD…)

• Powers to initiate actions relating to functions assigned: Powers to initiate actions relating to functions assigned:

• SEBI has a power to initiate actions in regard to functions assignedSEBI has a power to initiate actions in regard to functions assigned

• For example, it can issue guidelines to different intermediaries or can introduce For example, it can issue guidelines to different intermediaries or can introduce specific rules for the protection of interests of investorsspecific rules for the protection of interests of investors

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FUNCTIONS OF SEBIFUNCTIONS OF SEBI

• The SEBI performs functions to meet its objectives.The SEBI performs functions to meet its objectives.

• Functions can be broadly divided into:Functions can be broadly divided into:

• Protective functionsProtective functions

• Developmental functionsDevelopmental functions

• Regulatory functionsRegulatory functions

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FUNCTIONS OF SEBI FUNCTIONS OF SEBI (CONTD…)(CONTD…)

• Protective Functions-Protective Functions-• It Checks Price RiggingIt Checks Price Rigging• It Prohibits Insider tradingIt Prohibits Insider trading• SEBI prohibits fraudulent and Unfair Trade PracticesSEBI prohibits fraudulent and Unfair Trade Practices• SEBI undertakes steps to educate investors SEBI undertakes steps to educate investors • SEBI promotes fair practices and code of conduct in security market SEBI promotes fair practices and code of conduct in security market

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• Developmental Functions-Developmental Functions-

• SEBI promotes training of intermediaries of the securities market.SEBI promotes training of intermediaries of the securities market.• SEBI tries to promote activities of stock exchange by adopting flexible and adoptable SEBI tries to promote activities of stock exchange by adopting flexible and adoptable

approach in following way:approach in following way:• SEBI has permitted internet trading through registered stock brokers.SEBI has permitted internet trading through registered stock brokers.• SEBI has made underwriting optional to reduce the cost of issue.SEBI has made underwriting optional to reduce the cost of issue.• Even initial public offer of primary market is permitted through stock Even initial public offer of primary market is permitted through stock

exchange.exchange.

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• Regulatory Functions-Regulatory Functions-• It has framed rules and regulations and a code of conduct to regulate the It has framed rules and regulations and a code of conduct to regulate the

intermediaries such as merchant bankers, brokers, underwriters, etc.intermediaries such as merchant bankers, brokers, underwriters, etc.• It registers and regulates the working of all those who are associated with stock It registers and regulates the working of all those who are associated with stock

exchange in any manner.exchange in any manner.• It registers and regulates the working of mutual funds etc.It registers and regulates the working of mutual funds etc.• It regulates takeover of the companies.It regulates takeover of the companies.• It conducts inquiries and audit of stock exchanges.It conducts inquiries and audit of stock exchanges.

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BOARD MEMBERS OF SEBIBOARD MEMBERS OF SEBI

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Shri U. K. Sinha,Chairman, SEBI,SEBI Bhavan, Bandra Kurla Complex,Bandra (E), Mumbai - 400051

Shri Rajeev Kumar AgarwalWhole-Time Member, SEBI,SEBI Bhavan, Bandra Kurla Complex,Bandra (E), Mumbai - 400051

Shri Prashant SaranWhole-Time Member, SEBI,SEBI Bhavan, Bandra Kurla Complex,Bandra (E), Mumbai - 400051.

Shri Manoj Joshi Joint Secretary,Department of Economic Affairs,Ministry of Finance, New DelhiPart-time Member Ms. Anjuly Chib Duggal Secretary, Ministry of Corporate Affairs,New Delhi

Shri S. RamanWhole-Time Member, SEBI,SEBI Bhavan, Bandra Kurla Complex,Bandra (E), Mumbai - 400051.

SEBI- A Critical Analysis

CASE STUDY (SUBRATO ROY VS SEBI)CASE STUDY (SUBRATO ROY VS SEBI)

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• Introductions: Sahara India Pariwar• Sahara India Pariwar an Indian conglomerate company headquartered in

Lucknow• Diversified business in finance, infrastructure & housing, media &

entertainment, consumer merchandise retail venture etc. • Started by Mr. Subrata Roy Sahara in 1978 • Peak of success in very short period, such a success motivating but

suspicious• Main sponsor of the Indian Cricket Team (apparently withdrawn and

Hockey Team. • They own an IPL Team and 42.5% stake in Formula One's Force India

F1.

SAHARA V/S SEBI: FACTSSAHARA V/S SEBI: FACTS

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• Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHIC) issued Optionally Fully Convertible Debentures (OFCDS) through subscriptions from investors with effect from 25th April 2008 up to 13th April 2011.

• Raised around Rs.20,000 crores from investors • The purpose of issue was to carry out infrastructural activities namely,

constructing the bridges, modernizing or setting up of airports, rail system or any other projects which may be allotted to the company.

• Filed RHPs to the concerned ROC and specified intention of company not wanting to list the shares on any stock exchanges.

• As per Sahara issue of OFCDS was private placement

SAHARA V/S SEBI: FACTS (CONT’D)SAHARA V/S SEBI: FACTS (CONT’D)

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• However, amount was collected from about 30 million investors in the guise of a "Private Placement"

• The requirements applicable to the public offerings of securities were not complied with.

• Later, Sahara Prime City Limited intended to raise funds through listing of its shares filed Prospectus to SEBI

• While processing the prospectus, SEBI received complaint from one of the investor and “Professional Group of Investors Protections” on 25.12.09 and 4.01.10.

• Complaint alleged Sahara group for issuing Housing Bonds without complying with relevant regulations prompting SEBI to look into matter

SAHARA V/S SEBI: FACTS (CONT‟D)SAHARA V/S SEBI: FACTS (CONT‟D)

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• The Whole Time Member of SEBI passed an order dated 23rd June, 2011 directing the two companies to refund the money so collected to the investors

• Also restrained the promoters of the two companies including Mr. Subrata Roy from accessing the securities market till further orders.

• Sahara then preferred an appeal before Securities Appellate Tribunal (SAT) against the order. SAT confirmed and maintained the order of the Whole Time Member by an order dated 18th October, 2011.

• Subsequently Sahara filed an appeal before the Supreme Court of India against the SAT order.

SAHARA‟S CONTENTIONSAHARA‟S CONTENTION

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• Issue of Optionally Fully Convertible Bonds (OFCD‟s) is legal.

• Issue of OFCD‟s is not a public issue.

• OFDC are neither shares nor Debentures but “Hybrid” Class

• OFCD‟s are “Hybrid Instruments” cannot be listed. Serious error is committed by SEBI.

• No statutory requirement to list OFCD„s

SEBI‟S CONTENTIONSEBI‟S CONTENTION

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• OFCD was public issue

• OFCDs were securities transferable

• Violation of section 73 of Companies Act 1956

• Untrue Red Herring Prospectus Not following The Securities Contracts (Regulation) Act, 1956

• The forms issued by the two companies did not enclose an abridged prospectus

• Did not submit Balance Sheet and P&L a/c to the concerned ROC 11

SEBI‟S CONTENTION (CONT‟D)SEBI‟S CONTENTION (CONT‟D)

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• Aggrieved Sahara appealed to SAT(Securities Appeallet Tribunal).

• Passed order in favor of SEBI.

• Aggrieved Sahara again moved towards Supreme court.

• Finally, Supreme court of India passed the judgment in favor of SEBI.

• Ordered Sahara to repay the investors.

FACTUAL SUMMARYFACTUAL SUMMARY

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• Sahara aggrieved against the notice of SEBI moved the Allahabad High court and obtained stay.

• SEBI filed petition to Supreme Court. • Recall of the earlier order. • Allahabad High Court rejected the recall order. • SEBI again approached Supreme Court • Issue of fresh notice to Sahara by SEBI. • Confirmation of violation of rules and regulations and therefore, order

against Sahara was passed.

PRESENTED BY-PRESENTED BY-Sr. No.

Name Roll No.

1 DEEPESH SINGH 09

2 RIYAZ KHAN 28

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THANK YOUTHANK YOU

sebi with subrato roy case

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