Legal Provisions:

The entire issue rests on the issue of OFCDs which were issued to investors by IPOs but Sahara
contended that they were not public issues rather they were privately placed. SEBI had
jurisdiction in the matter as any issue or allotment of shares or debentures requires the prior
approval and conformity with the SEBI and its regulations.

Before the OFCD Issue starts, according to the Schedule II of the Companies Act of India
1956, SEBI has to review the DRHP of the company. The Schedule also specifies that,
when the company files its DRHP, the company directors have to file a declaration saying
that they have complied with all provisions of the Companies Act and the SEBI
guidelines. Sahara did not comply with any of the requirements. No prospectus was
issued, no closing dates of issues were mentioned, there was unregulated collection of
funds from public. The entire jurisdiction of SEBI was denied by the Sahara.
The question to jurisdiction of SEBI can be answered by referring to sections 11, 11A,
11B of the SEBI Act and section 55A under the Companies Act. The legislative intent
and the statement of objectives for the enactment of SEBI Act and the insertion of
Section 55A in the Companies Act is to delegate special powers to SEBI in matters of
issue, allotment and transfer of securities. According to the SC, SEBI has special powers
and its powers are not derogatory to any other provisions existing in any other law and
are analogous to such other law and should be read harmoniously with such other
provisions and there is no conflict of jurisdiction between the MCA and the SEBI in the
matters where interests of the investors are at stake.
It was argued that the OFCDs did not come under the definition of securities. They were
hybrid instruments. The court was of the view that it doesnt cease to be a security within
the meaning of Companies Act, SEBI Act and SCRA. It held that although the definition
of "Securities" under section 2(h) of SCRA does not contain the term hybrid instruments,
the definition as provided in the Act is an inclusive one and covers all "marketable
securities"
Sahara contended that money was raised through private placement hence no need to
issue the prospectus. But since the issue was made to more than 50 members it cannot be
a private placement. But in section 67(3) it has been specifically mentioned that when
any security is offered to and subscribed by more than 50 persons it will be deemed to be
a public offer and SEBI will have jurisdiction in the matter and the issuer will have to
comply with the various provisions of the legal framework for a public issue. As the limit
prescribed under section 67(3) was not observed hence criminal as well as civil liabilities
were also attracted now. Section 60 B was also violated.
Also as per section 73 Sahara argued that listing is not mandatory but as soon as the
threshold limit of 50 people is crossed the intention of the company to get listed is of no
more importance. They will be deemed to fall under the jurisdiction of sebi and will have

to comply with all the provisions laid down in this regard. The maxim acta exterior
indicant interiora secreta can be aptly cited here.
Sahara tried to take recourse to the Public Unlisted Companies (Preferential Allotment
Rules) 2003 under which preferential allotment by unlisted public companies on private
placement was provided for and permitted without any restriction on numbers as per the
proviso to Section 67(3) of the Companies Act and without requiring listing of such
OFCDs on a recognized stock exchange. But this rule is a delegated piece of legislation
and under no circumstances it can supersede the provisions of Companies Act or the
SEBI Act.
Sahara also contended that OFCDs were convertible bonds hence SCRA would not be
applicable. But the Act is not applicable only to the options or rights or entitlement that
are attached to the bond/warrant and not to the bond/warrant itself. Under section 28(1)
(b), it is clearly indicated that it is only the convertible bonds and share/warrant of the
type referred to therein that are excluded from the applicability of the SCRA and not
debentures which are separate category of securities in the definition contained in Section
2(h) of SCRA. And OFCDs, as the name suggests, are convertible debentures so the
SCRA will be applicable.
The SEBI asked the following questions to which the company had no answer like:
Why was the money raised, who were the investors and the owners, why there was no
regulation followed regarding the issuing, opening, closing of OFCDS and also why the
prospectus was not filed in the prescribed manner of schedule II of the SEBI Act.
The company did not even have the proper details of its investors, their names, addresses
etc. This very fact questioned the legitimacy of the entire issues made. Most of the
investors were from the lower strata of the society and villages hence they were easily
tricked into this fraud.
Also when the companies were unable to pay back the amount to the investors alongwith
the interest, SEBI was permitted to attach the properties of Sahara. It was discovered that
numerous lands on which Sahara had a claim were underpriced. Also many properties
that were mentioned did not even exist, thus making it impossible to recover the money
misappropriated by Sahara.
SEBI has been conferred with the powers of search and investgation and the companies
are supposed to fully cooperate. But in this case the company did not cooperate in the
investigation of the SEBI, in spite of the reminder from the Court.
Sahara also did not comply with the time limits that were given to it by SEBI on
numerous occasions. Extensions of deadlines became a routine course and still they were
not adhered to even after constant reminders from SEBI as well as the Courts.
Non-bailable warrant was issued against the Sahara Chief Mr. Subrata Roy but arrest
couldnt be made as he was untraceable. Court has constantly asked him to be present in
the proceedings but he has been evading from the court proceedings. This has resulted in
the arrest order of Mr. Subrata Roy but the only law to support this contention is
contempt of court. Since there is a lack of clear provisions in this regard, there is a lot of

confusion as to which law to be applied. And this confusion if going to increase in the
future and also produce counter-productive effects.
No specific provisions exist which could justify the arrest but to make the rule of law
work, also to promote the efficient investigation and to respect and obey the orders of the
court, this is important.

Criticism: If a common man who doesnt pay his debt say of Rs. 1,00,000/-, the entire banking
system as well as legal system leaves no way to harass and recover back the money from that
man. But when a huge debt of crores is pending then why does our system, both the banks as
well as law, suffers a paralytic attack and is unable to get back the amount on which the economy
of the nation rests. Scams like Sahara, Mallaya are a live example of this situation.
Why is it that the system leaves no opportunity to harass a common man and to take back every
single penny from him. And at the same time, the so called big time industrialists are given
thousands of relaxation on the same issue. In their cases thousands of crores are involved
alongwith the entire economy of the nation. People who are their employees, people who have
contributed towards the capital of the industry, the small shareholders; all depending on the
working of these companies are severely affected. The system is ready to pick on a common man
whose debt if not paid then the persons affected will be no one but he himself and his family. But
at the same time our very own system turns a blind eye towards these scams which affect the
entire nation. They are given more opportunities by our system but they d not use these
opportunities to make amendments. Rather these opportunities are once again misused by them
for their own benefit. Thus this discrimination cannot be justified by any excuse and stringent
measures need to be taken. On analysis of the Sahara scam the same result shows up; deceiving
of the public- moving to the court- court granting another opportunity- again misusing this
opportunity- ultimately fleeing from the country.