Mumbai, Aug. 31: The Sahara case verdict by the Supreme Court on Friday lays down the litmus test to decide when a flotation of shares or debentures should be treated as a public issue — a subject on which there has been ambiguity and a lot of legal quibbling till now.
The Supreme Court said that any issue of shares or debentures to more than 49 persons will automatically be deemed a public issue attracting all the relevant provisions of the Sebi Act and the Companies Act pertaining to such flotations.
According to the apex court, “Companies have no option or choice but to list their securities on a recognised stock exchange once they invite subscription from over forty nine investors from the public.”
Ruling that “listing of securities depends not upon one’s volition, but on statutory mandate”, the Supreme Court said that Section 73 (1) of the Companies Act casts an obligation on every company intending to offer shares or debentures to the public to apply to a stock exchange for listing of its securities.
Further, any offering of securities to 50 or more investors is a public offering by virtue of Section 67 (3) of the Companies Act, it said.
“Listing is a legal responsibility of the company which offers securities to the public, provided offers are made to more than 50 persons,” the court ruled.
Section 73 stipulates that a company must apply to the stock exchange authorities for permission to list on the bourses before it comes out with the issue. If the permission isn’t granted within 10 weeks from the close of the subscription to the issue, the company is obliged to refund the amount within eight days without interest and 15 per cent interest beyond that date.
The court verdict finally settles the contentious debate over whether the company issuing securities and its shareholders have any choice in the matter. Sahara had vehemently argued that it was the prerogative of the company to decide whether to list on the bourses or not.
Senior counsel for Sahara Housing Investment Corporation Ltd (SHICL) Gopal Subramanium had argued before the Supreme Court that Section 67 of the Companies Act did not imply that a company’s offer of shares or debentures to 50 or more persons would ipso facto become a public issue or a private offer.
“What is relevant is the intention of the offer, the numbers are irrelevant; it is only the intention to offer to a select or identified group which will make the offer a private placement,” Subramanium had argued.
He pointed out that Section 73 had a very narrow and limited role as it did not cover companies that did not intend to list their securities on the bourses.
The court did not agree with this view. It said that only Section 67(3) provided a set of circumstance under which an offer/invitation would not be treated as being made to the public. To qualify for this, the offer should not result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer.
There were only four situations under which an offer could be construed as not being made to the public:
(a) the offer of securities should be made to less than 50 persons
(b) the offer should be made only to existing shareholders (rights issues)
(c) the offer must be made to a particular addressee and be accepted only by persons to whom it is addressed
(d) offers made where it is the domestic concern of those making and receiving the offer
The Sahara group had earlier maintained that the optionally fully convertible debentures it issued were restricted to a select group and, hence, the issue was not a public offer.
to attract the provisions of SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2009.