SEBI Vs SAHARA GROUP

Background:

Sahara Housing Investment Corporation and Sahara India Real Estate Corporation planned to raise Rs 20,000 crores each through the issue of OFCDs (Optionally Fully Convertible Debentures). It issued a draft Red Herring Prospectus.  The above companies have stated that they do not have any intention to list the OFCDs in any stock exchanges in India or in foreign countries. Issuer informed that since the company do not wish to get its securities listed on stock exchanges and since it is an unlisted one, the jurisdiction to deal with the issues will vest with the Central Government in pursuant to section 55 A  ( c ) of the Act.Section 55 A of the companies Act describes the powers of  Securities and Exchange Board of India.

Issues Involved

The main issue in this case whether SEBI is authorised to initiate any action against the company  and if so , whether they should have been issued in pursuant to an offering document filed with SEBI. In  case of issue ,transfer of securities  and non-payment of dividend shall in case of

a)    In case of listed public companies;

b)   In case of public companies which aim to get their securities listed on any recognised stock exchange of India;

c)    In any other case , be administered by the Central Government ( MCA).

According to section 67(3) of the Companies Act ,

·         No invitation or offer shall be construed to be made to the public if the invitation or offer  is not made to public but made to those persons to whom it has been sent .

·         It could be regarded as a domestic concern of the individual receiving or making the invitation or the offer.

SEBI’s Perception to issue the Said OFCDs”

SEBI argued that modus operandi followed by the Sahara group was nothing but an indirect way of offering shares to public without adhering norms , without disclosing vital information , risk associated and not tailored to safeguard the investor’s interest.

SEBI argued that if the Companies like Sahara Group is allowed to raise capital from public by way of private placement , then it would be tantamount to ridicule to the whole gamut of capital market structure and all conventional mechanisms to safeguard investor’s interest.

SEBI issued a show cause notice to Sahara Groups why action should not be initiated against them which might include demanding the group to refund the money already received from investors.

Decision of the Allahabad High Court:

Allahabad High Court issued as stay against the decision of SEBI preventing Sahara Group to issue OFCDs

ü  The OFCDs issued does not fall under the SEBIs purview as the Sahara Group is neither a listed company nor any intention to get it listed with SEBI.

ü  MCA is already aware of the issue

ü  Allahabad High Court viewed the SEBIs order is in infringement of fundamentals of natural justice and SEBIs sweeping order has really injured the civil rights and SEBI should not have passed such an order which is against the principles of natural justice.

DECISION OF THE SUPREME COURT :

The Supreme Court of India also seconded the view of the Allahabad High Court in this issue.  It observed SEBI is having every right to ask details from Sahara Group on how OFCDs were being raised . Supreme Court also refused to stay the Sahara Group’s ongoing fund-mopping exercise.

Supreme Court also observed SEBI has the right to gather datas about investors details from Sahara Groups and also directed Allahabad High Court to dispose off the case expeditiously .

Supreme Court further observed that if it all , the investors make to decision to invest in the OFCDs offered by Sahara Group , then they would do the same at their own risk.

Supreme Court also directed the SEBI to issue a public advertisement warning the public the inherent risk associated in investing in such OFCDs .

Learning Lessons From Sahara Group OFCDs Case:

1.     A private limited company or a public limited unlisted company can issue OFCDs as a private placement to less than 50 investors which have no intention to get it listed.

2.    While offering OFCDs to the investors under private placement , the company should file an “Red Herring Prospectus “ with the Registrar of Companies concerned.

3.    Thus , private limited companies or public unlisted companies can go to the public and collect funds by following the strategy pursued by SAHARA without listing or observing the strict guidelines issued by SEBI for collecting funds from public.

CAN PARTLY PAID-UP SHARES BE TRANSFERRED ?

Yes . Partly-paid up shares can be transferred .

In such cases , Where the application is made by the transferor and relates to partly paid-up shares, the company has to give due notice of the amount due on shares/debentures to the transferee and the transferee shall raise objection, if any within two weeks from the date of receipt of the said notice.

Where the application is made by the transferor and relates to partly paid shares, the transfer shall not be registered, unless the company gives notice of the application to the transferee and the transferee makes no objection to the transfer within two weeks from the receipt of the notice. The notice to the transferee shall be deemed to have been duly given if it is dispatched by prepaid registered post to the transferee at the address given in the instrument of transfer, and shall be deemed to have been duly delivered at the time at which it would have been delivered in the ordinary course of post.

Please note that the transferee may be asked to pay the balance amount in the partly-paid-up share of the company.

Whether a Minor can be a Signatory to the Memorandum of Association of a Company ?

In case if during a incorporation of a private limited company, if only two signatories are there to the Memorandum of Association and if one is a minor, then it will not be valid as in such situation, a minor who is a signatory to the memorandum of Association of the company will become director automatically by the operation of law if no other name is mentioned in the Articles of Association of such company

Even otherwise , a minor cannot be a signatory to the memorandum of association of a company. Since, signatory to the memorandum of association will automatically become the first directors of the company, in such scenario, a minor cannot be a signatory to the memorandum of association of a company.

Generally , a minor cannot enter into contract hence cannot be the subscribers to MOA. Subscribers to MOA means the person promises to take the shares in proposed company. In this situation Minor cannot promise.

The Companies Act, 1956 generally not define the minimum age limit for becoming a director of the company. A minor is not competent to contract. Under section 184 of the Indian Contract Act, 1872, a person who is not the age of majority can not become an agent. In consequence a minor cannot be appointed to an office of director of a company.

For appointment of a Managerial person he should be one who has completed the age of 25 years and has not attained the age of 70 years.

As per Part I of Schedule XIII is as under, for appointment of MD or WTD , minimum age is fixed as the age of 25 years and has not attained the age of 70 years.

Exception: A special resolution is required for the appointment of a managerial person if he

(i)    Has attained the age of 70 years; or

(ii) Has not completed the age of 25 years, but has attained the age of majority (i.e. 18 years).

Form 32 - there is an instruction that appointee as a director should be of more than 18 age.

Thus, a minor cannot be a subscriber to a memorandum  of any company as he lacks capacity to contract and subscription to memorandum is a contract to subscribe a particular amount of shares and a minor cannot do that under existing laws.

In view of the above , a minor cannot be signatory to the memorandum of association of a company.

THE STAMP PAPERS DO NOT HAVE ANY EXPIRY PERIOD

Citation: Thiruvengada Pillai Vs Navaneethammal and Anr.

Brief: According to a recent Supreme Court judgement dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr,     

Judgment:According to a recent Supreme Court judgment dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr, the stamp papers do not have any expiry period. Relevant extract from SC Judgment is reproduced herein below:

 "The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper. Section 54 merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector provided it was purchased within the period of six months next preceding the date on which it was so surrendered. 

The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months.

 Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document

Whether the Whole Time Director can be held personally liable for the defualts done by him or if he is the known party to the defaults?

The whole -time directors are like the employees of the company and if they commit any violations , they will be held responsible.

If you are talking about the violations under the Companies Act, unless otherwise is proved the WTD being officer in default will be personally liable for all violations.

Each section of the Companies Act defining the liability, provides for the persons who would be personally liable for the violations.

 WTD is the officer in default under Section 5(g) of the companies Act, 1956 and for any willful default he will be personally liable and corporate veil can be lifted to see who is behind the scene.

he whole -time directors are like the employees of the company and if they commit any violations , they will be held responsible.

For instance , Section 372A of the Companies Act, Sub-section 1 of Section 372A stipulates that no company can acquire shares in any other “body corporate” through “subscription purchase or otherwise” for an amount exceeding 60 per cent of the acquiring company’s share capital and free reserves or 100 per cent of its free reserves, whichever is higher, as loans, guarantees and investments.

If company wants to invest more than the above limit , it would require shareholder authorization through a special resolution passed in a general meeting. The law also states that such a resolution has to be passed only through a postal ballot and with advance intimation to the RoC.

For instance , Satyam Board under Mr.Raju chairmanship ,approved a proposal to invest Rs 7,920 crore in the Maytas firms ( a subsidiary of Satyam group) whereas under section 372 A, it can invest only to the maximum level of Rs 2,136.37 crores without shareholders approval. Without Shareholders approval , Satyam invested Rs 7920 crores in Maytas.

Satyam board at that time consisted ts like prominent personalities as former cabinet secretary T R Prasad, Harvard Business School’s Krishna Paleppu, designer of the Pentium chip Vinod Dham etc.

Please note that Violating Section 372A would make the officers-in-default (which include the managing director, company secretary and whole time director) liable for punishment, which includes a fine of Rs 50,000 or imprisonment up to two years.

Thus , whole-time directors can be held liable for the violation or infringement of section 372A .

REMOVAL OF DIRECTOR UNDER SECTION 283 (1) (G) –PRECAUTIONS TO BE TAKEN:

REMOVAL OF DIRECTOR UNDER SECTION 283 (1) (G) –PRECAUTIONS TO BE TAKEN:

A director can be said to be ceased to be a director under Section 283 (1)(g) of the Companies Act, 1956 for not attending the three consecutive Board Meetings without obtaining leave of absence.

However, this section should not be abused to take revenge on a director by removing him without his consent. This section will be helpful where the director is not traceable, or in a jail or against whom a criminal proceedings is taken or could not be reached for long time.

One should take note the following precautions before removal of a director under this section:

1.Certified copies of minutes can be attached to the Form 32. However in order to avoid future disputes in this matter it is better to have the evidence of dispatch of notice for the meetings to the said Director, confirming due procedure followed as per the Act and as per the AOA.

2. Optionally, one can also attach Board Resolution in this regard and attendance sheet of these meetings and/or minutes sheet copies of these meetings.

You can also refer the decision made by D.S.Dhillion Vs.M/s Honeyrex Products Pvt. Ltd -CP No.60/2000 wherein CLB has asked to apply to a civil court for redressal of grievances by the affected director under the above section.

Generally, a director on the company’s board could be removed by shareholders at an annual or extraordinary general meeting.

If a board meeting notice is served on the other member, he is bound to attend the board meeting. If he fails to attend the meeting, then he may lose the directorship for not attending three consecutive board meetings without leave of absence. Under section 283(1)(g) the office of a Director shall vacate if he absents himself from three consecutive meetings of the Board of Directors or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board; 

When a director holds 99% of the share , he is the powerful director and he can remove the 1% holding non-consenting director for smooth running of the business.

However, much care and diligence have to be shown if one uses the proviso of this section. Otherwise, it will end in unnecessary legal battle between the parties.

PROOF FOR SERVICE OF NOTICE IS THE MAIN CRITERIA

Marble City Hospital and Research Center P Ltd v SARABJEET Singh Mokha [2010] 155 CAS 13 (MP) decided on 17-7-2009.

In this case , Madya Pradesh High Court held that services of notices by post and in person not established. Minutes of the meeting in statutory form not produced. Company failed to discharge its onus regarding of services notice. CLB refused to accept the certificate of posting as proof of service of notice on the footing that collateral evidences like dispatch register, register showing payment of postage stamps, accounts books etc were not produced. Hence, CLB held that removal of director under section 284 (1) (g) was not valid. CLB decision was appealed in the High Court by the appellant. High Court held that mere filing of postal certificates would not corroborate service of notice. There should be adequate proof for posting of letter, affixation of stamps etc. High Court also cited the Madhusoodhanam M.S v  Kerala Kamudi P Ltd [2003] where it was held that presumption could be drawn to hold that postal certificate were the proof for dispatching the notices to the respondent. Evidence should be legal, cogent and admissible one. Further, the affidavit filed by the employee of the company to demonstrate personal services of notices lacked specific particulars and details. Even in cases where the respondent was involved in some criminal cases or was absconding or on the grounds that he was not available to civil society, proper service of notice to the respondent should be made by the company.

Hence, If you want to remove a director under section 284 (1) (g), you have to take all precautionary measures as enumerated in the above case.

Can Single Director present in India sign the B/S on behalf of the company?

Query : A company has two director and one director being in India and other in foreign nation. Can a Single Director sign the B/S and P& L account through a validly convened board meeting ?


Even if a single director in India signs the B/S and P&L account and makes a statement in this regard as per requirement of section 215 (2) .
Save as provided by sub-section (2), every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of directors-

in the case of banking company, by the persons specified in clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the Banking Companies Act, 1949 (10 of 1949);

(ii) manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one.

(2) In the case of a company not being a banking company, when only one of its directors is for the time being in India, the balance sheet and the profit and loss account shall be signed by such director; but in such a case there shall be attached to the balance sheet and the profit and loss account a statement signed by him explaining the reason for non-compliance with the provisions of sub-section .

(3) The balance sheet and the profit and loss account shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon.

From the above mentioned provisions it is clear that one director in India can sign the B/S and P/L Account.


However , section 215 (3) requires even before signing B/S and P& L account , the same has to be approved by the Board.

2) stipulates that the quorum for a meeting of the Board of directors of a company shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors, whichever is higher : ( minimum and articles may prescribe more) .

With only one director in India , a valid board meeting cannot be convened under section 287(2) of the Companies Act 1956. Hence , it is suggested an alternate director has to be appointed and this will take care of the requirement of section 287(2) of the Companies Act .

A valid board meeting can be convened with the alternate director and B/S and P&L can be ratified in such meeting .Then , B/S and P&L can be signed by a single director as stated in the section 215 or two directors can sign ( including the alternate director) the same.

This could be the possible solution to the issue.

R.V.Seckar