Market watchdog SEBI on Thursday claimed before the Securities Appellate tribunal (SAT) that the Companies Act gives it enough powers to regulate unlisted companies if such entities have raised funds from the public.

“Does SEBI have powers under Section 55A of the Companies Act? My answer is yes. If OFCD is a security under the Securities Act, then it comes under the SEBI Act. And if it comes under the SEBI Act, then SEBI has jurisdiction. SEBI can (therefore) pass a special order to regulate unlisted companies,” SEBI's Counsel, Mr Arvind P. Datar, claimed before SAT.

Mr Datar was contesting Sahara Group's claim that its OFCD (optionally fully convertible debentures) were not a public issue and, therefore, cannot be regulated by SEBI.

Refund money

Sahara had been ordered by SEBI to refund the money its two group companies had raised from the public through an OFCD issue The company has challenged the SEBI order at the SAT.

Mr Datar further argued that Sahara companies' OFCDs were issued to the public and that it was actually “a public offer dressed up as a private placement.”

Mr Datar further said if an OFCD can indeed be defined as a security, then under the SEBI Act, SEBI has jurisdiction.

“They can only come under Section 55-A, Clause B. If one goes by a literal interpretation of this provision, then that would be very absurd, and the appellant may argue that this does not cover them,” Mr Datar said.

“We must understand why this provision was introduced in the first place. It was introduced, because Parliament wanted to give SEBI all powers,” Mr Datar said.

“A literal interpretation of Section 55-A would defeat the intention of Parliament....,” the SEBI counsel said.

SAT's Presiding Officer, Mr N. K. Sodhi, observed, “If it is a public issue, they should have gone to the stock exchange, and so Section 73(2) of the Companies Act follows. The necessary consequence is a refund of the money under Section 73(2). But who will give such a direction to refund? Should it be SEBI?”

The SEBI counsel replied that Section 55-A of the Companies Act will have the answer as to who can issue such a direction.

Mr Sodhi then observed that consequence could be that Sahara's public issue will go out of listing and 66 lakh investors will not be able to trade their securities.

‘Securities' defined

Arguing that Section 73 (1) of the Companies Act ought to be read in consonance with Section 55-A Clause B, which deals with intention of the company, Mr Datar said under Section 245 AA of the Companies Act, securities include “hybrid” financial instruments.

To this, Mr Sodhi asked Mr Datar what is the consequence of calling OFCD a security.

SAT will resume hearing next Monday.

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