1  

 
 
A  PROJECT  REPORT  
ON    
POWERS  AND  FUNCTIONS  OF  SEBI  (11-­‐11D)  
 

 
 
Submitted  To:                                                                                                Submitted  By:  
Ms.  Sahibjot  Kaur                                                                                          Meghna  
           BCOM  LLB(hons.)  
         Sec-­‐  B  (18606)  

 
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TABLE  OF  CONTENTS  
 
 
Sr.  no     Particular     Page  no.  

1   Acknowledgement     3  

2   What  is  SEBI  and  why  it  was  formed   4  

3   Structure  of  SEBI       4-­‐5  

4   Statutory  provisions     5-­‐17  

5   In  brief  about  functions  and  powers   17-­‐18  

6   Case  laws   18-­‐30  

 
 
 
 
 
 
 
 
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ACKNOWLEDGEMENT  
 

First and foremost, praises and thanks to the God, the Almighty, for His showers
of blessings throughout my research work to complete the research successfully.

I would like to express my deep and sincere gratitude to my research

supervisor, Ms. Sahibjot kaur professor of Business law in, Rayat College of Law,
Railmajra for giving me and my group this opportunity to do research and
providing invaluable guidance throughout this research. Her dynamism, vision,
sincerity and motivation have deeply inspired me. she has taught me the
methodology to carry out the research and to present the research works as clearly
as possible. It was a great privilege and honor to work and study under her
guidance. I am extremely grateful for what she has offered me.

I am extremely grateful to my parents for their love, prayers, caring and

sacrifices for educating and preparing me for my future. I am very much thankful
to my friends and classmates for their love, understanding, prayers and continuing
support to complete this research work. My Special thanks goes to my team
members for the keen interest shown to complete this thesis successfully.

 
 
 
 
 
 
 
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SEBI meaning – what is SEBI?

Short for Securities and Exchange Board of India, SEBI was established as an
autonomous regulator on 12th Apr 1992 with two main purposes – regulating the
capital markets and protecting the interests of investors. Today, SEBI has emerged as
a multifaceted entity that not only performs these two duties but also strives to
promote the capital markets as a safe place by actively engaging in the creation of
regulations and guidelines for the participants in the capital markets.

Why was SEBI formed?

The government felt a need to incorporate an authoritative body to ensure a fair

market for investors and oversee the functioning of capital markets. SEBI was, thus,
born and vested with powers to meet the needs for market regulation supervising the
intermediaries, as well as protecting investors.

Today, the SEBI meaning has evolved. From being just a regulator, SEBI has come to
be a catalyst for the development of the market and the economy as a whole. 1

Structure of SEBI

                                                                                                               
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SEBI has been established as a corporate entity that has a board of members with a
designated chairman heading it. There are a total of 9 representatives on the SEBI
board of members. They are as follows:

• A chairman who is appointed by the government

• 2 members who are officers belonging to the Ministry of Finance

• 1 member who is appointed by the Reserve Bank of India (RBI), and

• 5 members as chosen by the government

There are about 20 departments in SEBI, and each department is headed by a head of
the department (HoD). Some of the departments are:

• Corporate finance

• Hybrid and debt securities

• Human resources

• Commodity derivatives market

• Investment management

• Legal affairs2

Statutory provisions:

                                                                                                               
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CHAPTER IV
POWERS AND FUNCTIONS OF THE BOARD

⇒ Functions of Board.

11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect
the interests of investors in securities and to promote the development of, and to
regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures
referred to therein may provide for—
(a) regulating the business in stock exchanges and any other securities markets;
(b) registering and regulating the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with securities markets in any manner;
[(ba) registering and regulating the working of the depositories, 14[participants],
custodians of securities, foreign institutional investors, credit rating agencies and such
other intermediaries as the Board may, by notification, specify in this behalf;]
(c) registering and regulating the working of [venture capital funds and collective
investment schemes], including mutual funds;
(d) promoting and regulating self-regulatory organisations;
(e) prohibiting fraudulent and unfair trade practices relating to securities markets;
(f) promoting investors‘ education and training of intermediaries of securities markets;
(g) prohibiting insider trading in securities;
(h) regulating substantial acquisition of shares and take over of companies;
(i) calling for information from, undertaking inspection, conducting inquiries and
audits of the 16[stock exchanges, mutual funds, other persons associated with the
   7  

securities market], intermediaries and self-regulatory organisations in the securities

market;

(ia) calling for information and records from any person including any bank or any
other authority or board or corporation established or constituted by or under any
Central or State Act which, in the opinion of the Board, shall be relevant to any
investigation or inquiry by the Board in respect of any transaction in securities;]

[(ib) calling for information from, or furnishing information to, other authorities,
whether in India or outside India, having functions similar to those of the Board, in
the matters relating to the prevention or detection of violations in respect of securities
laws, subject to the provisions of other laws for the time being in force in this regard:
Provided that the Board, for the purpose of furnishing any information to any
authority outside India, may enter into an arrangement or agreement or understanding
with such authority with the prior approval of the Central Government;]
(j) performing such functions and exercising such powers under the provisions of 19[*
* *] the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated
to it by the Central Government;
(k) levying fees or other charges for carrying out the purposes of this section;
(l) conducting research for the above purposes;
(la) calling from or furnishing to any such agencies, as may be specified by the Board,
such information as may be considered necessary by it for the efficient discharge of its
functions;]
(m) performing such other functions as may be prescribed.

(2A) Without prejudice to the provisions contained in sub-section (2), the Board may
take measures to undertake inspection of any book, or register, or other document or
record of any listed public company or a public company (not being intermediaries
   8  

referred to in section 12) which intends to get its securities listed on any recognised
stock exchange where the Board has reasonable grounds to believe that such company
has been indulging in insider trading or fraudulent and unfair trade practices relating to
securities market.]

(3) Notwithstanding anything contained in any other law for the time being in force
while exercising the powers under [clause (i) or clause (ia) of sub-section (2) or sub-
section (2A)], the Board shall have the same powers as are vested in a civil court under
the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the
following matters, namely :—
(i) the discovery and production of books of account and other documents, at such
place
and such time as may be specified by the Board;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers and other documents of any person referred to in
section 12, at any place;]
(iv) inspection of any book, or register, or other document or record of the company
referred to in sub-section (2A); (v) issuing commissions for the examination of
witnesses or documents.] [(4) Without prejudice to the provisions contained in sub-
sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons
to be recorded in writing, in the interests of investors or securities market, take any of
the following measures, either pending investigation or inquiry or on completion of
such investigation or inquiry, namely:—
(a) suspend the trading of any security in a recognised stock exchange;
(b) restrain persons from accessing the securities market and prohibit any person
associated with securities market to buy, sell or deal in securities;
(c) suspend any office-bearer of any stock exchange or self-regulatory organisation
from holding such position;
   9  

(d) impound and retain the proceeds or securities in respect of any transaction which is
under investigation;
(e) attach, after passing of an order on an application made for approval by the Judicial
Magistrate of the first class having jurisdiction, for a period not exceeding one month,
one or more bank account or accounts of any intermediary or any person associated
with the securities market in any manner involved in violation of any of the provisions
of this Act, or the rules or the regulations made thereunder : Provided that only the
bank account or accounts or any transaction entered therein, so far as it relates to the
proceeds actually involved in violation of any of the provisions of this Act, or the rules
or the regulations made thereunder shall be allowed to be attached;
(f) direct any intermediary or any person associated with the securities market in any
manner not to dispose of or alienate an asset forming part of any transaction which is
under investigation : Provided that the Board may, without prejudice to the provisions
contained in sub-section (2) or sub-section (2A), take any of the measures specified in
clause (d) or clause (e) or clause (f), in respect of any listed public company or a public
company (not being intermediaries referred to in section 12) which intends to get its
securities listed on any recognised stock exchange where the Board has reasonable
grounds to believe that such company has been indulging in insider trading or
fraudulent and unfair trade practices relating to securities market : Provided further that
the Board shall, either before or after passing such orders, give an opportunity of
hearing to such intermediaries or persons concerned.

(5) The amount disgorged, pursuant to a direction issued, under section 11B of this Act
or section 12A of the Securities Contracts (Regulation) Act, 1956 or section 19 of the
Depositories Act, 1996, as the case may be, shall be credited to the Investor Protection
and Education Fund established by the Board and such amount shall be utilised by the
Board in accordance with the regulations made under this Act.]
Board to regulate or prohibit issue of prospectus, offer document or advertisement
soliciting money for issue of securities.
   10  

11A.(1) Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956),
the Board may, for the protection of investors,—
(a) specify, by regulations—
(i) the matters relating to issue of capital, transfer of securities and other matters
incidental thereto; and
(ii) the manner in which such matters shall be disclosed by the companies;
(b) by general or special orders—
(i) prohibit any company from issuing prospectus, any offer document, or
advertisement soliciting money from the public for the issue of securities;
(ii) specify the conditions subject to which the prospectus, such offer document or
advertisement, if not prohibited, may be issued.

(2) Without prejudice to the provisions of section 21 of the Securities Contracts

(Regulation) Act, 1956 (42 of 1956), the Board may specify the requirements for
listing and transfer of securities and other matters incidental thereto.] [Collective
investment scheme.

11AA. (1) Any scheme or arrangement which satisfies the conditions referred to in
sub-section (2) or sub-section (2A)] shall be a collective investment scheme:
Provided that any pooling of funds under any scheme or arrangement, which is not
registered with the Board or is not covered under sub-section (3), involving a corpus
amount of one hundred crore rupees or more shall be deemed to be a collective
investment scheme.

(2) Any scheme or arrangement made or offered by any [person] under which,—
(i) the contributions, or payments made by the investors, by whatever name called, are
pooled and utilized for the purposes of the scheme or arrangement;
   11  

(ii) the contributions or payments are made to such scheme or arrangement by the
investors with a view to receive profits, income, produce or property, whether movable
or immovable, from such scheme or arrangement; (iii) the property, contribution or
investment forming part of scheme or arrangement, whether identifiable or not, is
managed on behalf of the investors;
(iv) the investors do not have day-to-day control over the management and operation
of the scheme or arrangement.

[(2A)] Any scheme or arrangement made or offered by any person satisfying the
conditions as may be specified in accordance with the regulations made under this Act.

(3) Notwithstanding anything contained in sub-section (2) or sub-section (2A)], any

scheme or arrangement—
(i) made or offered by a co-operative society registered under the Co-operative
Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be
registered under any law relating to co-operative societies for the time being in force in
any State;
(ii) under which deposits are accepted by non-banking financial companies as defined
in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);
(iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938),
applies;
(iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under
the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (19 of 1952);
(v) under which deposits are accepted under section 58A of the Companies Act, 1956
(1 of 1956);
(vi) under which deposits are accepted by a company declared as a Nidhi or a mutual
benefit society under section 620A of the Companies Act, 1956 (1 of 1956);
(vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of
the Chit Fund Act, 1982 (40 of 1982);
   12  

(viii) under which contributions made are in the nature of subscription to a mutual
fund;
(ix) such other scheme or arrangement which the Central Government may, in
consultation with the Board, notify,]
shall not be a collective investment scheme.]

⇒ Power to issue directions.

11B. Save as otherwise provided in section 11, if after making or causing to be made
an enquiry,
the Board is satisfied that it is necessary,—
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in section 12
being
conducted in a manner detrimental to the interest of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person,
it may issue such directions,—
(a) to any person or class of persons referred to in section 12, or associated with the
securities market; or
(b) to any company in respect of matters specified in section 11A, as may be
appropriate in
the interests of investors in securities and the securities market.]
Explanation.—For the removal of doubts, it is hereby declared that the power to issue
directions under this section shall include and always be deemed to have been included
the power to direct any person, who made profit or averted loss by indulging in any
transaction or activity in contravention of the provisions of this Act or regulations
   13  

made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss
averted by such contravention.] Investigation.

11C. (1) Where the Board has reasonable ground to believe that—
(a) the transactions in securities are being dealt with in a manner detrimental to the
investors or the securities market; or
(b) any intermediary or any person associated with the securities market has violated
any of the provisions of this Act or the rules or the regulations made or directions
issued by the Board thereunder, it may, at any time by order in writing, direct any
person (hereafter in this section referred to as the Investigating Authority) specified in
the order to investigate the affairs of such intermediary or persons associated with the
securities market and to report thereon to the Board.

(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act,
1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and
other employee of the company and every intermediary referred to in section 12 or
every person associated with the securities market to preserve and to produce to the
Investigating Authority or any person authorised by it in this behalf, all the books,
registers, other documents and record of, or relating to, the company or, as the case
may be, of or relating to, the intermediary or such person, which are in their custody or
power.

(3) The Investigating Authority may require any intermediary or any person associated
with securities market in any manner to furnish such information to, or produce such
books, or registers, or other documents, or record before him or any person authorised
by it in this behalf as it may consider necessary if the furnishing of such information or
the production of such books, or registers, or other documents, or record is relevant or
necessary for the purposes of its investigation.
   14  

(4) The Investigating Authority may keep in its custody any books, registers, other
documents and record produced under sub-section (2) or sub-section (3) for six months
and thereafter shall return the same to any intermediary or any person associated with
securities market by whom or on whose behalf the books, registers, other documents
and record are produced : Provided that the Investigating Authority may call for any
book, register, other document and record if they are needed again : Provided further
that if the person on whose behalf the books, registers, other documents and record are
produced requires certified copies of the books, registers, other documents and record
produced before the Investigating Authority, it shall give certified copies of such
books, registers, other documents and record to such person or on whose behalf the
books, registers, other documents and record were produced.

(5) Any person, directed to make an investigation under sub-section (1), may examine
on oath, any manager, managing director, officer and other employee of any
intermediary or any person associated with securities market in any manner, in relation
to the affairs of his business and may administer an oath accordingly and for that
purpose may require any of those persons to appear before it personally.

(6) If any person fails without reasonable cause or refuses

(a) to produce to the Investigating Authority or any person authorised by it in this
behalf any book, register, other document and record which is his duty under sub-
section (2) or sub-section (3) to produce; or
(b) to furnish any information which is his duty under sub-section (3) to furnish; or
(c) to appear before the Investigating Authority personally when required to do so
under sub-section (5) or to answer any question which is put to him by the
Investigating Authority in pursuance of that sub-section; or
(d) to sign the notes of any examination referred to in sub-section (7), he shall be
punishable with imprisonment for a term which may extend to one year, or with fine,
   15  

which may extend to one crore rupees, or with both, and also with a further fine which
may extend to five lakh rupees for every day after the first during which the failure or
refusal continues.

(7) Notes of any examination under sub-section (5) shall be taken down in writing and
shall be read over to, or by, and signed by, the person examined, and may thereafter be
used in evidence against him.

(8) Where in the course of investigation, the Investigating Authority has reasonable
ground to believe that the books, registers, other documents and record of, or relating
to, any intermediary or any person associated with securities market in any manner,
may be destroyed, mutilated, altered, falsified or secreted, the Investigating Authority
may make an application to [the Magistrate or Judge of such designated court in
Mumbai, as may be notified by the Central Government] for an order for the seizure of
such books, registers, other documents and record.

[(8A) The authorised officer may requisition the services of any police officer or any
officer of the Central Government, or of both, to assist him for all or any of the
purposes specified in subsection (8) and it shall be the duty of every such officer to
comply with such requisition.]

(9) After considering the application and hearing the Investigating Authority, if
necessary, the Magistrate or Judge of the Designated Court] may, by order, authorise
the Investigating Authority –
(a) to enter, with such assistance, as may be required, the place or places where such
books, registers, other documents and record are kept;
(b) to search that place or those places in the manner specified in the order; and
(c ) to seize books, registers, other documents and record, it considers necessary for
the purposes of the investigation: Provided that [the Magistrate or Judge of the
   16  

Designated Court] shall not authorise seizure of books, registers, other documents and
record, of any listed public company or a public company (not being the intermediaries
specified under section 12) which intends to get its securities listed on any recognised
stock exchange unless such company indulges in insider trading or market
manipulation.

(10) The Investigating Authority shall keep in its custody the books, registers, other
documents and record seized under this section for such period not later than the
conclusion of the investigation as it considers necessary and thereafter shall return the
same to the company or the other body corporate, or, as the case may be, to the
managing director or the manager or any other person, from whose custody or power
they were seized and inform the Magistrate or Judge of the Designated Court] of such
return:
Provided that the Investigating Authority may, before returning such books, registers,
other documents and record as aforesaid, place identification marks on them or any part
thereof.

(11) Save as otherwise provided in this section, every search or seizure made under this
section shall be carried out in accordance with the provisions of the Code of Criminal
Procedure, 1973 (2 of 1974) relating to searches or seizures made under that Code.
Cease and desist proceedings.

11D. If the Board finds, after causing an inquiry to be made, that any person has
violated, or is likely to violate, any provisions of this Act, or any rules or regulations
made thereunder, it may pass an order requiring such person to cease and desist from
committing or causing such violation: Provided that the Board shall not pass such order
in respect of any listed public company or a public company (other than the
intermediaries specified under section 12) which intends to get its securities listed on
   17  

any recognised stock exchange unless the Board has reasonable grounds to believe that
such company has indulged in insider trading or market manipulation.3

⇒ The following pointers offer a brief idea about the same.

Ø Functions of SEBI

• To protect the interests of Indian investors in the securities market.

• To promote the development and hassle-free functioning of the securities

market.

• To regulate the business operations of the securities market.

• To serve as a platform for portfolio managers, bankers, stockbrokers,

investment advisers, merchant bankers, registrars, share transfer agents and
others.

• To regulate the tasks entrusted to depositors, credit rating agencies, custodians

of securities, foreignportfolio investors and other participants.

• To educate investors about securities markets and their intermediaries.

• To prohibit fraudulent and unfair trade practices within the securities market
and related to it.

• To monitor company takeovers and acquisition of shares.

• To keep the securities market efficient and up to date through proper research
and developmental tactics.

                                                                                                               
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⇒ Powers of SEBI

Ø Following are the key powers of SEBI-

Ø Quasi-Executive: SEBI is vested with the power of checking the financial

accounts and statements of companies. This is to ensure that the companies are
following the rules and that there are no violations. SEBI also has the power to
implement the rules and regulations that it formulates and take the necessary
legal action against violators.

Ø Quasi-Judicial: The Quasi-Judicial power allows SEBI to deliver judgments if

it uncovers fraudulent and unethical practices.

Ø Quasi-Legislative: This power gives SEBI the right to issue and implement
rules and regulations for fair trading practices and investors’ protection.

Though SEBI has these powers, market participants can challenge it in a court of law
– it is answerable to the Supreme Court of India as well as the Securities Appellate
Tribunal.

Case laws:

Harshad S. Mehta vs. UOI & Another, 1992 94 BOMLR 789

   19  

Brief Facts
The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992
('the Act') is a Special Act. The offences it deals with involve amounts of unusual
magnitude procured by brokers from banks and financial institutions. Unfortunately,
the proceedings before the Special Court, which was set up for a quick prosecution or
adjudication of claims have been trapped in unusual legal and interpretational
difficulties generated by the casual drafting of the Act that leaves much to the skills
and good sense of the courts.

The Special Court has observed that it has been functioning since June 1992. In
respect of two notified parties, namely, the Harshad Mehta Group & Fairgrowth
Financial Services Ltd., the time is approaching for distribution of their assets under
section 11. In view of the different possible interpretations of the provisions of section
11, the Special Court has raised certain questions of law.

After hearing all concerned parties, the Special Court has answered these questions in
the impugned judgment, somewhat in the fashion of an Originating Summons. The
custodian has raised certain additional questions which arise in interpreting and
implementing section 11.

Issues against the Court

The questions raised by the Special Court are as follows:

The Special Court has raised five questions pertaining to distribution under Section
11(2). We would, however, like to expand the three questions in order to bring out the
   20  

points at issue which have been argued before us. The questions can be reframed as
follows:

1. What is meant by revenues, taxes, cesses and rates due? Does the word "due"
refer merely to the liability to pay such taxes etc., or does it refer to a liability
which has crystalised into a legally ascertained sum immediately payable?

2. Do the taxes (in clause (a) of Section 11(2) refer only to taxes relating to a
specific period or to all taxes due from the notified person?

3. At what point or time should the taxes have become due?

4. Does the Special Court have any discretion relating to the extent of payments to
be made under Section 11(2)(a) from out of the attached funds/property?

5. Whether taxes include penalty or interest?

6. Whether the Special Court has the power to absolve a notified person from
payment of penalty or interest for a period subsequent to the date of his
notification under Section 3. In the alternative, is a notified person liable to
payment of penalty or interest arising from his inability to pay taxes after his
notification?

Held
The Special Court with regarding to the questions raised, held that:
Question No. 1: The first question on which the arguments have been advanced, relates to the
meaning of the phrase "tax due" used in Section 11(2)(a). Block's Law Dictionary at page 499
defines the word `due', inter alia, as, "owing; payable; justly owed or owing as distinguished from
payable. A debt is often said to be due from a person where he is the party owing it, or primarily
bound to pay, whether the time for payment has or has not arrived.
   21  

The word `due' always imports a fixed and settled obligation or liability, but with reference to the
time for its payment there is considerable ambiguity in the use of the term, the precise signification
being determined in each case from the context." (underlining ours) Jowitt's Dictionary of English
Law Vol. I, 2nd Edn. at page 669 defines `due' as, "anything owing, that which one contracts to pay
or perform to another...........

As applied to a sum of money, 'due' means either that it is owing or that it is payable; in other words,
it may mean that the debt is payable at once or at a future time. It is a question of construction which
of these two meanings the word 'due' has in a given case".

Question No. 2: Do these taxes relate to any particular period or do they cover all assessed taxes of
the notified person? The Special Court Act is quite clear in its intent. It seeks to cover all criminal
and civil proceeding relating to transactions in securities of a notified person between 1st of April,
1991 and 6th of June, 1992. The Special Court is empowered to examine all civil claims and to try
all offences pertaining to such transactions during the said period. Under Section 3(2) it is the
property of such offenders which is attached by the Custodian and which is disbursed under the
directions of the Special Court under Section 11(2).

Clearly, therefore, as the Special Court is empowered to examine all transactions in securities during
the period 1.4.1991 to 6.61992, as also all claims relating to the property attached, the Special Court
will also have to the property attached, the Special Court will also have to examine the tax liability
of the notified person arising during the period 1.4.1991 to 6.61992.

As the purpose of the Special Court Act, inter alia, is as far as practicable, to safeguard the funds to
which the banks and financial institutions may be entitled, and to ensure that these funds are not
done away with, there are provisions for attachment, ascertainment of claims and distribution of
funds. However, before the liabilities of a notified person to banks and financial institutions can be
discharged, Section 11(2)(a) requires the tax liability of the notified person to be paid.

In this context the tax liability can properly be construed as tax liability of the notified person arising
out of transactions in securities during the "statutory period" of 1.4.1991 to 6.6.1992. If, for
   22  

example, any income-tax is required to be paid in connection with the income accruing to a notified
person in respect of transactions in security during the "statutory period", that liability will have to
the banks and financial institution.

Questions No. 3: At what point of time should this tax liability have become quantified by a large
assessment which is final and binding on the notified person concerned? It is contended before us by
some of the parties that only that liability which has become ascertained by final assessment on the
date of the Act coming into force should be paid under Section 11(2)(a). Others contended that it
should have been so ascertained on the date of the notification.

The third contention is that it should have been so ascertained on the date of distribution. Since we
have held that tax liability under Section 12(2)(a) refers only to such liability for the period 1.4.1991
to 6.6.1992, it would not be correct t hold that the liabilities arising during this period should also be
finally assessed before 6.6.1992 (the date of the Act) or the date of the notification. It must refer to
the date of distribution.

The date of distribution arrives when the Special Court completes the examination of claims under
Section 9A. It on that date, any tax liability for the statutory period is legally assessed, and the
assessment is final and binding on the notified person, that liability will be considered for payment
under Section 11(2)(a), subject to what follows.

Question No. 4: The next question is, whether the assessed tax liability for the statutory period
requires to be discharged in full under Section 11(2)(a) or whether the Special Court has any
discretion in relation to the extent of payment to be made under Section 11(2)(a)? The banks who
have large claims against the notified persons have strenuously urged that the Special Court is not
required to pay the tax liability in full, but has some discretion as to the extent to which such
liability will be paid.

They have emphasised the words `shall be paid or discharged in full as far as may be' in Section
11(2) as indicating some discretion in the Special Court regarding payment of liabilities under
Section 11(2)(a). They point out that at the time when the said Act was enacted or when the
Ordinance which it replaced was promulgated, the full extent of the funds involved in malpractices
leading to the diversion of funds from banks and financial institutions to the pockets of the brokers,
   23  

was not known.

Even after the submission of report by the Janakiraman Committee, a special group known as an
inter-disciplinary group was required to be set up to trace the end use of funds involved in this fraud.
Auditors were appointed to check instances of differences where the attached assets were short of
problem exposure. It was, therefore, expected that the available funds from attached assets would be
speedily restored to the banks and financial institutions. It was also expected that even after the
discharge of tax liabilities for the relevant period, substantial funds would be left over for being paid
to the banks and financial institutions concerned.

Question No. 5: One other connected question remains: whether "taxes" under Section 11(2)(a)
would include interest or penalty as well? We are concerned in the present case with penalty and
interest under the Income Tax Act. Tax, penalty and interest are different concepts under the Income
Tax Act.

The definition of tax under Section 2(43) does not include penalty or interest. Similarly, under
Section 157, it is provided that when any tax, interest, penalty, fine or any other sum is payable in
consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee
a notice of demand as prescribed. Provisions for imposition of penalty and interest are distinct from
the provisions for imposition of tax.

Learned Special Court judge, after examining various authorities in paragraphs 61 to 70 of his
judgment, has come to the conclusion that neither penalty nor interest can be considered as tax under
Section 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this
connection.

Question No. 6: The Special Court has, in the impugned judgment, also dwelt at some length on the
question whether it can absolve a notified person from imposition of penalty or interest after the date
of the notification. Since the liabilities covered under Section 11(2)(a) are only liabilities arising
during the period 1.4.1991 to 6.6.1992.and do not cover penalty and interest, this question does not
really arise.

In any case, interest or penalty for any action or default after the date of the notification, are not
   24  

covered by the Act. However, we must reiterate that a taking statute is a code in itself for imposition
of tax, penalty or interest.4

Sahara India Real Estate Ltd. Vs. SEBI (2012) 174 Comp Cas 154 (SC)

The Supreme Court on 31st August, 2012 in one of its most anticipated judgment of
recent times has directed the Sahara Group and its two group companies Sahara India
Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment
Corporation Limited (SHICL) to refund around Rs 17,400 crore to their investors
within 3 months from the date of the order with an interest of 15%. The Supreme
Court while confirming the findings of the SAT has further asked SEBI to probe into
the matter and find out the actual investor base who have subscribed to the Optionally
Fully Convertible Debentures (OFCDs) issued by the two group companies SIRECL
and SHICL.

Background: Earlier SIRECL and SHICL floated an issue of OFCDs and started
collecting subscriptions from investors with effect from 25th April 2008 up to 13th
April 2011. During this period, the company had a total collection of over Rs 17,656
crore. The amount was collected from about 30 million investors in the guise of a
"Private Placement" without complying with the requirements applicable to the public
offerings of securities. The Whole Time Member of SEBI while taking cognizance of
the matter passed an order dated 23rd June, 2011 thereby directing the two companies
to refund the money so collected to the investors and 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 SAT against the order of the
Whole Time Member and after hearing the SAT confirmed and maintained the order

                                                                                                               
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   25  

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.

Issues in Question and Observations of the Supreme Court: The Supreme Court
of India while interpreting various provisions of the Companies Act, SEBI Act,
Securities Contract (Regulation) Act,1956, (SCRA) and various Rules and regulations
formulated there-under made some interesting observations on the issues raised before
it which forms the operative part of the judgment in the form of ratio decidendi.

The issues raised and the corresponding observations made by the Supreme Court are
enumerated below:

Issue 1. Whether SEBI has the power to investigate and adjudicate in this matter as
per Sec 11, 11A, 11B of SEBI Act and under Sec 55A of the Companies Act. Or is it
the Ministry of Corporate Affairs (MCA) which has the jurisdiction under Sec 55A
(c) of the Companies Act.

Observations of SC: The Supreme Court held that SEBI does have power to
investigate and adjudicate in this matter. It categorically iterated that the SEBI Act is
a special legislation bestowing SEBI with special powers to investigate and adjudicate
to protect the interests of the investors. It 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. To support this view, the Supreme Court laid emphasis
on the legislative intent and the statement of objectives for the enactment of SEBI Act
and the insertion of Section 55A in the Companies Act to delegate special powers to
SEBI in matters of issue, allotment and transfer of securities. The Court observed that
as per provisions enumerated under Section 55A of the Companies Act, so far matters
   26  

relate to issue and transfer of securities and non-payment of dividend, SEBI has the
power to administer in the case of listed public companies and in the case of those
public companies which intend to get their securities listed on a recognized stock
exchange in India.

Issue 2. Whether the hybrid OFCDs fall within the definition of "Securities" within
the meaning of Companies Act, SEBI Act and SCRA so as to vest SEBI with the
jurisdiction to investigate and adjudicate.

Observations of SC: The Supreme Court held that although the OFCDs issued by the
two companies are in the nature of "hybrid" instruments, it does not cease to be a
"Security" within the meaning of Companies Act, SEBI Act and SCRA. It says
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". As in this case such OFCDs were offered to
millions of people there is no question about the marketability of such instrument.
And since the name itself contains the term "Debenture", it is deemed to be a security
as per the provisions of Companies Act, SEBI Act and SCRA.

Issue 3. Whether the issue of OFCDs to millions of persons who subscribed to the
issue is a Private Placement so as not to fall within the purview of SEBI Regulations
and various provisions of Companies Act.

Observations of SC: The Supreme Court went on to hold that although the intention
of the companies was to make the issue of OFCDs look like a private placement, it
ceases to be so when such securities are offered to more than 50 persons. Section
67(3) specifically mentions that when any security is offered to and subscribed by
more than 50 persons it will be deemed to be a Public Offer and therefore SEBI will
have jurisdiction in the matter and the issuer will have to comply with the various
   27  

provisions of the legal framework for a public issue. Although the Sahara companies
contended that they are exempted under the provisos to Sec 67 (3) since the
Information memorandum specifically mentioned that the OFCDs were issued only to
those related to the Sahara Group and there was no public offer, the Supreme Court
however did not find enough strength in this argument. The Supreme Court observed
as the companies elicited public demand for the OFCDs through issue of Information
Memorandum under Section 60B of the Companies Act, which is only meant for
Public Issues. Supreme Court also observed that since introducers were needed for
someone to subscribe to the OFCDs, it is clear that the issue was not meant for
persons related or associated with the Sahara Group because in that case an introducer
would not be required as such a person is already associated or related to the Sahara
Group. Thus the Supreme Court concluded that the actions and intentions on the part
of the two companies clearly show that they wanted to issue securities to the public in
the garb of a private placement to bypass the various laws and regulations in relation
to that. The Court observed that the Sahara Companies have issued securities to more
than the threshold statutory limit fixed under proviso to Section 67(3) and hence
violated the listing provisions attracting civil and criminal liability. The Supreme
Court also observed that issue of OFCDs through circulation of IM to public attracted
provisions of Section 60B of the Companies Act, which required filing of prospectus
under Section 60B(9) and since the companies did not come out with a final
prospectus on the closing of the offer and failed to register it with SEBI, the Supreme
Court held that there was violation of sec 60B of the Companies Act also.

Issue 4. Whether listing provisions under Sec 73 mandatorily applies to all public
issues or depends upon the "intention of the company" to get listed.

Observations of SC: Although Sahara argued that listing requirement under Sec 73
of Companies Act is not mandatory and applies to those companies only who "intend
to get listed", no company can be forced to get listed on a stock exchange and in such
   28  

cases it will be a violation of corporate autonomy. The Supreme Court rejected this
contention and held as long as the law is clear and unambiguous, and any issue of
securities is made to more than 49 persons as per Sec 67(3) of the Companies Act, the
intention of the companies to get listed does not matter at all and Sec 73 (1) is a
mandatory provision of law which companies are required to comply with. The
Supreme Court observed that Section 73(1) of the Act casts an obligation on every
company intending to offer shares or debentures to the public to apply on a stock
exchange for listing of its securities. In addition the Supreme Court observed that the
maxim ''acta exterior indicant interiora secreta'' (external action reveals inner
secrets) applies with all force in the case of Saharas. The Court observed that the
contention that they did not want their securities listed does not stand. The duty of
listing flows from the act of issuing securities to the pubic, provided such offer is
made to fifty or more than fifty persons. Any offering of securities to fifty or more is
a public offering by virtue of Section 67(3) of the Companies Act, which the Saharas
very well knew, their subsequent actions and conducts unquestionably reveal so.

Issue 5. Whether the Public Unlisted Companies (Preferential Allotment Rules) 2003
will apply in this case.

Observations of Supreme Court: The companies also argued that as per the Unlisted
Public Companies (Preferential Allotment) Rules 2003, 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. They went on to argue that Sec 67(3) was made applicable to Preferential
Allotment made by unlisted public companies only in 2011 by amending the 2003
rules with prospective effect and not with retrospective effect. Hence before the 2011
Rules were framed, they were free to make preferential allotment to more than 50
persons also. However, the Supreme Court did not agree and held that the legislative
   29  

intent was not so, and such a Rule being a delegated piece of legislation cannot
supersede the statutory provisions of Sec 67(3) and in the existence of Sec 67(3) it is
implied that even the 2003 preferential allotment rules were required to comply with
the requirement of Sec 67(3). The Supreme Court observed that Even if armed with a
special resolution for any further issue of capital to person other than shareholders, it
can only be subjected to the provisions of Section 67 of the Company Act, that is if
the offer is made to fifty persons or more, then it will have to be treated as public
issue and not a private placement. The Court observed that 2003 Rules apply only in
the context of preferential allotment of unlisted companies, however, if the
preferential allotment is a public issue, then 2003 Rules would not apply.

Issue 6. Whether OFCDs are Convertible Bonds and whether exempted from
application of SCRA as per the provisions of sec 28(1)(b)

Observations of the SC: The two Sahara companies also contended that the OFCDs
being in the nature of Convertible bonds issued on the basis of the price agreed upon
at the time of issue and, therefore, the provisions of SCR Act are not applicable in
view of Section 28(1)(b) thereof and therefore SEBI will have no jurisdiction. The
Supreme Court rejected this contention and held that the amendment in the SCRA
was made and subsequently Sec 28 was inserted to exempt convertible bonds by
foreign financial institutions that had an option to obtain shares at a later date. The
Supreme Court further held that the inapplicability of SCRA, as contemplated in
Section 28(1)(b), is not to the convertible bonds, but to the entitlement of a person to
whom such share, warrant or convertible bond has been issued, to have shares at his
option. The Act is, therefore, inapplicable only to the options or rights or entitlement
that are attached to the bond/warrant and not to the bond/warrant itself. The Supreme
Court clarified by saying that 28(1)(b),clearly indicates that it is only the convertible
bonds and share/warrant of the type referred to therein that are excluded from the
   30  

applicability of the SCRA and not debentures which are separate category of
securities in the definition contained in Section 2(h) of SCRA.

Conclusion: This landmark Judgment is undoubtedly a milestone in India's Corporate

landscape, as it not only sanctifies SEBI's absolute power to investigate into the
matters of listed companies, but also into the matters pertaining to the unlisted
companies. It vests SEBI with myriad powers to investigate into any matter
concerning the interest of the investors even if it pertains to companies which are not
listed. It clarifies significant points of law and removes the grey areas relating to issue
of securities by the so called unlisted companies taking advantage of the loopholes of
law. Also, in the matters of jurisdiction, this Judgment has bridged the jurisdictional
gap which previously existed between that of the Ministry of Corporate Affairs and
SEBI. It is hoped that in future this judgment will be instrumental in preventing turf
war between the MCA and SEBI concerning jurisdictional issues as it categorically
iterates that in the matter of public interest, both SEBI and MCA will have concurrent
jurisdiction. This is a welcome relief, as in the past many defaulting parties have taken
advantage of this jurisdictional lacuna and have been able to easily get off the hooks.
Sahara has already filed a review petition against this judgment before the Supreme
Court. In a public statement they have also said even if the review petition fails, they
will challenge the same vide a curative petition before the Supreme Court. Whether
Sahara gets any relief in the near future remains to be seen. It however, seems to be a
tough legal battle ahead of them.5

                                                                                                               
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