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Securities and Exchange Board of India [SEBI] is a regulator of securities market in India.
Initially, it was formed for the purpose of observing the activities afterward in May 1992,
Government of India granted legal status to SEBI. The preamble of SEBI act says that it has
been established ‘to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters connected therewith or
incidental thereto.’1 In pursuance of this objective, SEBI keeps a tight eye on the participants
of securities market, namely, issuer of securities, investors, and the market intermediaries.

To protect the investors SEBI through its rules, regulations, guidelines, and watch keeping
ensures that investors are not fooled by misleading and false advertisements. Its regulatory
framework for advertisements tries to ensure that the advertisement is fair and concise.
Through various documents and its website it seeks to educate investors so that they are
able to make an informed choice. Guidelines have been issued to investigate cases of fraud
and insider trading with a view to minimize such instances. It keeps an eye on prices of
stocks to prevent manipulation of prices. The two way circuit breaker system is an evolution
towards this objective. Besides these measures, SEBI has also tried and tested the E-trading
concept in India which makes buying and selling of securities easier in India. Rules,
regulations, and guidelines have been formulated for all intermediaries such as brokers,
merchant bankers etc; to ensure that the investor money is secure.

Further, for smooth and proper functioning of securities market SEBI has set up various
departments. These departments keep an eye on activities of companies and investors to
ensure that transactions are done within legal sphere. These departments include:
1. Primary Market Department
2. Issue Management and Intermediation Department
3. Secondary Market Department (Policy, Operating, and Exchange Administration New
Investment Products, Insider Trading)
4. Secondary Market Department (Exchange Administration, Inspection, and Non-
Member Intermediaries)
5. Institutional Investment Department (Mutual funds and Foreign Institutional
Investment).

The securities market can be divided into two components, primary market and the
secondary market. Primary market is where the securities are offered by the firm directly.
The investor buys securities from the firm. It refers to the long term flow of funds from the
surplus sector to the government and corporate sector (through primary issues) and to banks
and non-banks financial intermediaries (through secondary issues). 2 Primary market
provides the channel for sale of new securities. Securities may be issued at face value, or at
a discount/premium and these securities may take a variety of forms such as equity, debt
etc. Primary market securities can be issued in domestic/international markets.

1
SEBI act
2
SHAIK ABUDL MAJEEB PASHA
et al
., A STUDY ON ROLE OF SEBI IN INDIAN CAPITAL MARKET: AN EMPIRICALANALYSIS,
International Journal of Multidisciplinary Research Vol.2 Issue 3 (March 2012); available
atzenithresearch.org.in/.../30_ZEN_VOL2_ISSUE3_MARCH12.pdf
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In secondary market, already bought securities are traded among consenting parties. In this
article, primary market transactions are dealt with a specific focus on private placement.

Apart from the SEBI act, the Companies Act and SCRA act also give SEBI the jurisdiction in
certain cases. SEBI can administer the provisions of the sections specified in section 24 Commented [1]: In 1956 act it was section 55A
(Companies Act 2013) to:
1. Issue of securities
2. Transfer of securities
3. Non-payment of divident.

In Kimsuk Krishna Sinha v. SEBI3, Delhi High Court throws interesting light on the role of
SEBI in ensuring Correct Disclosure in offer documents and actions that SEBI can or should
take:
“The purpose of inserting Section 55A in the Companies Act was to empower the SEBI to
take both corrective and preventice action. This is perhaps because as a regulatory body
SEBI gets to see the draft prospectus preceding a public issue by a company even before
the public gets to see the RHP. SEBI is enabled and empowered to examine the DRHP and
insist on complete and truthful disclosure of all relevant facts tehrein. The very purpose of
having an independent regulatory authority like SEBI, and vesting it with statutory powers of
inquiry, is to enable it to take prompt action in matters relating to issue and transfer of
shares.”

Private Placement Regulatory Framework

The path of private placement is often resorted to by the companies when it has to raise
funds. The Companies Act and SEBI rules, regulations and guidelines regulate private
placement but there are loopholes which are exploited and misused by the companies and
promoters to indulge in malpractices.

Private placement is when a company issues shares to a select group of investors, rather
than offering it to public at large. Companies resort to this as it is a faster way of raising
funds since the company has to comply with fewer conditions. Private placement bypasses
the stringent regulatory requirements of a public offering. It also is a very flexible way of
meeting the capital requirement besides lesser cost of issuance and lesser time taken. But
often, if one goes through private placement, one has to issue the securities at a discounted
price.

Chapter III, Part II of the Act, 2013 deals exclusively with private placements. Section 42,
explanation II of Companies Act 2013, defines ‘private placement’ as, Private Placement
means any offer of securities or invitation to subscribe securities to a select group of persons
by a company (other than by way ofpublic offer) through issue of a private placement offer
letter and which satisfies the conditions specified in this section.

3 Kimsuk Krishna Sinha v. SEBI (2010) 100 SCL 197

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Chapter 6 of SEBI (Disclosure and Investor Protection) Guidelines talk about the content of
the offer document. It mandates that the contents of the prospectus shall contain all the
information which shall be true and adequate so as to facilitate the investors to make an
informed decision on the investments in the issue. The information must be substantial
enough for the investor to make an informed choice.
SEBI also makes sure that the advertisements are not misleading. A full chapter is dedicated
towards this. It says that the advertisement shall be in a clear, concise, and understandable
language. Excess use of technical terminology should be avoided
SEBI had issued the guidelines for disclosure and investor’s protection in 1992 after the
Capital Issues (Control) Act, 1947 was repealed. Under these guidelines SEBI requires the
issuer to disclose full facts and particulars to the intending investors in their offer documents
and also prescribe other rules in connection with the issue of shares.

The Companies Act, 1956 had not defined private placement. Under Section 67(3) of the
said act, certain offers of shares or debentures/invitation to subscribe for shares or
debentures to any section of the public were not regarded as public issues. They were
available for subscription or purchase only to those receiving the offer/invitation, this
domestic concern of the issuer and those receiving the offer/invitation was termed as private
placement. However, as per the proviso to section 67(3) of the Act, 1956, when a company
made an offer or invitation to subscribe for shares or debentures to 50 or more persons, then
such offer was treated as if it had been made to public. Under this act, the conditions relating
to private placement were applicable only to public companies. 2013 Act changes this and
the conditions for private placement of shares and debentures apply to both private
companies and public companies.

Section 42 of the new act applies to issue of securities and not shares, thereby covering a
wide range of instruments. Similar argument was presented by Sahara in the case but was
negated by the Court. Further, Section 42(4) makes it mandatory for a company to follow the
SEBI act and the SCRA Act.

The section says that whatever needs to be paid for subscription through private placement,
needs to be paid by way of cheque or demand draft or other banking channels other than
cash. The securities need to be allotted within 60 days from date of receiving the money. 4 If
this cannot be done then the company has to refund the amount within 15 days, from
completion of 60 days. A separate bank account is needed to be opened for the issue and
the money raised cannot be utilised for any purpose unless the security has been allotted.
The only purpose for which these funds can be used are for adjustment against allotment of
securities or for the repayment of monies where the company is unable to allot securities.5
Further, the particulars of allotment under this section shall be submitted to the Registrar
withing 30 days of circulation of offer letter. Complete list of all security holders, with their full

4
Section 42(6) Companies Act, 2013
5 Proviso to Section 42(6) of the Companies Act, 2013
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names, addresses, number of securities allotted and such other relevant information also
needs to be given.6

The Supreme Court has also held that in the following conditions, the offer is deemed not to
be made to public:
1. Offer of securities made to less than 50 persons;
2. Offer made only to the existing shareholders of the company (right issue);
3. Offer made to a particular addressee and be accepted only by persons to whom it is
addressed;
4. Offer and invitation being made and it is the domestic concern of those making and
receiving the offer.7
5. Issue can be for only one type of security at a time.

Conditions for Private Placement:

The regulatory framework is codified under sections 42 and 62 of the Companies Act, 2013
and the Companies (Prospectus and Allotment of Securities) Rules, 2014. Rule 13 of the
Companies (Shares Capital and Debentures Rules), 2014 also lays down some mandatory
compliances:
1. Offer cannot be made to more than 200 people in aggregate in a financial year
excluding QIBs and employee’s stock option. 8
2. No fresh offer or invitation for private placement is to be made unless the earlier one
has been completed, withdrawn, or abandoned by company.
3. Allottee under private placement shall not transfer the securities to more than 20
persons during a quarter and the company shall not register any transfer which is not
in conforming to this.
4. Number of invitations cannot exceed 4 in a financial year and once in a calendar
quarter with minimum gap of 60 days between 2 invitations.
5. Private placement cannot be advertised to public at large through any medium.

The offer for private placement of securities has to be passed by the shareholders of the
company through a special resolution.9

Section 42(10) of Companies Act, 2013 talks about the penalty for contravention of Section
42. The promoters and directors of the company will be liable for penalty which may extend
to the amount involved in the offer or invitation or two crore rupees, whichever is higher.
Further the company will also be required to refund to subscribers within 30 days of the order
of imposing the penalty.

6 Section 42 (9) of the Companies Act, 2013

7
(2012) 10 SCC 603
8
Citation 10
9 Rule 14 (2) (a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
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Procedure for Private Placement

● A notice is sent to convene the Board Meeting. This notice must be sent at least 7
days prior to the scheduled date of meeting.
● A notice is sent to the shareholders for an Extra Ordinary General Meeting, to get the
approval of private placement offer.
● After that a Special Resolution is passed in the EGM. This special resolution is valid
for a period of 12 months from the passing of such resolution.
● Form MGT -14 needs to be filed with the concerned ROC within 30 days of passing
Special Resolution.
● An offer letter needs to be issued in form PAS-4 within 30 days of recording of name
of persons.
● A complete record of Private placement needs to be filed in PAS-5.
● The above mentioned forms, namely PAS-4 and PAS-5 need to be filed with the
concerned ROC within 30 days of issue of offer letter in Form GNL-2.
● The allotment of shares needs to be done within 60 days of receipt of money from the
persons to whom right was given.
● For this, a Board Meeting is called for allotment of shares. PAS-3 needs to be filed
with concerned ROC within 30 days of allotment.
● Share certificates are issued and the minute’s book and registers are updated.

SEBI Sahara case:

This case deals with the powers and jurisdiction of SEBI in case of corporate funding. In this
case, Sahara India Real Estate Corporation Limited and Sahara Housing Investment
Corporation Limited had issued Optionally Fully Convertible Debentures. Through this
security they had collected an amount to the tune of 24,000 crore rupees. This amount was
collected from around 23 million people, who were mainly from villages and small towns.
SEBI said that it was not a private placement but a public issue and the processory norms for
the same were not followed.
Debentures in layman terms are loan from public. On maturity of these debentures, a
company has to pay back the principal amount along with interest accumulated. The money
raised through debentures becomes part of company’s capital but it does not become its
share capital. Debentures can be wholly or partially convertible depending on the scheme of
issuance. If a debenture is optionally fully convertible debenture, then it is the choice of the
investor as to whether he wants to convert it into share or not.
Sahara claimed that it was a private placement and SEBI had no jurisdiction over it. It said
that OFCD’s did not fall under the definition of the term ‘securities’ as in SCRA act, and
further that the jurisdiction of SEBI only extended to listed companies. It said that the
company comes under the ambit of Unlisted Public Companies Rules, 2003.
The resolution to raise the funds was passed under Section 81(1A) of the Companies Act,
1956. In pursuance of the board resolution, a Red Herring Prospectus was filed under
Section 60B of Companies Act, 1956 at ROC Kanpur and Mumbai by Sahara India Real
Estate Corporation Limited and Sahara housing Investment corporation Limited respectively.
The RHPs indicated that the information memorandum was circulated only to selected
persons and that the funds were to be utilised for financing the construction and
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infrastructure activities. After the registration of RHPs, the money was raised as raised in an
open ended scheme. Around 2900 branch offices and 10 lakh agents were involved in
realising the capital.
SEBI and SAT decided the case on merits, and against Sahara. An appeal against the SAT
order was filed in SC where Sahara, on preliminary hearing challenged the jurisdiction of
SEBI. Sahara relied on Section 55A of Companies Act which talks about Powers of SEBI:
The provisions contained in Sections 55 to 58, 59 to 81 (including sections 206, 206A and
207, so far as they relate to issue and transfer of securities and non-payment of dividend
shall,-
a. In case of listed companies;
b. In case of those public companies which intend to get their securities listed on
any recognized stock exchange in India, be administered by SEBI; and
c. In any other case, be administered by the Central Government.
Explanation – For the removal of doubts, it is hereby declared that all powers relating
to all other matters including the matters relating to prospectus, statement in lieu of
prospectus, return of allotment, issue of shares and redemption of irredeemable
preference shares shall be exercised by the Central Government, Tribunal or the
Registrar of Companies, as the case may be.
Sahara said that they never intended to list the OFCDs and hence the issue fell outside the
purview of SEBI. SC while analysing this aspect went by the conduct of the Appellants and
stated that a ‘company’s option, choice, election, interest or design does not matter, it is the
conduct and action that matters and that is what the law demands.’ 10
Further it was said that OFCDs were hybrid securities, which was only included in definition
of securities of Companies Act and not SCRA act; hence SEBI did not have jurisdiction. The
court said that OFCDs issued were undoubtedly unsecured debentures by name and nature.
Though they have dual characteristics of share and debenture yet they continue to remain
debentures till the time they are converted. Further, it was held that the definition in SCRA
was not an exhaustive definition but an inclusive one.

In this case SC had said that issuance issuance of OFCDs was a public issue and hence it
entailed a listing.
In discussing the question of whether it was a public issue or not Supreme Court looked into
Section 67 of the Companies Act. The question was whether company’s offer of shares or
debentures to 50 or more persons would ipso facto become a public issue? It was not
disputed that there were more than 50 offerees to the issue of OFCDs. The contention was
that the number of allottees was immaterial in determining whether the issue was public or
not. It was said that the intention was to be seen which was to offer to a select or identified
group. This point was substantiated through Unlisted Public Companies (Preferential
Allotment) Rules, 2003 which do not stipulate a limit to the number of persons that a
preferential allotment may be made.
Supreme Court rejected these arguments and relied on Section 67 to conclude that an offer
to 50 or more persons constitutes a public issue. The lifting of corporate veil was also done
to examine the conduct and method adopted by the appellants. 11

10
Sahara citation
11
http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-
view/article/supreme-court-to-sahara-its-not-private.html
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The court then went to Section 73(1) of the Companies Act which 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. Hence, Sahara was found to be in contravention of this
provision as well.

This case finally settles the question of SEBI’s powers and jurisdiction over even unlisted
companies (whether private or public) which intend to (by conduct or otherwise) get their
securities listed. Apart from this, it is now settled that offer of security to more than 49
persons would ipso facto become a public issue. This judgment has reaffirmed the role and
object of SEBI as a securities market regulator and emphasized upon the inherent
jurisdiction of SEBI to oversee matters concerning the public investors at large.