Hybrid Instruments
A security with features of a debt instrument (such as a bond) and an equity interest (such as
share or stock). An example of a hybrid security is a convertible bond, which can be exchanged
for shares in the issuing corporation and is subject to stock-price fluctuations.
Hybrid as Security: Sahara India Real Estate Corporation Ltd. v. SEBI
Facts:
• Sahara Group offered various kinds of bond having common feature of fixed tenure
between four to ten years and the holders had the option to either redeem the bonds for
a fixed price after the expiry of the fixed tenure or to convert them into equity shares of
respective Sahara entity
• Optionally Fully Convertible Debentures
• SCRA does not define hybrids
• Companies Act, 1956 define hybrids
• The Companies Act merely clarifies that “hybrid” are securities too. Its presence in the
definition of term ‘securities’ in the Companies Act does not enlarge the scope of the term
securities beyond what is contemplated in the SCR Act but merely to elucidate it further.
• Also, SCRA definition include “other marketable securities”
Held:
• Sahara Group in SC attempted to take advantage of § 28(1)(b) wherein the application of
SCRA is restricted.
• However, SC held that – “SCRA Act” will not apply to the ‘entitlement’ of the buyer,
inherent in the convertible bond.
• Entitlement may be severable, but not itself qualify as a security that can be administered
by the SCRA, unless it is issued in a detachable format”
• The provision of SCRA will however be applicable to securities on which such right is
created.
• A combination of debt instrument and equity instrument and therefore a hybrid security
would also qualify as “security” if it is marketable and even if it is not specifically mentioned
in the list of instruments as "securities" in SCRA
• SEBI has the power to regulate unlisted companies if they are issuing securities
• Any entity which issues instruments which are marketable securities, would become a
“person associated with the securities market” and hence amenable to SEBI jurisdiction.
Summary:
• The term security has an inclusive definition.
• Convertible bonds are covered under the definition of securities, however mere
entitlements of right to convert them into equity shares, unless represented in datable
format, is not security
