Karela Fry

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TOI reminds us of an important judgment by the Supreme Court:

The Sahara India story up to August 31

The SC had on August 31 asked the two Sahara companies to refund within three months Rs 24,029 crore collected between 2008 and 2011 from over 2.96 crore investors, flouting mandatory regulatory provisions and the Companies Act. It held Sebi is right in faulting SIRHEL and SHICL for the manner in which they had raised huge funds.

SIRECL floated Optionally Fully Convertible Debentures (OFCDs) as an open-ended scheme and collected over Rs 19,400 crore from April 25, 2008 to April 13, 2011 from 2.21 crore investors. The company had a total collection of Rs 17,656 crore as on August 31, 2011, after meeting the demand for premature redemption. SHICL collected another Rs 6,380 crore by issuing similar OFCDs from other investors.

The court expressed suspicion that many of the OFCD subscribers could be fictitious and directed Sahara to produce documents about its investors to Sebi within 10 days. It allowed the regulator to engage investigators to probe genuineness of investors and the claim that certain refunds were made.

The story before that was summarized in an article in the Hindu from mid-July:

[Under the direction of the Supreme Court] SEBI examined the issues and summarised that: The OFCDs in question here constitute an offer to the public as they have been made to over 50 persons; the manner and the features of fund raising under the bond issues by the two companies suggest these issues are by no means ‘private’. What seems evident is that the two companies have been running a mass subscription solicitation from the public and the two companies do not fall under the entities specified in the second proviso to Sec. 67(3) which is the only exemption granted to the ‘Rule of 50′ that defines offer to the public under the Companies Act.

“I would therefore conclude that the OFCDs issued by the two companies are public issues, without any ambiguity,” K. M. Abraham, SEBI whole-time member wrote in his order.

One of the main arguments purported by the Shahara Group was that the two companies have made ‘private placements’ of OFCDs to persons related or associated with the Sahara India Group, and therefore these issuances are not ‘public’ issues.

Further, it said OFCDs are neither shares nor debentures in its strict sense and are in the nature of ‘hybrid’ as defined in the Companies Act, 1956.

It also argued that SEBI does not have any jurisdiction on such hybrid issues as the term ‘hybrid’ is not included in the definition of ‘securities’ under the SEBI Act or in the Securities Contracts (Regulation) Act, 1956 (SCR Act). However, SEBI concluded that OFCDs belong to the family of debentures covered by the definition of the term ‘securities’ in Sec. 2(h) of the SCR Act. That an OFCD is a hybrid therefore does not detract from the fact that an OFCD is by definition, design and its characteristics, intrinsically and essentially a ‘debenture’.

It is also pertinent to note that Sahara India Financial Corporation Limited (SIFCL), a residuary non-banking company (RNBC) registered since December 8, 1998, has been directed by the Reserve Bank of India (RBI) on June 17, 2008, not to accept any new deposits which mature beyond June 30, 2011, and also stop accepting instalments of existing deposits, with a road map prescribed to bring down its aggregate liability towards depositors (ALD) to zero on or before June 30, 2015.

The RBI found that deposit taking activities of this company were not in conformity with prudent practices and violated norms issued by them.

The Sahara group approached the Supreme Court against SEBI order.

The apex court promptly asked the group companies to approach SAT, clearly indicating that the matter of raising funds from public through the OFCD was a securities market-related issue than just a corporate affairs matter.

The judgment has been seen as a strengthening of the Indian investment climate. The Hindu noted in October:

[T]he Supreme Court judgment in the Sahara case is a landmark ruling, demystifying the relatively technical aspects of corporate and securities law and the Securities and Exchange Board of India (SEBI) Act with effortless ease. It considerably strengthened the hands of the SEBI which appeared to be waging an unequal battle with a politically well-connected group and the top lawyers engaged by it.

It would be useful to enumerate the salient features of the Supreme Court judgment on Sahara even as the group has filed for a review. Incredibly, just a few days earlier, Sahara’s senior counsel had assured the Court that it will have no problems repaying the depositors, as ordered.

(1) The Supreme Court plugged the apparent loopholes in existing laws that had emboldened the group to justify its massive fund raising efforts without submitting to the regulatory jurisdiction of the SEBI. Even after losing the legal battle at different stages — the Allahabad High Court and the Securities Appellate Tribunal (SAT) — the group thought it fit to approach the Supreme Court.

In the event, the Sahara group not only lost comprehensively but also received much more than the customary rap on the knuckles from the Court. The stringent criticism of the conduct of appellants is one of the highlights of the judgement.

(2) The Supreme Court has clarified the issues succinctly. Even a novice would know that the group’s stand was basically untenable and that, even in terms of common sense, it should have been dropped right at the beginning.

The Sahara group companies, both unlisted, were mobilising huge sums of money through “optionally convertible debentures”, little known opaque instruments, which, they claimed, will not come under the SEBI jurisdiction as they are “privately-placed” and, in any case, will not be listed on any exchange.

(3) Private placement is a legitimate route, but is applicable only when securities are offered to not more than 50 persons, who should be associates, friends, relatives, employees and others who are within the close circle of promoters or top management. Further, the offer will be restricted to those to whom the offer is being made. Implicit in that description is the fact that amounts of money so mobilised cannot be very large. It was, therefore, preposterous for the Sahara companies to call their massive Rs.20,000 crore plus mobilisation from over 2.2 crore investors, employing 10 lakh agents, as private placement.

Obviously, a landmark judgment such as this one has implications for the financial sector as a whole. Sahara was seeking to be regulated by the Ministry of Corporate Affairs even while it was resisting SEBI. Can an issuer of securities choose his own regulator? Sahara’s strategy does not reflect favourably on the Ministry. It is seen to be more pliable than the SEBI.

Two relevant points need to be emphasised. Despite the apparent pain regulation might cause, the regulated entity will be better [off] with it rather than defying its imposition. Regulation will give the stature which it might have lacked. Second, as important as regulation is, there is no substitute for investor education to evaluate the risks in any investment.

An important message from the recent Sahara judgment concerns unified regulation. Sahara was involved in a regulatory spat with the RBI earlier. A unified regulator will, most probably, pre-empt legal challenges of the type mounted by Sahara.

But the story was far from over, as Sahara refused to comply with the court order. Moneycontrol reported the proceedings of the hearing on December 3:

The Supreme Court today rapped the Sahara group for not refunding Rs 27,000 crore to investors, saying its every step was “very shaky” and questioned its “unjustifiable” conduct against the interest of the common investors.

“You are not entitled to any hearing,” a bench headed by Chief Justice Altamas Kabir tersely told the Sahara Group for not implementing its order for refunding the money. The court followed it up with some strong observations. “Your intention is very shaky. Your every step is shaky. You can’t interpret our order according to your need,” the bench said.

The market regulator SEBI insisted that strong action be taken against the Group’s companies and said that it has also filed a contempt petition against them. The bench, however, said it is more concerned about the common man, who has invested his money in the companies. “If you want us to send them to jail, we would send them, but we are more concerned about the investments made by the common man,” the bench observed.

Z news added a critical piece of information about the court’s order of December 3:

A bench headed by Chief Justice Altamas Kabir asked Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) to tell whether they would be able to refund the entire amount to their investors within a week.

“Tell us by tomorrow (Tuesday) whether you are ready to pay up or face the music,” the bench said, refusing to accept Sahara’s readiness to deposit Rs 5,126 crore in compliance with the August 31 judgment.

On December 5 WSJ reported:

The court ordered the group to pay 51.2 billion rupees ($840 million) immediately to the Securities and Exchange Board of India, the securities regulator, which is overseeing the repayment process. The first tranche of the remaining amount should be paid by the first week of January and the balance by the first week of February, a three-judge bench headed by Chief Justice Altamas Kabir said.

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