What is going on with the SEBI and Subrata Roy-Sahara Pariwar case?

What is going on with the SEBI and Subrata Roy-Sahara Pariwar case?

It all started with Sahara Prime City, a real estate venture of the Sahara group, filing a Draft Red Herring Prospectus (DRHP) with Sebi on September 30, 2009.

Draft Red Herring Prospectus (DRHP)

This is an initial document that a company needs to file with Sebi to bring out an IPO or initial public offer of shares to public investors

                  While going through this DRHP, Sebi sensed certain large-scale fund raising exercises by two Sahara firms — Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment Corp Ltd (SHICL).

Soon, Sebi received two complaints — one on December 25, 2009 and the second on January 4, 2010 — alleging illegal means used by these two firms in issuance of certain bonds, called OFCDs (Optionally Fully Convertible Debentures), to the public throughout the country for many months.

Debentures

Suppose a Telefilm company is producing a new bogus saas-bahu series.The company needs additional finance of 100 Crore rupees just for the make-up, jewelry and expensive sarees of those actresses.

Company can approach the bank for a loan, but problems:

1) terms and conditions are heavy 

2) the SARFAESI act (with its new amendments)

So, it’s better just to borrow from public.Whoever gives you Rs.100, you give him a piece of paper titled “blah blah blah..these are the terms and conditions, repayment dates, interest rates etc.” This piece of paper is called Debenture. In this case, you need 100 crores, meaning print 1 crore papers (debentures) each worth Rs.100.Whoever holds such paper units is called Debenture holder.

                          Optionally fully-convertible debentures (OFCD)

- These debentures can be converted into shares, when debt holder (investor) wishes (after expiry of xyz pre-decided date).

- But the “rate”, will be decided by the company e.g. 20 debentures =>1 share.

From investor’s view, this “option” to convert Debenture into Shares is good ONLY IF

1. Company is likely to make huge profit (so you, the shareholder can earn more dividend.) OR
2. Company’s share-price is likely to rise in the share market (then you can sell shares to third-party and make profit).

BUT if the Company is going bankrupt, then it is better to avoid converting the Debenture into shares.  Because when a company is liquidated (i.e. its assets sold off),  the Debenture holders get the money before the shareholders.

It means OFCD is a bit tricky game. Investors should have some knowledge and understanding of share prices, company performance etc. else they could lose money. (or end up not getting maximum profit out of their investment).

The second complaint was from Roshan Lal, which was received by Sebi through National Housing Bank. Based on these complaints, Sebi began seeking clarifications from the group, initially through their investment bankers Enam Securities and later directly.

Further investigations found that the funds were raised through OFCDs after filing RHPs (Red Herring Prospectus) with the Registrar of Companies, although the rules required permission from Sebi for any issuance of securities to 50 or more investors. In these cases, the number of investors ran into crores.

Eventually, Sebi passed an interim order against the two companies on November 24, 2010, asking them to refund the money collected from investors.

A final order was passed by the regulator on June 23, 2011, while the group challenged these directions before the Securities Appellate Tribunal. However, the Tribunal upheld the Sebi orders on October 18, 2011, and asked the companies to refund Rs 25,781 crore to over three crore investors.

SEBI - You (SAHARA) have violated rules. If OFCDs are issued then whole process should be completed within 10 working days, but here you continue collecting money from people for more than two years! 

SAHARA - This fund-raising was in the form of a private placement. I.e. we offered the schemes only to our select clients, this wasn’t meant a “Public Offer”! So what’s your problem? 

SEBI - Dude if this is private placement, then maximum only 50 people can invest money in it.Here ~23 million people have parked their hard earned cash! Hell the number of investors in this case, is even more than the total number of people investing in the conventional stock-exchanges of India! India’s biggest IPO till date was of Coal India worth Rs.15000+ crores, and you’ve made 24,000 crores out of these OFCDs! It is my responsibility to protect the investors’ in Capital market.

Hence, By the powers given to me under SEBI Act, I hereby order you to stop collecting money and refund all the money to those investors with 15% interest rate.

 SAHARA - This is not right! 

SEBI - Well, if you’re unhappy with my order you can go to the Securities Appellate Tribunal (SAT) 

SAHARA - Pleads before SAT. 

SAT - SEBI is right. You refund money to those people. 

SAHARA - Now, I’ll go to Supreme Court.

The group then moved the Supreme Court, which also passed a historic order on August 31, 2012, asking the two companies to deposit outstanding amount of over Rs 24,000 crore with Sebi for refund to the investors.

Saharas were also asked to deposit details of all investors to Sebi, which was mandated to refund the money after verifying their genuineness.

Sebi again moved the Supreme Court alleging non- compliance by the group to the earlier orders, pursuant to which the apex court passed another order on December 5, 2012, and asked the two firms to deposit the money in three instalments beginning with an immediate payment of Rs 5,120 crore.

SC - What are your arguments?

SAHARA - Those two companies are unlisted. Meaning, their shares are not listed on any Stock Exchange of India.Therefore, their conduct is outside the jurisdiction of SEBI. Because SEBI is regulator for listed firms only.Our matter falls under Union Corporate Affairs Ministry and not under SEBI.

SEBI - Nope, this matter comes under my jurisdiction, because OFCD is a “security” under the Securities Act. It comes under the Sebi Act. I’ve the jurisdiction. Hence I can pass a special order to regulate unlisted companies!

While the group paid the first instalment, it failed to meet the deadline for other two payments and rather claimed to have already paid more than Rs 20,000 crore directly to the investors.

Unconvinced with Saharas' claims, Sebi passed orders on February 13, 2013, to attach bank accounts and other properties of the group and later issued summons for personal appearance of Subrata Roy and other three directors before it.Roy and others appeared before Sebi on April 10, 2013, after which he famously told reporters that he was not even offered tea by Sebi officials.

During the same month, April 2013, Sebi finally closed its file on Sahara Prime City, whose planned IPO had kick-started this long-running battle.

In the meantime, Sahara group continued to issue full-page and multi-page advertisements in newspapers wherein it claimed to have cleared bulk of its outstanding liabilities to bondholders.In these advertisements, the group also claimed to have raised total funds to the tune of Rs 2,25,000 crore since inception in 1978 across various businesses and pegged its total networth at an astonishing figure of Rs 68,174 crore and the size of its assets at Rs 152,518 crore.

Sahara also charged that Sebi was making "baseless allegations" against it and accused it of not accepting "60 truckloads of documents", while the regulator countered these charges by saying that the documents given by them were "hopelessly mixed up".

Sebi also issued public notices in newspapers, cautioning investors and general public against dealing with Saharas.The regulator also asked various financial institutions including banks to freeze all accounts of the group, besides writing to district collectors and other authorities for attachment of land, real estate and other properties.

Sources:

- The Times of India

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