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Sebi-Sahara case: Delay tactics fail to work

Amid high drama, Sahara Group chief Subrata Roy was taken to a court by UP police.

Published:March 1, 2014 1:56 am

What is the Sahara case that has led to Subrata Roy’s arrest?

In March 2008, two Sahara Group firms — Sahara Housing Investment Corporation (SHICL) and Sahara India Real Estate Corporation (SIRECL) — passed a board resolution under the Companies Act to raise funds for acquisition of land, developing townships, residential apartment and shopping complexes etc, through unsecured optionally fully convertible debentures (OFCDs) by way of private placement. The company issued three different types of OFCDs — Abode Bonds (10 years tenure), Real Estate Bonds (5 year tenure) and Nirmaan Bonds (4 year tenure) — and said that it would need around Rs 20,000 crore for the objectives stated.

The company started collecting funds beginning April 25, 2008, which totalled Rs 19,400 crore till April 13, 2011. However, after accounting for premature redemptions, the company said that by August 2011, it had collected Rs 17,656 crore from 2.21 crore investors. Sebi’s contention has been that it was not a private placement as the number of investors are above 50 and that the securities should have been listed and since they did not comply with the norms ordered the firms to refund the investors’ money

How did Sebi come to know about it and what was the issue raised?

Sebi came to know about such a fund raising through an IPO draft red herring prospectus filed by Sahara Prime City Limited with Sebi where it was disclosed that two group companies had issued OFCDs. Sebi found that this was presumably in contravention of the provisions of the Companies Act, the Sebi Act, 1992, Sebi’s Disclosure and Investor Protection Guidelines, 2000 and the Sebi Issue of Capital and Disclosure Requirements Regulations, 2009.

Having ordered an investigation on the fund raised, Sebi found that the companies had collected sizeable amounts of money from the public without making proper disclosures and without conforming to the investor protection norms governing public issues. In a bid to protect investors and to prevent the company from collecting further funds from the public, the regulator passed an ex-parte order on November 24, 2010 restraining the companies from offering OFCDs or any other securities to public.

What did the final order say? 

Sahara Group moved against Sebi’s impugned order to the Allahabad High Court and then the Supreme Court challenging Sebi’s jurisdiction.The Supreme Court directed Sebi to approach Securities Appellate Tribunal (SAT). In the meantime, Sebi’s whole-time member passed a final order on June 23, 2011, holding the company guilty of violating various clauses of the Companies Act, and directed both the companies and their promoters/directors to refund the money collected to investors along with interest at the rate of 15 per cent from the date of receipt of money till the date of payment. 

What was Sahara’s response? 

Sahara approached the SAT against the order and argued that Sebi did not have the jurisdiction to pass it as OFCDs issued by the company were not ‘securities’. It further contested that the issue of OFCDs was not a public issue and were offered to the investors on private placement basis and thus were not required to be listed and that the jurisdiction over unlisted companies rests only with the Central government. 

Sebi, however, argued that OFCDs by the company was a public issue since the securities had been offered to more than 50 persons and the issue was therefore required to be listed on a stock exchange. Even the Additional Solicitor General, on behalf of the company affairs ministry, supported Sebi’s argument and said that the capital markets regulator had the jurisdiction in the matter. 

Following this, SAT on October 18, 2011, concluded that the OFCDs issued by the companies were “securities” and that the issue was a public issue requiring mandatory listing and that Sebi has the jurisdiction to deal with all kinds of securities and companies, whether listed or not. It therefore dismissed the appeal by the two firms and upheld Sebi’s order to refund money. 

How did events unfold at the SC leading to Roy’s arrest? 

While the Sahara Group approached the Supreme Court against the SAT order, the court in August 2012 ordered the two Sahara companies to refund its OFCD investors the full amount along with an interest of 15 per cent in the next three months (over Rs 24,000 crore). Following this, when the company failed to provide the documents within the time limit to Sebi, the regulator moved the Supreme Court alleging that the company is not complying with the order.

In November 2012, the court offered time till the first week of January to the companies to refund the money. While the company was required to pay Rs 10,000 crore, it failed to deposit the amount and then in February, the court declined to extend the deadline.

While Sahara adopted various delaying tactics, Sebi moved to attach the properties and seeking arrest of Subrata Roy. In November 2013, the SC barred Roy from leaving the country and then issued a non-bailable warrant on February 26 after he continued to be unavailable for hearing, leading to his arrest on February 28 for contempt of court.

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