The Supreme Court order asking Subrata Roy’s Sahara Group to refund more than Rs 17,700 crore raised from 22 million small investors marks a sensational triumph for market regulator Sebi, which had come close to dubbing this a Ponzi scheme. A Ponzi scheme in one where a company uses money to pay early investors with funds raised from later ones.
Since the money will have to be repaid with 15 percent interest, actual payments by the Sahara Group could exceed Rs 20,000 crore since most of the money was raised between 2008 and 2011 and interest would be payable. A retired Supreme Court judge, BN Agarwal, has been appointed to oversee that the court's orders are complied with within three months.
The money was raised by two Sahara Group companies - Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) - between 2008 and 2009 in contravention of Sebi rules.
In its final order, the Supreme Court raised doubts about whether all the subscribers to the two companies' optionally fully convertible debentures (OFCDs) were real or imaginary.
In a stinging rebuke to the Sahara group, the Supreme Court said: "There can…be no hesitation in accepting that…there was a pre-planned attempt at the hands of the SIREC and SHIC to bypass the regulatory and administrative authority of Sebi…But having so concluded, it is essential to express, that there may be no real subscribers for the OFCDs issued by SIREC or SHIC. Or alternatively, there may be an intermix of real and fictitious subscribers.” (Read the full judgment below)
The Sahara case marks a high point in Sebi’s efforts to rein in powerful groups that use subterfuge and political connections to cock a snook at the law.
Sahara had probably reckoned without the fighting instincts of former Sebi member KM Abraham, who diligently argued in an order dated 23 June 2011 that Sahara was seeking to raise Rs 40,000 crore through two companies which had negligible net worth running into just a few lakhs. Abraham also argued that Sahara deliberately avoided obtaining Sebi’s sanction for floating optionally fully convertible debentures (OFCDs) by terming it a private placement.
The following are some of the details of what Sebi wrote in its 23 June order (read the full order here), and which the Supreme Court has now upheld. (We are reproducing the details from an earlier report).
First, Abraham showed in his order that the Sahara Group, in contravention of Schedule II of the Companies Act, tried to deliberately exclude Sebi from vetting the DRHPs of the two companies. The schedule specifies that while filing the DHRP, company directors have to file a declaration saying that they have complied with all provisions of the Companies Act and the Sebi guidelines, among other things. But the directors of Sahara Commodity Services Corporation and Sahara Housing Investment Corporation excluded all references to Sebi while signing their declarations.
Says Abraham: “I also suspect that there has been a reprehensible attempt to conceal this applicability of the provisions of laws and the jurisdiction of Sebi on the issue itself, by making changes in the form and structure of the statutory declaration filed by the directors of the two companies.”
Second, Sebi’s alleged that Sahara tried to bypass its strict laws on investor protection. In this context, it points out that SHIC’s privately placed issue of OFCDs opened in 2008 and SCSC’s (earlier called Sahara India Real Estate Corporation, or SIREC) in 2009, but they had no closing date at all!
In fact, says Abraham, another Sahara company, Sahara India Commercial Corporation, had kept an issue for an overall size of Rs 17,250 crore open for 10 years!
How did this happen? Says Abraham: “Such an alternative conduit of capital mobilisation bypassing much of the regulatory framework applicable to issue of capital, could potentially subject our country’s financial market and its investors to inordinate risks. Needless to say, the risk that such softer paths could be misused for massive money laundering is also dangerously real. Any dilution of the regulatory regime for the issue of capital by companies in India clearly is antithetical to our own objectives of investor protection.”
Asks Abraham: “Can an issuer file an Information Memorandum, open the issue and keep the same open indefinitely? In fact, does it mean that an issuer need not even close the issue and keep it open perpetually?”