The Securities Appellate Tribunal (SAT), which asked two Sahara Group companies to return all the money they had raised through optionally fully convertible debentures (OFCDs), has strongly criticised both Sahara and the Registrar of Companies (RoC) in its order dated 18 October 2011. The former has been castigated for concealing material facts while filing its application for issuing OFCDs, and the latter for “dereliction of duty.”
The order not only vindicates Sebi’s 23 June order by saying it had jurisdiction in the matter, but also emphasises that the Sahara Group willfully suppressed facts to get its Rs 40,000 crore OFCD issues – Rs 20,000 crore each in two different companies — cleared without questions by the RoC. The two companies are Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC).
According to the Tribunal, SIREC had, as on 13 April 2011, collected Rs 19,400 crore through OFCDs, of which it had retained Rs 17,656 crore after some premature redemptions. This amount has to be returned to investors in six weeks. The SAT order did not indicate how much had been collected by the other Sahara company — Sahara Housing Investment Corporation — but a CNBC-TV18 report put the figure for the two companies at over Rs 24,000 crore.
SAT says that the two companies pretended to be making a private placement of OFCDs when the intention all along was to place it with the public. The Companies Act clearly specifies that if any issue exceeds 50 investors, it will be deemed a public issue and hence Sebi’s jurisdiction applies. But Sahara’s information memorandum and Red Herring Prospectus (RHP) hid this fact.
Said the SAT order: “What it (the RHP) did not disclose was the fact that the information memorandum was being issued to more than 30 million persons inviting them to subscribe to the OFCDs and there lies the catch….This concealment is, indeed, very significant and goes to the root of the controversy.”
“It is, therefore, evident that the intention of the company and its promoters from the very beginning was not bonafide. In this view of the matter, we cannot but hold that the appellants concealed some very vital facts from the RoC and from its shareholders and also from the investors and we are satisfied that the disclosures made in the RHP were not true and fair.”
But the RoC also comes in for scathing criticism that more or less said that it was sleeping on the job. The order, while noting that the “conduct of the RoC leaves much to be desired”, said the company (SIREC) had a capital base of only Rs 10 lakh when it was planning to raise Rs 20,000 crore through private placement.
The sheer size of the OFCD issue itself “should have alerted him (the Roc) and he should have made necessary queries in this regard. It is reasonable to assume that he knew that an offer/invitation made to 50 or more persons would make it a public issue and he ought to have enquired as to the number of persons to whom OFCDs were proposed to be offered and their particulars. The appellants tell us that no such queries were made. Had he made such a query he would have known that the offer would be made to more than 50 persons which would have made the issue of OFCDs a public issue. In that event he would have had no option but to insist upon the company to make all the necessary disclosures required to be made in a public issue. As already observed, no such disclosure has been made.”
In SAT’s view, the RoC could not register any prospectus (under circular No F.7/91-CL-V dated 1 March 1991 issued by the department of company affairs) unless Sebi indicated that it did not contravene any investor protection rules.
Says SAT: “As per this circular, it was incumbent upon him (the RoC) to submit to Sebi a draft prospectus for scrutiny. On receipt of the draft, Sebi was required to scrutinise the disclosures made therein to see if it contained adequate information for the investors. Admittedly, this was not done and we are of the view that the RoC while registering the RHP with undue haste had acted in dereliction of his duty.”
Clearly, while Sahara has to disgorge all its money — and will probably appeal in the Supreme Court — the RoC has much to answer for.