The two-judge Supreme Court bench that ordered two Sahara Group companies - Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) - to return all the money they raised through a dubious issue of optionally fully convertible debentures (OFCDs) has completely demolished the Sahara arguments and put the group's key directors in line for civil and criminal liabilities.
The court made it clear that the two companies had violated many of the statutory provisions of the Companies Act and the Sebi Act, making them liable to not only the relavant monetary penalties, but key directors could also face possible imprisonment.
The bench, comprising Justices KS Radhakrishnan and Jagdish Singh Khehar, in their judgment dated 31 August, used words like "dubious" and "preposterous" to describe the actions and intent of Sahara in raising money through OFCDs, and for attempting to evade market regulator Sebi's rules for investor protection.
The case had its origins in a Sebi order by whole-time member KM Abraham, dated 23 June 2011, which directed the two Sahara companies to return the money to investors for violating various Sebi rules and guidelines. The Supreme Court has essentially upheld Abraham's order of last year.
In Sebi's order of 23 June, the regulator banned promoter Subrata Roy and some Sahara directors - Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary - from accessing the capital market or being associated with any listed public company.
It is not clear which of them, or some others, will face civil and criminal liabilities in future.
The apex court's final order asked SIREC to return the money - estimated at around Rs 17,657 crore and owed to over 22 million investors as in August 2011 - with 15 percent interest within three months. While the order relates to SIREC, assuming SHIC will also receive the same ruling, one should add another Rs 6,373 crore to be returned. Overall, the amount to be returned, including 15 percent interest, could be over Rs 27,000 crore.
While Sebi has been given full authority to recover the money from Sahara and create a mechanism for its repayment to genuine investors, a retired judge of the Supreme Court, Justice BN Agarwal, has been appointed to oversee the refund process.
Given that the money has been collected from nearly 22-30 million investors - some of whom may be fake - the sheer logistics will be daunting.
But Sahara's troubles may just be beginning. Justice Radhakrishnan held that Sahara's "conduct invites civil and criminal liability under various provisions like sections 56(3), 62, 68, 68A, 73(3), 628, 629 and so on." The sections relate to the Companies Act
Justice Radhakrishnan observed that "economic offences in India, like the one committed by Saharas, (should) be treated with an iron hand, or else we may land in another security market pandemonium."
The judgment notes: "Section 62 casts a civil liability for misstatements in prospectus and section 63(1) speaks of criminal liability. Section 68 speaks of penalty for fraudulently inducing persons to invest, which also leads to imprisonment and fine. Section 68A prescribes punishment for violation of what is provided under Sections 68A (1)(a) and (b) with imprisonment for a term of five years. Section 73(3) also speaks of imposition of fine. Over and above the penal provisions, Section 628 of the Companies Act also proposes imprisonment and fine, for making false statements."
But, quite obviously, these civil and criminal liabilities will need cases to be filed in courts by the Registrar of Companies and Sebi, either jointly or separately, before they can be imposed on Sahara.
Though the two judges differed a bit on how they viewed Sahara's petition against the Securities Appellate Tribunal's (SAT's) confirmatory order to refund the money, they were unanimous in rejecting every single argument proffered by Sahara that it was somehow exempt from Sebi's jurisdiction since it was making a private placement of OFCDs and didn't need the marker regulator's nod or supervision.
While Justice Radhakrishnan noted the "dubious method" used by Sahara to make a public placement of OFCDs by calling it a private placement, Justice Khehar called attention to the strenuous efforts of the Sahara group to avoid giving the right information to Sebi, despite being given every opportunity to do so.
It seems that when Sebi's Abraham asked his investigating officer to check four names of investors in Sahara's OFCD list, two of them turned out to be non-existent. At the Securities Appellate Tribunal (SAT), where Sahara appealed against Abraham's order, this finding was ignored on the ground that Sahara was not given a fair hearing on this issue -and this went against the principle of natural justice.
But Justice Khehar would have none of this. He said: "The rules of natural justice, being founded on principles of fairness, can be available only to a party which has itself been fair, and therefore, deserves to be treated fairly."
When SIREC and SHIC claimed Sebi had not given them a fair hearing, SAT upheld their stand and ignored this finding of Sebi. But Justice Khehar said: "Whether or not the two companies herein could be permitted to agitate against the factual determination rendered by Sebi, based on inquiries made at the behest of Sebi (through its Investigating Authority) would depend upon their fairness in furnishing the materials sought by Sebi. It is apparent that both SIREC and SHIC, based on one excuse or another, did not provide the factual details sought by the Sebi, though the same were available with them."
Briefly, this is what the case was all about and why the judges came down heavily on Sahara.
SIREC and SHIC claimed they were going to raise around Rs 20,000 crore each through a private placement, and got Registrar of Companies approval for the same. But since it was a private placement, they claimed Sebi had no role in it. But Sebi, which came to know about this plan indirectly, realised that the companies were offering subscriptions to millions of people, and thus were effectively making a public offer of securities.
In an order dated 23 June last year, Sebi's Whole-Time Member KM Abraham said this was illegal and an attempt to evade its jurisdiction and asked them to return all the money with 15 percent interest.
The SAT, and now the Supreme Court, upheld this Sebi order and, in the process, confirmed the following:
- Any company seeking to raise money from 50 or more investors is essentially making a public issue. All public issues have to be listed.
- OFCDs, which are hybrid investments, do come under Sebi's jurisdiction since they are debentures that become shares later at the option of the investor.
- Any public issue has to be listed on the stock exchanges, and thus any issue with 50 or more investors has to be compliant with Sebi's rules and regulations. Since Sahara evaded both Sebi and the listing requirement, there was no option but to ask Sahara to refund the money.
Sahara's boss Subrata Roy will not only have to find the money to refund it all - the amount could be around Rs 27,000, including interest, but he will also have to provide Sebi with documentation on his investors - assuming they all exist.
After that, his key senior managers in the two companies may face other liabilities.