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Corporate Jun 24, 2011

Sahara capers: Hit the public for Rs 40,000 crore with Rs 11 lakh in your pocket

By R Jagannathan

Market watchdog Sebi has shown that it has fine investigative instincts. Its probe into the affairs of two Sahara group companies - Sahara Commodity Services Corporation (SCSC) and Sahara Housing Investment Corporation (SHIC) - have forced it to conclude that they were up to no good.

It has, therefore, ordered that they should return all the money raised through the ongoing issue of optionally fully convertible debentures (OFCDs) with 15 percent interest. SHIC was formerly called Sahara India Real Estate Corporation (SIREC). OFCDs are bonds which can be converted into equity at the investor's option.

Till the money is returned, the regulator has 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. The order, though, is subject to a confirmation by the Supreme Court.

The order was delivered by wholetime Sebi member KM Abraham on 23 June. He retires on31 July and has not been given an extension for unexplained reasons.

A brief recap will explain the circumstances under which Sebi gave its path-breaking order. (See here)

It stumbled into the case almost by accident, when the Sahara Group filed a Draft Red Herring Prospectus (DRHP) to raise equity for real estate company Sahara Prime City Ltd through an initial public offering (IPO). Sebi discovered through the DRHP that two associate group companies, SCSC and SHIC, were raising huge amounts of money from the public without so much as a Sebi by-your-leave.

The Sahara Group primarily challenged Sebi's intrusion into the affairs of SCSC and SHIC saying that OFCDs were not under Sebi's jurisdiction since they were hybrid instruments. AFP

It fired its first shot and asked the two to stop raising money through an order dated 24 November, 2010. Sahara rushed to the Lucknow bench of the Allahabad High Court, which stayed Sebi's order but not its investigation. Sebi moved the Supreme Court, which merely directed the high court to expedite the case. The high court vacated its stay on 7 Apri, when it found that the Sahara group was not cooperating with Sebi as it had directed. This is where Sahara received it first rap.

On 29 April, the Allahabad High Court dismissed the Sahara Group's petition with these caustic remarks: "A person, who comes to the court, is supposed to come with clean hands and bona fide intentions, and has to abide by the orders passed by the court, more so in a case where the parties' counsel agree for certain actions to be undertaken. If some assurance is given by any person to the court, as has been done in the present case, and the said assurance/understanding is not honoured, the court would not come to his rescue. The application is therefore, rejected."

The matter then went back to the Supreme Court which asked Sebi to conduct its enquiry after giving the company officials a fair hearing. The final Sebi order, which incorporates the details of those hearings, is a telling indictment of how close to the wind the group has been sailing. Here are the key takeouts:

The Sahara Group primarily challenged Sebi's intrusion into the affairs of SCSC and SHIC saying that OFCDs were not under Sebi's jurisdiction since they were hybrid instruments- neither shares nor debentures. Sebi demolished this argument easily since they were debentures that could be converted into shares.

In any event, said the Sahara group, the OFCDs were being privately placed with the Sahara Parivar and not the general public. When no public offer was involved, how could Sebi intervene?

Sebi kayoed this argument simply: when Sahara offices and agents were vending these OFCDs, and when the two companies had garnered over six million investors, many of whom had no connection with the Sahara group, the offers was effectively not a private placement.

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by R Jagannathan

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