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Sahara: SC shifts focus, asks Sebi ‘what about other cases?’

By R Jagannathan

The spotlight in the Sahara Group's controversial efforts to raise around Rs 40,000 crore in two unlisted companies appears to have shifted from the accused to the accuser.

On Tuesday, the Supreme Court asked Sebi, the market regulator who had ordered the two companies to return all the money they had raised from the public through a preferential allotment, to provide it a list of other unlisted firms which may have done the same thing as Sahara.

This means the court will not just examine the validity of Sebi's order on the two companies - Sahara Commodity Services Corporation (SCSC, formerly Sahara India Real Estate Corporation) and Sahara Housing Investment Corporation (SHIC) - but also what Sebi has done with other such cases.

On 23 June 2011, Sebi ordered a stop to what looked like a Sahara Group Ponzi operation where the two companies, both with minuscule net worth of a few lakhs of rupees each, started raising money from then public through optionally fully convertible debentures (OFCDs) in 2008 and 2009. Between the two, they were planning to keep the issue open indefinitely and raise as much as Rs 40,000 crore by bypassing Sebi.

The Sahara Group, which claimed these were private placements and not public issues, lost its case at the Securities Appellate Tribunal (SAT) in October last year, and the case then reached the Supreme Court.

Sebi has not tried to block all private placements, but Sahara's alleged private placement which ended up being a public issue with more than 50 investors. In fact, it had millions of investors. Reuters

Now, it seems the apex court case is heading in a different direction that goes beyond Sahara's culpability.

According to a report in Business Standard, a Supreme Court vacation bench comprising Justices KS Radhakrishnan and Jagdish Singh Khehar asked the Sebi counsel on Tuesday: "How many (unlisted) companies have issued shares or bonds to more than 50 investors? Have you done any study or investigation on this? Have you issued any show cause to any other company?"

Earlier, Sahara's counsel Gopal Subramaniam threw what appeared to be a red herring when he shifted the focus away from Sahara: He said: "Let us keep Sahara aside for a moment. There are over 100,000 public limited companies. Of these, only about 12,000 are listed on the stock exchanges. The remaining (ones) are unlisted. Several of these companies raise money through private placements. It is an important source of capital for them. If this route is blocked, it will have serious consequences," Subramaniam told the court.

The argument clearly is wrong. Sebi has not tried to block all private placements, but Sahara's alleged private placement which ended up being a public issue with more than 50 investors. In fact, it had millions of investors.

Justice Radhakrishnan asked. "We want to know because this (decision) could have far-reaching consequences." The court also asked the ministry of corporate affairs, also a party to the case, to provide the details of Sahara-like cases, if available, at its end.

The Supreme Court will obviously have to look at many angles, but it is not clear why it has chosen to expand the case beyond Sahara since this is not a public interest litigation involving all unlisted public companies. By seeking details from Sebi and MCA, the case is sure to prolong.

As Firstpost reported in June last year, the Sahara case was extremely well investigated by Sebi and its former wholetime member KM Abraham, The conclusions of Sebi's final order on Sahara show the group in very poor light. Among other things, this is what Sebi found:

First, Abraham shows how the group, in contravention of Schedule II of the Companies Act, tried to deliberately exclude Sebi from vetting the DRHPs (draft red herring prospectuses) 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 in his order dated 23 June 2011: "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 says 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! Abraham's order noted: "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?"

Third, the Sebi investigation clearly points to a lack of corporate governance at Sahara companies. The two companies, SCSC and SHIC,which were expecting to raise Rs 40,000 crore between them, did not even have a proper list of investors. Says Abraham: "The two companies... are without doubt, clearly in gross violation of the provisions of the laws applicable to public companies making offers of securities to the public. (They) seem to be unable to furnish even basic data on the identity of its (sic) own investors..".

To find out the names of its investors, SIREC (i.e. SCSC) apparently needed the help of professional accounting firms. Asks Abraham: "If the identity of the investors and addresses themselves are not readily available with the firm - and the compilation and authentication of the data across the thousands of service centres will have to, as admitted by SIREC, require the support of professional accounting firms at this stage, then I wonder what real safeguards can possibly be there in place for investor protection?"

Fourth, the Sebi order points out that the two companies have not complied with even the basic rules for investor protection designed by Sebi (which, in retrospect, is explained by the fact that the companies were all along trying to evade Sebi's jurisdiction).

Worse, the companies were planning to raise Rs 40,000 crore without having the basic financial strengths to do so. Says Sebi: "SIREC did not have any distributable profit for the financial year ending March 31, 2008. SIREC had a negative net worth at the time of the offer and the net worth of SHIC was around Rs 11 lakh.

"The subscribed capital of the two companies is very small in comparison to the liabilities on their balance-sheets. The OFCDs raised are of the order of at least a few thousand crores of rupees, with the requirements for funds indicated at Rs 40,000 crore. To compound these concerns, all the OFCDs are unsecured - there is no charge on either the assets of the companies or on the revenue streams from the various projects undertaken by the two companies."

Fifth, the group apparently intended to rotate money between one group company and another without reference to investors. The DRHPs of both companies state that "the money not required immediately by the company may be parked/invested inter alia by way of circulating capital with partnership firms or joint ventures or in the fixed deposits of various banks."

Observes Abraham: "This means that such funds mobilised beyond the pale of law, could be potentially diverted into various activities of the group companies, without any significant accountability or reporting requirements."

The Sebi order also points out that cheques from investors were sought in the name of Sahara India, Subrata Roy's partnership firm, but OFCD certificates were issued in the name of Sahara Housing Investment Corporation. Money apparently moves from one pocket of Sahara to another without investors really getting to know.

From all accounts, and given that SAT has confirmed Sebi's 23 June order on Sahara to return all the cash it raised through OFCDs, one wonders about the wisdom of widening the case beyond Sahara.

Especially, since a year has passed since the Sebi order.

by R Jagannathan

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