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Corporate Feb 7, 2013

Sebi, SC have tied themselves in knots over Sahara

By R Jagannathan

The Supreme Court did well to rap market regulator Sebi on the knuckles for beating around the bush with its 31 August 2012 order on the Sahara Group.

At a hearing yesterday, the same two-judge bench that gave the August verdict asked Sebi, which is seeking a contempt order against the Saharas, to stop pussyfooting around the judgment and implement it in toto. "We wonder whether Sahara is committing contempt (of court) or you are committing contempt," the bench observed. "You have done nothing, except issue notices after notices (to Sahara). Who is committing contempt?"

The facts do not do Sebi much credit, even though the court did end up sending Sahara a contempt notice. Five months after the judgment, Sahara continues to flout court orders to return the money raised by two of its companies - Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) - and all Sebi has been doing is keep moving court for contempt against Sahara.

While it is also true that the Saharas, true to form, have been moving the court for delaying the inevitable, Sebi has been inadvertently aiding the process by simply not doing what it had been asked to do: collect the money from Sahara, attach the Sahara accounts for any non-compliance, start collecting documents of genuine investors in Sahara's optionally fully convertible debentures, and set up processes to repay depositors.

What we have seen instead is Sebi moving with extraordinary caution, assuming it is not dragging its feet.

When the 31 August order was so clear in its intent, and provided all the remedies, how did Sahara, Sebi and even the Supreme Court manage to muddy the issues so brilliantly? Reuters

When the 31 August order was so clear in its intent, and provided all the remedies, how did Sahara, Sebi and even the Supreme Court manage to muddy the issues so brilliantly? Reuters

First, it declined to accept the truckloads of documents sent by Sahara, ostensibly because it breached the Supreme Court deadline. But if this was the reason, it could have accepted the documents and merely informed the court about the technical infringement of its order. But Sebi did not do so. It lost precious months in the process.

Second, Sebi has not done anything to attach the assets of Sahara, despite the group breaching the 30 November deadline to hand over the Rs 24,000-and-odd crore payable to investors in the optionally fully convertible debentures (OFCDs) of the two companies.

This is why an exasperated Supreme Court bench gave Sebi an earful. "Our directions were very clear. Our judgment provided for consequences. What steps are you taking? You are not taking any action. The judgment tells you what you should do but you are not doing it."

The 31 August judgment had these points: (1) it asked Sahara to submit documents to Sebi in 10 days, (2) repay the money to Sebi by 30 November. (3) It also gave Sebi sweeping powers to incur any cost, including the cost of hiring expert investigators to check the veracity of Sahara's investors, and seek court directions when needed. And (4) it even set up a former Supreme Court judge as overseer to help Sebi implement the judgment.

Little wonder the bench is exasperated with Sebi's slow-motion action. A Hindu report quotes the bench as asking Sebi's counsel why Sahara's accounts were not frozen if it had flouted the 31 August order, but when Sebi replied that it had issued notices, the court observed: "Issuing notice is not enough. Why did you give notice and not take action? You have to execute our order."

From the court's observations it seems that Sebi is moving with leaden-footed caution in the Sahara case even though the Supreme Court has empowered it to get the job done.

In the August judgment, the court was crystal clear about what it wanted Sahara and Sebi to do.

First, the OFCD money, with 15 percent interest, possibly in excess of Rs 24,000 crore overall, was to be paid "to Sebi". The court said this money should be deposited with a nationalised bank till it was paid out to investors after due verification. When Sahara went to the Securities Appellate Tribunal (SAT) and got its case thrown out, Sebi could have immediately attached Sahara's properties and bank accounts for non-compliance. It did nothing of the kind.

Second, when Sahara claimed it had repaid most of the OFCD money to investors and that only Rs 2,620 crore was left to be paid, Sebi dropped the ball once more. This was yet another violation of the August court order, and Sebi could have attached the Sahara accounts after the latter had condescendingly offered to pay Rs 5,120 crore just in case the Rs 2,620 crore fell short. The violation of the Supreme Court order lay in this: nowhere did Sahara mention it had already started repaying its investors when the case was being heard in the Supreme Court. Did Sahara pull a fast one on both the apex court and the regulator? And did both fall for it, when the presumption was Rs 24,000-and-odd crore was left to be repaid?

Third, Sebi did not seem to mind when Sahara got yet another bench, this time headed by the Chief Justice Altamas Kabir himself, to give the group yet another extension of three months for repayment. This extension was given in December, and Sahara was asked to pay Rs 5,120 crore immediately, Rs 10,000 crore in January, and the balance in February. The second and third payments did not happen. Sebi could have again attached Sahara's accounts, but did not do so.

Fourth, Sebi could also have opposed the Supreme Court's decision to get yet another bench to hear Sahara, when the original bench was best equipped to do so. This way the Saharas got themselves more time to evade the earlier judgment.

When the 31 August order was so clear in its intent, and provided all the remedies, how did Sahara, Sebi and even the Supreme Court manage to muddy the issues so brilliantly?

Is there more to it than meets the eye? The Saharas are being given a very, very long rope, and they have used it to tie both the court and the regulator in knots.

(A few other Sahara stories you may want to read are here and here and here. The original Firstpost story on the Sebi order that finally led to the SC order of August 2012 is here)

by R Jagannathan

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