The Supreme Court ordered two Sahara group companies to
refund all the money they have collected through so-called optionally fully
convertible debentures (OFCDs) to investors in three months, ending a
three-year tussle between India’s capital market regulator and the Subrata
Roy-owned business.
The apex court upheld the orders passed by the market
regulator and the Securities Appellate Tribunal (SAT) that had directed the two
firms—Sahara India Real Estate Corp. Ltd (SIRECL) and Sahara Housing Investment
Corp. Ltd (SHICL)—to refund the money they had raised through OFCDs.
The apex court verdict will require the two Sahara firms to
refund Rs.24,029.73 crore along with 15% annual interest to all OFCD investors
within three months. The companies had collected the money from at least 29.61
million investors between April 2008 and April 2011, the order said.
The 270-page order passed by justices K.S. Radhakrishnan and
Jagdish Singh Khehar brings to a close the battle between the Securities and
Exchange Board of India (Sebi) and the Sahara group, with the strongest
possible endorsement of the regulator’s decision and emphatically upholding the
sanctity of the country’s securities law. The money that has to be returned is
among the highest restitutions the Supreme Court has ordered.
The court order is a landmark judgment that upholds
securities regulations and investor rights, and will encourage better
disclosures by companies raising funds from investors, said Akil Hirani,
managing partner of Majmudar and Partners, a law firm.
“The Supreme Court order is a victory for rural investors as
they are the soft targets of such kinds of fund-raising and will set a
precedent of immense significance as it reinforces compliance of securities
norms,” he said. “This order will impact all the companies that have raised
public money through chit funds or any other means without adequate
disclosures.”
Sebi had in 2010 accused the Sahara group firms of violating
certain regulatory norms by raising money through OFCDs from the public in the
guise of private placement. Sebi’s former whole-time member K.M. Abraham had
restrained the two firms, their promoter Subrata Roy and their directors from
accessing the capital market till the the entire OFCD money was refunded to the
investors with interest. Subsequently, the order was challenged at SAT, which
upheld Sebi’s argument in its verdict in October 2011.
Following the SAT order, the two Sahara firms had moved the
Supreme Court in November.
According to a recent affidavit filed at the apex court,
SIRECL owed Rs.17,656.53 crore and SHICL Rs.6,373.2 crore to their OFCD
investors as of 31 August 2011.
“It is clearly apparent that the appellant companies (the two
Sahara firms) had clearly taken upon themselves to tread a path different from
the mandate of law delineated under the Companies Act,” said the Supreme Court
order.
The court supported Sebi’s argument that there was a
pre-planned attempt by SIRECL and SHICL to bypass the regulatory and
administrative authority of the market regulator.
Sebi will be the custodian of the deposits collected by the
two Sahara companies. The court has also appointed retired Supreme Court
justice B.N. Agarwal to oversee the refund process to be carried out by the
market regulator.
The watchdog has been authorized by the apex court to take recourse
to all legal remedies, including attachment and sale of property, and freezing
of bank accounts of Sahara firms for recovery of the OFCD money if it is not
refunded in the next three months.
The court further directed the two Sahara firms to furnish
every detail of their OFCD issuances, subscriptions and refunds within 10 days.
The two companies will then have to “furnish all documents in
their custody, particularly the application forms submitted by subscribers, the
approval and allotment of bonds, and all other documents to Sebi”.
The refund process will start after Sebi verifies the
authenticity of the documents produced by Sahara. If the documents are found
incorrect, Sebi can proceed with the refund process on the assumption that the
companies have not paid any amount to subscribers who had invested money in
OFCDs through six types of bonds issued by the two firms in 2008 and 2009.
According to the order, if Sebi is doubtful about the
bonafides of the subscriber, it will have to give the Sahara firms a chance to
establish the legitimacy of the investor. Sebi’s decision in such a case will
be final.
Following Sebi’s verification, the money of investors that
can’t be traced will be credited to the Union government’s account, said the
apex court order.
This is not the first time the Sahara group has been ordered
to repay investors. In 2008, the Reserve Bank of India (RBI) had banned Sahara
India Financial Corp. Ltd, the country’s biggest residuary non-banking
financial company, from taking deposits from the public and asked it to wind
down its operations by 2011. RBI had set a three-year sunset window on Sahara
India Financial, allowing it to accept fresh deposits maturing until 30 June
2011.
A 4 June 2008 RBI release had said Sahara “continuously”
violated investment norms; payment of prescribed minimum rate of interest to
depositors; asset-liability management guidelines; “know your customer” norms
for opening deposits, and had failed to intimate depositors when their deposits
matured.
The central bank wanted Sahara India to wind down its close
to Rs.20,000 crore public deposit base. It directed Sahara India to repay the
deposits as and when they mature and bring down the aggregate liability to
depositors to zero on or before 30 June 2015.
According to a Sahara group advertisement in newspapers, in
August 2011, Sahara India Financial accepted Rs.73,000 crore of deposits until
June 2011, but didn’t say anything about outstanding deposits.
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