Although many companies have taken recourse to it, the Sahara case is the biggest example in the country of a deemed public issuance. The surprising fact, however, is that neither SEBI nor any other government agency, such as the RBI or MCA, raised any red flag about such a large amount of money being raised from the public in utter violation of the law. Had Sahara Prime City Ltd (a group company) not decided to list on the stock exchange and thereby be forced to make disclosures to SEBI regarding its group entities such as Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL), the matter would never have come to light. It is also significant that the process of issuing these optionally fully convertible debentures (OFCDs) started around the same time as the RBI placed severe restrictions on the working of Sahara India Financial Corporation Ltd (SIFCL), a non-banking finance company of the group. SIFCL had been asked by the RBI not to raise any fresh deposits from the public and to close all existing deposits and reduce its public liability to nil in a given time frame. It is no coincidence that around the same time, these new instruments were issued by two companies of the Sahara group.
According to their own admission, the net amount raised by the two companies was more than Rs 24,000 crore from more than three crore investors.
Interim Order by SEBI
The SEBI Act states that in the interest of preventing continuing harm to investors, the regulator can pass an interim order pending conclusion of investigation. The bonds issued by SHICL were so open-ended that, although the issuance began in 2008, even in 2010 subscription was still possible. In view of this, SEBI passed an interim order in November 2010 restricting SIRECL and SHICL from mobilizing further funds under the red-herring prospectus issued by them in March 2008 and October 2009 respectively. They were further restrained from offering any shares or debentures to the public or even inviting subscription until further directions.
This sparked off one of the most keenly watched and widely reported legal battles in the history of this country. Although nine years have elapsed since the first order (interim) was passed, the case is still not over. It has tested not only the powers and authority of SEBI, but also how the directions of the highest court of this land, the Supreme Court, can be frustrated with impunity.
In December 2010,Sahara approached the Lucknow bench of Allahabad High Court in a writ petition and received a stay against the interim order of SEBI. Many in SEBI felt that this was a setback. The regulator had no option but to approach the Supreme Court. In its order passed in January 2011, the Supreme Court directed the high court to proceed with the hearing on a day-to-day basis. It also clarified that SEBI would be entitled to continue with its inquiry. In April 2011, the Lucknow bench of the Allahabad High Court finally passed an order vacating the stay it had granted earlier. The observations in this order are important to note. The court was dismayed at the fact that the assurances given before the court by Sahara were not honoured by them. It said: 'The court's orders cannot be allowed to be violated or circumvented by any means.' Sahara filed another petition in the high court to restore the stay order. This was also rejected with the observation that 'if 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.'
Final Order by SEBI (June 2011)
There was a sense of jubilation in SEBI at the new high court order. It was an endorsement of what SEBI was doing. Sahara went to the Supreme Court against this order. The Supreme Court in May 2011 asked SEBI, as the custodian of investors' interest and an expert body, to examine the issues expeditiously and pass appropriate orders. However, the same would not be given effect until the Supreme Court decided the matter.
In light of the above, Whole-time Member of SEBI K.M. Abraham passed the final order in June 2011. This was less than a month before his stint at SEBI came to an end. It was a comprehensive order in which each and every point of the law and fact was effectively dealt with. It clearly established which provisions of different laws/regulations had been violated, and how SEBI had the jurisdiction to deal with the case even though the concerned companies were not listed on the stock exchange. This order became the foundation for appeal before SAT and then before the Supreme Court by Sahara.
The case before the Supreme Court is still not resolved. Some of the important points made in SEBI's order of 23 June 2011 are that in June 2008, the RBI had issued a direction to SIFCL, a residual non-banking company (RNBC), prohibiting it from accepting any fresh deposit maturing beyond 30 June 2011. Since the minimum tenure of the deposits could be twelve months, effectively, it restrained SIFCL from raising fresh deposits beyond 30 June 2010. SIFCL was also to stop accepting instalments on existing deposits. They were asked to bring down their liabilities towards the general public to zero by 30 June 2015. It was noted that the scheme by SIFCL was similar to a recurring deposit scheme, and the mobilization had taken place through thousands of agents all over the country. At the same time, the OFCD scheme had no firm closing dates and was almost similar to running an account in the nature of a passbook akin to a para-banking activity.
SEBI held that the OFCDs raised by these two companies were no different from deposits from the public, except that there was an option to convert these into equity shares. The details of the investors had not been publicly disclosed, and it was also noted that there were reports that the Sahara companies were now planning to use a third method of fund mobilization, i.e. through cooperative societies. SEBI held that the OFCDs issued by the two companies fell within their jurisdiction. These had been issued to more than fifty individuals and were of public issuance in nature. These funds had been raised in violation of the law. These two companies were not eligible to make a public offer, as no draft offer document was filed, no debenture trust deed for securing these debentures was executed, no debenture redemption reserve was created, no monitoring agency was appointed to oversee, and no credit rating was conducted. The issues were kept open for more than two years in contravention of the time limit of ten days. They had failed to apply and obtain permission to list on the stock exchange. SEBI, therefore, ordered the two companies and their directors to refund the money collected, along with 15 per cent annual interest from the date of receipt of the money until such repayment. They were restrained from accessing the securities market for raising further funds until the refunds had taken place. They were also restrained from associating themselves with any listed company.
Excerpted with permission from Penguin Random House India