Vivek Kaul
The Rs 24,000 crore question for the Sahara group is where did it get the money from to repay the investors who had invested in its housing bonds or the optionally fully convertible debentures(OFCDs)? The group had raised this money through Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL).
This happened after the Reserve Bank of India(RBI) ordered the group to shut-down its para-banking operations through which it used to raise money to fund its capital intensive businesses from real estate to an airline.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
On this pretext, the group felt that issuance of these OFCDs did not amount to a public issue. As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Hence, the issuance of OFCDs was a public issue and given that it needed to be listed on a stock exchange, which it wasn’t. The Securities and Exchange Board of India(Sebi) came calling and KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In the order Abraham also contested how could Sahara raise such a huge amount of money only through members associated with the Sahara group. “The case of the two Companies is that they have issued OFCDs only to members associated with the Sahara group…Even the listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors. In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only of the order of 15 million,” wrote Abraham. Given this, how did Sahara manage to issue bonds to 2.96 crore investors, who were largely members associated with the group?
This Sebi order was challenged in court by Sahara. It led to a series of events, which finally led to the Supreme Court judgement on August 31, 2012. The apex court in the country basically stood by Sebi’s decision and asked Sahara to refund Rs 24,029 crore that it had raised through OFCDs, to the investors by November 2012.
The Supreme Court directed the Sahara group to hand over money to Sebi, which would in turn refund the money to the investors. The group was soon given more time to repay the money, and further directed to deposit Rs 5,120 crore immediately. This the group paid up on December 5, 2012 and hasn’t paid up anything since then.
It has since contested that it has already paid its investors and handing over the money to Sebi would mean double payment. The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. In fact, the Business Standard had reported in November 2012 that the agents of the Sahara Group were being pushed to collect sehmat patras (consent letters) from investors to show that their money had already been returned to them. “Agents, estimated to be a million strong, who sold OFCDs, often termed housing bonds, have been ordered to collect these letters, failing which their commissions are being stopped. With these consent letters, many of which are pre-dated, with dates ranging from as early as April to show that refunds were spread over a long period, documents such as account statements and passbooks in the hands of the customers are being collected,” the newspaper reported. This happened after the Supreme Court judgement asking Sahara to hand over Rs 24,000 crore to Sebi. If the group was refunding the investors as early as April 2012, why was it fighting a case in the Supreme Court at the same time?
Further, where did the group get the money from? Rs 24,000 crore is clearly not small change. Interestingly, the group has offered an explanation for this.
The group claims that the Sahara India Cooperative Credit Society and Sahara Q Shop bought the real estate assets worth thousands of crores from SIRECL and SHICL, the companies which had issued the OFCDs. This money was then used to repay the investors who had invested in the OFCDs.
But where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money to buy the real estate assets of SIRECL and SHICL? The group claims to have raised this money through the Sahara India partnership firm which raised money on behalf of Sahara India Cooperative Credit Society and Sahara Q Shop, across 4,700 locations throughout the country. The group essentially put its vast network of branches to work, it claims.
The next question is that what was the pretext on which Sahara India Cooperative Credit Society and Sahara Q Shop raised money? Sahara Q Shop could have raised money as an advance against the promise of providing consumer goods to investors who invested in it. The Sahara Q Shop had got immense credibility in small town India, given that it was being advertised by the Indian cricket team.
On the face of it Q Shop seems like a money raising scheme that is being marketed as a retail venture. In fact, in an affidavit filed with the Allahabad High Court, Sebi has alleged that the group was “forcibly and unilaterally converting the investments in Sahara India Real Estate and Sahara Housing Invest to Sahara Q Shop without any consent of the investor, in defiance of the orders of the Supreme Court.”
Also, the question is why shouldn’t the Sahara Q Shop venture qualify as a collective investment scheme. A collective investment scheme is defined as “Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS(collective investment scheme). Investors do not have day to day control over the management and operation of such scheme or arrangement.” And this should bring the Sahara Q Shop under the regulatory ambit of Sebi.
Interestingly, the Sahara Q Shop seems to have also invested in the troubled National Spot Exchange. As the Business Standard reports “Recent data put out by the troubled National Spot Exchange (NSEL) showed that Sahara Q Shop had invested a little over Rs 220 crore through Indian Bullion Markets Association, a subsidiary of NSEL.”
What all this tells us is that Sahara continues to be a para-banking operation on the ground.
The article originally appeared on www.FirstBiz.com on February 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Housing Bonds
Arrest warrant out, what new ruse will Subrata Roy come up with?
Vivek Kaul
George Orwell in his 1945 classic Animal Farm said that “all animals are equal, but some animals are more equal than others.” Sahara bossman Subrata Roy, clearly belongs to the second category.
On February 20, 2014, the Supreme Court of India had directed Roy to be present in court on February 26, 2014, to explain the failure of two Sahara group companies to refund an amount of a little over Rs 24,000 crore, raised from investors, by selling optionally fully convertible debentures (OFCDs).
Roy did not turn up in Court and his counsel Ram Jethmilani told the Court that “His mother is dying and he is required to be by her side holding her hand.”
To buttress their point further, the Sahara Group even attached a medical statement by doctors attending to Roy’s mother at the Sahara Hospital in Lucknow. Interestingly, along with Roy, the Court had directed Ashok Roy Choudhary, Ravi Shankar Dubey and Vandana Barghava, three directors of Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to be present on February 26, 2014. SIRECL and SHICL are the two companies that had issued the OFCDs.
Only Roy did not turn up citing his mother’s illness. The other three did. This did not go down well with the Court. “The arm of this court is very long. We will issue warrants. This is the Supreme Court of the land. When other directors are here, why cannot he be here?” asked Justice KS Radhakrishnan.
After this, the Court issued non bailable arrest warrant against Roy and directed that he be arrested and produced before it, on March 4, 2014.
The Sahara group has been testing the patience of the Supreme Court for a while now and on Wednesday (i.e. February 26, 2014), the apex court in the country simply ran out of it.
Sahara is a finance to reality conglomerate with huge para-banking operations in the states of Uttar Pradesh and Bihar. In July 2008, the Reserve Bank of India ordered the group to shut-down its para-banking operations. This, after it found several discrepancies in the books of Sahara. Sahara used to run the para-banking operations through the Sahara India Financial Corporation. The group raised a large amount of money from people who did not have bank accounts. It even collected small amounts on a daily basis.
The deposits funded the many businesses (like media, films, real estate, hospitals, hotels and even airlines) that the group was into. The Reserve Bank hit at the heart of Sahara’s business model by prohibiting it from running a para-banking operation. The central bank banned Sahara from raising fresh deposits beyond June 30, 2011 and at the same time asked Sahara to repay all its depositors by June 30, 2015.
It is easy to see that most of the businesses that Sahara was into were highly capital intensive. Hence, it was important for the group to keep raising deposits. But with the RBI clamping down on its para-banking operations that was not possible.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
Given this, the group felt that the issuance did not amount to a public issue, and did not require compliance either with the Companies Act, 1956, or the Securities and Exchange Board of India(Sebi) Act.
As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Given this discrepancy, KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In this order Abraham also pointed out that “The first proviso to section 67(3) inserted by the Companies (Amendment) Act, 2000 with effect from 13.12.2000 sets at rest the question by stating that if an invitation to subscription is made to 50 or more persons, it ceases to be a private.”
Hence, the OFCDs sold by Sahara constituted a public offer and given that needed to be listed on a stock exchange, which they were not. As Section 73 of the Companies Act points out “Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchange for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange.” The OFCDs of Sahara were not listed on any stock exchange.
Sahara challenged the Sebi order in court. This started a series of events which finally led to the Supreme Court judgement as on August 31, 2012. In this judgement, the Court directed the Sahara group to refund Rs 24,029 crore that it raised through OFCDs to the investors by the end of November 2012. The order had directed that Sahara to pay this amount to Sebi,which would in turn refund the money to the investors.
The group was given more time to refund and directed to deposit Rs 5,120 crore immediately. Rs 10,000 crore was to be deposited with Sebi in January 2013 and the remaining amount in February 2013. The Sahara group handed over draft of Rs 5,120 crore on December 5, 2012, and hasn’t paid anything since then.
In fact, it has since maintained that it has already returned the money to investors and paying money to Sebi would amount to paying twice. As a November 2013 report in the Business Standard puts it “Its(i.e. Sahara’s) top lawyers have argued that it was not the intention of the court to pay investors twice and that the regulator has to first check several truckloads of documents pertaining to the millions of investors before coming to ask for the balance.”
But there are some basic loopholes in the argument. If Sahara was in the process of repaying its investors, why was fighting a case with Sebi in the Supreme Court?
The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. This led to Justice Kehar, one of the judges on the bench hearing this case, to wonder “The whole of May and June, they were fighting before us. Why would they do that if they were already refunding?”
In January 2014, the Supreme Court had directed the Sahara group to file bank statements and documents to prove that it had refunded the money to its investors in 2012. A Business Standard report dated February 14, 2014, quotes Arvind Dattar, the Sebi counsel as saying “They have filed five volumes of documents. These contain everything except what we want.”
Datar also asked that how could Sahara return money that it had collected over a period of three years in just two months. The money Sahara has repaid to the investors who had bought OFCDs has come through transactions within the group. The group has told the Supreme Court that Sahara India Cooperative Credit Society and Sahara Q Shop bought real estate assets worth thousands of crores from SIRECL and SHICL, the two companies that issued OFCDs, to bail them out. This money was then used to repay the investors.
The question is where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money from? The Sahara Group told the apex court that the money to buy these assets was raised from numerous investors through its big branch network of 4,700 branches.
The money from this transaction was used to repay the OFCD investors in cash. The group explained that it put in place the cash policy after hundreds of cases of “snatching, robberies, injuries and even death faced by its workers while carrying money between branches and banks.” But wouldn’t that still be applicable, if it repaid its investors in cash? Wouldn’t its agents have to carry cash around to repay it’s investors?
In a statement issued earlier this month the Sahara group claimed that almost 98% of its investors had put in amounts ranging from Rs 500 to Rs 19,000 into the OFCDs. The average investment was around Rs 8,000. The group further said that these people do not go to banks and wanted their money back in cash.
The Supreme Court in a hearing this month asked if payments of such huge amounts of cash was legally allowed. The Sebi counsel Datar explained that “Under Section 73 of the Companies Act, refund has to be made only by cheque. Even the Sebi ICDR (Issue of Capital and Disclosure requirements) regulations mandate that payments have to be made through banking channels only.”
To conclude, basically, Sahara and its lawyers have been playing the delaying game and keep coming up with a new theory every time there is a hearing. It will be interesting to see what new theory they come up with on March 4, 2014, when Subrata Roy will have to appear in court.
We haven’t seen the last of this case. Watch this space.
The article originally appeared on www.firstpost.com on February 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)