Sahara Debacle SAT upholds SEBI order Sahara to refund Rs 24000 crore to investors in six weeks SAT pulls up RoC for hasty decision

The Securities Appellate Tribunal (SAT) on Tuesday upheld the order passed by the Securities and Exchange Board of India (SEBI) against the two Sahara Group companies. SAT has directed the Sahara Group companies to refund a sum of Rs. 24,029 crore to 29.6 million investors raised through Optionally Fully Convertible Debentures (OFCDs) within six weeks giving a big blow to Sahara Group’s fund raising plan..The Securities Appellate Tribunal (SAT) on Tuesday upheld the order passed by the Securities and Exchange Board of India (SEBI) against the two Sahara Group companies. SAT has directed the Sahara Group companies to refund a sum of Rs. 24,029 crore to 29.6 million investors raised through Optionally Fully Convertible Debentures (OFCDs) within six weeks giving a big blow to Sahara Group’s fund raising plan..The market regulator had on June 23, 2011 directed the two companies – Sahara Commodity Services Corporation and Sahara Housing Investment Corporation to refund money to the investors who had invested in their OFCDs with annual interest of 15 percent. SEBI had also restrained Subrata Roy and the directors of the two companies from associating with any listed public company and any public company which intends to raise money from the public till the repayments are completed..SEBI found that the companies had raised sizable amounts of money from the public (under the prospectus dated March 13, 2008 and October 6, 2009) without conforming to the prudent disclosure and other investor protection norms which govern public issues in India..It was against this order of SEBI that Sahara Group had filed an appeal before SAT. The important issues that were raised in the two appeals before SAT included whether the OFCDs issued by the Sahara Group companies are public issues required to be compulsorily listed on a stock exchange and whether these are ‘securities’ as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA). Another important issue was whether the SEBI has jurisdiction to regulate unlisted companies..DSK Legal’s Co-Founding Partner Satish Kishanchandani and Partner Jatin Pore have advised their long standing client Sahara Group in this matter. DSK Partners briefed Senior Advocates Fali Nariman and Sudipto Sarkar who appeared for Sahara Group companies and contended that SEBI had no jurisdiction to pass the impugned order as OFCDs issued by the company are not ‘securities’. They further contended that jurisdiction over unlisted companies rests only with the Central Government and not with SEBI..K. Ashar & Co. Managing Partner Jayesh K. Ashar and Partner Mihir Mody briefed Senior Counsel Arvind Datar who appeared for SEBI while Darius Khambata, the learned Additional Solicitor General appeared on behalf of Ministry of Corporate Affairs. The Senior Counsels contended that SEBI alone had the jurisdiction in the matter and that the impugned order does not suffer from lack of jurisdiction. They further argued that OFCDs were securities and, therefore, SEBI has the jurisdiction to regulate the issue and also the issuer company..SAT in its order said, “The fact that information memorandum was circulated to more than thirty million persons through ten lakh agents and more than 2900 branch offices is nothing but advertisement to the public. The appellants concealed some very vital facts from the Registrar of Companies (RoC) and from its shareholders and also from the investors and we are satisfied that the disclosures made in the Red Herring Prospectus (RHP) were not true and fair”..The Tribunal also drew attention to the conduct of the RoC, who allowed these issues without proper scrutiny. “We are of the view the RoC while registering the RHP with undue haste had acted in dereliction of his duty,” SAT said..Justice N.K. Sodhi in the order said, “OFCDs issued by the company are securities and that the issue was a public issue requiring mandatory listing and that SEBI has the jurisdiction under the SEBI Act to deal with all kinds of securities and companies, whether listed or not.”.The Tribunal took the view that when it comes to regulating the securities market and protecting the interests of investors in securities, SEBI Act is a standalone enactment and SEBI’s powers there under are not fettered by any other law including the Companies Act..SAT further observed that in view of the fact that OFCDs have been issued to more than 29.6 million investors, the company has gone to the public and is, therefore, estopped from contending that it is not going to the public and that it does not intend to get the securities listed. “Any offer or invitation to subscribe to shares or debentures if made to 50 persons or more shall be treated as a public issue and all provisions of law relating to public issues shall apply,” said the order by the SAT..Sahara India Real Estate owes Rs. 17,656 crore to 22.1 million investors and Sahara Housing Rs. 6,373 crore to 7.5 million investors, the Sahara Group’s affidavit shows. ET reports, Sahara Group in a statement said, “It is unbelievably shocking that in an exactly similar case, a Mumbai-based Company, Citicorp Finance India Ltd, had issued debentures in private placement to thousands of investors. This company was unlisted as is the exact case with Sahara. Such a contradictory act by a responsible regulator can only happen in our system.”.Sahara Group now plans to file an appeal before the Supreme Court against this order of SAT.