Sebi relies on Sahara order to nail fraudsters

Written by PTI | New Delhi | Updated: Feb 23 2014, 22:12pm hrs
SaharaSebi relies on Sahara order to nail fraudsters. (Reuters)
Sebi may still be fighting alegal battle to make Sahara pay over Rs 20,000 crore forrefund to investors, but the regulator has cited Supreme Courtorder in this high-profile case to bring to book operators ofat least five illicit money-pooling schemes.

Citing the apex court order in Sahara case, Sebi haspassed orders against at least five companies and 21individuals charged with collecting thousands of croresfraudulently through issuance of bond instruments like OFCDs,

RPSs, CPSs and art funds.

Through an order passed on August 31, 2012, the SupremeCourt had asked two Sahara group firms to refund more than Rs24,000 crore collected through issuance of certain bonds toabout three crore investors.

The companies were asked to deposit the money with Sebi,which was mandated to make further refunds to eligibleinvestors. Claiming to have already refunded more than Rs20,000 crore directly to investors in cash, Sahara later

deposited Rs 5,120 crore with Sebi and has been accusing theregulator of not doing anything to make the refunds.

Sebi has filed a contempt petition against Sahara and itstop officials. The Supreme Court has asked top executives oftwo Sahara firms to be present in the court during nexthearing onFebruary 26.

While this case continues to be fought in courts, theSahara order by the Supreme Court continues to be cited bySebi in its orders against entities raising funds throughinstruments like OFCDs (Optionally FullyConvertibleDebentures), Redeemable Preference Shares (RPSs), ConvertiblePreference Shares (CPSs) and many more.

One of the latest order is in case of money raised byVibgyor Allied Infrastructure Ltd (VAIL), wherein Sebi hasclamped down on the company and three individuals for raisingmoney through issuance of OFCDs in violation of norms.

Sebi began looking in this case way back in 2010 and,interestingly, the company had one once "agreed and undertookthat it shall abide by the decision of the Supreme Court inthe matter of issuance of OFCDs by Sahara India Real EstateCorporation Limited and Sahara Housing Investment CorporationLimited wherein the above issues of law were pending fordetermination by Hon'ble Supreme Court at that time".

However, at a later stage of investigation the companysaid that the "case is different from that of OFCD issuancesby Sahara group companies as Sahara issued OFCDs to very largenumber of persons without any clear relationship with theissuer whereas VAIL issued its OFCDs to an identified group of

persons who were members of the Vibgyor Institute of Studies,

a society under the Vibgyor Group."

Finally, Sebi in its order observed that Supreme Courtjudgement in Sahara case settled all controversies with regardto questions such as whether an offer is public or private,whether Sebi had jurisdiction on issuance of securities

including OFCDs to 50 persons or more, etc.

Sebi also said that Vibgyor had initially "agreed andundertaken that they shall abide by the decision of theSupreme Court in the above mentioned Sahara case", but theychanged their stand after controversies were set at rest by

the apex court through its order dated August 31, 2012.

In a different order recently passed by Sebi againstPrayag Infotech Hi-Rise and 4 individuals for raising fundsthrough certain RPSs, the Sahara order again found a mention.

While arguing its case before Sebi, this companycontended that "the provisions related to deemed public issueswere not known and the same came to light only after thejudgement of the Supreme Court in the matter of Saharas".

Sebi, however, observed that the "intent and purpose" ofthese provisions were always the same and "the position of lawof those provisions were reiterated by the Supreme Court inthe said judgement".

In most of these cases, the companies have argued thatsuch securities were not issued to the public at large andwere limited to a limited group of people on private placementbasis and therefore should not be considered public offer.

However, the regulations term any issuance of securitiesto 50 or more persons as a public offer and therefore any suchoffering needs approval from the Sebi.

In its order in the case of Alchemist Holding Ltd raisingfunds through certain RPSs also, Sebi said that the Saharaorder established that the "burden of proof" is entirely onthe company to show that the offer of securities was a privateplacement.

In a different order passed against Osian's for raisingmoney as certain art fund investments, Sebi cited the SupremeCopurt's Sahara order to establish that the company raised anamount of Rs 102.40 crore from 656 investors and therefore "itis not a private placement".

Sebi said that the apex court judgement ofAugust 31,2012 held "that an offer to fifty or more persons becomespublic issue by virtue of ... (relevant section).. of theCompanies Act.

The regulator further said that the Supreme Court alsoheld that the situations that would not be generally regardedas an offer made to public would include -- "offer ofsecurities made to less than 50 persons, offer made only to

the existing shareholders of the company (right issue), offermade to a particular addressee and be accepted only persons towhom it is addressed, offer or invitation being made and it isthe domestic concern of those making and receiving the offer".

Sahara order was also referred by Sebi as a benchmark forcases of unauthorised raising of money from public when itclamped down on seven persons and one company for theirinvolvement in the famous 'StockGuru' fraud.

Passing the order in that case, Sebi said that theSupreme Court order in Sahara case has "held that an offer tofifty or more persons becomes public issue" by virtue of therelevant provisions of the Companies Act and needs compulsorylisting.

In the StockGuru case, convertible preference shares wereoffered and issued to more than 49 persons and therefore itqualifies as a public offer, Sebi said, while adding that'specified securities' were offered to public withoutcomplying with the applicable provisions of Sebi Regulationsand Companies Act.

The regulator also said that it was a settled position,in view of the Supreme Court order in Sahara case, that thepower to administer proceedings in cases of public issue ofshares or debentures lies with Sebi.