The ministry of corporate affairs (MCA) has initiated a comprehensive inquiry into the fund-raising mechanisms adopted by the Subrata Roy-led Sahara Group companies, including public issues disguised as private placement. The ministry suspects that group companies have violated Companies Act provisions relating to private placement and mandatory disclosures.
The MCA inquiry is separate from the matter which is currently in the Supreme Court. On Monday, the court asked Sahara to furnish details regarding issuance of optionally fully convertible debentures (OFCDs) to investors.
According to sources, the MCA wants an expert body with the necessary mandate to probe into the possibility of money laundering within the Sahara group companies. It is also considering a tightening of regulations to govern private placements in the future.
FE on May 5 sent a detailed questionnaire to Sahara, whose public relations agency replied the next day that it would respond on May 9. However, despite a follow-up email and telephone calls, no response was forthcoming from Sahara till the time of going to press.
The ministry probe comes in the backdrop of Sebi?s November 2010 order, restricting two Sahara group firms and its promoters from raising money from the public. Sebi had forwarded the order to MCA to take appropriate action.
Sahara had refused to share details with Sebi, arguing that since Sahara India Real Estate Corporation Ltd (SIRECL) was an unlisted firm, it was beyond the market regulator?s jurisdiction.
As per the Companies Act, not more than 49 persons can be issued shares in a private placement. If it exceeds that number, the company has to go for a public offer. Officials told FE that MCA has supported Sebi?s view that the market regulator is well within its rights to conduct an inquiry and seek information from SIRECL since the said company was named in the draft red herring prospectus (DRHP) filed by Sahara at the time of going for an IPO for Sahara Prime City.
According to official sources, SIRECL has breached certain provisions of the Companies Act including section 67 (3) for breaching the 49-person cap on private placements and 81 (1A) for withholding mandatory information including not mentioning the upper limit for such an issue and closure period.
The official added that the ministry?s initiative was part of the government?s efforts towards stronger investor protection, since huge sums of unsecured loans have been raised by group companies of Sahara. Besides SIRECL, group company Sahara India Commercial Corporation (SICCL) too has raised large amounts.
As per records with the registrar of companies (RoC), while SIRECL has raised approximately R4,843 crore as on June 30 2009, SICCL has raised approximately R17,250 crore of unsecured debentures over a period of 10 years. Sources said that in both instances, the company withheld vital details like full information of allottees, closure period and the upper limit of such issues.
What made MCA curious is that R24,696 crore was raised collectively in the entire capital market by 39 companies through IPOs during 2009-10. However, SICCL alone mobilised over R17,000 crore in a span of 10 years from July 6, 1998 to June 30, 2008.
?It has been observed that the Sahara group of companies are resorting to the practice of raising money from the public in the form of unsecured loans in the guise of private placement without making complete disclosures,? the official said. The ministry has also observed that the company has erroneously interpreted the language in Section 55 A ?intended to get listed? as ?choice to be listed?.
The ministry is baffled as to why Sahara is ?hesitant? in revealing the sources of funds. ?It has not disclosed the source of funds to RoC all this time on some pretext or the other, liberally resorting to a wrong interpretation of Company Law,? the official said.
Sources went on to add that since Sahara group of companies bypassed laws in raising large sums of money, it could be an indication of the possibility of ?black money laundering as circular movement of funds? within group companies. ?Deep examination of these issues by an expert body is warranted,? the MCA official said.
In fact, this is not the first time that a Sahara group company has attracted MCA ire. Under the Early Warning System (EWS) which was put in place by MCA under former corporate affairs minister Salman Khurshid to detect any abnormal trends in the financial statements of companies, two Sahara group firms were identified. Apart from the Sahara group, 160 other firms also were identified in the process.
The Sahara group firms included Sahara India Financial Corporation Ltd (SIFCL) and Sahara Prime City Ltd (SPCL). In both instances, the ministry found an abnormal increase in profits. In the case of SPCL, the EWS detected related party transactions to the tune of R1,200 crore while SIFCL?s investments were more than 50% of the paid-up capital of reserves.
The ministry had directed RoC to invoke provisions of Section 234 of the Act on both companies and submit reports to MCA. However, the RoC is yet to submit any report.
In 2008, MCA had received complaints against Sahara India Financial Corporation Ltd (SIFCL) for raising massive sums of money. The complaint was processed in the file number 7/67/2008-CL-II and the investigating officer had proposed that the deposits collected by group company was alarming and shocking needing immediate attention by the government under section 397/398 of the Companies Act.
