This Article is From Feb 23, 2014

Sebi relies on Sahara order to nail fraudsters

Sebi relies on Sahara order to nail fraudsters
New Delhi:

Sebi may still be fighting a legal battle to make Sahara pay over Rs 20,000 crore for refund to investors, but the regulator has cited Supreme Court order in this high-profile case to bring to book operators of at least five illicit money-pooling schemes.

Citing the apex court order in Sahara case, Sebi has passed orders against at least five companies and 21 individuals charged with collecting thousands of crores fraudulently through issuance of bond instruments like OFCDs, RPSs, CPSs and art funds.

Through an order passed on August 31, 2012, the Supreme Court had asked two Sahara group firms to refund more than Rs 24,000 crore collected through issuance of certain bonds to about three crore investors.

The companies were asked to deposit the money with Sebi, which was mandated to make further refunds to eligible investors. Claiming to have already refunded more than Rs 20,000 crore directly to investors in cash, Sahara later deposited Rs 5,120 crore with Sebi and has been accusing the regulator of not doing anything to make the refunds.

Sebi has filed a contempt petition against Sahara and its top officials. The Supreme Court has asked top executives of two Sahara firms to be present in the court during next hearing on February 26.

While this case continues to be fought in courts, the Sahara order by the Supreme Court continues to be cited by Sebi in its orders against entities raising funds through instruments like OFCDs (Optionally Fully Convertible Debentures), Redeemable Preference Shares (RPSs), Convertible Preference Shares (CPSs) and many more.

One of the latest order is in case of money raised by Vibgyor Allied Infrastructure Ltd (VAIL), wherein Sebi has clamped down on the company and three individuals for raising money 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 undertook that it shall abide by the decision of the Supreme Court in the matter of issuance of OFCDs by Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited wherein the above issues of law were pending for determination by Hon'ble Supreme Court at that time".

However, at a later stage of investigation the company said that the "case is different from that of OFCD issuances by Sahara group companies as Sahara issued OFCDs to very large number of persons without any clear relationship with the issuer 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 Court judgement in Sahara case settled all controversies with regard to 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 and undertaken that they shall abide by the decision of the Supreme Court in the above mentioned Sahara case", but they changed 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 against Prayag Infotech Hi-Rise and 4 individuals for raising funds through certain RPSs, the Sahara order again found a mention.

While arguing its case before Sebi, this company contended that "the provisions related to deemed public issues were not known and the same came to light only after the judgement of the Supreme Court in the matter of Sahara's".

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

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

However, the regulations term any issuance of securities to 50 or more persons as a public offer and therefore any such offering needs approval from the Sebi.

In its order in the case of Alchemist Holding Ltd raising funds through certain RPSs also, Sebi said that the Sahara order established that the "burden of proof" is entirely on the company to show that the offer of securities was a private placement.

In a different order passed against Osian's for raising money as certain art fund investments, Sebi cited the Supreme Copurt's Sahara order to establish that the company raised an amount of Rs 102.40 crore from 656 investors and therefore "it is not a private placement".

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

The regulator further said that the Supreme Court also held that the situations that would not be generally regarded as an offer made to public would include -- "offer of securities made to less than 50 persons, offer made only to the existing shareholders of the company (right issue), offer made to a particular addressee and be accepted only persons to whom it is addressed, offer or invitation being made and it is the domestic concern of those making and receiving the offer".

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

Passing the order in that case, Sebi said that the Supreme Court order in Sahara case has "held that an offer to fifty or more persons becomes public issue" by virtue of the relevant provisions of the Companies Act and needs compulsory listing.

In the StockGuru case, convertible preference shares were offered and issued to more than 49 persons and therefore it qualifies as a public offer, Sebi said, while adding that 'specified securities' were offered to public without complying with the applicable provisions of Sebi Regulations and Companies Act.

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