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Chronicle of an arrest foretold

Saturday, 1 March 2014 - 8:30am IST | Place: New Delhi | Agency: dna

Subrata Roy knew the arrest was neigh. On February 26, the Supreme Court of India had issued a non-bailable arrest warrant against the Sahara Group chief for contempt proceedings in connection with a Rs 24,400 crore investor repayment case. When the police arrived at Roy's doorstep in Lucknow's Sahara Shahar on February 27, he was not at home. After his arrest on Friday though, Roy said: "I am not that human being who will abscond. In fact, being a law-abiding citizen, I shall hate myself to do any such thing ever in my life."

Roy's battle with the law goes back to the year 2008 when one of Sahara Group's multiple companies involved in infrastructure and housing, Sahara Prime City, approached market regulator Securities and Exchange Board of India (Sebi). It was through this company's documents that Sebi learnt that two other Sahara companies — Sahara India Real Estate Corporation (SIRECL) and Sahara Housing Investment Corporation (SHIC) — had been raising money from public. So it asked Sahara to refund some Rs 24,400 crore with interest to the over two crore investors who had paid for SIRECL's and SHIC's optionally fully-convertible debentures (OFCDs) as this para-banking activity was against capital market regulations.

Sahara appealed against Sebi's decision with the Securities Appellate Tribunal (SAT). In October 2011, SAT asked the Group to return all the money to the investors within six weeks as it had concealed material facts while filing its application for issuing OFCDs. Sahara bought time by appealing the SAT decision in the Supreme Court. It also challenged Sebi's jurisdiction over OFCDs.

Now, OFCDs are hybrid instruments and defined under the Companies Act, 1956. They are debentures that can be converted into shares at a predetermined rate on expiry if the investor or holder of such instruments wishes to do so. Initially, OFCDs inherit the characteristics of debentures but at a later stage, if the holder of the security exercises the option of conversion, takes on the characteristics of shares. The nature of the security-as-debentures and as shares empowers Sebi to bring such instruments under its jurisdiction to monitor and protect investors as a regulator.

Even as the matter dragged in the Supreme Court, the Group presented a complex web of multiple holdings through over 200 companies to state that the Group was capable of protecting the interests of its crores of investors, who had put Rs 24,000 crore in SIRECL and SHIC. However, an affidavit submitted in the Supreme Court on January 4 2012 shows that all of the Group's money is locked in real estate businesses. As on November 2011, the Sahara Group had only Rs 1,655 crore in cash, bank balances and fixed deposits. In addition, it has Rs 23 crore in mutual funds units. The rest of its capital is directly or indirectly invested in real estate projects, including in the controversial Aamby Valley project on the outskirts of Mumbai.

On 31 August, 2012, the Supreme Court delivered its verdict against Sahara and ordered its companies to pay back the collected amount with 15% interest to its 2.21 crore investors. The Court directed Sahara to hand over Rs 24,000 crore to Sebi so that the regulator could disburse the amount to its 2.69 crore investors once Sahara furnished the list and addresses of these investors. However, Sahara deposited only Rs 5,210 crore with Sebi against the demand of Rs 24,000 crore. Two months later, on 9 December 2012, Sahara claimed through a newspaper advertisement that it had cleared the liability of Rs 24,000 crore and it now owed only Rs 2,620 crore. It never furnished proof of the refunds and even failed to provide a complete list of its investors to Sebi.

With claims and counter-claims continuing in Court through most of last year, the Supreme Court finally asked Roy to be present in court on February 20 2014. But Roy didn't appear and the Court issued an arrest warrant against him on February 26.

About OFCD scheme
Sahara raised Rs 19,400 crore through optionally fully convertible debentures (OFCDs) through its two companies – Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) — in 2008.
Sahara had a capital base of only Rs 10 lakh and was a loss-making company when it began collecting the money
SIREC and SHIC claimed to have appointed 10 lakh agents and opened 2,900 branch offices to generate Rs 24,000 crore by way of private placement through unsecured OFCDs
Most investors invested money into two of the three bonds – Adobe and Real Estate – by SIRECL and SHIC
The refunds in Adobe bond were due from 2018-19 onwards, while the refunds in real estate bonds were due in 2013-2014
Sahara claims to have made premature refunds arbitrarily without the knowledge of the court

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