The issue dates back to November 1993 when the state-owned SSNL raised Rs 250 crore through 20-year deep discount bonds at Rs 3,600, with a redemption value of Rs 1.11 lakh. Later, through a state legislature enactment SSNL was conferred with powers to lower the rate of interest and tenure
The Gujarat High Court last week (Jan 15) declared a March 2008 state legislature enactment “ultra-vires”— meaning beyond one's legal power— that permitted premature redemption at reduced interest rates of a bond issue floated by a public limited company, Sardar Sarovar Narmada Nigam Ltd (SSNL) in November 1993.
The issue dates back to November 1993 when the state-owned SSNL raised Rs 250 crore through 20-year deep discount bonds at Rs 3,600 with a redemption value of Rs 1.11 lakh at maturity. The bonds were also guaranteed by the Gujarat state government to ensure investor-confidence and full subscription to fund the Sarovar dam project.
For the company, the amount it would have to fork out in maturity payments was Rs 7,500 crore.
SSNL, after 10 years of its initial offer, expressed its desire of lowering rates and seeking premature redemptions to the bonds holders at a special general body meeting held in 2004. The investors rejected the proposal outright.
The market watchdog, Securities and Exchange Board of India (Sebi), then came to the rescue of four lakh-odd investors and filed an affidavit in November 2008 stating that the state legislative Act was unconstitutional.
The Gujarat state legislature, in March 2008, enacted a law that empowered SSNL to make amendments to the terms of bond issue with an additional clause that permitted the company to lower rates and the right to seek premature redemption of the 6.70 lakh bonds issued. The said right was absent in original contract.
Besides, the enactment also prevented investors from approaching the Civil Court
SSNL, armed with the new amendment, went ahead on 10 January 2009 and redeemed the bonds prematurely at Rs 50,000/- when the secondary market rates were trading above Rs 60,000/-. The bonds, in January 2008, were then trading on the BSE at Rs 59,050/-.
Several petitions were filed by investors before the high courts of Maharashtra, Karnataka and Gujarat, forcing the Supreme Court to intervene and direct all matters pertaining to the bond issue be heard by the High Court of Gujarat.
In many cases, SSNL credited the bank accounts of investors directly and even without discharge of documents.
In the case of Maharashtra State Electricity Contributory Provident Fund, the amount directly reflected in the account, said its advocate Masoom Shah who represented the fund's case through Little & Co.
The Maharashtra State Electricity Contributory Provident Fund on January 16, 2009 even communicated to SSNL that the said refund was made despite the pendency of court proceedings that were being argued on investor rights and protection.
The entire exercise of SSNL has now been declared "ultra vires" by Gujarat High Court and thereby treated that the debt of the government company is not equivalent to that of public debt of the state.
This means SSNL's debt to investors cannot be treated at par with any liability directly incurred by the state, in this case Gujarat.
As per the high court judgment investors who have protested can now approach the civil court for recovery.
"This is a landmark and momentous ruling for protection of investors in India by Gujarat High Court. It shall act as a deterrent to anyone acting against investors. I am awaiting the text of the judgment to understand its repercussions." said Shah.
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