SAT asks Sahara to explain fund mobilisation mode

The Securities Appellate Tribunal (SAT) today directed the Sahara Group to file a fresh affidavit explaining how it had raised funds from as many as 66 lakh investors without even issuing an advertisement.

"Our sympathies are not with the appellant (Sahara Group) since you have not told us how you had reached out to 66 lakh investors and raised funds from them without even issuing an advertisement. We want to know how it happened.

"Of course, this will have no binding on the case. Could you have an affidavit about how much money was raised and the mode adopted to raise the money? This is only for our information. This is looking very odd," the SAT Presiding Officer NK Sodhi told Sahara counsel Fali S Nariman.

The matter came up before the quasi-judicial body SAT after two Sahara group companies -- Sahara India Real Estate Corporation and Sahara Housing Investment Corporation - had appealed against an order by Sebi to refund the money raised through an issue of optionally fully convertible debentures.

Nariman argued that the Securities and Exchange Board of India (SEBI) had no jurisdiction and its provisions do not apply on his client's bonds, unless securities are listed.

He argued that every issue regarding Sahara's red herring prospectus must be dealt with the Corporate Affairs Ministry and the Registrar of Companies (RoC).

"The only competent authority is the RoC. It is not SEBI at all and therefore its guidelines don't apply on us.

The SEBI board says my client is guilty of violating Section 117. But I say SEBI has no jurisdiction and that it has misunderstood its authority.

"Besides, the Company Law Board and SEBI could not have worked without consulting each other. They should have known. It is impossible to run a government without inter-departmental correspondence. After all, they are supposed to work "in tandem" to protect investors' interests," Nariman said.

The SAT too agreed that SEBI itself had chosen not to regulate unlisted companies.

Nariman also questioned why they are not entitled to a copy of the investigative report as charges are based on it.

He also pointed out that out of 66 lakh of investors, the investigative report has picked up the case of only two investors to try and demolish Sahara's private placement of optionally fully convertible debentures (OFCDs).

However, SEBI counsel Arvind P Datar argued that OFCDs are a "hybrid" instrument in the sense that it is a debenture or debt instrument for 119 months, and on the 120th month when it is converted to shares, it becomes equity.

"My submission is that the Sahara has not disclosed everything. They tried to term it as a "private" placement, when it was actually a public issue. The RoC giving the group a certificate is not approval of their act," Datar said.

He also cited an instance where Sahara India Real Estate Corporation's  directors who are sons of the Group chairman, resigned merely two days prior to the extraordinary general meeting.

"The company had no whole time directors. Three months prior to the resolution to raise money through OFCDs, the company's fixed assets were nil and its net current assets were merely Rs6,54,000. Its debit balance is nothing but losses carried forwarded.

"A loss-making company with a paid up capital of merely Rs10 lakh, wanted to raise Rs20,000 crore! We don't know when it began raising deposits. When the Ministry of Corporate Affairs asked them about deposits raised, they said that they will furnish details after the issue," the SEBI counsel said.

Citing documents, he argued that there are so many "introducers" who have affixed signature, but whose address proof were not furnished. Besides, computer code numbers were also assigned to these introducers. He also pointed out aspects which were not mentioned by the company's red herring prospectus. All this shows that these debentures were issued to the public and that it was not a private placement.

The tribunal will continue to hear the arguments tomorrow.