In the biggest refund order in its two-decade history, the Securities and Exchange Board of India on Thursday directed two Sahara group companies to return at least Rs 4,843 crore (Rs 48.43 billion) collected under their debenture schemes to investors.
The two companies are Sahara Commodity Services Corporation and Sahara Housing Investment Corporation.
The order will, however, take effect only after it is considered by the Supreme Court. On May 12, the Supreme Court had asked Sebi to "expeditiously hear and decide this case."
Sahara Commodity (earlier known as Sahara India Real Estate Corp) and Sahara Housing started raising money by issuing optionally fully convertible debentures in March 2008 and September 2009, respectively.
According to the balance sheet of the former, it had raised Rs 4,843 crore in June 2009.
Sebi, while going through a prospectus filed by another group firm, Sahara Prime City, for an initial public offer, found that this money-raising through OFCDs violated its public issue norms. It banned these entities from raising money in November 2010.
Sahara challenged this interim order in the Allahabad High Court and later in the Supreme Court, which passed its order on May 12.
The 99-page order passed by Sebi whole-time member KM Abraham on Thursday held Sahara group promoter Subrata Roy Sahara and three directors of the companies -- Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary -- jointly and severally liable for the refund.
Sebi also asked the entities to pay an interest of 15 per cent per annum from the date of receipt of money till the refund.
It also restrained the entities from accessing the securities market for raising funds "till the time the aforesaid payments are made to the satisfaction of the regulator."
"The four individuals have also been barred from associating themselves with any company which intends to raise money from the public till such refund," said the order.
An email to the Sahara spokesperson did not elicit any response till the time of going to press.
During the hearing, the Sahara counsel argued that the OFCDs issued were "hybrid" and therefore out of Sebi's jurisdiction.
"OFCDs are neither shares nor debentures in their strict sense and are in the nature of 'hybrid' as defined in the Companies Act, 1956," counsel Sudeep Seth argued before Sebi earlier this month.
"Sebi does not have any jurisdiction over such 'hybrid' issues as the term 'hybrid' is not included in the definition of 'securities' either in the Sebi Act or the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the SCR Act)," Seth said.
Abraham dismissed the argument saying OFCDs were debentures from the nomenclature itself. "A 'red rose' is as much a 'rose' as any other rose flower. Debentures are securities under the SCR Act and therefore OFCDs are securities under the same Act," he said.
In reply to the showcause notice dated May 20, Subrata Roy Sahara said he was only a shareholder and not a director. He said he did not held any executive, managerial or other position in either of the two companies. He said the notice was unwarranted and liable to be withdrawn, the Sebi order said.
However, Sebi observed that Subrata Roy Sahara, apart from being the founder of the Sahara India Group, was admittedly a major shareholder (holding about 70 per cent capital in each of the two companies).
"He can be reasonably regarded as a person in accordance with whose directions or instructions the boards of the two companies were accustomed to act," said the order.
Furthermore, with 70 per cent ownership or holding, he is definitely in a position of control and has the power to direct management policy and appoint the majority of directors, the Sebi order says.