Mumbai: Sahara India Pariwar, the diversified business group owned by Subrata Roy Sahara, is raising money from retail investors through housing bonds sold by two of its group firms without seeking approval from the capital market regulator Securities and Exchange Board of India (Sebi) that is required for any public issue.
Sahara Housing Investment Corp. Ltd and Sahara India Real Estate Corp. Ltd had filed a so-called red herring prospectuses with the registrar of companies (RoC) to raise money through a private placement of instruments known as optionally fully convertible debentures (OFCDs).
Sebi’s website publishes all offer documents filed with it by companies for raising money through sale of debt and equity. These two firms do not feature there.
Private placement? 1) A pamphlet used by Sahara agents showing bonds sale. Agents selling these bonds earn between 5.94% and 12% as commission. 2) and 3) The front and reverse of Isharawati Devi’s bond certificate for Rs10,000. The housing bonds are open for subscription until 31 March.
A registered non-banking finance company (NBFC) needs the Reserve Bank of India (RBI) approval before selling bonds to the public, while others need clearance from the capital market regulator, said a senior Sebi official on condition of anonymity.
“The issue of OFCD is by way of closely held invitation by a non-listed company,” Sahara India’s head of corporate communications Abhijet Sarckar said in an email response to queries from Mint. “It does not intend to list the security in any stock exchange. The issue is as per the provisions of the Companies Act, 1956.”
Any issue of debt or equity to 50 persons or more qualifies as a public issue and requires disclosures by the issuer in accordance with Sebi (issue and listing of debt instruments) regulations, 2008.
According to these rules, a “private placement” means an offer or invitation to less than 50 persons to subscribe to debt securities in terms of sub-section (3) of section 67 of the Companies Act, 1956 (1 of 1956). The same rules define “public issue” as an offer or invitation by an issuer to the public to subscribe to debt securities that are not in the nature of a private placement.
“The proviso (3) of section 67 of the companies Act clearly states that in reference to offering shares or debentures, when an invitation is made to 50 or more people, it is deemed as an invitation to public. This section is the basis of how to construe a public offering and it doesn’t make any distinction as to whether a debenture is convertible or not. It covers all kinds of debentures,” said a leading corporate lawyer, who did not want to be identified.
Using their agent network, Sahara Housing and Sahara India Real Estate are selling the bonds across the country, promising returns that could be as much as six times the investment.
Rajesh Gupta, 35, owner of a photocopy shop in Gorakhpur, Uttar Pradesh, bought 10 Sahara Housing Corp. bonds in the last week of January for Rs10,000. “It is like a fixed deposit,” said Gupta, adding, “aur dus saal mein mujhe teen guna paisa dene ka vada kiya hai (they have promised 300% returns over a 10-year period).”
Isharawati Devi, a daily wage earner in Gorakhpur, said she also bought 10 Sahara housing bonds of Rs1,000 each. The total redemption value promised to Devi was Rs63,000 in 15 years.
Another investor from Gorakhpur, who did not want to be named, said the scheme was inaugurated “with full publicity” by R.L. Patel, zonal chief of Sahara, who also heads its parabanking division in Gorakhpur.
“Sahara India, soon after the launch, carried a news article in its Hindi daily Rashtriya Sahara, which explained the housing bond scheme along with the options available for investors,” he said. Mint couldn’t independently confirm this claim. It also couldn’t confirm whether the issue has been restricted to these three investors, and 46 others, which would mean that it meets Sebi’s definition of private placement.
The housing bonds are open for subscription until 31 March, Patel told Mint. “I can’t give more details on phone,” he said. “You can talk to Mumbai office for further clarity.”
Sahara Housing Investment is owned by Subrata Roy Sahara and his associates. According to the documents filed with RoC and reviewed by Mint, the primary shareholders in Sahara Housing Investment are Roy, his wife Swapna Roy and J.B. Roy. The three of them collectively hold around 60% and Kumar Pandey “for and on behalf of Sahara India Financial Corp. Ltd holds 40%”.
Subrata Roy Sahara owns 30% in Sahara India Real Estate Corp. Ltd and Sahara India Commercial Corp. Ltd owns 45%, according to the draft offer document of Sahara Prime City Ltd filed with Sebi ahead of an initial public offer (IPO). Sahara Prime City and Sahara India Finance and Investment Ltd hold 5% each in the company. The rest is held by Roy, Om Prakash Srivastava and Ashok Roy Choudhary.
To be sure, the housing bond issues are not linked to the proposed IPO of Sahara Prime City.
Mint reported on 2 February that Sebi is looking into a housing bond issue by Sahara Housing Investment Corp. as part of its examination of the offer document for Sahara Prime City’s share sale.
In an extraordinary general meeting on 9 March 2009, shareholders of Sahara India Real Estate authorized the board of directors to borrow up to Rs14,500 crore, 145 times the company’s authorized share capital of Rs100 crore. On the same day, the directors were also given powers to invest up to Rs13,000 crore in market instruments.
While Sahara Housing filed a red herring prospectus with RoC in Mumbai in October 2009, Sahara India Real Estate did so in Lucknow in March 2008. Both are issuing OFCDs.
In such instruments, the investor has the option to convert these debentures into shares at a price decided by the issuer/agreed upon at the time of issue.
Both said in their prospectus that these instruments would be “privately placed”.
“According to Companies Act provisions, any issue that is made to more than 49 investors will qualify as public issue and (the company making the issue) has to file offer documents with Sebi,” said Prithvi Haldea, head of Prime Database Ltd, a New-Delhi-based primary market investment tracking firm. “The nature of the securities, convertible or not, does not make any difference as long as it comes under the term securities.”
Haldea added: “It could be a different case if the so-called housing bonds come with an accompanying offer for a piece of land. Since in this case it is a convertible bond with no other attachments, it is totally illegal to issue it to public without proper disclosures and filings.”
Banks and companies raise thousands of crores of rupees through bond issues, but these are done as private placements and involve a few institutional investors.
According to P.K. Chaudhary, vice-chairman and chief executive officer of rating agency Icra Ltd, any public issue should be accompanied by proper disclosures as mandated by Sebi. Chaudhary’s company rates corporate debt issues. Public issues of debt need to be compulsorily rated by rating agencies.
“A private placement is to be made to certain qualified institutions and should not involve ordinary retail investor,” Chaudhary said.
Further, according to rules of private placement, the forms for subscription should be marked “private and confidential” and no public advertisement of the issue is to be made to the general public.
Mint has a copy of the pamphlet used by Sahara agents to sell these bonds.
The application forms for housing bonds reviewed by Mint do not show any distinct markings setting them apart as private placement.
Further they are being sold to retail investors who do not clearly understand the implications of an instrument such as an OFCD. These bonds are not rated by any agency. No investment banker is involved in hawking these bonds.
Due to the stringent procedures and disclosure norms, even the biggest corporate names avoid coming to the public equity and debt markets.
“Many companies do not go for public issues because it is cumbersome and one needs to take care of the market conditions while pricing and marketing the issue. One also needs to make sure that other sources of fund-raising do not get cannibalized,” said an official at Housing Development Finance Corp. Ltd, India’s largest mortgage lender.
The agents selling these bonds are earning between 5.94% and 12% as commission depending on their hierarchy. For example, if one invests through the last-mile agent, then the commission is a maximum 12%. If the same investment is made through a higher official in the hierarchy, the agents’ commission goes down. The amount of commission is proportionate to the number of middlemen involved in the transaction
Tapash Baidya, a Sahara India Pariwar agent from Sibsagar district in Assam, said that he had so far collected investments of around Rs40 lakh in the bonds.
“There are investors who can invest only Rs5,000 and there are those who won’t talk anything less than Rs5 lakh. I have both kinds of investors,” said Baidya, who gets up to a 12% commission; if the amount of investment is big enough he would do it for a lesser commission.
Sahara has a presence in at least 1,400 centres with several agents such as Baidya working for it in each.
In 2008, RBI banned Sahara India Financial, the country’s biggest residuary non-banking finance company, from taking deposits from the public and asked it to wind down its operations by 2011. After several meetings with Sahara, RBI set a three-year sunset window on Sahara India Financial, allowing it to accept fresh deposits maturing until 30 June 2011.
The central bank is in favour of the winding down of Sahara India’s close to Rs20,000 crore public deposit base. It has directed Sahara India to repay the deposits as and when they mature and bring down the aggregate liability to depositors to zero on or before 30 June 2015. According to RBI’s order, Sahara India’s deposit liability should not exceed Rs15,000 crore as of 30 June 2009; Rs12,600 crore as of 30 June 2010; and Rs9,000 crore as of 30 June 2011.
Sahara group’s business interests include finance, entertainment, real estate and media. Its Hindi-language newspaper competes in some markets with Hindustan, published by HT Media Ltd, which also publishes Mint.
Anirudh Laskar contributed to this story.