Mumbai: In a bid to track down companies raising public money in the guise of private placements, India’s capital market regulator plans to open offices across the country. Following up on its victory in India’s highest court against two Sahara group companies over the issue of Rs.24,000 crore worth of hybrid debt instruments, the Securities and Exchange Board of India (Sebi) wants to use a network of local offices to enhance its intelligence gathering efforts and keep a close eye on violations.
Two persons with direct knowledge of the matter said Sebi will initially open at least 30 offices. The network will serve three purposes—protection of investors from companies that are raising public money in violation of norms, education of investors to enhance their awareness, and clearing offer documents of smaller firms.
“There might be several companies in smaller towns which are raising significant money from the public either in violation of (rules regarding) collective investment schemes (CIS) or without getting necessary approvals from Sebi for public offers. The local office network can effectively tackle such issues,” said one of the persons mentioned above.
Neither of the people wanted to be named, given the sensitivity of the issue.
A Sebi spokesperson declined to comment for the story.
A CIS is one where a company pools money from investors to garner profits. Investors do not have any direct control over the management of the scheme. Such schemes include those offered by mutual funds, pension funds and cooperative societies.
The two people said several such schemes in the past neither obtained the regulator’s approval nor wound up their schemes and repaid investors. Sebi has usually acted tough against such companies by compelling them to pay back investors, and barring their promoters and directors from accessing the market.
In 2004, following a legal battle between Sebi and Golden Forests India Ltd, the Supreme Court ruled in the regulator’s favour and directed a refund of the money collected by the company. The firm had floated at least 100 subsidiaries and raised money through several investment schemes till 1997. The apex court had appointed a committee to take into its custody all assets of the company.
Currently, Sebi has seven offices, including its Mumbai headquarters. If it is able to executive its plan, it will have the largest national presence among all financial regulators. The Reserve Bank of India has 19 regional offices and nine sub-offices. The insurance regulator has two offices.
In August, Sebi opened offices in Jaipur and Bangalore. Incidentally, the number of complaints received by Sebi regarding dubious money-raising activities by lesser-known firms has also increased.
“Regional help centres allow you to be close to the investor and operate at the ground level. Several big companies operate in the CIS space as the line of differentiation between such a scheme and others is thin. It is a welcome move from the regulator,” said Virendra Jain, president of Midas Touch Investors Association.
On 31 August, the Supreme Court ordered two Sahara group companies to refund within three months all the money collected through so-called optionally fully convertible debentures (OFCDs), ending a three-year tussle between Sebi and the Subrata Roy-owned business.
The apex court upheld the orders passed by the market regulator and the Securities Appellate Tribunal that had directed the two firms—Sahara India Real Estate Corp. Ltd and Sahara Housing Investment Corp. Ltd—to refund the money they had raised through OFCDs.
The court verdict will require the two Sahara firms to refund nearly Rs.40,000 crore, including interest, to investors. The companies collected the money from at least 29.61 million investors between April 2008 and April 2011, the order said.
Sebi, in its board meeting in July 2011, had cleared a proposal to decentralize its functions by opening regional offices. Initially, the plan was to open local offices in Hyderabad, Guwahati and Lucknow.
In March 2012, the regulator said it would also open offices in Chandigarh, Indore, Bangalore, Kochi, Patna, Bhubaneswar and Jaipur.
“Physical proximity can make a lot of difference and enhance the confidence of investors. Sebi may also take help from local enforcement authorities in its probes,” said one of the two persons cited in the first instance.
The plan will also help Sebi address investor complaints, including non-receipt of refunds, allotments, dividends and transfer of shares.
Sebi’s headquarters deals with policy matters and operational issues. The six regional offices deal with investor grievances, investor education, inspection of brokers, clearance of offer documents up to Rs.100 crore, and court-related matters in the region.
Following the decentralization plan, the regional offices may be given greater powers.