Mumbai: The Indian capital market regulator’s appellate body on Tuesday directed two Sahara group firms to refund money collected through sales of optionally fully convertible debentures (OFCDs) from investors within six weeks.

Going by the order of the Securities Appellate Tribunal (SAT), the amount raised by the two firms could be as much as Rs40,000 crore.

The Securities and Exchange Board of India (Sebi) had on 23 June asked the two firms—Sahara Commodity Services Corp. Ltd (formerly Sahara India Real Estate Corp. Ltd) and Sahara Housing Investment Corp. Ltd—to refund money to the investors with 15% interest.

SAT has upheld the Sebi order.

Sahara group chairman Subroto Roy . (File photo)

In an affidavit filed with SAT, Sahara Commodity said it has raised at least 19,000 crore from about 22 million investors since April 2008 through OFCDs. Excluding premature redemption by investors in August, the company raised Rs17,656 crore.

Sahara Commodity has invested about Rs6,000 crore of this money in real estate and the current market value of the properties exceeds Rs36,000 crore, the company said.

It is not known how much money Sahara Housing raised through this route.

Another group firm, Sahara India Financial Corp. Ltd, the country’s largest residuary non-banking company, announced in August that it will wind up deposits and pay all its customers by December, about four years before a deadline set by the Indian central bank.

Sahara India Financial’s advance payment notice said the company accepted Rs73,000 crore of deposits till June, but didn’t say anything about outstanding deposits.

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“We are amazed that both (Sahara Commodity) and the housing company have collected huge sums of money close to Rs40,000 crore from the unsuspecting investors without putting in place investor protection measures and without making the necessary disclosures to them or to Sebi, thereby making a mockery of the regulatory system prevailing in the capital market. In the circumstances, Sebi was justified in taking action against the company," said the SAT order, passed by presiding officer N.K. Sodhi.

In June, Sebi restrained both firms, their promoter Subrata Roy and their directors from accessing the capital market till they refunded the money with interest. The Sebi order was kept in abeyance by the Supreme Court.

According to SAT, OFCDs are marketable, and hence “securities" falling in the category of debentures. Though debentures do not find a specific mention under the Sebi Act, the six bonds through which the Sahara group firms raised money, SAT said, fall under “other marketable securities of a like nature", under Securities Contracts (Regulations) Act, or SCRA, and hence, they are under Sebi’s jurisdiction.

Sahara’s lawyers had argued that since the OFCDs were meant for close associates and affiliates, their issue was a private placement and hence outside SCRA’s purview.

According to Sebi norms, any issue made to 50 or more investors is a public one and must get the regulator’s clearance.

Sahara’s red herring prospectus, or RHP, filed with the registrar of companies (RoC) said OFCDs will be offered only to those persons “to whom the information memorandum was circulated and/or approached privately who are associated/affiliated or connected in any manner with Sahara group of companies, without giving any advertisement in general public".

While the company said in the RHP that the issue was a private placement for persons to whom the information memorandum would be circulated, according to SAT, “what it did not disclose was the fact that the information memorandum was being issued to more than 30 million persons inviting them to subscribe to the OFCDs and there lies the catch...and all provisions of law relating to public issues shall apply".

That the invitation to subscribe to OFCDs was going to be made to more than 50 persons was “carefully camouflaged" in the RHP and the RoC was misled, the order said.

The appellate tribunal said OFCDs issued by the company are securities and that the sale was a public issue requiring mandatory listing. The regulator has the jurisdiction under the Sebi Act to deal with all kinds of securities and companies, whether listed or not, SAT said.

“It must be remembered that listing is an admission of a security to dealings on a recognized stock exchange and gives a valuable right to the investor to trade, which alone can provide liquidity. If an issue is a public issue, investors cannot be deprived of this right to trade," SAT’s presiding officer pointed out.

The order follows a 15 July apex court direction asking SAT to examine the question of whether the two companies can use OFCDs to raise money from investors. The court also asked SAT to decide the issue of jurisdiction on the regulation of instruments such as OFCDs.

The dispute dates back to November 2010, when Sebi barred the two firms from raising public money in any manner, citing violations of capital-raising norms and certain sections of the Companies Act.

After Sahara challenged the Sebi order in the Allahabad high court, the regulator moved the Supreme Court against an interim stay that the high court had granted.

Sebi found that OFCDs were “in effect no different from deposits from the public, except that they come with an ‘option to convert’ appended to it… It seems that under the guise of OFCDs, the two companies are extensively taking up parabanking activities and running deposit schemes".

The Sahara group is involved in a range of businesses, including entertainment, media and real estate. The group publishes a Hindi-language newspaper that competes in some markets with Hindustan, published by Hindustan Media Ventures Ltd, a unit of HT Media Ltd, which also publishes Mint.

Sahara has filed a defamation case in a Patna court against Mint’s editor and some reporters over the newspaper’s coverage of the company’s dispute with Sebi. Mint is contesting the case.