Sahara India Pariwar Investor Fraud Case

The Sahara India Pariwar investor fraud case is the case of the issuance of Optionally Fully Convertible Debentures issued by the two companies of Sahara India Pariwar to which Securities and Exchange Board of India had claimed its jurisdiction and objected on why Sahara has not taken permission from it.

1. SAHARA PARIWAR FRAUD CASE Sahara vs. SEBI

2. CASE BRIEF Two companies of the Sahara group issued securities and mobilised a large sum of money (more than Rs 24,000 crore) from over 3 crore investors without complying with SEBI’s regulatory framework for public issues. The companies had been raising money since 2008. In 2011, they decided to become bigger and opted for a public issue. While scrutinizing the draft prospectus of the proposed issue, SEBI found out about the other two issues that were not compliant with the regulations. The company claimed that the issues were complaint with the Companies Act and that SEBI had no jurisdiction over it. SEBI’s battle with Sahara, asking it to comply with regulations, went through various rounds of orders, stays, court rulings and tribunal hearings, until it finally went to the Supreme Court, which ruled in favor of SEBI and ordered the Sahara companies to refund the money raised by circumventing regulations.

3. SEBI SEBI is a statutory regulatory body established by the Government of India to regulate the securities market in India and protect the interests of investors in securities. It also regulates the functioning of the stock market, mutual funds, etc. Founded on April 12, 1992, under SEBU Act, 1992. Prevents malpractices in the capital market of India and promote its development. Protects the interests of the investors by enforcing certain rules and regulations.

4. SAHARA INDIA PARIWAR Company profile •An Indian conglomerate •Headquarters: Lucknow, India •Founder: Subrata Roy •Founded: 1978, Gorakhpur •Type: Privately owned Mission To provide an amiable environment to all workers , so that their productivity remains on a perpetual high and they always experience a blissful state of peace and satisfaction Vision To ensure that the interests of the Pariwar are kept paramount and justice prevails in every sphere and at all levels to safeguard the interests of all workers. Core values Discipline, Collective Materialism, Absolute Honesty, No discrimination, Duty

5. Business Operations Subrata Roy laid the foundation of Sahara India in 1978, with the opening of a small office for his business of deposits and para-banking in Gorakhpur. In this business, he would increase the money of wage workers by providing them with some interest on the money which these workers would initially submit to him, as a means to carry out the duty of a bank in rural areas. Sahara grew from 42 depositors to around 6.1 crores investors and depositors From there, it went on to become the largest conglomerate of India with a diversified range of business interests. The company now has interests in financial services, education, real estate, media, entertainment, tourism, healthcare, and hospitality. The lucrative business scheme, diversification and the branding of the company made people develop trust on Sahara Roy realized how easy it is to take advantage of the wage workers, and of their trust that he had so gained

6. MAJOR CONCEPTS AND TERMS When a company gets money from the public through the stock market, it is called the Initial Public Offering (IPO). The DRHP, comprises the company's details and can be considered as the biodata of the company . Debentures are a debt instrument by which the companies borrow money from people, and pay interest to them in return. OFCD is a kind of debenture in which the people can convert the debenture into equity and then become equity shareholders in the company. According to Securities Act, OFCD is a security and hence anything related to them comes under SEBI’s jurisdiction. Securities” include— ( i ) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable. securities of a like nature in or of any incorporated company or other body. IPO DRHP DEBENTURES OFCD SECURITY SECURITIES ACT

7. TIMELINE September 2009 December 2009 November 2010 October 2011 October 2009 January 2010 June 2011 Sahara Prime City files Draft Red Herring Prospectus (DRHP) with Sebi to bring out an initial public offer of shares to public investors. Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) file Red Herring Prospectus with Registrar of Companies. Sebi receives complaint from Professional Group for Investor Protection against SIRECL and SHICL Similar complaint received against Sahara group from one Roshan Lal through National Housing Bank. Sebi seeks clarifications from the group, initially through their investment bankers Enam Securities and later directly. Sebi passes interim order against the two firms, asking them to refund the money collected from investors. Sebi passes final order and Sahara challenges these directions before the Securities Appellate Tribunal. Securities Appellate Tribunal upholds Sebi order and asks the companies to refund Rs. 17,656 crore to over three crore investors.

8. August 2012 February 2013 July 2013 February 26, 2014 December 2012 April 2013 February 20, 2014 February 28, 2014 Sahara moves Supreme Court, which also passes order asking the two companies to deposit over Rs. 17,400 crore to Sebi for refund. Supreme Court asks Sahara to deposit the money in three instalments beginning with an immediate payment of Rs. 5,120 crore. Sebi issues orders to attach bank accounts and other properties of the group after companies failed to pay remaining two instalments and later issues summons for personal appearance of Sahara chief Subrata Roy and other three directors before it. Subrata Roy appears before Sebi after summons. Sebi moves Supreme Court against Sahara group for non-compliance with the court’s direction November 2013: Subrata Roy barred from leaving the country. Supreme Court issues non-bailable warrant after Subrata Roy fails to make personal appearance; Sahara chief cites mother’s illness for non-appearance. Supreme Court asks Subrata Roy to appear personally. Subrata Roy arrested in Lucknow and sent to police custody till March 4..

9. To analyze the powers of the SEBI under section 55A(b) of the Companies Act, 1956 to administer various provisions relating to issue and transfer of securities to the public by listed companies or companies which intend to get their securities listed on any recognized stock exchange in India. Whether appellants had violated the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and various regulations of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Whether Optionally Fully Convertible Debentures ('OFCDs') offered by the appellants should have been listed on any recognized stock exchange in India, being Public Issue u/s 73 read with Section 60B and allied provisions of the Companies Act. Whether OFCDs issued are securities under the Securities Contracts (Regulation) Act, 1956 ['SCR Act']. OBJECTIVES OF THE CASE

10. PROBLEMS OR INSTANCES OF FRAUD IN THE CASE Complaint of wrong issue of OFCD SEBI started investigation. Found out that 2.5 cr investors that raised 24000 cr rs Zero transparency of source or use of these funds Sahara claimed to submit red herring prospectus to RoC instead of SEBI as OFCDs which are hybrid securities were issued to investors of SIRECL and SHSCL without the authorisation /approval of SEBI SEBI banned the issue of OFCD and told them to return the money to the investors with 15% interest Supreme court; SAT approached. Sahara claimed that these were not public issues. These were private issues for those related to the Sahara group. However, more than 50 people = public issue SEBI picked random investors. they were fictitious investors to do money laundering

11. Supreme court asked them to return it with interest as a deposit to SEBI. And asked for documents of all investors Documents had incomplete details. money laundering. unrealistic information, about address agents and names Sahara was to pay SEBI in 3 instalments, but they ended up paying only one Claimed to return their investors’ money. Only 4600 came to claim. Claimed that the remaining had already been paid No proof of payment to investors and no answer to the source of payment Subroto Roy and directors jailed on account of money laundering and fraud

12. JUSTIFICATION Did SEBI have the power to investigate and adjudicate? Were OFCD’s deemed to be a security under ICA? Was it really a private placement? Whether preferential allotment rules apply to this case?

13. JUDGEMENT May 2011 - Supreme Court of India asked Sahara India Real Estate (SIREC) to furnish the  format of the application for its optionally fully convertible debenture (OFCD) scheme and a  list of accredited agents that raised money on the company's behalf.  October 2011 - Securities Appellate Tribunal (SAT), set up by the Supreme Court, ordered  two unlisted Sahara group companies to refund within six weeks about Rs. 17,656.53 crore  with 15% interest, which it had raised through OFCDs.  November 2011 - Sahara India Pariwar moved the Supreme Court against SAT's order and  the Supreme Court stayed the SAT order, and asked the two companies to refund Rs.  17,400 crores to their investors and asked the details and liabilities of the companies. 

14. January 2012 - Supreme Court gives three weeks’ time to Sahara India Pariwar to choose  between options to return investments made by public in its OFCD scheme. Sahara to either  to give sufficient bank guarantee or attach properties worth the amount raised through  OFCDs.  May 2012 - Supreme Court is informed by senior counsel Fali Nariman of Sahara India Real  Estate Corp that SEBI could not have taken up this issue of Sahara Group of companies  raising funds through OFCD as there was no complaint from any investor. August 2012 - Supreme Court directed Sahara India Real Estate Corporation Ltd. (SIRECL)  and the Sahara Housing Investment Corporation Ltd. (SHICL) to refund over Rs. 24,400  crore to its investors. 

15. February 2014 - Subrata Roy arrested by Uttar Pradesh police for failure to appear before the  Supreme Court.  March 2014 - Subrata Roy, along with two other directors of Sahara, sent to Tihar jail.  March 2015 - Supreme Court stated that the total dues from Sahara have gone up to Rs  40,000 crore with the accretion of interest.

16. FINAL PROVISIONS OF THE LAWS When the company is issuing their OFCDs to less than 50 people, they’ve to get a permit from ROC (Registrar Of Companies). When the company is issuing OFCDs to 50 or more than 50 people, they’re supposed to take a permit from SEBI. The process of issuing these OFCDs need to be completed within 6 weeks by the company but Sahara continued for 2+ years. OFCDs issued by Sahara’s were public issue of debentures, hence securities Unlisted companies like Sahara’s when made an offer of shares or debentures to fifty or more persons, it was mandatory to follow the legal requirements of listing their securities. U/S 11B, SEBI has the power to issue appropriate directions in the interests of investors in securities and securities market to any person who is associated with securities market.

17. Passing of Special Resolution u/s 81(1A) of Companies Act, 1956 for preferential allotment by Private Placement of OFCDs does not confer the right to the company to issue such securities to a large number of people. Company is also bound to comply with the relevant provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 ['DIP Guidelines'] and various regulations of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ['ICDR 2009'] related to an issue to the public. The submission of Information Memorandum ('IM') and that Red Herring Prospectus ('RHP') u/s 60B of the Companies Act with Registrar of Companies ("ROC") doesn't implies that the company has complied with all the provisions of the said act. The company also needs to file the same to the SEBI for its scrutiny on the ground of being an issue to the public and the involvement of the stake of a large number of people.

18. SUGGESTIONS To bring about a visible decline in the culture of corporate scams in India, three major systematic changes can and need to take place. L aws protecting whistleblowers are imperative. G reater level of autonomy to federal and market regulators than they presently enjoy. Need for judicial reform in India

19. LOOPHOLES This case is about the corporate social irresponsibility towards investors and failure of corporate Governance mechanism of Sahara Group. It raises questions for both law makers and regulators. Is India’s regulatory framework equipped to consistently detect, halt and penalize such organized efforts? The court’s order lays out how two Sahara group companies made “a pre-planned attempt” to “bypass the regulatory and administrative authority” of the Securities and Exchange Board of India (SEBI). The regulator should take steps to institutionalize the elements that led to this rare victory in court. Is there sufficient intelligence gathering and co-ordination among different financial sector regulators? The level of interaction between the different financial sector regulators is clearly insufficient. The only regular forum for interaction, the Financial Stability and Development Council  (FSDC), concentrates on macro-prudential matters. More active co-ordination is needed at the grass-roots level.

20. Is everything as simple as it seems to be? Despite advertisements in papers and other strenuous efforts, the market regulator has not been able to find investors of more than Rs 10 crore.  If the Sahara investors are fictitious, SEBI doesn’t really have a role as it is mandated to deal with real investors, and some other agency should look into the case. And if Sahara’s claim of having repaid its investors is true, Subrata Roy and the two directors shouldn’t be in jail.  Lesson: This case should serve as wake-up calls for authorities such as the Income Tax Department and the Enforcement Directorate to follow the money trail more closely. Different regulators and enforcement authorities should clearly act to avoid duplication and enable better deployment of resources. The government has formed a panel of retired and serving bureaucrats, called the Financial Sector Legislative Reforms Commission (FSLRC), to rewrite and harmonize some 60-odd financial sector laws.

21. Sahara’s misdeeds are considered as an eye-opener in several respects about the uncertain dealings inside the corporate-houses and it brings in to being the need for protecting the interest of several millions of investors, who invested their hard earned money in such socially irresponsible corporations. SEBI proved to be effective machinery in tackling the case to an extent but still it has a limitation of regulating unlisted companies in India. The reasons for such scandals are several including lack of transparency, weak provisions, political nexus and above all, ignorance of investors. In the light of Sahara case, it is the responsibility of the government and its various agencies to protect the interests of investors and nation as well through putting in place necessary provisions in accordance with the changing requirement of market. CONCLUSION PRESENTED BY – Adarsh Agrawal (1920602), Shashwat Vijaywargiya(1920626), Amisha Nahar (1920632), Shrishankari R (1920647), Vani Ambardar (1920654)