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SC Orders Sahara To Refund Rs 17,400 Cr To Investors

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In a major setback to the Sahara Group, the lead sponsor of India's cricket team and which recently agreed to buy New York's Plaza Hotel, the Supreme Court on 31 August directed two of its companies to refund around Rs 17,400 crore to their investors within three months with 15 per cent interest. This reaffirms the apex court's earlier rulings that said Sahara's fundraising did not comply with securities regulations.
A bench of justices K S Radhakrishnan and J S Khehar directed the Securities & Exchanges Board of India (Sebi) to take action against the two unlisted group companies, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, if they fail to refund the money.
The apex court dismissed the petition filed by the Sahara Group challenging the Securities Appellate Tribunal (SAT) order directing its two companies to refund around Rs 17,400 crore raised from 2.3 crore investors through optionally fully convertible debentures (OFCD).
In 2008, the two unlisted Sahara group companies, with paid up capital of less than $20,000 each (Rs 10 lakh), began raising funds through OFCDs. Last year, Sebi had ordered the companies to refund the money, with 15 per cent annual interest, after it found that the fundraising process did not comply with its rules. An appellate tribunal upheld the regulator's order.
While Sahara had argued the fund-raising was a private placement not governed by rules for public issues, Sebi had said it violated rules because a private placement should be limited to a maximum of 50 investors.
Sahara argued the fundraising was in the form of a private placement. The Securities and Exchange Board of India countered that a private placement should be for a maximum of 50 investors -- not 23 million. The sums raised by the politically well-connected Sahara group exceed the amount raised in India's largest ever IPO, that of Coal India. Its largely rural investors exceed the total number of retail investors for India's entire universe of listed stocks.

On 31 August, the apex court allowed Sebi to attach properties and freeze bank accounts of the two companies if they did not comply with its order.
The bench further directed Sebi to conduct investigation against the companies to find out their actual subscriber base besides getting other relevant information.
It directed the companies to furnish all their documents and account details before the regulatory body and appointed a former apex court judge B N Aggarwal to oversee the probe by Sebi against the two Sahara firms.
The court had earlier reserved its verdict on June 14.On January 9, the court had stayed the SAT's order and also admitted the appeal filed by the Sahara Group.
In its plea, the Sahara Group had said it has sufficient assets to protect the interests of the investors.
The group had earlier told the court that it had filed an affidavit explaining that it will protect the interests of its investors who have put in their money in the two companies.
The apex court had on November 28, 2011 asked the two companies to place before it their 2010-11 balance sheets and statements of accounts for November 2011 and had issued notices to the Central government and the Sebi seeking their response on Sahara's plea.
The SAT's decision had come on an appeal by Sahara Group against the Sebi's June 2011 order asking the two firms to return the money collected from investors through financial instrument OFCD, on grounds of violation of regulatory norms.
The stock market regulator had also restrained the two entities from accessing the securities market for raising funds till payments were made to the satisfaction of SEBI.
The two companies, promoter Subrata Roy Sahara, and directors Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary were told jointly and severally to refund the collected money by the regulator to refund the collected money by the regulator.
The Supreme Court ordered Sahara to pay 15 per cent annual interest to investors on their deposits, reaffirming the capital markets regulator's order last year, two lawyers representing the regulator said.
Unlisted Sahara, which has interests ranging from financial services and housing to media and sports, did not immediately comment on the decision.
P. Venugopal, a lawyer representing the Sebi, said the court ordered Sahara to refund the money within three months and had appointed a retired judge to oversee the process.
"It's a landmark judgment given by the Supreme Court today which gives a lot of protection to investors," he told Reuters.
Sahara, founded by Subrata Roy Sahara, has been the sponsor of the Indian cricket team for more than a decade. It also sponsors the country's field-hockey team and owns a stake in Formula One auto racing team, Force India.
Last month, Sahara agreed to buy a controlling stake in New York's landmark Plaza Hotel for $570 million. It also owns London's Grosvenor House Hotel.
Investors in Sahara's financial products tend to be from small towns and rural areas where banking penetration is low.
"They see Sahara on television everyday as sponsor of the cricket team and that leads them to believe that this is the best company," said a spokesman for the Investors and Consumers Guidance Cell, a consumer activist group.
Reuters Breakingviews last year cited India's National Council of Applied Economic Research as saying 81 percent of rural households save, but only half keep their savings in bank deposits, while 36 per cent prefer to keep cash on hand.
So how will Sahara manage to return the cash? Over a third of the sum raised through issue of OFCDs has been invested in Aamby Valley, a luxury township project developed by the group in Maharashtra, according to annual reports for the year ended June 2010. Sahara has always maintained that if it loses the case that it has sufficient liquidity to pay the sum back in full. For the sake of India's financial system, it needs to make good on that promise - soon.