The manner in which the market regulator has treated the Sahara Group is not only in violation of the laws of the land but also sets a bad precedent for India’s capital markets. The Supreme Court must intervene
In April this year, I had written on how various points in a 2012 Supreme Court judgement against the Sahara Group, on the basis of an earlier Securities and Exchange Board of India order, were erroneous. I had titled the article The Unputdownable! as an appreciative sobriquet for Mr Subrata Roy ‘Sahara’, the Sahara Group Managing Worker, who, despite attempts by external entities to pull him down, has come back with exemplary credentials.
First, the background to this case. The Sahara group, which has issued Optionally Fully Convertible Debentures since 2001 with Government permission, and has submitted all details as required by the authorities, suddenly got a prohibitory order from Sebi in November 2010 against the OFCDs issued by two unlisted group companies, Sahara Housing Investment Corporation ltd and Sahara India Real Estate Corporation ltd. This, despite the fact that just seven months before SEBI had said that as these unlisted companies had not filed a draft red herring prospectus with it, any complaint with respect to these two should be handled by the Ministry of Corporate Affairs.
Of importance is the fact that the Ministry of Corporate Affairs, in its written submission to the Allahabad High Court in 2010, mentioned, “The issuance of OFCD [by] the petitioner company after the registration with the Registrar of Companies has been permissible under law. The Central Government remains the regulating authority for the company.” Similar were the notings of Additional Solicitor General, Mohan Parasaran (who is now Solicitor General), and of the Minister of Corporate Affairs, Veerappa Moily.
True to its past, Sebi disregarded all this and brought out an order against the two Sahara companies in June 2011, demanding that they immediately pay back all the moneys collected through OFCDs, with due interest. After subsequent hearings in the Securities Appellate Tribunal, finally in August 2012 in the Supreme Court, the two Sahara firms unfortunately again received the short end of the judgement, when Sahara was ordered to pay back the OFCD moneys with interest. A few of the statements in the judgement seemed wrong.
For example, referring to the hard copy of investors’ details, one of the Supreme Court judges said that one of the introducer/agents mentioned in it — a man named Haridwar — couldn’t have had that name. The judge wrote in the order: “Haridwar, as a name of a person of Indian origin, is quite uncomprehendable [sic]. In India, names of cities do not ever constitute the basis of individual names.” It took me all of five minutes to put paid to the judge’s contention. Searching ‘Haridwar’ on Google led me to former Director of Defence Research and Development Organisation Haridwar Singh.
Also, the judges weren’t clear on how much money was in contention. While one believed that the OFCD money collected by two Sahara firms was around Rs 27,000 crore, the other said that the amount collected was around Rs 40,000 crore. Moreover, the August 2012 judgement gave powers to Sebi much beyond the Sebi Act. It directed Sebi to attach all bank accounts related to the two companies, in case the two Sahara firms fail to comply with the orders. But as per the SEBI Act, Sebi can attach only those bank accounts that relate to the proceeds involved in the violation of any of the provisions of this Act.
The Supreme Court order resulted in Sebi attaching not just the movable and immovable properties of the two companies involved, but also of other group companies even though this wasn’t mentioned in the judgement. This not just violated the Sebi Act, but went beyond the basis of capitalism that distinguishes between group entities and shareholders.
No sensible investor will invest in an Indian company if Sebi and Indian courts transgress the line that demarcates a company’s incorporation, giving it legal status independent of its group companies and shareholders. In my earlier article, I wrote that the Union Finance Minister had said that we cannot have rich promoters and sick companies, and that banks should act against such promoters. Interestingly, if banks extend this rule to the Government’s loss-making companies like Air India, Rashtrapati Bhawan could be attached soon.
Because that’s what Sebi did against the Sahara group after August 2012 order. It made a plea to the Supreme Court on July 30 this year requesting it to act against Mr Roy for not following the earlier order. This is despite the fact that Mr Roy is not a director in those companies, and cannot be held liable. In other words, what Sebi wishes the Supreme Court to enforce is that any shareholder of any company can be indicted for the company’s shortcomings.
Sebi also pleaded to the court that the Sahara Group was a single economic entity and any group company’s commitments were liable to be paid by the other group companies. But in a brilliant turnaround, the Supreme Court judges refused to accept Sebi’s contention. Therefore, while the August 2012 judgement against Sahara seemed to be completely against the laws, the recent reconsideration by the Supreme Court of a few critical issues that have the potential to destabilise the tenets on which capitalism is based, is a positive step.
Mr Roy represents the other India, what I call ‘Bharat’, but it seems like the English media can’t handle the trust that ‘Bharat’ holds in him and his companies. It is time we start changing such a mindset and ensure that capitalists are not punished because one market regulator decided that they could make and break the rules as they wished. And this change has to be initiated by the Supreme Court at the earliest.
(The author is a management guru and honorary director of IIPM Think Tank)