Essay: Optionally fully convertible debentures

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  • Optionally fully convertible debentures
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An Optionally Fully Convertible Debenture is just a kind of Bond that can be converted into Equity Shares by the investors if they want to. So, this is a kind of hybrid market instrument that would come under the jurisdiction of the Securities and Exchanges Board of India (SEBI)

These two companies were raising thousands of crores but SEBI was not fully aware of why they were doing so or what they were doing with the collected money. Ideally speaking, before such an issue happens, the company is expected to file a request with SEBI, get it approved and then start the collection of public money. However, that wasn’t the case.

What is SEBI?

In accordance with Section 11(1) of the Securities and Exchange Board of India Act 1992, SEBI is required to protect the interests of investors in securities and regulate and promote the development of the securities market. Established in 1988, the Securities and Exchange Board of India (SEBI) was instituted as the official regulator of Indian markets but was only given statutory powers through the SEBI Act in 1992 by Indian Parliament.

SEBI’s primary goal is to cater to the needs of the market, which include investors, issuers of securities and any third parties involved. Its functions include, but are not limited to, regulating the stock market, preventing insider trading, managing company takeovers and acquisiti on of shares, and investigating fraudulent activities in the securities market. To an extent, SEBI has successfully made tangible changes in the market. It did away with inefficiencies and delays by passing the Depositories Act, which eliminated the need for physical documents and certificates and played a major role in moving markets toward an electronic and paperless platform. Administrative achievements aside, SEBI also made strict changes that demanded corporate promoters disclose more information.

That being said, SEBI has its fair share of problems as well. Many perceive, and perhaps rightly so, the regulatory body is all bark, no bite. One of the major criticisms against the SEBI Act was it did not provide SEBI with sufficient powers. The government, particularly the Finance Ministry, has an unnecessarily constrictive hold on SEBI, which makes the regulator extremely susceptible to political interference for three main reasons.

So, how did SEBI find out that Sahara was collecting public money?

Actually, it was a random accident. Mr. Abraham who was the Director of SEBI until July

2011 was reviewing the Draft Red Herring Prospectus (DRHP) to raise equity for real estate company Sahara Prime City Ltd through an initial public offering (IPO). The DRHP di sclosed details of two associate group companies (SIREC and SHIC) that were raising huge amounts of money from the public through optionally fully convertible debentures.


Any company that wants to issue equity shares or Debentures or any other market related instrument to the public through the IPO Process has to file a Draft Red Herring Prospectus or DRHP to SEBI to tell them the details of the public issue, why they are doing so, their financial

position etc. It is pretty standard procedure in India. When SEBI found out that two Sahara Group Cos were raising thousands of crores by issuing optionally fully convertible debentures which they were not aware of, they started digging to find out what exactly is happening.

So, what did SEBI Do when they found out?

SEBI asked the two companies ‘ Sahara India Real Estate Corporation (SIREC) and Sahara

Housing Investment Corporation (SHIC) to stop raising money through an order dated 24

November 2010

What did Sahara do in Response?

The usual ‘ whatever large corporates do in our country when they are questioned’ Sahara rushed to the Lucknow bench of the Allahabad High Court, which stayed SEBI’s order but not its investigation. SEBI moved the Supreme Court, but the apex court too was not of much help. It merely directed the high court to expedite the case. The high court vacated its stay only on 7
April 2011, when it found that the Sahara group was not cooperating with SEBI as it had directed. On 29th April 2011 the Allahabad High Court lost patience with Sahara and dismissed the group’s petition against SEBI with the following remarks:

‘A person, who comes to the court, is supposed to come with clean hands and bona fide intentions, and has to abide by the orders passed by the court, more so in a case where the parties’ counsel agree for certain actions to be undertaken. If some assurance is given by any person to the court, as has been done in the present case, and the said assurance/understanding is not honoured, the court would not come to his rescue. The application is, therefore, rejected.”

What was SEBI’s Justification to go with the Court-Case Route?

The Sahara Group primarily challenged SEBI’s intrusion into the affairs of SIREC and SHIC saying that OFCDs were not under SEBI’s jurisdiction since they were hybrid instruments ‘ neither shares nor debentures. Also, while Sahara was arguing with SEBI about whether their issue came under SEBIs jurisdiction or not, they also claimed that the OFCDs were being privately placed with the Sahara Group and not to the general public. When no public offer was involved, how could SEBI intervene?

Was this Justification True?

Of Course Not. Any market related instrument comes under SEBIs Jurisdiction. SEBI demolished this argument easily since they were debentures that could be converted into shares. This contention was later upheld by the Securities Appellate Tribunal and the Supreme Court in 2012.

Sahara’s counter to the Private placement point was – when Sahara offices and agents were busy hawking these OFCDs, and when the two companies SIREC and SHIC had over 6 million investors, the offers can’t possibly be considered as a private placement.

Was Sahara Right in Excluding SEBI from their OFCD Issue?

Absolutely Not. Before the OFCD Issue starts, according to the Schedule II of the Companies Act of India, SEBI has to Review and Vet the DRHP of the company. The Schedule also specifies that, when the company files its DRHP, the Company Directors have to file a Declaration saying that they have complied with all provisions of the Companies Act and the SEBI guidelines.

In reality, the Directors of these 2 Sahara companies SIREC and SHIC excluded all references to SEBI while signing their declarations. On top of all this, this whole OFCD Issue had actually started in 2008 for SHIC and the SIREC Issue had no-closing date. How can an Issue happen which has no closing or end date?
n here…

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