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 SEBI order were clearly erroneous and went against even Constitutional Acts. (Read the article here http://www.thesundayindian.com/en/story/the-unputdownable/25/47189/). I had titled the article ‘The Unputdownable!’ as an appreciative sobriquet for Subrata Roy Sahara, the Sahara Group Managing Worker, who, despite various attempts by external entities to pull him down – the English media in India included – has come back with exemplary credentials.
First the background to this case and on the face-off that Subrata Roy Sahara has had with SEBI, and in this I liberally refer to my previous article. The Sahara group, which has issued OFCDs (Optionally Fully Convertible Debentures) since the year 2001 with all relevant government permissions, and which has regularly submitted all details as required by the concerned government 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.) – and this despite the fact that just seven months before that, SEBI had, through its own communication to Ministry of Corporate Affairs, commented that as these were unlisted companies and had not filed a draft red herring prospectus with SEBI, any complaint with respect to these two companies 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 the 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, where the judges asked Sahara to pay back the OFCD moneys with interest. The fact is that a few of the statements within the August 2012 Supreme Court judgement seemed to be wrong.
For example, referring to the hard copy of investors’s details that Sahara had handed over to the court, one of the Supreme Court judges said that one of the introducer/agents mentioned in the hard copy, a man named Haridwar, apparently 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. One will never find Allahabad, Agra, Bangalore, Chennai or Tirupati as individual names.” It took me all of five minutes to put paid to the Supreme Court judge’s contentions. For example, typing Haridwar on Google got me to Dr. Haridwar, much awarded erstwhile Director of DRDO, Ministry of Defence.
Also, the judges weren’t clear on how much money was in contention. While one of the Supreme Court judges giving the order on Sahara believed that the OFCD money collected by two Sahara firms was around Rs.27,000 crore (“Saharas have no right to collect Rs.27,000 crore from three million investors,” Justice K. S. Radhakrishnan), the other judge believed that the amount collected was around Rs.40,000 crore (“What the two companies chose to collect through their OFCDs was a contribution to the tune of Rs.40,000 crore,” Justice Jagdish Singh Khehar).
Not only that, the Supreme Court’s August 2012 judgement wrongly gave powers to SEBI much beyond the SEBI Act, and directed SEBI to attach “all and any 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 “or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made there under...”; also, the bank accounts could have been attached for only a month as per the Act.
The Supreme Court order resulted in SEBI moving ahead and attaching not just the movable and immovable properties of the two companies involved, but also of other group companies (and this point about other group companies anyway wasn’t mentioned even in the Supreme Court judgement). SEBI’s mindless drive to attach accounts and properties of other group companies of Sahara and of shareholders goes not just beyond the SEBI Act, but beyond the very basis of capitalism and the distinction between group entities and between shareholders, that the Indian Companies Act clearly defines.
The Sunday Indian was the first and till now perhaps the only media house that came out vociferously against this stupendously faulty move of SEBI. As a basic tenet of capitalist business, no sensible investor would ever invest in an Indian company in case SEBI and the Indian courts start transgressing the clear line that demarcates a company’s incorporation – giving it a definitely independent legal status as compared to its group companies and its shareholders.
In my earlier article, I wrote how our respected finance minister spoke that we cannot have rich promoters and sick companies, and that banks therefore should start acting against promoters in such cases. Amusingly, if banks extended this rule to the government’s loss making companies like Air India, the Rashtrapati Bhawan could well be attached any time soon.
But that’s what SEBI decided to do against the Sahara group post the August 2012 Supreme Court order. They made a plea to Supreme Court on July 30, 2013, strongly requesting the Supreme Court to act against Subrata Roy Sahara for not following the earlier Supreme Court order, and that too simply because he is, as per SEBI, a shareholder holding a 70 percent stake in the companies. This is despite the fact that Subrata Roy Sahara is not a Director in those companies, and he cannot be held legally liable. In other words, what SEBI wishes the Supreme Court to enforce is that from now on, any significant shareholder of any company can be indicted for the company’s shortcomings. In other words, if you hold a significant number of shares in Unilever, and if there’s any court order against Unilever, you might as well get ready for SEBI’s Chairman Mr. U. K. Sinha pulling you up to pay on behalf of Unilever. I consider this behaviour of SEBI similar to kangaroo court proceedings.
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. Clearly, this line of argument is exactly what is wrong with SEBI’s understanding of modern day capitalism. And in a brilliant turnaround, the Supreme Court judges refused to accept SEBI’s contention. “...The other [Sahara Group] companies have not given any [such] undertakings,” Justice Radhakrishnan commented, while Justice Khehar flatly questioned the SEBI counsel, “Each of these [Sahara Group companies] are individual companies; to what extent can we proceed against their assets?” The SEBI counsel, having no plausible reply as of then, said he’ll argue the point later.
One should also note that SEBI pleaded in the Supreme Court that Sahara Group’s newspaper advertisements berating SEBI and bringing out SEBI’s clear misrepresentations, amounted to contempt of court. To this, the bench, after studying the advertisement in contention, amusingly replied to the SEBI counsel, “This is not contempt [of the court]. The expression used in the advertisement is for you.”
In conclusion, all I can say is that while the August 2012 case against Sahara seemed to be completely against the laws of natural justice, Parliamentary Acts and Supreme Court mandates, the recent reconsideration by the Supreme Court of a few critical issues that have the potential to destabilize the tenets on which capitalism is based – in other words, the protection provided to shareholders, and the fact that group companies cannot be held responsible for other group companies financial issues – is an extremely positive step and one badly needed to rein in the so-called market regulator which has suddenly become obsessed with lynch-mobbing Subrata Roy Sahara and his group of companies.
As I had written in my previous article, while Subrata Roy represents the other India, what I call Bharat, the English media just can’t handle the trust this other India holds in him and his Sahara group of companies. It is time we start changing such a mindset and ensure that capitalism and capitalists are not punished purely because one market regulator decided that they could make the rules and break them whenever they wished. And this change has to be initiated by the Supreme Court at the earliest.