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[Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained

What is Debenture?
Difference between Bonds and Debentures?
Types of Debentures
What is Optionally fully-convertible debentures (OFCD)?
2008-09: The game begins
2011: SEBI Order
2012: Supreme Court hearing
Order of Supreme Court
Government’s response

What is Debenture?
From the earlier Debt + Equity article, you know there are two (legit) ways to arrange money for starting or expanding a company

Type meaning Example

1. Bank loans
2. Borrowing from friends, relatives,
Borrow money from someone. Offer him interest rate and guarantee to repay the
Debt moneylenders
principal after xyz date.
3. Bonds
4. Debentures

1. IPO-> Share.
Equity Take money from someone and offer him part ownership of the company. 2. Venture Capitalist
3. Angel Investor

Suppose a Telefilm company is producing a new bogus saas-bahu series.

The company needs additional finance of 100 Crore rupees just for the make-up, jewelry and expensive sarees of those actresses.
Company can approach the bank for a loan, but problems: 1) terms and conditions are heavy 2) the SARFAESI act (with its new
amendments)
So, it’s better just to borrow from public.
Whoever gives you Rs.100, you give him a piece of paper titled “blah blah blah..these are the terms and conditions, repayment
dates, interest rates etc.”
This piece of paper is called Debenture.
In this case, you need 100 crores, meaning print 1 crore papers (debentures) each worth Rs.100.
Whoever holds such paper units is called Debenture holder.
The cash thus collected is a loan for the company. (=debt)
Difference between Bonds and Debentures?
Overall, the principle behind Bonds and Debentures is same: They offer fixed interest rate + principal repaid at the specified date.

Ok then what’s the difference?

1.Bond 2.Debenture

Issued by

1. Union Government Issued by companies.

2. State Government
3. PSUs

Second difference: the different rates of Stamp Duty applied on each of them.
Third difference: The interest rate offered by Debenture is (usually) higher than Government Bonds. Because Government more
likely to repay = no need to seduce customers with higher interest rate.
Types of Debentures
Based on ‘convertibility’ the Debentures are of two types

1.Convertible debentures They can be converted into shares of the company on the expiry of xyz date.

2.Non-Convertible Debentures They cannot be converted into shares.

When debenture is converted into shares, it means debt holder becomes an equity holder.
Both debt vs equity have their own advantages and disadvantages. We’ve discussed it in the earlier article (click ME)
But by and large, from the investor’s point of view, Debt is safer than Equity.
What is Optionally fully-convertible debentures (OFCD)?
These debentures can be converted into shares, when debt holder (investor) wishes (after expiry of xyz pre-decided date).
But the “rate”, will be decided by the company e.g. 20 debentures =>1 share.

From investor’s view, this “option” to convert Debenture into Shares is good ONLY IF

1. Company is likely to make huge profit (so you, the shareholder can earn more dividend.) OR
2. Company’s share-price is likely to rise in the share market (then you can sell shares to third-party and make profit).
BUT if the Company is going bankrupt, then it is better to avoid converting the Debenture into shares. Because when a company is
liquidated (i.e. its assets sold off), the Debenture holders get the money before the shareholders.

It means OFCD is a bit tricky game. Investors should have some knowledge and understanding of share prices, company performance
etc. else they could lose money. (or end up not getting maximum profit out of their investment). Now let’s move to the SEBI-
SAHARA case.

2008-09: The game begins

Two firms of Sahara Conglomerate:

1. Sahara Housing Investment Corporation

2. Sahara India Real Estate Corporation. (aka Sahara Commodities)

These ^two companies Issued OFCD to collect money from investors.

~23 million people, mostly from villages and small towns subscribed to this scheme. They invested ~24,000 crores rupees in these
OFCDs of SAHARA.

2011: SEBI Order

You (SAHARA) have violated rules. If OFCDs are issued then whole process should be completed within 10 working
SEBI
days, but here you continue collecting money from people for more than two years!
This fund-raising was in the form of a private placement. I.e. we offered the schemes only to our select clients, this
SAHARA
wasn’t meant a “Public Offer”! So what’s your problem?

Dude if this is private placement, then maximum only 50 people can invest money in it.
Here ~23 million people have parked their hard earned cash! Hell the number of investors in this case, is even more
than the total number of people investing in the conventional stock-exchanges of India!
SEBI India’s biggest IPO till date was of Coal India worth Rs.15000+ crores, and you’ve made 24,000 crores out of
these OFCDs! It is my responsibility to protect the investors’ in Capital market.
Hence, By the powers given to me under SEBI Act, I hereby order you to stop collecting money and refund all the
money to those investors with 15% interest rate.

SAHARA This is not right!

SEBI Well, if you’re unhappy with my order you can go to the Securities Appellate Tribunal (SAT)
SAHARA Pleads before SAT.
SAT SEBI is right. You refund money to those people.
SAHARA Now, I’ll go to Supreme Court.

2012: Supreme Court hearing

SC What are your arguments?
 Those two companies are unlisted. Meaning, their shares are not listed on any Stock Exchange of India.
SAHARA Therefore, their conduct is outside the jurisdiction of SEBI. Because SEBI is regulator for listed firms only.
Our matter falls under Union Corporate Affairs Ministry and not under SEBI.

Nope, this matter comes under my jurisdiction, because

SEBI OFCD is a “security” under the Securities Act= it comes under the Sebi Act= I’ve the jurisdiction= Hence I can
pass a special order to regulate unlisted companies!

Order of Supreme Court

Saare sabuto aur gawaaho ko madde nazar rakhte hue (in the light of all evidence and witnesses)

To SAHARA To SEBI

We are unconvinced with your logic that OFCD schemes
don’t come under the scope of SEBI.
Mostly rural people have Invested money in your schemes
and they’re not aware of OFCD.
At the end of day, they would come and say that they were
cheated. You know Harshad Mehta’s case, same modus
operandi was there. Investors were not aware of the scheme.
It seems you have no intention of returning the investors’
money. Your intentions are shady.
We order you to refund the money.
If those two companies of SAHARA donot refund
money, you’re free to attach their properties and freeze
their bank accounts.
Also conduct a probe against those two Sahara
companies to find out their actual subscriber base. (to
make sure some funny game or money laundering isnot
going on.)
Check the genuineness of the investors and if the
investors are not traceable, the amount will go to the
government.

Government’s response
As you’ve seen in ^this case, SAHARA’s main argument is “SEBI doesn’t
have jurisdiction over our OFCD investment scheme, because this money was
meant for our “unlisted” companies.”
Government has decided to fix this ambiguity in the new Companies Act.
According to Companies Bill 2012 (passed in Lok Sabha): SEBI will have
undisputed jurisdiction over any investment scheme involving more than 50
investors-It doesn’t matter whether you’re a listed company or an unlisted
company.
MCQ

Find incorrect Match:

1. SEBI: SAT
2. CCI: COMPAT

a. Only 1
b. Only 2
c. Both
d. None

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101 comments to [Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning Print || PDF Subscribe
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Tannu Dua
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Thank u very much Mrunal Sir for explaining all topics in a very efficient and understandable way. Thanks a lot.

ravi pawar
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Great job mrunal you are making over life easier by posting such articles..
:)

jude_lucy
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c.
Both are correct

manoj
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bhai
“But the “rate”, will be decided by the company e.g. 20 debentures =>1 share”—–is this a predetermined rate or a current growth accounted
rate

Akilan
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Great piece

Naidu
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Awesome explanation man !!!!!!!

NARENDRA
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VERRY EXCELLENT EXPLAINATION.THANX A LOT

sridhar
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Thank you…

Pravin
Reply to this comment
Great article

abhay
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mrunal, private company can not issue ofcd, right?

मनु
झा
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Sahara is a cheat ! Mera bhi paisa fansa hua hai .. :( :(

dev,iit roorkee
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mrunal bhai …thank u very much… if i succeed in civil services … i will surely give 25 % credit to you …

prabhakar mishra
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very good explaination

PK
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than you mrunal bhai

RAJAN
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Wonderful…………. easily explained the whole matter….
just one word WAAO….

shravankumar
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sir i am unable to get pdf from your site ,so is there any other way to get all these notes.

Mrunal
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copy paste the article in MS Word.

Nikunj
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Good Very Informative,

Vivek Agrawal
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ha ha ha… bura fasa bichara :P
you are awesome mrunal sir

rajendra shah
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Mera bhi paisa fansa hua hai sahara mein . ye paisa kaise milega sir

H V Kulkarni
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Your Explanation is awesome Mrunal………
i liked a lot

Shakti Swami
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only Today i found this FORTUNE(for IAS aspirants)…thanx a ton sir….U gave me the way to move AHEAD…the day i’ll get selected ,i’ll pay
tribute

SANIJA SATHYAN
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I appreciate your effort for making this topic so easy that even a layman could read it and understand it beeter. thank you.

saumitra pandey
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thanks a lot bro i have started loving economy u made it lot easier n funny u r great man keep the good work up God bless u Can u list some
sites for hindi medium student

saleem
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Wonderful. Crisp and clear

Revathi C
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Very Informative and even layman can also understand this case by studying this article……Thanks

Manish Kumar
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Wonderful Job..!!! easy to understand and remember…

chandra jeet
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thank u sir,awesome.

vikas awasthi
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very informative article i got all the information regarding sahara issue

Raja Mohammed
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Simply decoded , i have great difficulty in understanding This issue and Vodafone case . Searching for a like button . append a like button to
your post.

vibha khajanchi
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that’s just a wonderful explanation sir! economy may sound dull and dreary but the u have succeeded in making it so very interesting!
this is an art of teacher

Anand Kumar
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THIS IS THE EASIEST FINANCE RELATED ARTICLE READ BY ME IN MY ENTIRE INTERNET HISTORY. NOW I AM GONA READ ALL
THE POSTS TO INCREASE MY KNOWLEDGE. GREAT WORK FRIEND

shiva
Reply to this comment
TO CLEAR UPSC EXAMS NEED CLARITY. YOU HAVE PROVIDED THEM FREE OF COST. GOOD WORK BROTHER.

Shashi
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Thank you very much Sir..

Sagar Mohanty
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This is excellent work… Clear,lucid and sharp.Many many thanks

deepak
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thank u very much sir..
very well explained…

deepak
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thank u very much sir

murali
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ossam sir.. I understand it very well and you explained in a general terms

Rohan Paliwal
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Great work man…it is the most effective explanation of the entire scene…Hats off to u..

Sudhir
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Still the issue is on, so i would like to add-up based on recent developments.
SEBI: A pilot study conducted by Sebi for ascertaining the genuineness of investor documents submitted by Sahara, however, found that
close to 99 percent of the bondholders were untraceable.
Sebi sent out redemption notices inviting claims to more than 21,000 bondholders but it received less than 300 claims, which are currently
under examination.
(Sahara claims they have refunded to rest of the investors on their own)
I think the money wasnt only from village/city based genuine investors. Also as SC pointed out about shady motives behind the investment,
looking at the over-all picture, shady-ness was may be due to the money(source etc) rather than intention of returning.(SAHARA is doing
good in other business’)

Mohit Rawat
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your articles are delightful.
Thanks.

manohar
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good job sir

Robin Lewis
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concept very well explained. hats off to you sir.
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