In March 2008, two Sahara Group firms - Sahara Housing Investment Corporation and Sahara India Real Estate Corporation passed a board resolution under the Companies Act to raise funds for acquisition of land, developing townships, residential apartment and shopping complexes etc, through unsecured optionally fully convertible debentures (OFCDs) by way of private placement.
The two companies of the Sahara Group had mobilised a large sum of money (more than 24,000 crore) from over 3 crore investors without complying with SEBI's regulatory framework for public issues. SEBI came to know about such fund raised through an IPO draft red herring prospectus filed by Sahara Prime City Limited with SEBI where it was disclosed that the two firms had issued OFCDs.
SEBI's contention had been that, firstly the entity should be profitable, should have an adequate net worth, and the funds to be raised should be limited to a multiple of the net worth, to ensure that the issuer has the financial strength for prudent use of public money. There have been many emotional pitches by Sahara Group, which claimed to have a net worth of Rs. 68,000 crore and assets worth over Rs. 1.5 lakh crore. One of the Sahara firms was making a loss and the net worth of the other was Rs. 11 lakh. Clearly, neither company had the requisite financial standing to raise thousands of crores of rupees from the public.
Secondly, it was not a private placement as the number of investors was above 50 and that the securities should have been listed. Also, the prospectus floated for the amounts mobilised were scrutinised by SEBI and found to be wanting in terms of adequacy and accuracy of disclosures.
Lastly, the securities market enables the promoters of businesses to raise capital from the public without directly involving them in the business, when the capital needed is spliced into securities of small denominations in which several investor protection in such cases rests on the safeguards created by regulators. SEBI's regulatory framework requires clear accounting of funds, its audit and supervision of end use. It also requires setting up a debenture trustee mechanism if the security represents a borrowing. The Saharas had none of these safeguards.
The Supreme Court ordered and asked the two firms to deposit the money in three instalments beginning with an immediate payment of Rs. 5,120 crore. While the group paid the first instalment, it failed to meet the deadline for other two payments. SEBI began an exercise for refund to genuine investors from the money deposited in the first instalment by the Saharas. However, not much headway appears to have been made in the process as SEBI has detected instances of multiple accounts, on which it has sought a clarity from the Supreme Court.
The high - profile saga saw the arrest of flamboyant Sahara Group Chief Subrata Roy, after the Supreme Court ordered his arrest over delays in repaying thousands of crores of rupees illegally collected from small investors. Roy's jailing is a landmark case, showing that even the most powerful fraudsters will eventually be brought to book.