3/19/13 [Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained « Mrunal

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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

DebtBorrow money from someone. Offer him interest rate and guarantee to repaythe principal after xyz date.

1. Bank loans2. Borrowing from friends, relatives,

moneylenders3. Bonds4. Debentures

Equity Take money from someone and offer him part ownership of the company.1. IPO-> Share.2. Venture Capitalist3. 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 thoseactresses.Company can approach the bank for a loan, but problems: 1) terms and conditions are heavy 2) the SARFAESI act (with itsnew 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 Government2. State Government3. PSUs

Issued by companies.

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 Governmentmore likely to repay = no need to seduce customers with higher interest rate.

Types of Debentures

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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.) OR2. 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 companyis 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, companyperformance etc. else they could lose money. (or end up not getting maximum profit out of their investment). Now let’s move tothe SEBI-SAHARA case.

2008-09: The game begins

Two firms of Sahara Conglomerate:

1. Sahara Housing Investment Corporation2. Sahara India Real Estate Corporation. (aka Sahara Commodities)

These t̂wo 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 theseOFCDs of SAHARA.

2011: SEBI Order

SEBIYou (SAHARA) have violated rules. If OFCDs are issued then whole process should be completed within 10working days, but here you continue collecting money from people for more than two years!

SAHARAThis fund-raising was in the form of a private placement. I.e. we offered the schemes only to our select clients, thiswasn’t meant a “Public Offer”! So what’s your problem?

SEBI

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 evenmore than the total number of people investing in the conventional stock-exchanges of India!India’s biggest IPO till date was of Coal India worth Rs.15000+ crores, and you’ve made 24,000 crores outof 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 refundall 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.

3/19/13 [Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained « Mrunal

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2012: Supreme Court hearing

SC What are your arguments?

SAHARAThose two companies are unlisted. Meaning, their shares are not listed on any Stock Exchange of India.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.

SEBINope, this matter comes under my jurisdiction, becauseOFCD is a “security” under the Securities Act= it comes under the Sebi Act= I’ve the jurisdiction= Hence Ican 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 schemesdon’t come under the scope of SEBI.Mostly rural people have Invested money in your schemesand they’re not aware of OFCD.At the end of day, they would come and say that they werecheated. You know Harshad Mehta’s case, same modusoperandi was there. Investors were not aware of thescheme.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 refundmoney, you’re free to attach their properties and freezetheir bank accounts.Also conduct a probe against those two Saharacompanies to find out their actual subscriber base. (tomake sure some funny game or money laundering isnotgoing on.)Check the genuineness of the investors and if theinvestors are not traceable, the amount will go to thegovernment.

Government’s response

As you’ve seen in t̂his case, SAHARA’s main argument is “SEBIdoesn’t have jurisdiction over our OFCD investment scheme, because thismoney 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 haveundisputed jurisdiction over any investment scheme involving more than50 investors-It doesn’t matter whether you’re a listed company or anunlisted company.

MCQ

Find incorrect Match:

1. SEBI: SAT2. CCI: COMPAT

a. Only 1b. Only 2c. Bothd. None

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

« Older Comments 1 2

Tannu DuaReply to this comment

Thank u very much Mrunal Sir for explaining all topics in a very efficient and understandable way. Thanks a lot.

ravi pawarReply to this comment

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

jude_lucyReply to this comment

c.Both are correct

manojReply to this comment

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

AkilanReply to this comment

Great piece

NaiduReply to this comment

Awesome explanation man !!!!!!!

3/19/13 [Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained « Mrunal

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NARENDRAReply to this comment

VERRY EXCELLENT EXPLAINATION.THANX A LOT

sridharReply to this comment

Thank you…

PravinReply to this comment

Great article

abhayReply to this comment

mrunal, private company can not issue ofcd, right?

मन ुझाReply to this comment

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

dev,iit roorkeeReply to this comment

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

prabhakar mishraReply to this comment

very good explaination

PKReply to this comment

than you mrunal bhai

RAJAN

Reply to this comment

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

shravankumarReply to this comment

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

MrunalReply to this comment

copy paste the article in MS Word.

NikunjReply to this comment

Good Very Informative,

3/19/13 [Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained « Mrunal

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Vivek AgrawalReply to this comment

ha ha ha… bura fasa bichara :P

you are awesome mrunal sir

rajendra shahReply to this comment

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

H V KulkarniReply to this comment

Your Explanation is awesome Mrunal………i liked a lot

Shakti SwamiReply to this comment

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’llpay tribute

SANIJA SATHYANReply to this comment

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

saumitra pandeyReply to this comment

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 listsome sites for hindi medium student

saleemReply to this comment

Wonderful. Crisp and clear

Revathi CReply to this comment

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

Manish KumarReply to this comment

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

chandra jeetReply to this comment

thank u sir,awesome.

« Older Comments 1 2