Apex court empowers SEBI to seize assets, freeze bank accounts if money not returned with interest

Holding that economic offences committed by the Sahara Group must be dealt with an iron hand, the Supreme Court on Friday directed its group companies — Sahara India Real Estate Corporation Ltd and the Sahara Housing Investment Corporation Ltd — to refund over Rs 24,400 crore collected from 2.21 crore depositors through an instrument known as optional fully convertible debentures.

Giving this direction, a Bench comprising Justices K. S. Radhakrishnan and J. S. Khehar said the companies should refund the amounts collected after issue of Red Herring Prospectus (RHPs) dated March 13, 2008 (Rs 17,400 crore) and October 16, 2009 (over Rs 7,000 crore) along with 15 per cent interest to the Securities and Exchange Board of India from the date of receipt of the subscription amount till the date of repayment, within three months, which should be deposited in a nationalised bank bearing maximum rate of interest.

Supporting documents

The Bench directed the group to furnish the details, with supporting documents, to establish whether they had refunded any amount to persons who had subscribed through RHPs within 10 days and “it is for the SEBI to examine the correctness of the details furnished.”

The court appointed a retired Supreme Court judge B. N. Agarwal “to oversee whether directions issued by this Court are properly and effectively complied with by the SEBI (WTM) from the date of this order. Justice Agarwal would also oversee the entire steps adopted by SEBI and other officials for the effective and proper implementation of the directions issued by this Court.”

Justice Khehar, in a separate judgment, said: “It seems the two companies collected money from investors, without any sense of responsibility to maintain records, pertaining to funds received. It is not easy to overlook that the financial transactions under reference are not akin to transactions of a street hawker or a cigarette retail made from a wooden cabin. The present controversy involves contributions which approximate Rs 40,000 crore, allegedly collected from the poor rural inhabitants. Despite restraint, one is compelled to record, that the whole affair seems to be doubtful, dubious and questionable. Money transactions are not expected to be casual, certainly not in the manner expressed by the two companies.”

The Bench, in its common order, directed the companies to furnish all documents in their custody, particularly, the application forms submitted by subscribers, the approval and allotment of bonds and all other documents to SEBI so as to enable it to ascertain the genuineness of the subscribers as well as the amounts deposited, within 10 days.

It said “SEBI, if after the verification of the details furnished, is unable to find out the whereabouts of all or any of the subscribers, then the amount collected from such subscribers will be appropriated to the Government of India.”

The Bench made it clear that if the companies fail to comply with these directions and did not effect refund of money as directed, SEBI could take recourse to all legal remedies, including attachment and sale of properties, freezing of bank accounts etc for realisations of the amounts. It directed SEBI to submit a status report, duly approved by Justice B.N. Agarwal, as expeditiously as possible, and also permit SEBI to seek further directions from this Court, as and when, found necessary.

The Bench, after examining various provisions of the Companies Act, said: “the provisions for imposing civil and criminal liability and refund of the amount with interest would indicate that, of late, economic offences in India like the one committed by the Saharas must be treated with an iron hand, or else we may land in another security market pandemonium.”

The Sahara group had submitted that SEBI had no jurisdiction to enquire into this issue as it was not a public issue. It said that “this issue is purely on the private placement basis and the company does not intend to get these OFCDs listed on any of the stock exchanges in India or abroad. The Memorandum for Private Placement is neither a prospectus nor a statement in lieu of prospectus. It does not constitute an offer for an invitation to subscribe to OFCD’s issued by Sahara India Real Estate Corporation Ltd.”

Rejecting the argument, Justice Radhakrishnan, in his separate judgment, said, “OFCDs issued by Saharas were public issue of debentures, hence securities. Once there is an intention to issue shares or debentures to the public, it is/was obligatory to make an application to one or more recognised stock exchanges, prior to such issue. The Sahara group could not have filed Red Herring Prospectus or any prospectus with RoC, without submitting the same to SEBI under Clauses 1.4, 2.1.1. and 2.1.4 of DIP Guidelines.”

Sahara’s assurance

Meanwhile, Sahara India, in a statement assured depositors and investors: “You need not worry about anything and be at absolute peace as Sahara is the most dutiful and absolute honest custodian of your money…” It further claimed that each and every rupee it had accepted in the last 33 years was always against receipt from the company and with an application form duly signed by the depositors/investors. Every rupee which has come to Sahara can be verified by the authenticity of the depositors/investors, the company said.

(This article was published on August 31, 2012)
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