Facts that have come to light on the massive issue of convertible debentures by unlisted companies of the Sahara group throw up some startling issues for investors and regulators. It is certainly an eye-opener that two unlisted companies through an alleged ‘private placement' could mobilise a sum of Rs.19,400 crore, much higher than that raised by any Indian primary offer, without the trappings of road-shows, lead managers or investment bankers.

Widespread investments

It is not as if this issue raised money from a select few. The Securities Appellate Tribunal (SAT) order mentions that as many as 2.2 crore investors participated in this offer. That is much more than the total number of demat account in the country (1.96 crore) and about half the number of retail investors in all mutual funds (4.7 crore). Most ironically, this money was raised to fund residential real estate projects worth Rs.20,000 crore. Real estate stocks are among the worst performers in the stock market over the past three years.

So why did so many investors choose to participate in this offer from low-profile entities without the benefit of public issue formalities mandated by SEBI? The terms of the debenture issue, as detailed in the SAT order, offer a few clues. The offer of optionally fully convertible debentures consisted of three types of bonds for 4, 5 and 10 year terms. The promised returns on these bonds was not more than 12 per cent compounded annually. True, they carried a ‘conversion' option to be exercised one month before maturity, where a bond could be converted into shares of the issuer at a stated price. But as the issuer was unlisted, it is unclear how investors looked to monetise this portion of the offer.

FLAWED STRATEGY

From the few facts that are available, it appears that investors may have gone mainly by the higher-than-market interest rates promised on these bonds. That isn't surprising. When it comes to investing in companies through the equity route, Indian investors are quite conservative. Yet, the same investors who shunned a company's shares may put money into its fixed deposit or debentures, merely because of the ‘fixed return' being promised. That is a flawed strategy as safety of capital and the promised interest payments also depend heavily on the company's fundamentals and core business prospects. Going for ‘fixed returns' without a good idea of where those payments are coming from has in fact spawned many of the crises in the Indian financial sector that put household savings in jeopardy. The Unit Scheme 64, the chit fund and benefit fund failures or the jewellery deposit schemes of a decade ago come to mind.

These episodes are, in a sense, a reminder to India's regulators that they are not all-powerful. However much RBI or SEBI may whip regulated and listed entities into shape,there are a number of unlisted and unorganised entities out there which are still accessible to investors.

Therefore, pulling up recalcitrant companies will only help the regulators win the smaller skirmishes on investor protection. It is only widespread financial awareness and investor education that can help them win the war.

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