3/19/13

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

[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 Governments 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, moneylenders 3. Bonds 4. Debentures 1. IPO-> Share. 2. Venture Capitalist 3. Angel Investor

Debt

Borrow money from someone. Offer him interest rate and guarantee to repay the principal after xyz date.

Equity Take money from someone and offer him part ownership of the company.

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, its 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 whats the difference? 1.Bond 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. 2.Debenture

Types of Debentures mrunal.org/2013/01/economy-sebi-sahara-ofcd-case-optionally-fully-convertible-debentures-meaning-explained.html

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

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. Weve discussed it in the earlier article (click ME) But by and large, from the investors 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 investors 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. Companys 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 lets 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

SEBI SAHARA You (SAHARA) have violated rules. If OFCDs are issued then whole process should be completed within 10 working 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 wasnt meant a Public Offer! So whats 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! Indias biggest IPO till date was of Coal India worth Rs.15000+ crores, and youve 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.

SEBI

SAHARA This is not right! SEBI SAT Well, if youre unhappy with my order you can go to the Securities Appellate Tribunal (SAT) SEBI is right. You refund money to those people. SAHARA Pleads before SAT. SAHARA Now, Ill go to Supreme Court.
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[Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained Mrunal

2012: Supreme Court hearing

SC SAHARA What are your arguments? Those 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. Nope, this matter comes under my jurisdiction, because OFCD is a security under the Securities Act= it comes under the Sebi Act= Ive the jurisdiction= Hence I can pass a special order to regulate unlisted companies!

SEBI

Order of Supreme Court

Saare sabuto aur gawaaho ko madde nazar rakhte hue (in the light of all evidence and witnesses) To SAHARA We are unconvinced with your logic that OFCD schemes dont come under the scope of SEBI. Mostly rural people have Invested money in your schemes and theyre not aware of OFCD. At the end of day, they would come and say that they were cheated. You know Harshad Mehtas 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. To SEBI If those two companies of SAHARA donot refund money, youre 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.

Governments response
As youve seen in ^this case, SAHARAs main argument is SEBI doesnt 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 doesnt matter whether youre a listed company or an unlisted company. MCQ Find incorrect Match: 1. SEBI: SAT 2. CCI: COMPAT

a. b. c. d.

Only 1 Only 2 Both None

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

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

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Tannu Dua
Reply to this comment Thank u very much Mrunal Sir for explaining all topics in a very efficient and understandable way. Thanks a lot.

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

jude_lucy
Reply to this comment c. Both are correct

manoj
Reply to this comment bhai But the rate, will be decided by the company e.g. 20 debentures =>1 shareis this a predetermined rate or a current growth accounted rate

Akilan
Reply to this comment Great piece

Naidu
Reply to this comment Awesome explanation man !!!!!!!
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[Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained Mrunal

NARENDRA
Reply to this comment VERRY EXCELLENT EXPLAINATION.THANX A LOT

sridhar
Reply to this comment Thank you

Pravin
Reply to this comment Great article

abhay
Reply to this comment mrunal, private company can not issue ofcd, right?

Reply to this comment Sahara is a cheat ! Mera bhi paisa fansa hua hai .. :( :(

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

prabhakar mishra
Reply to this comment very good explaination

PK
Reply to this comment than you mrunal bhai

RAJAN
Reply to this comment Wonderful. easily explained the whole matter. just one word WAAO.

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

Mrunal
Reply to this comment copy paste the article in MS Word.

Nikunj
Reply to this comment Good Very Informative,
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[Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained Mrunal

Vivek Agrawal
Reply to this comment ha ha ha bura fasa bichara :P you are awesome mrunal sir

rajendra shah
Reply to this comment Mera bhi paisa fansa hua hai sahara mein . ye paisa kaise milega sir

H V Kulkarni
Reply to this comment Your Explanation is awesome Mrunal i liked a lot

Shakti Swami
Reply to this comment only Today i found this FORTUNE(for IAS aspirants)thanx a ton sir.U gave me the way to move AHEADthe day ill get selected ,ill pay tribute

SANIJA SATHYAN
Reply 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 pandey
Reply 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 list some sites for hindi medium student

saleem
Reply to this comment Wonderful. Crisp and clear

Revathi C
Reply to this comment Very Informative and even layman can also understand this case by studying this articleThanks

Manish Kumar
Reply to this comment Wonderful Job..!!! easy to understand and remember

chandra jeet
Reply to this comment thank u sir,awesome.

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