#ofcd

April 2013

This one is going to make the Samajwadi Party turn green. Turns out its erstwhile best friend and political arch rival have more than just geography in common! I’m talking Sahara and BSP.

Political funding data collated by the Association for Democratic Reforms shows that BSP’s income grew from Rs. 4 cr in FY05 to Rs. 115 cr in FY11, totalling Rs. 484 cr in that period. Donations contributed more than half of this. And not a single donation, in any of the 6 financial years, exceeded Rs 20,000. That works out to a minimum 2.4 lakh donors. (SP is not too far behind - only 4% of donations received by the party are in excess of Rs. 20,000).

Last month SEBI Chairman U K Sinha said in a public conference - "...there is this particular company that claims to have returned more than Rs 20,000 cr to their so-called investors and more than 90% of this refund has been made in cash in the last 3-4 months. I want you to ponder over it and think how feasible, how credible this story can be."

No prizes for guessing which company (actually 2 of them) Sinha was referring to. Within hours Sahara fired back saying ‘...90% amount of investors in both the companies have come from investors upto Rs. 20,000 that is 2.99 cr.’

In short, over 5 months last year the two Sahara companies (SIRECL & SIHCL) returned to their OFCD (Optionally Fully Convertible Debentures) investors Rs 20,000 cr in change ie: in payments of less than Rs 20,000.

What’s so special about the Rs. 20,000 limit? Many readers may know this already but for those who don’t – Sections 269SS and 269T of the Income Tax Act require that a deposit/loan of Rs 20,000 and more has to be made and/or repaid by an account payee cheque/demand draft. So, if it has to be cash then it has to be less than Rs. 20,000. Neat way to avoid leaving a bank trail - though Sahara claims there are no bank accounts to trail - that 2.99 cr of its 3 .07 cr investors have no access to banking facilities and hence deal in cash.

BSP may use the same explanation but in reality the party, like all other political parties, probably just wants to avoid Section 29C of the Representation of People Act, 1951 – it requires political parties to disclose details on all contributions exceeding Rs. 20,000. Non-compliance could lead to denial of tax relief.

If I wanted to deviate I could argue that it’s odd that 97% of Sahara’s investors had no access to bank accounts whereas a 2010 Nabard report says Uttar Pradesh’s ‘adult population is 82.23 million and the total number of bank accounts is 47.13 million... This suggests financial inclusion of 55.7% adult population.’ Infact Nabard’s report goes on to say ‘the number of accounts per 100 of population is 28 and per hundred of adult population is 57 as against the national average of 31 and 59 respectively’.

 But maybe most of Sahara’s investors are not UP residents. Or maybe many don’t exist as SEBI’s verification attempts seem to suggest. Of a batch of 21,000 investors SEBI wrote to, only 233 could be confirmed as Sahara OFCD holders. But ignore that and assume for a moment that the OFCD investors do exist and don’t have bank accounts – even then there are odd aspects to Sahara’s claims that deserve more attention.

For instance, of the 6 series of OFCDs sold by the two Sahara companies to raise Rs. 25,000 cr, 2 had no provision for premature redemption and in the other three the earliest opportunity for premature redemption is either starting April this year or 2019. The only scheduled redemptions were of a couple of thousand crore rupees for the Nirman bond series that matured last year. Yet Sahara claims to have refunded Rs 20,000 cr to investors over 5 months starting April 2012. Its press release says ‘almost 60% repayments had to be done in around 45 days only’. Funny that any company would entertain premature redemption requests that investors had no right to make. Even funnier is the prospect of SEBI attaching properties that don’t exist. Because to refund Rs. 20,000 cr Sahara would surely have had to liquidate the many investments made using the OFCD funds raised by its two companies. By Sahara’s own admission all the money was invested in group assets. That means, last year, even while their case was being heard in the Supreme Court, the two Sahara companies must have been selling these investments to fund the redemptions. But it disclosed this to no one...neither SEBI nor the Supreme Court.  In March 2013, after Sahara had failed to comply with the Supreme Court’s orders to hand over Rs. 24,000 cr to SEBI, SEBI moved to attach the assets of the two Sahara companies. Except that, if most of the OFCDs have been redeemed and assets sold to fund the redemptions - there isn’t anything to attach is there? Except on paper.

What’s outright hysterical is that investments worth Rs. 19,000 cr were sold and nobody had the slightest inkling. Sahara itself claims 60% repayments were done in 45 days – that’s over Rs 11,000 cr refunded in a month and a half. Yet Sahara’s banks didn’t blink – not when the investment proceeds must have come to them, nor when the money was being withdrawn to make the 2.99 cr payments of less than Rs. 20,000 each. Transactions worth Rs. 38,000 cr took place in a span of 5 months but no flags went up.

But the punch line in this extended comedy is this; In June 2011 SEBI ordered Sahara to repay its OFCD investors and Sahara refused – that is the genesis of this saga.  Yet, in June 2012, even as its case was being heard in the Supreme Court, Sahara claims to have refunded most of its investors. If that is true then it amounts to compliance with SEBI’s order...even if it be in a twisted fashion. And yet Sahara made no mention of this to SEBI or the Supreme Court. You have to wonder why... why it wanted no one to know that it was giving back Rs 20,000 cr in change?

PS: SEBI’s contempt petitions come up for hearing next week; it’s the regulator’s best chance to get Sahara to comply with the 2 Supreme Court orders. Attachment and sale of properties is a time consuming and litigious process and could run into several years...