Raising Funds Without IPO: The Sahara Case and Beyond
In the world of business and finance, companies often face the challenge of raising capital. The traditional route is through Initial Public Offerings (IPOs), but there are numerous alternative methods. This article explores the complex journey of the Sahara Group and how it attempted to raise funds without listing on the stock exchange, leading to a high-profile case that made headlines.
Regulatory Framework and SEBI Regulations
Under the Companies Act 2013, as well as the erstwhile Companies Act 1956, and the SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations, companies need to follow specific regulations to raise funds from the market. The Securities and Exchange Board of India (SEBI) has regulations in place to protect investors and ensure transparency in the fundraising process.
In 2011, SEBI issued a notice restraining Sahara Group from issuing bonds and demanded the repayment of funds to investors, ultimately taking the matter to the Supreme Court. The court's final ruling was in favor of SEBI, instructing Sahara to refund the total amount with interest to the investors.
Alternatives to IPO
While IPOs are a common way for companies to raise capital, they are not the only option. Companies can explore various other methods, such as:
Selling Shares to Promoters Taking Loans from Investment Banks Investment from Individual Investors Optionsally Fully Convertible Debentures (OFCDs)OFCDs, while similar to other convertible debentures, offer an additional layer of flexibility for both the company and the investor. They allow investors to become shareholders if they choose to convert their debentures into equity.
The Sahara Case and OFCDs
The Sahara Group utilized OFCDs to raise funds, a method that allowed them to circumvent SEBI regulations. However, their approach was fraught with legal discrepancies and ethical concerns.
In 2008, the Reserve Bank of India (RBI) debarred Sahara India Financial Corporation from raising fresh deposits. This pushed the group to look for alternative ways to fund their operations. They turned to OFCDs, and the Sahara Group floated two companies—Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC)—to issue these debentures.
The Registrar of Companies (ROC) cleared the issuance without addressing the discrepancies in the companies' financials. Each company had a negligible net worth, yet they planned to raise massive sums. This blatant disregard for regulatory norms eventually led to the case being taken to the courts.
Key Events and Legal Battles
The Chronology of Events:
2008: RBI Debarment—RBI restricted Sahara India Financial Corporation from raising fresh deposits. 2008: Issuance of OFCDs—Sahara issued OFCDs through SIREC and SHIC, which cleared ROC approval despite the companies' negligible net worth. 2011: SEBI Intervention—SEBI issued an order citing the OFCDs as public issues, pushing the matter to the Securities Appellate Tribunal (SAT). 2012: SAT and Supreme Court Rulings—SAT held that the issuance of OFCDs was a public issue and that the Sahara Group had been non-compliant with SEBI regulations. The Supreme Court also ruled in favor of SEBI, instructing Sahara to refund the funds with interest. 2013: Non-bailable Warrant—In November 2013, Nirav Roy, Sahara’s Chief Executive, was issued a non-bailable warrant and summoned to appear in court on March 4, 2014.These events highlight the complexities and challenges companies face when attempting to raise funds without adhering to the established regulatory framework.
Conclusion
The Sahara case underscores the importance of compliance with regulatory requirements when raising funds. Companies must navigate the intricate legal and financial landscape to avoid legal disputes and ensure the protection of investors. While OFCDs and other alternatives can be useful tools, they must be used within the bounds of the law to maintain trust and integrity in the financial markets.