Current Scenario :

With investors lapping up offers with funds mobilised by companies through non-convertible
debentures (NCDs) has jumped by nearly 16 times in the first half of 2016-17. Firms have raised
a record 23,901.4 crore through NCDs between April and September, data with markets
regulator Sebi showed. This is the highest ever in the first six months of a financial year since
Sebi started publishing data on public issue of NCDs from 2008-09.

The NCD offers were subscribed nearly 2.75 times on an average in the first half of 2016-17.
NCDs, which are primarily loan-linked bonds, have turned into an attractive investment
proposition due to the high returns they offer. NCDs that closed in September are offering
returns of 8.55%-9.25% per year. They provide interest on an annual basis. In contrast, most
banks are giving interest rate of around 7.25% for one-year fixed deposits (FDs).

Bank FDs have become unattractive in a falling interest rate regime. NCDs, however, offer
higher returns. This is driving investor appetite in NCDs, say industry experts. Interest rates are
going down by the day. NCDs have become popular as they give better returns than bank FDs.

Dewan Housing Finance Corporation (DHFL) and Kosamattam Finance took the NCD route
twice to raise capital. The NCD issues of DHFL, Mahindra and MahindraFinancial Services and
Indiabulls Housing Finance saw good interest from investors. DHFL's maiden NCD issue, which
opened in August, was subscribed nearly 19 times on the first day itself.

The second issue with a base size of 2,000 crore, which also opened in August, and was worth up
to 10,000 crore was subscribed more than six times on the first day itself. This prompted DHFL
to close the NCD issue on August 30, the second day of the offer, itself. The issue was scheduled
to close on September 12.

Indiabulls Housing's NCD, which opened on September 15, was subscribed 117 times on the
Bombay Stock Exchange within the first hour of the bidding process. The NCD, with a base size
of 3,500 crore, raised 7,000 crore.

In terms of number, funds were raised through 10 issuances in the first half of 2016-17 compared
to just four in the same period the previous year. Companies had raked in 33,811.9 crore from 20
issuances during 2015-16, while in 2014-15, they had raised 9,713.4 crore through 25 issuances.
Runaway hit
Debenture issue a big success.

M. Rahmanwithbureau reports
September 30, 1988

It was promoted like a block-buster, and in just 10 days it emerged as the biggest runaway hit of
all times. After weeks of intense speculation and rumours that it was heading for disaster, the Rs
593-crore Reliance Petrochemical Limited (RPL) fully convertible debenture issue closed last
month under an avalanche of applications.
Reliance Industries, which promoted the issue, estimated that over Rs 1,300 crore had been
collected from some 20 lakh people. In fact, it claimed that RPL's maiden foray into the market
ranked among the top 10 most successful issues in the world.
Even as the mountain of paper was being sorted out at Reliance offices in Bombay, there was
fresh cause for whoopee in Chairman Dhirubhai Ambani's camp. In an unusual gesture, the
Finance Ministry has decided that Reliance would be allowed to retain excess subscriptions to
the issue - if the Government clears additional RPL projects within three months.
While that would save Reliance up to Rs 20 crore in issue promotional expenses, the Finance
Ministry's surprise move seemed to signal that more mega projects are corning the controversial
company's way.
Reliance now has licences for producing mono ethylene glycol (MEG), high density
polyethylene (HDPE) and poly vinyl chloride (PVC) at the Hazira petrochemical complex in
Gujarat. But RPL's ambitious Rs 1,000-crore second phase envisages a gas cracker complex and
more downstream units.
"We have four or five applications pending in New Delhi, but we will not pursue the proposal for
retaining the excess amount for another four weeks, when all the paper work on the debenture
issue will be over," said a company spokesman.
Private firms are normally allowed to retain 15 per cent of the surplus funds received. But if
Reliance bags the extra Rs 700 crore that investors have showered into the RPL
debenture khazana, it'll be yet another coup for the Ambanis. So far, the Government has made
an exception for only two much smaller issues - Oswal Agro and Sona Steering.
The debenture issue's success was clearly a triumph for the Ambanis' marketing strategy. The
issue cost Reliance Rs 20 crore - and more than half of it was spent on promoting it just a month
before it opened. A veritable media blitz was launched - among other things, 70 one-minute
commercials and 60 time-checks were telecast on Doordarshan and 3,480 radio spots were
broadcast in all languages.
The advertising strategy was devised after painstaking market research, including an analysis of
the letters received by Reliance over the years from ordinary investors. The emphasis was on TV
with the message linked to the family's future - the exquisitely carved khazana. The letter
analysis produced the idea which attracted the maximum media attention - classified ads in the
matrimonial and real estate columns of newspapers.
But their real innovation was to break up what has so far been a faceless mass of investors into
different segments - professionals, housewives, students, even film industry wallahs. "For the
first time an issue has been marketed as a consumer product, "notes R. Kannan, Canbank
Financial Services' executive vice-president."Reliance has taken the dourness out of selling
stocks.''
Supremely confident of the results, Reliance pegged brokers' commissions at 1.5 per cent, as
against the normal 1.5 to 3 per cent. And the Ambanis decided to pay interest on subscriptions
only after they were accepted, rather than from the date on which cheques are received in
company offices as per common practice. Quite simply, that means Reliance will earn interest of
over Rs 20 crore since it has 90 days to send out acceptance letters - a windfall that has come
about only through an unprecedented official nod.
But that's not been the only windfall. According to Reliance's initial feedback, the RPL issue
attracted five lakh investors who have never invested in the stock-market before. If this is
correct, it will not only add a big number to Reliance's existing 30-lakh-strong army of investors,
but will also spell hope for the long-troubled markets. Says S.M. Parande, executive director of
SBI Capital Markets: "It will certainly provide a boost to the new mood among investors."
For all the bravado, just how successful the issue has been with ordinary investors will be known
only after the contributions of the public sector banks and financial institutions are known.
According to one source, only half the money has been put in by existing Reliance shareholders
and new investors. But a Reliance spokesman maintains that the institutions have subscribed
only Rs 38 crore to the RPL issue, the Unit Trust of India chipping in Rs 18 crore. Whatever the
breakup, one thing is clear - the Ambanis are in a position to head for even more mega times.
ANALYSIS OF SAHARA CASE

Introduction

Securities Exchange Board of India v. Sahara India Real Estate Ltd. is regarded as one of the
landmark cases with reference to the power and jurisdiction of SEBI in the case of corporate
fundraising. SEBI claimed that in the form of Optionally Fully Convertible Debentures, Sahara
India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation
Limited claim to have collected deposits from general public including cobblers, labourers,
artisans and peasants. Around 23 million people, mostly from villages and small towns
subscribed to this scheme and invested about 24,000 crores rupees. Now before moving on with
the main crux of the case, one should understand the term Optionally Fully Convertible
Debentures.

Optionally Fully Convertible Debentures:

Debenture can be understood as an instrument to raise loan by the company. For example, if a
company X requires capital in order to proceed with its new idea or project it can opt to raise
capital by taking a loan from the bank, but that would raise the issue of high interest rate and
other terms which the company should adhere to. In this case, the company has an option to raise
a loan from the public by means of debentures. One of the important aspects of this type of
fundraising is that the company has to pay the specified amount with interest, and although the
money raised by the debentures becomes a part of the companys capital, it does not become
share capital. The company can issue secured and unsecured debentures. A debenture may be
wholly or partially convertible at the time of redemption depending on the fact that whether the
special resolution is passed by the shareholders. Now under Optionally Fully Convertible
Debentures, it depends on the choice of the investor as when the debt holder wants to convert its
debentures into shares. The conversion is good in case the company is about to make a good
amount of profit, or the price of the shares of the company is about to increase. Thus, the very
fact which should be taken into consideration is that the investor in this case where he has been
issued OFCD should have basic ideas of the performance of the company, market fluctuations
and other financial market aspects to gain on the conversion of the debentures.
SAHARAS MANOEUVRE

One of the noteworthy facts of this case was that Sahara took investment from the people
belonging to the lower strata of the society who dont have much idea about the working of
financial institutions, fluctuations in the market and the skill to check the daily performance of
the company. Sahara claimed that it was a private placement and only selected clients were
intimated about the scheme. SEBI has no jurisdiction with respect to the same as its jurisdiction
is restricted only to listed company. It also contended that OFCDs issued by the company does
not fall within the ambit of the definition of the securities as provided under the SEBI Act. The
main contention raised by the Sahara was that SEBI has no jurisdiction over the unlisted
companies and, therefore, objected its interference in the present case on the ground that the said
company comes within the ambit of Unlisted Public Companies Rules 2003.

OBJECTIONS RAISED BY SEBI

As per the provision of Section 55A of the Companies Act, 2013, it paves the path for SEBIs
jurisdiction and also restricts it to listed public company and in this case, the company in
question being an unlisted one does not fall within the ambit of SEBIs jurisdiction. As per the
facts of the case if Sahara contends that it was a private placement and only selected clients were
asked for investment then the whole task of OFCD should have been wrapped up within 10 days
as per rules and regulations and in adherence to the guidelines and also the offer should have
been restricted to not more than 50 members. But in this case more than 23 million people
invested in the scheme and it went down for more than 2 years which made it an obligation on
the company to make it listed as per Section 73 of the Companies Act, 2013 which prohibits
private company to take deposits from the public and allows only eligible companies to accept
deposits from the public. It must be intimated to the registrar of the company and in such a
circumstance brings it within the purview of the SEBI. Therefore, in the light of facts provided
and arguments advanced SEBI contented that OFCD scheme is within the purview of the
definition of securities as provided by SEBI Act 1992 and Sahara should be obligated to refund
the deposits of more than Rs. 24000 crores to its investors as it was taken in contravention of the
laws of the land

SUPREME COURT REMARKS

 Supreme Court finally made an important observation that it was stated by Sahara
company that its OFCD scheme was a kind of private placement and included only
selective clients yet it failed to prove the same, and it is very well evident that it was a
kind of public offer in which more than 23 million people invested over which SEBI
has complete authority.
In the case of private placement, the documents should be submitted by the company
that its investors had some relation with the company which in this case was not
proved by the Sahara group and thus it does not qualify the claim of the investment
being a private placement.

DECISION OF THE CASE

The Honble Supreme Court ordered Sahara to refund the entire deposits collected by it through
Red Herring Prospectus at an interest rate of 15% till the date of refund. It also authorised SEBI
to take legal recourse in case the appellant i.e. Sahara fails to comply with the said order.