- 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
- Government’s response
- SEBI ordinance
From the earlier Debt vs. Equity article, you know there are two (legit) ways to arrange money for starting or expanding a company
|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, it’s 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)
Overall, the principle behind Bonds and Debentures is same: They offer fixed interest rate + principal repaid at the specified date.
|Issued by||Issued by companies.|
- 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.
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. We’ve discussed it in the earlier article (click ME)
- But by and large, from the investor’s point of view, Debt is safer than Equity.
- 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 investor’s view, this “option” to convert Debenture into Shares is good ONLY IF
- Company is likely to make huge profit (so you, the shareholder can earn more dividend.) OR
- Company’s share-price is likely to rise in the share market (then you can sell shares to third-party and make profit).
It means Sahara 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 let’s move to the SEBI-SAHARA case.
Two firms of Sahara Conglomerate:
- Sahara Housing Investment Corporation
- 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.
|SC||What are your arguments?|
Saare sabuto aur gawaaho ko madde nazar rakhte hue (in the light of all evidence and witnesses)
|To SAHARA||To SEBI|
- As you’ve seen in ^this case, SAHARA’s main argument is “SEBI doesn’t 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 doesn’t matter whether you’re a listed company or an unlisted company.
- In 2013, Government had introduced Securities Laws (amendment) Bill, 2013. This was to empower SEBI against Sahara like litigations.
- although it couldn’t be passed, but since the matter was of urgent importance, government decided to implement the provisions as an ordinance.
- In March 2014, For the third time, Government extended this ordinance.
The silent features of the bill/ordinance:
- Empowers SEBI to investigate, raid and attach bank account and properties.
- If a person doesn’t comply with SEBI order, SEBI can arrest him without approaching the court.
- If any entity gathers funds of 100 crore OR above from juntaa, it’ll be called Collective investment scheme. (=indirectly it means company will fall under jurisdiction of SEBI, because SEBI regulates after Collective investment schemes.) This is necessary because Sahara says, “our scheme was above 100 crore but we are not a CIS, hence SEBI doesn’t have jurisdiction over us”
- SEBI can further expand the definition of Collective Investment funds through regulations.
- SEBI can sign agreements with foreign financial regulators for exchange of information.
- Fast track courts for speedy trials of pending SEBI cases.
Mock Multichoice question: consider following pairs
- SEBI: SAT
- CCI: COMPAT
correct matches are:
- Only 1
- Only 2