SAT had on 18th October asked the group’s two companies—Sahara India Real Estate Corporation (now known as Sahara Commodity Services Corporation) and Sahara Housing Investment Corporation—to return the money
New Delhi: The Sahara group today moved the Supreme Court challenging Securities Appellate Tribunal (SAT) order asking the company to refund the money raised through Optionally Fully Convertible Debentures (OFCD) to investors within six weeks, reports PTI.
SAT had on 18th October asked the group’s two companies—Sahara India Real Estate Corporation (now known as Sahara Commodity Services Corporation) and Sahara Housing Investment Corporation—to return the money.
Sahara, which has challenged the SAT order, has also sought an interim stay on it.
SAT had passed the order on an appeal filed by the group challenging the order of the Securities and Exchange Board of India (SEBI) which had in June asked the two entities to return the money collected from investors through financial instrument OFCD citing violation of regulatory norms.
Besides, the stock market regulator had also restrained the entities from accessing the securities market for raising funds till the time payments are made to the satisfaction of the SEBI.
The two companies and its promoter Subrata Roy Sahara, and the directors—Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary—jointly and severally were told to refund the money collected.
The company had then approached the Supreme Court which asked it to approach the tribunal.
While dismissing the appeal, the SAT had held that the market regulator has jurisdiction over such fund raising schemes.
“...we may mention that in view of our findings that OFCDs issued by the company are securities and that the issue was a public issue requiring mandatory listing and that SEBI has the jurisdiction under the SEBI Act to deal with all kinds of securities and companies, whether listed or not...”, the order had said.
Sahara had contended that SEBI has no jurisdiction over the issue as the companies involved were not listed. It maintained that entities involved were privately-held companies and were under the jurisdiction of the ministry of corporate affairs (MCA).
But the tribunal did not agree with its contention and dismissed the appeal saying “this argument has no merit... A plain reading of regulation... leaves no room for doubt that the regulations apply to all public issues”.
Dr Vijay Mallya is seeking a bailout for the nearly bankrupt-Kingfisher. But he has leveraged the group to the hilt, according to our sources
Even as Dr Vijay Mallya, the promoter of United Breweries (UB) group is looking for a bailout for the debt-ridden Kingfisher Airlines, Moneylife learns that he has leveraged the group to the hilt.
According to reliable sources, Dr Mallya and other promoters of the UB Group have pledged over 90% of their shares in Kingfisher and United Spirits to raise Rs592 crore and Rs3,600 crore respectively from lenders.
Dr Mallya and other promoters hold around 59% stake in Kingfisher Airlines and have pledged 90% shares out of this shareholding to raise Rs592 crore. Similarly, Dr Mallya and other promoters have a 29% stake in United Spirits and have pledged 93% of these shares to raise Rs3,600 crore.
Even in the group’s flagship company United Breweries, the promoters’ have pledged 13% out of their total holdings of 75% to raise Rs1,400 crore. UB Holdings Ltd, another company belonging to Dr Mallya is in the same situation. The promoters have pledged 17% shares out of their 53% shareholding in the company to raise Rs72 crore.
As far as Kingfisher Airlines is concerned, it has already been rescued once after some prodding by Dr Mallya's political friends. However, its large debt remains a huge drag on the airline. "Kingfisher implemented a debt-recast package during the year under review, pursuant to which loans from bankers in excess of Rs1,300 crore and funds from promoters of approximately Rs745 crore were converted into share capital," said Dr Mallya while speaking at the annual general meeting (AGM) of the company.
Following the debt restructuring, State Bank of India (SBI) now owns 6% stake in Kingfisher, while ICICI Bank and IDBI hold 5.5% and 3.8%, respectively. Other banks like Bank of India, Punjab National Bank and UCO Bank hold less than 2% stake in the debt-ridden Airlines.
Lenders, including state-run banks had to convert the debt of Rs1,400 crore into equities at a premium of 60% at Rs64.48 per share to Kingfisher's market price of Rs39.9 a share in April 2011. Considering Kingfisher's closing price of Rs19.85 per share on Friday the lenders already have lost Rs44.63 per share in the company. indeed, it was clear to everybody even when the conversion was done, that this is a black hole. And yet, the politically well-connected owner of the company is seeking government bailout all over again.
Pension ULIP products will enter the market after 4.5% per annum guaranteed return has been scrapped, but some guarantee will ensure high exposure to debt and hence returns will not even beat inflation. Will customers shy away?
The Insurance Regulatory and Development Authority (IRDA) has announced new pension guidelines for insurance companies. The guidelines need all pension products to explicitly define the assured benefit that the customer would get at the time of surrender or vesting age. At the time of vesting, the annuity shall be provided by the same insurer who contracted the original policy. On surrender of policy post the lock-in period or on the date of vesting, the policyholder can commute to the extent allowed under Income Tax Act (1/3rd at this time) and utilise the remaining amount to purchase immediate annuity guaranteed for life at prevalent annuity rates, or buy a single-premium deferred pension product.
Insurance companies except Life Insurance Corporation of India (LIC) have been reluctant to launch regular premium pension plans post September 2010. Will anything change after the new guidelines? Will the customer really benefit? Gorakhnath Agarwal, chief actuary, Future Generali India Life Insurance, gives a realistic perspective. According to him, “The new guidelines, though appear to be relaxed in terms of guarantee, may still not achieve the objective of reviving sales of pension products.”
In less than two years there have been a lot of changes in pension ULIPs (unit linked insurance products). From allowing high equity exposure due to ‘no guarantee’ to high debt exposure due to ‘4.5% p.a. guarantee’ to possible continuation of high debt exposure due to ‘non-zero guarantee’, pension products have undergone frequent changes. Here are three hiccups in store for customers along with ‘what could have been better option’:
1. High exposure to debt will continue – Mr Agarwal says, “Retirement saving is meant to provide protection against inflation. Any kind of guarantee would restrict investment freedom (insurers will invest in debt products in order to meet the guarantee) and hence may not achieve the objective of providing protection against inflation. This might lead to under provision for retirement.”
‘No-guarantee’ option not on the table – Pension ULIPs prior to 1 September 2010 had no guarantee and hence the policyholder had the flexibility of high equity exposure. According to Amitabh Chaudhry, managing director and chief executive officer, HDFC Life, “Would we have liked an option for no guarantee? Yes, since that would have allowed flexibility for the funds to be invested in equity in a higher proportion which would have meant potential higher returns. But I think the regulator is rightly focused on ensuring capital protection for customers who are saving up in a pension plan for their retirement.”
2. Annuity from same insurer – IRDA may have genuine reasons for enforcing same insurer to continue with annuity phase of the product due to LIC taking 95% burden of it, but where does it leave the customer? According to Gorakhnath Agarwal , “We already offer our deferred pensioners purchase of annuity from our company, but we are still of the view that choice to purchase annuity from any insurer should have continued as it is in the interest of the policyholder and he should be given the opportunity of a competitive deal.”
Annuity at what rate? The captive customers for annuity phase may ensure less motivation for insurers to offer best rate. The annuity rates will be decided at the time of vesting of pension. If at that time another insurer offers better annuity rates, you are struck with your insurer for literally rest of your life. To top if off, annuity in India is taxable which itself is the biggest snag.
3. Enforced annuity – Pension ULIPs, prior to September 2010, did offer lump-sum payment (taxable). This option was removed post September 2010 regulatory changes. The window of opportunity was left in traditional pension products, but it is now closed. While one-third of the corpus can be taken out tax free at the time of vesting, the remaining two-third will be forced into annuity. Even if you surrender the policy before the policy term, the annuity is mandatory. Mr Agarwal says, “While we appreciate the need of annuitisation of pension corpus, making it compulsory in all cases may lead to problems. The examples are—surrender value is generally too small to buy the pension or the policyholder might be suffering from some critical/ terminal illness, etc. In such cases lump-sum should have been allowed. In other countries including the UK, lump-sum is permitted in such cases which, of course is subject to tax.
Exit option – Taxable lump-sum withdrawal used to be an exit option, though there are valid arguments against it. Mr Chaudhry adds, “Pensions are meant to accumulate a corpus during your productive years that can be then utilised in a systematic way during your non-productive years. A complete withdrawal leaves the customer open to risk of choosing another investment vehicle based on the right advice at a particularly vulnerable stage in her life. While a lot of us might differ on forcing an option on the customer, I think we should consider the maturity of our market and see this as the right move in the interest of the customer.”
The million dollar question is whether customers will get attracted to non-zero guarantee even if the returns are low, annuity from same insurer and enforced annuity? A veteran LIC agent summarizes it accurately. He says, “What is the real incentive for customer to go for pension product anymore? They can as well take regular life insurance policy and get the corpus on maturity as tax free. If they wish to lock money in annuity, immediate annuity is an option. If they do not want to lock anywhere, invest in any other instrument. There is flexibility here for high equity exposure in life insurance policy, choosing any insurer for immediate annuity, tax benefits and not worry about locking money forever at any stage.”
Moneylife view is that pension ULIPs prior to September 2010 did not have anything harmful (except for high charges). As the saying goes, “If it ain’t broken, don’t fix it”.