SC directs Sahara to approach SAT against SEBI order on OFCDs

Senior advocate Fali S Nariman appearing for Sahara Group firm submitted that till the final order of the SAT, it will not invite any fresh deposit in the OFCD scheme

New Delhi: The Supreme Court today directed Sahara Group firm Sahara India Real Estate Corporation to approach the Securities Appellate Tribunal (SAT) against market regulator Securities and Exchange Board of India's (SEBI) order directing the return of money collected from investors for an optionally fully convertible debentures (OFCD) scheme within a period of three weeks, reports PTI.

A three-member bench headed by chief justice SH Kapadia also directed SAT to decide Sahara India Real Estate Corp's appeal against SEBI within a period of eight weeks.

"We are of the view that keeping in mind interest of the investors... better option would be to give an opportunity to the petitioner (Sahara) a hearing before SAT," the bench observed.

Meanwhile, senior advocate Fali S Nariman appearing for Sahara Group firm submitted that till the final order of the SAT, it will not invite any fresh deposit in the OFCD scheme.

"We make it clear, in the appeal which is proposed, that ministry of corporate affairs (MCA) should be a party as a respondent, particularly in view of issues arising in this statutory appeal," the bench added.

The apex court also said that the interim order of SEBI would not be operational till the appeal is decided by SAT.

In addition, the apex court directed the Sahara Group firm to withdraw its petition filed against SEBI in the Allahabad High Court.

The apex court said that SAT will take a decision irrespective of SEBI's interim order and the remarks passed by the Allahabad High Court in this issue.

The apex court also directed the Sahara Group firm not to take any adjournments before SAT.

The issue relates to SEBI's finding in November that two Sahara Group firms-Sahara India Real Estate Corporation and Sahara Housing Investment Corporation-were raising funds from the public through an optionally fully convertible debentures (OFCD) scheme without conforming to prudent disclosure and other investor protection norms.

Subsequently, the Sahara Group had contested SEBI's authority to look into the issue in the Supreme Court, asserting that it was a privately held company and not listed and therefore, was under the jurisdiction of the ministry of corporate affairs.

Earlier, on 27th June, a vacation bench of the apex court comprising justices P Sathasivam and AK Patnaik had declined to hear the plea of Sahara India Real Estate Corp and asked it to list the matter before the chief justice, who has been hearing the case.

Following the orders of the Supreme Court, SEBI had on 23rd June directed the two Sahara Group firms-Sahara India Real Estate Corporation and Sahara Housing Investment Corporation-to refund the money, along with 15% interest, raised through its OFCD scheme for violating regulatory norms.

As per SEBI's order, the two companies, promoter Subrata Roy Sahara and directors Vandana Bhargava, Ravi Shankar Dubey and Ashok Roy Choudhary, jointly and severally, shall refund the money.

Besides, the 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.

OFCDs are a type of bond with the option to fully convert them into equity at a rate decided by the company.


Monsoon slips into red; 3% deficient rains since June

For the week ending 13th July, the monsoon rains were 19% below normal but the weather office has presented an outlook of fairly widespread rainfall over many parts of the country barring southeast peninsula for the next five days

New Delhi: After an upbeat start, India's monsoon slipped into the red this week with the country receiving 3% deficient rains since its onset in June, reports PTI.

As per statistics released by the India Meteorological Department (IMD), eight of the 36 sub-divisions had received deficient rainfall in a month when farmers take up sowing in a big way.

For the week ending 13th July, the monsoon rains were 19% below normal but the weather office has presented an outlook of fairly widespread rainfall over many parts of the country barring southeast peninsula for the next five days.

Southeast peninsular region is expected to get scattered rains during the period.

Last year, rainfall was 24% below normal in the week to 14th July after a weak start in June, but rains picked up in the remaining period of the four-month monsoon and ended as normal.

In April, the IMD had forecast normal monsoon for the June-September season and pegged the rainfall at 98% of the Long Period Average of 89 cm.

On 21st June, the weather office had downgraded its forecast from 'normal' to 'below normal', with southern peninsula being the worst hit.

The IMD has warned that isolated heavy to very heavy rainfall would occur over Uttarakhand, Haryana, west Uttar Pradesh, north-eastern states, Konkan & Goa, coastal & north interior Karnataka, Kerala and Madhya Maharashtra over the next two days.


Are the Nifty and the Sensex flawed?

The Bombay Stock Exchange and the National Stock Exchange do not take into account holding companies and cross holdings while making index calculations. This introduces double counting which flaws the popular Nifty and Sensex indices

A leading business newspaper recently pointed out that whatever happens around the HDFC companies or the Tata group companies has a far greater impact on the indices, like the BSE Sensex, than Reliance companies. The article mentioned that the HDFC group has a 12.1% weight and the Tata group has a 11.17% weight in the Sensex, compared to 10.73% for Reliance Industries Limited.

One problem that the index calculation faces is that it is purely mathematical and often ignores the underlying realities. The result is that index calculation often gets distorted due to the presence of holding companies or cross holdings. While the methodology involves the usage of free-float market capitalisation, the fact that the above mentioned factors distort the market capitalisation itself is what makes the calculation shaky.

Take for example HDFC Ltd. At the time of writing (current market price Rs718.80) HDFC Ltd has a market capitalisation of Rs1,05,277 crore. The free-float market capitalisation is Rs94,749 crore. HDFC Bank (CMP Rs2,552) on the other hand has a market capitalisation of Rs1,19,021 crore and free-float market capitalisation of Rs95,217 crore. HDFC Bank has a weight of about 6.3% and HDFC Ltd has a weight of about 6.2% in the Sensex (as of 6th July 2011). So the combined weight of HDFC group is 12.5% in the Sensex.

Now, as of June 2011, HDFC Ltd owned 23% of HDFC Bank. This means that the value of HDFC Bank shares lying in the books of HDFC Ltd is close to Rs24,000 crore. (I will ignore further complications like the holding company discount in valuations). It will be foolhardy to believe that the market is giving zero value to the investment book of HDFC Ltd.

In fact, HDFC Ltd, in its investor presentation, even calculates the possible gain it will realise on selling its listed investments, to calculate its adjusted book value.

The bottom line is that simply considering the market capitalisation of companies will lead to more than deserved weight for a company-in this case HDFC Bank.

Let me illustrate this through an example. Suppose tomorrow for some unknown reason HDFC Bank drops 50% and all other stocks remain at the same level. Since HDFC Bank has a weight of 6.3%, the impact on the index will be about 3.15% down. But the fall doesn't stop there. The value of HDFC Ltd will also come down by about Rs12,000 crore (50% of Rs24,000 crore). So, HDFC Ltd will see a price drop of about 11.4% (Rs12,000 crore/Rs1,05,277 crore). This will impact the index by an additional 0.7%. So the net impact on the index will be about 3.75% down.

So indirectly HDFC Bank has a weight of 7.5% on the index thanks to its shares being housed by HDFC Ltd another index constituent. If we assume for a moment that HDFC Ltd did not own anything in HDFC Bank then HDFC Ltd would have a weight of not more than 5%. So the HDFC group's total influence on the index would have been only 11.3% and not 12.5% as is now the case.

So there needs to be some way this anomaly is accounted for. Today, if Ratan Tata feels that his group's influence on the index should be much more than the current level, all he needs to do is list Tata Sons, the holding company for all Tata group companies. The listing of this entity will create a behemoth whose market capitalisation in turn depends on the other index components like TCS, Tata Motors, Tata Steel, etc. Since the methodology to include a scrip in the index doesn't have too many subjective considerations, Tata Sons, upon listing, will be pushing some genuine index constituents out of the index.

Even Reliance had the benefit of this holding company structure some time back when Reliance Petroleum Ltd (RPL) was a constituent of the Nifty and the Reliance Industries Ltd (RIL) share price reflected the RPL price, by virtue of it being a subsidiary of RIL.

The problem does not stop here. A lot of investors make a decision about the relative attractiveness or otherwise of the markets studying the ratios like P/E, P/Book or EV/EBITDA for the entire index. This distortion affects these ratios also as the earnings of HDFC Bank is double counted when we consider earnings of HDFC Limited on a consolidated basis or the dividends of HDFC Bank is considered as an income in the standalone books of HDFC Limited.

There is no hard and fast rule as to how this anomaly can be resolved. Different investors attribute different holding company discounts. It can vary from zero (in the case we have discussed) to as high as 65-70% in some companies. So how much of the overlap should be eliminated remains an issue of subjectivity. Under these circumstances, probably, simply sticking to market capitalisation is the easy way out.

(The writer is teaching at the Asian Business School. He has previously worked with Birla Sunlife Asset Management and Pari Washington Company Advisors.)


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