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Indian regulator's past haunts Sahara case

Jeff Glekin
INDIA'S top securities regulator is under a cloud. Last year a former deputy to the chairman of the Securities and Exchange Board of India (SEBI) wrote to the prime minister alleging that Upendra Kumar Sinha was going easy on the Sahara conglomerate. That puts SEBI, which has been tasked with overseeing the repayment of over $5 billion that Sahara raised from 30 million rural investors, in an awkward position.
Between 2008 and 2011, two unlisted Sahara companies raised a total of $4.3 billion using instruments known as optionally fully convertible debentures. Under Sinha's predecessor, SEBI ordered the group to refund the money, with 15 percent annual interest, after it found that the fund-raising process did not comply with securities market rules. The Supreme Court has just upheld that ruling.
Following Sinha's appointment in February 2011, his second in command -- Kandathil Mathew Abraham -- wrote to the prime minister alleging that the new chairman was under pressure from the finance minister to deal leniently with a number of high-profile cases, including that of Sahara. Among other things, Abraham says that when he proposed that SEBI issue a newspaper advertisement highlighting a High Court judgment against Sahara, Sinha refused and would only agree to a press release on the regulator's website. A more public warning from SEBI might have deterred investors from placing their money with Sahara.
Both SEBI and the finance ministry have publicly rubbished Abraham's accusations. The ministry called them
'false, vexatious and defamatory' and countered with its own allegations of corruption against the whistleblower. Last month Prime Minister Manmohan Singh cleared Abraham of the charge. But it's not clear that his allegations have been formally investigated.
SEBI now looks to be taking a tough line with Sahara. The group has accused the SEBI of acting in vengeance after it failed to acknowledge a truck carrying documents that the
company had been ordered to hand over. SEBI says the truck was refused entry after Sahara failed to meet a deadline set by the Supreme Court.
Though Abraham's allegations have never been proven, they pose a question mark over SEBI's independence. The best response for the regulator -- and for Sinha -- is to ensure that 30 million Sahara investors get their money back.
HIGHLIGHTS
X The Supreme Court on August 31 ordered the Sahara conglomerate to refund $4.3 billion it had raised from
around 30 million small investors, reaffirming an order from the capital markets regulator of June 2011. The Supreme Court also ordered Sahara to pay 15 percent interest to investors, taking the total payout to more than $5 billion.
y* The court directed two Sahara firms to furnish the Securities and Exchange Board of India (SEBI) with all the details of their issuance of optionally fully convertible debentures (OFCD), subscriptions and refunds within 10 days.
y* Sahara Group accused SEBI of acting in vengeance, in a report in the Business Standard on September 13, after the regulator failed to acknowledge a truck carrying documents. Sahara said a truck was refused entry as it arrived after the close of business hours on September 10, the deadline imposed by the Supreme Court.
y* Sahara has 90 days to deposit around $5 billion with SEBI. The regulator has been authorized by the court to take recourse to all legal remedies, including attachment and sale of property, and freezing of bank accounts of Sahara firms for recovery of the money if it is not refunded in the next three months.
y* In a letter dated October 2011 Kandathil Mathew Abraham, the number two at SEBI at the time, and the author of the original order against Sahara, wrote to the Prime Minister, Manmohan Singh. He alleged that the Chairman of SEBI, Upendra Kumar Sinha was under pressure from the then Finance Minister, Pranab Mukherjee, to deal leniently with a number of high profile cases, including that of Sahara.
The author is a Reuters Breakingviews columnist.