Doubtful, dubious, questionable and similar strong words are peppered through the Supreme Court judgment in the Sahara case and why not? Here was a group (two companies, mainly, Sahara India Real Estate Corporation Ltd. and Sahara Housing Investment Corporation Ltd.) that raised funds from the public — often poor, unlettered, rural people — for over three years from April 2008 promising the moon and yet refusing to subject itself to scrutiny by the Securities and Exchange Board of India (SEBI) whose mandate is precisely to regulate such fund-raising companies.

The details of this massive Rs.40,000 crore raised over time came to the open when another Sahara company approached SEBI for clearing its initial public offer in 2010. It was then that SEBI discovered that these two companies had raised such massive funds through optional fully convertible debentures (OFCD). Its doubtful if the poor people who subscribed to this even understood what the instrument was.

When asked to stop by SEBI, the Sahara group decided to contest it in the Allahabad High Court in November 2010 and obtained a stay. But SEBI, displaying a rare combative streak, went public with advertisements urging people to not invest in the OFCD issue.

In June 2011 under Supreme Court direction, SEBI flexed its muscles with an order directing the two companies to refund the money and banning the promoter, Subroto Roy, and other directors from raising public money till they complied with the order.

The case then moved to the Securities Appellate Tribunal which upheld the SEBI order after which Sahara appealed to the Supreme Court in November 2011 which delivered its judgment on Friday.

The judgment is significant for two reasons. First, it puts down what was clearly an illegal fund-raising programme that is by far the biggest ever such public exercise in India. The total money raised by the two companies is more than double that of the largest ever public issue made on Indian stock exchanges- that of Coal India, which was just over Rs.15,400 crore. Sahara also kept the OFCD offer open for an indefinite period from April 2008 until SEBI stepped in. Public offers for listed companies last no more than 3-4 days.

Second, SEBI has emerged from this judgment not just with its image burnished but also its muscles enhanced. The main contention of Sahara was that since this was not an offer to list on the exchanges, it was outside SEBI’s ambit. The judgment, by clearly underlining SEBI’s power to regulate any offer of shares or debentures to more than 50 persons, sends out a clear signal on who the boss is in matters of public fund raising, whether by listed or unlisted entities. Other similar entities raising public money on the sly had better watch out now.

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