[Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained

SEBI Sahara OFCD case timeline

[Economy] SEBI-Sahara OFCD case: Optionally fully-convertible debentures- Meaning explained

  1. What is Debenture?
  2. Difference between Bonds and Debentures?
  3. Types of Debentures
  4. What is Optionally fully-convertible debentures (OFCD)?
  5. 2008-09: The game begins
  6. 2011: SEBI Order
  7. 2012: Supreme Court hearing
  8. Order of Supreme Court
  9. Government’s response
  10. SEBI ordinance

What is Debenture?

From the earlier Debt vs. Equity article, you know there are two (legit) ways to arrange money for starting or expanding a company

Type meaning Example
Debt Borrow money from someone. Offer him interest rate and guarantee to repay the principal after xyz date.
  1. Bank loans
  2. Borrowing from friends, relatives, moneylenders
  3. Bonds
  4. Debentures
Equity Take money from someone and offer him part ownership of the company.
  1. IPO-> Share.
  2. Venture Capitalist
  3. Angel Investor
  • 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)

Difference between Bonds and Debentures?

Overall, the principle behind Bonds and Debentures is same: They offer fixed interest rate + principal repaid at the specified date.

Ok then what’s the difference?
1.Bond 2.Debenture
Issued by

  1. Union Government
  2. State Government
  3. PSUs
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.

Types of Debentures

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.

What is Optionally fully-convertible debentures (OFCD)?

  • 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

  1. Company is likely to make huge profit (so you, the shareholder can earn more dividend.) OR
  2. Company’s share-price is likely to rise in the share market (then you can sell shares to third-party and make profit).
BUT if the Company is going bankrupt, then it is better to avoid converting the Debenture into shares.  Because when a company is liquidated (i.e. its assets sold off),  the Debenture holders get the money before the shareholders.

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.

2008-09: The game begins

Two firms of Sahara Conglomerate:

  1. Sahara Housing Investment Corporation
  2. Sahara India Real Estate Corporation. (aka Sahara Commodities)

These ^two companies Issued OFCD to collect money from investors.

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