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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jeff Glekin
MUMBAI (Reuters Breakingviews) - There's a lot riding on the $5.5 billion case against Sahara group which reaches the Supreme Court this week. Regardless of who actually comes out top, the amount of cash raised from 23 million mostly rural investors means confidence in India's financial system is at stake.
In 2008, two unlisted Sahara group companies, with paid up capital of less than $20,000 each, began raising funds through a complex instrument known as an optionally fully convertible debenture. Between them they raised at least $3.7 billion. Sahara argues the fundraising was in the form of a private placement. The Securities and Exchange Board of India (SEBI) countered that a private placement should be for a maximum of 50 investors -- not 23 million. Sahara declined to comment while the case was still in pending with the Supreme Court.
The sums raised by the politically well-connected Sahara group exceed the amount raised by India's largest ever IPO, that of Coal India. Its largely rural investors exceed the total number of retail investors for India's entire universe of listed stocks. Most of Sahara investors are poor. If something has gone amiss, the political and economic fallout will be immense.
The case has already courted controversy. In June last year, a letter to the prime minister from SEBI's outgoing second-in-command alleged that the finance ministry had put pressure on the new SEBI Chairman in relation to the Sahara case. The finance ministry denies the allegation.
Even if Sahara wins its Supreme Court action, questions will remain over the regulatory environment. In particular, how could so many investors be sold a product that benefits from neither the protection associated with a public issue nor the safeguards a depositor would get from putting money in a bank? If Sahara loses, the questions over how such a huge mobilisation of funds was allowed to take place at all will be even more searching. And, of course, there will be the small matter of making sure that Sahara's investors get their money back swiftly.
-- The Supreme Court will hear the appeal of Sahara group on January 20. Sahara is challenging India's security market regulator's order of June 2011 for it to return around $5.5 billion to at least 23 million mostly rural investors.
-- The Securities Exchange Board of India (SEBI) charged Sahara with raising funds from the public without proper disclosures and adherence to investor protection norms. It stopped the company from raising funds through India's capital markets until repayments were made to the investors. The Securities Appellate Tribunal upheld SEBI's order in October 2011.
-- The privately-owned Sahara group has interests in finance, infrastructure, housing, media, entertainment and sports. It is the main sponsor of the Indian cricket team.
Editing by Hugo Dixon and David Evans