14.12          ndian     onom
     For debenture-holders the ‘option’ to convert                     Corporate Affairs (both the Sahara firms
     debenture into shares is profitable and/or safer                  which issued OFCDs are unlisted). But
     once either of the following situations are correct:              SEBI contended that it can regulate even
           (i) The firm is likely to make high profit (so              an unlisted firm if it issues OFCD, as
                the shareholder can earn higher dividend),             the SEBI Act, 1992 contains the term
                or                                                     OFCDs. There was really some regulatory
                                                                       confusion. This is why the government
          (ii) Firm’s share-price is likely to rise in the
                                                                       added a ‘clause’ in the recently passed
                share market (profit can be made by
                                                                       Companies Act, 2012 which gives SEBI
                selling shares).
                                                                       undisputed jurisdiction over any
           But suppose the firm has weak balance sheet                 investment scheme involving more than
     (going bankrupt), then it is better to keep hold on               50 investors whether the company is
     the debenture rather than converting them into                    listed or unlisted. Menawhile, Sahara has
     shares, because when a company is liquidated (i.e.,               been ordered to return the total capital it
     its assets sold off), the debenture holders get primacy           raised through OFCDs with an interest
     over shareholders in payment. It means OFCD is                    of 15 per cent per annum.
     a bit tricky thing and is the only suitable route to
     invest in the security market for the investors who     DerivAtives
     have some knowledge and understanding of share          Derivative is a product whose value is derived
     prices, company performance, etc.                       from the value of one or more basic variables,
           Recently, the OFCDs issued by Sahara (an          called bases (underlying asset, index or reference
     NBFC under regulatory control of the RBI)               rate), in a contractual manner.
     were in news due to some irregularities – it was a           The underlying asset can be equity, forex,
     simple case of certain loopholes in the regulation      commodity or any other asset. For example, wheat
     of OFCDs and some violations by Sahara:                 farmers may wish to sell their harvest at a future
           (i) Actually, an OFCD issue process has to        date to eliminate the risk of a change in prices by
                be completed within 10 working days          that date. Such a transaction is an example of a
                (Sahara continued for over two years).       derivative. The price of this derivative is driven by
          (ii) If the OFCD is being issued through           the spot price of wheat which is the ‘underlying’.
                the ‘Private Placement’ route only 50             In the Indian context the Securities Contracts
                individuals/ institutions can subscribe      (Regulation) Act, 1956 [SC(R)A] defines
                to it (Sahara issued it to over 23 million   derivative to include :
                people and raised over Rs. 24,000 crores).        (i) A security derived from a debt instrument,
                Such a tricky instruments being issued to              share, loan whether secured or unsecured,
                novice public was a clear case of financial            risk instrument or contract for differences
                irregularities.                                        or any other form of security.
         (iii) Unlisted companies do not come under              (ii) A contract, which derives its value from
                the regulatory control of SEBI. In place               the prices, or index of prices, of underlying
                they are regulated by the Ministry of                  securities.