Mumbai: The Reserve Bank of India (RBI) set a three-year sunset window on Sahara India Financial Corp., India’s largest residuary non-banking company, or RNBC, allowing it to accept fresh deposits maturing until 30 June 2011.
The central bank is in favour of the winding down of Sahara India’s close to Rs20,000 crore public deposit base in seven years. It has directed Sahara India to repay the deposits as and when they mature and bring down the aggregate liability to depositors to zero on or before 30 June 2015.
Sahara India has also been instructed to appoint statutory auditors from the panel of auditors suggested by RBI by 31 August and continue to appoint statutory auditors each year from a panel suggested by the regulator till all depositors are repaid in full.
Still, the move is a climb down from the Indian banking regulator’s original ban on Sahara India accepting any new deposits with immediate effect. Sahara then got a court order which asked RBI to meet with the firm. The latest order follows several meetings between the bank and Sahara India executives.
As part of its order, RBI directed Sahara India to strictly follow investment guidelines, which stipulate that an RNBC must invest 100% of its deposits in government and other RBI-approved bonds.
RBI has also asked Sahara India to comply with the “know your customer” norm and submit a comprehensive business plan by 16 August.
RBI’s order comes after three rounds of meetings with Subrata Roy, managing worker and chairman of Sahara India.
“We will go by the true spirit of the RBI order,” said Abhijet Sarckar, head of corporate communications, Sahara India.
Going by the RBI order, Sahara India’s deposit liability should not exceed Rs15,000 crore as of 30 June 2009; Rs12,600 crore as of 30 June 2010; and Rs9,000 crore as of 30 June 2011.
“Sahara India shall not treat non-payment of instalments under any running daily deposit or other recurring deposit schemes by depositors after 30 June 2011, as a default by depositor and shall be liable to pay the agreed rate of interest on the amounts actually held by it for the entire term of the deposit as if there was no default,” the banking regulator said.
The regulator also said Roy and the company’s senior executives have offered to reconstitute the firm’s board with 50% independent directors acceptable to RBI within 30 days of 16 June.
The appointment of these independent directors will be ratified at a annual general meeting of the company and this arrangement will continue until all depositors are repaid in full.
Incidentally, the Kolkata-based Peerless General Finance and Investment Co. Ltd, another large RNBC, had also faced a similar fate in the 1990s.
The banking regulator forced Peerless to wind down its deposit base and recast its board after it found serious irregularities in its functioning.
On 4 June, RBI first prohibited Sahara India from accepting public deposits for violating Indian banking regulator’s norms.
Sahara India then got a stay of that order from the Lucknow bench of the Allahabad high court the following day, though RBI swiftly moved the Supreme Court to lift the stay.
After hearing both RBI and Sahara India, the Supreme Court said: “It would be appropriate for the...Reserve Bank of India to give an opportunity of hearing” to Sahara but, the court did not find any merit in Sahara India’s argument that RBI had violated the principle of natural justice.
It also said, “Till the matter is disposed off afresh by the Reserve Bank of India,” the banking regulator’s earlier order will not be effective.
The banking regulator had earlier asked the company to call back all investments in various group firms to comply, in stages, with investment guidelines governing such companies.
Under the law, an RNBC is required to invest all its deposits in government bonds, deposits in other banks and corporate bonds with ratings of “double A+” (AA+) and above.
According to an RBI release on 4 June, Sahara “continuously” violated investment norms; payment of prescribed minimum rate of interest to depositors; asset-liability management guidelines; “know your customers” norms for opening deposits; and failed to intimate depositors while their deposits matured.
RBI had first issued a show-cause notice to the company and followed it up with a “personal hearing” and “written submission”.
Sahara India Financial is part of the Sahara group that has interests in businesses such as finance, entertainment, real estate and media, and publishes a Hindi-language paper that competes in some markets with Hindustan, published by HT Media Ltd, which also publishes Mint.