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Mumbai: India’s capital market regulator and Subrata Roy Sahara are at war with each other. Sahara’s managing worker and chairman has stepped up his offensive against the regulator, which asked the Supreme Court on 15 March that he be detained for allegedly flouting its directions. (The company handouts refer to the man as Saharasri and Subrata Roy Sahara.)

As chief of Sahara India Pariwar, Roy presides over a Lucknow-based business conglomerate that has at least 4,100 establishments in its fold and 1.18 trillion in assets (for fiscal year 2011, the latest available data for the group, which has two listed companies). Sahara is engaged in real estate, infrastructure, media, hospitality, cricket and Formula One (F1) racing, besides finance.

While the Securities and Exchange Board of India (Sebi) has sought his arrest for non-payment of money to investors in bonds floated by two group companies, the Sahara boss has issued a full-page advertisement in most Indian papers saying, “Enough is Enough."

Roy has challenged the Sebi chairman to a live debate on television on the “extreme injustice" meted out to the Pariwar.

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Sebi chairman U.K. Sinha.

Six years ago, in 2007, when the group was under tremendous pressure from another regulator—the Reserve Bank of India (RBI)—to moderate the growth of Sahara India Financial Corp. Ltd, a so-called residuary non-banking company (RNBC), and was forced to put every penny raised from the public in government bonds, Roy had sought a meeting with then central bank governor Y.V. Reddy for the “benefit" of his “vision and guidance." (4 April 2007)

Reddy politely declined, saying, “I have no personal vision and guidance that could be considered other than what has been articulated in public and also in the series of discussions between us." (11 April 2007)

Reddy forced Roy to wind down Sahara India Financial as he felt it was becoming a threat to the financial system. He wanted to protect millions of Sahara depositors before it became too big and created a systemic problem. RBI reconstituted the Sahara board, bringing in professionals as independent directors to oversee the business, and also changed its auditors.

After a series of meetings and a protracted legal battle, the banking regulator imposed a three-year sunset window on Sahara India Financial in July 2008, allowing it to accept fresh deposits maturing until June 2011. It was directed to repay money to all its depositors at maturity and bring down the liability to zero on or before 30 June 2015.

RBI cracked down because of Sahara’s alleged persistent violation of investment norms. The banking regulator said Sahara India Financial did not follow rules regarding payment of the prescribed minimum rate of interest to depositors, asset-liability management guidelines, know-your-customer (KYC) norms for opening deposits, and failed to intimate depositors when their deposits matured. As a result, it allegedly benefited from the resultant windfall of unclaimed deposits.

After a meeting between the central bank and Sahara executives, on 17 June, RBI allowed Sahara India to accept fresh deposits with just a three-year maturity and repay all deposits over the next seven years.

As of February this year, Sahara India has returned more than 71,000 crore to depositors. Its liability towards them is now around 1,700 crore.

Harder battle

Sinha seems to be fighting a harder battle than the one Reddy engaged in as Sebi needs to oversee how two Sahara group firms—Sahara India Real Estate Corp. Ltd (SIRECL) and Sahara Housing Investment Corp. Ltd (SHICL)—are paying back the money raised through optionally fully convertible debentures (OFCDs) at the direction of the Supreme Court.

The apex court has already heavily criticized Sebi for delaying action against the group. Unable to ensure that debenture holders have been paid, Sebi has moved the Supreme Court seeking Roy’s arrest.

Roy, 65, claims to have paid back about 86% of the money owed—some 22,117.39 crore—and less than 5,120 crore is left to be paid, which the group has already deposited with the regulator.

Sebi is not convinced. It has found that most names and addresses of the OFCD subscribers are not genuine. Media reports suggest Sebi has found only 68 genuine investors till now among the lakhs of names that it checked. This means that either the money has not reached the right people or it does not belong to those mentioned on the two firms’ records.

Sahara, on its part, claims it has sent 128 truckloads of data and many more trucks are parked at the company’s warehouse in Mumbai loaded with sackfuls of printouts.

Allegations against Sahara about holding on to the money of people and giving them wrong identities are not new. A senior industry professional said its RNBC arm, which does not accept deposits any more, used to collect names of dead people from cemeteries and funeral grounds in Lucknow and other parts of Uttar Pradesh to create records of depositors.

Sahara spokesman Abhijit Sarkar denied this. “We are not aware of such observation ever made on RNBC by RBI." He also said the company regularly submits all returns, including KYC compliance certificates.

Sebi actually stumbled on the large-scale collection of money from the public through OFCDs while processing the draft red herring prospectus of another group company, Sahara Prime City Ltd.

After inquiring into the issue, Sebi said the OFCDs raised by the two firms were “in effect no different from deposits from the public, except that they come with an ‘option to convert’… It seems that under the guise of OFCDs, the two companies are extensively taking up para-banking activities and running deposit schemes".

Sebi said the OFCDs amounted to a public issue in breach of the Companies Act and Sebi regulations. Under Section 67(3) of the Companies Act, an entity is required to secure Sebi’s consent for any capital-raising issue that involves 50 or more investors.

Sahara contended that the two firms were not obliged to seek approval as they were not listed and the issue was meant for a select group of subscribers associated with the group.

Sebi dismissed this argument, saying this particular provision of the Companies Act was applicable only for issues with less than 50 investors. The two firms should have sought its approval before raising public money, and since the number of investors exceeded 50, are compelled by the existing rules to get listed, Sebi said. OFCDs are debentures by name and nature, and the definition of debenture as given under the Companies Act includes other securities such as hybrids, it said.

Sahara reached out to a battery of legal luminaries including A.M. Ahmadi, a former chief justice of India; S.P. Kurdukar, a former judge of the apex court; Mohan Parasaran, then additional solicitor general of India (now solicitor general); and the late C. Achuthan, former presiding officer of the Securities Appellate Tribunal (SAT, the appellate body of Sebi), among others. All of them were of the view that such offers were outside Sebi’s jurisdiction. That left Sebi and, later on, the judiciary unmoved.

The regulator first barred the two Sahara companies from raising money from retail investors in November 2010. The Lucknow bench of the Allahabad high court stayed the Sebi order, but that did not deter the regulator. It issued advertisements in newspapers warning investors that it would not be able to redress grievances on OFCDs and, after getting the court order vacated, asked Sahara to refund money with 15% interest in June 2011.

Sahara got another stay on the Sebi order by moving the Supreme Court, which directed the company to appeal to SAT. The appellate body upheld the Sebi order and the Supreme Court concurred when Sahara moved the apex court against SAT.

The Supreme Court on 31 August last year directed the two Sahara companies to refund all the money they had collected through the OFCDs in three months, which should have ended the three-year battle between the regulator and Sahara.

The 270-page court order directed the group to furnish Sebi with payment vouchers, redemption documents and application forms on the approval and allotment of bonds to around 30 million investors.

Sahara was directed to refund 24,030 crore—collected by the two schemes in 2008 and 2009—along with annual 15% interest to Sebi within three months. A back-of-the-envelope calculation suggested that the amount Sahara group companies had to refund could be close to 40,000 crore. The money was to be deposited in a nationalized bank that offered the maximum rate of interest.

The two group companies were told to furnish the details with supporting documents to establish that the money they had refunded reached the right people. Sebi was allowed to hire experts, consultants and even investigators to check the veracity of all documents at Sahara India Pariwar’s cost. The court also decided that in those cases where investors’ identities were not established, the money would go to the government’s investor education fund.

B.N. Agrawal, a retired Supreme Court judge, was assigned to oversee the entire process. Sebi was given the freedom to take recourse to all legal remedies, including attachment and sale of properties, freezing of bank accounts, among others, if Sahara refused to cooperate and refund the money. Sebi followed the court order in right earnest.

In December, the Supreme Court gave more time to Sahara—till February this year—to make full payment in three instalments. When the company failed to do so, the regulator moved a contempt petition against the two firms for defying the court order and not refunding 24,030 crore to investors. It also directed banks to freeze the accounts of two Sahara firms, their promoters and directors. It followed this up with a plea in the Supreme Court cited above for the detention of Roy and two other directors—Ashok Roy Choudhary and Ravi Shankar Dubey—“after giving reasonable opportunity of hearing".

SAT on Saturday adjourned the hearing of Subrata Roy’s appeal against the freezing of his personal accounts by Sebi to 26 March. The case will be heard at Shastri Bhavan in New Delhi.

While Sahara senior counsel S. Ganesh contended that Roy, who was not a director of SIRECL and SHCIL, could not be made personally liable for repaying money to investors, Sebi counsel Arvind Datar made the point that Roy was chief executive officer of Sahara India in all legal documents. “Subrata Roy cannot be absolved because he is the chief executive officer of Sahara India, which had collected money through OFCDs on behalf of the two firms," Datar said.

Relaxed Roy

At the interview with Mint in the third week of January in Lucknow, during which he promised to answer all questions, the Sahara boss appeared to be relaxed. Roy, who rarely gives interviews, is an inch shy of 6ft and weighs a trim 79kg, down from 115kg a year ago. He said he lost weight by drastically cutting down on carbs and evening snacks. He smokes Davidoff cigarettes, although he quit the habit for about three years (he used to smoke Benson & Hedges before), but resumed because he “felt like" it.

His key argument in the fight with Sebi is that Sahara, being unlisted, does not come under its purview. Two additional solicitor generals have given affidavits in favour of Sahara’s argument, and even then law minister M. Veerappa Moily said Sahara is right, he said.

Roy seems to be unfazed by Sebi’s determination because he says he’s sitting on a massive 36,631-acre land bank, possibly the biggest of any corporate entity in India.

Roy said the group has around 220 acres of land near Gurgaon in Haryana. The plot was purchased at less than 100 crore but he’s got offers of up to 2,100 crore. Similarly, in Versova in Mumbai, Sahara owns 106 acres of land. The profit from this piece of land could be as much as 30,000 crore after it is developed.

But Roy is not willing to sell his land bank. “We are an unlisted company. We don’t need to take care of EPS (earnings per share). Why should we sell?"

But Sebi questions this claim. Apparently, an investigation by the regulator has found that the price of the land has been inflated and, in many cases, the ownership is not clear.

To outsiders, Sahara is a conglomerate that is solid but not liquid—it’s asset-rich, but cash flow is a problem. Roy rejects this view. It has given 5,120 crore to Sebi towards paying back the investors and claims to have already repaid 22,117.39 crore, he reiterates.

In 2011, Roy teamed up with liquor baron Vijay Mallya of the UB Group, whose Kingfisher Airlines Ltd has been grounded for months, paying $100 million for 42.5% of his Force India F1 auto racing team. He paid $370 million for the Pune Warriors India franchise in cricket’s Indian Premier League. In 2010, Sahara considered buying English Premier League soccer club Liverpool and held talks to buy the debt of film studio Metro-Goldwyn-Mayer, but none of these deals actually took place.

Roy also bought Grosvenor House hotel in London for $470 million. This followed the purchase of a controlling stake in New York’s Plaza Hotel.

A 5 January report in The Economic Times said the money raised by the Sahara group from investors through OFCDs may have been partly used to buy the London hotel. The newspaper’s investigation has revealed that a “slice" of the funds raised by SIRECL was deposited at the Lucknow branch of ING Vysya Bank Ltd, a Bangalore-based private bank, and the Khar (Mumbai) branch of State Bank of India, the nation’s largest lender. The money was then sent to Sahara’s Aamby Valley Ltd (again through a Lucknow branch of Punjab National Bank) as an unsecured loan, which was subsequently converted to equity. With a higher networth of 6,058.9 crore as of March 2010 (after the loan conversion to equity), Aamby Valley was able to transmit the money to London via Mauritius without RBI vetting.

Under current regulations, Indian companies are allowed an investment of up to four times their networth in a foreign company through the automatic route.

Incidentally, Roy has never stayed in his London hotel. He prefers to stay at a guest house in Chelsea. He also vehemently denies the allegation of so-called round-tripping.

“If they find anything wrong, they can hang Sahara. We haven’t done anything against the law. When we first bought the guest house, somebody suggested some ways to buy the property, but I said we would buy openly—can’t we spend $25 million for a guest house? We are very strict on law matters," Roy said.

Round-tripping, as defined by The Wall Street Journal, is a form of barter that involves a company selling an unused asset to another company while at the same time agreeing to buy similar assets at the same price.

In this case, Sahara allegedly used the money raised by two of its firms to boost the equity of a third firm, which, in turn, bought a company overseas. Globally, round-tripping is used for tax evasion and money laundering.

A Sahara official denied this, saying there was no norm specifying where the money raised through OFCDs can be deployed.

Expanding overseas

Will Roy expand overseas to de-risk Sahara’s business profile? Will he buy more hotels overseas? “No. Hotel is not a profitable business, but we acquire hotels because there is capital appreciation," he said. For instance, the Qatar government is willing to pay $800 million for the London hotel, but Roy won’t sell till he’s offered $1.2 billion.

Sahara also has big business plans for Macedonia, the birth place of Mother Teresa to whom Roy says he was very close. A black-and-white photograph of Mother Teresa with Roy adorns his secretariat at Sahara Shaher—a walled city in Lucknow complete with a mini-golf course, an auditorium, a helipad, a petrol pump and even a fire brigade station—where the group is headquartered.

“It is a wonderful democratic country… We are going to make a huge Las Vegas kind of thing there. We are going to develop all facilities for Bollywood and Hollywood shooting," he said, but did not reveal anything beyond this.

A plan is also being drawn up for a big dairy project. The local government has given Sahara around 2,000 acres of land on the banks of Lake Ohrid straddling the mountainous border between south-western Macedonia and eastern Albania at a nominal price. The project is aimed at attracting the international tourist trade.

The overseas expansion doesn’t mean he has any plans of winding up his India operations as he “loves his country and can die for his country".

Does Sahara make money through the forfeiture of subscribers’ deposits? “I can only say one thing—you can record it 10 times—we have never done one wrong thing in my life. That’s how I can fight. People can make all sorts of stories—I call them chandu khana ki kahaani (tales from the opium house)... We read (things) about ourselves which we don’t know, my wife says," Roy said, without giving a direct answer.

The popular perception is that agents often don’t go back to depositors after a few years when their commission drops. Most depositors are unable to approach the group to recover the cash and the forfeited money runs into hundreds of crores of rupees, according to this narrative.

Does Sahara act as a repository for the unaccounted wealth of politicians? No, Roy is emphatic. “Never. In fact, a few years back two big politicians—both good friends—came to me and offered me big money. In 1978-79, when there was a question of existence for us, my chartered accountant in Gorakhpur told me if I could just make an entry of 4-5 lakh, I can earn a few thousand rupees, but I had said no to it. If I didn’t do it then, why should I do it now?"

Humble beginnings

Roy set up shop in 1978 with three workers serving 42 customers and assets of 2,000 in Gorakhpur, a city in eastern Uttar Pradesh, close to the India-Nepal border and around 266km from Lucknow.

Now the group has a presence across India, serves at least 71 million customers and employs a million workers, reportedly the second biggest employer in the nation after Indian Railways.

The Lucknow bench of the Allahabad high court recently permitted officials of Employees’ Provident Fund Organisation (EPFO) to enter and search the premises of the Sahara group of companies to check whether the company was paying the statutory dues of its employees under EPF rules and the terms of the Miscellaneous Provision Act, 1952.

Roy is aware that EPFO is demanding data on a million employees, but clarified that since most of them are “piecemeal" employees, there was no question of providing them provident fund (PF) benefits.

There are about 48,000-50,000 employees on the group’s payroll and they, Roy said, are better paid than Union government employees with benefits such as PF, gratuity and pension. Sahara has not seen any labour trouble in its history.

He also says his personal wealth isn’t all that it’s cracked up to be.

“We have taken oath and nobody can share profit or asset of the company which is nothing but an organised cooperative. My personal wealth—including that of my wife, four sons, daughters—will not be more than 10-12 crore in 34 years. As a promoter chairman, I should have hundreds or thousands of crores. But I don’t have even 15 crore personal wealth."

Is Sahara a vehicle for laundering black money into white? “In 34 years, we have not given any unsecured loan to anybody. Not even to our directors. We give a loan of 70 only if you keep 100 worth of securities," he said.

He also hates politics, he said. “Everybody offered me Rajya Sabha, but I said no. I will never join politics." But he has many friends among politicians—Amar Singh, Mulayam Singh Yadav, Rajiv Shukla, Rajnath Singh, L.K. Advani, Narendra Modi, Digvijay Singh, Salman Khurshid…the list is long and he is not willing to say who he is closest to.

“If you are my friend, you’re my friend—I cannot be a nopungsak (coward) and disown you—I am not a fair weather friend…"

That he’s well-connected is publicly evident. In February 2010, former aviation minister Praful Patel launched non-scheduled flights between Aamby Valley City and Mumbai. In January this year, Uttar Pradesh chief minister Akhilesh Yadav dropped in at his residence, Chhabi Roy’s Swapna Kuti, at Sahara Shehar to wish him and his wife Sapna Roy on their 39th wedding anniversary. Nonagenarian Chhabi is Roy’s mother, who lives with her son and his descendants.

On the day before the 23 March SAT hearing, Roy held a show of strength. The annaprashan, or rice-eating ceremony, of his granddaughter hosted by him at The Ashok in New Delhi on 22 March saw the attendance of several celebrities. The politicians included Farooq Abdullah, Mulayam and Akhilesh Singh Yadav, Lalu Prasad, Arun Jaitley and Rajiv Pratap Rudy, according to India Today online. Bollywood was represented by Jaya and Abhishek Bachchan, Sridevi and Boney Kapoor, Anil Kapoor and Hema Malini, besides Telugu superstar and minister of state with independent charge of the tourism ministry, Chiranjeevi. The cricketers included Sachin Tendulkar, M.S. Dhoni, Virat Kohli, Ravindra Jadeja, Suresh Raina, Michael Clarke and Steven Smith. One wedding in the Roy family was well-known for having Amitabh Bachchan and members of his family as celebrity ushers.

Loyalty is something that Roy makes much of. Ten years ago, he made a list of 80 people—his school and college friends in Bihar and Uttar Pradesh—and asked them to leave their respective jobs and join the group. It took nearly one year to gather information about them and all 80 people are working with him now, he said.

Regulator shopping

The entrepreneur in him does not seem to have faith in regulations—he always looks for loopholes, and when one such door closes, looks for another. He started his career as an entrepreneur with prize chits and money circulation schemes in 1978.

When they were banned in 1980, he set up an un-incorporated body—Sahara India—to raise money from the public, but the amendment in the Banking Regulation Act of 1949 closed that door too, and Roy shifted first to a housing finance company and later to a mutual benefit company or “nidhi" company.

Someone who wants to deposit savings in a nidhi has to first become a member by paying the share subscription. As nidhis deal with their members and not with the general public, legally they are not regarded as banks, though in their economic functions they are no different from them. They are regulated by the department of company affairs.

When Roy found it difficult to continue with those activities, he took the RNBC route and prospered till RBI’s Reddy put an end to that. The next option to tap public money was the OFCD route, until Sebi stopped that. Amid the fight with Sebi, the Sahara group started running cooperatives (Roy said employees run them and not the company).

In housing, it has set up so-called housing clubs, while in retail it has set up Q Shops. By the end of 2013, Roy hopes to touch 30,000 crore in Q Shop sales, riding on a mixed model—doorstep delivery plus 40,000 outlets measuring 300-500 sq. ft each.

The stores operate on a franchisee or exclusive retailer model, and offer a range of products. The group is planning to open 3,780 Q Shops in Maharashtra alone. Currently, they are present in Uttar Pradesh, Rajasthan, Bihar, Jharkhand, Uttarakhand and the Delhi national capital region.

Sahara Q Shop also has a direct-selling plan, as part of which the company is recruiting customers who pay 12,250 in advance to purchase merchandise from the retail venture. The advance payment will be locked in with the company for five years, and every month 3.5% of the amount spent by a customer will be adjusted against this. At the end of the five years, the company will refund the residual money, if any, with interest.

The group runs some 4,100 firms—units being continuously floated to exploit regulatory loopholes—and Roy does not plan to consolidate them. He blames the government for this.

“This government has never given us the opportunity. They banned one activity after other, and we had to jump from one to other. We have to expand as I need to see my 10 lakh employees live happily."

After the Prime City experience, he’s vowed not to seek a listing for any of his group companies. However, he does not rule out an overseas listing for any group firm even though he does not specify any timeframe for this.

Surprisingly, the group has no bank loans, barring a small amount for buying hotels overseas. This reflects two aspects: first, the banking community does not think very highly of Sahara, and second, it has money on tap. Where does this come from?

Roy said it raises resources from millions of small depositors in North India and pays back every last penny to them, but there are not too many takers for this theory. Many say the main source is forfeiture of deposits because of defaults on regular payments and money deposited by people who do not want to be identified for obvious reasons. There is another theory also—Roy continues to invest in land and the appreciation in this asset class always gives him a cushion.

Roy claims to have repaid 1,70,636 crore to 147 million people so far since the inception of the group. This includes money raised from all sources, through various instruments and dozens of companies in the past 35 years. But when it comes to repaying OFCD subscribers, Sebi has found much to be dissatisfied about.

Even though he continues to get favourable decisions from the Lucknow bench of the Allahabad high court, the Supreme Court does not see any merit in Sahara’s arguments and no politician supports him openly.

Roy is a staunch believer in astrology and has been wearing emerald and sapphire for the last 20 years.

“Astrology, like astronomy, is a science, but 99% astrologers are not so knowledgeable," he said. But he trusts his two astrologers in Lucknow and Gorakhpur, whom he finds accurate.

“The stones help—they are like a raincoat and an umbrella in heavy rain... They save you from getting drenched but can’t prevent a flood; they are just a superficial support," he said.

He draws mental strength from them, but is not dependent on them. It remains to be seen how he faces the biggest challenge in Sahara’s history even as India’s capital market regulator braces for a fight to the finish.

Khushboo Narayan contributed to this story.

Coming soon: Tamal Bandyopadhyay’s book on the untold story of Sahara, a Mint-Random House publication.

Sahara has filed a defamation case in a Patna court against Mint’s editor and some reporters over the newspaper’s coverage of the company’s disputes with Sebi. Mint is contesting the case.

Are Sebi’s actions against Sahara, including seeking the arrest of its founder Subrata Roy, justified? Take the Mint poll here, and let us know what you think.

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