BackWhat next for Sahara’s Subrata Roy?
Sahara group chairman will be produced in Supreme Court on Tuesday, but what will happen in court is anybody's guess
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Mumbai: On 20 June 2008, three days after India’s banking regulator released its directions for shutting down Sahara India Finance Corp. Ltd (SIFCL), Sahara India Pariwar’s residuary non-banking financial company (RNBC), the Mayawati government in Uttar Pradesh demolished one wall of the high profile Sahara Shaher at Gomti Nagar—the fortified, 360-acre, self-supporting township in Lucknow that houses Pariwar’s headquarters—to make way for a road. The demolition drive didn’t last beyond a few hours. Coming down heavily on the Lucknow Development Authority, the urban planning and development wing of the city, the Allahabad high court asked the Uttar Pradesh government to return the land to the Sahara group and explain why it demolished the wall without any notice.
This was symbolic—one can scratch the surface, even break the walls, but it’s not easy to dismantle Sahara boss Subrata Roy’s citadel.
Nearly six years later, last week, the Lucknow Police marched into Sahara Shaher to arrest Roy, the managing worker and chairman of Sahara India Pariwar, a business conglomerate with 4,799 establishments in its fold and at least Rs1.52 trillion in assets, including 36,631 acres of land, and spanning business interests in real estate, finance, infrastructure, media and entertainment, healthcare and hospitality, retail, consumer products, information technology, cricket, hockey and Formula One racing.
This time around, the chief minister of Uttar Pradesh is Akhilesh Yadav, the son of Roy’s close friend Mulayam Singh Yadav and someone Roy has seen grow up.
The arrest followed a non-bailable warrant issued by the country’s apex court against Roy for non-appearance before the court on 26 February.
Is the long arm of the law catching up with Roy?
Is it the end of the road for India’s most flamboyant and enigmatic business tycoon whose association with film stars, cricketers and politicians is an object of envy for many?
Or is it an issue of financial regulators unfairly targeting a man who claims he is helping the poor develop the habit of saving in a country where only 35% of the adult population has access to formal banking services, according to a World Bank working paper.
What will happen on 4 March at the Supreme Court is anybody’s guess. After all, Roy’s arrest is a technicality—for his non-appearance in the court despite being called to do so, a contempt of court.
Interestingly, the appearance that wasn’t was also in relation to a case for contempt of court. The Securities and Exchange Board of India (Sebi) the country’s capital market regulator, filed the contempt petition against Sahara on 2 November 2012 for not following the court’s 31 August 2012 order that directed Sahara to refund ₹ 24,029 crore to 29.6 million investors in so-called optionally fully convertible debentures (OFCDs) of two Sahara group firms.
There has not been a single instance of an investor complaining to the police, courts or regulators about a default by Sahara. Then why has the court being chasing Roy? That’s because Sebi wants the money raised to be returned to investors as it is convinced that the required norms were not followed. Besides, Section 142 of the Indian Constitution empowers the court to take decisions for the greater good of the society—“a virtue which transcends all barriers and neither the rules of procedure nor technicalities of law can stand in its way."
The official reason behind Roy’s non-appearance at the apex court on 26 February is his mother’s illness—92-year-old Chhabi Roy has been ailing for some time—but the legal fraternity is curious to know why Roy chose not to appear after being summoned by the court. Was be being ill-advised by his lawyers or did he overrule them? Did he apprehend his arrest?
In July 2013, the Supreme Court issued contempt notices to the two Sahara firms for failing to comply with its order and followed it up by directing the firms to make available to Sebi the title deeds of property worth ₹ 20,000 crore, restraining the group from selling moveable and immoveable property, even barring Roy from leaving the country. The logical culmination of all these could have been his arrest.
Did Roy see it coming?
Roy had responded positively when Sebi summoned him in April 2013. After the meeting with Sebi’s full-time director Prashant Saran, Roy told reporters that he had asked the regulator to speed up the verification of investors’ documents. “Aaj ek ghanta Sebi ne bithaya humhe. Ummeed thi ki ek pyali chai ke liye poochenge; lekin woh bhi nahi poocha." (Today, Sebi made us wait for an hour. We had hoped that they would offer at least a cup of tea; we were not offered even that.)
Meanwhile, some in the legal fraternity are questioning the Supreme Court decision to deposit the funds raised by Sahara and subsequently returned in the Consolidated Fund of India in case genuine investors are not found.
“If Sebi cannot find the investors, this means the money belongs to somebody else and the small investors are only lending their names. In that case, the corpus should be treated as income and Sahara should pay income tax on that. Why should this money flow into the Consolidated Fund of India?" said a Mumbai-based lawyer who does not want to be named.
That was the approach the income tax department adopted in the early 2000s when the tax demand on Sahara’s RNBC arm was much higher than the company’s net profit could justify. Taxmen were not able to find many of the depositors physically at the addresses given by the company and added the money involved to the company’s taxable income.
This argument is possibly not applicable here, as in the absence of the identity of investors being established, the money is being treated as an unclaimed investment—and not income of the two Sahara group companies—and hence it needs to flow into the Consolidated Fund of India.
“If a person dies without a legal heir leaving behind a fortune, the state inherits the wealth. The same philosophy works here," explains another lawyer.
How did Sahara get into this situation?
The money-raising by two group companies—Sahara India Real Estate Corp. Ltd (SIRECL), known earlier as Sahara India Commercial Corp. Ltd (SICCL), and Sahara Housing Investment Corp. Ltd (SHICL)—through OFCDs, a hybrid financial instrument, might have gone unnoticed but for Roy’s plan to list another of his companies, Sahara Prime City Ltd.
On page 640 in the disclosure section in the 934-page draft red herring prospectus (DRHP) filed with Sebi, Sahara Prime City mentioned certain tax-related issues.
The company mentioned a ₹ 35.57 crore dispute with the income tax department over accepting OFCDs worth ₹ 20,000 or more from many investors through cash and not account payee cheques or demand drafts, as is required under the Income Tax Act, 1961.
At the time of the filing, SICCL held a 13.7% stake in Sahara Prime City. SICCL had also on 30 January 2008 entered a service agreement with Sahara Prime City to facilitate all government or other regulatory permits, licences and approvals required in connection with the development of its proposed integrated townships.
Sebi discussed the OFCD issue and sent a routine enquiry to the merchant bankers, but Sahara was reluctant to part with information and that made the regulator suspicious. This was in 2009-10.
Two other things happened around the same time.
First, on 4 January 2010, Roshan Lal, a resident of Indore, sent a note to the National Housing Bank (NHB), requesting that it look into housing bonds issued by two companies of the Sahara group. A chartered accountant, Lal wrote in Hindi that he found that the bonds, bought by a large number of investors, were not issued according to the rules. NHB forwarded the note to Sebi.
Second, the regulator received another, similar note from the Professional Group for Investor Protection, based in Ahmedabad.
Sahara was not forthcoming with the information requested by the regulator; its position was that unlisted companies had issued the OFCDs and they were not regulated by Sebi. Sahara claimed to have obtained the ministry of corporate affairs’ permission for issuing the OFCDs and produced legal opinion to back it.
Lal’s identity itself remains a mystery.
Sahara lawyers have pointed out that Enam Securities Pvt. Ltd, the merchant banker to the Sahara Prime City initial public offering (IPO), had sent a response to Lal’s Janata Colony address in Indore, but that the letter was not delivered as the address could not be found. N. Sundaresha Subramanian, a journalist with financial daily Business Standard, wrote in a report on 8 September 2012 that he “tried hard to locate him but in vain".
For Sebi, though, the information provided by Lal, not his identity, was relevant.
On 24 November 2010, Sebi banned the Sahara group from raising money from the public in any form. Its 34-page order explains how the regulator tried to get information from Sahara on the OFCDs, and how the group declined to furnish anything primarily on two grounds: Section 55A of the Companies Act, 1956, empowers Sebi to seek information only from listed companies; and Section 60B of the Companies Act, according to which a company can file a prospectus with the Registrar of Companies and raise money as long as it did not want to list the securities through which the money is raised.
Sebi’s investigation revealed that the OFCDs were not the so-called private placement as had been claimed by Sahara, as they involved more than 50 investors, and that by not listing them, Sahara was violating Section 73 of the Companies Act. It found that SIRECL had raised ₹ 4,843.37 crore and SHICL ₹ 32,355.55 crore between 2004-05 and 2008-09 through them. Some of this money had already been paid back to investors.
Given the magnitude of the money raised, Sebi said it wanted to ascertain the source of such funds and ensure the protection of investors. It alleged that the Sahara group was not giving it the information it had sought
The Sebi order restrained SIRECL and SHICL from mobilizing funds from the public, prohibited the promoters and directors of the two companies—Subrata Roy, Vandana Bharrgava, Ravi Shankar Dubey and Ashok Roy Choudhary—from soliciting money from anybody, and asked the two companies to show cause as to why action should not be taken against them.
“Astonished" at the “irresponsible and wrongful ex parte order," Sahara first issued an advertisement in national newspapers on 26 November 2010 and moved the Lucknow bench of the Allahabad high court on 29 November 2010, saying Sebi lacked the jurisdiction to pass such an order, and without a hearing.
Justices Virendra Kumar Dixit and Devi Prasad Singh granted a stay on the Sebi order on 13 December 2010. Sebi quickly moved the Supreme Court with a special leave petition on 4 January 2011.
The Supreme Court said Sebi was entitled to seek any information, including the names of OFCD investors, and Sahara’s lawyers agreed to provide such information. The apex court requested the high court to hear and decide on the case expeditiously. Sahara gave a commitment to share the requisite information, but did not actually do this. Owing to this, the high court dismissed the petition in April 2011.
Sebi gave its final order on 23 June 2011 asking the Sahara group to pay back investors with 15% interest.
The salient features of its 99-page order were:
n SIRECL and SHICL and their directors to refund money to the investors in OFCDs with 15% interest.
n Such repayment to be done through demand draft or pay order.
n The two firms to publish advertisements on how they planned to make the refund.
n The two companies to not access the securities market till the money was paid back to the OFCD holders.
n Roy, Bharrgava, Dubey and Roy Choudhary to not access the securities market till Sebi was satisfied with the mode of refund.
n Appropriate action, including the launch of a prosecution, to be taken by Sebi if the companies fail to comply with its order.
The order clearly stated that the OFCDs were securities on which Sebi’s writ held, and as they were issued to more than 50 people, this route of money-raising could not be called a private placement. And since they were not private placements, the securities needed to be listed.
It also said that though the Sahara group companies claimed the OFCDs were issued to persons related or associated with the companies themselves, money was actually mobilized from millions of investors through thousands of service centres and that these subscribers had no connection with the Sahara group.
The order criticized Sahara’s “lackadaisical and cavalier attitude to investor identification" and the scant respect for the so-called know-your-customer norms.
Sahara’s defence has been that it is reaching out to investors in areas where banks fear to tread. These people often have no official identity barring their names and are all associated with the group as depositors in one of its schemes.
In October 2011, the Securities Appellate Tribunal (SAT), the appellate body of Sebi, upheld the capital market regulator’s order and directed the two Sahara firms to refund ₹ 24,029 crore within six weeks to 29.6 million investors. The August 2012 Supreme Court order endorsed the SAT decision.
The Supreme Court order was delivered by two judges—K.S. Radhakrishnan and Jagdish Singh Khehar—who also issued the non-bailable arrest warrant against Roy on 26 February.
Radhakrishnan and Khehar’s 263-page judgement told Sahara to refund ₹ 17,500 crore with a 15% interest within three months. The group was also asked to furnish details of investors who had received the money and Sebi was to validate such claims. If Sebi did not find the documents produced by Sahara to be genuine, it would be presumed that the two companies had not refunded any amount, the judgement said.
The court also gave Sebi freedom to appoint external agencies and experts to sift through the documents and validate them—all at Sahara’s expense.
In case genuine investors were not found, the money not owned by anybody would go to the Consolidated Fund of India for investor protection, the judges said.
Finally, in case Sahara was not able to refund the money to investors, Sebi was empowered to take legal action, including attachment and sale of properties and freezing of bank accounts to realize the money, they added.
The court appointed retired judge B.N. Agarwal to oversee the entire recovery process and directed Sebi to file a status report and seek further direction if required.
The Supreme Court judgement also said that “in the event of finding that the genuineness of the subscribers is doubtful, an opportunity shall be afforded to Sahara to satisfactorily establish the same as being legitimate and valid. It shall be open to Sahara, in such an eventuality, to associate the concerned subscribers to establish their claims. The decision of Sebi in this behalf will be final and binding on Sahara as well as the subscribers."
As it is clear now, the August 2012 Supreme Court judgement was not the end but the start of a new chapter.
Sahara missed some deadlines; sent truckloads of documents to Sebi that took the regulator weeks to collate and even longer to read and make sense of; and, all the while, the legal battle continued, both before the Supreme Court and the appellate body.
Sebi filed a contempt petition against Sahara; the apex court gave an extension to the group for a phased repayment in three stages; Sebi froze bank accounts of the Sahara companies and their directors, and barred Roy from travelling overseas; and finally, Roy was arrested for non-appearance before the court after being summoned.
At the core of the dispute are two questions.
One, who has the jurisdiction over fund-raising activities by the two unlisted Sahara group entities, SIRECL and SHICL, through the “private placement" route—Sebi or the ministry of corporate affairs of which the Registrar of Companies is a part?
Two, should raising money from more than 50 people, even if through the private placement route, be construed as a public offering?
The first time Sahara started collecting money through this route was in 2001 and the window was closed in 2007. A year later, in 2008, the two companies once again took permission from the Registrar of Companies to raise funds through OFCDs. They raised money from millions of investors, all of whom, they claimed, were people associated with the Sahara group.
Sahara filed returns for 19.8 million OFCD investors in 2006 for the money raised since 2001after getting clearance from the Registrar of Companies in Kolkata.
In 2008-09, SIRECL once again received permission from the Registrar of Companies in Kanpur to raise money. SHICL received its permission the same year from the Registrar of Companies in Maharashtra.
On 21 April 2010, R. Anand, a manager in the division of issues and listing at Sebi’s corporation finance department, wrote to the regional directors of the northern and western region of the Registrar of Companies, saying the markets regulator had received complaints alleging that SIRECL and SHICL had issued OFCDs “violating statutory requirements".
“We have understood that the Sahara India Real Estate Corporation Ltd has filed its red herring prospectus with Uttar Pradesh and Uttarakhand on 13 March, 2008, and Sahara Housing Investment Corporation Ltd has filed its red herring prospectus with registrar of Maharashtra, on 6 October, 2009. Since both…these companies are unlisted…and have not filed their DRHP with us, we hereby enclose the copy of complaints and other documents to your office for examination and necessary action."
The minister of state for finance, Namo Narain Meena, in a different context, told the Lok Sabha, the lower house of Parliament, that privately placed debentures by unlisted companies, issued under the Companies Act, were under the regulatory purview of the ministry of corporate affairs, not Sebi.
All of this, Sahara reasons, means that the ministry of corporate affairs has jurisdiction over fund-raising activities of private companies.
Sahara reached out to a battery of legal luminaries seeking their opinion on the case. Those it reached out to include the late C. Achuthan, a former presiding officer of SAT; S.P. Kurdukar, a former judge of the Supreme Court of India, and A.H. Ahmadi, a former Supreme Court chief justice.
The legal opinion of all of the experts was that Sebi had no business overseeing the fund-raising of unlisted entities even if they were raising money from more than 50 investors as just that didn’t qualify such fund-raising arrangement as a private placement.
Sahara also wrote to the ministry of corporate affairs seeking clarification on whether the two firms were governed by it or Sebi. The corporate affairs ministry, in turn, referred the matter to the ministry of law and justice and Mohan Parasaran, then additional solicitor general of India, observed that Sebi has no locus standi over unlisted companies.
Sahara believed that all of this improved its chances of keeping Sebi away from its massive money-raising activities from “associates and friends" through the so-called private placement route.
These arguments did not cut ice with the Supreme Court, which directed the two firms to refund the money after accusing them of violating regulatory norms by raising money through the debentures from the public in the guise of private placements.
In December 2012, Sahara deposited ₹ 5,120 crore with Sebi. It has not paid any other instalment as it claims that it has directly refunded the rest to the investors.
In fact, going by Sahara’s own calculations, only around ₹ 2,000 crore is left to be paid, but that is covered two-and-a-half times with the money kept with the markets regulator. The group claims to have sent all original payment vouchers and other documents to Sebi. These were ferried by at least 100 trucks, while another 20-30 truck load of documents have been lying at a Sahara godown in Mumbai after the regulator declined to receive those papers. The group also claims that out of ₹ 5,120 crore, Sebi itself has managed to disburse only ₹ 1 crore since December 2012.
Sebi claims that letters sent to thousands of investors have come back as these people simply do not exist.
In July 2013, the Supreme Court, for the first time, said it would summon Roy and other directors of the two companies if the investors were not repaid. Subsequently, the court issued contempt notices to the two firms, asked for bank guarantees for ₹ 20,000 crore, and directed them to make available to Sebi title deeds of properties and restrained the group from selling them. Before restraining Roy from overseas travel, the court also directed the group to reveal the source of money that it claimed to have repaid the investors and warned it of an inquiry by the Central Bureau of Investigation and the Registrar of Companies.
Sahara’s claim has been that all transactions have been done in cash and the money raised by other group firms have been used to pay off the investors and that, as a result, there are no bank statements to show the money trail. Exasperated with the excuses, the court on 20 February asked Roy to be present before it on 26 February.
Roy didn’t appear.
There are two ways to interpret the chain of events that led to Roy’s arrest.
Sahara is right and close to 30 million investors in OFCDs exist but they cannot be tracked. Sahara knows its customers well, but to the outside world they don’t exist as most do not have permanent addresses. They are rickshaw pullers, vegetable vendors and daily-wage earners who live on the streets and makeshift shanties in the hinterland of India. In that sense, the Sahara group is a unique laboratory of financial inclusion in Asia’s third largest economy where the banking regulator is planning to give licence to a new set of private banks to spread banking services.
But if this is not true, then these investors exist only on paper to lend names and give legitimacy to the ₹ 25,000 crore corpus, the ownership of which is suspect.
The suspicion that Sahara is a parking space for politicians’ ill-gotten gains is as old as the organization, but no investigative agency has proved this. As far back as December 1996, the income tax department had asked Sahara to furnish a list of members of Parliament (MPs) and state legislative assemblies (MLAs) that were its investors.
Prasenjit Singh, then assistant commissioner of income tax, central circle III, Lucknow, signed two notices that were sent to Sahara on 4 December and 23 December 1996.
Both the notices had the same text:
You are requested to furnish the following information along with documentary evidence:
a) The total investment made by the MLAs, MLCs (members of legislative councils) and MPs as per annexure attached, from 1.4.1994 to 31.10.1996.
b) You are also required to furnish the above mentioned details regarding the deposits made by the mayors of Lucknow and the corporators of Lucknow during this period.
The list in the annexure included a former Prime Minister of India, P.V. Narasimha Rao, and two others who would go on to occupy that post, Atal Bihari Vajpayee and Chandra Shekhar.
On 2 February 1997, about two months after the first notice was issued, Sahara wrote back to the income tax department, saying: “In spite of our best efforts we have not been able to link any depositors in our accounts for and on whose behalf the names and addresses supplied by your honour along with aforesaid notice in respect of deposits."
The income tax department wrote back on 8 February 1997 saying: “The answer has to be specific and not loose-ended replies." It also said Sahara had not denied that leading politicians deposited black money with it.
Sahara India Pariwar retaliated by releasing two full-page advertisements in national newspapers in February and March. Signed by Roy, the text of the advertisement said:
“I, as the chief executive of the organization, claim with total steadfastness that our intention has always been to abide by the rules and regulations of the land...
It is unfortunate that instead of encouraging us for our multidimensional success—maintaining such ideal norms—a few officials of certain departments have been regularly behaving in such a contemptible manner that it would not be possible to describe the degree of such meanness. We will never bow our head to their unjustified demands...
We would love to abide by the directive of income tax officials within seven days but we would like to inform that the complete control of our establishments (more than 1100 offices...) is done through our command office at Lucknow. For effective controlling... the computer department runs two shifts, 30 days a month. Our computerized system is based on a unique account number. In order to get a report based on names, it would definitely take more time. Besides, there is yet another point that the list provided by the income tax department is in Hindi whereas all our entries are in English.
Under these circumstances, when we translate from Hindi to English and then match the...name...it is quite possible to commit an error... In such a system, if there is a single wrong entry...the computer is unable to give the correct information. We have still made all efforts and in the preliminary we have not been able to find even a single name in our depositors’ list in accordance with the list provided to us... Many of the names in the list are of very important personalities with whom it is difficult to communicate in such a short time. Hence, we are publishing the names of the honourable citizens whom we believe will fully cooperate in abiding with the rules and regulations of the country to avoid any embarrassment to us and inform us at the earliest if they have deposited any amount in any scheme run by Sahara India."
The ad carried the list of people (mainly politicians) mentioned in the income tax notices.
On 15 March 1997, the group issued a second ad in which it claimed that it had given a 10,000-page reply to the income tax department.
It challenged the tax office: “If any shortcoming, wrongdoing, weakness, dishonesty is found in our intention, which is against the nation’s interests...we should be hanged at once, but we should not be harassed everyday...by misusing one’s powers."
The ads continue. One was released following Roy’s failure to appear before the Supreme Court on 26 February.
Meanwhile, the group’s business has been growing. The Reserve Bank of India stopped its deposit-taking business and Sebi has put a spoke in its money-raising efforts, but neither seems to have affected the group’s fortunes. The two new growth engines of the group are Sahara Q Shop, a retail venture, and a cooperative credit society. Sahara Q Shop Unique Products Range Ltd, which runs Sahara Q Shops, was incorporated in June 2011, while the credit cooperative society was set up in October 2009 and registered in March 2010.
The credit cooperative society is run by its employees, and it will keep the flow of money going. The three mainstay deposit mobilization schemes of the society are mirror images of OFCDs banned by Sebi, the rest are very similar to the recurring deposits that SIFCL offered and were banned by the Reserve Bank. The flow of money into the Sahara group never dries up even as Sahara shifts from one regulatory jurisdiction to another. Credit cooperative societies come under the state government or, in case they operate in more than one state, under the ministry of agriculture.
This cycle has been going on since 1978 when Roy set up Sahara with a capital of ₹ 2,000, a peon and a clerk, and his father’s Lambretta scooter, in Gorakhpur in eastern Uttar Pradesh.
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 dispute with Sebi. Mint is contesting the case.
Sahara has filed a defamation suit in the Calcutta high court against Tamal Bandyopadhyay and obtained a stay against his forthcoming book Sahara: The Untold Story that he has written in his personal capacity.
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