Unraveling the Sahara Scam: For a country where 250 million people live below poverty, there sure are too many billion-dollar scams with the perpetrators eventually escaping the country. Today we discuss one of the biggest corporate scams in India i.e. The Sahara India Pariwar Investor fraud case which was worth well over $3billion.
What seems surprising about this scam is that it highlights some of the most powerful people being brought to the books by efficient regulators in India. Let’s unravel the Sahara Scam.
Who is Subrata Roy?
Subrata Roy, who is the founding chairman of the Sahara Group and was responsible for building the Sahara Group or Sahara India Pariwar.
Before Sahara, Roy had a Chit Fund business. Roy conducted his chit fund in rural areas where banks were inaccessible. He would carry out the duty of a bank in rural areas. His chit fund would provide daily wage workers with interest on the money they would deposit with him. It was the success of this chit fund that allowed Roy to build an aura of trust around him. While dealing in rural India, Roy also was able to recognize the untapped financial potential present in these areas.
He used the same principles to create the Sahara Group. He created an army of agents who would were asked to bring investors for this new establishment. Over the years Roy was able to grow his chit fund into a conglomerate. Sahara thrived in various sectors entertainment, sports, finance, real estate, household, infrastructure, and manufacturing, etc.
In 2004 the Sahara Group was the second Largest Employer in India after the Indian Railway. By 2011 Sahara had a Mcap of US$ 25.94 billion and Roy was named as one of “The 10 most powerful people in India” by India Today. All this was until he was sentenced to jail by the Supreme Court on account of fraud.
Unraveling the Sahara scam
Sahara first came to the attention of SEBI when they wanted to make one of their companies public. On 30th September 2009, the Sahara Group announced that one of its companies named Sahara Prime City (SPC) would be raising fresh capital through an IPO. The group submitted a Draft Red Herring Prospectus which had all the necessary information about the company to the SEBI in order to get listed. SEBI uploaded the DRHP online in order to allow investors access to the information.
On scrutiny of the document, the SEBI found out irregularities with two other companies in the group i.e. namely Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL). The irregularities were soon bought to light when an Indore-based chartered accountant Roshan Lal sent a note to the National Housing Bank stating that the Group was two companies i.e. SIRECL and SHICL were issuing housing bonds which were not in accordance with the law.
The NHB forwarded the complaint to the SEBI due to a lack of authority they had in this matter. According to the prospectus provided by the group, it was found out that the companies were raising money through hybrid security called an OFCD (Optionally Fully Convertible Debentures). These securities are issued as debentures but after a period of time give investors the option to be converted from debentures to shares. This allows investors to convert from debtors to shareholders.
After further investigation, SEBI found out that SIRECL, and SHICL, had raised the OFCD worth Rs.24000 crores from 2.5 crore investors and were still issuing OFCD for over 2 years without informing SEBI.
Sahara Scam: What was the problem here?
The SEBI was set up as the official regulator of Indian markets. Its duties involve protecting the interests of investors in securities and regulating and promoting the development of the securities market. What the Sahara Group had done is gone behind their back to issue securities in the market in order to raise funds.
There were many problems with this issue of OFCD’s. For a company to be allowed to raise funds it firstly has to be profitable and be of adequate net worth. One of the Sahara firms was making a loss and the net worth of the other was only Rs. 11 lakh. By finding an alternative route these companies were able to raise thousands of crores.
In addition to this, a company is also required to account for the funds carefully by forming a committee in order to prevent misuse along with audit and supervisory requirements. None of this was done. The funds collected were simply kept in a bank account of the group entity called ‘Sahara India’, which agreed to ‘share’ its bank account with the companies that raised the money.
The OFCD issued also requires interest paid till maturity upon which investors are given the option to convert. The OFCD’s issued by Sahara had no maturity date. This allowed Sahara to use the funds raised with complete autonomy without any regulation.
SEBI vs Sahara: The Conflict
After finding out about this illegal process in Sahara Scam, Sebi immediately asked Sahara to return the funds to investors with 15% interest. Sahara argued that as OFCD’s were hybrid securities the Sebi had no authority over its issue. Instead of following their orders Sahara filed a case against Sebi in the Allahabad court and won. The case when then directed to the SAT( Securities Appellate Tribunal) where the company was found guilty. SAT again directed the company to follow Sebi’s orders. Sahara moved to the Supreme court crying about injustice.
The Supreme Court ruled in favor of Sebi and ordered Sahara to refund investors’ money by depositing it with SEBI. The court also instructed Sebi to provide Sebi with investor information so that the refund process may begin. Sahara then declared that they had already returned a major portion of the funds it had raised. Citing this reason Sahara deposited only $840 million out of the $3.9 billion. On being asked for proof of payment Sahara then stated that they did not have any as they had made cash payments.
When it came to providing investor information Sahara sent 127 trucks containing 31,669 cartons full of over three crore application forms and two crore redemption vouchers to the Sebi office. This resulted in a huge traffic jam on the outskirts of Mumbai. Sebi rejected 25% of investor information sent as they had reached after office hours and post the deadline. On scrutinizing these documents Sebi agents found that they were not complete and realistic.
SEBI has found that the documents Sahara provided do not provide sufficient, verifiable information, and SEBI has heard back from less than 1 percent of the 20,000 investors it contacted, with many addresses turning out to be invalid. The courts did not accept Sahara’s claim that it had already made the payments. Sahara on the other hand argued that it was being forced to make double payments.
In an attempt to locate the investors Sebi ran full and multi-page advertisements in newspapers. Sebi did this over several rounds in various newspapers. Out of the 2.5 crore investors, only 4600 came forward to claim their money. On one hand, this added weight to the argument provided by Sahara but the courts refused to accept it as the company had no proof. The Sebi now sensed that this could very well be a money laundering case. This gave rise to the possibility that the company was used to tunnel black money and also had political connections as the efforts made by regulatory bodies were met by roadblocks.
When Sahara failed to deposit the remaining money with SEBI and Subrata Roy skipped his hearing, the Supreme Court of India issued an arrest warrant for the Sahara chief in February 2014. Finally, on 28th February 2014, Subrata Roy and the other two directors of the company were arrested by the police in Sahara Scam.
In May 2016, the Supreme court granted parole to Subrata Roy as his mother had passed away. Since then, Roy has remained outside of jail as his parole got extended multiple times by the court. On November 2017, the ED (Enforcement of Directorate) filed a case of Money Laundering against the Sahara Group. Although it is yet to be proved it is speculated that Sahara schemes were simply a front to hide black money for influential donors. Unfortunately, it is the rural population that got caught up along with Sahara and were exploited.
The name i.e. ‘Sahara India Pariwar’ translates to Sahara being Supporting someone and Pariwar, meaning family. But after decades of existence, it has come to light that the company misused the trust with which hard-working Indians placed their hard-earned money. The victory however will go down as historical for Sebi.
But despite this, the case has bought to light several major issues plaguing the system. The most important being the powers given to the Sebi. The Sebi unfortunately is significantly influenced by the government particularly the Finance ministry. Even the appointment of the Sebi board includes the chairman, who is nominated by the Central Government; one member from the Reserve Bank of India; two officials from the Finance Ministry; and five remaining members who are recommended by the Union Government.
Although Sebi is given the right to create rules, it cannot implement them without the approval of the federal government. The Sebi also does not have the power to prosecute. The Sebi should be given independent powers like the SEC in the US in order to prosecute without government interference. Scams like this erode investor trust in the markets and further create a dent in India’s image.
Thanks to Sebi this has been one of the few cases where the perpetrators were at least presented before justice. Roy who once was one of the most powerful men in India possibly faces more time in jail as the case develops and has been reduced to an episode on Netflix’s Bad Boy Billionaire’s.