How Sahara Hoodwinked Sebi, RBI and the Supreme Court
There are a few business conglomerates in India which are often engulfed in mystery. Their dealings, activities and political affiliations are often discussed in a hush – hush tone by the press and the public. Not a lot is often known about their dealings. A few of such famous business groups include the Sahara Group headed by Mr. Subrata Roy, the Adani Group headed by its reclusive Chairman Gautam Adani and the real estate giant DLF headed by KP Singh.
Evolution of the Sahara Pariwar
Subrata Roy, is the head of the $10bn (£5.5bn) Sahara Group. Sahara Group has diversified businesses in banking, media and housing sector. Subrata Roy started off in 1978, when he founded Sahara along with three workers in the state of Uttar Pradesh as a small deposits Para-banking business. Today, the group has expanded into a gigantic business conglomerate with roots entrenched in housing, media & entertainment and aviation. Sahara India is in entertainment, newspaper, and raises claim to own around 33,000 acres of real estate across the length and breadth of India. It sponsored the national Cricket team of India for around a decade and intends to further diversify into life insurance, housing finance, consumer products and healthcare. Sahara Group has also built one of the most sought after real estate projects in India, Aamby Valley. The project has witnessed some of the biggest name in Indian entertainment industry and sports arena as well as some former international Olympic medal winners as its brand ambassadors.
The story of Sahara India is astonishing by any standard. It is akin to a fairy tale. In 1978, Subrata Roy, a man who hails from a very humble family with dependents of around 15, founded a savings institution in Gorakhpur, a highly deprived area of north India. He had total assets of ₹1600, three co-workers and a single office. Today, 35 years later, Sahara India is one of India’s largest private company, with more than 32 subsidiaries. Its business span finance, infrastructure, tourism, housing, hospitality, media, consumer products, manufacturing. It is an employer to around 910,000 people which is more than any other Indian company except the state-owned Indian Railways – has assets of £5.68bn and 1,707 offices.
The Sahara Fraud case is completely about Optionally Fully Convertible Debentures and their investors. Hence, before looking into the chronology of events, let us learn what is an OFCD.
OFCDs are issued by a company to its potential customers to raise money. OFCD holders can choose to be shareholders of the company if they want to, or in other words it is not mandated by the company to be so. Generally, there is no asset market against such investments. In other words they are unsecured in nature. In case of default or liquidation of the company, they will be among the last stakeholders to be refunded.
Now, in 2008 RBI instructed Sahara India Financial Corporation from accepting fresh deposits anymore. The growth of the Sahara empire had always been shrouded with mystery and Sahara India Financial Corporation was at the heart of that growth. Now, as RBI closed the doors on the collection of deposits, it needed a financial instrument to stay afloat. It was also seen later that a major chunk of the deposits were collected from the rural parts of India.
Excerpts from the order from RBI-“ Reserve Bank of India had, by its order dated June 4, 2008, in exercise of its powers under Sections 45K(4) and 45MB(1) prohibited SIFCL from accepting deposits from the public and directed SIFCL, inter alia, to repay the depositors on maturity and comply with the directions of RBI”. The complete report on the 2008 ruling can be accessed at http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=18452 .
Sahara decided to float two companies- Sahara India Real Estate Corporation( SIREC) and Sahara Housing Investment Corporation(SHIC) and issued housing bonds which were technically referred to as OFCDs. The Sahara Group said that these bonds were issued to “friends, workers and other individuals who were related to the Sahara group of companies.” Henceforth, the company felt that the issuance of the OFCDs did not result into a public issue. However, according to Section 67 of the Companies Act, 1956, any issue of shares or debentures to 50 persons or more is constituted as a public offer.
It is the registrar of companies that needs to provide clearance to these investment instrument and its role remains vital in the complete process mainly due to its inaction. SIREC had a negative net worth and an equity capital of ₹10 lakhs while SHIC had a net worth of around ₹10 lakhs at the time of issuance. But, both companies planned to raise around ₹20,000 crores for the purpose of modernizing, setting up of airports and other projects allotted to the company and these funds were disguised in the form of private placements. The group had decided to raise money from around 30 million investors. This reiterates the need of financial education to the people at the bottom of the pyramid. Adding to the above mentioned fact, the issue was left open ended. In fact, an issue of ₹17250 crore was kept open for 10 years by a Sahara group company.
However, there are some laws that allow these companies to operate within the regulatory grey area and some of such dubious laws are Acceptance of Deposits law, 1975 and CIS regulations. The first is under the purview of Companies Act, 1956 while the second is under the framework of SEBI.
However, the crackdown of the Sahara group started with a note from Mr. Roshan Lal, a resident of Indore, on January 4, 2010 to the National Housing Bank and requested it to look into the housing bonds issued by two Sahara group companies namely SIREC and SHIC. Lal, a chartered accountant found that the bonds purchased by a lot of investors were not complying with the rules. However, the NHB forwarded the letter to SEBI, the regulator of Capital markets in India to investigate the matter. Another similar request came from a professional group of investors. Just then another Sahara company, Sahara Prime City filed a draft prospectus for a public issue of shares. SEBI wrote to the merchant banker for the issue to get an insight into the housing bonds issued by SIREC and SHIC. The bank said that OFCDs have been issued by the company in compliance with all regulations on a “tap” basis. However, the OFCDs were issued on an open ended basis and the company had collected over ₹19,400 crore from April, 2008 to April, 2011. SHIC had also filed a red herring prospectus with the ROC in 2009 and raised around ₹6373 crores from 7.5 million investors.

The grey regulatory framework of the country allowed Sahara to support its actions citing legal loopholes. However, as the issued bonds were to more than 50 people, it was under the purview of SEBI and this position was further under Mr. Veerappa Moily as the corporate affairs minister who authorised SEBI to have full jurisdiction over public issues. In 2010, SEBI passed an interim order to stop all fund raising activities with immediate effect and later that year Allahabad High Court stayed the interim order.

It was the dedicated hard work of Mr. KM Abraham, then whole time member of SEBI that alleged that SIREC and SHIC rotated the money between the two companies. The identities of the investors were sought by SEBI and interesting facts evolved during the investigation.
The court noted the example of an investor called “Kalawati”. The list did not clear her relation with Sahara and more so because it was a limited placement. The list had no mention of her parentage/husband’s name and mentioned her address as Uchahara, UP. The agent’s name was given as Haridwar which is an uncommon name by any standards and his address as Bani Road, Sant Kabir Nagar. “One would not like to make any unrealistic remark, but there is no other option but to record that the impression emerging from the analysis of the single entry is that it seems totally unrealistic, and may well be fictitious, concocted and made up,” Justice Khehar noted in the judgment.

Finally, The Supreme Court of India ordered the Sahara Group to return ₹24029 crore- raised through the issuance of OFCDs-to its 30 million investors along with an interest of 15% per annum. The companies were given a time period of 90 days to deposit the money with SEBI which has been authorised to return the money to its investors. But, suddenly the group said that it had paid ₹16177 crore to the investors in May and June, 2012. It has been found that the agents were ordered to collect the sehmat patras from the investors failing which their commission were blocked. The certificates, most of which were predated which shows that there had been payments over a long time. But, the vital question was where did it get money from? Interestingly, according to Sahara, Sahara India Cooperative Credit Society and Sahara Q Shop bought real estate assets from SIREC and SHIC and this money was used to repay the investors. Now where did the above mentioned 2 companies(namely SICCS and Q shop) get the money from? The group claims to have raise this money through a partner Sahara firm across 5000 locations throughout the country. The Q shop raised money on credit by promising consumer goods. In other words, the Q shop appeared to be a money raising scheme that was portrayed as a retail venture. Interestingly, Sahara Q shop had invested around ₹220 crore through Indian Bullion markets association. All this just shows that Sahara continues as a para banking operation till today.

Now, let us look into some of the issues concerning the Supreme Court of India while
Deciding on the fate of the Sahara Group. The provisions of the Companies Act, Securities Contract Act, 1956, SEBI act, SCRA and other related rules were thoroughly interpreted during the course of action.

1. Under Sec 11, 11A, 11B of SEBI Act, does the power to investigate lies with SEBI or the authority to intervene lies with Ministry of Corporate Affairs (MCA) under Sec 55A of the Companies Act?

According to the Supreme Court of India, SEBI act is a special legislation that bestows special powers to investigate and protect the interests of the investors and there is no conflict of jurisdiction when the interests of the investors are at stake.

2. Does the issue of OFCD to millions of People categorise as private placements and is it covered under SEBI regulatory framework and the various provisions of the Companies Act?
According to Section 67(Subsection 3) of the Companies Act, issue of OFCDs to more than 50 people does not categorise as private placements. The company elicited public demand through the issue of Information Memorandum which is meant only for Public Issues. Thus, it is very clear that both companies wanted to work around the rules and regulations by disguising them as private placements.

3. Are the listing provisions under Sec 73 mandatory for all public issues or depends on the intention of the company?
According to Section 67(Subsection 3) of the Companies Act, issue of OFCDs to more than 50 people is mandatory to be listed. According to Sec 73 every company that intends to offer securities to public should list its securities.
Thus, this judgement is a milestone in the corporate landscape of India. It exposed the regulatory loopholes that allowed the chit funds to strive prosperously. The chasm related to the jurisdiction between the MCA and SEBI was also resolved.