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Corporate Sep 1, 2012

Sahara says no benami money; SC talks of ‘dubious’ affair

By R Jagannathan

Faced with yesterday's damning verdict ordering him to repay Rs 24,400 crore to investors in two of his companies-Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC)-within three months and with 15 percent interest, Sahara Group boss Subrata Roy lashed out in all directions.

"For the past seven-eight years, we have faced the onslaught of various authorities since they concluded whimsically...that the deposits and investments we have received from the public are fictitious and bogus as they feel the money with us is ill-gotten from politicians, etc," The Times of India quoted the group as saying.

Sahara group chief Subrata Roy. AFP

The reference to the authorities' whimsicality can only be about either the Reserve Bank of India (RBI), which ordered him to wind up his Sahara India Financial Corporation (SIFC) in 2008, or Sebi, which ordered SIREC and SHIC to repay the money raised from fraudulently issued optionally fully convertible debentures (OFCDs) in June 2011.

"The RBI in 2008 killed our financial inclusion-based RNBC (residual non-banking finance company) activities and gave us seven years' time to repay our depositors, which we cleared in just four years," Sahara said.

The point to note is this: while Sahara claims it was keen to bat for "financial inclusion", it also wants "regulatory exclusion". No oversight at all by Sebi - which is what brought down the wrath of the Supreme Court. In trying to raise Rs 40,000 crore in two companies, Sahara was effectively trying to dodge Sebi's supervision. (Read details here and here)

The Supreme Court was not amused. Judge JS Khehar, one of the two judges on the bench, observed frostily: "Despite restraint, one is compelled to record that the whole affair seems to be doubtful, dubious and questionable. Money transactions are not expected to be casual, certainly not in the manner expressed by the two companies."

But, in an apparent response to the Supreme Court's order (read the judgment here) which made references to the possibility of Sahara Group having raised money under fictional names, the group threw an open challenge to the authorities to prove any wrongdoing.

The Sahara statement issued on 31 August said: "The fact is that there is not a single benami money (sic) and this statement is Sahara's challenge to all authorities of our country. Each and every rupee we have accepted in (the) last 33 years is always against receipt from the company and with an application form duly signed by its depositors and investors."

Sahara's challenge to the authorities should be taken up in earnest. And they may not find proof wanting. Both the Sebi order of 23 June 2011, written by then wholetime member KM Abraham, and the final Supreme Court verdict yesterday, carry enough indications that they don't believe Sahara fully.

While Abraham's order last year made references to that fact that a random check on four names on Sahara's OFCD subscriber list found two of them non-existent, the Supreme Court, after doing its own cursory fact-checking, concluded that Sahara's record-keeping was less than diligent.

Justice Khehar, while checking a hard copy of investor details furnished to the court, noted that "it was not possible to persuade oneself to travel beyond the first page of the voluminous compilation," reports BusinessLine.

And why was that? One of the investors was named Kalawati - and her details looked implausible.

But let's hear Justice Khehar on this fully: "First and foremost, the data furnished by the appellant-companies does not indicate the basis of the alleged 'private placement'. It is impossible to determine whether 'Kalawati'...whose name figured at Sl.No.6603675, was invited to subscribe for the OFCDs, as a friend or associate of group companies or worker/employee and/or other individual associated/affiliated or connected in any manner with Sahara India Group of companies.

"Besides the aforesaid, 'Kalawati' is a very common name, and there could certainly be more than a couple of Kalawatis at the investor's address indicated in the compilation. Neither her parentage nor her husband's name has been disclosed, so that the identity of Kalawati could be exclusively determined to the individual who had subscribed to the OFCDs. The address of Kalawati indicated is of a general description, as it does not incorporate a particular door number, or street, or locality.

"The name of the introducer/agent, leads to a different impression altogether. 'Haridwar', as a name of a person of Indian origin, is quite uncomprehendable (sic). In India names of cities do not ever constitute the basis of individual names. One will never find Allahabad, Agra, Bangalore, Chennai or Tirupati as individual names. The address of the introducer/agent, depicted in the compilation, is as intriguing as the address of the investor."

While charitably admitting that he would not like to "make any unrealistic remark", he went on to say that "there is no other option but to record that the impression emerging from the analysis of the single entry extracted above is that the same seems totally unrealistic, and may well be, fictitious, concocted and made up".

While brother judge KS Radhakrishnan focused on the legal aspects of the case and concluded that Sahara's actions would attract civil and criminal liabilities, which include prison terms for certain transgressions, Justice Khehar was trenchant in his observations about the group.

After discussing the legal issues, he concluded: "There can, therefore, be no hesitation in accepting that there was a pre-planned attempt at the hands of SIREC and SHIC to bypass the regulatory and administrative authority of Sebi. One can only hope it is not so. But having so concluded, it is essential to express that there may be no real subscribers for the OFCDs issued by the SIREC or SHIC. Or alternatively, there may be an intermix of real and fictitious subscribers." (Italics ours)

This is why the Supreme Court, while ordering the two Sahara companies to return the money collected in three months, made Sebi responsible for the return of the money and even gave it further investigative powers to probe the details about the investors.

The order makes it clear that:

1) The money, with interest, will be paid "to Sebi". It is not clear whether the money can be paid to investors directly. But the court order says this money will be deposited with a nationalised bank till it is paid out to investors.

2) The court order also directs Sahara to furnish details and supporting documents on money refunded to investors. It is not clear if this refers to investors who have already been repaid the money or the remaining ones. But the court says that if the documents are not found by Sebi to be "genuine and acceptable", the amount would be deemed as not paid. This is an important pointer indicating the court's inability to trust Sahara.

3) The court authorised Sebi to investigate the Sahara documents and finances, and it can engage experts and investigators at Sahara's cost.

4) To ensure compliance, a former Supreme Court Judge, BN Agarwal, has been asked to oversee the whole refund process by Sebi.

Quite clearly, the Supreme Court has empowered Sebi to undertake a far-reaching clean-up at these two Sahara companies. Given the sheer effrontery involved in these two companies trying to raise Rs 40,000 crore between them without the regulator's nod, it would be best if Sebi's efforts are complemented by a wider investigation into the affairs of the Sahara Group, which claims total group assets of Rs 53,027 crore and a market value of Rs 1,16,719 crore.

Few groups of this size would be able to grow without resort to public funding. But the problem with the shadowy Sahara group is that it has raised money from the public for what seemed like private purposes by avoiding the hard gaze of the regulator.

Sahara's "doubtful, dubious and questionable" affair deserves a wider probe so that Subrata Roy's claim that there is "not a single benami money" can be established for good.

Sahara Judgment

by R Jagannathan

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