Sahara and Subrata Roy had been in news for last few weeks.   During discussions I have come to know that lot of our readers are not fully aware about the background of the case.  It is a complex case and Sahara has tried to take maximum advantage of the loopholes and infirmities of the Indian legal and judicial system.   I am giving below the gist of the case so that our readers can fully understand the case and appreciate the point of view of Supreme Court and the reasons for taking such a tough stand against one of the biggest business house who always swears by his love for the nation.   Bankers needs to learn lessons from such cases so that they too are not trapped and swayed by such business houses.

 Who is Subrata Roy  Sahara :

 He is an Indian businessman and founder-cum chairman of the Sahara India Pariwar, an Indian conglomerate with diversified ownership interests.  Roy, the self-proclaimed “managing worker” of the group, made his start in Gorakhpur (UP).     It is said that after the death of his father Sudhir Chandra, who used to work at a sugar mill in Uttar Pradesh, Roy, the eldest son, first tried his hand at making salted snacks (Jaya Products) and later experimented with another venture along with his wife Sapna Roy. Both failed,    In 1978, he started the so-called para-banking venture, which took deposits from investors—sometimes of as little as Rs.1 a day. By 2008, Sahara India Financial was India’s largest residuary non-banking company, or RNBC. In July 2008, Sahara India Financial made public its unaudited financial results for the first time. 

What is the Current Controversy Wherein Mr Roy has been sent to Tihar Jail :  

The roots of the current controversy can be traced back when Sahara Group filed a a Draft Red Herring Prospectus (DRHP) to raise equity for real estate company Sahara Prime City Ltd through an initial public offering (IPO).  

 The above document  made claims and disclosed details of two associate group companies namely (a) Sahara India Real Estate Corporation ( SIRECL) and (b) Sahara Housing Investment Corporation (SHICL). which  were raising huge amounts of money from the public through optionally fully convertible debentures (OFCD).     

 Further enquiries led SEBI to find that the above referred two companies had issued OFCDs in contravention of the provisions of the Companies Act 1956, SEBI Act 1992 and other regulations.   It was observed that SIRECL and SHICL were raising sizable amounts of money from the public without conforming to the prudent disclosure and other investor protection norms which govern public issues,  

 Thus to protect the interests of investors and public, SEBI passed an order dated 24^th November, 2010, which interalia restrained both companies from mobilizing funds till further directions.   Sahara moved to Lucknow bench of Allahabad High Court and obtained stay on the order.  SEBI challenged the same in Supreme Court through Special Leave Petition.   Although SC did not interefere with stay of High Court order,  yet it directed HC to hear the case on day to day basis.  Finally, on 7^th April, 2011, Lucknow bench of Allahabad High Court vacated the stay, as it felt that Sahara is not complying with the assurances given by themselves.   Sahara preferred to appeal to Supreme Court which in its order dated 12^th May, 2011 directed SEBI to examine the issues including the nature of OFCDs and the manner in which investments are called for.

Based on the Supreme Court order, SEBI finally issued a notice dated 20^th May, 2011 to two companies and persons named as Promoters and Directors , asking them to show cause as to why appropriate directions should not be issued against them.  

 SEBI gave an opportunity to Sahara to put up his point of view.   During the hearing at SEBI, Sahara tried to divert the issue by saying that two companies have made “private placements” of OFCDs to persons related or associated with the Sahara India Group and thus these were not “public issues”.   They also tried to convince that OFCDs are neither shares nor debentures and thus SEBI does not have any jurisdiction for “hybrid” instruments. 

 In terms of  Section 67 of the Companies Act, 1956, an offer of shares  or debentures made to 50 persons or more is construed as a public offer.   The Sahara group took the plea that these bonds were issued to "friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies Thus, Sahara tried to justify that  issuance of these OFCDs did not amount to a public issue.     It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.

SEBI was of the view that the issuance of OFCDs was a public issue as these were allotted to huge number of investors and can by no standard be termed as private issue. Certain observations are interesting : “The case of the two Companies is that they have issued OFCDs only to members associated with the Sahara group...Even the listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors. In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only of the order of 15 million,"

 Finally by order dated 23^rd June, 2011, Dr K M Abraham, whole time member of SEBI, asked the Sahara group companies to refund investors and holding (among others) Subrata Roy liable for the same.    Thus, Sebi restricted the promoters and directors of Sahara group companies, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, from raising any capital through the issue of securities including any form of securities.  (You can Read the full order here).    Later on the Supreme Court agreed with almost all the contentions of Abraham in his final order against the two Sahara companies. His work was so meticulous and unimpeachable that nobody could challenge their authenticity.  Thus,  Dr.  K M Abraham,  is credited for nailing Sahara group’s bluff.   Finance Ministry appears to have put pressure on him  as it has been reported that he even  wrote to the Prime Minister alleging that the Finance Ministry was pressuring the regulator to go easy on several cases including Sahara.    The Finance Ministry denied the allegations.   His tenure ended under a cloud.

 In October 2011, the Securities Appellate Tribunal (SAT), the appellate body, upheld the SEBI’s order and directed the two Sahara firms to refund Rs.24,029 crore within six weeks. This was eventually endorsed by Supreme Court judges K.S. Radhakrishnan and Jagdish Singh Khehar in August 2012.. The apex court in the country basically stood by Sebi's decision and asked Sahara to refund Rs 24,029 crore that it had raised through OFCDs, to the investors by November 2012.  The Supreme Court directed the Sahara group to hand over the money to Sebi, which would in turn refund the money to the investors. The group was soon given more time to repay the money.   In the meantime, when Sahara found itself in soup, Sahara contested that it has already paid its investors and handing over the money to Sebi would mean double payment. The group claimed that it refunded Rs 16,177 crore to investors in May and June 2012.   It also first sent truckloads of documents to Sebi as proof of its payments to millions of investors.   Later on was asked to deposit Rs.5,120 crore with the regulator,  which it did.     Sahara had claimed to have paid most of the  investors in cash using the money raised by other group firms.   However, Sahara was not able to  satisfy the Supreme Court, which wanted to see the money.

This time onwards, Sahara Group again tried to play hide and seek game through legal battle, and even issued full page advertisements in newspapers justifying their stand.  Finally, the order to arrest Roy was issued for his failure to appear before the apex court in a contempt case arising out of non refund of Rs 20,000 crore to investors by two of his companies. A bench of justices K S Radhakrishnan and J S Khehar at Supreme Court  rejected Roy’s plea to exempt him from personal appearance on the ground of ill-health of his 92-year-old mother.   Such manipulations irked Supreme Court which led to his arrest.    Roy was remanded to Tihar Jail  on 4^th March,  2014, for failure of two of his companies to pay a sum of Rs 24000 crore to SEBI as per the court order of Aug 31, 2012.    The money is to be repaid to investors. Later on Supreme Court relented and asked  Sahara chief to pay Rs 5000 crore in cash and another Rs 5000 crore by way of a bank guarantee to prove his bona fides for release. He is trying to dispose of his assets and raise the money but hasn't succeeded yet.

The Supreme Court on 9^th April, 2014 even  turned down the  plea of Sahara to keep its chief Subrata Roy under house arrest instead of Tihar Jail,

Questions Which Have Remained Unanswered :

(a)    If Sahara group was refunding the investors as early as April and May 2012, why was it fighting a case in the Supreme Court at the same time?

(b)   Further, where did the group get the money from?  Rs 24,000 crore is a huge amount and to claim that it has been paid in cash is difficult to believe.    The cash movement of such large amount across the country needs to be done through cash vans under tight security. 

(c)    Sahara of late has been claiming that he Sahara India Cooperative Credit Society and Sahara Q Shop bought the real estate assets worth thousands of crores from SIRECL and SHICL, the companies which had issued the OFCDs. This money was then used to repay the investors who had invested in the OFCDs.  In such a situation, question arises, where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money to buy the real estate assets of SIRECL and SHICL?

 Although Sahara had been trying to give various arguments to justify as to how they raised the money to repay the investors, but more it explains, more new issues crop about the legality of the money raised by them.