The Sahara – Sebi Case

Now this is a hot topic of economic importance. Very rarely, in India, you will see owners of major business empires being arrested, especially for monetary matters. But even rare is a scenario when the owners are arrested with a non-bailable warrant. This is what happened to Sahara’s chief, Subrata Roy when the Honourable Supreme Court on Feb 26 2014, issued a non-bailable warrant against him for failing to appear before it in person as directed at the court’s last hearing. The irritation of the judges on Roy’s evasion tactics can be understood from their statement where they told Roy’s counsel that “Even if we retire; we will ensure the order to be implemented”.

Subrata Roy had no option, but to surrender before police, which he did on Feb 28, 2014. Currently, he is kept in Delhi’s Tihar Jail. Supreme Court on March 26 2014 said Sahara group Chief Subrata Roy could walk out of Tihar Jail on bail the moment he paid Rs 10,000 crore. But Subrata Roy’s lawyer on March 27 2014 told the Supreme Court that the company could not deposit the Rs 10,000 crore as surety for bail, as the amount is “too high”. This means Subrata Roy will have to stay in jail till the next hearing which is on April 3.

So, what is it that Sahara India has done that such an extreme measure was taken against one of the better off Indian Business Empire’s Chief?

Let us read this story.


Before we look at the chronological events that led to this Supreme Court order, an explanation of OFCD is needed.
OFCDs are optionally fully convertible debentures. These are issued by the company to potential investors in order to raise money. OFCD holders can become shareholders of the company if they chose to do so. Generally (which is true in the case of Sahara) there is no asset marked against such investment, in other words they are unsecured in nature and in case of a default and liquidation of the company they will be one of the last stakeholders to be refunded.

Sahara’s case is all about OFCD and its investor. But its root is in a ruling by the Reserve Bank of India in 2008. Here is a chronological 10 point list of how events unfolded from 2008 to the issuance of non-bailable warrant to Sahara chief.

1. In 2008, RBI debarred Sahara India Financial Corporation from raising fresh deposits. Growth of Sahara’s empire was always a mystery; many believed it ran a Ponzi scheme by collecting funds from investors. The group needed continuous flow of fresh funds to keep it afloat.

With RBI closing a door on the group from collecting deposits from the people, the group needed a financial instrument that would be out of the purview of RBI but still get access to public fund.

2. That is when Sahara thought of issuing OFCDs by floating two companies – Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC). It was the Registrar of Companies (ROC) that needed to clear these investment vehicles.

3. Registrars of Companies role in the entire episode is critical since it cleared the proposal without raising the most basic of questions. Consider these facts. Both the companies had negligible net worth. SIREC had an equity capital of only Rs 10 lakh (Rs 1 million) and a negative net worth at the time of issuance while the net worth of SHIC was around Rs 10 lakh.

But both the company planned to raise Rs 20,000 crore (Rs. 200 billion) each. Imagine applying for bank loan of Rs 20,000 crore with only Rs 10 lakh as your contribution! A banker would fall laughing on such a proposal, but ROC allowed the Sahara Group companies to go ahead with the proposal.

More than one law was flouted by Sahara in issuing these OFCDs, which it calls private placement.

4. First the sheer size of the issue makes it a public issue. Any company seeking money from more than 50 persons have to take the approval of Securities and Exchange Board of India (SEBI) in doing so, in which case the company would have to make all the disclosures required as per SEBI norms.

The Sahara group had sought money from nearly 30 million investors. Apart from the size and number of investors, another deliberate error was keeping the issue open ended; ideally such issues should be closed within six weeks.

In fact a Sahara group company kept an issue of Rs 17,250 crore (Rs 172.5 billion) open for 10 years.

5. Sahara’s money making machine could have continued had it not committed a mistake. Sahara decided to tap the stock markets to raise money through Sahara Prime City.

In doing so the company had to file a Red Herring Prospectus and disclose working and financials of other group companies. This is when K M Abraham spotted SIREC and SHIC and found that the money raised through OFCDs was camouflaged as private placements.

6. Abraham found out that even though the Sahara group companies collected money they did not have proper records of the identity of its investors. How and to whom would they then return the money? Even professional agencies were unable to locate the investors.

7. The two companies, Abraham alleged, intended to rotate money between group companies. Though the OFCD instruments were issued in the name of the two companies, cheques were sought in the name of Sahara India.

8. When SEBI issued its order on the wrongdoings of the Sahara group on June 23, 2011, Sahara group took the matter with Securities Appellate Tribunal (SAT). But SAT held the SEBI findings to be correct. SAT in its order said, “What it (Red Herring Prospectus) did not disclose was the fact that the information memorandum was being issued to more than 30 million persons inviting them to subscribe to the OFCDs and there lies the catch…This concealment is, indeed, very significant and goes to the root of the controversy.”

9. Sahara group then approached the Supreme Court but in August 2012, the honourable court asked the group to repay an amount of over Rs 24,000 crore (Rs 240 billion) to SEBI within 90 days.

The regulator will then distribute the money to bonafide investors. But suddenly Sahara said it had repaid most of the money over the last one year and an amount of just over Rs 5,000 crore (Rs 50 billion) was pending.

10. In the October hearing Supreme Court had clearly hinted that it was no longer amused by the delaying tactics of the Sahara group and would detain the group’s officials till the payments are made.

The Supreme Court Bench had said that previous orders have not been compiled with and that was why Roy and the directors were being summoned to explain the delay. Roy did not turn up, thus the non-bailable warrant.


Here is a cut-short timeline of important events in the Sahara-SEBI case:

November 24, 2010: SEBI restricts the promoters and directors of two Sahara group companies, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, from raising any capital through the issue of securities: either equity shares, convertible debentures or any other securities.

December 13, 2010: Lucknow bench of Allahabad High Court stays SEBI order.

January 2011: Supreme Court (SC) turns down SEBI’s plea to stop two firms from raising money from investors, but empowers it to seek information and issue advertisements to inform investors that the matter is pending investigation. SEBI issues a public notice on its website cautioning investors against the buying debentures of Sahara India Real Estate Corp and Sahara Housing Investment Corp. Sahara India Real Estate sends a legal notice to SEBI.

April 2011: The Lucknow bench of Allahabad High Court vacates stay. SEBI issues a public notice alerting investors about a ban on money mobilisation by two Sahara group firms. Sahara Group files a petition in the Supreme Court challenging the Allahabad High Court order, which asked it to share full details of investors participating in its fund-raising exercise with SEBI. Sahara accuses SEBI of defaming the company.

May 2011: SC directs SEBI to proceed with its investigation into financial instruments used by two Sahara group companies to raise money from the public.

June 2011: SEBI directs Sahara firms to immediately refund the money collected through sales of optionally fully convertible debentures (OFCDs) with annual interest of 15 percent.

July 2011: Sahara appeals in SC that SEBI has no jurisdiction. Seeks notice to Centre. *SC directs Sahara to approach the Securities Appellate Tribunal (SAT) against SEBI order on OFCDs.

October 2011: SAT upholds SEBI order against Sahara to refund money.

November 2011: SC stays SAT order.

January 2012: SC gives Sahara group companies three weeks’ time to choose between two courses to secure the investments made by the public in the OFCD scheme — either to give sufficient bank guarantee or attach properties worth the amount.

August 31, 2012: A Supreme Court bench of Justice Radhakrishnan and Justice Khehar rules in favour of SEBI and orders the two Sahara companies to return to its OFCD investors the full outstanding amount of over Rs 20,000 crore, along with 15 percent interest, within three months.

October 2012: Sahara companies file a review petition in the Supreme Court. Sahara claims it sent a truckload of documentation to SEBI within the 10-day limit. But SEBI did not accept it as the documents arrived on the 10th day, after office hours.

October 19, 2012: SEBI approaches Supreme Court alleging Sahara’s non-compliance with the main order.

November 2012: SEBI files a contempt petition against Sahara claiming it had not furnished the investor documents within the court stipulated time.

December 2012: The Sahara Group gets a temporary reprieve from the SC. SC grants it more time to repay the money.

January 2013: Sahara misses the repayment deadline set up by SC. The company fails to deposit the second instalment amount with market regulator. It was required to submit Rs 10,000 crore by January first week.

February 2013: SC refuses to hear a plea asking for extension of deadline to refund investors’ money. SEBI moves in to attach properties of the group and group chief.

March 2013: Sahara approaches special appellate tribunal against SEBI move to attach properties. SEBI seeks arrest of Roy. SEBI also says most of records provided by Sahara untraceable, implying several accounts were fictional.

July 2013: SEBI files a contempt petition against Sahara in SC. Says Company flouting SC direction to make refund.

November 2013: SC bars Subrata Roy from leaving country. Sahara attacks SEBI, calls it a “sarkari gunda” which is working with political patronage.

February 2014: SC issues non bailable warrant against Roy for failing to appear at a court hearing. Sahara India Chief Subrata Roy surrenders before the police, a day after they failed to trace him to execute a Supreme Court warrant for his arrest.

March 2014: On Mar 25, the Sahara group submitted a fresh proposal to the SC offering to pay Rs. 20,000 crore in five instalments to SEBI towards refunds to investors. In its latest plan, Sahara said it will pay Rs.2,500 crore within three days of the proposal being accepted by the Supreme Court, three instalments of Rs.3,500 crore each by 30 June, 31 September (an apparent typographical error made by the company) and 31 December, and the remaining Rs.7,000 crore by 31 March next year. On Mar 26, SC said Sahara’s latest proposal “is not in compliance” with its order passed on 31 August 2012. SC also said Sahara group Chief Subrata Roy could walk out of Tihar Jail on bail the moment he paid Rs 10,000 crore. But Subrata Roy’s lawyer on Mar 27, told the Supreme Court that the company could not deposit the Rs 10,000 crore as surety for bail, as the amount is “too high”. This means Subrata Roy will have to stay in jail till the next hearing which is on April 3.

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