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Corporate Nov 30, 2012

Subrata Roy’s Sahara is a fit case for an SIT probe

By R Jagannathan

Between 31 August 2011 and 31 August 2012, Subrata Roy's Sahara Group apparently managed to pay off nearly Rs 19,000 crore to possibly over 20 million investors in two of his low-profile companies, Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC).

We didn't know this. We found this out only yesterday, when the Securities Appellate Tribunal (SAT), which hears appeals against orders of market regulator Sebi, dismissed a Sahara Group plea to receive a final payment of Rs 5,120 crore - the amount that the group claimed was all that was left to be repaid to investors in the optionally fully convertible debentures (OFCDs) issued unlawfully by SIREC and SHIC by bypassing Sebi's regulatory scrutiny.

The dates are important, for 31 August 2012 is when the Supreme Court specifically ordered Sahara to wind up the two schemes and pay the money to Sebi, which would then disburse the funds to legitimate investors after a verification of documents.

Any refunds made by Sahara to investors directly - of which there is ample anecdotal evidence reported in the media - after 31 August 2012 would thus have been a clear violation of the Supreme Court's orders. A Business Standard report yesterday suggested just such an exercise.

The question is: did the Sahara Group flout the Supreme Court's orders anyway? How did the Rs 24,029 crore owed to 29.6 million investors in August 2011 come down to just Rs 5,120 crore one year later? And that too, conveniently just before the Supreme Court order of August this year, after which no refunds could have been made?

In the case of the Sahara Group, there are always more questions than answers. But one thing is clear: the group primarily operates in areas where regulation is weak. PTI

If Rs 24,029 crore has been legitimately whittled down to Rs 5,120 crore in a year's time, it needs to be established by a forensic investigation. For the numbers appear difficult to believe.

In the case of the Sahara Group, there are always more questions than answers. But one thing is clear: the group primarily operates in areas where regulation is weak or where regulators are not sure of their jurisdiction.

Sahara has also been very nimble about shifting from one regulatory jurisdiction to another in order to stay ahead of the law-enforcers.

What is crystal clear is that the group is primarily into money-raising schemes that operate on the edges of the law.

Consider the sequence of its recent regulatory escapes.

In 2008, the group's Sahara India Financial Corporation was debarred by the Reserve Bank of India from raising fresh deposits. It was ordered to stop accepting deposits maturing after 30 June 2011, and return whatever it already had by 30 June 2015.

Finding the RBI's scrutiny difficult to evade, the group then moved into the ambit of the Registrar of Companies (RoC) - which simply does not have the ability to police the country's unlisted companies. This is where Sahara dreamed up two OFCD issues to raise upto Rs 20,000 crore each in SIREC and SHIC.

The RoC happily okayed these huge issues without much application of the mind. Should the official (or officials) who signed the clearances not have asked himself whether two companies with negligible net worth could raise Rs 40,000 in schemes with no closing dates? No antennas apparently went up at the RoC. (Read here).

Everything would have been all right - and Sahara would have got away with this deliberate attempt to evade Sebi's jurisdiction - till it got too cocky and made its first big mistake: it decided to raise money from the market in Sahara Prime City and filed a draft Red Herring Prospectus. This is where Sebi discovered that two other companies, SIREC and SHIC, were raising huge amounts of money from the public through OFCDs camouflaged as private placements.

Luckily for investors, Sebi, through the efforts of Wholetime Director KM Abraham, investigated the matter and ordered the two Sahara companies to return the money in an order dated 23 June 2011. Abraham, after some of his own checking, found that many of the alleged investors in SIREC and SHIC may be non-existent. (Read about it here)

The Supreme Court, in its 31 August order, also raised similar suspicions based on a sampling of just one investor record. Justice JS Khehar, one of the two judges on the bench, had harsh observations to make: "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."

Long before this verbal rap from the Supreme Court, Subrata Roy probably concluded that his game was up. This is why he dragged Sebi to SAT, which gave him its own rap on the knuckles, and upheld Sebi's order; the matter then moved to the Supreme Court, which ended the schemes once and for all. In short, Sebi's order of 23 June 2011 was finally upheld only 14 months later in August 2012. In this huge timegap between the discovery of Sahara's mala fides and the final order to wind up that the OFCD schemes, the group found enough time to whittle down its outstandings to investors.

What was the need for such unseemly rush to repay, when it claimed the money was apparently safe? If the money was safe, how is it that Sahara managed to float a couple of more money-raising schemes, including a so-called Sahara Credit Society started by staffers and agents? In this society, and a new retail venture called Q-Shops, neither RBI nor Sebi has any real jurisdiction.

Clearly, even after Sebi showed him up, Roy has found another shady spot to run his money-raising businesses.

The group's finances are, however, difficult to fathom. As Firstpost noted earlier, a Sahara affidavit filed in the apex court gave some details: SIREC is said to have invested Rs 6,430 crore in real estate projects whose market value increased to astronomical heights - Rs 36,000 crore, a near six-fold rise!

It is not clear what happened to all the real estate the two Sahara companies bought with the OFCD money. If investors were being refunded all through between August 2011 and August 2012 - when outstandings fell from Rs 24,000-and-odd crore to Rs 5,120 crore - did the group sell off some of these real estate assets so quickly in a bad market?

In details submitted before Sebi last year, SIREC had listed current assets, cash and bank balances, development rights on land and projects, advances under joint ventures, etc, the book value of which was pegged at Rs 15,937 crore. The market value of current assets, including cash flow, is shown as Rs 20,297 crore.

The affidavit submitted before the Supreme Court said that SIREC had Rs 23 crore in mutual funds as on 30 November 2011, an investment of Rs 125 crore in partnership firms, and loans and advances (other than to Optionally Fully Convertible Debenture holders) of Rs 204 crore. And the cash and bank balances, including fixed deposits and other current receivables as on 30 November 2011, stood at Rs 1,655 crore.

It is difficult to match one number with another, since these are all private companies.

Sebi caught Sahara only because Subrata Roy made the mistake of trying to raise money from the stock market by filing a draft red herring prospectus with the regulator for yet another company called Sahara Prime City Ltd.

The moral is clear: Sahara, which has interests in real estate, finance, retail, hotels, sports and Formula 1 racing, is clearly a man whose activities the regulators are unable to keep track of.

Since most of his businesses operate in the private realm, no regulator or agency is actually able to look at his books to figure out the real nature of his money-spinning schemes.

Subrata Roy Sahara is thus a fit case for investigation by a Supreme Court-appointed Special Investigation Team, and/or a joint team of forensic experts appointed jointly by the RBI, Sebi, the Registrar of Companies, and the Special Frauds Investigation Office (SFIO) of the Company Affairs Ministry.

by R Jagannathan

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