Sahara Parivar

SAHARA INDIA INVESTOR FRAUD

An insight into the ambitious journey from rags to riches of Mr. Subroto Roy, the Managing Director of Sahara India

Sahara India started by Mr. Subroto Roy in 1978, as a chit fund company which took money from small investors, who did not have access to a formal banking system. In a span of 30 years, it becomes India’s largest residual non-banking company, with a net worth more than $5 Billion USD.

Their assets included the following:

➢ Owned more than 4000 companies with business interests ranging from Real Estates to Airlines; and from Malls to hospitality.

➢ Possesses a land bank of 36000 acres and a stake in landmark hotels in New York and London.

➢ Owned an Indian Premium Cricket team and also had a stake in India’s Formula One team.

➢ At a time, a second largest employer with one million resources and agents, just behind the Indian government.

A case that set a landmark example in the Corporate History of India

Sahara’s manifold growth has always been shrouded in mystery. From a small-scale chit fund company to a conglomerate of over 4000 companies, continuously floated to exploit the regulatory loopholes of Indian Financial system. The Sahara Investor fraud case, one of the biggest Corporate fraud of India, is all about its Investors and Optionally Fully Convertible Debentures(OFCDs)

➢ The scam started to unravel in 2008 when the Reserve Bank of India(RBI) ruling that barred Sahara India financial corporation to raise money from the investors, through his chit fund schemes, because of the persistent violation of the investment norms.

➢ As the company required funds to stay afloat, it needed a financial instrument which was out of RBI pursuit and gave access to public funds.

➢ It floated two companies Sahara India Real Estate Corporation Limited(SIRECL) and Sahara Housing India Corporation Limited (SHICL) and started issuing a hybrid investment product, Optionally Fully Convertible Debentures (OFCDs). The investors had an option to convert into shareholders and generally, which holds true in this case, there are no assets marked to them – essentially, unsecured loans.

➢ Both the companies which were commenced with a negligible capital of $20,000 USD and a negative net worth planned to raise $2 Billion dollars each. The company managed tens of millions of dollars from roughly 3 million investors.

➢ In June 2009, the company decided to tap the stock market with its new venture Sahara Prime City. In doing so, the company had to file a Draft Red Herring Prospectus(DRHP) with Stock Exchange Board of India(SEBI), and disclose all their existing companies working and financials.

➢ While going through the DHRP, the chief officer of SEBI, sensed a large-scale raising of funds by its two companies.

➢ SEBI received two complaints - one on December 25, 2009 and the second on January 4, 2010 - alleging illegal means used by these two firms in the issuance of certain bonds, called OFCDs (Optionally Fully Convertible Debentures) to the public throughout the country.

➢ Based on these complaints, SEBI began seeking clarifications from the group, initially through their investment bankers, Enam Securities, and later directly. It was then spotted that money was raised in a guise of the private placement and even the records of the investors were not proper and complete.

➢ Eventually, SEBI passed an interim order against the two companies on November 24, 2010, asking them to refund the money collected from investors.

➢ On June 23, 2011, when SEBI issued its final order, the group challenged its directions before the Securities Appellate Tribunal. However, the Tribunal upheld the SEBI orders on October 18, 2011.

➢ Sahara group then approached the Supreme Court but in August 2012, the honorable court asked the group to repay $5 Billion to SEBI within 90 days

CONTENTIONS FROM SAHARA INDIA:

➢ That section 55A of companies act of 1956, delegates administrative powers to SEBI, only in respect of listed public companies.

➢ That OFCDS are Hybrid instruments, neither shares nor debentures, thus cannot be listed. Issuance of Hybrid, are in terms with 60(b) of Information Memorandum and only Central Government has jurisdiction under section 55A(c)of Companies act 1956. The Red Herring Prospectus was registered with Registrar of Companies(ROC). Thus, this matter was outside the market regulator’s