Sahara- Sebi tussle and several unanswered questions

The Sahara-SEBI slugfest now looks more like an I-Spy game with the market regulator unable to press its charges that once sounded solidly genuine against Subrata Roy, India’s self-styled baron for the poor. 

Despite repeated advertisements inserted by SEBI — in both English and regional language dailies — only 4,600 investors of two Sahara group companies have – till date – claimed their refunds, the total a little below Rs10 crore.

The low demand has bolstered Sahara's argument in the courts that it had repaid most investors who had bought bonds issued by two group companies — Sahara India Real Estate Corp (SIRECL) and Sahara Housing Investment Corp (SHICL).

The low turnout also raises question that Sahara’s investors are either fully or partially fictitious. If that is the case, the onus is on the market regulator to prove it.

On paper, Sahara’s previous refunds has been certified by none other than the Reserve Bank of India (RBI) in 2008 when the company exited its para-banking RNBC business in 2008 and paid back Rs18,000 crore to 40 million investors over three years — instead of the stipulated five years — under the stern RBI gaze helmed by the federal bank’s two Statutory Auditors and three nominated directors. There were no violations.

But SEBI is just not satisfied. It pressed another charge in India’s apex court — as late as Thursday, October 30, 2014 — arguing Sahara India has not paid a whopping Rs47,000 crore to its investors and worse, the Lucknow-based conglomerate showed little interest in selling three luxury hotels in New York and London to raise cash for Roy’s bail.

The charges have incensed Sahara lawyers, who have argued that SEBI needs to answer why it was unable to find the investors and that there was no let up in their efforts to sell the iconic hotel. One of the properties, the Grosvenor House, was listed as “for sale” for nearly a decade before Roy offered cash. 

Unlisted Sahara had paid $759 million in 2010 for Grosvenor House and about $570 million for the Plaza in 2012. It also owns the Dream Hotel in New York.

But selling the hotels is a tough proposition.

The slugfest between the two has perplexed legal luminaries across India, many of whom are wondering where is the case headed. Deals for sale of the three hotels are still hanging, while SEBI is unable to find all the unpaid investors it needs, to put Sahara further in the dock.

Meanwhile Roy, Sahara’s big boss, is back in a cell in Delhi’s maximum security Tihar prison after living in a makeshift office for two months while working on the hotel sale.

Roy, jailed for contempt of court in March, amid a long-running dispute with SEBI over Sahara's failure to repay billions of dollars to three core investors who were sold outlawed bonds worth Rs24,000 crore, now has books, A4 size white papers, pens and pencils and two Sahara directors for company in the cell. 

Once he had an office, phone, Internet connection and three secretaries, all permitted by the Supreme Court.

But now, no one has a clear picture as to how Roy, who needs to raise Rs100 billion ($1.6 billion) to have a chance of obtaining release on bail, will garner cash. At the same time, SEBI must prove its charges that Sahara’s investors are fictitious and that the company is just a front for parking illegal cash of corrupt politicians and corporate captains. 

The Sahara case is not the only one India’s stock market regulator is chasing. It has a huge log of cases, and the cash recovery component a little over Rs65,000 crore. If Sahara is added to the list, the amount could gross a little over Rs100,000 crore, enough to buy 126 fighter jets from France. The task is huge, almost like cleaning the Ganges. 

The regulator has reached mango orchards, timeshare resorts, beehive sellers, tea, peanut and jatropha plantations and even goat farms in its push against unregistered investment funds to root out suspected Ponzi-like schemes. Notices have been issued against 39 companies since May this year, four times the number the market regulator censured in 2013. 

The growth of such companies reflects an awful lack of systems in the hinterland where these companies flourish without being noticed, often hiring Bollywood stars to promote their daily deposit of pygmy schemes to gullible villagers in under-banked region, lacking investment options.

For the records, India is the world’s third fastest growing market for shadow banking, right behind China and Argentina, says a 2013 Financial Stability Board report. 

Consider the case of Delhi-based PACL, a real estate company with interests in cashew and mango firms and travel booking portal, which has been asked to refund a whopping Rs49,100 crore. What is interesting is that a former SEBI executive director, Sandeep Parekh, is now representing PACL in its case against the market regulator.

There were others like the Mumbai-based Pancard Clubs that raised a little over Rs3100 crore by selling hotel timeshares to about 2.5 million investors. And there was Beetal Livestocks that sought goat investments, offering guaranteed monthly returns of 2 per cent on a minimum investment of Rs6000. 

Both were censured by SEBI. Now, it is the market regulator’s job to ensure that these companies — almost like Sahara — return investors’ money, else face criminal charges. Thanks to a new amendment in the SEBI act, the regulator has got unprecedented enforcement powers, much more than those of the market regulator in the United States.

Two factors, hence, are of utmost importance in this big search for illegal cash. First, it must be proved the investors were duped and they lost their monies. And secondly, the company must be forced to pay back. Minus the first, the second will not work.

In Sahara’s case, the first option is proving to be the biggest bottleneck for SEBI. That needs to be uncorked, duped investors traced and criminal charges pressed against Roy. Minus that, it will be a weak case.

The writer is the India Editor for Central European News