Economic Offences

Cracking the whip

Print edition : April 04, 2014

Subrata Roy at a press conference in Kolkata on November 29, 2013. Photo: DIBYANGSHU SARKAR/AFP

Sahara group's documents in cartons are being unloaded at Stock Holding Corporation of India's custodial office in Navi Mumbai on December 15, 2012. Photo: SHASHI ASHIWAL

The Supreme Court’s direction to the Sahara group to refund Rs.24,000 crore to investors and the decisive action to send its chairman Subrata Roy and two other directors to judicial custody send out a strong message against financial crimes.

AMID high drama and heavy security, Subrata Roy, the chairman of Sahara group, finally appeared before the Supreme Court on March 4 following a non-bailable arrest warrant against him. A courtroom packed to capacity saw some leading legal luminaries trying to rationalise Sahara’s inordinate delay in repaying investors according to a direction of the Supreme Court issued in August 2012. Among the prominent lawyers representing Sahara in the ongoing contempt petition in the court are Ram Jethmalani and Ravi Shankar Prasad, Deputy Leader of the Opposition in the Rajya Sabha. But they failed to extract any clemency from the special two-judge Bench hearing the petition. Justices K.S. Radhakrishnan and J.S. Khehar came down heavily on the company for its use of “dilatory tactics” in delaying the implementation of the orders of the apex court. The court’s insistence on Sahara refunding the money to investors as well as its decisive action in sending the Sahara chief and two other directors of the group to judicial custody in Delhi send out a strong message against serious financial crimes committed to dupe gullible investors.

The Sahara group, with a net worth of Rs.68,174 crore, has businesses in finance, housing, manufacturing, media and aviation. It also owns London’s iconic Grosvenor House and New York’s Plaza Hotel. The success story of Sahara’s expansive corporate empire is also one of the unholy nexus between powerful politicians and corporate conglomerates. The lavish wedding of Roy’s sons in 2004 saw a number of people from the corridors of power—politicians, Bollywood actors, cricketers—fly down to Lucknow. Even the then Prime Minister, Atal Bihari Vajpayee, attended the celebrations.

Roy cultivated relationships with Mulayam Singh Yadav of the Samajwadi Party over the years. In 1999, the wedding reception of Mulayam’s son, Akhilesh, was hosted at Sahara Shahar, the lavishly built Sahara township of 120 hectares in Uttar Pradesh. In 2012, Akhilesh Yadav was greeted with a lunch party at Sahara Shahar within hours of his swearing in as Chief Minister. It is hardly surprising then that Roy’s arrest only elicited muted responses from the political class.

Violation of norms

Roy’s fall from grace has caught as much public attention as his meteoric rise. On August 31, 2012, the Supreme Court directed the Sahara group to refund to about three crore investors by that November end Rs.24,000 crore raised through optional fully convertible debentures (OFCD) in 2008-09 by two of its group companies—Sahara Housing Investment Corporation Ltd (SHICL) and Sahara India Real Estate Corporation Ltd (SIRECL).

An OFCD is a debt instrument issued to a small-time investor which can be converted into equity when the investor wishes. This money was collected from small-time depositors without following any prudent disclosure and investor protection norms. Putting the details of the mobilisation out in the public domain, as required by law, was also not followed.

The two group companies had not intended to list the securities on a stock exchange, as was required by the Securities and Exchange Board of India (SEBI) Act. As per a SEBI order in June 2011, which eventually led to Sahara being held guilty in the Supreme Court, these companies, in their red herring prospectuses filed with the Registrar of Companies, had stated that the money collected from the investors would be used for financing the commercial activities of the company.

Following a series of flip-flops by Sahara and its inability to pay the said amount of money to the investors, the Supreme Court ordered Roy to be personally present in the court on February 26. The court refused to accept his plea that he could not appear for the hearing because of the failing health of his 92-year-old mother. Apart from continuing contempt of the court, the Sahara case has also brought to the fore glaring loopholes in the functioning of the country’s capital markets. The contempt petition against Sahara, which was listed for further hearing on March 11, has been adjourned indefinitely at the time of writing this article.

In the case against SIRECL, the Supreme Court refused to allow the company to buy more time in settling its repayments to the investors. In an attempt to paint Sahara’s efforts to issue OFCDs as a mode of financial inclusion, Roy told the Bench on March 4: “It is a beautiful human story. If you hear our story, you will love us and you will pat us.” The Bench was quick to retort: “We will love you if you pay the investors’ money. We will love you if you obey the rule of law. We will love you if you comply with our judgment.”

The court summarily rejected two proposals of repayment presented to it by the company on March 7 and March 10. On March 7, Sahara made a proposal to furnish a bank guarantee for Rs.22,500 crore. In the meanwhile, SEBI could initiate the sale of property for which titles had been handed over, it said. The sale of property would stop once the bank guarantee was finalised and handed over to SEBI and the amount earned to date would be refunded to Sahara. The court rejected this proposal as being unacceptable and said that the sale of property could have been started by the company much earlier.

On March 10, the Sahara group proposed to pay Rs.19,000 crore of the investors’ money with SEBI in cash instalments of Rs.2,500 crore each at regular intervals of three months, thereby meeting all outstanding claims by July 2015. The court dubbed this proposal as “unacceptable” and “dishonourable”.

In its August 2012 judgment, the Supreme Court observed that it was the intention of Sahara to issue securities to the public under the garb of private investment and that it did not intend the securities to be listed on a stock exchange though in reality they were issued to the public. “Principles of listing is intended to assist public companies in identifying their obligations, which are continuing in nature, transparent in content and call for a high degree of integrity,” the court observed.

The court had also emphasised the significance of disclosure norms as a mechanism to prevent the public from being misled. It had, therefore, concluded that Sahara had no right to collect Rs.24,000 crore from three crore investors without complying with any regulatory provisions contained in the Companies Act and the SEBI Act. It upheld a SEBI order of June 2011, which had held that Sahara was legally liable to repay the amount collected from the investors.

There is some dispute about the amount to be repaid to the investors, with SEBI and Sahara citing different figures. While Sahara proposed to furnish a bank guarantee for a sum of Rs.22,500 crore to settle the payments of investors, SEBI argued that the dues of Sahara amounted to Rs.37,000 crore. SEBI lawyers contended that according to the Supreme Court order of August 2012, Sahara would have to refund the amounts collected through the red herring prospectuses dated March 13, 2008, and October 16, 2009, along with interest at 15 per cent a year to SEBI from the date of receipt of the subscription amount until the date of repayment within three months hence. According to the affidavit filed by Sahara in the Supreme Court, the last subscription was received on April 13, 2011. Calculating the interest from April 2011 to March 2014, SEBI arrived at the figure of Rs.37,000 crore to be repaid to the investors.

While hearing the contempt petition, the court further made some significant observations in its order on March 4 on the importance of maintaining market integrity and investors’ confidence. “Preservation of market integrity is extremely important for economic growth of this country and for national interest. Maintaining investors’ confidence requires market integrity and control of market abuse. Market abuse is a serious financial crime which undermines the very financial structure of this country and will make imbalance in wealth between haves and have-nots,” the court observed.

Attempts to mislead the court

During the contempt proceedings, SEBI counsel Arvind Datar informed the court that there was a contradiction at every stage in the submissions by Sahara which frustrated its attempts to collect the money to be refunded to the investors. On March 4, Datar informed the court that Sahara had sent about 3.4 crore application forms and two crore refund vouchers in 127 truckloads in December 2012. He said that SEBI had been trying to unravel these documents for the past 11 months and had found glaring irregularities. “There are instances where the inflows of money are recorded, but there is no record of the outflows,” he said.

Datar also stated that SEBI had received 3,500 claims from investors for an amount totalling Rs.27 crore. The refunds could not be carried out yet as there were instances of investors with multiple accounts. During the course of the hearings on March 4, Ram Jethmalani argued that SEBI had not cooperated in the verification of the documents provided by Sahara to determine the genuine investors.

The Supreme Court, in its March 4 order, also raised concerns about the company misleading the court. “Documents and affidavits produced by the contemnors themselves would apparently falsify their refund theory and cast serious doubts about the existence of the so-called investors. All the fact-finding authorities have opined that majority of investors do not exist,” it said.

Role of SEBI

It was investigations led by K.M. Abraham, who was whole-time director of SEBI until July 2011, that led to the unravelling of financial irregularities in the issuing of OFCDs by Sahara. Abraham’s order against SHICL and SIRECL led to Sahara being held guilty of financial crimes in the highest court of the land. The SEBI order states the manner in which the Board of Directors of Sahara held a meeting on March 10, 2008, and resolved to issue unsecured OFCDs by way of private placement, the details of which were mentioned in the red herring prospectus filed with the Registrar of Companies, Kanpur. SIRECL had specifically indicated in the prospectus that it did not intend to get its securities listed on any recognised stock exchange.

Further, it was also stated in the prospectus that only those persons to whom the Information Memorandum was circulated and/or approached privately who were associated/affiliated or connected in any manner with Sahara group would be eligible to apply.

It was also stated in the prospectus that the funds raised by the company would be utilised for the purpose of financing the acquisition of townships, residential apartments, shopping complexes, and so on, and for construction activities to be undertaken by the company in major cities of the country and to finance other commercial activities/projects taken up by the company within or apart from the above projects.

The Supreme Court judgment in August 2012 relied on the detailed order prepared by Abraham.

Abraham was not given an extension at SEBI. He is at present Additional Chief Secretary in the government of Kerala.