Wednesday, March 5, 2014

The Subrata Roy Sahara and the SEBI Fiasco With Supreme Court – Explained!!!

The past few days have been very busy for the Sahara Family. The Patriarch Mr. Subrata Roy was arrested over the weekend and is currently under judicial custody along with a few of his key management personnel for his alleged involvement in the 20,000 crore Investment Cam perpetrated by his group companies. Yes, you read it right – 20,000 crores. A common man who owes lets say just Rs. 20,000/- to his credit card will get recovery agents to his house daily and will end up getting some of his assets repossessed within weeks. Here we have a billionaire who has been saying that he will repay the money soon for years and hasn’t actually done it yet. Talk about disparity in how the LAW Treats you based on who you are…

Anyways, the purpose of this article is to explain to you what exactly happened so that you will know why this case is hogging the news so much of late…

The Beginning …

In 2010, two Sahara Group Companies Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) were raising large sums of money – Thousands of Crores from investors by issuing Optionally Fully Convertible Debentures to the public.

An Optionally Fully Convertible Debenture is just a kind of Bond that can be converted into Equity Shares by the investors if they want to. So, this is a kind of hybrid market instrument that would come under the jurisdiction of the Securities and Exchanges Board of India (SEBI)

Back to the topic, these two companies were raising thousands of crores but SEBI was not fully aware of why they were doing so or what they were doing with the collected money. Ideally speaking, before such an issue happens, the company is expected to file a request with SEBI, get it approved and then start the collection of public money. However, that wasn’t the case.

So, how did SEBI Find out that Sahara was collecting public money?

Actually, it was a random accident. Mr. Abraham who was the Director of SEBI up until July 2011 was reviewing the Draft Red Herring Prospectus (DRHP) to raise equity for real estate company Sahara Prime City Ltd through an initial public offering (IPO). The DRHP disclosed details of two associate group companies (SIREC and SHIC) that were raising huge amounts of money from the public through optionally fully convertible debentures.

Any company that wants to issue equity shares or Debentures or any other market related instrument to the public through the IPO Process has to file a Draft Red Herring Prospectus or DRHP to SEBI to tell them the details of the public issue, why they are doing so, their financial position etc. It is pretty standard procedure in India.

So, when SEBI found out that two Sahara Group Cos were raising thousands of crores by issuing optionally fully convertible debentures which they were not aware of, they started digging to find out what exactly is happening.

So, what did SEBI Do when they found out?

SEBI asked the two companies – Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) to stop raising money through an order dated 24 November 2010

What did Sahara do in Response?

The usual – whatever large corporates do in our country when they are questioned…

Sahara rushed to the Lucknow bench of the Allahabad High Court, which stayed Sebi's order but not its investigation. Sebi moved the Supreme Court, but the apex court too was not of much help. It merely directed the high court to expedite the case. The high court vacated its stay only on 7 April 2011, when it found that the Sahara group was not cooperating with Sebi as it had directed.

On 29th April 2011 the Allahabad High Court lost patience with Sahara and dismissed the group’s petition against Sebi with the following remarks:
“A person, who comes to the court, is supposed to come with clean hands and bona fide intentions, and has to abide by the orders passed by the court, more so in a case where the parties' counsel agree for certain actions to be undertaken. If some assurance is given by any person to the court, as has been done in the present case, and the said assurance/understanding is not honored, the court would not come to his rescue. The application is, therefore, rejected."

What was SEBI’s Justification to go with the Court-Case Route?

The Sahara Group primarily challenged SEBI’s intrusion into the affairs of SIREC and SHIC saying that OFCDs were not under SEBI’s jurisdiction since they were hybrid instruments – neither shares nor debentures.

Also, while Sahara was arguing with SEBI about whether their issue came under SEBIs jurisdiction or not, they also claimed that the OFCDs were being privately placed with the Sahara Group and not to the general public. When no public offer was involved, how could SEBI intervene?

Was this Justification True?

Of Course Not. Any market related instrument comes under SEBIs Jurisdiction. Sebi demolished this argument easily since they were debentures that could be converted into shares. This contention was later upheld by the Securities Appellate Tribunal and the Supreme Court in 2012.

Sahara’s counter to the Private placement point was - when Sahara offices and agents were busy hawking these OFCDs, and when the two companies SIREC and SHIC had over 6 million investors, the offers can’t possibly be considered as a private placement.

Was Sahara Right in Excluding SEBI from their OFCD Issue?

Absolutely Not.

Before the OFCD Issue starts, according to the Schedule II of the Companies Act of India, SEBI has to Review and Vet the DRHP of the company. The Schedule also specifies that, when the company files its DRHP, the Company Directors have to file a Declaration saying that they have complied with all provisions of the Companies Act and the SEBI guidelines.

In reality, the Directors of these 2 Sahara companies SIREC and SHIC excluded all references to SEBI while signing their declarations.

On top of all this, this whole OFCD Issue had actually started in 2008 for SHIC and the SIREC Issue had no-closing date. How can an Issue happen which has no closing or end date?

Why Does SEBI Have these Guidelines?

The main reason behind SEBI Asking companies to follow the guidelines is to protect the Investor. If some random company starts issuing stocks or bonds in the market and dupes investors, who would be responsible?

Ya that’s right SEBI. This is why SEBI has those guidelines. Plus, unregulated collection of funds from the public could result in Money Laundering and other illegal activities which SEBI is trying to control here…

The Obvious Next Question – Why Would a company like Sahara try to bye-pass the Process?

I guess the easiest answer is because – they can. They have enough political and financial backing to get away with anything. At least – that is what they thought so up until they were caught in this situation.

Another Sahara group company, Sahara India Commercial Corporation, had kept an issue of size worth Rs 17,250 crore open for 10 years! How they managed to do this right under SEBIs nose is still a mystery. Maybe if we get into details of who helped them, maybe a lot more heads will roll…

So, What did SEBI Do, after it found Irregularities?

SEBI simply asked the following questions:
1. Why are you raising the money?
2. Who are the owners and investors in these companies that are collecting the money?
3. What do you Intend on doing with the collected money?
4. Why the OFCD Issues were open for such a long period and what will be the Closing Date?
5. Why did the OFCD Issue Open without the DRHP being filed with SEBI?

Was Sahara able to answer these questions?

Unfortunately NO. They were not able to get straight answers to questions 1, 3, 4 and 5. In fact, they dint even have a list of Investors who had invested into the company. To find out the names of its own investors, SIREC actually needed the help of professional accounting firms. If the identity of the investors and addresses themselves are not readily available with a company how is it practically possible that the issue was even a legit one?

So, What are the Courts Saying Now?

The courts were totally unhappy about the fact that the Sahara Group was non-cooperative throughout the Investigation. The Supreme Court had directed the group to refund the money collected by them to the Investors. Sahara was asked to block or pledge assets worth 20,000 crores to help SEBI recover the money and refund it to investors.

Why Did the Courts Come to such a Drastic Decision to Arrest Mr. Roy?

SEBI Even tried freezing Sahara’s assets with banks but that measure wasn’t successful. They reached out to 58 banks in India and they were able to recover a total of 1 Crore. Yes, you read it right – Just 1 crore. It is surprising how little money such a large corporate had in its accounts.

Sahara had pledged an Asset – 700 plus Acres of unbuilt land in Ambey Valley in the outskirts of Mumbai. Sahara claimed that this asset was worth over 3400 crores. But when State Bank of India tried to estimate the value of the Asset their valuation was a mere 870 crores. Other assets that Sahara were pledged were even hard to locate for SEBI. Sahara had claimed that they had 46 lakh sq. ft of land in Goregaon but based on the Land Survey numbers given, the size of the plot was just 19 lakh sq. ft. On top of this, according to governmental records the land may not even belong to Sahara. SEBI got back to the supreme court that, they were not even able to find out some of the assets pledged by the group.

On top of all this, Mr. Roy never appeared in person to explain the situation. Of course, this was up until last week when the Supreme Court got really frustrated and issued a Non Bailable Arrest Warrant against Mr. Roy which eventually resulted in him finally gracing the Supreme Court with his Presence.

Could this really be a Legit Attempt by Sahara to Raise Funds?

Maybe, maybe not. This is something only a thorough investigation by impartial authorities can find out. However, based on the facts I was able to gather from the Internet, it doesn’t seem to be a Legit Attempt by Sahara to Raise Funds. Here is why…
1. They explicitly went under the nose of SEBI. If they were legitimately trying to raise funds – why exclude SEBI?
2. They were unable to furnish basic details requested by SEBI or the Supreme Court
3. They have been trying to Impede the Investigation all along and the assets they pledged are either non-existent or don’t have the value they claim
4. Their Bank Accounts in India do not seem to have that much funds. The 20,000 crores that they collected seems to have just vanished…

The Smoking Gun

Over the past few years – Mr. Subrata Roy and his Group have purchased the following:
1. The IPL Team – Pune Warriors India
2. A Stake in a Formula 1 Team – Sahara Force India
3. A Stake in Plaza Hotel in New York
4. A Stake in Dream Downtown Hotel in New York
5. A Stake in Landmark Grosvenor House Hotel in London

All this purchases would have cost Sahara around 9000 crores or more. Sahara claims to have purchased these Assets using their liquid cash surplus and through profits made by the other Sahara Group companies.

With the amount of money they have in their bank accounts in India and given the fact that most of the Sahara Group Cos posted little to no profits over the past many years – it is practically not possible that they came up that much funds internally.

When the Enforcement Directorate probed these transactions, they found that a large chunk of funding (2500 crores) in the purchase of the Landmark Grosvenor House Hotel in London came from SIREC – one of the companies that SEBI is Investigating.

Also, the Enforcement Directorate (ED) Was also able to find suspicious cash transactions. Money was routed from SIREC to Aamby Valley, and from there to Mauritius and London. The transactions took place from mid-2011, around the time SEBI had begun probing SIREC.

The Most Recent Update:

Yesterday the Supreme Court was very hard on Mr. Subrata Roy. They were totally unhappy over the fact that he and his group have been non-cooperative throughout the whole investigation. He asked for more time to refund the money and was trying to pacify the Judges. The Judges said that they tried to accommodate him but since his behaviour was not satisfactory, they had no choice but to arrest him. Mr. Roy offered fresh Bank Guarantees worth Rs. 22,500/- crores to SEBI and the Supreme Court.

My Last Words:

As the full details are yet to be made public by Investigators, there is a possibility that all of this was a big confusion. However, based on the details that have come out so far, it looks like this whole fund raising exercise was some grand scheme orchestrated by the Sahara Group to just collect money from the public without actually divulging true details. As the authorities suspect this could be a Money Laundering exercise or some scheme by them to convert black money to white.

At this time – God Only Knows what the truth is. We would have to wait until the Authorities finish their investigations and the Supreme Court comes up with its final ruling…

Disclaimer: All Details in this article were gathered from the Internet. The Author does not guarantee the accuracy of the details posted here.


  1. A case can be resolved or not depends on the processes executed, with a slow & malicious approach followed by law in our country, even my next generation would read another article on Sahara after 20 years down the line. This has now turned into a kid's game with EPFO also participating in.

  2. It is SEBI's fault in the first place because they never showed transparent reports to sc & tried to misguide sc and wasted the time of both sc and sahara. If some one has to be behind the bars than it should be the directors and owners of sebi and not Sahara. They have ignited this false fire, EPFO is now adding fuel to it.


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