Author: Monica R Final Year Law Student at Sastra Deemed University
Abstract
The 2010, Sahara India Pariwar scam is the one of the biggest financial frauds in India. Two Sahara Companies involved in raising of illegal sum of money from more than 3 Crore investors without complying with SEBI guidelines. These two companies have been arising funds from investors from 2008. In 2011, these two companies wanted to expand their operations and decided to arise funds from public issue. While checking the documents of the public issue, SEBI found out that there is malpractice involved in it. Legal proceedings went on and ruled in the favour of SEBI. In this article, The Sahara India Pariwar scam, its implications on the financial market, reformation that followed this scam, impacts on stakeholders and investors will be examined.
Keyword – Sahara India Pariwar, SEBI, Investors Protection, Optionally Fully Convertible Debentures
Introduction
Sahara Group is founded by Subrata Roy Sahara. He gradually diversified the businesses of the group and expanded into a diversified conglomerate in the fields of finance, media, sports, hospitality, real estate, etc. Within a short period of time, the group attained financial stability and significant market share. It acted as an official sponsor of the Indian Sahara India Pari war scam emerged as a watershed moment in Indian Financial market. It affects the investors interest and discovery of the several loopholes in the enforcement mechanisms, and leads to increase in investor security, financial security, inclusivity and transparency in the management of the company.
Background of the Scam
Two entities of the Sahara Group – Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) involved in arising of funds from investors without fulfilling the regulations of the SEBI. The scam can be dated back to early 2000, where Sahara India Real Estate Corporation Ltd and Sahara Housing Investment Corporation Ltd started to issue to the public Optionally Fully Convertible Debentures (OFCDs). This instrument guaranteed more returns to the public and it attracted the people in India. The people who are attracted towards this instrument are the people where the Sahara group has established its company. The companies have issued the Optionally Fully Convertible Debentures and raised money from the public till 2011.
The issue has raised when the chartered Accountant Roshan Lal, sent a letter to National Housing Bank about the housing bonds issued by these two companies. Letter highlighted the noncompliance of the new regulations of the SEBI. Due to the lack of the power to proceed with the case, National Housing Bank transferred the case to SEBI. SEBI investigated into the case. The SEBI investigated into the prospectus issued by these two companies. Both of the companies have issued IPO for arising fund for the Real Estate firm of the Sahara Group, Sahara Prime City Limited. Similar letter was also sent by the group of lawyers from Ahmedabad.
SEBI conducted investigation into both the letters received and found out that the Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) have raised the capital of 4,000 and 32,300 crores respectively. SEBI has issued show cause notice to define their increase in capital. But both companies not able to prove their cash flow.
The primary market and the secondary market are the two distinct market types that have been formed for each of the two legal ways to get funds from the market. Primary market means include things like rights issues, bonds issued by financial institutions, private placement, venture capital, and public issues. On the secondary market, securities issued on the main market are bought and sold. The fictional stock market is created by these individuals who trade financial assets on it. Although Sahara is a publicly traded company, the company was characterized as private in its prospectus.
Sahara Prime City, a firm of the Sahara India Pariwar group, published a red herring prospectus for debentures that had over 934 pages.
The Sahara group have tax disagreements with the Income Tax authorities regarding the issuance of OFCDs. A disclosure of 34 crores was made in the prospectus. Furthermore, it issued OFCDs to collect money between April 25, 2008, and April 13, 2011, which was obviously against the company’s prospectus.
Additionally, the company made initial public offerings (IPOs) available. The company has generated income of Rs. 17,656 crores in total over this period. The funds were collected with contributions from almost 30 million people. It also failed to notify SEBI, the organization in charge of market regulation, of the same. By the end of 2009, the company’s liability had grown to Rs. 20,000 Crore.
The Reserve Bank of India prohibit the company from issuing any additional debentures and directed it to start winding up processes. To sum up, the company was charged with money laundering and financial wrongdoing.
SEBI’s Accountabilities
SEBI took note when the National Housing Bank filed the charge in this particular case. Subrata Roy questioned the authority and provided reasons for not applying for approval from SEBI after reading the same. Subrata Roy stated that it had sent the ROC, its red herring prospectus prior to issuing the bonds. Consequently, they are not committing fraud. The two Sahara companies were instructed by SEBI to cease marketing the bonds in question and pay back investors’ money.
Court Cases Concerning Subrata Roy and the Sahara Scam
Subrata Roy missed the three-month deadline and 15% interest rate for depositing the money with SEBI. The Supreme Court mandated that Sahara Group to make payments in 3 instalments.
Subrata Roy claimed that investors had already received their money back and paid the first instalment of Rs. 5120 Crores but withheld the next two instalments.
Out of the approximately 2–5 million investors, just 4600 showed up to claim their money.
The Supreme Court ordered the detention of Sahara Group chairman Subrata Roy on February 26, 2014. The Enforcement Directorate charged Sahara Group with money laundering in November 2017.
Money Laundering Crisis
Only a small percentage of the 170 trucks full of investor information that were delivered to SEBI were accepted due to the fact that it was delivered late. An investigation showed that the information provided to investors was false. Furthermore, the funds were not sent to Subrata Roy within the stipulated three-month period.
Sahara was required by Apex to make the three instalment payments. Subrata Roy only made the initial payment of Rs. 5120 crores; the other two payments were not paid. Money is already received by the investors; this is the statement of Subrata Roy. Although Subrata Roy asserted that the payments had already been paid, only roughly 4600 investors complained that their money had not arrived. Consequently, the court made a demand for proof and details regarding the source of funds for the returns.
Effects on Stakeholders and Investors
The Sahara scam had significant and wide-ranging repercussions. Millions of investors, many of whom came from disadvantaged economic backgrounds were left feeling unsettled when questions about the validity of their investments surfaced. The unhappiness of investors brought to light the necessity of more powerful regulatory frameworks and legislation protecting investors from financial fraud and mismanagement.
The Sahara scam affected India’s financial system and regulations in addition to investors. It emphasized the gaps in the private placement regulatory framework and questioned if current regulations are sufficient to handle intricate financial schemes intended to avoid detection.
Need for Reforms
The Sahara scam forced India to critically reevaluate its legal system and enforcement tactics. SEBI implemented stronger laws governing firms’ fundraising efforts in response to the gaps revealed by the scam. These restrictions included higher transparency standards, stricter disclosure norms, and strengthened surveillance methods.
The incident served as a spark for more extensive changes meant to improve corporate governance standards and investor confidence throughout India’s financial systems. It emphasized how crucial it is for regulators to quickly adjust to changing financial practices and technologies while maintaining the values of transparency, accountability, and investor protection.
Conclusion
The 2010 Sahara scam serves as a lesson in unbridled corporate greed, regulatory oversight, and the never-ending pursuit of justice in India’s financial systems. Legal precedents, regulatory changes, and increased public knowledge of investor rights and safeguards are all manifestations of its legacy. The lessons learned from the Sahara scam serve as a sobering reminder of the significance of strong regulatory oversight and moral corporate conduct in defending investor interests and promoting sustainable financial markets as India continues to negotiate the challenges of economic growth and financial inclusivity.
FAQS
1. What was the 2014 Sahara scam?
In the 2014 Sahara scam, Optionally Fully Convertible Debentures (OFCDs) were purportedly used by Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) to raise substantial sums of money from investors; however, it was later discovered that these securities had regulatory violations.
2. With whom was the Sahara scam associated?
The main players were the Sahara Group’s founder, Subrata Roy Sahara, and a number of other Sahara Group organizations that were charged with planning the fraudulent fundraising efforts.
3. In what ways did the Sahara Group use OFCDs to raise money?
Sahara Group offered OFCDs to investors with the promise of large returns. Millions of investors were drawn in by the widespread marketing of these debentures, which were mostly promoted in India’s rural and semi-urban areas.
4. Which legal actions did Sahara Group face?
SEBI filed a lawsuit against Sahara Group, claiming that the company had misled investors and violated regulatory standards. The matter made its way to the Indian Supreme Court, which rendered significant decisions about regulatory authority and investor protection.
5. What effects did the Sahara scam have on investors?
Investors had to deal with uncertainty and possible losses when the validity of their investments was called into question. The fraud brought attention to legal loopholes pertaining to investor protection and increased public understanding of the dangers of unregulated financial instruments.
6. Has the Sahara scam resulted in changes to regulations?
Yes, SEBI tightened rules pertaining to corporate fundraising activities, with a special focus on private placements and bond issuances, in response to the Sahara scandal. Reforms intended to improve openness and investor protection were introduced.
7. Which are the key takeaways emerged from the Sahara fraud?
The Sahara fraud served as a reminder of the value of strict implementation of investor protection laws, transparent financial transactions, and strong regulatory monitoring. It also brought attention to the regulatory framework’s weaknesses, which required fixing.
8. What effects did the Sahara fraud have on India’s banking industry?
The fraud significantly affected investor confidence, corporate governance procedures, and regulatory laws in India’s banking sector. It acted as a key for changes meant to boost the stability and integrity of the financial markets.
Sources
https://lawinsider.in/insight/sahara-india-pariwar-scam-insight
https://finshots.in/archive/the-mystery-of-saharas-25-000-crores/
