Author: Thanushree P S, a student at JSS Law College
The Sahara India Pariwar is an Indian Conglomerate headquartered in Lucknow with diverse business interests encompassing finance, infrastructure, housing, media and entertainment, consumer merchandise retail ventures, manufacturing and information technology. It is a privately held company, founded in 1978 by Subrata Roy in Gorakpur. The group operates as an extensive network of 4,799 establishments under the umbrella of Sahara India. The Sahara Scam is mainly associated with two companies- (i) Sahara India Real Estate Corporation Ltd. (SIRECL) and (ii) the Sahara Housing Investment Corporation Ltd. (SHICL).
The Sahara fraud revolves around the failure of the company to return more than 24,000 crores, along with the accrued interest, to its investors.
The Facts of the case
In 2008, the Reserve Bank of India (RBI) imposed a ban on Sahara India Financial Corporation, preventing the company from raising additional deposits. The growth of Sahara’s business empire had always been shrouded in mystery, with suspicions that it operated a Ponzi scheme by collecting funds from many investors. The group relied on a continuous influx of fresh capital to sustain the company’s operations. With the RBI closing the door on collecting deposits from the public, Sahara India needed a financial instrument that could bypass RBI’s oversight while still accessing public funds.
On 30th September 2009, Sahara Prime City (A company of Sahara Group) filed a DRHP with SEBI for its IPO [When a company raises money for the first time via the stock market, it is called an Initial Public Offering (IPO), and it is preceded by seeking approval from SEBI. For this purpose, the company has to submit a Draft Red Herring Prospectus (DRHP), which acts as a kind of bio-data of the company that contains almost all the details about the company. After this, the SEBI analyses the DRHP of the company and decides whether to grant approval to that company or not]. While analysing the DRHP, SEBI detected some errors in the fund-raising process of those two companies of the Sahara Group (Sahara India Real Estate Corporation and Sahara Housing Investment Corporation).
Sahara decided to issue Optionally Fully Convertible Debentures (OFCDs) by these two companies: Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC). The Registrar of Companies (ROC) had to grant approval for those investment vehicles. During that exact period, on 25th December 2009 and 4th January 2010, SEBI received complaints that SIRECL and SHICL are issuing Optionally Fully Convertible Debentures (OFCDs) and raising funds in a wrong way. Because of these complaints, SEBI’s doubts were proven right.
Consequently, SEBI started investigating these two companies and asked Sahara India Group for clarification regarding their method of fundraising. Several factors contributed to this complex legal situation. Firstly, the sheer scale of the issue made it essentially as a public offering. Any company seeking funds from more than 50 individuals had to obtain the approval from the Securities and Exchange Board of India (SEBI) and should adhere to SEBI’s disclosure requirements. But the Sahara group had sought investments from nearly 30 million investors. In addition to the large size and number of investors, another deliberate oversight was keeping the offering open-ended, whereas such issues should typically close within six weeks. In fact, the Sahara group company kept an issue open for 10 years, raising nearly Rs. 20 to 24 crores.
Sahara’s troubles increased and became intense when the group attempted to raise funds through Sahara Prime City by tapping into the stock markets. In doing so, the company had to file a Red Herring Prospectus and had to disclose financial information about other companies of the group. It was during this process that K M Abraham, a board member of the SEBI and Kerala cadre IAS officer, identified irregularities with SIREC and SHIC, revealing that the money raised through OFCDs was disguised to be private placements.
Abraham discovered that despite collecting significant sums of money, Sahara group companies lacked proper records of their investors’ identities, raising questions about how and to whom the funds are to be returned. Even professional agencies were unable to trace these investors.
The Sahara group contested (opposed) SEBI’s findings by taking the matter to the Securities Appellate Tribunal (SAT). However, SAT upheld SEBI’s findings, emphasising the significance of Sahara’s failure to disclose the vast number of investors’ details in their Red Herring Prospectus.
SEBI claimed its jurisdiction and objected on why Sahara has not taken permission from it. Sahara contended that the said bonds are hybrid product, thus does not come under the jurisdiction of SEBI, instead is governed by Registrar of Companies (ROC) under Ministry of Corporate Affairs (MCA), from which the two companies of Sahara had already taken permission and submitted the DRHP with ROC before issuing the bonds. SEBI in return ordered Sahara’s two companies to stop raising money through OFCD and ordered return the money to investors with 15% interest. Sahara approached the Allahabad High Court challenging the SEBI’s order. In December 2010, Allahabad High Court restricted SEBI’s order. In April 2011, Allahabad High Court cancelled the mentioned restriction and the case eventually came to the Supreme Court of India.
Reports also suggested that between the time that SEBI first initiated the inquiry and Roy’s eventual detention, there has not been a single instance of an investor in either of the two Sahara firms actually filing a police complaint or going to court. However, this also points out the possibility of large scale money laundering by the Sahara Group to hide black money. The Group has failed to satisfy the Supreme Court’s order to provide evidence of the source of funds used to make the claimed return payments.
Further Proceedings on Sahara Scam in 2012-2013
In August 2012, the Supreme Court asked both the companies to deposit the money of OFCD holders with 15% interest within 3 months, with SEBI. They were also asked to submit all the details of OFCD holders to SEBI so that SEBI can assure that the money reaches the investors.
During 2013, Sahara sent 127 trucks containing cartons full of details relating to the OFCD holders to SEBI office. SEBI rejected the second batch of files because the trucks reached after office hours, which as per Sahara contained 25% of the investor information. SEBI realised that the files do not contain proper and complete details about the investors, and it was doubted to be a case of money laundering.
Sahara failed to submit money with SEBI with 15% interest within 3 months. Later Supreme Court ordered Sahara Group to make payment in 3 instalments. Sahara paid the 1st instalment of Rs. 5120 Crores, but not the other 2 instalments and claimed that they’ve already made payment to the investors.
Among 2-2.5 Crore investors, only 4600 came forward to claim their money. Upon which, Sahara India said that the other investors did not come forward to claim their money as they’ve already been repaid. Upon being asked for evidence to prove so, Sahara India could not provide any such proof. Neither did they give details of the source of income of the money repaid.
By this time, both the Supreme Court and SEBI started considering it a case of money laundering. Consequently, they started freezing the bank accounts of Sahara India along with their assets.
Final Order of the Supreme Court on the Sahara Scam
The Hon’ble Supreme Court’s Bench noted that previous orders had not been complied with, which lead to the summons of Subrata Roy and other directors to explain the delay. Subrata Roy did not appear before the Court, resulting in a non-bailable warrant. On 26th February 2014, Subrata Roy, the Chairman of Sahara Group, was arrested upon the orders of the Supreme Court. In November 2017, the Enforcement Directorate charged Sahara Group with the case of money laundering and fraud. Sahara Group has always had a shady business for a long time. But this time, they’ve finally been caught in sight.
Conclusion
As an end note, in Sahara v. SEBI, the Supreme Court reinforced the authority of SEBI and investor protection measures. This case also clarified SEBI’s jurisdiction to investigate and regulate companies, even if the companies are not listed on stock exchanges. The Court also closed the jurisdictional gaps between the Ministry of Corporate Affairs and SEBI. This landmark case serves as a pivotal incident of upholding transparency, accountability, and investors’ interest in India’s corporate landscape, setting important precedents for regulatory enforcement and investor protection.
Latest Update
Recently, the Union government has also launched a portal to refund the investor’s money. The disbursement process is monitored by a committee comprising Justice R Subhash Reddy, former Judge of the Supreme Court, and Gaurav Agarwal, amicus curiae in the Sahara case. Even after the death of the Conglomerate’s founder, Subrata Roy, on 14 November 2023, the distribution of funds to the registered investors is being continued as per SEBI.
