Author: Vedika Mishra, KC Law College
Abstract
The Sahara Scam of 2010 shook the foundations of corporate governance and financial regulation in India. Sahara India Pariwar was everywhere- aviation, tourism, hotels, media and entertainment, housing and infrastructure, and public deposit mobilization. From sponsoring the Indian Cricket Team to providing employment to over 1.2 million Indians, Sahara India Pariwar, led by Subrata Roy was undoubtedly a significant part of the Indian economy. This scam primarily revolves around the illegal collection of funds from investors made by two public companies of the Sahara India Pariwar conglomerate, Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL), which illegally collected funds from investors. Both the companies raised funds in contravention of regulatory norms, rendering the public issue illegal. This article aims to expose the truth behind this scam, highlighting SEBI’s and the Hon’ble Supreme Court’s involvement and significant roles. It is about Subrata Roy’s journey, from propelling Sahara India Pariwar to dizzying heights to facing guilt for illegal public issues and enticing unsuspecting investors and his detention. This is story of The Sahara Saga.
To The Point
Both the companies, Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) of the Sahara India Pariwar conglomerate, raised more than 24,000 crore rupees from 3 crore investors. The funds were generated by issuing Optionally Fully Convertible Debentures (OFCDs) through both the companies. However, this issue was not in the adherence of the regulatory board, The Securities and Exchange Board of India (SEBI), which is India’s market regulator. Thus, the public issue was illegal as it contravened the regulatory norms and not adhered to the laws relating to the public issue. Furthermore, the optionally fully convertible debentures were issued without seeking approval of SEBI in this case. This led to one of the most significant legal battles in the history of corporate governance and securities regulation in India. The legal battle between SEBI and Sahara India Pariwar, which spanned over several years questioned the pursuance and adherence of regulatory framework set by SEBI by the two subsidiary companies of Sahara India Pariwar. It eventually led to the initiation of investigation against Sahara India Pariwar, after SEBI started receiving complaints against the irregularities of Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) while raising funds through issuing optionally fully convertible debentures. Both the companies were said to have violated various provisions of the Securities and Exchange Board of India Act, 1992; the Securities Contract Regulation Act, 1956, and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Also, there were issues regarding the authenticity of the investors, questioning the involvement of black money and money laundering.
Use of Legal Jargon
Optionally Fully Convertible Debentures
Optionally Fully Convertible Debentures are debt securities which allow an issuer to raise capital and the issuer pays interest to the investor till the maturity in return. The unique aspect of OFCD is the option for investors to convert them into equity shares, based on specific conditions.
Draft Red Herring Prospectus: Draft Red Herring Prospectus is an initial document filed with regulatory bodies by a company intending to launch an Initial Public Offering (IPO) or a public issue. This document comprises of essential information about the company’s business, operations, financial performance, and prospectus.
Collective Investment Scheme: Collective Investment Scheme are financial products which pools money from multiple investors to create a large investment fund. Professional managers then invest this money in a diversified portfolio of assets.
Public Placement: A public placement is when a company raises capital by offering its securities to general public through public issue, such as an Initial Public Offering (IPO).
Private Placement: A private placement is a method of raising capital where a company offers securities to a group of investors rather than general public.
The Proof
Both the companies, SIRECL and SHICL of the Sahara India Pariwar conglomerate, raised more than 24,000 crore rupees from 3 crore investors by issuing Optionally Fully Convertible Debentures (OFCDs). However, this issue was not in the adherence of the regulatory board, The Securities and Exchange Board of India (SEBI) leading to the Sahara Saga, the Sahara Scam of 2010.
The rise and the fall of Subrata Roy
Subrata Roy came from an economically weak background in Uttar Pradesh. He started Sahara India Pariwar in 1978. From selling snacks to fans, he tried everything. But he kept failing at everything one after the other. Nothing worked.
In 1978, Sahara India Pariwar began as a small financial entity called Sahara Finance, where it primarily focused on schemes. Sahara would take money from the underprivileged and low-income groups and promise them good returns after a stipulated period of time. These schemes were called as chits. In the 1980s, Sahara grew exponentially. This system is called as a pyramid scheme through which small investments, with time leads into a sizeable business empire. Soon, Sahara India Pariwar became an integral part of the Indian economy as Sahara began to invest in various kinds of assets, such as, aviation, tourism, hotels, media and entertainment, housing and infrastructure, and public deposit mobilization.
When everything seemed to be gold for Sahara, things soon began to take a turn- a wild one as two public companies of the Sahara India Pariwar conglomerate, SIRECL and SHICL were held responsible for issuing funds illegally. Both the companies raised funds in contravention of regulatory norms, rendering the public issue illegal.
SEBI v. Sahara India Pariwar
As SEBI started receiving complaints about the illegal public issued made by the two subsidiary companies of Sahara India Pariwar, it led to the initiation of an investigation. Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) while raising funds through issuing optionally fully convertible debentures. Both the companies were said to have violated various provisions of the Securities and Exchange Board of India Act, 1992; the Securities Contract Regulation Act, 1956, and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Furthermore, Sahara did not file the draft red herring prospectus with the regulatory authority before generating the funds through public issue. Additionally, the Sahara group also disguised its prospectus as the draft red herring prospectus, which is also a contravention of the law. Despite raising funds from general public, Sahara falsely claimed it to be a private placement, but it clearly exceeded the limits and specifications under the law, rendering it a public placement.
After multiple contraventions by Sahara one after the other, SEBI sent an interim order to Sahara group, stating that it cannot raise any fund through optionally fully convertible debentures and must return the funds generated through such issue back to the investors. To which Sahara responded by filing an appeal with the Securities Appellate Tribunal (SAT), which was eventually rejected. So, Sahara was obligated to repay the depositors. Moreover, after the repayment to the majority of the depositors was done, it was found that most of the investors who were paid back by the Sahara group as it claimed to the regulatory authorities, actually never existed. These investors were “fake depositors”. Since, most of the depositors were phantom, Sahara was never transparent about who the investors were or the manner and rules under which the repayment was made. This was clearly shady and created the possibility of the involvement of black money and money laundering. Therefore, the Hon’ble Supreme Court stated that Sahara must return all the funds generated through such issue to SEBI, which shall further make the repayment to the investors. Sahara was obliged to return the funds and also 15% of the original investment as penalty. Ultimately, Subrata Roy was arrested in 2014 for contempt of court as he failed to comply with the Supreme Court’s refund order. He was under imprisonment for two years after being released on a parole.
Case Laws
SEBI Interim Order (2011): SEBI barred the two subsidiary companies of Sahara India Pariwar from raising funds through issuing optionally fully convertible debentures and also ordered the repayment of the generated funds to the investors.
Sahara India Real Estate Corporation Ltd & Ors. v. SEBI & Anr. (2012) 10 SCC 603: It affirmed SEBI’s jurisdiction over Sahara’s illegal public issue and obligated Sahara to make the repayment to the investors.
Sahara India Real Estate Corporation Ltd. V. SEBI, Civil Appeal Nos. 9813 and 9833 of 2011 (2013): This appeal was dismissed and it reaffirmed that Sahara failed to comply with Supreme Court’s refund order.
SEBI v. Sahara & Subrata Roy – Contempt Petition (C) No. 412 of 2012: This led to the arrest of Subrata Roy for contempt of court.
Conclusion
This scam raised many questions regarding the financial irregularities and the misuse of the corporate structure. It also in a way emphasized on the significance of the requirement of corporate transparency and accountability. Regulatory compliance is extremely crucial for the protection of the investors in this country. In a way, it portrayed the effectiveness of SEBI for the regulatory compliance, protection of investors and to regulate and monitor the financial market in India. Moreover, it also showcased the challenges regarding refund and recovery of funds. Furthermore, Subrata Roy was jailed for the irregularities and repeated contravention of law, but the fact of the matter is that most of the depositors who shelled out all their savings, never really got their money back!
FAQS
Q1. What was the Sahara Scam?
Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) of the Sahara India Pariwar conglomerate, raised more than 24,000 crore rupees from 3 crore investors. The funds were generated by issuing Optionally Fully Convertible Debentures (OFCDs) through both the companies. However, this issue was not in the adherence of the regulatory board, The Securities and Exchange Board of India (SEBI), which is India’s market regulator. Thus, the public issue was illegal as it contravened the regulatory norms and not adhered to the laws relating to the public issue.
Q2. What was the role of SEBI?
As SEBI started receiving complaints about the illegal public issued made by the two subsidiary companies of Sahara India Pariwar, it led to the initiation of an investigation. Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) while raising funds through issuing optionally fully convertible debentures. After multiple contraventions by Sahara one after the other, SEBI sent an interim order to Sahara group, stating that it cannot raise any fund through optionally fully convertible debentures and must return the funds generated through such issue back to the investors. In a way, this portrays the effectiveness of SEBI for the regulatory compliance, protection of investors and to regulate and monitor the financial market in India.
Q3. What was the Supreme Court’s decision on the Sahara Scam?
The Hon’ble Supreme Court stated that Sahara must return all the funds generated through such issue to SEBI, which shall further make the repayment to the investors. Sahara was obliged to return the funds and also 15% of the original investment as penalty. Subrata Roy was arrested in 2014 for contempt of court as he failed to comply with the Supreme Court’s refund order. He was under imprisonment for two years after being released on a parole.
Q4. What impact did this scam have on India?
The Sahara Scam of 2010 shook the foundations of corporate governance and financial regulation in India. This scam raised many questions regarding the financial irregularities and the misuse of the corporate structure. It also in a way emphasized on the significance of the requirement of corporate transparency and accountability. Regulatory compliance is extremely crucial for the protection of the investors in this country.
