N Sundaresha Subramanian tracks the sequence of events and the people involved

On January 4, 2010, Roshan Lal, a resident of Indore, sent a note, written in Hindi, to the National Housing Bank, requesting it to look into housing bonds issued by two of the Lucknow-headquartered Sahara group, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation. Being a chartered accountant, Lal wrote in the small note, he found that the bonds, bought by a large number of investors, were not issued according to the rules. The National Housing Bank did not have the wherewithal to investigate the allegation, so it forwarded the letter to the Securities and Exchange Board of India, or Sebi, the capital markets regulator. That note set in motion a chain of events that resulted in the Supreme Court ordering the two on August 31 to return the money they had raised through the bonds — Rs 24,029 crore — to the 29.6 million investors, along with interest (15 per cent per annum).

The have 90 days to deposit the money with Sebi, which has been tasked by the Supreme Court to return the money to the investors. Abhijit Sarkar, the Sahara spokesperson, did not respond to queries. But, on the day of the Supreme Court judgment, Sahara issued a statement to assuage the fears of investors. “You need not worry about anything and be at absolute peace,” it said, “as Sahara is the most dutiful and absolute honest custodians of your money (sic) and by the grace of God, we are so healthy with all-round strength that there cannot be even one day delay in any payment commitment of Sahara.” In the last 33 years, the statement said, Sahara had repaid Rs 140,000 crore to 120 million investors and there hadn’t been even a single complaint of non-payment. In 2008, the Reserve Bank of India had given it seven years to repay Rs 17,513 crore to 39.4 million depositors; Sahara claimed the dues have been cleared in four years. Sebi’s task too is cut out — it has to locate the investors spread across many states, verify their identity and deposit the money in their accounts.

The courtroom drama was short but high-profile. On one side was Subrata Roy Sahara, the enigmatic tycoon with interests in real estate, media, hospitality, financial services and cricket, the owner of two iconic hotels (Grosvenor House in London and Plaza in New York) and IPL team Pune Warriors, sponsor of the Indian cricket team, and investor in a Formula One team (Force India), supported by a battery of eminent lawyers including Fali S Nariman.

On the other were faceless Sebi functionaries led by whole-time director Kandathil Mathew Abraham. A career civil servant from Kerala, as well as chartered financial analyst and licensed financial analyst (from USA), he came on deputation to Sebi in 2008. His office was on the eighth floor of Sebi Bhavan, the headquarters of the market regulator in the Bandra-Kurla Complex. (In 2011, when his tenure got over, Abraham returned to Kerala.)

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On receiving Lal’s letter, and another similar request from “Professional Group for Investor Protection”, Sebi didn’t know where to start, till it realised that another Sahara company, Sahara Prime City, had filed the draft prospectus for a public issue of shares. So, it wrote to Enam Securities, the merchant banker for the issue, to ascertain the details of the “housing bonds” issued by Sahara India Real Estate Corporation and Sahara Housing Investment Corporation. On January 29, 2010, Enam informed Sebi that the two companies had issued optionally fully convertible debentures (OFCDs) in compliance with all regulations including those of the ministry of corporate affairs. In another letter, written on February 26, 2010, Enam (now owned by Axis Bank) said the OFCDs were issued on a “tap” basis.

The details are contained in the Supreme Court judgment. Sahara India Real Estate Corporation, in an extraordinary general meeting held on March 3, 2008, had resolved through a special resolution to raise funds through unsecured OFCDs by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with the Sahara group, without giving any advertisement to the public. The company’s board gave its approval a week later, and a red herring prospectus to this effect was filed with the Registrar of Companies, Kanpur, on March 13, 2008.

The prospectus mentioned that the funds raised by the company would be used in real estate development — construction, townships et cetera — and infrastructure projects. The memorandum of information for prospective investors clarified that the issue was a private placement and the company had no intention of listing the OFCDs in any exchange in India or abroad. The OFCDs, the Supreme Court judgment notes, were issued on an open-ended basis and the company collected over Rs 19,400 crore from 22.1 million investors between April 25, 2008 and April 13, 2011. After redemptions, the amount stood at Rs 17,656 crore on August 31, 2011. Similarly, Sahara Housing Investment Corporation (it had filed a red herring prospectus with the Registrar of Companies, Mumbai, in October 2009) raised Rs 6,373 crore from 7.5 million investors.

When Sebi sent its queries, Sahara had its arguments well marshalled. Section 55A of the Companies Act of 1956, it argued, delegates administrative power to Sebi only with respect to listed public companies and those companies which intend to get their securities listed in India. Since the two companies, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, had stated in their red herring prospectuses that they did not intend to list the OFCDs, the matter was outside the market regulator’s purview. Also, since the OFCDs were being issued to a defined group of people, though large it may be, it was a preferential issue, not a public issue, and hence not within Sebi’s regulatory jurisdiction.

Sebi was not convinced by these arguments. If OFCDs are being issued to 50 people or more, it becomes a public issue and therefore falls within its jurisdiction, the market regulator said. It sent another letter to Enam in April 2010 seeking specific details about the issue in order to determine the legal status of the debentures more accurately. It wanted to know, among other things, the date of opening and closing of the subscription, number of application forms, number of applications received, list of allottees, and date of allotment and dispatch of debenture certificates. It also demanded copies of application forms, prospectuses, pamphlets and other promotional material circulated by the two companies. Sahara insisted that it would agree to be regulated by Sebi only if so directed by the ministry of company affairs.

Initially, government opinion favoured Sahara. In early 2011, when Salman Khurshid was the corporate affairs minister and Veerappa Moily was law minister, Additional Solicitor General Mohan Parasaran had said that unlisted companies, like Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, should be regulated by the ministry of corporate affairs and not Sebi. In July 2011, Khurshid and Moily swapped portfolios and the scenario changed: the ministry of corporate affairs now said that Sebi and it would work in tandem and the market regulator had full jurisdiction over public issues.

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In the summer of 2010, Sahara gave a different argument. “In the months of May and June, in the year, most of the staff remains on long holidays with their children due to summer holidays of schools/colleges. In our case also concerned officials are on vacation and gone out of station with their children,” the two Sahara companies told Sebi in May 2010. Justice Jagdish Singh Khehar of the Supreme Court observed in his judgment: “One wonders whether the appellant companies were running a kindergarten, where their staff was expected to be unavailable during the summer.”

In November 2010, Sebi passed an interim order directing the companies to stop all fund-raising with immediate effect. On December 13, 2010, the Lucknow bench of the Allahabad High Court stayed this interim order. Sebi moved the apex court against the stay order saying the move would be detrimental to the interests of investors. On January 4, 2011, the Supreme Court upheld Sebi’s rights to seek these details. It further directed the High Court to hear the case expeditiously and dispose it of. What Sebi got next, in April 2011, was a password-protected CD which was supposed to contain names of some 6.6 million investors. Sebi alleged that the Sahara companies refused to give it the password. Soon thereafter, the Allahabad High Court lifted its stay on the Sebi interim order. In the following two months, Abraham passed orders directing the two companies to refund the amount collected by OFCDs. The matter went to the Supreme Court. Sahara lawyers at one point argued they had no investor complaints, then why should Sebi bother? Nariman, who represented Sahara India Real Estate Corporation, even said Sebi protects “those guys in black suits” — investment bankers — and their interests and not those of small investors.

Sahara also placed a list of the investors with the Supreme Court. But that didn’t cut much ice. “During the course of an examination of the hard copy, it was not possible to persuade oneself to travel beyond the first page of the voluminous compilation,” the Supreme Court verdict says. The court noted the example of an investor called Kalawati. The list did not specify how she was associated with Sahara (it was a limited placement), did not give her parentage or husband’s name and left her address as Uchahara, SK Nagar, UP. The agent’s name was given as Haridwar (an uncommon name, the Supreme Court noted) and his address as Bani Road, Semeriyawa, Sant Kabir Nagar. “One would not like to make any unrealistic remark, but there is no other option but to record that the impression emerging from the analysis of the single entry is that it seems totally unrealistic, and may well be fictitious, concocted and made up,” Justice Khehar noted in the judgment.

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After the judgment, all eyes are on Sahara: where will it find the money? It does have serious assets on its books. According to filings with the ministry of corporate affairs, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation have invested Rs 6,687 crore in shares and debentures of Aamby Valley, a luxury township located off the Mumbai-Pune highway. A news website, quoting an affidavit filed by Sahara in the Supreme Court, said the group owns 90-95 per cent stakes in 64 real estate projects across the country on land measuring 4,378 acres. These stakes are valued at Rs 21,361 crore.

And Sahara is miffed. In mid-August, while announcing the group’s foray into retailing of packaged food (Sahara Q Shops), Subrata Roy Sahara, managing worker & chairman, had said that the diversification was caused by the stifling regulations in the financial sector. “I have started terming some of the regulators banning agencies, not regulators,” he said. “If I had to start Sahara today, I would have probably reached a business of a crore or two.” In the statement issued after the Supreme Court verdict, Sahara said that “everyone’s problem is why and how can Sahara raise so much of funds (sic) from the public”.

Ninety per cent of the depositors were, it added, small unbanked investors. Had Sahara’s one million workers not collected this money, they would have blown it up on vices like gambling and drinking. These “unjustified tortures”, the statement added, were responsible for driving Indian corporations, big and small, abroad. “Of course, we at Sahara, we are not escapists. We will fight against the system and grow in our beloved country.”

Meanwhile, the mystery around Roshan Lal, whose complaint to the National Housing Bank triggered it all, has deepened. Sahara lawyers had pointed out how when Enam had sent a response to Lal’s “Janata Colony address” in Indore, it came back with the remark “addressee not found.”

This correspondent too tried hard to locate him, but in vain.