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Whose money was it anyway?
The Supreme Court in its latest order observed that the documents submitted by Sahara to the court and its refund theory casts “serious doubts on the existence of the so called investors.” In the language of the court’s order dated 4 March 2014, “all fact finding authorities have opined that majority of the investors simply do not exist.”

As Subrata Roy (aka Saharasri) cools his heels in jail and the Supreme Court contemplates whether to appoint a SIT on the Sahara episode or not, it becomes necessary to reflect upon this interesting tale that has caught the public imagination.  It is true that the incarceration of Sahara’s chief sends a very strong message to corporate India to either play by the rules of the game or face lethal consequences.   It is equally true that independent regulators and the courts have asserted their authority in ways like none before to send a message that abuse of financial markets will not be tolerated.

For a moment let’s look at the Sahara episode from a different perspective.  Was it a case of a money laundering plan gone horribly wrong? Or were the investors real and is Roy simply the fall guy?


Sahara and Saradha Ponzi scheme...

We can perhaps draw parallel between the Sahara Saga and the Saradha Ponzi Scam for three reasons.  Both cases involved large sums of public money.  Both failed to repay their depositors and investors (Rs 4000 crore in the case of Saradha and Rs 24,000 crore in case of Sahara). Both involved millions of small depositors (1.7 million investors for Saradha and 22-30 million investors for Sahara based on its own claim).

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Reaction to the Saradha Scam

When the infamous Saradha Ponzi Scam hit West Bengal it unravelled itself into a full-blown crisis.  There was an unprecedented sense of loss and grief everywhere.  The mood of despondency quickly spread to the neighbouring states as well. There was trouble for offices and officers of the Saradha Group everywhere.  Approximately 600 collection agents claiming to be associated with the Saradha Group assembled at the headquarters of TMC and demanded government intervention with threats of suicides.  The reporters compared the crisis to a cyclone that had spread misery in the past.


Contrast muted response to the Sahara episode...

In sharp contrast, the Sahara episode is a very curious case that has had a totally muted response from public.  Out of over 22 million investors that Sahara claims to have raised the money from, not one seems to have come forward to demand refund!  This is after both SEBI and the Supreme Court passed strictures asking it to refund the money!  There were no protests on the roads, no sense of loss, no violence in the streets, no death threats or suicides!  There were no group of small investors protesting before the government demanding that Supreme Court’s order on refund be implemented and Saharasri be arrested!


22 million investors developed inner peace...

It is interesting to note that the number of investors in case of Saradha Group Scam was a mere 1.7 million compared to the gargantuan 22 million investors claimed by Sahara Group. One can only conclude that perhaps the investors have developed ‘inner peace and patience’ as Saharasri always advocates as a part of his corporate philosophy or that there were no investors at all.

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Unmasking ghost Investors

On a serious note, it is preposterous to imagine that there are real investors in l’affaire Sahara.  If it were, we would have had led to a huge crisis by now.  Further credence is added by the fact that Sahara claims to have directly refunded Rs 20,000 crore in cash to the investors.  This is after the SEBI, the Securities Apellate Tribunal and the Supreme Court had specifically ordered that repayment must be done under the supervision of a Supreme Court Judge and deposited in SEBI’s account.  Further the Group was unable to explain the source from which it raised the Rs 20,000 crore it claims to have paid 24 million investors directly.


India’s investor base is 15 million; Sahara claims 24 million!

Not only Sahara’s investors do not exist it may be quite a while before such investors do start to exist in India in the first place.  Consider that even the biggest of listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors.  In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only around 15 million.  For Sahara’s investors to exist, the total investors in all depository accounts in India would need to be exceeded.

Aptly, the Supreme Court in its latest order observed that the documents submitted by Sahara to the court and its refund theory casts “serious doubts on the existence of the so called investors.”  In the language of the court’s order dated 4 March, 2014 “all fact finding authorities have opined that majority of the investors simply do not exist.”

Anatomy of money laundering...

If it is true that the Sahara investors are fake, then what explains the Sahara saga and the need to show that Rs 24,000 crore has been raised from 22-24 million investors? One possible explanation is that it could be for laundering money obtained from sources that are unaccountable.

The goal of any money laundering scheme is to create a source for unaccountable monies that is not easily traceable. The following trail of events and factual matrix as noted in the order of Securities Appellate Tribunal when put together shows the scheme in detail:

1.    The Sahara Group forms a special purpose vehicle ie, a new public limited company for the purpose of deployment in the scheme.  Enter Sahara Real Estate Ltd., a company with a capital base of  Rs. 10 lakh with no assets, no reserves and cash balance of Rs. 6 lakh

2.    The company intends to raise funds through private placement by issue of Optionally Fully Convertible Debenture (OFCD).  The choice of OFCD instrument is important because it is essentially a debt security convertible into equity at a future date purportedly to keep out of the jurisdiction of SEBI.  Further there would be no need to list the company in any of the stock exchanges in India as it is a private placement and not a public offer.

3.    At this stage it must be noted that, the raising of funds by private placement can be done only for less than 50 investors thereby the rigorous SEBI disclosure norms and the SEBI (ICDR) regulations would not apply and other KYC norms would also not apply.

4.    The company then files a Red Herring Prospectus (‘RHP’) with Registrar of Companies (RoC) stating that the public deposits are intended to be received from private placements only.  Once the RoC approves the RHP, the Information Memorandum is purportedly distributed to crores of small investors (22 million investors who do not have KYC documents).  At this stage the provisions of Companies Act which require that only 50 members or less can be approached for private placement stands violated and the whole issue becomes patently illegal.

5.  The number of investors claimed is 22-30 million.  This number is not picked randomly.  The Income Tax Act mandates that any deposit above Rs 20,000 should flow only through banking channels which means that the investors would need to have KYC documents to send the money.  If you back work on number of investors needed for Rs 24,000 crore to be raised in cash without KYC documents the number should be at least 12 million investors or more.  Around 24 million investors or more would mean that the amount is Rs 10,000 and less thereby circumventing the requirement of Income Tax law and KYC norms.  Now all dealings can be said to have been done in cash without violating the Income tax law.

6.    The inflow and outflow of any unaccountable funds from the company can be easily done in cash by showing the same as further cash receipts from OFCD subscription or refund to the OFCD holders.

7.    The company can now easily deploy its unaccounted cash into purchase of properties both in India and abroad and use the same in its business.  When the Income Tax Department asks for source, the Group can contend that the source of the funds is the money raised from 22-30 million small investors who incidentally are so small that they have no KYC documents.

8.    Through this entire process the face of the real investor is hidden behind the mask of ‘millions of small investors without KYC documents’ and one can conveniently move monies across the Group.

Scheme mess up – a quirk of fate

But how did the well planned, meticulously structured scheme get messed up? Surely, the scheme escaped the scrutiny of the RoC who should have logically asked how a company with no assets, no reserves, no business and mere Rs 6 lakh of cash intends to raise over Rs. 24,000 crore and that too through private placements.  For reason best known to the department, the RoC silently approved the RHP.  On this point the SAT order notes: “we are of the view that the RoC, while registering the RHP with undue haste, had acted in dereliction of his duty.”

Ordinarily the scheme would not have got noticed if not for meticulous work by a few upright officers of SEBI when it received complaints from a few people that this scheme was dubious. SEBI, therefore, got involved by a sudden quirk of fate.  And when SEBI found something quirky in the offer documents and the RHP, it followed it up with a thorough investigation and the rest, as they say, is history.  

The constant flip flops of Sahara Group and the constant attempt at hoodwinking the regulator by sending 127 truckloads of documents only confirms the suspicion that the scheme was a money laundering scheme in the first place.  The SAT order observes the behaviour of the Group: “it is evident that the intention of the company and its promoters from the very beginning was not bonafide.”

Whose money sought to be laundered?

We may perhaps never know whose money the Rs. 24,000 crore was ie. the real source and the real investors whose money was being laundered, unless the Income Tax Department starts a probe into this episode as well.  Unfortunately, the same Income Tax Department that sends notices to the middle class, the salaried and the pensioners at a drop of a hat, has found no reason to act in the case of Sahara India.  This conspicuous silence of the Enforcement Directorate and the Tax Department is indeed disconcerting and perhaps a sobering reminder of dilution of autonomy of these independent institutions by the political masters.

Therefore, we may never know whose money it was and who the real face behind the valley of masks was.  But we do know whom Subrata Roy counts as his close friends.  For example, we do know that the wedding of Akhilesh Yadav was hosted and fully financed by Saharasri in Sahara Sahar, and that many feasts were hosted there for the Yadavs after they gained political power in the state.  We do know that among friends of Saharasri, BJP’s tallest leader, Atal Bihari Vajpayee, attended the lavish wedding of Roy’s sons.  It is hardly surprising that in the whole Sahara Episode, the political class, otherwise known to rant at high decibels, has maintained a muted response.

Way forward for Saharasri

After his jailing, the options for Saharasri are limited.  Either he must admit before the Supreme Court that all or most of the investors were fake which would then entail criminal prosecution for fraud and also action from various quarters including the Income Tax Department or the group has to forgo the monies and deposit of Rs. 25,000 crore to SEBI. But it appears that Sahara does not have that kind of money as it has purchased various assets in India and abroad already and opened Q shops all over India.  The only future course of action is for SEBI to appoint a receiver to sell assets to recover its dues.

Concluding thoughts

The Sahara Saga reveals a large gaping loophole in the financial laws of this country and the regulations governing the capital market.  The fact of the matter is that even under extant regulations, it is possible to dress a public offer like a private placement and a group can go ahead and claim to raise Rs 24,000 crore outside the purview of SEBI, take money from three crore depositors and call it a ‘private placement’ is indeed disconcerting.  And that perhaps is a clarion call for reforms.

Also shocking is the remarkable conspiracy of silence across the spectrum cutting across political parties and the media. At a time when we are clamouring that black money stashed abroad should be brought back to India, it would be sad if we never get to know whose money was sought to be laundered. Our hope rests solely with the Supreme Court.


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