governance, political economy, institutional development and economic regulation

Image Subrata Roy the florid, flashy, brash promoter of the Sahara Group has been in Tihar Jail since March 4, 2014. The crime committed by him baffles most aam admis, including this one.

The Supreme Court held way back in 2012 that his companies acted in contravention of the SEBI rules for public issues by unlisted companies. His legal arguments that SEBI has no jurisdiction over unadvertised issuance of Optionally Convertible Debentures by unlisted companies have been rejected by the Supreme Court and he was directed to refund Rs 175 billion (USD 4 billion) collected by his 1.2 million agents from an estimated 22 million small investors between 2008 and 2011.

In a more “liberal” environment Roy would be hailed as an innovator par excellence who extended financial inclusion to millions of investors and provided livelihood to over a million agents.

Wherein lay his innovation? Quite simply he profited by providing “informal financial services” on top of the wave of public corruption which has conservatively equaled between 2 to 5% of the GDP since the “ go go” years began in the 1990s. His modus operandi is probably simple. He provides a “cloak” of legit financial services to the corrupt public servant and politician by managing the cash generated illegally by them. This “cloak” of financial services is based on a micro-financial network of investors and agents on a staggering scale with around 3000 branches and massive investments in real estate…what else?

Similar to any other Ponzi scheme, his trick was to offer huge returns in excess of 25% per year. Ponzi schemes ultimately fail because they run out of new investors to provide the cash flow to service the existing investors because the underlying assets invariably never provide adequate return. This is where Sahara had a winning card. They possibly had access to an inexhaustible source of unaccounted cash coming to them from corrupt public servants and politicians. Forget for the moment, the cash flow available from the film industry, drugs or terrorism.

Since Sahara serviced the politically powerful, they were immune from censure. But a more basic reason why Sahara remained below the radar was possibly because they maintained a tight leash on the volume of “real” small time depositors who provided the cloak to “benami” big time investors. It is noteworthy that the Supreme Court wondered how many “real” investors they had. No one knows. But had these small time investors reached a volume where their investments exceeded the illegal cash, the scheme would have imploded. As it happens it never did.

It was Securities Exchange Bureau of India (SEBI the David) who slew Sahara (the Goliath). It investigated the retail cash collection done by Sahara agents (Rs 175 billion or around US $ 4 billion) between 2008 and 2011 against the issue of a “hybrid” instrument called Optional Convertible Debenture. It held that this was “akin” to a public issue and hence in their turf. Since Sahara had no approval from SEBI for issuing such “public” securities the cash collection was illegal. What motivated SEBI to wake up? Ostensibly they responded to a complaint by an association of investors. It is not clear if any of them had actually invested in the debentures or were simply being “high minded”. Other reasons could be: (1) the financial regulator fighting for turf with the Ministry of Corporate Affairs, who had approved the issue of debentures under the Companies Act; (2) SEBI’s apprehension that significant domestic savings were being directed away from the bourses where listed companies raise money under SEBI oversight . Between 2008 and 2011 listed companies, in India, raised USD 26 billion as new capital against USD 4 billion raised by Sahara, an unlisted Indian company, (3) as always in India, the possibility of government settling political scores.  We await an intrepid investigator to inform us, which of these was the case.

But what there are some intriguing aspects to this case:

First, why did the dog not bark? Why did no retail investor complain that Sahara had defrauded them? Subrata Roy asserts that not a single investor has been disadvantaged and that all assets are being serviced and redeemed. This seems entirely plausible in the light of the reasoning given above that the “beauty” (as Subrata himself would say) of the scheme lay in completely insulating the retail investors from risk and indeed to molly coddle them with fabulous returns, using the inexhaustible cash flow of the fatter investors.

Whilst Subrata is no Robin Hood, his novel method of socializing and distributing the gains from corruption across 30 million investors is unique in its scale . Reliance has had a similar strategy which makes investors forgiving of its poor public image.

Dhirubhai, was an early mover in this game. He had an uncanny feel for the pulse of the nation. He was the first to recognize that distributing profits to over 3 million shareholders is a good way of building social capital for a corporate. Subrata has gone much further with 30 million investors, though they are difficult to trace.

Second, why is it that the entire government machinery, except SEBI, has remained passive and silent? Why has no action been taken against the Ministry of Corporate Affairs, which since 2008 was sanguine enough about the operations of Sahara to clear their Red Herring Prospectus for collecting cash from investors?

Third, why is Subrata Roy in Jail? He is not a criminal. Even if he has committed contempt of the Supreme Court, why has SEBI failed to attach Sahara’s; issue a public notice to ascertain who their investors are and compensate them accordingly, despite being specifically directed by the Supreme Court to do so in 2012?

Is this a case of judicial activism where the Supreme Court has stepped in to discharge a public duty which appropriately lies with the executive? If so then why not name and shame those in the executive who have been hand and glove with Sahara? Why is the corruption angle not being investigated by the CBI and the CVC?

Arbitrary curtailment of human rights violates the Rule of Law, no matter how high the authority which falls into that trap.

Finally why pick only on Subrata Roy. Is he paying solely for the scale of his illegality (Rs 175 billion against Harshad Mehta’s Rs 40 billion); for his flashiness and love of the good life?

We aam admis can be forgiven for muddling the offence of corruption with the social opprobrium that an open flouting of the law should attract.

But a judicial determination guided by anger at the passivity of the executive, rather than cold, legal logic does not give comfort that India’s system of checks and balances is working.

Comments on: "Subrata “Sahara” Roy: Victor, villain or victim?" (2)

  1. I must say that this particular write up very nicely drafted and i congratulate the person / team behind this article.
    Now i have few questions, just to clear my queries out…. I see there is a mention of Black money from film industry , terrorism and drugs… First of all my friend / friends, these are serious allegations.If you do not have a source to prove your statement , you might get yourselves in trouble… Anyways, I have been following this case and even for once if i agree with you, can you tell me , why is it so hard to believe that there are actual investors who are actually there with Sahara… Few people from media, politics , few influenced aam admi (as you term) only speak the word of whats written on newspapers and TV… You ask them and they would say exactly the headlines shown in either of the news channels… Look, think and understand… Sahara India is the first generation company and in a way they have really done well…36 years from Rs 2000/- to Multi million dollars company today with 12 lac employees …Phew !! That is absolutely impressive and whats wrong if he is enjoying his life in a royal way..Everyone deserves that… If any one of us go to a good restaurant to eat, why in the world shall we care about anyone else..I wont give a damn what people thinks of me going to a 5 star these days.We all develope, we all grow and we change our lifestyle …Its my money and my life…So WHATS THE FUSS ALL ABOUT?!
    For Mr Subrata Roy and everyone else have the right to live the way he wants to… Come out of your limited zone of borrowed knowledge and understand the fact that Sahara is the one of the largest employer after Indian Railways, Sahara changed the face of Indian Cricket, Sahara was the first corporate to help the families of thousands of Jawans who lost their life fighting in Kargil, Sahara is the first corporate to adapt 1000 villages across India and is completely responsible for all developments in those places, every year in Lucknow’s grand kingdom called Sahara Shaher 101 marriages takes place and these people include the less fortunate people in our society… These are only the basic things done by Sahara … And we say that they are corrupted … All we do is compare…Thanks to all those small different groups who fled with public money.. The question is how and where are those companies going ?! Are they actually no where to be found or this is just another machinery of this government to fill up their accounts…. Amazing….!!!
    I ask everyone.. Why?! Why so biased, why such a different attitude for the group which literally wow(ed) everyone of us so many times… They are genuine people trying to work and earn their living and also working for the betterment of the country and the society… Please do not just write them off as of yet…. I think he is a man of merits, he is a man of words, commitment and he is more importantly a very genuine and wonderful person…..
    My request to all of you is to take things easy and dont make accusations just because you have he power of media as that’s mis – utilization of powerful resources…

  2. irvinder said:

    The point about judicial overreach is correct. Even the Supreme Curt order for transferring to government treasury all funds not repaid to depositors is strange and appears to be not based on law.

    The right way would be for the Income Tax Department to treat it as undisclosed income and tax it with penalties and interest. It is not clear how the SC can just order the confiscation of the entire money not refunded.

    If Sahara does not repay how long can they keep him in jail. What if Sahara says they have no money in this scheme. Can we keep him in jail indefinitely. With due respect to the honourable court, arbitrary orders and imprisonment certainly lower the reputation of the country.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Tag Cloud

%d bloggers like this: