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BW Businessworld

Mysterious Money Trail

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Let us think of a company that  boldly goes where no one else has ventured, that is, to the grassroots and collects deposits from the very low income class — this includes vegetable vendors with names like Hardwar, Kalawati or Lalu Yadav (multiple times). Another group company also raises optional fully convertible debentures (OFCDs) from a similar mass of savers to fund various ventures. This is financial inclusion at its best and this is what our regulators have been talking of all the time.

Yet, objections have been raised. The RBI is disturbed that those who save on a daily basis may not exist and the terms for the deposits are harsh as they involve penalties if they miss an instalment. In fact, it is believed that the depositors are being taken for a ride as they may not be aware of the fine print. Sebi argues that permission for raising OFCDs, though procured from the Registrar of Companies, is still under its purview as there are more than 50 holders, which makes it a public issue. This issue is hence very much in its domain.

Moreover, Know Your Customer (KYC) norms have been flouted and curiously lots of purchases have been in cash. Also, there is no complaint from any of the deposit or bond holders even though rules have been flouted.

This is the crux of the book Sahara: The Untold Story, written by journalist Tamal Bandyopadhyay, which makes good reading in the genre of a mystery novel. The protagonist is Subrata Roy, who is larger than life, runs around 5,000 establishments and is the lord of Rs 1.5 lakh crore of assets covering 30 million savers and over a million employees with business across the entire spectrum. Roy says he is a patriot and has done no wrong and is working for the good of the country. He is doing under the umbrella of inclusive finance exactly what everyone is talking about. In fact, he argues that he has always been ahead of the curve in this respect.
Madan Sabnavis
The RBI and Sebi are the other ‘angry characters’ in this plot which try and break the RNBC model (residual non-banking companies) and get Sahara to come clean on its deposit/bond holders who are believed to be fictitious and allegedly a part of a money laundering plan, which cannot be proved. There is an allegation that the shareholders are dubious, who invested in cash and never followed KYC norms. But Sahara’s contention was that when a person is too poor to have a home, then the address would be unconventional. Further, in these small towns persons tend to have similar names and could go without surnames? This logic sounds convincing when looked at from their point of view.

Y.V. Reddy and V. Leeladhar ran the crusade for the RBI and K.M. Abraham and C.B. Bhave for Sebi. It sounds spooky when it is revealed that there were 93 lakh deposit holders who did not claim their money and that there are no records on Rs 40,000 crore of funds. Such money, according to the regulator, should have been transferred to the government fund if this was the case. Has the mystery been solved? You never can tell.

Roy has been a maverick and has his characteristic style of responding to allegations. To convince Sebi of his ‘parivar’ of holders, 127 trucks with 31,000 crates of documents were loaded and sent to Mumbai as proof that everything was going by the book. When questioned by the regulator, a standard pattern is followed: first, delay for months; next, sends replies that go into 10,000 pages, which makes it challenging to read. Third, if this fails, then seek redress from various levels of courts. And if things still look really bad, then get hold of the politician through the official ministry to intervene. This standard fourfold path has been quite assiduously followed to keep issues in abeyance.

Three important things stand out that go beyond whether Sahara did right or wrong. First, our two regulators are beyond reproach and have displayed remarkable integrity and high standards of governance notwithstanding pressures. Second, political interference comes out in the open and the link between industry and politicians is strong and, in a way, disgusting. Third, regulatory arbitrage is exploited by companies, and the Sahara case is probably just the tip of the proverbial iceberg, which got exposed. Corporates are quite nimble footed and know how to dodge regulation through this route.

The reader can get into a maze following the names of various group companies that keep coming up — a reflection of how the empire works. The author must have spent a lot of time just digesting these names before getting a perspective on the issue.

The book had a brush with litigation. But now it has been released with a disclaimer from Sahara. The ‘thriller’ starts with the company view that the book is loosely speaking a pack of lies, but magnanimously wishes the author the best. The fact that this has been passed may give one the feeling that Sahara has done no wrong. Bandyopadhyay does not pass judgements but lays open the issues and arguments on both sides. This balancing act is quite remarkable because you, as a reader, would tend to swing from one end to the other when reading arguments on both sides. You are left to pass your own verdict.

The writer is Chief Economist at CARE Ratings, a credit rating agency

(This story was published in BW | Businessworld Issue Dated 28-07-2014)]]>