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Muddied. Sullied. In Danger.

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The year was 2004. It was quite an overwhelming sight. The Sahara Group’s ‘managing worker’ and chairman, Subrata Roy, was to make a press announcement at South Mumbai’s Tata Theatre, at the National Centre for Performing Arts. Now, nobody has a ‘press conference’ at the Tata Theatre, a 1,000-seat cultural hub frequented by the music-concert-and-play-going Mumbai elite. So when word went out that ‘Saharashri’ himself, then at his pinnacle in Uttar Pradesh, was going to address the press, it would have been a serious miss to not attend.   

Banners outside the hall called it a ‘World Press Summit’. Two planeloads of journalists were flown in from Lucknow and other cities. Pretty saree-clad hostesses ushered the wide-eyed journos to their seats. Occupying the stage in black outfits were Subrata Roy, flanked by his sons Sushanto and Seemanto. There were a couple of senior executives too. It was a scene straight out of Men In Black.

The announcement the ‘managing worker’ made was that his group was entering the realm of real estate. And how! He said Sahara would be investing an eye-popping Rs 90,000 crore to develop ‘Sahara townships’ in 60 cities across the country, all fitted out with hospitals, malls and even mineral water bottling plants. And another Rs 35,000 crore would be pumped into ‘Aamby Valley’ near Pune to make it the most-sought-after layout of country villas. When it came to questions, a senior journalist asked Roy Senior in all seriousness: Where is all this money going to come from?

Saharashri was irked, and demanded to know whether the journalist was questioning his financial bona fides. Minutes later, two bouncers came and sat menacingly next to the poor journalist. The ‘press conference’ ended as abruptly as it had started. While most reporters filed ‘straight’ copies, minus the mood statements and nuances, many were left wondering what the Rs 1.25 lakh crore realty investment was about.
Sahara Saga
Roy started small and went on to create an empire that now teeters on the brink
August 1978:  Subrata Roy joins Sahara Finance, a chit fund, and later takes it over and makes it a  residuary non-banking company (RNBC)
January 1990:  The  company  establishes  its headquarters in Lucknow
December 1990:  Launches first real estate venture Sahara City covering 170 acres
February 1992:  Launches Hindi newspaper Rashtriya Sahara
January 2000:  Launches Sahara TV
March  2002:  Purchases Centaur Hotel in Mumbai  and  names it Sahara Star
April 2008:  Sahara Housing Investment Corporation ( SHICL) and Sahara India Real Estate Corporation (SIRECL) raise money through optional fully convertible debentures (OFCD)
June 2008:  Reserve Bank of India prohibits Sahara India Financial Corporation (SIFCL) from public deposits
September 2009: Sahara Prime City, a developer, files its draft red herring prospectus with Sebi
November 2010: Sebi rejects Sahara Prime City’s IPO plan, issues order restraining SHICL and SIRECL from accessing the capital markets on complaints that they were issuing OFCDs not disclosed in the prospectus
December 2010: Allahabad High Court stays Sebi order on a petition filed  by SIRECL
January 2011: Sebi moves SC which permits it to call for names of investors who invested in the OFCDs
August 2012: SC orders the two firms to return Rs 19,400 crore raised from 2.21 crore investors through OFCDs. Amount comes to Rs 24,000 crore with 15% interest
February 2013: Sebi orders a freeze on assets and bank accounts of the Sahara companies and executives, including Roy
March 2013: Sebi seeks SC nod to arrest Roy for failing to comply with the latter’s August 2012 order to refund investors
November 2013: SC restrains Roy and other directors from leaving the country, and their companies from selling any movable or immovable property
January 2014:  SC asks Sahara Group to reveal the source of the
Rs 22,885 crore which it claimed was used to refund its investors, or face an inquiry
February 2014:  SC directs Roy, along with directors Shankar Dubey, Ashok Roy Choudhary and Vandana Bhargava, to appear before it
February 2014:  SC rejects Roy’s request for exemption from personal appearance. It issues a non- bailable warrant against him. Police arrest Roy on February 28, and keep him at a forest guest house near Lucknow
March 2014:  The Sahara boss, driven from Lucknow to Delhi in a Mercedes escorted by police cars, appears before the Supreme Court on 4 March. The court sends him to custody for a week
March 2014:  SC grants Roy interim bail subject to him depositing Rs 10,000 crore —Rs 5,000 crore in cash and the balance as a bank guarantee. Sahara Group requests that the embargo on sale of its properties be lifted
January 2015:  Mirach Capital, an investment vehicle, lines up a $2 billion loan package to help bail out Roy. Conditions include it taking control of the group’s landmark hotel assets in New York and London
February 2015: Mirach deal runs into trouble
March 2015: SC issues ultimatum to Sahara to pay up in three months or face public auction of company assets
Fast forward 11 years, and Subrata Roy has completed a year in Tihar Jail since his arrent. He was arrested for contempt on 4 March 2014 on the orders of the Supreme Court, after he failed to pay Rs 24,000 crore to the Securities and Exchange Board of India (Sebi) as per the terms of the court’s August 2012 order. He is on his third and last lifeline of 90 days to raise the bail bond of Rs 10,000 crore to regain his liberty. If he fails again, as he has in earlier attempts to sell his properties, the apex court will seize his assets and appoint a liquidator to realise the dues.

Will Roy be able to raise the money to gain his freedom? More important, is it the end of the road for the Sahara Group? There is another lurking question. Sahara has returned part of the money — around Rs 5,120 crore to Sebi — but the market regulator can’t seem to find the ‘investors’. Will the apex court take the inquiry further to find out who these ‘investors’ are? 

Realty Becomes Prime Property

Going back to 2004, there was a measure of scepticism around the size of Subrata Roy’s real estate plans, but Roy’s was not an empty boast. His primary businesses of para-banking and chit funds were in trouble and were slowly winding up; he had to find an alternative.

Roy had joined a small, struggling chit fund company, Sahara Finance, in 1978, and turned it into a money-making machine after the business model and scale were changed. For decades, his prime business continued to be para-banking. Roy’s flagship Lucknow-based company, Sahara India Financial Corporation (SIFCL), officially called a residuary non-banking finance company (RNBFC), relied on a huge network of agents that fanned out into villages and small towns, collecting crores in small lots of Rs 50 and Rs 100. The strategy of these agents was to promise huge returns with high interest rates. A Sahara collection agent, Rupinder Panwar, had said a few years ago that the volume of small notes was so large that he used bedsheets to collect deposits in the villages before he returned to Lucknow! SIFCL’s size and operations have always been shrouded in mystery. One estimate puts the collections received from the public between 1978 and 2012 at around Rs 2.25 lakh crore.
Some compared Sahara’s chit fund operations to a massive ponzi scheme where money from one set of depositors was used to pay off an earlier lot, even as another wave of fresh deposits was being collected, and so on. Somebody had to turn wise. Finally, Reserve Bank of India  clamped down on these myriad schemes and, in June 2008, banned SIFCL from accepting deposits. After an initial stay from the Allahabad High Court, the Supreme Court directed the company to wind up operations by 2010.
Meanwhile, other parts of Roy’s business empire were also going bust. He always had a yen for businesses that made waves, and predictably launched Sahara Airlines in 1991 with a couple of Boeing aircraft. He was also among the first of the private domestic airlines to get a licence for international flights in 2004. But Roy’s airline never sprouted international wings. Air Sahara, as it was called, continued to bleed, and there was little likelihood of a turnaround. The airline signed a sale agreement with then market leader Jet Airways in January 2006 for Rs 2,000 crore, but the deal was only consummated 18 months later after Jet Airways forced down the consideration to Rs 1,450 crore.

It was in such circumstances that Roy turned to real estate as a business that could match the size and returns that para-banking had given him. Hotels and hospitality would act as adjuncts.  The first of the hotel deals was when Sahara picked up Air India’s Centaur hotel in Mumbai in 2002 for Rs 115 crore, rechristened it ‘Sahara Star’ and developed it as a posh five-star property. In parallel operations, Sahara began mobilising funds for investing in real estate, uncannily in the same manner as Roy ran his para-banking operations.

The group launched a bond issue through two unlisted Sahara companies — Sahara India Real Estate Corporation and Sahara Housing Investment Corporation — collecting Rs 19,400 crore and Rs 6,380 crore, respectively, through the two companies as optional fully convertible debentures (OFCD) from close to three crore investors. Interestingly, Sahara’s para-banking arm Sahara Finance Corporation, which had been ordered to wind up by 2010, had to return thousands of crores worth of maturing and aborted deposits in that period to a mind-boggling 1.9 crore depositors. According to Sahara’s own admission, many of its para-banking depositors squared off their dues with Sahara and became ‘investors’ in the group’s new real estate funds!

Sebi launched an investigation and concluded that the group’s mobilisation of funds for the bond issue was ‘illegal’; it ordered Sahara to return the money to depositors. The Sebi Act and the Companies Act mandate that when such money is mobilised from 50 or more persons it will be deemed a public issue (Section 67 (3) of the Companies Act). This requires the company to get listed and if it fails to mobilise the targeted public investment, it has to refund the entire money to investors (under Section 73 (2) of the Companies Act).

The more recent history is better known. After Sahara got a stay against the Sebi order, and the matter landed before the Supreme Court, the latter, in a historic judgment on 31 August 2012, asked Sahara Group firms to return the money with 15 per cent interest and directed Sebi to facilitate the return of funds. Sahara’s case has always been that its liability is just Rs 2,000 crore. It has also claimed it has settled the dues of investors directly and carted 127 truckloads of signatures in 31,669 cartons to Sebi’s headquarters in Mumbai to prove its case. As far as the Supreme Court is concerned, it has discounted these claims. The accepted math is Sahara has only returned Rs 5,120 crore to Sebi so far.

Finally, Roy’s arrogance proved to be his undoing. When told to appear before the apex court in Sebi’s contempt petition, he ignored the summons claiming he was tending to his ailing mother. Arrest warrants were issued on 24 February 2014, and the bench comprising justices K.S. Radhakrishnan and J.S. Kehar ordered that he be produced before them on 4 March. He has not gone home since. On that day, he along with two other Sahara directors was sent to Tihar Jail for a week and India’s highest ever bail bond was posted at Rs 10,000 crore ­­— half in cash, the remainder as a bank guarantee. The court expected Roy, a man of no small means, to furnish the bail bond in days. That did not happen, and the trio continue to languish in jail. 

Land Bank A Mirage?

What went wrong? Why has Roy not been able to buy his freedom by cashing in on Sahara’s famed land assets? The group claims to possess thousands of acres of developable land and hundreds of crores worth of housing and commercial projects. Why is it not able to monetise a mere Rs 6,000 crore of these assets to pay off the remaining bail money? The answer is simple: very few of the titles of these tracts and projects belong to Sahara companies; and legal and regulatory issues have eroded their worth to a fraction of their perceived price.

This is evident from Sahara’s own records and statements. The Draft Red Herring Prospectus (DRHP) of September 2009 for the public listing of Sahara Prime City (which incidentally never went through) states that the company holds 8,484.65 acres, of which as much as 67.3 per cent is agricultural land and only “15.5 per cent comprises land in either a residential or commercial zone”.

Moreover, the DRHP admits that only a minuscule proportion of the titles of these lands are directly held by the company, and control is exercised through myriad joint ventures and development agreements. Sample this: “Out of our aggregate land reserves of approximately 8,484.65 acres, we own only 48.94 acres directly…the rest of our land reserves are directly held by our subsidiaries or represent land for which we or our subsidiaries have entered into development agreements, memoranda of understanding or agreements to sell,” says the Sahara Prime City DRHP.

Despite these admissions, the Sahara website tom-toms an “enviable land bank of 33,633 acres” — an unbelievable claim that it has quadrupled its land holdings since it filed the DRHP of Sahara Prime City in 2010! Sahara on its website also says it is currently developing integrated housing projects in 15 cities — Lucknow, Jaipur, Indore, Nagpur, Satna, Coimbatore, Gwalior, Bareilly, Kashipur, Aurangabad, Sholapur, Porbandar and Katni, among others.

However, when it came to a crunch in 2013, the only properties that Sahara presented that were marketable and with value were the 106-acre Versova land in Mumbai which it said was valued at Rs 19,300 crore, and another property in Vasai, north of Mumbai, valued at around Rs 1,000 crore. However, the valuation by Knight Frank Property Consultants was faulted by Sebi, whose counsel Arvind Datar pointed out to the court that they were part of a larger 614-acre layout administered by the Byramjee Jeejeeboy and Wakharia family Trust, and fell in a ‘no-development zone’. Sebi’s Datar valued the land at no more than Rs 118 crore.

Knight Frank today concedes the valuation was done independent of regulatory encumbrances. “The Rs 19,000-crore valuation of the Versova property would be valid only if it was free of CRZ and NDZ restrictions,” Shishir Baijal, CEO of Knight Frank, told BW | Businessworld. It is not that Sahara has not tried or succeeded in selling its realty assets in India. For instance, the group recently raised Rs 1,211 crore from M3M India by selling 85 acres of urban developable land in Gurgaon. Knight Frank too brokered a Rs 500 crore sale of a 104-acre urban holding last August in Ahmedabad. But obviously the math is not adding up.

“Most of the land holdings of Sahara are in remote areas on the outskirts of Tier II and III towns, and do not command the valuation the company claims,” says Pankaj Kapoor, CEO of property tracking agency Liases Foras.

“As a business strategy, Roy acquired thousands of acres in city outskirts and along growth corridors. They were early-stage assets and acquired through intermediaries as farm land cannot be bought by corporate groups. His vision was to convert these into commercial and residential land. He was sure of his clout and that the government machinery would fall in line,” explains Sunil Rohokale, CEO of the ASK Group.

Rohokale recalled a presentation by the Sahara Group in Mumbai in 2007 where it announced Rs 10,000-crore worth realty projects. He points out that “for many of these assets, the land-use conversion was never carried out, and they remained illiquid. Only a very courageous person today will buy these assets”.

Another analyst who has worked on valuations of Sahara properties in the past, but who preferred anonymity, valued the group’s Indian assets between Rs 70,000 and Rs 1,00,000 crore, but said Sahara’s attempts to sell these assets had hit a wall because of three factors: most of these assets were not contiguous; the company was barred by court from selling below the government-notified circle rate; and the market was illiquid and was not forthcoming even for the more attractive properties owned by the group.

The sale of the largest of Sahara’s Indian assets, the 10,000-acre Aamby Valley township, near Pune, valued between Rs 40,000 and 45,000 crore, has so far not found mention either in court or in the property market. The Supreme Court has, however, recently allowed a 600-acre parcel of this property to be put on the block.

Hotels Find No Takers
In 2010, when Sahara was at the peak of its expansion drive and fund-raising, in a distinctive Subrata Roy flourish, the group decided to buy London’s iconic hotel, the Grosvenor House. It was a style statement that the ‘Saharashri’ had arrived. Grosvenor House was purchased from Royal Bank of Scotland for $726 million (Rs 4,350 crore). This was followed up by the acquisition of two well known New York hotels — New York Plaza and Dream Downtown — both based near Manhattan’s Central Park — for $800 million (Rs 4,400 crore). These were audacious acquisitions considering the bids in New York were made after the Supreme Court had ordered Sahara to return Rs 24,000 crore to depositors.

It is indeed ironic that with Roy in jail and unable to produce the bail amount, Sahara had to fall back on a strategy to sell these hotels to raise funds. The Supreme Court went so far as to allow the company to set up a full-fledged corporate office, equipped with video-conferencing facilities, within the jail premises, so that Roy could personally negotiate on behalf of the group. Two rounds of talks and negotiations have failed, and Roy is currently on his final lifeline.
On 23 March, the Sahara counsel told the apex court that it was raising €900 million from Hong Kong-based Noaum, which in turn was financed by Spanish Bank BBVA, to buy out Bank of China’s loans. This, along with the sale of 10 Indian properties, is expected to cover the bail amount. The court found the plan “prima facie credible” and has allowed Roy 90 days before his assets are turned over to a liquidator. However, at the time of going to press, reports emerged that BBVA had denied offering a line of credit to Sahara.

Property broking houses which have worked closely with the Sahara Group say the problem is that negotiations have run into trouble as Roy does not have the luxury of negotiating individual deals for the three hotels. They have to be sold as a package to repay $800 million to Bank of China, which financed the buyout of Grosvenor House, and to raise another $800 million to fund Roy’s bail demand. In these circumstances, the target of raising $1.6 billion in one single transaction covering all three hotels has proved difficult and elusive. The fact that potential buyers know that the hotels are on ‘distress sale’ is not helping matters.

A refinancing bid for the hotels made by a newly founded entity, Mirach Capital, that promised to raise $1.5 billion to settle Bank of China’s claims and secure Roy’s liberty fell through in mid-March. While Sahara has alleged that Mirach Capital had forged a bank guarantee, Saransh Sharma, CEO of Mirach Capital, countered by saying he is filing a $400 million defamation suit for making false statements.
A detailed questionnaire sent to the Sahara Group on Mirach Capital and a host of other issues went unanswered. Abhijit Sarkar, head of the company’s corporate communications department, promised that a reply was in the works on 20 March but none landed.    

Whither ‘Investors’?
There is another ticklish issue that the apex court is seized of —  how to get the money that Sahara has deposited, and will deposit in the future, to the original ‘investors’.

Sahara has repeatedly castigated Sebi in court for its inability to refund the money the company has deposited. Sebi says it has twice issued public notices and advertisements asking ‘investors’ to submit their claims along with proof of their investments. The market regulator has also admitted it has received just 4,900 refund claims till date. Of these, according to Sebi, only 560 have been found fit for payment, and so far it has distributed a little over Rs 1 crore. So where have all these ‘investors’ vanished? And, more important, who are these ‘investors’?

Some of those close to the investigation have questioned whether most of the 30 million ‘investors’ exist at all. “The most critical component of this case is the money laundering aspect.  This crucial element has not received adequate emphasis in any of the orders passed by the court and other government agencies,” says K.M. Abraham, a former whole-time director of Sebi who first investigated the Sahara realty bond issues and wrote the initial Sebi order.  “That is clearly disappointing because the country loses an opportunity to set right some of its fractured financial systems,” he adds.

“My own investigation for verifying the identity of many in the list of investors provided by Sahara group lends credence to a hypothesis that a majority of those names and addresses could be fictitious.  This can only be corroborated by detailed examination,” says Abraham.  Recalling his investigation into the realty bonds issue, Abraham says he had sent three teams to locate three random ‘investors’. In one case, the address was genuine but no ‘investor’ by the listed name existed. In two other cases, both the names and addresses were fake. “The government should now ensure that it unravels whether there was any big money laundering motive behind the Sahara bonds issue,” adds Abraham. 

What happens if the ‘investors’ are not traced? “As prescribed by the Supreme Court, it can be assumed that Sebi will follow its currently existing refund process, and that the undistributed amount will be deposited with the Government of India,” says senior corporate lawyer Anoop Narayanan.

“Unfortunately, Sebi does not have the expertise and staff to carry out the verification of the addresses of close to 30 million investors. It is also a big question whether these are genuine investors and if they exist at all,” says Kumar L. Desai, a Mumbai-based securities lawyer.

With Sebi unable to trace ‘investors’, and with pending allegations of money laundering, the Supreme Court will find it difficult to close the case. It will, on the other hand, have the option of ordering a police investigation to trace the ‘investors’; and, if they are found to be bogus, it can investigate to find out the real ‘investors’ and why their identity remains shrouded in mystery.

On the action so far against Sahara, the public mood is supportive of both Sebi and the apex court’s intent to ensure corporate fund-raising does not shortchange the investing public, and those who break the rules are penalised in equal measure.

In their order dated 6 May 2014, justices Radhakrishnan and Kehar noted: “During our entire careers as advocates, as judges of different high courts, as chief justices of high courts in different states, and also as judges of this court, we have yet to experience a demeanour of defiance similar to the one adopted by SIRECL or SHICL or their promoter and directors. The responsibility for the above defiance, which constituted a rebellious behaviour, challenging the authority of the Sebi, from investigating into the affairs of the two companies, required brazenness, flowing from unfathomable power and authority. It is apparent that not a hundred, but hundreds of judge hours came to be spent in the instant single Sahara Group litigation, just at the hands of the Supreme Court. This abuse of the judicial process needs to be remedied.”

Says Desai: “With the Sahara judgment, the Supreme Court has set high standards for the benefit of the larger investor community. By affirming Sebi’s orders, it has sent a clear message to the corporate world that Sebi can and will use the powers available under Section 55 (a) of the Companies Act to protect the interest of investors.”

Will the Sahara Group be able to survive this crisis? Even if Sahara manages to raise the Rs 6,000-crore deficit for the bail bond and secures Roy’s liberty, the second leg of the Supreme Court judgment — refund of depositors’ money which has now swollen from Rs 24,000 crore to Rs 40,000 crore — will prove even more challenging. Sahara disputes these figures and has said it will contest the revised amount. But given that there is little scope for revision, does it have the resources to raise the money?

The sentiment found an echo at the 23 March hearing of the Supreme Court when the bench comprising justices T.S. Thakur, A.R. Dave and A.K. Sikri doubted the Sahara Group’s ability to pay back depositors when it was having trouble bailing out its own chairman. 

The authors are Gurbir Singh & C.H. Unnikrishnan

(This story was published in BW | Businessworld Issue Dated 20-04-2015)