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High and dry

27 September 2012 By Jeff Glekin

There’s no bigger sport in India than cricket. So you might think that the company which sponsors the Indian national team would be a household name. But Sahara has always been shrouded in mystery. Now, following a ruling by the country’s Supreme Court that the company must return $4.5 billion to millions of small investors, its finances are set for a stiff examination. The saga also raises important questions about Indian financial regulation – and how such scandals can be avoided in the future.

In India’s larger cities, Sahara is known for its glamorous links to Bollywood and for its flagship five-star hotels, which now include the Plaza in New York and London’s Grosvenor. But out in the sticks Sahara employs a million agents to raise deposits from rural Indians. The sums are small, but as important to Sahara as to the customers who trusted the company with their limited savings. Following the Supreme Court’s ruling last month, those deposits are due to be returned – with 15 percent interest.

It’s not the first time Sahara has fallen foul of the authorities. In 2008, the Reserve Bank of India shut down Sahara’s savings unit. The same year, however, two unlisted Sahara companies, with paid up capital of less than $20,000 each, began raising funds through an instrument known as an optionally fully convertible debenture (OFCD). Sahara argued the fundraising was a private placement. The Securities and Exchange Board of India (SEBI) countered that a private placement should be for a maximum of 50 investors – not 29 million.

The Sahara companies touted lucrative investments promising, in some cases, to return three times their face value after 10 years. They collected money “without any sense of responsibility to maintain records”, the Supreme Court said. The court has questioned just how genuine all the investors in Sahara’s OFCD were, but has instructed Sahara to repay the full amount nonetheless. If the investors cannot be located, Sahara must pay the money to the Indian government.

What is clear is that Sahara recruited a large number of investors who probably did not realise the complexity of the products they were being sold. The OFCD’s structure was akin to a regular savings scheme. But Sahara’s customers did not benefit from the protection associated with a public issue, or enjoy the safeguards that depositors get when they put money in a bank. Even now, as Reuters has reported, many investors remain oblivious to the fact that they are due a refund.

If Sahara doesn’t pony up within 90 days, the Supreme Court has instructed SEBI to use all legal means to claim the cash, including seizing Sahara property and freezing bank accounts. The regulator may need those powers: the balance sheets of the two firms which raised the OFCDs suggest that they lack the assets to pay back the full amount on their own. The larger of the two firms, which raised around $3 billion, showed $1.7 billion of inventories in its 2011 balance sheet. In addition, the firm has invested $1.4 billion in unlisted Sahara group companies.

Even if the cash is recovered, there’s still the tricky question of why such a huge mobilisation of funds was allowed to take place. The authorities missed opportunities to intervene before the money was raised. According to the Supreme Court, the Ministry of Corporate Affairs, which registers all private placements, should have alerted SEBI the moment the OFCDs were submitted. SEBI’s chairman has questions to answer, too. Last year, his deputy wrote to the prime minister alleging that, under pressure from the Finance Ministry, the chairman was going easy on Sahara by refusing to take out a newspaper advertisement highlighting a High Court judgment against the company. A public warning from SEBI might have deterred investors. Both SEBI and the Finance Ministry deny the allegations.

The broader question, however, is how to better serve India’s rural savers. Mainstream banks find the lowest end of the market more trouble than it’s worth. But the Sahara saga highlights that there is a large amount of cash in rural India looking for a safe home. One positive development could be the proposed introduction of a unique identity number for every Indian, which could allow more savers to open a bank account. If that turns out to be the case, the Sahara mess could at least leave a positive legacy.


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