It was an innocuous-looking complaint by one 'Roshan Lal' four years and four months ago that sent watchdog Sebi on the trail of "various illegalities" committed by Sahara group in raising over Rs 24,000 crore from more than three crore investors.

Flamboyant Sahara Group chief Subrata Roy, often photographed wearing a black vest over a white shirt, keeps a low profile. He rarely gives interviews but enjoys throwing lavish parties at his Lucknow mansion which are attended by Bollywood celebrities and top political leaders.

A high-profile saga -- which culminated last week in the arrest of Roy, who calls himself "Managing Worker" of his business empire -- has seen many dramatic events along the way.

There have been many emotional pitches by Sahara group, which claims to have a net worth of over Rs 68,000 crore and assets worth over Rs 1.5 lakh crore.

The Sebi-Sahara case itself comprises staggering numbers like collection of over Rs 24,000 crore from three crore individuals, while Sahara once sent 127 trucks containing 31,669 cartons full of over three crore application forms and two crore redemption vouchers to Sebi’s office. This apparently resulted in a huge traffic jam on the outskirts of Mumbai where the regulator is headquartered.

Sahara’s woes had begun in 2008 when it shut operations as India’s biggest non-bank deposit-taking firm on orders of the court, which was worried about the soundness of investments in which money was being parked.

Raising funds and hackles

When Sahara Prime City, a real estate venture of the group, filed a Draft Red Herring Prospectus (DRHP) with Sebi ahead of a planned IPO on September 30, 2009, Sebi sensed certain largescale fundraising exercises by two Sahara firms -- Sahara India Real Estate Corp (SIREC) and Sahara Housing Investment Corp (SHIC).
Further investigations found that the funds were raised through certain bonds called OFCDs (Optionally Fully Convertible Debentures) after filing RHPs (Red Herring Prospectus) with the Registrar of Companies, although the rules required permission from Sebi for any issuance of securities to 50 or more investors. In these cases, the number of investors ran into crores.

Soon, Sebi received two complaints -- one on December 25, 2009 and the second on January 4, 2010 -- alleging illegal means used by these two firms in issuance of OFCDs to the public throughout the country for many months.

The second complaint was from Roshan Lal, which was received by Sebi through National Housing Bank. Based on these complaints, Sebi began seeking clarifications from the group, initially through their investment bankers Enam Securities and later directly. Eventually, Sebi passed an interim order against the two companies on November 24, 2010, asking them to refund the money collected from investors.
A final order was passed by the regulator on June 23, 2011, while the group challenged these directions before the Securities Appellate Tribunal. However, the Tribunal upheld the Sebi orders on October 18, 2011, and asked the companies to refund Rs 25,781 crore to over three crore investors.

The group then moved the Supreme Court, which passed an order on August 31, 2012, asking SIREC and SHIC to deposit the outstanding amount of over Rs 24,000 crore with Sebi for refund to investors.

Sahara was also asked to deposit details of all investors with Sebi, which was mandated to refund the money after verifying their genuineness.
Sebi again moved the Supreme Court alleging non-compliance by the group with the earlier orders, pursuant to which the apex court passed another order on December 5, 2012, and asked the two firms to deposit the money in three instalments beginning with immediate payment of Rs 5,120 crore.

While the group paid the first instalment, it failed to meet the deadline for the other two payments. Rather, it claimed to have already paid more than Rs 20,000 crore directly to the investors.

Unconvinced,  Sebi passed orders on February 13, 2013, to attach bank accounts and other properties of the group and later issued summons for personal appearance of Subrata Roy and the other three directors. During the same month, Sebi finally closed its file on Sahara Prime City. Meanwhile, Sahara continued to issue full-page advertisements in newspapers wherein it claimed to have cleared the bulk of its outstanding liabilities to bond holders.

Smell of Ponzi        

   There are many who believe that Sahara has been running a Ponzi scheme by collecting funds from hundreds of small investors on the lines of what many chit fund companies indulged in. Observers note that much of Sahara's fundraising success rested on the fact that vast numbers of rural Indians have no access to banks and no other place to put their money than in poorly regulated non-bank institutions.
The court and Sebi had repeatedly cited delays in repaying billions of dollars illegally collected from small investors. Subrata Roy’s arrest was ordered over delays in repaying money collected from rural savers through OFCD bond sales. These bonds are issued by a company to potential investors to raise money. In cases of default and liquidation of the company, OFCD holders will be among the last stakeholders to be refunded.

After RBI banned the company from collecting funds from the public, Sahara opted for the OFCD route to tap funds from untapped geographies in India where conventional banking is yet to gain a foothold. SIREC and SHIC were set up for clearance from the Registrar of Companies with this specific function.

Once RoC clearance was breezed through, Sahara got down to business, merrily ignoring the Sebi stipulation that companies raising money from 50 or more investors have to take the market regulator’s approval through proper disclosures before going ahead. The issue was also kept open-ended, with media reports claiming that one Sahara Group company kept an issue of Rs 17,250 crore open for 10 years. This attracted the ire of Sebi, though it came a little late in the day.

K M Abraham, who complained against Sahara in 2008, alleged that the money raised by Sahara was being camouflaged as private placements. Abraham also alleged that SIREC and SHIC planned to rotate the money between Sahara’s group companies. He pointed out that though the OFCD instruments were issued in the name of SIREC and SHIC, the cheques were being sought from investors in the name of Sahara India.
Thereafter, Subroto Roy Sahara’s woes became a continuum with the company having to shut operations as India's biggest non-bank deposit-taking firm on orders of the court, which was worried about the soundness of investments in which money was being parked.

The Sahara empire extends from a stake in a Formula 1 racing team to a sprawling luxury township, and once included the iconic New York Plaza Hotel.

Sahara maintains that it is only helping small investors outside the banking system and that it has never defaulted on them. A company statement claimed last week that it has repaid all its OFCD liabilities except around Rs 2,000 crore. In typically jeering and grammatically challenged prose, the statement said: “Company has given Sebi all original payment vouchers, receipts and all other documents containing all details of esteemed investors more than 100 truckloads. Rest 20-30 truckload documents are lying in Mumbai godown and Sahara tried their best but all in vain and Sebi did not receive these documents.”

Sahara claims that the documents are absolute proof of its payments that “even a child can see and get convinced. But Sebi will not go through the same and that is Sebi’s great strategy against Sahara”, the company scoffed, adding that Sahara had deposited Rs 5,120 crore with Sebi which the market regulator has been sitting on for the last 16 months.

“Sebi could disburse only Rs 1 crore (till now) in last sixteen months,” Sahara said, attempting to justify its theory that there is no payment demand against it. “In last 17 months, Sebi has not done even 1 per cent verification,” Sahara went on to add, as it detailed the company’s understanding of what it called Sebi’s “great strategy” to liquidate it.

In advertisements, the group has claimed to have raised funds totalling Rs 2,25,000 crore since inception in 1978 across various businesses and pegged its total net worth at an astonishing figure of Rs 68,174 crore and the size of its assets at Rs 1,52,518 crore. Parallely, Sebi’s exercise of refunding genuine investors from the Rs 5,120 crore deposited by Saharas does not appear to have made much headway. Sebi says it has detected instances of multiple accounts on which it has sought clarity from the Supreme Court. As Roy awaits his day in court, expect the action to hot up further on both fronts.