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SC applies record $3bn screws to Sahara, lines up crim case. What gives?

Sahara: A lonely place right now
Sahara: A lonely place right now
It’s going to be an incredibly tough future for the Subroto Roy-owned Sahara Group (also known as Sahara India Parivar) after today’s judgment by the Supreme Court of India. The court asked two group companies to return an unprecedented Rs 24,000 crores ($4.3bn) to their roughly 28 million investors, while setting the company and its directors up for possible criminal prosecution.

The judgment is a stinging indictment of the company’s practices. It is also probably the largest ever transaction ordered by an Indian court to date.

The Supreme Court’s tenacious pursuit of the two Sahara real estate companies also resulted in a huge fillip for powers of India's capital markets regulator, the Security and Exchange Board of India (Sebi). The court virtually unleashed Sebi on Sahara, reaffirming the views of the Sebi Appellate Tribunal (SAT), and going further to suggest that the case might be the result of mammoth financial fraud on the part of Sahara’s companies.

Sebi has been directed to launch multiple investigations into Sahara's companies on both civil and criminal provisions of capital markets and corporate laws. “SEBI shall have the liberty to engage Investigating Officers, experts in Finance and Accounts and other supporting staff to carry out directions and the expenses for the same will be borne by Saharas and be paid to SEBI,” reads the judgment. “We also make it clear that if Saharas fail to comply with these directions and do not effect refund of money as directed, SEBI can take recourse to all legal remedies, including attachment and sale of properties, freezing of bank accounts etc. for realizations of the amounts.”

The two-year-long legal battle began at the Allahabad High Court's Lucknow bench where Sahara asked the bench to prevent Sebi from looking into its fund raising affairs. The matter was escalated to the Supreme Court, where Chief Justice of India (CJI) SH Kapadia's bench asked the capital markets regulator to go ahead and pass an order on the nature of financial instruments used by Sahara.

Last June Sebi said that the optional fully convertible debentures (OFCDs) used by Sahara were not a legitimate mode of raising money from investors. SAT held the same view and the SC's conclusion appears to have finally settled this question of law.

However, the judgments (there were two concurring verdicts) written by justices KS Radhakrishnan and Jagdish Singh Khehar go much further and set up the Sahara companies for criminal prosecution for flouting rules.

This is what justice Jagdish Singh Khehar had to say:

“For the first time before this Court, in their challenge to the SAT order dated 26.8.2011 (whereby the SEBI (FTM) order dated 23.6.2011 was upheld), some details were disclosed by SIRECL. On an analysis the material placed before this Court, I have recorded hereinabove, that the same seemed to be unrealistic, and may well be, fictitious, concocted and made up. Independently of the interaction of the appellant-companies with SEBI, from letters written by SIRECL in January, 2011, it was concluded by the SEBI (FTM), that the company was seeking professional services to collect and compile data pertaining to the OFCDs issued by it.

“Since the subscription to the OFCDs under reference commenced in March, 2008, the same raised suspicious about the genuineness and the bonafides of the appellant-companies. Surely the suspicion was well placed. This itself is sufficient to conclude, that the whole affair was doubtful, dubious and questionable. The consequence thereof, if correct, would be shocking.”

This comes as an additional blow to Sahara which announced a joint venture with US-based real estate major Turner Construction Co in February for various projects and townships across India. According to people familiar with Turner's investment plans at the time, the US company was concerned about Sahara's OFCD case that was pending before the Supreme Court.

Sahara also recently said it was launching an ambitious retail chain project, Sahara Q Shop, for which it was initially investing Rs 3,000 crores, besides already having business interests in sports and media ventures.

(Roy launched the Pune Indian Premier League cricket team and built a huge stadium outside the city. Sahara invested significantly in Vijay Mallya's Formula One Racing team last October. He also owns a Hindi newspaper and news channel).

CJI Kapadia had indicated that the court was suspicious of Sahara's money-raising methods by making several observations during the hearings. The judgments by his brethren on the bench only confirmed the court's views on the matter.

Sahara now has to return the money within three months and it has to supply Sebi with crucial documents for investigations within 10 days. The bench appointed retired justice BN Agarwal to oversee the implementation of the judgment by Sebi.

And unfortunately for Sahara, the criminal side of this case appears to be starting to unfold now. Once SEBI starts investigating, much more muck will likely become public. All legal options used by Sahara, what Sebi said were only to stall investigations, have been exhausted.

Sahara's only hope is to find some incredibly gracious saviour who might be willing to fund some part of this haemorrhage. The case is vaguely similar to the episode Ramoji Rao’s Eenadu Group faced when its chit fund business, Margadarshi, was under Supreme Court scrutiny in 2008. Fortunately for Rao, he found Mukesh Ambani through Nimesh Kampani (JM Financial) to help fund Margadarshi.

Much like in the 2G licence cancellation judgment, where the Supreme Court pretty much declared former telecom minister A Raja responsible for the scandal, the court made several scathing observations against Sahara in this judgment too, virtually scripting the prosecution’s submissions, and making it hard for the trial court to resist a conviction.

“The provisions for imposing civil and criminal liability and refund of the amount with interest would indicate that, of late, economic offences in India like the one committed by Saharas be treated with an iron hand, or else we may land in another security market pandemonium.”

Interestingly, no senior law officer took up arguing the matter for Sebi before the Supreme Court.

Instead, Sebi brought in senior counsel Arvind Datar from Madras to take on Sahara, who in turn fended the experienced senior advocate Soli J. Sorabjee before Kapadia's bench. Later, Sahara hired senior counsel Fali S Nariman to stave off the fire-breathing bench from looking too closely at its case.

Alas, two charming old school lawyers weren’t able to fully protect Sahara's account books from Kapadia’s watchful eye.

Read and download the full judgment.

Photo by Hamed Saber

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