London Hotel purchase: Sahara must explain where it got the money and how

The money raised by the Sahara Group from investors through its optionally fully convertible debentures (OFCDs), and which the Supreme Court has ordered to be returned with 15 percent interest, may have been partly used to buy London’s Grosvenor House hotel.

According to an investigation by The Economic Times, a “slice” of the funds raised by Sahara India Real Estate Corporation (SIREC, one of the two companies asked to wind up and repay investors) was kept as deposit with the Lucknow branch of ING Vysya and the Khar (Mumbai) branch of the State Bank of India (SBI).

The money then went to Aamby Valley Ltd (again through a Lucknow branch of the Punjab National Bank) as an unsecured loan which was subsequently converted to equity. With a higher net worth of Rs 6,058.9 crore as in March 2010 (after the loan conversion to equity), Aamby Valley was able to transmit the money to London via Mauritius without the Reserve Bank of India (RBI) having to vet it. Under current regulations, companies can invest up to four times their net worth in a foreign company through the automatic route.

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[caption id=“attachment_578840” align=“alignleft” width=“380”]  This is where Sebi discovered that two other companies, SIREC and Sahara Housing Investment Corporation (SHIC), were raising huge amounts of money through OFCDs camouflaged as private placements. Reuters[/caption]

What this ET story proves is that the Sahara Group is always one step ahead of the regulators, and some of its activities are, in fact, intended to evade regulatory vigilance.

As Firstpost has noted before, the group has been busy creating one money-raising scheme after another. But whenever the regulators found out, they asked it to shut down. In 2008, Sahara India Financial Corporation was debarred by the Reserve Bank of India from raising fresh deposits. It was ordered to stop accepting deposits maturing after 30 June 2011, and return whatever it already had by 30 June 2015.

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Finding the RBI’s scrutiny difficult to evade, the group then moved into the ambit of the Registrar of Companies (RoC) - which simply does not have the ability to police the country’s unlisted companies. This is where Sahara dreamed up two optionally fully convertible bond (OFCD) issues to raise up to Rs 20,000 crore each in SIREC and Sahara Housing Investment Corporation (SHIC).

The RoC okayed these huge issues without much application of the mind. Should the official who signed the clearances not have asked himself whether two companies with negligible net worth could raise Rs 40,000 in schemes with no closing dates? No antennas apparently went up at the RoC.

Everything would have been all right - and Sahara would have got away with this deliberate attempt to evade Sebi’s jurisdiction over OFCDs - till it made its first big mistake: it decided to raise money from the market in Sahara Prime City and filed a draft Red Herring Prospectus. This is where Sebi discovered that two other companies, SIREC and Sahara Housing Investment Corporation (SHIC), were raising huge amounts of money through OFCDs camouflaged as private placements.

Luckily for investors, Sebi, through the efforts of Wholetime Director KM Abraham, investigated the matter and ordered the two Sahara companies to return the money in an order dated 23 June 2011. Abraham, after some of his own checking, found that many of the alleged investors in SIREC and SHIC may be non-existent.

The Sahara Group then fought a long battle at the Securities Appellate Tribunal, and even in the Supreme Court, but on 31 August 2012 the apex court upheld the Sebi order and asked SIREC and SHIC to return Rs 24,000-and-odd crore raised from OFCDs to investors. A retired judge was asked to oversee Sahara’s payments to Sebi and finally to investors after verification of documents.

But late last year, Sahara pulled off a surprise when it claimed that it had paid off all investors and only Rs 2,620 crore was left. It, however, offered to pay up Rs 5,120-and-odd crore to Sebi in case there were still some doubts.

Sebi filed a contempt plea, but on 5 December, a Supreme Court bench headed by Chief Justice Altamas Kabir ordered Sahara to pay Rs 5,120 crore immediately to Sebi, Rs 10,000 crore by 5 January (today), and the rest by February. This suggests that the court still thinks nearly Rs 24,000 crore may be owed to investors.

The Economic Times story raises more questions than answers. If Rs 3,620 crore of the money raised by SIREC went to buy Grosvenor House via Aamby Valley - a purpose for which the money may not have been intended - how was it able to pay off everybody else in SIREC and SHIC?

Sahara needs to explain the whole money equation from start to finish, where the money came, where it went, how the investments made with the funds raised were liquidated, and who the money was paid too.

Whatever it has done so far does not look kosher.

Read the earlier Sahara stories here, here , here , and here.