Moneyspinner Subrata Roy spins new yarn: direct retail

First, the Reserve Bank of India sent him packing . Sahara India Financial Corp was forced to stop taking deposits last year. Then, Sebi also packed him off. Two Sahara companies, planning to raise Rs 40,000 crore between them through irregular means, were asked to return the cash raised through optionally fully convertible debentures (OFCDs).

Now, Sahara Group boss Subrata Roy believes if anyone should do the packing in future, it will be he himself. He has just announced a massive entry into the retail sector where the core business will be the sourcing, packing and forwarding consumer goods to final buyers.

Instead of a mall, you go to a Sahara Q shop - which is a small delivery centre of around 330 sq ft, which will deliver food staples, toiletries, general merchandise and lifestyle products. Or you could order the stuff by calling a Sahara salesman or call centre. The stuff will even be delivered home.

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Roy, who announced a Rs 3,000 crore investment in direct retailing on Monday, says some 800 Sahara Q shops are already up - if not running. They’ll run from 15 August. And he wants to raise the number to 60,000 (yes, you heard that right, 60,000), and hopes to take turnover to Rs 20,000-25,000 crore annually in 12-18 months. There will be 305 warehouses acting as the bulk supply depots.

If that looks like pie-in-the-sky, you are entitled to your skepticism. Last year, Reliance Retail achieved Rs 7,600 crore of annual turnover after five years in business. The Economic Times tells us that the entire direct selling industry in the country is now worth just Rs 6,000 crore - and Roy wants to overhaul this figure four-fold in 18 months. Says ET derisively: “Roy, who owns an IPL team, has a way of announcing ambitious and sometimes outlandish projects. This one ranks right up there.”

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We wouldn’t quite put it like that, but it seems clear that Roy’s current dalliance with direct retailing has more to do with the push he has got from the two financial regulators (RBI and Sebi) than the pull of the retail sector.

He said as much to Business Standard. “We are so much active in the financial business. Now, I have started terming some of the regulators banning agencies, not regulators. If I had to start Sahara today, I would have probably reached a business of a crore or two,” he said.

[caption id=“attachment_417995” align=“alignleft” width=“380”]  Sahara’s problem is simple. It has anywhere between 6 lakh to one million parabankers who have been earning a living from selling Sahara’s various money-raising schemes. AFP[/caption]

Roy has been thwarted both by the RBI and Sebi. A few years ago, the RBI asked Sahara India Financial Corporation to return all deposits by 30 June 2015. The company proclaimed last year that it was winding it up earlier.

In June 2011, Sebi stopped two Sahara companies dead in their tracks. In an order dated 23 June, the market regulator ordered Sahara Commodity Services Corporation and Sahara Housing Investment Corporation (SHIC) to return the money collected through the issue of optionally fully convertible debentures (OFCDs) from investors with 15 percent interest.

As we noted earlier, the two companies, which had minuscule net worth of a few lakh rupees when they started passing the hat around to investors in 2008 and 2009, had the gall to target a collection of a humongous Rs 40,000 crore for vaguely defined purposes before Sebi stepped in. And, curiously for an OFCD issue involving 6.6 million investors, the issues were to be kept permanently open. Something unheard of in the capital market. OFCDs are debentures which investors can convert into shares at their option.

The Securities Appellate Tribunal upheld the Sebi order, and Sahara has now moved the Supreme Court - where the matter has remained stuck since late last year.

The retail operations are possibly a direct fallout of these two actions by two regulators.

Sahara’s problem is simple. It has anywhere between 6 lakh to one million parabankers who have been earning a living from selling Sahara’s various money-raising schemes. This money-collection machinery will get rusty if the Sebi order is finally upheld. The Sebi order, written by KM Abraham (read here), is so logically argued that it would be tough for even the Supreme Court to overturn its decision easily. In short, Sahara has to plan for other ways to deploy the numbers.

Sahara’s plan is to deploy some of the parabankers in the retail operations - mostly to sell merchandise. ET quotes him as saying: “Our one million workers regularly visit 6.5 crore depositors and it would be easy for them to enter those houses and sell our other products.”

Once again, Roy is probably building castles on sand. Selling financial products is one thing; trying to get people to buy products is quite another. If it were that easy, direct selling would have been bigger than Rs 6,000 crore annually.

Apart from the need to deploy his underemployed army, the retail business also lures Roy because of two similarities with his existing businesses: the link to cash, and real estate.

Even though Roy assures us that he is not planning big retail malls like Wal-Mart, the fact is building 305 warehouses at various vantage points in the country involves real estate and building a supply chain and vendor base.

Moreover, Roy is familiar with money-churning cash schemes - which is what small-time retailing is all about.

Bring the cash, realty and a parabanking together, and retailing must have sounded like a great idea of Roy.

By the end of 2013 we will know if it’s just a pipe dream or Roy’s a genius.