Sahara's phantom investors: Why Subrata Roy's numbers don't add up

If Subrata Roy today finds himself in police custody for failing to turn up in the Supreme Court on 26 February as ordered, many people who haven’t been following the case closely may be wondering what the fuss is all about.

They are right to wonder. After all, Sahara has been one of the most ubiquitous brands on the Indian firmament, sponsoring the cricket team, hobnobbing with top Bollywood stars and top politicians, et al. The man also wraps himself in the flag of nationalism and claims to be a well-wisher of Bharat Mata.

And even in the matter of the fight it has been having with Sebi, which ordered Roy to return Rs 24,000-and-odd crore to depositors in optionally fully convertible debentures (OFCDs) issued by two of his companies, Roy has been telling anyone who will listen that he has indeed repaid most of the money, and the balance is with Sebi – paid through a cheque for Rs 5,120 crore.

Even today, the Saharashree is quoted by The Economic Times as saying: "The fact is the company has repaid all liabilities of OFCDs except around Rs 2,000 crore,” adding, if he still owed people money “then in last 16-17 months there would have been at least one complaint against Sahara. Had there been non-payment there would have been bloodbaths and suicides.”

This is true. If investors had really been cheated of their money or left unpaid amidst all this brouhaha, surely we would have heard a rising crescendo of accusations from the aam aadmi? So what’s the real issue here?

The answer, to put is simply, is really about the colour of the money. Was Sahara’s money laundered stuff, or the hard-earned savings of small retail investors? In the Supreme Court, Sahara claimed that as in August 2011, it owed investors Rs 24,029 crore to around 2.96 crore investors.

Roy has claimed innocence. PTI

Roy has claimed innocence. PTI

Is this believable? This question can only be answered by asking two further questions: Did Sahara really have that many investors? And if this number is not credible, who were the real investors? And even assuming Sahara paid off all the claimed investors, would this have been physically possible?

Let’s start with numbers. India has around 25 crore households. Sahara had 2.96 crore investors. This means 8.5 percent of Indian households were Sahara investors.

We know that Sahara has the bulk of its presence in Uttar Pradesh – which has a population of around 20 crore – or four crore households. Did Sahara really have the equivalent of three-quarters of Uttar Pradesh’s households as its investors?

The possibility that Sahara really had 2.96 crore investors as in August 2011 (it had claimed 3.08 crore in April 2011) is very low.

Now, let’s take the opposite case: that Sahara really did have 2.96 crore investors in August 2011. When the Supreme Court judgment came the following year in 31 August 2012, Sahara did not claim that investors were being paid off regularly – in fact, no repayments were due under the terms of the OFCDs issued by the two companies, Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC).

If we assume that the payments began only after the judgement, which asked that Rs 24,029 crore should be paid in 90 days, it means the bulk of the repayments happened over three months, since in December 2012 the group claimed it had only Rs 2,620 crore left unpaid. (It is interesting that Roy now claims only around Rs 2,000 is unpaid, when he claimed Rs 2,620 crore was left to be paid in full-age ads in December 2012. He is not supposed to pay anything except through Sebi, but that is another story).

However, the fact is even under the terms of the OFCDs, no money was repayable to investors till after 2013-14.

Sahara offered investors three types of bonds through SIREC - the Abode 10-year bond, where early redemptions were possible only after five years; the Real Estate bonds of five years, where no early redemptions were possible; and the Nirmaan four-year bond, where redemptions were possible after 18 months.

The bulk of the investors opted for the first two bonds - Abode and Real Estate, where no redemptions were possible for five years. Since the SIREC bonds were issued only from 2008 (SHIC began only towards end-2009), how is it possible that such a large bulk of OFCDs were refunded to investors when they were not even due?

As Firstbiz noted earlier, a majority of SIREC's investors (13.036 million) preferred to invest in Real Estate bonds worth Rs 7,120 crore. And Abode bonds came in for second preference, as 7.06 million invested in them, but the amount invested was larger at Rs 8,411 crore. Nirmaan bonds had a small following of 13.06 lakh investors with an investment of Rs 1,959 crore.

The big question is this: how can Sahara claim that it repaid nine-tenths of the money collected (only Rs 2,620 crore left out of Rs 24,029 crore or more) when the two biggest OFCDs issued by SIREC did not have any clause for premature encashment before five years - which meant only in 2013 or later?

There was, of course, a provision for premature refunds in case of deaths, but Sahara is not claiming that most of its investors had passed away during the term of the OFCDs.

The claim that the bulk of the 2.96 crore investors on its records in August 2011 were repaid is simply not credible.

So, there is a strong possibility that most of Sahara’s investors were of the phantom kind, though only a Supreme Court-directed probe can establish this beyond doubt.

Suspicion that Sahara may have had many phantom investors was raised both by KM Abraham, the Sebi wholetime director who nailed Sahara in an order dated 23 June 2001, and the final Supreme Court judgment of 2012.

According to Abraham, SIREC did not even have access to its own OFCD investors and needed professional accounting firms for help.

He said: "If the identity of the investors and addresses themselves are not readily available with the firm - and the compilation and authentication of the data across the thousands of service centres will have to, as admitted by SIREC, require the support of professional accounting firms at this stage, then I wonder what real safeguards can possibly be there in place for investor protection?"

Abraham's order made references to his own random check on four names on Sahara's OFCD subscriber list. He found two of them non-existent. But the Supreme Court, after doing its own cursory fact-checking, raised doubts over Sahara's record-keeping.

Justice JS Khehar, one of the members of the two-judge bench that delivered the 31 August 2012 Sahara verdict, raised doubts after checking just one detail of one about Sahara's alleged OFCD investors, Justice Khehar picked so many holes - about the name (Kalawati), address and other details - that he was forced to conclude negatively. "There is no other option but to record that the impression emerging from the analysis of the single entry extracted above is that the same seems totally unrealistic, and may well be, fictitious, concocted and made up".

Sebi, after it received the records from Sahara after the judgement, put out ads and sent letters to the addresses mentioned. In March 2013, after an initial effort, it found that only 1 percent of the investors responded. When it’s your money involved, even assuming some investors had changed their addresses, would you not expect a better response?

So, either the documentation is wrong or substantial numbers of Sahara’s investors don’t exist.

This leaves us with the last question: if Sahara didn’t have that many investors, whose money was it anyway? The fact that almost no politician has raised a fuss all this while, and the fact that the bulk of the Rs 24,000 crore was quickly "returned," tells its own story.

Whom can you return Rs 22,000 crore in three months? 2.96 crore small investors or a few politicians?

Your guess is as good as mine.

This article was originally published on Firstbiz

Updated Date: Mar 01, 2014 12:13 PM

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