Was Sahara Saga a Money Laundering Scheme gone wrong?

The Honourable Supreme Court in its latest order observed that the documents submitted by Sahara to the court and its refund theory casts “a serious doubts on the existence of the so called investors”.  In the language of the court’s order dated March 4^th 2014 “All fact finding authorities have opined that majority of the investors simply do not exist”.

As Sahara sri cools his heels in jail and the Supreme Court contemplates whether to appoint a SIT on the Sahara episode or not, it becomes necessary to look back to reflect upon this interesting tale that has caught the public imagination.  It is true that the Incarceration of Sahara’s chief sends a very strong message to corporate India to either play by the rules of the game or face lethal consequences.   It is equally true that that Independent regulators and the courts have asserted their authority in ways like none before to send a message that abuse of financial markets will not be tolerated.

But let us take another look at the Sahara episode from a different perspective.  Was it a case of a money laundering scheme gone horribly wrong? Or were the Investors real and that Sahara sri. a victim of circumstances rather than a villain of piece?

In the recent public memory, one can perhaps draw parallel between the Sahara Saga and the Sarada Ponzi Scam for three reasons.  Both the cases involved large sums of public money.  Both failed to repay their depositors and investors (Rs 4000 crore in case of Saradha and Rs 24,000 crore in case of Sahara) and both these cases involved millions of small depositors (1.7 million investors for Saradha and 22-30 million investors for Sahara based on its own claim)

Reaction to the Saradha Scam

When the Infamous Saradha Ponzi Scam hit the state of West Bengal it unravelled itself into a full-blown crisis.  There was an unprecedented sense of loss and grief everywhere.  The mood of despondency quickly spread to the other states of Eastern India (ie West Bengal, Orissa, Assam and Tripura).  There was trouble for offices and officers of Saradha group everywhere.  Approximately 600 collection agents claiming to be associated with Saradha Group assembled at the headquarters of TMC and demanded government intervention with threats of suicides.  The Reporters compared the crisis to a cyclone that had spread misery in the past.

Response to the Sahara episode

However the Sahara episode in sharp contrast is a very curious case that has had a totally muted response from public.  Out of over 22 million investors that Sahara claims to have raised the money from, not one seem to have of have come forward to demand refund.  This is after both the SEBI and the Supreme Court passed strictures asking it to refund the money.  There were no protests on the roads, no sense of loss, no violence in the streets, no death threats or suicides.  There were no group of small investors protesting before the government demanding that Supreme Court’s order on refund be implemented and saharasri be arrested. 

It is interesting to note that the number of Investors in case of Saradha Group Scam was merely 1.7 million in comparison to gargantuan 22 million investors as claimed by Sahara Group.

One can only conclude that perhaps the investors have developed ‘inner peace and patience’ as Saharasri always advocates as a part of his corporate philosophy in Sahara sahar.

Unmasking the Ghost Investors

On a serious note, it is a preposterous idea that there are real investors to the Sahara Saga.  If it were, we would have had a huge crisis by now.  Further credence is added by the fact that Sahara claims to have directly refunded 20,000 crores in cash to the investors.  This is after the SEBI, the Securities Apellate Tribunal and the Supreme Court had specifically ordered that repayment must be done under the supervision of a Supreme Court Judge and deposited in SEBI’s account.  

Further the Group was also not able to explain the source from which it paid back the 20,000 crores it claims to have paid to 24 million investors directly.

Not only the Sahara’s investors do not exist, interesting as it may sound, it may be quite a while before such investors do start to exist in India in the first place.  Consider that even the biggest of listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors.  In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only around 15 million.  For Sahara’s investors to exist, the total investors in all depository accounts in India would need to be exceeded.

Aptly, the Supreme Court in its latest order observed that the documents submitted by Sahara to the court and its refund theory casts “a serious doubts on the existence of the so called investors”.  In the language of the court’s order dated March 4^th 2014 “All fact finding authorities have opined that majority of the investors simply do not exist”.

Anatomy of the Money Laundering Scheme

If is true that the Sahara investors are fake then what explains the Sahara saga and the need to show that 24000 crores has been raised from 22-24 million investors? One possible explanation is that it could be for laundering money obtained from sources that are unaccountable.

The goal of any Money Laundering Scheme is to create a source for unaccountable monies that is not easily traceable or verifiable.

The following trail of events and factual matrix as noted in the order of Securities Appellate Tribunal when put together shows the scheme in detail

                    The Sahara Group forms a special purpose vehicle ie, a new public limited company for the purpose of deployment in the scheme.  Enter the Sahara Real Estate Limited, a company with a capital base of 10 lacs with no assets, no reserves and cash balance of Rs 6 lacs

The Company intends to raise funds from Private Placement by issue of Optionally Fully Convertible Debenture (‘OFCD’).  The choice of OFCD instrument is important because it is essentially a debt security convertible into equity at a future date purportedly to keep out the jurisdiction of SEBI.  Further there would be no need to list the company in any stock exchanges in India for this purpose as it is merely a private placement not a public offer.

At this stage it must be noted that, the raising of funds by private placement can be done for less than 50 investors thereby the rigorous SEBI disclosure norms and the SEBI (ICDR) regulations would not apply and other KYC norms would also not apply.
The Company then files a Red Herring Prospectus (‘RHP’) with Registrar of Companies (‘RoC’) stating that the public deposits are intended to be received from private placements only.  Once the RoC approves the RHP, the Information Memorandum is purportedly distributed to crores of small investors (22 million investors who do not have KYC documents).  At this stage the provisions of Companies Act which require that only 50 members or less can be approached for private placement stands violated and the whole issue becomes patently illegal.

 The number of investors claimed is 22-30 million.  This number is not a mere coincidence or picked randomly.  The income tax act requires that any deposit above Rs 20,000 should flow only through banking channels which means that the investors would need to have KYC documents to send the money.  If you back work on number of investors needed for Rs 24,000 crores to be raised in cash without KYC documents the number should be at least 12 million investors or more. 

Around 24 million investors or more would mean that the amount is Rs 10,000 and less thereby circumventing the requirement of income tax law and stringent KYC norms.  All dealings can be said to have been done in cash without violating the income tax law.

The inflow and outflow of any unaccountable funds from the company can be easily done in cash by showing the same as further cash receipts from OFCD subscription or refund to the OFCD holders.

 The company can now easily deploy its unaccounted cash into purchase of properties both in India and abroad and use the same in its business.  When the income tax department asks for source, it can contend before the income tax department that the source of the funds is the money raised from 22-30 million small investors who incidentally are so small that they have no KYC documents.

Through this entire process the face of the real investor is hidden behind the mask of ‘millions of small investor without KYC document’ and can conveniently move monies across the Group.

Where required the OFCDs can be converted to equity to recognise the investor who intends to take up the stake of an unlisted company which again does not have rigorous disclosure norms like those in a listed company.

Scheme Mess up – A quirk of Fate

But how did the well planned, meticulously structures scheme get messed up so bad? Surely, the scheme escaped the scrutiny of the Roc who should have logically asked how a company with no assets, no reserves, no business and mere 6 lacs of cash balance intends to raise over 24000 crores and that too through private placements.  For reason best known to the department, the RoC silently approved the RHP.  On this point the SAT order notes “we are of the view that the RoC while registering the RHP with undue haste had acted in dereliction of his duty”.

Ordinarily the scheme would not have got noticed if not for meticulous work by a few upright officers of SEBI when it received complaints from a few people that this whole scheme as dubious.  The SEBI therefore got involved by a sudden quirk of fate.  And when SEBI found something quirky in the offer documents and the RHP, It followed with a thorough investigation and the rest as they say is history. 

The constant flip flops of Sahara Group and the constant attempt at hoodwinking the regulator by sending 127 truckloads of documents only confirms the suspicion that the scheme was a money laundering scheme in the first place.  The SAT order observes the behaviour of the Group “It is evident that the intention of the company and its promoters from the very beginning was not bonafide”

Whose Money was it anyway?

We may perhaps never know whose money the 24000 crore was ie the real source and the real investors unless the Income tax department starts a probe into the episode as well.  Unfortunately, the same income tax department that sends notices to middle class, the salaried and the pensioners at a drop of a hat has found no reason to act in a case of Sahara India.  This conspicuous silence of enforcement directorate and the tax department is indeed disconcerting and perhaps a sobering reminder of dilution of autonomy of these Independent Institutions by their political masters.

Therefore we may never know whose money it was and who the real face behind the valley of masks was.  But we do know whom Mr Sahara sri calls as close friends.  For example, we do know that the wedding of Mr Akhilesh Yadav was hosted and fully financed by Sahara sri in Sahara Sahar, and that many feasts were hosted there for the yadavs after they gained political power in the state and Akhilesh ascended the throne of UP.  We do know that among friends of Saharasri, BJP’s tallest leader Atal Bihari Vajpayee attended the lavish wedding of Roy sons.  It is hardly surprising that in the whole Sahara Episode, the political class has maintained a muted response.

Way forward for Saharasri

After Jailing of Sahara sri, the options for Saharasri are now limited.  Either Sahara must admit before the Supreme Court that all or most of the investors were fake which would then entail criminal prosecution for fraud and also action from various quarters including the income tax department or the group has to forgo the monies and deposit of 25000 crore to SEBI.  But it which it appears that Sahara does not have that kind of money as it has purchased various assets in India and abroad already and opened Q shops all over India.  The only future course of action is for SEBI to appoint a receiver to sell assets to recover its dues.

Concluding Thoughts

The Sahara Saga reveals a large gaping loop hole in the financial laws of this country and the regulations governing the capital market.  The fact of the matter is that even under the extant regulations, it is possible to dress a public offer like a private placement and a group can go ahead and claim to raise Rs24,000 crore outside the purview of SEBI, take money from three crore depositors and call it a ‘private placement’ is
indeed disconcerting. 

And that perhaps is a clarion call for reforms.