Subrata "Sahara" Roy: Victor, villain or victim?

Sanjeev Ahluwalia
15 March 2014, 07:03 PM IST

Subrata Roy the florid, flashy, brash promoter of the Sahara Group has been in Tihar Jail since March 4, 2014. The crime committed by him baffles most aam admis, including this one.

The Supreme Court held way back in 2012 that his companies acted in contravention of the SEBI rules for public issues by unlisted companies. His legal arguments that SEBI has no jurisdiction over unadvertised issuance of Optionally Convertible Debentures by unlisted companies have been rejected by the Supreme Court and he was directed to refund Rs 175 billion ($4 billion) collected by his 1.2 million agents from an estimated 22 million small investors between 2008 and 2011.

In a more "liberal" environment Roy would be hailed as an innovator par excellence who extended financial inclusion to millions of investors and provided livelihood to over a million agents.

Wherein lay his innovation? Quite simply he profited by providing "informal financial services" on top of the wave of public corruption which has conservatively equaled between 2 to 5% of the GDP since the "go go" years began in the 1990s.

His modus operandi is probably simple. He provides a "cloak" of legit financial services to the corrupt public servant and politician by managing the cash generated illegally by them. This "cloak" of financial services is based on a micro-financial network of investors and agents on a staggering scale with around 3000 branches and massive investments in real estate…what else?

Similar to any other Ponzi scheme, his trick was to offer huge returns in excess of 25% per year. Ponzi schemes ultimately fail because they run out of new investors to provide the cash flow to service the existing investors because the underlying assets invariably never provide adequate return.

This is where Sahara had a winning card. They possibly had access to an inexhaustible source of unaccounted cash coming to them from corrupt public servants and politicians. Forget for the moment, the cash flow available from the film industry, drugs or terrorism.

Since Sahara serviced the politically powerful, they were immune from censure. But a more basic reason why Sahara remained below the radar was possibly because they maintained a tight leash on the volume of "real" small time depositors who provided the cloak to "benami" big time investors. It is noteworthy that the Supreme Court wondered how many "real" investors they had. No one knows. But had these small time investors reached a volume where their investments exceeded the illegal cash, the scheme would have imploded. As it happens it never did.

It was Securities Exchange Bureau of India (SEBI the David) who slew Sahara (the Goliath). It investigated the retail cash collection done by Sahara agents (Rs 175 billion or around US $ 4 billion) between 2008 and 2011 against the issue of a "hybrid" instrument called Optional Convertible Debenture. It held that this was "akin" to a public issue and hence in their turf. Since Sahara had no approval from SEBI for issuing such "public" securities the cash collection was illegal.

What motivated SEBI to wake up? Ostensibly they responded to a complaint by an association of investors. It is not clear if any of them had actually invested in the debentures or were simply being "high minded". Other reasons could be: (1) the financial regulator fighting for turf with the Ministry of Corporate Affairs, who had approved the issue of debentures under the Companies Act; (2) SEBI's apprehension that significant domestic savings were being directed away from the bourses where listed companies raise money under SEBI oversight . Between 2008 and 2011 listed companies, in India, raised USD 26 billion as new capital against USD 4 billion raised by Sahara, an unlisted Indian company, (3) as always in India, the possibility of government settling political scores. We await an intrepid investigator to inform us, which of these was the case.

But what there are some intriguing aspects to this case:

First, why did the dog not bark? Why did no retail investor complain that Sahara had defrauded them? Subrata Roy asserts that not a single investor has been disadvantaged and that all assets are being serviced and redeemed. This seems entirely plausible in the light of the reasoning given above that the "beauty" (as Subrata himself would say) of the scheme lay in completely insulating the retail investors from risk and indeed to molly coddle them with fabulous returns, using the inexhaustible cash flow of the fatter investors.

Whilst Subrata is no Robin Hood, his novel method of socializing and distributing the gains from corruption across 30 million investors is unique in its scale . Reliance has had a similar strategy which makes investors forgiving of its poor public image.

Dhirubhai, was an early mover in this game. He had an uncanny feel for the pulse of the nation. He was the first to recognize that distributing profits to over 3 million shareholders is a good way of building social capital for a corporate. Subrata has gone much further with 30 million investors, though they are difficult to trace.

Second, why is it that the entire government machinery, except SEBI, has remained passive and silent? Why has no action been taken against the Ministry of Corporate Affairs, which since 2008 was sanguine enough about the operations of Sahara to clear their Red Herring Prospectus for collecting cash from investors?

Third, why is Subrata Roy in Jail? He is not a criminal. Even if he has committed contempt of the Supreme Court, why has SEBI failed to attach Sahara's; issue a public notice to ascertain who their investors are and compensate them accordingly, despite being specifically directed by the Supreme Court to do so in 2012?

Is this a case of judicial activism where the Supreme Court has stepped in to discharge a public duty which appropriately lies with the executive? If so then why not name and shame those in the executive who have been hand and glove with Sahara? Why is the corruption angle not being investigated by the CBI and the CVC?

Arbitrary curtailment of human rights violates the Rule of Law, no matter how high the authority which falls into that trap.

Finally why pick only on Subrata Roy. Is he paying solely for the scale of his illegality (Rs 175 billion against Harshad Mehta's Rs 40 billion); for his flashiness and love of the good life?

We aam admis can be forgiven for muddling the offence of corruption with the social opprobrium that an open flouting of the law should attract.

But a judicial determination guided by anger at the passivity of the executive, rather than cold, legal logic does not give comfort that India's system of checks and balances is working.