Given the audacity with which the Sahara group’s “managing worker”, Subrata Roy, conducted himself, mocking regulators and cocking a snook at even the Supreme Court, the apex court did well to order his arrest. Despite the court repeatedly directing him to appear before it, the last occasion being a few days ago, Roy remained elusive. Meanwhile, the group proclaimed its innocence through large advertisements and tried every trick in the book to avoid scrutiny, the most stunning of which was sending truckloads of meaningless documents to the stock market regulator when it asked for proof of payments to investors.
This is a textbook case of how, with the right lawyers, companies can get around the law. Its genesis lay in investors’ complaints about residuary non-banking finance companies (RNBFCs) not repaying them and the RBI stopping them from raising fresh deposits since the amounts collected were large and could well blow up into a large systemic crisis. The two biggest, Sahara and Peerless, were given a few years over which the money they had collected had to be repaid, giving them enough time to mobilise the funds without causing undue panic in the financial system. Sahara, however, floated a couple of firms which, technically, did not fall under the definition of RNBFC and between 2008 and 2011, these two firms raised Rs 17,700 crore from, they claimed, 22 million investors. Since the firms were unlisted, they did not come under the purview of Sebi. Indeed, Sebi discovered the fund-raising purely by chance since it was mentioned in a regulatory filing by another group company. For years, the matter bounced between various courts, with Sahara arguing that Sebi had no jurisdiction and the latter arguing it did since more than 50 investors were involved, a cut-off after which Sebi’s writ comes in. When Sahara lost the case, and was told to refund the money, it claimed it already had done so over a period of time. That is when, upon Sebi asking for proof, it sent 127 trucks with 31,669 cartons of documents to the regulator.
Whatever course the Sahara case takes now, the larger lesson from the episode is that there are enough loopholes in the jurisdiction of various authorities, and that time and again, the high-level committee of financial regulators that is supposed to coordinate action has been found wanting. Whether a single financial regulator will help is uncertain. What is clear is that there needs to be a significant step up in the manpower and software capabilities of all regulators. Exemplary punishment for those breaking the law is an important part of empowering regulators.