Sahara group chairman Subrata Roy, who passed away aged 75 on Tuesday, had a series of run-ins with financial sector regulators in the country.
Beginning in the mid-2000s, he ran afoul of the Reserve Bank of India (RBI), when it was clamping down on the residuary non-banking finance companies (RNBCs). Lucknow-headquartered Sahara India Financial Corporation (SIFCL) was one of the two dominant RNBCs in those days, the other being Kolkata-based Peerless Group. Under the RBI’s licensing guidelines, RNBCs were permitted to mobilise deposits from the public but not allowed to lend against assets. They, however, were allowed to make discretionary investments. In fact, the RBI was not very comfortable with the old ways of functioning of the RNBCs. Systemic risk was building up in the financial market as the two RNBCs controlled 80 per cent of the public deposits in the non-banking sector.
From 2005, the RBI came out with a slew of guidelines that restricted discretionary investments. It also directed RNBCs to invest 100 per cent of their deposits in government bonds and bank deposits. The interest rates were low on those approved securities.
The noose was already tightening on Sahara’s RNBC business. As early as 2008, the RBI banned SIFCL from accepting fresh deposits from the public. The RBI acted on the complaint from depositors for default in the interest and principal amount. The RBI’s investigation also found violations of know-your-customer and investment guidelines. There were also issues with asset-liability management. SIFCL had a huge deposit base of Rs 20,000 crore from small depositors at that time.
Roy, who by then had a large business empire, was not the one to give in easily. So, when the ban came, he used all his firepower to challenge the RBI order. He was also politically connected. The matter even moved to the Supreme Court, after which the RBI provided some relaxation by giving a glide path. The RBI set a deadline by directing SIFCL to repay all deposits by the end of seven years, i.e., by June 2015, and has allowed the company to take fresh deposits that mature in a maximum three years.
At that time, there were three Sahara Group entities registered with the RBI: the flagship SIFCL, which was an RNBC; Sahara India Corp Investment Ltd. (SICIL), a non-banking finance company (NBFC); and Sahara India Infrastructural Development Ltd. (SIIDL).
SIFCL was prohibited by the RBI from accepting deposits, while the other two were not allowed to accept deposits as per the licensing requirement. In fact, SIICL also came under the RBI scanner. In 2008, SIICL decided to voluntarily exit the NBFC business.
The ban impacted the group severely. Roy was in desperate need of funds for his other businesses. In fact, RBI came to know that the group was accepting deposits in the name of Sahara Pariwar and Sahara India Pariwar. In 2011, the RBI had to issue a public warning to investors against money collected in the name of these two companies. The RBI made it clear to the public that these two companies were not authorised to accept deposits from the public.
Soon, other regulators also stepped in as the group found new ways to mobilise money. In February 2015, the RBI wanted to join the legal fight between Sahara and the Securities and Exchange Board of India (Sebi). The RBI asked the SC to prevent SIFCL from selling assets to free Roy from jail by paying a penalty to another regulator, Sebi. The RBI had said SIFCL had obligations to pay back depositors under the RNBC framework and that money should not be used for any other purpose.
Finally, in 2019, the RBI filed a winding-up petition against SIFCL in the Allahabad High Court, which culminated the long tussle between the two.