In the dock?

He’s the self-styled “guardian of the world’s largest family”. That’s how Subrata Roy, Chairman, Sahara Group, refers to himself (the “guardian”) and his band of investors (a “family” estimated to be 42.5 million-strong) in a corporate presentation on the group. Last fortnight, however, the Rs 50,000-crore Sahara empire, for the first time, appeared to have begun crumbling at the core. The Reserve Bank of India (RBI) prohibited the group’s cash cow, Sahara India Financial Corporation (SIFC), from taking fresh deposits for violating various norms. Sahara promptly got a stay from the Allahabad High Court, but the apex bank was quick to move the Supreme Court. On the day Business Today was going to press, the apex court had directed Sahara to appear before the RBI on June 12 and convince the central bank that its house was in order.

At the time of writing the ultimate outcome is still hazy, but insiders at the Sahara Group admit that if the RBI diktat prevails, Sahara could be in big trouble. “None of the businesses except Sahara India Financial is making profits for the group and the funding of the group’s other businesses is mainly through it,” says a former employee of the Sahara Group who declined to be named.

Spokespersons for the Sahara Group were either unavailable or declined to comment on the matter. An RBI statement of June 4 points out that the residual nonbanking company, with a deposit base of over Rs 18,000 crore and a depositor base of 4.25 crore, had continuously violated directions and guidelines relating to payments of a minimum interest rate, know-your-client norms and intimating deposit holders of maturity and repayment.

But what could be a greater concern for the central bank is the Sahara company’s asset liability match (ALM), as the RBI found a violation of the ALM guidelines as well. This could be a concern both for the central bank and the depositors. RBI’s spokesperson declined to comment, as the matter is in court.

The legal counsel of Sahara was confident of answering all the RBI’s queries. After the Supreme Court directive, K.K. Lahiri, lawyer for Sahara in the Supreme Court, told BT: “We have answers for all the allegations made by the RBI.” He further says that there is not a single depositor complaint.

The financials of SIFC aren’t exactly impressive; net profit fell 57 per cent to Rs 17.75 crore for the financial year ended March 2007, while the deposit base increased 16 per cent to Rs 18,108 crore for the same period. The financials for the year ended March 2008 were not available.

If the Sahara Group does lose in the court room, the impact would doubtless be felt on its other businesses, including real estate, media and other financial services like mutual funds and insurance. A statement issued by the group after the RBI directive maintains that all the businesses will continue as before and will not be impacted by the prohibitory order.

A section of analysts tracking the group reckons that it may still emerge unscathed. They point to the presence of several prominent members on the Sahara board, including a former RBI Deputy Governor, a former board member of the Securities & Exchange Board of India (SEBI) and a retired Chief Secretary of the Uttar Pradesh government. It may be too early to predict the demise of the Sahara Group, but the fact is that Roy’s conglomerate hasn’t been under so much pressure in a long, long time.