Sahara's Financial Mirage

WHEN IT COMES TO DISPLAYING PATRIOTIC FERVOUR, few Indian corporate houses can match the zeal of the Sahara group. From their logo, which is inspired by the national flag, to their tribute to Bharat Mata (Mother India) in the form of a gigantic statue wearing a saree while riding a chariot drawn by four lions—the statue has been placed near the entrance of Aamby Valley, the 10,000-acre lake city being developed by the group near Lonavala, Maharashtra—the Sahara group has never missed an opportunity to latch on to any kind of symbolism that might help burnish its patriotic credentials. Since 2001, it has supported the most cherished of all Indian love affairs by sponsoring the national cricket team—a sponsorship it renewed in 2010 at a whopping Rs 3.3 crore (Rs 33 million) per match. In March 2011, after acquiring the luxurious Grosvenor House hotel in Mayfair, London, Sahara chairman Subroto Roy hosted a ceremony to hoist the tiranga at that most iconic of all London hotels.

Yet, for all the group’s jingoism-infested public-relations campaigns, the real credentials of the group’s various businesses, and their ability to generate enough money to finance this patriotic largesse, has been shrouded in mystery. This is the group that for many years ran a loss-making airline before selling it off to Jet Airways. Its newspapers and media channels have barely any following. And almost all the glitzy infrastructure projects that the group boasts of, including the grand Aamby Valley City, are in reality a series of black holes that continue to suck in more and more money with little evidence of profitability.

The sole exception is the group’s finance arm, which has been Sahara’s mainstay since the group was founded in 1978. Little is known about the intricacies of Sahara’s para-banking operations, except that they rely on a gargantuan network of agents that operate around the country and specialise in collecting tiny amounts of money—as low as Rs 50 and Rs 100—mostly from investors in small towns and villages. A Business Standard analysis of Sahara’s financial statements reveals just how much money the group has been able to raise since its inception in 1978. According to the report, which was published last December, the group received a total of Rs 2.25 lakh crore (Rs 2.25 trillion) from the public between the years 1978 and 2012.

In contrast, on 30 September 2012, the group had a net outstanding liability—including public deposits, debentures, secured loans from banks, advances against various projects, life insurance policies and mutual funds—of  Rs 54,364 crore (Rs 543.64 billion). According to a financial statement released by the group on 30 April 2011, however, its net outstanding liability stood at Rs 40,078 crore (Rs 400.78 billion). Therefore, there had been an increase in net liabilities by a massive Rs 14,286 crore (Rs 142.86 billion) in a period of only 17 months. In other words, from the total amount the group had collected over the years, what they owed to the public and banks at large, after taking into account the money they had already paid back (including interest), had gone up by almost 35 percent in less than a year and a half.

In some ways, the group’s financial setup resembles a Ponzi scheme, wherein each successive round of fundraising from the public helps the company pay off the investors from previous rounds. In between successive rounds of fundraising and claim settling, the company running a Ponzi scheme relies on a number of mechanisms to secure its own cut. Sooner or later, however, the scheme collapses under the burden of needing to take in ever-greater volumes of money in order to pay back the growing ranks of investors.

Whether or not Sahara’s giant money machine is a Ponzi scheme has never been definitively established. But there are a number of signs pointing in this direction. In August 2012, the Supreme Court passed judgement against two of the group’s companies, Sahara Housing Investment Corporation and Sahara India Real Estate Corporation Limited (SIRECL). Through the group’s financial arm, the two companies, which had a paid-up capital of just around Rs 10 lakhs (Rs 1 million), raised an astonishing Rs 27,000 crore (Rs 270 billion) from about 3 crore (30 million) subscribers in a period of less than three years. To reap this huge amount, the group relied on a network of more than 10 lakh (1 million) agents stationed in more than 2,900 branch offices. The court ruled that, while raising money from the public, the companies had violated the norms laid down by the Securities and Exchange Board of India (SEBI), and the companies were instructed to refund Rs 24,000 crore (Rs 240 billion) to the regulator.

Sahara defended its fundraising by arguing that the debentures were made to “friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with the Sahara India Group of companies”, and that therefore the investments were private placements and beyond the jurisdiction of SEBI. The absurdity of Sahara’s claim of having more than 3 crore friends and associates aside, the real intrigue lies in the group’s arcane ability to raise money without any underlying fundamentals. According to the balance sheet of SIRECL, on 31 December 2007, the company had cash and bank balances totalling a mere Rs 671,881 and current assets worth only Rs 654,660. There were no fixed assets or investments. Yet, by April 2011, the company was able to raise a sum of Rs 19,400 crore (Rs 194 billion) from 22,107,271 investors.

These two companies are only the latest in a series of ventures that Sahara has floated to raise money, and the amount collected by the two is only about 10 percent of the total amount that the group has raised from the public over the last 35 years. In every case, the same pattern repeats itself: Sahara’s real estate, media, retail and manufacturing companies are bottomless cesspools of investment that have failed to create much in the way of value, while the financial arm is able to generate billions of rupees, in short periods, without the back-up of any real collateral.

How has Sahara’s million-strong army of agents managed to convince tens of millions of small investors to subscribe to the Sahara companies’ financial plans when there is evidently no viable business model in place to guarantee returns? A probable answer is that Sahara has cracked two of the most influential factors in the financial decision-making of small investors, especially in rural areas: trust and accessibility.

Trust is perhaps the key metric by which one evaluates investment schemes. To generate it, Sahara—with its flamboyant patriotism, its grand schemes to develop huge townships, and its omnipresence on the cricket field—has built a grand narrative of its empire’s noble intentions and infrastructural might (never mind that almost all their projects are white elephants).

Accessibility relates to the weakness of formal banking in small towns and villages across the country. Sahara’s agents have achieved what India’s banking system has so often failed to do: take financial services to the doorstep of the smallest investors in the most remote areas, in a manner that works around those investors’ limitations of time, location, and capital. For example, a conventional bank requires its depositors to travel to its nearest branch, which might be a fair distance away, and arrive during opening hours; the direct costs of this travel are compounded by the depositors’ loss of valuable working time. In contrast, Sahara agents bring the entire service to the depositors’ doorstep, at convenient times, without any fuss over the small size of the investments.

Last year’s Supreme Court judgment casts serious doubt on the first pillar of Sahara’s approach—trustworthiness. The court called into question the “intention of the companies to repay the debenture-holders upon redemption” and remarked that the incomplete subscriber records collected by the companies “seem totally unrealistic, and may well be fictitious, concocted and made up”, thereby suggesting that “the two Companies collected money from investors without any sense of responsibility to maintain records pertaining to funds received”.

The court’s judgment will not, by itself, lift the veil of secrecy lying over Sahara’s financial empire. The present case only pertains to the statutory and regulatory norms that the company followed while raising money from the public; it doesn’t yet raise questions about the fundamentals of Sahara’s businesses, or about the group’s ability to pay back investors. But the case could trigger a series of actions that will eventually force the group and its promoters to shed more light on their activities—and this might bring the whole Sahara edifice crashing down. On March 15, SEBI took just one such action when it moved the court to seek the arrest of group promoter Subroto Roy Sahara, after the two companies failed to comply with the court’s order to refund the money to its investors.