Subrata Roy made a mockery of even the SC
With Sahara Group managing worker Subrata Roy repeatedly failing to make an appearance before the Supreme Court in connection with the Rs 17,700 crore raised by group companies, after making a mockery of orders of the stock market regulator, the Court had no option but to direct the police to ensure he appeared before the court next week—this is what led to his arrest yesterday. On the last occasion, Roy’s lawyers argued his mother was seriously ill and, as a devoted son, he was duty-bound to remain by her side. In between, when Sebi asked Sahara for proof that it had, as claimed, actually refunded a large part of the money it had collected, the group sent 17 trucks with 31,669 cartons of application forms and redemption vouchers to Sebi’s office, causing more than a minor traffic jam. The judge appointed to oversee the payment, however, declared that the documentation added to little. In between, when the group was asked to file securities with the Court for the amount it had to repay, it was found the properties pledged were worth a lot less than claimed, a fact that the group said was a mistake. In short, it has been a saga of the group using every trick in the book to avoid regulatory scrutiny.
Indeed, the case itself came to light purely by chance, exposing the huge gaps in India’s financial regulatory system which allowed firms like Sahara to get away for years. The genesis of the present case lies in RBI trying to get para-banking firms to stop taking deposits since the amounts were getting very large and this was a sector over which RBI or Sebi had little regulatory oversight. Larger para-bankers such as Peerless and Sahara were given a long period over which to refund the deposits they had taken since a sudden withdrawal of liquidity would shock the system. Sahara, however, floated two unlisted firms—this took them out of Sebi’s jurisdiction—to raise funds between 2008 and 2011. Sebi discovered this when, as luck would have it, it chanced upon a regulatory filing by a listed group firm while planning to raise equity. When Sebi directed Sahara to return the funds, the latter argued Sebi had no jurisidiction but the courts upheld the Sebi argument that, since funds were raised from more than 50 persons, it had locus.
While it is not clear whether a single financial regulator will solve the problem—the high-level financial regulators’ coordination committee clearly does not work—there is little doubt the investigative muscle of the regulatory system requires to be increased dramatically. If Sebi has to be feared, or admired, as the US SEC is, it cannot do so on a shoestring budget; and it cannot do much if it has to fight pitched battles to get access to something as basic as even phone call records or search-and-seizure powers.