The Sahara Scam

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February 26th, 2014 has been etched as landmark in the history of India as the entire country was in shock when the Hon’ble Supreme Court of India sanctioned a non-bailable warrant against the Sahara India Pariwar Chairman, Subrata Roy. What makes this typical and absolutely normal corporate scam, absurd and unusual is the fact that the perpetrator of this Rs 25,000 Crore scam actually had to face the consequences of the same, which is a rarity for corporate crimes in India. Despite immense political pressure and functional restrictions on the Securities and Exchange Board of India (hereinafter referred to as “SEBI”), the body secured a victory against the corporate giant in an arduous five-year judicial battle. Through the last 10 years, we saw an aggressive regulatory conflict between the SEBI and the Sahara group. The fraud came into notice by the SEBI when it found out that the Sahara has been issuing Optionally Fully Convertible Debentures (hereinafter referred to as “OFCD”) and by which the company has accrued huge credits. The manner of its functioning was already under scrutiny by various concerned departments. With this, SEBI got a hold of it. SEBI ordered Sahara to issue a full refund to its investors. Sahara challenged the order before the Securities Appellate Tribunal which upheld the order of SEBI. Sahara then moved to the Supreme Court which also concurred with the order of SEBI. Sahara then made a fresh claim and stated that it has already refunded most of its creditors on its own. It handed over a petty amount to SEBI for the rest of the investors. This was again disputed by SEBI and it asked for the details of the investors who have been refunded. When Sahara failed to provide the information or to deposit the remaining amount and Subrata Roy skipped his hearing, the Supreme Court issued an arrest warrant against him and he soon was arrested. What makes this case more interesting is the fact that there was the involvement of lakhs of people in this scam who supposedly invested in the company. What intrigued the Hon’ble Supreme Court as well as SEBI is the fact that none of the investors came up at any point of time complaining against the misuse of their capital. Sahara tried to project it as a matter of their unity and trust, whereas the Supreme Court ruled it out as a possible case of money laundering. The company failed to provide for the details of any investor anyway, which makes the dealings fishier and the allegations of money laundering stronger. The matter is more berserk than it sounds, what lies between and parallel to this straight introduction is provided below.

About Sahara

Sahara India Pariwar is an Indian conglomerate based in Lucknow. It was founded in the year 1978 by Subrata Roy in Gorakhpur, where he is based from. Initially, his business was related to capital generation from public at large by urging them to invest. As his company grew, the Sahara India Pariwar Group of Companies was formed. The Chairman of the group was Mr Subrata Roy. His main business interest lies in the field of finance, infrastructure and housing, media and entertainment, consumer merchandise, information technology etc. The group has been a major investor in sports and was the title sponsor of Indian national cricket team for years. The group operates more than 5,000 establishments across India with the employee strength of around 1.4 million in total. It isan unlisted company. There are huge allegations of having unknown source of capital and various other corrupt practices such as money laundering, fictitious investors and dummy shares. The Revenue Department already had its eyes on this company as it became so huge in such a short span of time. The said scam then came into light in the year 2009-10 for the first time.

The Sahara Scam

The matter first came into notice when an Indore based chartered accountant Roshan Lal sent a note to the National Housing Bank (hereinafter referred to as “NHB”), requesting it to look into the anomalies of housing bonds issued by the two companies of the Sahara group viz. Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC), both being headquartered in Lucknow. His observation was that the bonds have not been issued as per the law for time being in force. The NHB forwarded the complaint to the SEBI due to lack of authority to pursue the case. SEBI being the capital market regulator reviewed the draft red herring prospectus issued by the two companies to raise equity for the real estate company Sahara Prime City Limited through initial public offering. SEBI also received a similar letter from an Ahmadabad based advocate’s group, Professional Group for Investor’s Protection. In the probe that was launched by the SEBI on perusal of the complaints, it was found that in the last four years, the two companies SIREC and SHIC have added Rs. 4,000 Crore and Rs. 32,300 Crore in their capital pool of which there was no accountability. On a show cause notice, the companies could not justify this inflow of money. As per their own prospectus, the two companies were raising huge chunks of money from the public through OFCD.

As per the law, there are two methods for raising capital from the market and for which two types of markets are created viz. the pPrimary market and the secondary market, for this purpose. Primary market means and includes methods like public issue, rights issue, private placement, venture capital, bonds issued by financial institutions and the like. In the secondary market securities issued in the primary market are sold and bought. It is formed by such investors who deal in financial securities in proverbial stock exchange. One example of this is the National Stock Exchange (NSE) where the trade of securities takes place without any involvement of the company which issues the securities.

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The Fault on Behalf of Sahara

The prospectus issued by the Sahara declared the company as a private company but it was operating as a public company. Sahara Prime City, a company of this Sahara India Pariwar group registered a red-herring prospectus of more than 934 pages for issuing debentures. In the said prospectus, they mentioned the tax disputes that the company is facing against the Income Tax Department for issuance of OFCDs worth Rs. 34 Crore. It also collected money by issuing of OFCD between the period of 25th April 2008 and 13th April 2011, which was a clear violation of what was written in the prospectus of the company. The company further issued Initial Public offerings (IPOs) as well. During this period, the company had collected over Rs. 17,656 Crore. The amount was collected from approximately 30 million people. Further, it failed to report the same to SEBI which is the market regulating authority. By the end of year 2009, liability of the company had gone up to Rs. 20,000 Crore. The Reserve Bank of India barred the company from issuing any further debentures and asked it to start proceedings for winding up. That’s from where the real issue started. To sum it up, the company was charged for fraud and money laundering.

Role of SEBI

The SEBI is a regulatory body of India. It regulates and controls the securities market. It was established in the year 1988 as a regulator of capital market under a resolution passed by the government of India. Under the SEBI Act of 1992, it was given an additional statutory power. The main function of SEBI is to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. SEBI functions as a quasi-judicial body which has a right to impose punitive measures for fraud and other unethical practices. The SEBI is authorised to even compel certain companies to list their shares on one or more securities exchange.

In the present matter, SEBI took cognizance when the complaint was forwarded from the NHB. On perusal of the same, Sahara challenged the jurisdiction and provided reasons for as to why Sahara has not taken permission from the SEBI. Sahara then contended that the said bonds of the company are hybrid products, therefore, do not fall under the jurisdiction of SEBI, instead are governed by the Registrar of Companies (hereinafter referred to as “ROC”) under the Ministry of Corporate Affairs (hereinafter referred to as “MCA”). Sahara stated that they have submitted its red herring prospectus with the ROC before issuing the bonds. Therefore, they are committing no fraud. SEBI ordered the two Sahara companies to stop issuing the said bonds and return the money to investors. 

The Battle in the Supreme Court

The SEBI, while taking cognizance of the matter, passed an order on 23rd June 2011 directing the two companies to refund the money collected from the people concerned. It further restrained the promoters of the companies including Mr. Subrata Roy from accessing the securities market till any further orders.  Sahara made an appeal to the Securities Appellant Tribunal (hereinafter referred to as “SAT”)against the order of SEBI. The SATconfirmed and maintained the order. Subsequently, Sahara approached the Hon’ble Supreme Court of India.

When the matter reached the Supreme Court, the group was asked to give evidence of the source of funds used to make the claimed return payments. The group failed to satisfythe same. The Hon’ble Supreme Court, while interpreting the provisions of Companies Act, 1956, the SEBI Act of 1992, and the rules and regulations formulated thereunder, the Supreme Court held that SEBI has the power and authority to investigate this matter. Further, it was held that although the OFCDs are hybrid instruments in nature, but it does not cease to be a “security” under the Companies Act, 1956. Therefore, the debentures shall be treated as securities for the purpose of Companies Act 1956 SEBI Act of 1992 and Securities Contracts (Regulation) Act, 1956. The intention of the company was to make the issuance of OFCDs a matter of private placement, but it cannot be held so if the security is subscribed to more than 50 persons[1]. In that case, it automatically becomes a public offer. Therefore, the authority of SEBI in the present matter is asserted. The Supreme Court also observed that there was a violation of Section 60B of the Companies Act, 1956 which requires filing of prospectus with SEBI. It was also held that non listing of securities when it is being issued to more than 49 persons is a clear mandate of law. The Supreme Court observed that the maxim “acta exterior indicant secreta” (which means external action reveals inner secrets) applies in the present case. The attempt to collect capital from public in the garb of a private company to evade liability on multiple levels clearly shows the attempt of Sahara to befool the government and indulge in corrupt corporate practice. This landmark judgment is undoubtedly a milestone in the corporate jurisprudence of India as it sanctions SEBI’s power to investigate into matters relating to listed as well as unlisted companies. It also bridges the gap between the jurisdiction of the MCA and the SEBI, as it was stated in this judgement that in matters of public importance, the SEBI and the MCA will have concurrent jurisdiction.


The case which unravelled in the year 2010 for the first time, has been an undying process and has unfolded in the following manner:

  • November 2010– SEBI barred Sahara from raising money from the public, and deemed the manner in which they issued OFCDs as illegal.
  • December 2010– On Sahara’s Appeal to the High Court, a stay was granted against the order of SEBI.
  • May 2011– The Supreme Court asked Sahara to furnish the format of application for its OFCD scheme and a list of accredited agents that raised the money on company’s behalf.
  • October 2011– The SAT ordered the two Sahara companies to refund about Rs 17,656.53 Crore with an interest of 15 per cent within six weeks which was raised by it through the OFCDs.
  • November 2011– Sahara India approached the Hon’ble Supreme Court against the SAT’s order. The SC ordered an interim stay on the same.
  • January 2012– The Supreme Court gave time of three weeks to Sahara to return the investments made by public by either giving a sufficient bank guarantee or by attachment of properties.
  • August 2012– The Supreme Court directed Sahara to refund over Rs 24,400 Crore to its investors.
  • February 2014– Subrata Roy was arrested by Uttar Pradesh police for not appearing before the Supreme Court.
  • March 2014– Subrata Roy, along with other directors of Sahara were sent to Tihar jail.
  • May 2016Subrata Roy was released from the jail on parole. Since then, he’s been out as the court has been extending his parole. He has been given this parole because of the periodical payments he has been making.
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This is how the decade long process has unfolded till now. Since the payment has not yet been fully made by the Sahara group, we cannot say that the case has completed. It is yet to be seen when the real justice will be served.

Current Status

In the year 2019, the company’s total liability has arisen up to Rs 25,781 crores, without interest in its entirety. The Apex Court stated that the company is still due to pay Rs. 10,621 crores to meet its total liability. Subrata Roy is out on parole since 2017 after spending almost two years in jail. In an unprecedented move, the company was asked to fill a bail bond of Rs 10,000 Crores, on failure of which he had to spend almost 2 years in jail. Not only this, the law has been strict on the Sahara group generally. The Supreme Court recently gave its nod for the auction of Sahara’s flagship property in Maharashtra after it failed to deposit the amount of Rs 750 Crore in the SEBI – Sahara refund account. The same could not be materialised because of the bad real estate conditions going on currently. Even though the time limit for the payment given by the Supreme Court ends this year, the company is failing to make payments and citing fall in the real estate market as the reason. The Supreme Court is likely to allow some more time to the company for the repayment as it has specifically stated that it will not involve itself in selling the properties of the Sahara group, as it’s not the job of the courts to sell assets.

How Corporate Fraud Impacts the General Public?

While discussing any corporate fraud, we see it as an isolated happening with no direct repercussions in our lives. What we often forget to notice is the serious ethical considerations and significant implication which it brings in the life of a common man. Many of these scams include taxpayer’s money that would have otherwise been invested for improving amenities for citizens of the country. In a country like India where more than 250 million people live in abject poverty, corruption exists from top to grassroots level and the economy relies heavily on the corporate sector, the rising financial scams should definitely bother us. The Sahara scandal represents the antithesis of all business ethics.  The ramifications of the actions of a few conniving businessmen and politicians affect the entire nation. On an international level, it makes foreign companies lose interest in investing in India which adversely hits us in ways more than one.

Potential Solutions

While going through news reports, we find that the cases of financial fraud have grown manifold in India over the last few years. This has been one of the most deterring factors for the foreign companies investing in India. To bring about a decline in this culture of corporate scams, the following systematic changes need to be brought in India-

  • The law for protection of whistle blowers is imperative. More people will come forth to give information if they are given assurance of their protection.
  • The regulating agencies involved in these cases like the SEBI, the RBI etc. should be provided with greater autonomy and political influence should be reduced.
  • An essential judicial reform to provide for the fast disposal of such matters, so that the consequences are severe and immediate.


A corporate scam of this level, which first came in the radar in year 2009, could reach till the first conviction by the Supreme Court in the year 2014 shows how inefficient our system is, especially when the fight is against muscle and money. Even then, we came across the important role played by the SEBI in this case in absence of which, we probably wouldn’t have ever been able to get hold of this huge fraud. Even with all the laws coming up in this regard, we will not be able to curb these incidents because of the lack of activism in the judicial mechanism, the omnipresent loopholes and the power of money. Nonetheless, this case is an example of how the wrong will not prevail in the end irrespective of how fool proof it was.

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[1] Section 67(3) of the SEBI Act, 1992.