Sahara now to raise funds through a cooperative society

A few days ago, Subrata Roy’s Sahara Group got slapped down by the Supreme Court and two of its companies, Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC), were asked to return over Rs 24,000 crore collected from investors with 15 percent interest in three months.

But even as Sahara reels under the Supreme Court’s barb that it was running a “doubtful, dubious and questionable” operation at these two companies, it is already one step ahead of the regulators. It has shifted to an area where regulation is even weaker.

According to The Economic Times, the group has, with the help of some staffers, initiated a new entity called Sahara Credit Cooperative Society, which neither the Reserve Bank of India (RBI) not Sebi can regulate. Cooperatives are regulated – if one can call benign neglect regulation – at the state level by the registrar of cooperatives.

So the pattern is clear. When one regulator gets tough, promoters move on to another turf where the regulatory reach is weak or lacking. In 2008, when the RBI asked Sahara India Financial Corporation to stop taking deposits from the public, the group obtained permission from the registrar of companies (RoC) to raise Rs 40,000 crore from optionally fully convertible debentures (OFCDs) through SIREC and SHIC, allegedly by “private placements”.

In 2010-11, Sebi discovered, quite by accident, that this was merely an elaborate ruse by Sahara to evade regulation by making a fool out of the RoC. The RoC clearly failed to do its job of thoroughly checking out Sahara’s intentions when the latter called its public issue to 30 million people a “private” placement.

But now that the Supreme Court has upheld Sebi’s right to regulate public issues even if they are dubiously dubbed as private (private placements involving more than 50 people are effectively public, and such companies have to be listed, the Supreme Court has said), Sahara has managed to move on to another fund-raising alternative – this time at the very edge of regulation.

Under current laws, the RBI, Sebi and even the RoC cannot regulate cooperative societies. Only registrars of cooperative societies can look at such entities, but no state-level registrar really has the financial or administrative capability to oversee thousands of such societies, especially when they cross state boundaries, though there is a Multi-State Co-operatives Act in place.

Clearly, a new law is needed to regulate entities that operate in the gaps between the RBI, Sebi and the RoC. But making such a law could be a minefield in the current phase of suspicious centre-state relations.

The Economic Times, while noting that the RBI has alerted the centre on the need for such a law, also quotes an official as saying that it could be a long time coming “as a solution could mean amending the Multi-State Co-operative Act, which is no mean task. It could also mean treading on the toes of state governments, raising issues of constitutional propriety.”

The Sahara group has made its next move well before Sebi can close out SIREC and SHIC.

The credit society, says a Business Standard report, started work as soon as it became clear that the SIREC and SHIC game was up, with Sebi going after them in 2010-11.

According to a complaint filed by the Mumbai-based Investors and Consumer Guidance Society (ICGS), the Saharas were mobilising deposits through this credit society under three schemes: Sahara A Select, Sahara U Golden and Sahara E Shine.

The RBI has said this society cannot be regulated by it even though it was canvassing deposits.

Sahara has found a way out to continue its money-raising activities under a new name.