The RBI sealed the fate of SIFCL [Sahara India Financial Corporation Ltd] in June 2008, but the entrepreneur in Subrata Roy knows how to open another door when one closes. Money, the raw material of his business, does not grow on trees. Nor does he have a note-printing machine at Sahara Shaher, the fortified, 360-acre, self-supporting township in Lucknow that Roy lords over. But he knows how to collect money the way seasoned gardeners gather leaves in the fall.
Sahara Shaher boasts of everything that one needs for a comfortable living—a helipad, a cricket stadium, a mini sports complex, a lake 11-km in circumference, an 18-hole mini-golf course, a revolving open-air stage, a state-of-the-art auditorium that can accommodate 3,500 people, a 124-seater cinema theatre and a five-bed health centre with an ambulance, besides a fire brigade station and a petrol pump.
When SIFCL was hibernating, two of the group companies, Sahara India Real Estate Corp Ltd (SIRECL), known earlier as Sahara India Commercial Corp Ltd (SICCL), and Sahara Housing Investment Corp Ltd (SHICL), started raising money through OFCDs, a hybrid financial instrument.
There is no interest payment during the life of the instrument, usually three or five years. The investor in such an instrument has the option to decide at a predetermined time—after one or two years from date of issuance—to convert the debenture at a formula, linked to the market rate. Usually, it is at a discount to the assumed market price on the date of conversion. Since the investor does not earn interest, the earning is a function of differential pricing.
How does the company benefit? The company does not have to service the debt until it is converted into equity; this arrangement protects the annual cash flows. However, if an OFCD is not converted by the investor, the company needs to redeem it at a premium to the issue price, factoring in the interest payment. This usually happens when the market price of equity is less than the conversion price as the investor loses incentive to convert OFCD into equity.
In contrast, FCDs or fully convertible debentures, are converted on a predetermined date at a fixed price and the investors get interest at regular intervals till the date of conversion into equity.
Sick and tired of the RBI’s insatiable appetite for information and endless scrutiny, a nimble-footed Roy chose to move into the fold of Registrar of Companies (RoC) in UP and Uttarakhand, under the Ministry of Corporate Affairs, an entity that polices all of India’s registered companies.
The listed companies, by virtue of being traded on stock exchanges, are looked after by Sebi as well. Incidentally, Roy has under his belt 4,799 establishments, almost equal to the universe of listed companies in India, the largest market for listed entities in the world.
It might have gone unnoticed but for Roy’s plan to list one of his group companies, Sahara Prime City Ltd. On page 640 in the disclosure section in the 934-page Draft Red Herring Prospectus (DRHP) of Prime City filed with Sebi, one critical piece of information was tucked away that India’s capital market regulator latched on to—certain tax-related issues in regard to OFCDs which SICCL was fighting out with the income tax authority. This was related to a Rs 35.57 crore disputed income tax that was imposed on the company for accepting OFCDs worth Rs 20,000 or more from many investors through cash and not account payee cheques or demand drafts, as is required under the Income Tax Act 1961.
When Sahara Prime City filed the DRHP, SICCL was holding a 13.7% stake (7,46,46,889 equity shares) in it. SICCL had also on 30 January, 2008 entered into a service agreement with Sahara Prime City to provide all government or other regulatory permits, licences and approvals required in connection with the development of the proposed integrated townships of Sahara Prime City.
Sahara submitted the DRHP on 30 September 2009. It gives us a peek into the business model of the group where hundreds of unlisted companies cohabit and some undergo name changes periodically. For instance, Sahara Prime City was incorporated on 9 March 1993 as Sahara India Financial Corp Ltd (SIFCL) and, since then, has changed its name thrice—first to Sahara India Corp Ltd on 20 October 1994, then Sahara India Investment Corp Ltd on 5 August 2005. The latest name was taken up on 15 February 2008.
Incidentally, SIFCL, which is being forced by the RBI to wind down its business by 2015, was incorporated in 1987 as Sahara India Savings and Investment Corp Ltd. It changed its name to SIFCL on 23 November 1994. This means that only for six weeks in 1994—between 10th October and 23rd November—did the group not have a company named SIFCL in its fold.
The DRHP claimed that Prime City was one of the largest real estate development companies in India with 8,484.65 acres of land reserve—bigger than seven countries in the world: Tuvalu, Nauru, Tokelau, Gibraltar, Pitcaim Islands, Monaco and Vatican City. This includes a vast tract of land the company either owns or holds contractual development rights over. Sahara Prime City wants to develop 88 integrated townships under the Sahara City Homes brand and 15 residential complexes under the Sahara Grace brand, across 99 cities. It owns its greatest stretch of land—274.53 acres—in Vasai on the outskirts of Mumbai, followed by Muzaffarnagar (213.75 acres) and Kanpur (212.76 acres) in Uttar Pradesh, and Kurukshetra (201.05 acres) in Haryana. It has land banks of at least 100 acres or more each in 18 Indian cities, including the metropolitan Kolkata.