The Sahara endgame

In this edited excerpt from Sahara: The Untold Story,Tamal Bandyopadhyay recounts how the RBI persuaded promoter Subrata Roy to give up his Rs 20,000 crore flagship financial company

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SAHARA: THE UNTOLD STORY
Author: Tamal Bandyopadhyay
Publisher: Jaico
Pages: 412
Price: Rs 450

Two meetings - running for hours - at the RBI headquarters on Mint Road, Mumbai, on 12 and 16 June 2008, sealed Sahara's fate. Of course, these two meetings were preceded by a courtroom drama, both in the Allahabad High Court and the Supreme Court. However, unlike the legal battle with Peerless that lasted nearly two decades, the legal cases in this instance were more of an interlude in the prolonged closed-door negotiations between the RBI and Sahara [Sahara India Financial Corp or SIFCL]. The legal fight lasted just for a day each - on 5th June in the high court and on 9th June at the Supreme Court.

Let's focus on the last round of the meetings.

Neither the then RBI governor [Yaga Venugopal] Reddy nor his deputy V Leeladhar attended the meetings of 12 and 16 June 2008. The first meeting, on a Thursday, lasted six hours, from 4pm to 10pm. The second and final meeting, on a Monday, began earlier, at 3pm, and went on till nearly midnight.

The venue of the meeting was a relatively small room on the 15th floor of the RBI office in Mumbai.

Subrata Roy - who came along with his trusted lieutenants Anupam Prakash, Pallav Agarwal and Vandana Bharrgava (executive directors of Sahara India Pariwar) - looked tired but never lost his composure...

The RBI was represented by G Gopalakrishna, executive director in charge of the department of non-banking supervision; P Krishnamurthy, chief general manager; GS Hegde, the legal head; and two other officers - Shekhar Bhatnagar and Reena Bannerji...

The Indian central bank's strategy was simple: no confrontation; Sahara had to be convinced through discussion.

Gopalakrishna started the meeting with a warm welcome address and a brief on the agenda for the meeting. After that, Krishnamurthy took over…

Roy was anxious, but he gave no sign of losing his calm even though it was not easy to give up a Rs 20,000-crore empire.

Throughout the meeting, Krishnamurthy harped on the same point: in the absence of a rectification of its operations, the RBI couldn't allow Sahara to grow. He appealed to Roy: "Sir, please cooperate with us. We are not comfortable with the RNBC model. Please convert it into a non-banking finance company. Please stop taking fresh deposits." [RNBCs are residuary non banking financial companies like SIFCL that enjoyed much more freedom than conventional NBFCs.]

Roy knew he had little choice, but was ready to fight for every penny. Since Peerless was given four years to stop taking fresh deposits, and Sahara had grown to be much bigger than Peerless, it must be given at least five years, Roy argued…

"Sir, you are a business tycoon and the economy can't flourish without you... It's a very small adjustment for you," Krishnamurthy told Roy. But the deadlock could not be broken at the first meeting…

The RBI also did not want to project itself as a regulator in a hurry to force its decision down Sahara's throat... So, the RBI team told Roy to discuss matters with his people over the weekend and assemble again the following Monday, 16th June, at 3pm.

On that day, when the RBI governor, Reddy, finally left his office at 9pm, there had been no progress in the matter as both sides were adamant. Leeladhar stayed put in his cabin on the 18th floor. Wily Reddy knew that Roy was trapped, and it was a matter of time before he accepted the RBI's road map for winding down Sahara…

Roy's team took intermittent breaks to discuss their strategy in an adjacent room. Tea and coffee were served every half an hour and there were cookies… At around 11pm, Roy signed on the closure deal. He was given four years - the same time frame that Peerless had been given...

However, it was a technical victory. Although Sahara was allowed deposit-taking activities for four years, till June 2011, it had a three-year window for all practical purposes. This was because the minimum maturity for deposits raised by an RNBC was one year. Since it was decided that no fresh deposits would mature beyond June 2011, Sahara could effectively take deposits only till June 2010.

It was also decided that the last deposit would mature in 2015, when Sahara had to close shop. So, the maximum-maturity, seven-year deposits could not be taken after 2008…

The next step was recasting the Sahara board and changing the auditors. Roy was agitated. The RBI knew it did not have the power to do this and that it had to convince Roy to do this on his own, saying it would enhance his credibility…

Like the Sahara team, the RBI team was also taking breaks to discuss the developments and strategies. Krishnamurthy left the meeting for a few minutes, took the lift and went to the 18th floor where Leeladhar was waiting patiently.

When Krishnamurthy returned, the final outlines were discussed and both teams drafted a note on plain paper on the changes to be made in the Sahara board and its auditors.

Roy was requested to write down everything on a Sahara letterhead and bring it back the next day. Only after that would the RBI issue a press release. Roy agreed to send the note, but bargained hard to extract a promise from the RBI team that the statement would say that Sahara had volunteered the changes.

In retrospect, it was a model discussion for both the RBI and Sahara - their teams fought hard on virtually every point, but in the end, they settled it amicably. The RBI established the regulator's supremacy with dignity and Roy gave up his empire with a smile.

At well past midnight, Leeladhar sent a text message to Reddy, who had not yet gone to bed, "Sir, mission completed. Strictly as you wanted." He had dictated the message to Krishnamurthy, who typed it on Leeladhar's mobile while taking the lift down from the 18th floor. "Great job. God bless you," Leeladhar's mobile phone flashed back as the deputy governor left the RBI headquarters at 12.30am…

The RBI forced all these changes on SIFCL because of its continuing alleged violations of investment norms….[There were a] series of 11 meetings, spread over three years at periodic intervals, and an inspection of books. By May 2008, the RBI had lost its patience and served a show cause notice to Roy on 9th May...

Sahara responded to the show cause notice, but before that, Roy wrote a letter to "Respected Shri V Leeladharji" on 15th May in which he "most humbly" submitted that he had always respected the directions of the RBI and the efforts would continue. He also affirmed that Sahara would exit from RNBC activities and would in no way defy any of the RBI's directions, though keeping in mind the size of the company and its large field staff, it had proposed to accept fresh deposits till fiscal 2014.

As a last resort, Roy wrote to Prime Minister Manmohan Singh on 26th May, seeking his intervention "for protection of interest of millions of workers" of SIFCL…

"We are just seeking reasonable time for an orderly and honourable exit from the RNBC business," he wrote and urgently sought a "few moments" with the Prime Minister; but did not get any response...

On 4th June, the inevitable happened. Gopalakrishna issued the prohibitory order that Roy had been dreading...

An hour before the RBI took the decision to ask Sahara to stop its business with immediate effect, Krishnamurthy asked DPS Rathore, the RBI's regional director in Lucknow, to inform the state administration about this.

Rathore called up the then chief secretary of Uttar Pradesh, Atul Kumar Gupta, and cautioned him on a likely public disturbance in the state. For the next few hours, Rathore was inundated with telephone calls from almost every government official. One of them was cabinet secretary Shashank Shekhar Singh, the first non-IAS officer in UP to have risen to that unique position created by then chief minister Mayawati.

The bureaucrat was upset and said that he should have been informed earlier of such a critical decision that could have enormous impact on public order. Rathore politely told Singh that the central bank was not seeking any help from the state administration and that the information could not have been shared in advance for the sake of confidentiality; the RBI merely wanted to keep Singh in the loop to prevent any public disturbance. Singh allegedly threatened to put the entire RBI administration behind bars. Rathore told him in that case, he would need to take action against the Mumbai office as the top brass sat there…

There was no law and order problem. However, on the same night, at 9pm,

SIFCL company secretary Shiv Kumar Pandey circulated a board resolution that authorized director OP Srivastava to take legal action against the regulator's move.

The RBI had sensed that Sahara would file a writ in the Allahabad High Court against the prohibitory order. So, that very evening, immediately after issuing the show cause notice, Krishnamurthy and Hegde flew to Lucknow. Had the RBI not tied up with a lawyer before they landed in Lucknow, it would have been difficult to find one as almost all of them had already been hired by Sahara.

Sahara, on 5th June, moved a vacation bench of the court for interim relief…. And UK Dhaon and Shabihul Hasnain of the bench stayed the RBI's directive and ordered the petition to be listed in the last week of July for hearing…

The Krishnamurthy-Hegde duo flew to Delhi late that evening. They first met advocates at a law firm that the RBI had engaged for fighting the case in the Supreme Court and reached the RBI guesthouse on Sansad Marg at almost midnight. They then worked till 4am on the special leave petition they planned to file in the apex court…

The RBI moved a special leave petition at 10:30am in the Supreme Court for an urgent order against the Allahabad High Court's stay. In the absence of a copy of the high court order, the Supreme Court decided to hear the case on 9th June…

Supreme Court judges Arijit Pasayat and PP Naolekar, after hearing both sides, asked the RBI if it would give another hearing to Sahara or wait for the hearing at the Allahabad High Court. The RBI counsel was willing to give the company a hearing, but Sahara panicked as it knew that the RBI would only repeat its old order.

Admitting that the principle of natural justice was followed, the judges said it would be appropriate for Sahara to have the opportunity of another hearing. They even fixed the date as 12th June...

As directed by the court, the RBI called Sahara for a hearing. "We are here to hear you," RBI officials said, but they knew what would happen. So did Sahara…

For many within the RBI, it was still a mystery: why did it have to act so fast? What was the provocation? One officer raised a critical issue before anybody was aware of what was happening. Reddy was to retire in September 2008 and his deputy, Leeladhar, in December… Would the RBI continue to chase Sahara after the change of guard with the same zeal? Nobody knew of course. So, could the chapter be closed before that?

"Can we do it?" Reddy asked Leeladhar. His deputy, after checking with the legal department, confirmed that the RBI was ready for the final onslaught. Reddy and Leeladhar wanted to shut down Sahara. For them, it was mission accomplished.

Reproduced with permission
Note: Sahara group has stated that "the book at best can be treated as a perspective of the author with all its defamatory content, insinuation and other objections"