Friday’s Supreme Court order against the massive money-raising activity by the Sahara group – two Sahara group companies have been ordered to repay their investors Rs 17,000 crore plus interest calculated at 15 per cent – raises questions for both lawmakers and regulators. Most importantly, is India’s regulatory framework equipped to consistently detect, halt and penalise such organised efforts? The court’s order lays out how two Sahara group companies made “a pre-planned attempt” to “bypass the regulatory and administrative authority” of the Securities and Exchange Board of India, or Sebi. In this case, a few Sebi officials relentlessly pursued the case; will similar doggedness be always on display? The regulator should take steps to institutionalise the elements that led to this rare victory in court.
Secondly, the case highlights the issue of intelligence gathering and co-ordination among different financial sector regulators. The controversial money-raising operation followed a ban on Sahara’s para-banking activities by the Reserve Bank of India in 2008. Sebi was, however, only alert to the operation two years after Sahara started, that too when one of the group companies came to the regulator for a “legal” public issue. What about hundreds of companies that have not come to Sebi? The level of interaction between the different financial sector regulators is clearly insufficient. The only regular forum for interaction, the Financial Stability and Development Council (FSDC), concentrates on macro-prudential matters. More active co-ordination is needed at the grass-roots level. In fact, Sahara’s public “regulator shopping”, wherein it wanted to be regulated by the ministry of corporate affairs rather than by Sebi, was not a good advertisement of the state of affairs at the former. Both the Securities Appellate Tribunal and the Supreme Court have pointed out the deficiencies with this key regulator, which, unlike Sebi, is directly under political control. The court also pointed out that all or any of the estimated 30 million Sahara subscribers could be “fictitious”. Justice J S Khehar even observed that “there may be no real subscribers”, or that fictitious subscribers are mixed in with the real ones. If the number of real investors is large, then it is important that the money be repaid promptly and efficiently, or small investors will be turned off the financial sector, causing major damage to India’s efforts to mobilise savings.
These should serve as wake-up calls for authorities such as the Income Tax Department and the Enforcement Directorate to follow the money trail more closely. More than 14 months ago, former Sebi member K M Abraham reportedly forwarded these details to various relevant authorities for action, but little has been heard of it subsequently. Different regulators and enforcement authorities should clearly act to avoid duplication and enable better deployment of resources. The government has formed a panel of retired and serving bureaucrats, called the Financial Sector Legislative Reforms Commission (FSLRC), to rewrite and harmonise some 60-odd financial sector laws. The expanding investigation into the Sahara group – which spans banking, real estate, securities market, co-operatives, and now retail – will serve as a useful case study for FSLRC.
