POSTED: 1:30 a.m. HST, Mar 14, 2014
NEW DELHI » Subrata Roy has long been one of Asia's most flamboyant billionaires, a bejeweled, modern maharajah who lives on an opulent 270-acre estate and presides over the Sahara Group, which is, by its own account, India's largest private employer. To his allies, Roy is an up-by-the-bootstraps hero who built from scratch a sprawling empire that provides vital financial services to India's poor.
But last week India's Supreme Court locked him up in Tihar Jail in New Delhi on a charge of contempt and demanded at least $3 billion, to be returned to investors, to set him free. His company may be forced to sell or mortgage some of its most valuable assets to pay for his freedom.
Among the jewels in Sahara's crown are The Plaza Hotel in New York and the Grosvenor House hotel in London.
Roy has not been charged with a crime, but the Supreme Court ordered him jailed as he faced a civil suit over accusations that many of the company's investment vehicles were illegal and its investors fictitious. The company has said that it helps about 90 million Indians without access to banks save and invest.
At its heart, the battle is over whether Sahara is one of the world's most important providers of credit to the deserving poor or a huge money-laundering operation for the crooked rich.
In addition to being India's largest private employer, Sahara claims to be the country's largest private property owner and its largest private financial institution. It said it had plans to hire 56,000 people this year and 400,000 by 2017, bringing its total employee base to 1.6 million working in about 4,800 finance offices, as well as retail shops, hotels, hospitals, housing developments, newspapers, television news channels, a sugar factory and power generation projects.
Sahara executives, several of whom demanded anonymity because of the court proceedings, said the company had done nothing illegal and deserved a Nobel Peace Prize for its work. Any harm brought to Sahara, they said, could hurt all of India.
But the Supreme Court concluded that the company either had little idea how to contact millions of its depositors or many of those small depositors were fictitious, implying that its billions come from India's huge black-market economy.
"Is Sahara the Swiss Bank of India," a prominent newspaper columnist asked this week, "where the high and mighty keep their unaccounted money and millions of investors have only lent their names?"
Suspicions that Sahara is laundering money have swirled since at least 1996, when the tax authorities in the city of Lucknow first investigated the claims. Roy has never been charged with money-laundering and openly boasts of an unrivaled stable of influential friends.
A corporate website includes pictures of him with President Barack Obama, former President Bill Clinton, almost every top politician in India in the past 25 years and a bevy of Bollywood actors.
People close to the present investigation who asked to remain anonymous because the case was still being adjudicated said that some of the country's most powerful politicians repeatedly called securities regulators in recent years to ask for leniency for Roy.
"Why hasn't the Sahara scam been denounced by any politician or political party, like every other scam has?" asked Prithvi Haldea, a securities analyst who sits on government securities oversight committees. "There's a deafening silence on Sahara, and it's because they're all complicit."
Roy, 65, started Sahara in 1978 with $32 and a scooter that is now kept on a pedestal at company headquarters. He coaxed tiny but regular deposits from hundreds, then thousands, then millions of India's poor, promising in return to pay for a son's wedding, a daughter's dowry or a grandmother's operation in a service that was part bank, part insurance and part investment. He did not demand the blinding array of documents that India's banks insist upon, and he and his employees often appeared at depositors' homes.
Like many businessmen in India, Roy has frequently faced legal trouble. He laughed off investigations for so many years that he even skipped a Supreme Court hearing on Feb. 26 that he had been ordered to attend (his 92-year-old mother was sick, he said later). Angered, the Supreme Court issued an arrest warrant.
The police went to his estate in Lucknow called Sahara Shahar, which has an artificial lake, its own gas station, a theater with luxury seats and a 5,000-seat auditorium. Roy was not present that day but turned himself in the next.
He was then taken for the weekend to a high-end government guesthouse, where his family and lawyers visited him for days and his personal chef attended to his needs. The Supreme Court ended those privileges last week, and he is now lodged in the notorious Tihar Jail, South Asia's largest prison complex.
The Sahara case demonstrates not only the extraordinary deference given the wealthy and well-connected but the lack of sophisticated oversight of India's financial system, according to Ajay Shah, a professor at the National Institute of Public Finance and Policy in New Delhi.
"India's present laws are hopelessly out of touch with what's happening in the real economy," Shah said.
The World Bank has estimated that only 35 percent of India's adult population has access to formal banking services, and much of Sahara's business has been based on serving the remaining 65 percent — rickshaw pullers, tea vendors, farmers and cobblers.
Indian law allows companies to collect cash deposits of up to $317. Anything more must be accompanied by a check or other traceable instrument.
Using millions of such tiny and untraceable deposits, Sahara reported that two of its companies had created privately placed bonds valued at $4 billion. But Indian law also requires that investments involving 50 or more people be regulated by the Securities and Exchange Board of India, widely known as SEBI.
For years the board peppered Sahara with questions about its bonds, and for years Sahara refused to provide answers.
"We were challenging the basic jurisdiction of SEBI," Satish Kishanchandani, a Sahara lawyer, said in an interview.
In one letter to the securities board, Sahara wrote that it could not answer in detail because "most of the staff remains on long holidays with their children, due to summer holidays" — an explanation that prompted the Supreme Court to wonder derisively whether Sahara was "running a kindergarten where their staff were expected to be unavailable during the summer."
Then Sahara said that it had to collect the information about its own investors before providing that information, a claim the Supreme Court termed "outrageously ridiculous."
After more orders by the board and the Supreme Court, Sahara provided compact discs that purportedly contained the identities of millions of investors, but Sahara refused to divulge the discs' passwords, regulators said.
Then Sahara sent 127 trucks containing nearly 31,669 cartons that it said contained investment records from 30 million people. The cavalcade caused a huge traffic jam in Mumbai, the headquarters of the Securities and Exchange Board. But thousands of letters sent to investors by the board have been returned undelivered.
The Supreme Court's cursory examination of Sahara's investor list led it to conclude that many of the names "may well be fictitious, concocted and made up."
The name Haridwar led the court to note that this was the name of a city, not a person. "In India, names of cities do not ever constitute the basis of individual names," the court's order stated.
Sahara representatives responded that the board and the Supreme Court were demanding formal addresses and responses from people who lived in mud huts. And the company repeatedly brought to court an investor it said was named Haridwar.
"An uneducated person living in rural India cannot fill out a form and spend money sending it back," Kishanchandani said.
Sahara says it has already returned $3 billion to investors and given an additional $800 million to the board, and that is all that is due.
"Our contention is that we have paid," Kishanchandani said. "Asking for more is double-paying. Give us some concession."
But Securities and Exchange Board officials say that Sahara has provided no verifiable proof that it has paid back its millions of investors.
A 2010 World Bank study concluded that India's shadow economy, which includes legal activity that is concealed from the authorities, is equivalent to a fifth of the country's gross domestic product. Most real estate transactions involve bags of unreported cash, and 85 percent of all jobs are in the cash-based informal sector.
The Indian finance minister, Palaniappan Chidambaram, reported last year that only 42,800 people had declared income of $158,000 or more a year, a figure he said was "laughable."
Even India's traditional banks are increasingly troubled. Loans reported as nonperforming at 40 publicly traded banks jumped 36 percent in December from the same period a year earlier, and many economists believe the problem is far worse than the banks have admitted. There is growing speculation that the government, which owns 70 percent of the banking system, may soon have to recapitalize most banks, a process that will involve a huge transfer of wealth.
The Supreme Court has ruled that if the board cannot find genuine Sahara investors, the money the company surrendered should be given to the government. With interest, the outstanding balance is $5.4 billion, the board said Friday.
A Sahara proposal to pay $400 million immediately and $2.6 billion during the next 16 months was dismissed by the Supreme Court as "dishonorable."
The company filed a habeas corpus petition Wednesday, citing Roy's "fundamental rights to personal liberty." If it is rejected, Roy will have to wait at least 10 days to appeal his imprisonment again.
Sahara representatives said the company had the financial wherewithal to pay for his release, although they said the demand to do so was grossly unfair.
"It's a big organization. We can survive," said one official. "But it's a major pressure on cash flow."
Gardiner Harris, New York Times