The Untold Story
pp.374. Price Rs.450.
There as successful businesses, and they create an aura around themselves, become subjects of case studies and help us to build theories. And there are enigmatic business that have a mystery around them, raise the curiosity leave us guessing. We do not know whether these enigmatic businesses have been innovative and path breaking or just plain unethical or illegal. Sahara was always perceived as a business shrouded in mystery with several conspiracy theories doing the rounds on its sources of funding and its business practices.
Tamal Bandyopadhyay’s book on Sahara is as close as it could get to prying open the lid. It does not reveal much; does not tell the untold story in detail, but has information, events, conversations and exchanges that attempt to tell us what it could be. Even this small prying of the lid was not acceptable to Sahara. They filed a defamation case against the publisher and author, which was eventually settled with a two page disclaimer that indicates that the book is part fiction. Whether this prominently displayed disclaimer was in itself a marketing tool can be discussed by experts, but the buzz around the controversy was enough to raise the levels of curiosity about the explosive stuff that the book could have had.
Bandyopadhyay writes carefully and meticulously. He pieces together information, interviews and research, done painstakingly over the years and presents it in a readable style. He adds drama – makes it appear like a participant-observer giving details of the venues, almost verbatim reporting of what was said and the exact timings of when text messages were exchanged. That adds to the readability of the book, without much distraction.
There are two strands in the Sahara story that Bandyopadhyay weaves together. The first strand is the structural issues where the regulator’s concerns about Residuary Non Banking Finance Companies (RNBC) are discussed. As a supplement he also discusses the other large RNBC – Peerless. He discusses the regulatory architecture for raising resources; the jurisdiction of the Securities Exchange Board of India (SEBI) and other elements of the financial system. The second strand is the story of Sahara, its promoter and the Pariwar. This strand is set in a larger imprecise maze. The maze helped Sahara to leverage every loophole in the system. The also has some sub-strands that do not add value to the story: The chapter in pages 185-224 where he discusses the roles and profiles of people on the regulatory side, is an example of force-fitting details into the book. It makes the book look well researched and meticulous but adds little value to the narrative.
How do organisations like Sahara evolve and thrive? Bandyopadhyay says that Sahara “has 4,799 establishments and businesses under 16 verticals in its fold and is the second largest employer in the country after the Indian Railways…” (p.xiv). That a group could be so complex in its organization and so diverse in its business ranging from retail to real estate, with a finance company in its core could be a challenge even for financial forensics specialist. How did the regulatory agencies allow Sahara to grow and become a case of too-big-to-fail – moving beyond the financial sector, in a diversified set of activities? Sahara is a case that poses challenges to arguments on convergence versus specialization in regulatory approaches. I wonder if the financial sector legislative reforms committee (FSLRC) report would be written differently if it’s singular purpose was to deal with an organization like Sahara.
The book demonstrates (a) how frail our regulatory architecture could be; (b) how a smart business house could constantly exploit the regulatory arbitrage; and (c) how slow the system is to plug the loopholes. The book demonstrates the complexities in regulating a fully grown business with its complex web of transactions like Sahara. Any inquiry or regulatory intervention on Sahara is obfuscated two of its favourite tactics: (a) overload the regulator with truckloads paper and (b) go to the press with full page advertisements on its innocence. In documenting the story of Sahara, Bandyopadhyay has rightly raised more questions about the Indian financial system and has answered lesser questions about Sahara itself.
The details of the Sahara story goes much beyond Sahara itself. Sahara is a case in point, but it is a story of our regulatory and policy architecture that left enough space for a player like Sahara and Peerless to operate, in a space that appears to be regulated, but difficult to regulate. In the story it is only the Reserve Bank of India (RBI) under Governor YV Reddy that comes out as a mature and patient regulator, who is trying to fix the system, while the other regulators are groping around on how to deal with an instrument issued in the market here, a tax dispute there and so on. Surprisingly the Sahara also does not appear to be as sure footed as it usually is, when it comes to RBI. This is possibly because Reddy looked at the larger picture, more from a systemic view with Sahara being a case in point. That may also be why Bandyopadhyay deals with Peerless in such detail, while the book is about Sahara.
While the regulatory frame provided Sahara to thrive and prosper, its strength was in raising resources. Any diversified business group of that scale would have accessed the capital markets regularly for equity and debt. Surprisingly Bandyopadhyay tells us that only four of the 4,799 companies of Sahara Pariwar are listed and the one time it went to the capital market for substantial funding was when the RBI choked its milking cow – deposits raised from RNBC. This public offering was of Optionally Fully Convertible Debentures (OFCD). If we put the sequence of events together, it appears that this was the turning point for the business group. Investigations started and legitimate questions were raised. Approaching the market meant offering a prospectus with substantial amounts of data which was subject to the scrutiny of the regulators.
The book discusses the regulatory jurisdiction and the nuances involved in the OFCD issue and how it started spelling trouble for the group. So, what was the source of funding before Sahara took the public offer route? This is where we get to discuss the opaqueness of the Indian financial system.
The source of funding for Sahara till then was the RNBC which was providing unlimited amounts of cash for the group to indulge in businesses as diversified as Formula One racing, owning a cricket team, media, real estate, hospitality, financial services and retail. The bone of contention was the source of this money. The argument of Sahara was that these were deposits painstakingly collected by their staff from large number of retail depositors who are very poor and were looking at a safe and reliable place to park their savings. This is explained by an army of deposit collection agents recruited by Sahara which takes it to the claim of being the largest employer after Indian Railways. However, the moment that channel is choked – we saw that the empire was in the danger of crumbling – particularly with the fact that raising resources from the mainstream markets appeared to be fraught with regulatory and disclosure related risks. The entire episode pertaining to the identity of the depositors of OFCDs indicates what Sahara was up against once it moved from its traditional and opaque source of funding.
This takes us back to the RNBC – which was the main source of finances for the company. There are enough indications in the book to hint that it was difficult to identify the depositors. There isn’t enough material to establish the widespread perception that Sahara was funded from unaccounted finances from politicians. If we were to give the benefit of doubt to Sahara - that it was indeed collecting deposits from the countryside with an army of its agents; their customers were known to the agents but were the ones excluded by the banking system because they did not have identity papers, it brings us to a larger question on financial inclusion – particularly on the savings side. By closing this option, has RBI closed one option in the formal sector that the poor could access to save their money?
We need to examine the proposal for setting up of payment banks in this context. On the liabilities (deposit collection) side, Sahara was like the proposed payment banks: providing the savers opportunities to put in small amounts of savings. On the assets side while the stipulation for RNBCs was to park 80% of the deposits collected in safe government securities, the stipulation for the payment banks seems that all the money (100%) has to be invested in government securities. Sahara possibly was able to garner profits through using the 20% buffer it had on free deposits to invest in diversified businesses that fetched handsome profits to service the depositors. With payment banks having no head room for managing the assets side, and with heightened regulatory requirements on know your customer (KYC) norms applicable to the depositors, is there a business case for the payment banks? Bandyopadhyay’s book does not offer an insight into the business model of this structure, but at this juncture it is important to examine the experience of the RNBCs while we make a case for the payment banks.
The book is lucidly written, and while there are many digressions from the core and the narrative gets chatty at places, we could allow that stylistic freedom to the author considering the painstaking research undertaken for this study. While it is a well-researched book, what is unsaid seems to be much more significant than what is said. The author is to be complimented for doing such a fine job. We should also welcome the fact that the author settled the dispute with the Sahara group to go ahead with the publication with a disclaimer. If that has not happened we would have missed out on an opportunity to get this insight into a significant player in the financial sector.