Shadow Financier Under Attack Wants Bank Permit: India

Subrata Roy, under pressure from Indian regulators and ordered by the nation’s Supreme Court to refund $4.3 billion to bondholders, wants a banking license.

His Sahara group’s financial-services companies, which say they have 100 million depositors and investors in villages and small towns, are part of India’s largely unregulated $670 billion shadow-banking industry. Sahara would need approval from the Reserve Bank of India to start a bank.

Roy, whose $12.2 billion empire includes New York’s Plaza Hotel and television channels, will have to demonstrate “sound credentials and integrity” to win the license, according to the regulator. Confrontations with the central bank have forced Roy to return 180 billion rupees ($3.2 billion) to depositors, while a dispute that began in 2009 with the Securities & Exchange Board of India over debt sales has escalated to the top court.

“We are fighters and we will remain so,” Roy, 64, said of his quest for the license in an interview at his home office in Lucknow, the capital of Uttar Pradesh, India’s biggest state. “In three years, we will be -- asset-wise, cash asset-wise and profitability-wise -- we will be among the top few companies in the world.”

Photographer: Prashanth Vishwanathan/Bloomberg

Subrata Roy, chairman of Sahara Group. Close

Subrata Roy, chairman of Sahara Group.

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Photographer: Prashanth Vishwanathan/Bloomberg

Subrata Roy, chairman of Sahara Group.

The Reserve Bank in February asked companies to apply by July 1 for the permit to start a bank. The central bank today said companies will have 18 months to start a bank after getting its approval.

Roy, who began operations in 1978 with 2,000 rupees and a Lambretta scooter, said his employees are preparing the application.

Media, Sports

His closely held Sahara India Pariwar group of companies now includes real estate developers, insurers, media assets and sports teams. Roy sold his airline company in 2007 to Jet Airways (India) Ltd. (JETIN) for 14.5 billion rupees, and bought a controlling stake in the Plaza Hotel last year for $575 million.

The group, which also holds about 36,600 acres of land around the nation, had a net worth of 681.7 billion rupees as of Sept. 30, according to an advertisement published by the group in Indian newspapers on Dec. 1. Sahara employs more than 1 million full-time and contract staff, the notice said.

The banking license would reduce Roy’s funding costs by allowing him to collect deposits through current and savings accounts. India’s five largest banks pay as little as 4 percent annually on savings accounts, compared with the 8.9 percent that finance companies such as Mahindra & Mahindra Financial Services Ltd. (MMFS) offer to attract term deposits. Bank deposits of as much as 100,000 rupees are also insured by the central bank.

Photographer: Prashanth Vishwanathan/Bloomberg

Subrata Roy, chairman of Sahara Group. Close

Subrata Roy, chairman of Sahara Group.

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Photographer: Prashanth Vishwanathan/Bloomberg

Subrata Roy, chairman of Sahara Group.

To win the license, Roy will have to successfully defend himself in the Supreme Court on the dispute with the Securities & Exchange Board, known as SEBI, and settle matters with the Reserve Bank of India, according to Vishal Narnolia, an analyst with SMC Global Securities Ltd. (GLBS)

‘Clean Chit’

“Unless all the regulators, including SEBI, give them a clean chit, they will never make it past the first round of screening,” said Mumbai-based Narnolia. “There are many other contenders with better credentials.”

Billionaire Kumar Mangalam Birla’s Aditya Birla Financial Services Group as well as Mahindra & Mahindra Financial Services (MMFS), a unit of India’s largest tractor maker, are among those seeking a bank license.

The Sahara group deserves a permit because its companies have provided financial services to many Indians who didn’t have access to banks, though the disputes with regulators make it unlikely that it will win a license, Roy said in the interview. Ghulam Zeeshan, a spokesman for Sahara, declined to immediately respond to Narnolia’s comments.

Photographer: Prashanth Vishwanathan/Bloomberg

Subrata Roy, chairman of Sahara Group. Close

Subrata Roy, chairman of Sahara Group.

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Photographer: Prashanth Vishwanathan/Bloomberg

Subrata Roy, chairman of Sahara Group.

Friends, Associates

Sahara’s dispute with the capital-markets regulator was triggered by a 2009 initial public offering prospectus filed by the group’s Sahara Prime City Ltd. On reviewing the application, SEBI found that two affiliated companies -- Sahara India Real Estate Corp. and Sahara Housing Investment Corp. -- had been selling convertible debt through private placements without seeking approval from the watchdog.

In November 2010, SEBI barred the companies from tapping capital markets. The sale of the securities to about 30 million investors -- or more than the population of Australia -- was made as an offer to “friends, employees, associates,” SEBI said in a June 2011 order, demanding that the two companies refund the money, with interest set at about 15 percent a year.

A month later, Roy took the dispute to the Supreme Court. India’s top court in August ordered Sahara to deposit 174 billion rupees, plus accrued interest, with the market regulator to repay to bondholders. In December, the Supreme Court followed up with another order demanding that Sahara place 51.2 billion rupees, as the first of three payments, with SEBI, which would handle the refunds.

Repaying Funds

Hearings began last month in the Supreme Court on charges by SEBI that Sahara has failed to comply with those orders and the next hearing is scheduled for July 17.

In his defense, Roy said that a division of India’s Ministry of Corporate Affairs, which oversees closely held companies, had given its approval for the debt sales. The group wasn’t told that raising funds from more than 50 investors requires approval from SEBI, he said.

The two Sahara companies have since repaid 221.1 billion rupees of the 257.8 billion rupees collected from investors, and deposited 51.2 billion rupees with the regulator following the court’s Dec. 5 order, Sahara India Pariwar said in a Feb. 16 advertisement published in Indian newspapers.

The capital-markets watchdog is confident that it will prevail in the dispute because of the Supreme Court’s backing, and the funds it has received will be returned to investors, SEBI Chairman U.K. Sinha said in an interview with Bloomberg TV India on May 20, without elaborating. N. Hariharan, a Mumbai-based spokesman for SEBI, didn’t return two calls to his mobile phone or an e-mail seeking comment on the dispute.

Deposit Fight

Sahara has also clashed with the central bank, which began cracking down on companies that aren’t licensed to take deposits in 2004 to curtail risks to the financial system.

Lending outside the banking industry, or shadow banking, accounts for about 21 percent of the nation’s gross domestic product, according to the Reserve Bank of India. Finance firms such as Roy’s companies and Mahindra & Mahindra Financial Services, as well as money lenders, are included in the largely unregulated system that the central bank is trying to curtail.

Roy’s Sahara India Financial Corp. was barred from raising funds and ordered to return the deposits, with interest, to savers by 2015 because it had flouted rules such as paying the minimum interest rates, the Reserve Bank said in June 2008.

The central bank’s crackdown began “on some flimsy ground” and developed into an act of “clear-cut vengeance,” Roy, whose title is “managing worker” and chairman, said in the interview, without explaining why the regulator’s officials would escalate the dispute into a vendetta.

No Complaints

“Not a single complaint is there from investors in all these years,” Roy said in the interview at one of his homes, which is located within a 365-acre property owned by the group that includes an artificial lake, golf course and helipad in Lucknow. The regulators have been penalizing his companies as they increase rules for India’s financial markets, he said.

Following the central bank’s order, the Lucknow-based company published an advertisement in August 2011 asking customers to collect their money from its service centers. The firm, which had 180 billion rupees in liabilities, refunded about 170 billion rupees three years ahead of the deadline, according to the Dec. 1 advertisement. Roy last month said the company has cleared the balance.

A Reserve Bank spokeswoman in Mumbai didn’t reply to two e-mails seeking comment on the matter.

Expansion Ambitions

The public spat with regulators won’t deter him from expanding his businesses, Roy said. His hospitality companies plan to add 45,000 hotel rooms in the country and sell minority stakes. He is also seeking equity partners for his hospital, dairy and retail businesses. The group companies plan to sell as much as 15 percent of equity to raise funds from investors, he said, without giving a time frame.

Granting Sahara a banking license would help further India’s goal of extending financial services to the poorest and to those living in rural areas, according to Roy. That makes the quest -- even if it’s ultimately futile -- a worthy cause, he said.

“We have to fight, it is our obligation,” Roy said. “If I’m wrong, you cannot save me. I’m right, you cannot hurt me.”

To contact the reporters on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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