Vivek Kaul
The Rs 24,000 crore question for the Sahara group is where did it get the money from to repay the investors who had invested in its housing bonds or the optionally fully convertible debentures(OFCDs)? The group had raised this money through Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL).
This happened after the Reserve Bank of India(RBI) ordered the group to shut-down its para-banking operations through which it used to raise money to fund its capital intensive businesses from real estate to an airline.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
On this pretext, the group felt that issuance of these OFCDs did not amount to a public issue. As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Hence, the issuance of OFCDs was a public issue and given that it needed to be listed on a stock exchange, which it wasn’t. The Securities and Exchange Board of India(Sebi) came calling and KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In the order Abraham also contested how could Sahara raise such a huge amount of money only through members associated with the Sahara group. “The case of the two Companies is that they have issued OFCDs only to members associated with the Sahara group…Even the listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors. In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only of the order of 15 million,” wrote Abraham. Given this, how did Sahara manage to issue bonds to 2.96 crore investors, who were largely members associated with the group?
This Sebi order was challenged in court by Sahara. It led to a series of events, which finally led to the Supreme Court judgement on August 31, 2012. The apex court in the country basically stood by Sebi’s decision and asked Sahara to refund Rs 24,029 crore that it had raised through OFCDs, to the investors by November 2012.
The Supreme Court directed the Sahara group to hand over money to Sebi, which would in turn refund the money to the investors. The group was soon given more time to repay the money, and further directed to deposit Rs 5,120 crore immediately. This the group paid up on December 5, 2012 and hasn’t paid up anything since then.
It has since contested that it has already paid its investors and handing over the money to Sebi would mean double payment. The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. In fact, the Business Standard had reported in November 2012 that the agents of the Sahara Group were being pushed to collect sehmat patras (consent letters) from investors to show that their money had already been returned to them. “Agents, estimated to be a million strong, who sold OFCDs, often termed housing bonds, have been ordered to collect these letters, failing which their commissions are being stopped. With these consent letters, many of which are pre-dated, with dates ranging from as early as April to show that refunds were spread over a long period, documents such as account statements and passbooks in the hands of the customers are being collected,” the newspaper reported. This happened after the Supreme Court judgement asking Sahara to hand over Rs 24,000 crore to Sebi. If the group was refunding the investors as early as April 2012, why was it fighting a case in the Supreme Court at the same time?
Further, where did the group get the money from? Rs 24,000 crore is clearly not small change. Interestingly, the group has offered an explanation for this.
The group claims that the Sahara India Cooperative Credit Society and Sahara Q Shop bought the real estate assets worth thousands of crores from SIRECL and SHICL, the companies which had issued the OFCDs. This money was then used to repay the investors who had invested in the OFCDs.
But where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money to buy the real estate assets of SIRECL and SHICL? The group claims to have raised this money through the Sahara India partnership firm which raised money on behalf of Sahara India Cooperative Credit Society and Sahara Q Shop, across 4,700 locations throughout the country. The group essentially put its vast network of branches to work, it claims.
The next question is that what was the pretext on which Sahara India Cooperative Credit Society and Sahara Q Shop raised money? Sahara Q Shop could have raised money as an advance against the promise of providing consumer goods to investors who invested in it. The Sahara Q Shop had got immense credibility in small town India, given that it was being advertised by the Indian cricket team.
On the face of it Q Shop seems like a money raising scheme that is being marketed as a retail venture. In fact, in an affidavit filed with the Allahabad High Court, Sebi has alleged that the group was “forcibly and unilaterally converting the investments in Sahara India Real Estate and Sahara Housing Invest to Sahara Q Shop without any consent of the investor, in defiance of the orders of the Supreme Court.”
Also, the question is why shouldn’t the Sahara Q Shop venture qualify as a collective investment scheme. A collective investment scheme is defined as “Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS(collective investment scheme). Investors do not have day to day control over the management and operation of such scheme or arrangement.” And this should bring the Sahara Q Shop under the regulatory ambit of Sebi.
Interestingly, the Sahara Q Shop seems to have also invested in the troubled National Spot Exchange. As the Business Standard reports “Recent data put out by the troubled National Spot Exchange (NSEL) showed that Sahara Q Shop had invested a little over Rs 220 crore through Indian Bullion Markets Association, a subsidiary of NSEL.”
What all this tells us is that Sahara continues to be a para-banking operation on the ground.
The article originally appeared on www.FirstBiz.com on February 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Subrata Roy
Arrest warrant out, what new ruse will Subrata Roy come up with?
Vivek Kaul
George Orwell in his 1945 classic Animal Farm said that “all animals are equal, but some animals are more equal than others.” Sahara bossman Subrata Roy, clearly belongs to the second category.
On February 20, 2014, the Supreme Court of India had directed Roy to be present in court on February 26, 2014, to explain the failure of two Sahara group companies to refund an amount of a little over Rs 24,000 crore, raised from investors, by selling optionally fully convertible debentures (OFCDs).
Roy did not turn up in Court and his counsel Ram Jethmilani told the Court that “His mother is dying and he is required to be by her side holding her hand.”
To buttress their point further, the Sahara Group even attached a medical statement by doctors attending to Roy’s mother at the Sahara Hospital in Lucknow. Interestingly, along with Roy, the Court had directed Ashok Roy Choudhary, Ravi Shankar Dubey and Vandana Barghava, three directors of Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to be present on February 26, 2014. SIRECL and SHICL are the two companies that had issued the OFCDs.
Only Roy did not turn up citing his mother’s illness. The other three did. This did not go down well with the Court. “The arm of this court is very long. We will issue warrants. This is the Supreme Court of the land. When other directors are here, why cannot he be here?” asked Justice KS Radhakrishnan.
After this, the Court issued non bailable arrest warrant against Roy and directed that he be arrested and produced before it, on March 4, 2014.
The Sahara group has been testing the patience of the Supreme Court for a while now and on Wednesday (i.e. February 26, 2014), the apex court in the country simply ran out of it.
Sahara is a finance to reality conglomerate with huge para-banking operations in the states of Uttar Pradesh and Bihar. In July 2008, the Reserve Bank of India ordered the group to shut-down its para-banking operations. This, after it found several discrepancies in the books of Sahara. Sahara used to run the para-banking operations through the Sahara India Financial Corporation. The group raised a large amount of money from people who did not have bank accounts. It even collected small amounts on a daily basis.
The deposits funded the many businesses (like media, films, real estate, hospitals, hotels and even airlines) that the group was into. The Reserve Bank hit at the heart of Sahara’s business model by prohibiting it from running a para-banking operation. The central bank banned Sahara from raising fresh deposits beyond June 30, 2011 and at the same time asked Sahara to repay all its depositors by June 30, 2015.
It is easy to see that most of the businesses that Sahara was into were highly capital intensive. Hence, it was important for the group to keep raising deposits. But with the RBI clamping down on its para-banking operations that was not possible.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
Given this, the group felt that the issuance did not amount to a public issue, and did not require compliance either with the Companies Act, 1956, or the Securities and Exchange Board of India(Sebi) Act.
As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Given this discrepancy, KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In this order Abraham also pointed out that “The first proviso to section 67(3) inserted by the Companies (Amendment) Act, 2000 with effect from 13.12.2000 sets at rest the question by stating that if an invitation to subscription is made to 50 or more persons, it ceases to be a private.”
Hence, the OFCDs sold by Sahara constituted a public offer and given that needed to be listed on a stock exchange, which they were not. As Section 73 of the Companies Act points out “Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchange for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange.” The OFCDs of Sahara were not listed on any stock exchange.
Sahara challenged the Sebi order in court. This started a series of events which finally led to the Supreme Court judgement as on August 31, 2012. In this judgement, the Court directed the Sahara group to refund Rs 24,029 crore that it raised through OFCDs to the investors by the end of November 2012. The order had directed that Sahara to pay this amount to Sebi,which would in turn refund the money to the investors.
The group was given more time to refund and directed to deposit Rs 5,120 crore immediately. Rs 10,000 crore was to be deposited with Sebi in January 2013 and the remaining amount in February 2013. The Sahara group handed over draft of Rs 5,120 crore on December 5, 2012, and hasn’t paid anything since then.
In fact, it has since maintained that it has already returned the money to investors and paying money to Sebi would amount to paying twice. As a November 2013 report in the Business Standard puts it “Its(i.e. Sahara’s) top lawyers have argued that it was not the intention of the court to pay investors twice and that the regulator has to first check several truckloads of documents pertaining to the millions of investors before coming to ask for the balance.”
But there are some basic loopholes in the argument. If Sahara was in the process of repaying its investors, why was fighting a case with Sebi in the Supreme Court?
The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. This led to Justice Kehar, one of the judges on the bench hearing this case, to wonder “The whole of May and June, they were fighting before us. Why would they do that if they were already refunding?”
In January 2014, the Supreme Court had directed the Sahara group to file bank statements and documents to prove that it had refunded the money to its investors in 2012. A Business Standard report dated February 14, 2014, quotes Arvind Dattar, the Sebi counsel as saying “They have filed five volumes of documents. These contain everything except what we want.”
Datar also asked that how could Sahara return money that it had collected over a period of three years in just two months. The money Sahara has repaid to the investors who had bought OFCDs has come through transactions within the group. The group has told the Supreme Court that Sahara India Cooperative Credit Society and Sahara Q Shop bought real estate assets worth thousands of crores from SIRECL and SHICL, the two companies that issued OFCDs, to bail them out. This money was then used to repay the investors.
The question is where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money from? The Sahara Group told the apex court that the money to buy these assets was raised from numerous investors through its big branch network of 4,700 branches.
The money from this transaction was used to repay the OFCD investors in cash. The group explained that it put in place the cash policy after hundreds of cases of “snatching, robberies, injuries and even death faced by its workers while carrying money between branches and banks.” But wouldn’t that still be applicable, if it repaid its investors in cash? Wouldn’t its agents have to carry cash around to repay it’s investors?
In a statement issued earlier this month the Sahara group claimed that almost 98% of its investors had put in amounts ranging from Rs 500 to Rs 19,000 into the OFCDs. The average investment was around Rs 8,000. The group further said that these people do not go to banks and wanted their money back in cash.
The Supreme Court in a hearing this month asked if payments of such huge amounts of cash was legally allowed. The Sebi counsel Datar explained that “Under Section 73 of the Companies Act, refund has to be made only by cheque. Even the Sebi ICDR (Issue of Capital and Disclosure requirements) regulations mandate that payments have to be made through banking channels only.”
To conclude, basically, Sahara and its lawyers have been playing the delaying game and keep coming up with a new theory every time there is a hearing. It will be interesting to see what new theory they come up with on March 4, 2014, when Subrata Roy will have to appear in court.
We haven’t seen the last of this case. Watch this space.
The article originally appeared on www.firstpost.com on February 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Sahara's hide and seek with the Supreme Court and Sebi continues
Vivek Kaul
The Supreme Court has barred Sahara, the finance to reality conglomerate, from selling any immovable property. It has also ordered Sahara boss Subrata Roy and its directors not to leave the country until they submit original title deeds on properties worth Rs 20,000 crore.
On October 28, 2013, the court had directed Sahara to hand over title deeds of properties worth Rs 20,000 crore to the Securities and Exchange Board of India(Sebi). It had also added that a failure to do so would mean that Sahara bossman Subrata Roy would not be allowed to leave India.
On that date, the judges had said “You indulge too much in hide and seek. We cannot trust you any more…There is no escape for you and the money has to come.”
Yesterday, Sahara submitted documents for two parcels of land. This included 106 acres of land in Versova, a western suburb in Mumbai and another 200 acres of land in Vasai, another Western suburb of Mumbai. Sahara provided a detailed valuation of the land carried out by Knight and Frank and another valuer. This put the value of the land in Versova anywhere between Rs 18,800-19,300 crore. The land in Vasai is expected to be worth around Rs 1,000 crore.
This claim of Sahara was immediately contested by the Sebi counsel Arvind Datar. He pointed out that the land in Versova was a part of a green zone where real estate development would not be possible, and that is why there was a plan to develop a golf course there. Sahara contested this claim by saying that the rules had been changed in 2012 and development was possible. To this Datar replied saying that environment ministry would have to agree to this.
Also, the 106 acres of land was a part of a larger disputed area of 614 acres. Sahara is currently in litigation with original owners B Jeejeebhoy Wakaria and associates since 2001.
Over and above this, Datar pointed out that Sahara had supplied only 52 out of the 82 title deeds relating to the collaterals. The rest were certified copies. Datar also challenged Sahara to sell the land and deposit the money. “Let them sell this, find a buyer and deposit the money. Let them sell it and show. Why should Sebi undertake this responsibility? … The October 28, 2013, order was clear – to submit original title deeds of land worth Rs 20,000 crore…The rights and interests of investors must be protected,” he said.
The Supreme Court then asked Sahara to deposit original title deeds of properties worth Rs 20,000 crore anywhere in the country, within two days. This would ensure that the order barring Sahara from selling any property and not allowing its directors to leave the country, would not operate.
So what is the fuss all about? In July 2008, the Reserve Bank of India, ordered Sahara to wind down its parabanking operation run through the Sahara India Financial Corporation, which operated as a Residual Non-Banking Company (RNBC).
This happened after the central bank found several discrepancies in the books of Sahara. It banned Sahara from raising fresh deposits beyond June 30, 2011 and at the same time asked Sahara to repay all its depositors by June 30, 2015.
Sahara India Financial Corporation is big in parts of Uttar Pradesh and Bihar, where it has managed to raise thousands of rupees as deposits over the years. These deposits funded the various businesses of the group from media, films, real estate to even buying international hotels. The group even ran an airline briefly which it sold off to Jet Airways. Most of these businesses are capital intensive businesses which needed a lot of money. The money as mentioned earlier came from the parabanking operation of the group.
Once RBI asked Sahara to wind down its parabanking operation it stuck at the heart of the group’s business model. But soon Sahara started issuing what it called housing bonds. Two group companies, Sahara India Real Estate Corporation Ltd and Sahara Housing Investment Corporation Ltd, issued these bonds technically referred to as optionally fully convertible debentures (OFCDs).
Sahara noted that these OFCDs were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
Hence, it did not amount to a public issue and thus, did not require compliance either with the Companies Act, 1956, or the Sebi Act as well as regulation dealing with public issues. This was the way Sahara interpreted the OFCD issue.
As per the Section of the Companies Act, 1956, any offer made to 50 or more people, becomes a public offer. Estimates suggest that the OFCDs were sold to nearly 2.96 crore investors.
This started a series of events which finally led to the Supreme Court judgement as on August 31, 2012. In this judgement, the Court directed the Sahara group to refund investors Rs 24,029 crore to the investors by the end of November.
One of the judges, Justice Khehar said: “It seems the two companies collected money from investors without any sense of responsibility to maintain records pertaining to funds received. It is not easy to overlook that the financial transactions under reference are not akin to transactions of a street hawker or a cigarette retail made from a wooden cabin. The present controversy involves contributions which approximate Rs. 40,000 crore, allegedly collected from the poor rural inhabitants of India. Despite restraint, one is compelled to record that the whole affair seems to be doubtful, dubious and questionable. Money transactions are not expected to be casual, certainly not in the manner expressed by the two companies.”
The November deadline was further extended and Sahara was directed to deposit Rs 5,120 crore immediately, Rs 10,000 crore in January 2013 and the remaining amount in February 2013. Of this amount the group handed over draft of Rs 5,120 crore on December 5, last year, and hasn’t paid anything since then.
At the same time it continued to play ‘hide and seek’ with the Indian judicial system by claiming that it had already repaid most of the amount to the investors and hence, did not have to pay Sebi anymore money. If that was the case why was this not brought to notice of the Supreme Court in August 2012? And why was it brought to notice after the Supreme Court asked it to repay the investors?
As a report in the Business Standard puts it “Its(i.e. Sahara’s) top lawyers have argued that it was not the intention of the court to pay investors twice and that the regulator has to first check several truckloads of documents pertaining to the millions of investors before coming to ask for the balance.”
A report appearing in the Business Standard newspaper in late November 2012 seemed to suggest that agents of the Sahara Group were being pushed to collect sehmat patras (consent letters) from investors to show that their money had already been returned to them. “Agents, estimated to be a million strong, who sold OFCDs, often termed housing bonds, have been ordered to collect these letters, failing which their commissions are being stopped. With these consent letters, many of which are pre-dated, with dates ranging from as early as April to show that refunds were spread over a long period, documents such as account statements and passbooks in the hands of the customers are being collected,” the newspaper reported. Of course, this happened after the Supreme Court judgement in August 2012.
Also money was being transferred to the new Q shop venture launched by the group. As the Business Standard reported“While this documentation process has been on, a significant portion of the money deposited in the accounts have already been transferred to the Q-Shop plan, another money raising plan being marketed as a retail venture.”
It remains to be seen whether Sahara deposits title deeds of properties worth Rs 20,000 crore with Sebi in two days time or not. Or will it manage to come up with a new delaying tactic and continue with its casual approach? In short, all that can be said is that we haven’t heard the last of this issue.
Watch this space.
The article originally appeared on www.firstpost.com on November 22, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Arindam Chaudhuri is the Subrata Roy of the MBA business
Vivek Kaul
One of my bigger regrets in life is that I spent two years doing a post graduate diploma in management (or what is better known as an MBA). Around 16-17 months into the course came the realisation that I was wasting my time. Since I had already wasted a lot of time, I thought wasting a few months more and completing the course would do me no harm. And which is precisely what I did.
The course barely helped me improve intellectually (though I have to concede that I ended up learning some versions of compound interest, which I still use to make a living) but it did help me improve my job prospects.
The institute I did my MBA from was neither recognised by the All India Council for Technical Education(AICTE) nor was it affiliated to any university. Despite that students did not shy away from applying and the application to acceptance ratio was around 200:1 (which meant for every 200 people who applied only one was finally selected).
To give the institute due credit at no point did they try to mislead. Time and again they repeated the fact that their course was not recognised. But that did not make any difference to those applying. They came by the droves. What also helped was a lot of positive coverage in the media.
This was primarily because the institute figured in the top 20 in most business school rankings at that point of time. What it told the potential applicants was that despite not being recognised the institute was reasonably good and one would have decent job prospects after completing the course.
While I did not gain much from the course (having chosen the wrong specialisation and then losing interest totally), most of my batchmates thought the education offered was good (if not excellent) for the kind of money that was charged. In MBA lingo, there was great bang for the buck. And more than 10 years later, most of my batchmates have high paying high flying jobs .
The point I am trying to make here is that being affiliated to a university or being recognised by the AICTE has nothing to do with offering quality education which can make one employable. If that was the case our universities wouldn’t be churning out so many unemployable graduates and engineers. So in that sense I really do not have a problem with the existence of an MBA chain like Indian Institute of Planning and Management (IIPM).
There is a clear cut reason behind the mushrooming of MBA institutes(like IIPM) across the country. As the Indian economy expanded over the last two decades there has been a greater need for people who have some understanding of management and business.
The seats in government run MBA institutes (the IIMs, and business schools run by universities) have remained stagnant over the years. Only in recent years has the government started expanding, by setting up more IIMs.
Hence there has been a great demand for an MBA degree, given the perception that it improves job prospects significantly. And since everybody couldn’t get into an IIM, entrepreneurs all over the country sniffing an opportunity jumped in setting up MBA institutes. The AICTE was more than helpful when it came to approvals and that explains how all kinds of institutes got approved.
In states like Maharashtra where politicians run most education institutes, these MBA institutes immediately got a university affiliation.
Setting up an education institute with approvals is one thing but providing quality education is totally another thing. So even though all these institutes with approvals were set up, the quality of their education and infrastructure was suspect and continues to remain suspect.
The point here is that since the government couldn’t cater to the demand given that it had more pressing needs, the private sector came in. Hence, all kinds of institutes were set up, the good, the bad and the ugly. In fact one education entrepreneur regularly set up MBA institutes when the economy was on its way up, and shut them down when the economy flagged.
A fair comparison for the MBA education system in our country is the banking system. A November 2011 presentation made by the India Brand Equity Foundation ( a trust established by the Ministry of Commerce and the Confederation of Indian Industries (CII)) makes some very interesting points:
– Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch
– Only 40 per cent of the adult population has bank accounts.
Given this it is no surprise that a lot of Indians don’t deposit their savings with banks because around where they live there are no banks. Or the amount of money they want to save is so small that it is not profitable for banks to entertain them.
Hence, they end up saving money with firms like Sahara and other non banking firms. The lack of banking facilities has allowed firms like Sahara to thrive and become very big. And one of the things about becoming big is that you want to continue to remain big, doing whatever it takes. As Raghuram Rajan and Luigi Zingales write in the Saving Capitalism from the Capitalists “Those in power – the incumbents – prefer to stay in power.”
In that sense Sahara led by Subrata Roy and IIPM led by Arindam Chaudhuri are very similar. Both thrived primarily because the system that was in place was not big enough to meet the demand of the citizens of this country. They created their own system to exploit this demand and became very big in that process. And now that they are big, they want to remain big. It is a natural progression of things.
This has led to Sahara trying almost every possible way to stay in business and not hand over the Rs 24,000 crore that the Supreme Court has directed it to pay the Securities and Exchange Board of India. In IIPM’s case it has meant an all out effort to remove almost every negative thing that gets said against it and Arindam Chaudhuri. Also being a big advertiser in newspapers has meant that no newspaper of standing writes anything against it.
To conclude, getting a government approval to set up an MBA institute is no guarantee for quality education. Hence, I really have no problem in non AICTE affiliated/non university recognised business schools operating because those with approvals aren’t any great shakes either.
But at the same time, it is important that prospective candidates who want to do an MBA make informed judgements. And to do that they need access to all kinds of information and not only the brochure of the institute they want to apply to.
Hence, it is preposterous that any negative information on IIPM gets contested in lower courts around the country and is ultimately removed from the internet. If after going through this information students still want to apply and join IIPM, then it is really their choice and that should be respected.
The point is that if prospective MBA candidates would have to make their decisions to figure out which institutes to apply for only on the basis of information provided by those institutes and their brochures, then they would end up counting chickens before they are hatched.
The article originally appeared on www.firstpost.com on February 16, 2013
(Vivek Kaul is a writer. He can be reached at [email protected]. He did his post graduate diploma in management (PGDM) from the Symbiosis Centre for Management and HRD. The institute is now a part of the Symbiosis International University, a deemed university)
KFA and Sahara: How they have damaged capitalism
Vivek Kaul
Capitalism is a bad word these days.
And who made it a bad word? The communists? The trade unionists? Those fired from their jobs? Those who fear they might be fired from their jobs? The politicians? Or simply put you and I?
Well, actually none of the above.
Capitalism has been given a bad name by those who practise it i.e. the capitalists. And the capitalists in this have been helped by the politicians and the other insiders.
In India this role has been played to the hilt by Vijay Mallya of Kingfisher and Subrata Roy of Sahara.
As Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”
Lets look at this statement first in the context of Kingfisher and then Sahara. The Kingfisher crisis has been on for sometime now and the firm has not been allowed to fail. In fact last year there was a lot of talk of even the government of India stepping in to rescue the airline. But thankfully, the government which continues to blow up the taxpayer’s hard earned money on Air India, chose not to do so with Kingfisher.
Before that as per an announcement made in April 2011, the banks which had loaned a lot of money to Kingfisher agreed to convert Rs 1400 crore of it into equity at a premium of more than 60%.
Of course with the benefit of hindsight one can clearly say that what were they thinking? At the time of conversion of debt into equity Kingfisher shares were priced at Rs 39.9 and the debt was converted into equity at a price of Rs 64.48. As I write this the share price of the former airline is at Rs 9.56 on the Bombay Stock Exchange (BSE). Interestingly, there are sellers willing to sell the share at this price but there are no buyers in the market. So this price doesn’t really have any meaning. A stock market like any other market needs sellers and buyers to function.
If there are no buyers there is no market. As of December 31, 2012, the State Bank of India, IDBI Bank, ICICI Bank and Bank of India owned 8.78% of the shares of the company. This was down from the 18.78% that these banks along with Punjab National Bank and UCO Bank held as on March 31, 2011, after the banks had converted their debt into equity. So these banks have managed to whittle down their holding in the airline but even with that they may have been left holding onto a stake which is worth next to nothing now. Since the latest numbers as on March 31, 2013 are not available it can’t be said with clarity what stake banks have still left in the airline.
Also, this is only the part that was converted into equity. Over and above this there is Rs 7,723 crore of debt that Kingfisher Airlines still owes the banks. The banks have a collateral worth Rs 5,237 core against the outstanding loans of Kingfisher. Experts remain sceptical on how much collateral, which includes Mallya’s bungalow at Candolim in Goa among other things, the banks will be able to sell to recover their loans.
The basic question that remains is that why would banks convert debt into equity at a premium of more than 60%, for an airline that even then had never made money? The answer probably lies in the fact that most of the banks that had given loans to Kingfisher, with the possible exception of ICICI Bank, were public sector banks. It can be safely said that political pressure was at play. The fact that Mallya is a member of the Rajya Sabha must have helped.
Hence those who Rajan and Zingales call the incumbents i.e. the promoter, his financiers and the politicians kept Kingfisher going, when it clearly was in no position to continue. And we have now ended up with a situation which is clearly messier.
No one in their right mind will now buy the airline given that it would be cheaper and easier to start a fresh airline than clear up the mess inside Kingfisher and re-launch it.
The moral of the story is that while capitalism creates, it is very important to let it destroy as well, otherwise there are costs for the society to bear.
In the aftermath of Kingfisher going bust the Ministry of Civil Aviation does not seem to be in the mood to issue fresh licenses, such is the fear of another airline going bust. Also, when Spice Jet recently cut ticket prices, the Ministry went out of its way to ensure that other players did not match that price. The logic being that if tickets are sold at a lower price there would be more losses, more airlines getting in trouble (read Air India) and so on.
In the process the prospective consumer i.e. you and me, lose out on cheaper tickets and perhaps better service, which would be the case with more airlines in the fray.
And more than anything the employees of the airline who had gone back to work on the assurances of the top management, continue to remain largely unpaid.
If the process of trying to rescue the airline had not been prolonged for so long, things would have been better for everyone concerned, except perhaps the promoter.
Now lets come to Sahara. Sahara is an even more blatant example of why you need to save capitalism from the capitalists. Here is a firm, which has been directed by no less than the Supreme Court of India to hand over more than Rs 24,000 crore to the Securities Exchange Board of India (SEBI) to repay its investors and is not doing so. In fact as an earlier column pointed out Sahara is probably even going against the decision of the Supreme Court. This cannot happen without political support.
In fact till date, politicians who jump at every opportunity to be seen as messiahs of the masses, haven’t spoken a word against Sahara. This is probably also linked to the fact that most politicians run cricket in India by controlling the state boards and the district cricket associations and Sahara remains the biggest sponsor of what was once called the gentleman’s game. As the old saying goes, you don’t bite the hand that feeds you.
Meanwhile the unsuspecting poor of the country continue to handover their hard earned money to Sahara. It is safe to say that Sahara has inspired a whole host of other firms to raise money from the unsuspecting public in India, knowing fully well that even if they do not follow the law of the land, things would just be fine. It also explains to a large extent why pyramid and Ponzi schemes continue to flourish in India. Nobody ever gets punished.
Rajan and Zingales point out that “Those in power – the incumbents – prefer to stay in power.” And in order to do that they tend to go any extent possible. In the process things get messier.
Hence, it is important for firms which are no longer viable to be allowed to fail, and if they are not in the mood to do it themselves, then they the law of the land should ensure that they do fail. As a certain Frank Borman once said “I’ve long said that capitalism without bankruptcy is like Christianity without hell.”
The article originally appeared on www.firstpost.com on February 16, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])