An Indian Banker Steps Out of the Shadows

Roy seeks a banking license as he expands his $12.2 billion domain | “We will be among the top few companies in the world”

Bhuma Shrivastava and Anto Antony


Subrata Roy built an empire as a shadow banker, operating at the edges of India’s regulated financial system. Companies in his Sahara group take deposits from and lend money to mostly poor Indians. Now Roy wants to step into the light: He’s applying for a license to open a conventional bank.

Getting approval may be hard for Roy, who’s had run-ins with the Reserve Bank of India — the nation’s central bank — and the Securities and Exchange Board of India (SEBI). Unless the regulators give him a clean bill of health, Sahara “will never make it past the first round of screening,” says Vishal Narnolia, an analyst with SMC Global Securities in Mumbai. “There are many other contenders with better credentials.”

Sahara is a $12.2 billion group that includes real estate developers, insurers, media companies, and sports teams. Roy bought a controlling stake in New York City’s Plaza Hotel last year for $575 million. “We are fighters, and we will remain so,” says Roy, 64, at his office in Lucknow, the capital of Uttar Pradesh, India’s biggest state.

In an effort to bring shadow banking companies under its control, the Reserve Bank in February said that finance companies could apply for banking permits. A license would reduce Roy’s funding costs by allowing him to offer savings accounts rather than employ agents to collect small amounts of money from individuals at their homes and offices. He’d also be able to pay depositors less: India’s five largest banks pay as little as 4 percent annually on savings accounts, compared with the 8.9 percent finance companies offer to attract customers. Bank deposits of as much as 100,000 rupees ($1,761) are insured by the central bank.

Sahara’s dispute with SEBI began when the regulator discovered that Sahara India Real Estate and Sahara Housing Investment had been selling convertible debt without seeking approval from the watchdog. In his defense, Roy says a division of India’s Ministry of Corporate Affairs, which oversees closely held companies like Sahara, had given its approval for the debt sales. Sahara wasn’t told that raising funds from more than 50 investors requires approval from SEBI, he says.

SEBI demanded that the two companies refund about $3 billion — with interest — to the more than 30 million investors who’d bought the debt. Roy took the dispute to the Supreme Court of India, which in August 2012 ordered Sahara to make the refunds. In an advertisement published in Indian newspapers in February, Sahara said the two companies had repaid nearly all the money collected from investors and deposited the remainder with SEBI. Even so, in May the court began hearings on SEBI’s charges that Sahara has failed to comply with the repayment order. The next hearing is scheduled for July 17. A spokesman for SEBI did not return calls seeking comment.

Sahara has also clashed with the Reserve Bank. In June 2008 the central bank barred Roy’s Sahara India Financial from taking new funds and ordered it to return money to depositors by 2015, again with interest, because it had violated rules, including failing to pay the minimum interest rates.

The central bank’s crackdown began “on some flimsy ground” and developed into an act of “clear-cut vengeance,” says Roy, whose title is “managing worker” and chairman of Sahara. “Not a single complaint is there from investors in all these years.” A Reserve Bank spokesman didn’t respond to requests for comment.

The disputes with regulators won’t deter him from expanding his businesses, Roy says. His hospitality companies plan to add 45,000 hotel rooms in the country and sell minority stakes to outside investors. He’s also seeking equity partners for his hospital, dairy, and retail businesses. Granting Sahara — which says it does business with 100 million people — a banking license would help India achieve its goal of extending financial services to the very poor and to those living in rural areas, according to Roy. That, he says, makes his quest a worthy one even if it’s futile: “We have to fight. It is our obligation. If I’m wrong, you cannot save me. If I’m right, you cannot hurt me.”

The bottom line Sahara, which says it does business with 100 million people, must surmount regulatory issues in its bid for a banking license.


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