In this excerpt from Sahara; The Untold Story, Tamal Bandyopadhyay recounts a key meeting at the RBI headquarters, in which Subrata Roy yielded to the regulator's persuasion, leading to the gradual winding down of Sahara India Financial Corporation Ltd.

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When India's banking regulator was fighting it out with Peerless (General Finance and Investment Co.) in the country’s apex court in the 1990s, Yaga Venugopal Reddy, an Indian Administrative Service officer of the 1964 batch, was the banking secretary in the ministry of finance. Manmohan Singh was finance minister and C Rangarajan was the governor of the Reserve Bank of India.

There was tremendous political pressure on the RBI to back out. The support of the Left Front that was ruling West Bengal then was critical for the Congress government at the Centre, headed by PV Narasimha Rao. The Congress had ushered in economic reforms in the early 1990s to pull India out of an unprecedented balance of payment crisis. Rao’s government couldn’t afford to upset Jyoti Basu, then chief minister of West Bengal for whom Peerless was even playing the role of lender of the last resort. Some government officials nudged the RBI to begin a dialogue with Peerless.

The RBI’s stance was clear — Peerless had dragged it to the Supreme Court and it could not enter into a dialogue with the company while the case was being heard. You could not negotiate with somebody who had gone to the Supreme Court against you. If you did, how could you protect your accountability?

By late 1995, political pressure on the RBI had increased to unilaterally pull out of the Supreme Court case. Both Singh and Reddy were foursquare behind governor Rangarajan. The RBI deputy governor, SS Tarapore, was directed to attend a meeting in the finance ministry where Peerless would be present, but both Tarapore and Reddy declined to be there.

Reddy was appointed the 21st governor of the RBI on 6 September 2003 and served in that position for five years. By that time, Peerless was back on the profit track and had started growing, albeit slowly. On the other hand, SIFCL was growing at a rapid pace. Reddy’s one-point agenda was to finish off Sahara and Peerless, which by then accounted for 70% of all deposit-taking companies in the country and were quickly growing to be too big to fail.

Reddy, known for his differences with the finance ministry on many critical issues, always felt that the two groups were holding the regulator to ransom. There were three other RNBCs — much smaller in size — that the RBI wanted shut. These three firms accepted the exit plans charted out for them. They were based in Calcutta, Guntur (Andhra Pradesh) and Bellary (Karnataka). The Calcutta one was the last of the three to shut shop.

Peerless, after losing its legal battle, couldn’t grow much. It became more of a holding-on operation for the Roys. But Sahara continued to grow at a breakneck speed. With Reddy at the helm, the RBI’s job was to entice, incentivize and enable Sahara to slow its growth momentum. Its winding down had to be drawn out, as a sudden move would have disrupted the entire financial system and created a social chaos with millions of depositors losing their money and lakhs of collection agents losing their jobs.

Two meetings — running for hours — at the RBI headquarters on Mint Road, Mumbai, on 12 and 16 June 2008, sealed Sahara’s fate. Of course, these two meetings were preceded by a courtroom drama, both in the Allahabad High Court and the Supreme Court. However, unlike the legal battle with Peerless that lasted nearly two decades, the legal cases in this instance were more of an interlude in the prolonged closed-door negotiations between the RBI and Sahara. The legal fight lasted just for a day each — on 5th June in the high court and on 9th June at the Supreme Court.

Let’s focus on the last round of the meetings.

Neither the then RBI governor Reddy nor his deputy V Leeladhar attended the meetings of 12 and 16 June 2008. The first meeting, on a Thursday, lasted six hours, from 4pm to 10pm. The second and final meeting, on a Monday, began earlier, at 3pm, and went on till nearly midnight.

The venue of the meeting was a relatively small room on the 15th floor of the RBI office in Mumbai, adjacent to the large conference room where the RBI brass meet bank chiefs every April and October for the annual monetary policy and the half-yearly review.

Subrata Roy, who came along with his trusted lieutenants Anupam Prakash, Pallabh Agarwal and Vandana Bharrgava (executive directors of Sahara Pariwar), looked tired, but never lost his composure. Prakash handled all legal matters for SIFCL while Agarwal’s forte was finance. He played a critical role in the Air Sahara-Jet deal. Bharrgava was in charge of Roy’s secretariat in Lucknow. Her husband, Ashok K Bhargava, was the chief executive officer of Sahara India Power Corp. Ltd.

The RBI was represented by G Gopalakrishna, executive director in charge of the department of non-banking supervision (DNBS); P Krishnamurthy, chief general manager; GS Hegde, the legal head; and two other officers — Shekhar Bhatnagar and Reena Bannerji.

The RBI Strategy: No Confrontation

The RBI’s strategy was simple: no confrontation; Sahara had to be convinced through discussion. The RNBC model had inherent weaknesses, according to the regulator. The RBI team had studied him well: Roy had a superb understanding of his business, but Sahara was too big to be left unscathed this time.

Gopalakrishna started the meeting with a warm welcome address and a brief on the agenda for the meeting. After that, Krishnamurthy took over.

A 1981 batch RBI officer, Krishnamurthy had closely worked with Bimal Jalan when the latter had been the RBI governor, and with Reddy when he had been deputy governor, on exchange rates for successive years: first, during the Asian financial crisis of 1997; then in 1998 when the US imposed economic sanctions on India after the Bharatiya Janata Party-ruled government conducted a series of underground nuclear tests; and, finally, during the Kargil war with Pakistan in 1999. He had been sent to Oman on deputation in 2003–2004 to advise the local central bank on reserve management.

After a small stint in the RBI’s Bangalore office, the tall, dark and shy Krishnamurthy was transferred to Mumbai to oversee DNBS in June 2005, replacing OP Agarwal, who was made regional director in Jammu.

“You are free to ask any question you wish and we will respond,” Krishnamurthy told the Sahara team. Roy was anxious, but he gave no sign of losing his calm even though it was not easy to give up a `20,000-crore empire.

Throughout the meeting, Krishnamurthy harped on the same point: in the absence of a rectification of its operations, the RBI couldn’t allow Sahara to grow. He appealed to Roy: “Sir, please cooperate with us. We are not comfortable with the RNBC model. Please convert it into a non-banking finance company. Please stop taking fresh deposits.”

Unlike NBFCs, which are required to follow many regulations in terms of raising and investing money, RNBCs enjoyed too much freedom. Apart from the capital adequacy ratio that does not allow NBFCs unbridled asset creation without an adequate capital base, these financial intermediaries also need to follow norms on deposit mobilization as well as on giving loans to firms. For RNBCs, created by an RBI directive in 1987, the regulatory tools were capital adequacy ratio and the investment norms. Till March 2005, an RNBC needed to invest 80% of money raised in government bonds and other securities approved by the RBI. In April 2005, the limit for such investments was raised to 90% and a year later, to 100%. The capital adequacy ratio was 12%. This means, for creating assets worth Rs100, an RNBC needed a capital of Rs12.

Krishnamurthy recognized Roy’s role in building a big RNBC, was extremely polite and made Roy feel he would be doing the regulator a big favour by closing his RNBC. But Krishnamurthy was firm on one count — the RBI had nothing to do with the employees and the agents of Sahara; the regulator’s only concern was Sahara’s depositors.

The RBI team counselled Roy, cajoled him, and when nothing worked, started appealing: “Sir, please give up the business.”

Roy knew he had little choice, but was ready to fight for every penny. Since Peerless was given four years to stop taking fresh deposits, and Sahara had grown to be much bigger than Peerless, it must be given at least five years, Roy argued.

The RBI was willing to give him a three-year window for deposit-taking, till June 2010, and wanted Sahara to close shop in five years, by 2015.

“Sir, you are a business tycoon and the economy can’t flourish without you... It’s a very small adjustment for you,” Krishnamurthy told Roy. But the deadlock could not be broken at the first meeting. That the RBI didn’t care much about Roy’s 1.1 million workforce was pretty evident and it was also certain that Sahara would have to close down its RNBC, but they bargained hard on the time frame for doing this.

The RBI also did not want to project itself as a regulator in a hurry to force its decision down Sahara’s throat. It wanted to come to a decision through discussion, even though it was firm on the final outcome of the meeting. So, the RBI team told Roy to discuss matters with his people over the weekend and assemble again the following Monday, 16th June, at 3pm.

On that day, when the RBI governor, Reddy, finally left his office at 9pm, there had been no progress in the matter as both sides were adamant. Leeladharstayed put in his cabin on the 18th floor. Wily Reddy knew that Roy was trapped, and it was a matter of time before he accepted the RBI’s roadmap for winding down Sahara. He dropped a subtle hint while leaving office that the three-year time frame could be stretched to four, but no further concessions could be given to Sahara, even if that meant a no-deal.

Roy’s team took intermittent breaks to discuss their strategy in an adjacent room. Tea and coffee were served every half an hour and there were cookies. Roy was keen to continue taking deposits and close shop after seven years, but he had to succumb to the RBI’s pressure. At around 11pm, Roy signed on the closure deal. He was given four years — the same time frame that Peerless had been given. A small victory for Roy.

However, it was a technical victory. Although Sahara was allowed deposit-taking activities for four years, till June 2011, it had a really three-year window for all practical purposes. This was because the minimum maturity for deposits raised by an RNBC was one year. Since it was decided that no fresh deposits would mature beyond June 2011, Sahara could effectively take deposits only till June 2010.

It was also decided that the last deposit would mature in 2015, when Sahara had to close shop. So, the maximum-maturity, seven-year deposits could not be taken after 2008.

Once Roy gave his nod to the scheme, the RBI team felt like a tiger that had just tasted blood but it could not roar as the job was only half-finished. The next step was recasting the Sahara board and changing the auditors. Roy was agitated. The RBI knew it did not have the power to do this and that it had to convince Roy to do this on his own, saying it would enhance his credibility.

You Are the Sector

As was his wont, Krishnamurthy told Roy, “Sir, you are the sector. We are trying to get you more credibility... We won’t force you. You will do it voluntarily... You give us the names (of directors).”

For once, Roy turned emotional. Once the board was reconstituted, what would he be left with?

Like the Sahara team, the RBI team was also taking breaks to discuss the developments and strategies. Krishnamurthy left the meeting for a few minutes, took the lift and went to the 18th floor where Leeladhar was waiting patiently.

When Krishnamurthy returned, the final outlines were discussed and both teams drafted a note on plain paper on the changes to be made in the Sahara board and its auditors. Roy was requested to write down everything on a Sahara letterhead and bring it back the next day. Only after that would the RBI issue a press release. Roy agreed to send the note, but bargained hard to extract a promise from the RBI team that the statement would say that Sahara had volunteered the changes.

In retrospect, it was a model discussion for both the RBI and Sahara — their teams fought hard on virtually every point, but in the end they settled it amicably. The RBI established the regulator’s supremacy with dignity and Roy gave up his empire with a smile.

(Courtesy Jaico Publishing House)

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