Investment Fraud: The Case of Sahara India Pariwar*

Investment Fraud: The Case of Sahara India Pariwar

In 2008, Mr. Subrata Roy, the Chairman of Sahara India who once believed to be one of the most influential business magnates in India1 was accused of duping investors, non-compliance of regulatory provisions and contentious financial practices. Being a high profile case and given its complexities, Sahara India investor fraud case is one of the biggest investment fraud cases of the decade. Is it mostly the CEO and the top management who are involved in such fraudulent activities? What made the Sahara Chief resort to such fraudulent behaviour? Does effective monitoring help in detecting and curbing investment fraud? What are the end results or consequences of such fraud?

Sahara India Investment Fraud – A Brief Outline

After the RBI barred Sahara India Financial Corporation from raising funds from the public in 2008, to keep its operations going, the group floated two companies, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHIC). The two companies raised funds from more than 3 crores investors by issuing Optionally Fully Convertible Debentures (OFCDs) of over INR 24000 crores. The illegal money raising issue came to light when Sahara group filed a red herring prospectus with Securities and Exchange Board of India (SEBI) to raise money from the public in the secondary capital market. Also, several investors’ complaints prompted SEBI to investigate into the financial matters of Sahara India leading to the unfolding of the facts that the organization has been flouting several compliance norms for years...................

The CRIME Model

The CRIME model suggests the five interactive factors which determine the causes and consequences of investment fraud in the corporate world. The model states that the interactive forces of cooks, recipes, incentives, monitoring/lack of it can help in increasing the occurrence of investment fraud. It also highlights the consequences associated with investment fraud on the organization and the economy..............

Analyzing the Sahara India Investor Fraud Case

In this section, the Sahara India case is analyzed through the CRIME model. The causes and consequences of the investment fraud case are determined with the help of the five factors of the model........

i) The Cooks

The main accused in the fraud case is the Chairman and founder of the company, Mr. Subrata Roy and the directors of the company...............

ii) The Recipes

The recipes here include raising deposits from the investors by duping them and promising high returns, manipulation of the assets of the company and diversion of funds.............

iii) The Incentives

Financial and economic pressures were the two main incentives for Sahara India to engage in fraudulent activities.........

iv) Monitoring

This case throws a light on both the effectiveness of efficient monitoring and the lack of it. On one hand, it shows the efforts of SEBI to detect and book fraudulent activities in the market..........

v) End Results or Consequences

The end results of the investors’ fraud carried out by Sahara India over years is massive. The investors were duped of INR24000 crore. The positive consequences with the Sahara fraud case coming to light and the role of the regulatory authority..................

Potential Measures of Curbing Investment Fraud

The study provides a useful insight into the causes and consequences of investment fraud through the case of Sahara India. The data collected from secondary sources is analyzed by using the CRIME model which states the interactive forces which induces investment fraud and the consequences thereof. The case study further confirms that it is mostly the senior management of the organization involved in the fraudulent behaviour...........

Assignment Questions

I. What are the factors inducing fraud and what are the consequences thereof? What encourages the senior management to engage in such activities?
II................

Exhibits

Exhibit I: People Engaging in Fraudulent Activities in an Organization (%)

Investment Fraud: The Case of Sahara India Pariwar

Synopsis

The premise of this case study is to enable a discussion on the interactive factors which induce investment fraud in an organization and the consequences of such activities are identified through the analysis of the Sahara India’s investment fraud using the CRIME model. Unfortunately, it is predominantly the senior management, due to economic pressures and individual’s ideologies, are engaging in duping investors, misappropriating assets and breaching regulatory laws. The lack of adequate monitoring further encourages such activities leading to the investors losing money as well as faith in the economy.

Prerequisite Conceptual Understandings (PCUs)/Before the Classroom Discussion

The students/participants are encouraged to read the following before the class to get a better understanding of the case and ensure a productive discussion:

• Newspaper articles from Financial Newspapers like The Economic Times, Business Standard, related to the Sahara India case.
• Background of Sahara India conglomerate.
• A brief background of SEBI and its powers.

Case Positioning and Setting

This case study can be helpful for MBA, Executive MBA, Chartered Accountant Programs. It can also be used in Financial Reporting, Forensic Accounting and Business Analytics courses. The case forms an introductory base for participants studying forensic accounting and data analytics techniques to detect fraud. For chartered accountant courses, the study gives a fair idea of the importance of quality audit. For the MBA participants, this study might help them to understand the value of corporate governance and the ethical aspects of business.

Assignment Questions

I. What are the factors inducing fraud and what are the consequences thereof? What encourages the senior management to engage in such activities?
II...........

Preamble

This case study sensitizes the students/participants regarding the factors which might induce fraudulent activities and the end results of such acts through the CRIME model. Fraud includes any intentional attempt by any corporate to deceive or mislead users of published financial statement, specially the investors. In the past decade, corporate frauds are on a rise in India which is detrimental to the investment climate and economic growth in the country. Keeping in mind the current scenario, this case study helps in exploring the interactive factors which might influence investment fraud by corporates.........