The RBI has prohibited Sahara India Financial Corp. Ltd from accepting public deposits with immediate effect for violating its guidelines

The Reserve Bank of India (RBI) on Wednesday prohibited Sahara India Financial Corp. Ltd, the countrys largest residuary non-banking finance company (RNBC), from accepting public deposits with immediate effect for violating its guidelines.

Sahara India Financial, part of the influential Sahara group, has threatened to take RBI to court.

The company had a deposit liability of close to Rs20,000 crore at the end of 2006-07. It is not a listed entity and its latest financials are not available.

The banking regulator had earlier asked the RNBC to call back all investments in various group firms to comply, in stages, with investment guidelines governing such companies.

Under the law, an RNBC is required to invest all its deposits in government bonds, deposits in other banks and corporate bonds with ratings of double A+ (AA+) and above.

RBI fiat: Sahara India Pariwar chief Subrata Roy.

RBI fiat: Sahara India Pariwar chief Subrata Roy.

A release by RBI issued late on Wednesday said the firm has been prohibited from accepting public deposits from any person in any form whether by way of fresh deposits or renewal of the deposits or otherwise.

Abhijet Sarckar, head of corporate communications, Sahara India Financial, said in a faxed statement the company had approached the RBI and requested for a time limit governing the changes. However, without giving due consideration to the demand regarding the time limit, RBI has passed an order...stopping the acceptance of deposits in a most vindictive and arbitrary manner and not in conformity with provisions contained in RBI Acts inasmuch as the order completely ignores the interest of the depositors and has been passed in a most premeditated and vindictive manner.

He said the order is legally unsound and is wanting in prudence and application of mind ... and that the company has proposed legal proceedings at a very early date.

He also stated that depositors would face no inconvenience and their deposits would be fully reimbursed on maturity. The company, Sarckar said, was functioning in total compliance with the rules and regulations. He added that the RBI ruling would not affect the groups other businesses.

According to RBI, Sahara continuously?violated investment norms; payment of prescribed minimum rate of interest to depositors; asset-liability management guidelines; know your customers norms for opening deposits; and failed to intimate depositors while their deposits matured. RBI said it prohibited Sahara India Financial from accepting deposits to protect the interests of depositors.

It had first issued a show-cause notice to the company and followed it up with a personal hearing and written submission. It passed the order after carefully examining the submissions.

The banking regulator has directed Sahara India Financial to repay the deposits at an agreed rate of interest as and when they mature. The firm cannot treat any non-payment of instalments (by depositors) as default.

Sahara is, however, allowed to carry on its other business activities, the RBI release said.

Sahara India Financial had an equity of Rs93.03 crore, preference capital of Rs300 crore, and reserves and surplus of Rs313.84 crore on 31 March 2006.

It has been under the scanner of the income-tax department for some time. The department treats part of Saharas deposits as undisclosed income of the company. Its 2005-06 balance sheet mentions a disputed income-tax demand of Rs1,945.01 crore.

The banking regulator has progressively tightened the investment norms for RNBCs to reduce overall systemic risk in the financial sector.

Apart from Sahara, there are two more RNBCs, including the Kolkata-based Peerless General Finance and Investment Co., that are subject to the same regulations. However, both of them are smaller than Sahara.

In 2004-05, RBI allowed these companies 20% of their deposits for discretionary investments; this was reduced to 10% in 2005-06 and 5% in 2006-07.

From 1 April 2007, RNBCs could not make any discretionary investment.

RBI had, three years ago, appointed audit firm KMPG to conduct a special audit on Sahara India Financials books. The findings of the audit are not known as the banking regulator never made them public. The Sahara group has interests in businesses such as finance, entertainment, real estate and media, and publishes a Hindi-language paper that competes in some markets with Hindustan, published by HT Media Ltd, which also publishes Mint.