> Posted by Hemang Mandalia, Software Engineer, Investment Banking, Credit Suisse

The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

This is the third in a series of several posts from this year’s Credit Suisse Virtual Volunteers, where research and insights across a variety of financial inclusion areas will be shared.

This brief tale begins with an investment scheme from a corporation called Sahara that claimed to seek “financial inclusion” through investments from the unbanked, but at the same time sought regulatory exclusion for its practices. Sahara provided investment opportunities to the rural nooks and corners of India that were overlooked by most major banks – but it is alleged to have falsified records and subverted Indian regulations.

Sahara India Pariwar is an enormous Indian conglomerate with headquarters in Lucknow, Uttar Pradesh. Its diversified business has interests in finance, infrastructure and housing, media, entertainment, retail, manufacturing, and information technology. Sahara has also been the main sponsor of the Indian national cricket team for several years, cricket being so popular it is often referred to as a religion. The link to cricket has helped Sahara establish itself as a household name.

Sahara’s financial services companies are said to have 100 million depositors and investors in villages and small towns, often from rural unbanked areas. As for the group’s investment products, Subrata Roy Sahara, chairman of Sahara, indicates they serve small investors who are outside the banking system.

In 2008, Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, two firms owned by Sahara, began to offer optionally fully convertible debentures (OFCDs) to small investors promising attractive interest rates. OFCDs are similar to bonds, except there is the possibility that they will be converted into equity shares in the company. The model operated through almost a million agents, who could be local grocers, milk producers, village authorities, etc. The agents visited individual households to sign up and collect payments from new investors. With such an impressive agent network, the two firms are estimated to have attracted almost 30 million investors and raised around $3 billion dollars.

This model became very popular, for several reasons. Many customers came from unbanked parts of the country and they had no previous opportunity to invest. The agent network offered great convenience. And Sahara’s brand popularity added a level of familiarity and trust.

But this scheme also caught the attention of regulators and courts, which determined that it was designed to bypass the regulatory and administrative authority of the Securities Exchange Board of India (SEBI), the body that works to protect investor interests in securities. The company has also been faulted for its lack of transparency on terms, source, and use of its funds, especially given that it works with new investors who may be unfamiliar with OFCDs. Additionally, the Supreme Court of India while looking into investor records found several listed clients to be nonexistent and determined Sahara’s record-keeping to be less than diligent.

For its part, Sahara claims that the work of the two companies remains outside of any regulation because they are not listed on the stock exchange, and says “Not a single complaint is there from investors in all these years.” What’s more, the company asserts that every rupee they have accepted in the last 33 years has been against receipt from the company and with an application form signed by its depositors and investors.

SEBI has directed Sahara to refund all money collected in this scheme with 15 percent annual interest, along with all documents including subscriber application forms, to SEBI, who is then responsible for the transferring of the refund and interest to investors. The Supreme Court of India has upheld this ruling.

The actions from SEBI and the Supreme Court of India have been appropriate. However, the regulators and government authorities did not take action on Sahara until well after it became a huge mammoth that posed a potential threat to the economy. Since the amount of money and number of investors involved in this matter is very large, in this unregulated scheme default or mismanagement could have a significant impact on the lives of millions of investors, many of which are among the bottom of the pyramid, and ultimately on India’s economy. While one may debate Sahara’s culpability, it’s very important for authorities to keep investor interests paramount and appropriately regulate services, especially when the level of funding and number of investors exceed a certain threshold. Investor education – ensuring that these new investors understand their investments – is another crucial aspect, which must be maintained while pursuing growth of banking services to the last corner of the country.

While Sahara created a compelling model – leveraging a strong brand, creating an effective network of agents, providing convenience, and accepting small investments – any player in the microfinance space should ensure active compliance with all regulatory authorities and an appropriate level of transparency. Sahara stands as a cautionary tale that demonstrates both the potential of rural unbanked communities, and the pitfalls.

For more information on Financial Inclusion 2020, sign up for project updates.

Hemang Mandalia has worked with Credit Suisse since early 2010 developing algorithmic trading systems, and also working in quantitative research. Prior to joining Credit Suisse Mr. Mandalia was working with Ericsson on telecom consumer behavior discovery using machine learning. He holds a Masters in Computer Science and Engineering from Indian Institute of Technology (IIT) Madras.

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