India’s Sahara Group would appear to be the envy of the hotel industry after its recent acquisition of the iconic Plaza Hotel and the Dream in New York City. But in reality it’s facing a $5 billion nightmare in India.
In 2008, the company raised over $4.8 billion from about 30 million small investors living mostly in rural parts of the country. Investees were given “optionally fully convertible debentures.” But when the capital-markets regulator, SEBI, investigated and discovered that the money was raised in violation of its rules, it ordered Sahara to refund this money along with 15% interest on it to investors. Sahara challenged the order in the Supreme Court. In August, the court passed an order asking Sahara to refund the money by Sept. 10. In addition to the money, the court ordered Sahara to provide documentation relating to its investors by Sept. 10. Sahara claims it sent a truckload of documents, but Sebi did not accept it. Sebi claims the truck arrived after close of business on Sept. 10 and filed a contempt of court notice.
For the last few months Sahara has been releasing large advertisements in all Indian newspapers clarifying its stance and reassuring investors that their money would be returned to them. However, it is not getting any sympathy either from the market watchdog or from the apex court. The dispute over whether Sahara’s first truckload of documents reached Sebi’s offices within the deadline set by the court or not managed to buy the company more time, but its payday will be in a couple of weeks from now. On Dec. 5, the court asked the company to deposit $1.02 billion and pay the remaining in two installments over the next three months. If Sahara fails to eventually comply with the orders, Sebi can attach the assets and freeze the bank accounts of its companies.
With its bill of over $5.5 billion to be paid to investors over the next three months, it is unclear how Sahara plans to fund its acquisitions of Plaza and Dream. It is likely to take on debt to cover the $800 million due—its bill for The Plaza Hotel is $575 million and for the Dream New York is $220 million.
Sahara Group, a largely privately-held real estate to retail conglomerate (its media division and housing finance company are listed on the stock exchange), started off as a financial services company. The company’s founder, Subroto Roy, refers to himself as Sahara’s Managing Worker and Chairman. The group shot into national prominence when the company took on the sponsorship of the Indian cricket team. Recently, it also acquired an equal stake in India’s Formula 1 team, Force India, after its beleaguered owner, Vijay Mallya of the Kingfisher Group, was forced to sell in order to raise funds.
This isn’t the first time that Sahara has battled a reputation for dubious behavior. In 2010, the group tried to raise funds through an IPO for Sahara Prime City, a housing company, but investor complaints and several inconsistencies in the draft prospectus made the company abandon its plans. What’s more, the company has swooped in and bought several distressed assets, and has a significant land bank, but very little is known about its source of funds and its inner workings.
Yet none of its worries about repaying billions of dollars will come in the way of Sahara’s game of real estate monopoly around the world. Sahara acquired London’s iconic hotel, Grosvenor House at Mayfair, in 2010 for $726 million. The deal was reported in the Indian media at the time as one that signified the resurgence of India after a couple of centuries under imperial rule. In March last year, the group hosted a ceremony in which Roy hoisted the Indian flag. Three Indian flags now flutter daily at the hotel. The Times of London lamented that the historic Great Room will be used for Bollywood style weddings.
In the long term, Sahara’s US acquisitions are likely to reap dividends since the prospects for the hospitality industry in the US are optimistic, according to PricewaterhouseCoopers. The firm predicts 6.5% growth in revenue per available room in the US in 2012. This growth will be led by the higher price segment (pdf), which both of Sahara’s new properties occupy.
Soon, Sahara will have to come up with the money. If it finds a way out of its $5 billion liability, it’s likely to celebrate it with a grand flag hoisting in New York.