* Must also pay 15 pct annual interest within 3 months
* Court upholds regulatory order on rules violation
* Sahara says complied with rules, assures investors (Adds Sahara statement in paragraph 5 and 6)
By Suchitra Mohanty and Devidutta Tripathy
NEW DELHI, Aug 31 Unlisted conglomerate Sahara, one of India's biggest groups and a household name through its cricket sponsorship, must refund 174 billion rupees ($3.1 billion) raised by "dubious" means from 22 million small investors, India's top court has ruled.
Friday's judgment underscored an increasing assertiveness by India's judiciary and regulators as businesses and financial markets expand at a fast pace in Asia's third-largest economy.
K.S. Radhakrishnan, one of the two judges ruling on the case, said in his order that the ruling demonstrated the need to treat economic offences "with an iron hand".
The sting in the judgment's tail was that Sahara must also pay investors - mostly from smaller towns and rural areas where banking penetration is low - interest at 15 percent from the day money was paid in.
The group, which has interests ranging from financial services and housing to media and sports, said late on Friday it had complied with rules for such fund-raising, and assured investors that it was "healthy" enough to honour its payment obligations in time.
"Here we want to inform all our Hon'ble Depositors and investors that you need not worry about anything and be at absolute peace...," Sahara said in a statement.
"It is a landmark judgment given by the Supreme Court today which gives a lot of protection to investors," P. Venugopal, a lawyer representing India's market regulator, told Reuters.
The Supreme Court, whose order reaffirmed an earlier ruling that the fundraising did not meet rules, ordered two unlisted Sahara group firms to refund money they had raised with the interest within three months.
From 2008-11, they received 174 billion rupees through what is known as an optionally fully convertible debentures.
The markets regulator, the Securities Exchange Board of India, last year ordered the two Sahara firms to return investors their money after it found the fundraising process did not comply with regulations. An appellate tribunal subsequently upheld SEBI's order.
Sahara said the fund-raising was a private placement not governed by rules for public issues. SEBI rejected this, saying a private placement should be limited to 50 investors. Sahara then appealed the order at the Supreme Court.
Founded by Subrata Roy Sahara, Sahara has been the sponsor of the Indian cricket team for more than a decade. It also sponsors the country's field-hockey team and owns a stake in Formula One auto racing team, Force India.
Last month, Sahara agreed to buy a controlling stake in New York's landmark Plaza Hotel for $570 million. It also owns London's Grosvenor House Hotel.
Sahara firms offered seemingly lucrative bonds to investors, promising, in some cases, to return three times the face value after a period of 10 years.
They collected money "without any sense of responsibility to maintain records", Jagdish Singh Khehar, the other judge on the case, said in his order.
"One is compelled to record that the whole affair seems to be doubtful, dubious and questionable," he said, adding financial transactions were not the same as the transactions made with a street hawker or roadside cigarette seller.
Consumer activists have campaigned for months against what many saw as a fundraising scheme that took unsuspecting investors' money.
"They see Sahara on television everyday as sponsor of the cricket team and that leads them to believe that this is the best company," said a spokesman for the Investors and Consumers Guidance Cell, one of the activist groups. ($1 = 55.6150 rupees) (Additional reporting by Anurag Kotoky; Writing by Devidutta Tripathy; Editing by Dan Lalor, John Chalmers and Tim Dobbyn)