SEBI finds HBN in violation of CIS regulations, orders wind-up, refund to investors

The Securities and Exchange Board of India (SEBI) found that HBN was operating a Collective Investment Scheme (CIS) without registration, violating SEBI Act and CIS Regulations. SEBI directed HBN to wind up the CIS, refund investors by a specified date, and comply with repayment procedures. HBN and its directors were prohibited from fund collection, market access, and asset disposal. Non-compliance would lead to extended restraints, law enforcement involvement, and asset recovery measures by SEBI. SEBI reserved the right to initiate further proceedings under SEBI Act and CIS Regulations if necessary.

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Issues Involved:
1. Whether HBN is operating a Collective Investment Scheme (CIS) without obtaining registration from SEBI.
2. Whether HBN has failed to repay the investors as per the approved detailed procedure.

Issue-wise Detailed Analysis:

1. Whether HBN is operating a CIS without obtaining registration from SEBI:

a. SEBI's Investigation and HBN's Response:
SEBI received a complaint alleging that HBN was illegally mobilizing funds from the public. SEBI advised HBN to submit various documents to ascertain whether it was operating a CIS. Instead of complying, HBN applied for CIS registration and later withdrew the application, claiming it did not wish to initiate CIS activities.

b. Examination of HBN's Schemes:
SEBI examined HBN's schemes, which involved public participation in dairy farming through joint ventures. The schemes promised assured returns and included clauses for accidental death compensation. The plans were categorized into lump sum and installment payment schemes, with specific terms and conditions.

c. Legal Framework:
Section 11AA of the SEBI Act defines a CIS and sets conditions for such schemes. SEBI's investigation found that HBN's schemes met all four conditions of a CIS: pooling of investor contributions, expectation of profits, management of the scheme by HBN, and lack of day-to-day control by investors.

d. Conclusion:
SEBI concluded that HBN was operating a CIS without obtaining registration, in violation of Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations. The schemes were found to be investment schemes rather than genuine joint ventures.

2. Whether HBN has failed to repay the investors as per the approved detailed procedure:

a. SEBI's Repayment Procedure:
SEBI approved a detailed repayment procedure for HBN, which included appointing a Registrar and Share Transfer Agent (RTA), opening an escrow account, publishing advertisements, and appointing a concurrent auditor. HBN was required to deposit funds into the escrow account and repay investors in tranches.

b. HBN's Compliance and Issues:
HBN claimed to have repaid Rs. 242.17 crores to 2,36,307 investors. However, SEBI found that repayments were not made from the escrow account, and many investor complaints alleged non-payment or bounced cheques. HBN also failed to provide necessary documents and comply with the repayment procedure.

c. Investor Complaints and SEBI's Findings:
SEBI received over 1,200 complaints alleging non-payment and fraudulent practices by HBN. SEBI's investigation revealed that HBN continued to collect money from investors under a different name, HBN Foods Limited, and issued receipts accordingly.

d. Conclusion:
SEBI found that HBN failed to comply with the repayment procedure and continued to collect funds illegally. The company's claims of repayment were not substantiated, and investor complaints indicated ongoing fraudulent practices.

Judgment and Directions:

a. Prohibition on Fund Collection:
HBN and its directors/former directors are prohibited from collecting any money from investors or launching any CIS.

b. Market Restraint:
HBN and its directors/former directors are restrained from accessing the securities market and prohibited from dealing in securities for four years.

c. Winding Up and Repayment:
HBN and its directors must wind up the existing CIS and refund the money collected with returns due to investors by March 09, 2015. They must submit a winding-up and repayment report to SEBI.

d. Proof of Refunds:
HBN must provide proof, including bank statements and receipts, to support its claim of refunds to investors.

e. Asset Disposal Restriction:
HBN and its directors are prohibited from disposing of any assets except for the purpose of making refunds to investors.

f. Asset and Account Disclosure:
HBN and its directors/former directors must provide a full inventory of their assets, properties, bank accounts, demat accounts, and securities holdings.

g. Consequences of Non-Compliance:
If HBN fails to comply with the above directions by March 09, 2015, further actions will follow, including extended market restraint, references to law enforcement and regulatory authorities, and initiation of attachment and recovery proceedings by SEBI.

h. Additional Proceedings:
SEBI may consider initiating further proceedings under the SEBI Act and CIS Regulations for the contraventions found in this order.

i. Order Enforcement:
The order comes into force immediately, and copies are forwarded to stock exchanges and depositories for necessary action.

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