2016 (3) TMI 835 - AT - Companies Law

Tribunal upholds SEBI's decision on unregistered Collective Investment Schemes, grants extension for refund

Royal Twinkle Star Club Private Ltd. and Others Versus Securities and Exchange Board of India

The tribunal upheld SEBI's decision that the appellant's schemes constituted Collective Investment Schemes (CIS) and were operated without registration. ... Invalid CIS scheme - non seeking registration with SEBI - collection of subscription amount after the ex-parte interim order - refund to investors - Held that:- While upholding the decision of SEBI that the Appellants have floated and operated CIS without registering with SEBI and hence in violation of CIS Regulations, since the schemes are closed by the Appellants voluntarily and substantial amount is refunded to the investors, we grant extension of two years time from the date of this order to the Appellants to enable them to pay the balance amount refundable to the investors. Looking to the conduct of the Appellants before and after 31/3/2012 which is fair, we restrict the debarment imposed against the directors from the date of the impugned order i.e. from 21st August, 2015 till the date of present order. Issues Involved:1. Whether the business activities of the appellant constituted Collective Investment Schemes (CIS) under Section 11A of the SEBI Act, 1992.2. Whether the SEBI's investigation and subsequent actions were justified.3. Whether the principles of natural justice were violated in the issuance of the show-cause notice.4. Appropriateness of the penalties imposed, including the debarment from accessing the securities market.5. Time extension for the appellant to refund the money to the investors.Issue-wise Detailed Analysis:1. Whether the business activities of the appellant constituted Collective Investment Schemes (CIS) under Section 11A of the SEBI Act, 1992:The appellant, Royal Twinkle Star Club Private Ltd. (RTSCL), engaged in selling holiday plans, including refundable and non-refundable schemes. SEBI received complaints alleging that RTSCL was operating CIS without registration under CIS Regulations. SEBI's investigation concluded that RTSCL's activities fell under the definition of CIS as per Section 11A(2) of the SEBI Act, 1992. Despite the appellant's argument that their business did not constitute CIS and was merely selling a product, the tribunal upheld SEBI's decision, noting that the schemes had characteristics of CIS, especially the refundable schemes where customers were repaid with additional monetary benefits if they did not avail the holiday plan.2. Whether the SEBI's investigation and subsequent actions were justified:SEBI initiated an investigation based on complaints and issued a letter to RTSCL seeking information. Despite RTSCL's contention that they were beyond SEBI's purview as an unlisted company, SEBI proceeded with the investigation. The Ministry of Corporate Affairs had also conducted an inspection but found no fraud. SEBI's order dated 7/3/2014 directed RTSCL to cease collecting money and wind up the schemes. The tribunal found SEBI's actions justified in determining the nature of RTSCL's business and issuing necessary directions to protect investors.3. Whether the principles of natural justice were violated in the issuance of the show-cause notice:The appellant argued that the show-cause notice did not mention the specific penalty of debarment from accessing the securities market, violating the principles of natural justice as established in Gorkha Security Services Ltd. v. Government (NCT of Delhi). The tribunal acknowledged this argument, noting that the show-cause notice should have specified the proposed action of debarment. However, the tribunal also considered the appellant's cessation of enrolling new members since 31/3/2012 and the directors' compliance with SEBI's directions.4. Appropriateness of the penalties imposed, including the debarment from accessing the securities market:The tribunal noted that the directors of RTSCL were debarred from accessing the securities market for four years, a penalty not explicitly mentioned in the show-cause notice. Considering the cessation of new enrollments and the directors' compliance, the tribunal found the debarment period excessive. The tribunal restricted the debarment to the period from the impugned order's date (21st August 2015) to the present order's date.5. Time extension for the appellant to refund the money to the investors:The tribunal acknowledged RTSCL's efforts to refund the money collected from investors and noted that substantial amounts had already been refunded. Considering the remaining contractual liability and the appellant's assets, the tribunal granted a 24-month extension for RTSCL to repay the remaining amount to investors. During this period, RTSCL was allowed to continue receiving EMIs from willing members and was restricted from encumbering or disposing of assets except for making refunds or running routine business.Conclusion:The tribunal upheld SEBI's decision that RTSCL's schemes constituted CIS and were operated without registration, violating CIS Regulations. However, considering the cessation of new enrollments and substantial refunds made, the tribunal granted a two-year extension for repaying the remaining investors and restricted the debarment period to the date of the present order. Both appeals were disposed of with no order as to costs.