2019 (11) TMI 845 - AT - SEBI

SEBI upholds penalty for unregistered Collective Investment Scheme; Directors directed to pay within 30 days.

The Tribunal upheld the penalty of Rs. 25 Lakh imposed by SEBI on a company and its directors for operating a Collective Investment Scheme (CIS) without ... Collective Investment Scheme (‘CIS’) without SEBI registration - violating Section 12(1B) of the SEBI Act, 1992 and Regulation 3 of the SEBI (Collective Investment Scheme) Regulations, 1999 (‘CIS Regulations, 1999’) - Non obtaining certificate of registration for running such a scheme under SEBI Act and CIS Regulations - HELD THAT:- The appellants are in fact running a CIS. It is also an admitted fact that the appellants did not obtain a certificate of registration for running such a scheme under SEBI Act and CIS Regulations, 1999. Accordingly, the penalty imposed on the appellants cannot be faulted. The penalty imposable under Section 15(D)(a) of SEBI Act at the relevant time was ₹ 1 lakh for each day during which an entity carries on any collective investment scheme or ₹ 1 crore whichever is less. In the instant case, the appellant Company was set up in 2010 and the money collected in the form of investment in joint venture project / scheme during 2012-13 and for periods ranging from 4 to 7 years. Therefore, the Company and the scheme came into existence many years after notification of the CIS Regulations, 1999 and the schemes were flouted despite the fact that Regulations notified in the year 1999 makes it mandatory for obtaining registration from SEBI for hoisting any such a scheme. Accordingly, we do not find any anomaly in the direction to pay a penalty of ₹ 25 lakh jointly and severally by the appellants which takes into account the mitigating factors under Section 15J of SEBI Act - Appeal is dismissed. Issues:Challenge to order of Adjudicating Officer for running Collective Investment Scheme without SEBI registration.Analysis:1. The appeal challenges the order of the Adjudicating Officer (AO) of SEBI directing the appellants to pay a penalty of Rs. 25 Lakh for running a Collective Investment Scheme (CIS) without SEBI registration, violating SEBI Act, 1992 and CIS Regulations, 1999.2. The appellants, a company and its directors, collected funds from investors for a solar power project, raising concerns about the investors' active involvement in the scheme, especially those from distant states compared to the project location in Maharashtra.3. SEBI initiated proceedings after the appellants denied running a CIS, leading to an exparte order and a final order concluding their involvement in CIS without registration, challenged before the Appellate Tribunal. Despite ongoing refund processes, SEBI imposed a penalty in 2018.4. The appellant's counsel argued that joint agreements with investors indicated collective management, not a CIS. Refunds were in progress, with properties auctioned for recovery. The penalty was deemed harsh considering ongoing refund efforts under SEBI's supervision.5. SEBI contended that the penalty was justified under SEBI Act provisions, emphasizing the appellants' non-compliance despite ongoing refund processes and the penalty amount being reasonable under the circumstances.6. The Tribunal rejected the appellant's argument, stating that SEBI's parallel proceedings were lawful, as the appellants' compliance with previous orders did not negate the CIS violation. The appellants' delay in refunding investors was noted.7. The Tribunal dismissed the claim of joint management based on agreements, highlighting investors' lack of control and distant locations. The appellants' reliance on unsigned meeting minutes was deemed insufficient to prove joint management, confirming the appellants' CIS operation.8. The Tribunal referenced relevant legal provisions to establish the appellants' CIS operation, emphasizing pooling of funds, profit expectations, and management control by the company, concluding the appellants' violation of SEBI Act and CIS Regulations.9. The Tribunal reiterated the legal provisions defining CIS and the requirement for SEBI registration, emphasizing the appellants' failure to comply despite the scheme's establishment post-CIS Regulations notification.10. The Tribunal upheld the penalty of Rs. 25 Lakh, considering the appellants' violation, absence of SEBI registration, and the penalty amount's reasonableness under the law, directing the appellants to pay within 30 days.11. In conclusion, the appeal was dismissed, and the appellants were instructed to pay the penalty within the specified timeframe.