2020 (7) TMI 60 - SC - SEBI

Supreme Court affirms SEBI's CIS classification for Yatra Art Fund Trusts, orders refund compliance

Osians Connoisseurs of Art (P.) Ltd. Versus Securities and Exchange Board of India

The Supreme Court upheld SEBI's classification of the Yatra Art Fund Trusts as Collective Investment Schemes (CIS) and mandated compliance with SEBI's ... Collective Investment Schemes - show cause as to why the Yatra Art Fund should not register itself with SEBI in the prescribed corporate form, as otherwise the collective investment scheme carried out by the Trust would be illegal - SCN also mentioned that all amounts collected should be refunded within a period of 30 days from the said show cause notice - HELD THAT:- The statutory scheme is that, if a collective investment scheme, as defined, is to be floated by a person, it could only be done in the form of a collective investment management company and in no other form. This is the reason why Section 11AA uses the expression 'company' in sub-Section (2) and not the word 'person' (as the CIS Regulations of 1999 had come into force on 15-10-1999; Section 11AA being enacted and coming into force on 22-2-2000). Once the statutory scheme becomes clear, it is clear that the collective investment scheme that was being carried on by the appellants in the form of a private Trust would be in the teeth of the Statute read with the CIS Regulations and would thus be illegal. This being the case, it is difficult to upset any part of SEBI's order that remains after the penultimate part of the order was set aside by the Appellate Tribunal. This litigation has been going on for an extremely long period of time and instead of remanding the matter to SEBI to decide the refund issue afresh, we order as follows: The principal amount repayable to each investor of both the Schemes shall be paid back within a period of six months from today in the following manner: We are informed that so far as the first Fund is concerned, 81.32 per cent of the total principal sum of ₹ 10.95 crores has been repaid. Insofar as Fund No. 2 is concerned, we have been informed that 50 per cent of the principal amount of ₹ 21.92 crores has been repaid. The balance owing to the 50 investors of Fund No. 1 and to the 132 investors of Fund No. 2 be therefore, repaid within six months from the date of this judgment. So far as the interest at the rate of 10 per cent is concerned, this amount will be paid on the principal outstanding amount from the date on which it becomes due to each such member, till the date on which each Fund came to an end, i.e., insofar as Fund No. 1 is concerned till 15-9-2011 and so far as Fund No. 2 is concerned till 31-1-2012. The aforesaid interest shall be paid within nine months from the date of this judgment. Once the amounts are actually paid within the time period specified, compliance report be filed with SEBI in this behalf. Issues Involved:1. Classification of the Yatra Art Fund Trusts as Collective Investment Schemes (CIS).2. Applicability of SEBI regulations to the Trusts.3. Compliance with SEBI's directives.4. Refund of monies collected from investors.5. Jurisdiction of SEBI over non-corporate entities.Issue-wise Detailed Analysis:1. Classification of the Yatra Art Fund Trusts as Collective Investment Schemes (CIS):The primary issue was whether the Yatra Art Fund Trusts (Fund I and Fund II) constituted Collective Investment Schemes under the SEBI Act. SEBI initially informed the trustees that the Funds needed to register as CIS. The appellants denied this classification, arguing that their activities did not amount to CIS. However, SEBI issued a Show Cause Notice, leading to a determination that the Funds were indeed CIS. The Supreme Court upheld SEBI's and the Appellate Tribunal's concurrent findings, stating, 'it would not be possible to state that the Schemes in the present case would not be Collective Investment Schemes.'2. Applicability of SEBI Regulations to the Trusts:The appellants contended that since they operated as a Trust and not a company, SEBI regulations did not apply to them. They argued that Section 11AA of the SEBI Act uses the term 'company' and not 'person.' The Supreme Court dismissed this argument, clarifying that Section 12(1B) of the SEBI Act uses the term 'person,' and the CIS Regulations define a 'Collective Investment Management Company' as a company that manages CIS. The Court concluded, 'if a collective investment scheme, as defined, is to be floated by a person, it could only be done in the form of a collective investment management company and in no other form.'3. Compliance with SEBI's Directives:SEBI's order directed the Yatra Art Fund to stop collecting money, refund the collected amounts with 10% interest per annum, and submit a winding-up report. The Appellate Tribunal modified this order, setting aside the directives to register civil/criminal cases and initiate attachment and recovery proceedings but upheld the refund directive. The Supreme Court found no reason to interfere with SEBI's remaining order, emphasizing the statutory scheme's clarity.4. Refund of Monies Collected from Investors:The Supreme Court ordered the appellants to refund the principal amounts to investors within six months and the interest within nine months. The Court noted that 81.32% of the principal for Fund I and 50% for Fund II had already been repaid. The balance amounts were to be repaid within the stipulated periods, with compliance reports to be filed with SEBI. The judgment stated, 'The balance owing to the 50 investors of Fund No. 1 and to the 132 investors of Fund No. 2 be therefore, repaid within six months from the date of this judgment.'5. Jurisdiction of SEBI over Non-Corporate Entities:The appellants argued that SEBI's jurisdiction did not extend to Trusts. The Supreme Court rejected this, highlighting that the statutory scheme required CIS to be managed by a company, making the appellants' Trust-based operations illegal. The Court concluded, 'Once the statutory scheme becomes clear, it is clear that the collective investment scheme that was being carried on by the appellants in the form of a private Trust would be in the teeth of the Statute read with the CIS Regulations and would thus be illegal.'Conclusion:The Supreme Court upheld SEBI's classification of the Yatra Art Fund Trusts as CIS and mandated compliance with SEBI's refund directives. The appellants were ordered to repay the remaining principal and interest to investors within specified periods, reinforcing SEBI's regulatory authority over collective investment schemes, regardless of their organizational form. The appeal was disposed of accordingly.