TaxTMI 
TaxTMI 
2013 (11) TMI 884
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....ad launched Collective Investment Schemes ("CISs") without obtaining any registration from the Respondent as mandated by the provisions of Section 12(1B) of the SEBI Act, 1992 and Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 ("CIS Regulations"). With the consent of learned senior counsel for both the parties, the two appeals are taken up for final hearing and are heard together. Accordingly, both the appeals are being disposed of by the present order. Appeal No. 124 of 2013:- 2. Appellant No. 1 is stated to be a public limited company carrying on business of development of high quality infrastructure and real estate in and around India, while Appellant No. 2 and 3 are its Directors and all three Appellants have their registered office in New Delhi. Appellant No. 1 was incorporated on April 2, 2002 and it commenced business within a week of its incorporation but is not listed on any Stock Exchange. 3. The case of Appellant No. 1 is that it is not dealing in any "securities" as defined under the SEBI Act, 1992 or Securities Contracts (Regulation) Act, 1956 ("SCRA"). Appellant No. 1, therefore, submits that it is not connected with the securities....
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....during the development period the purchaser is stated to be the absolute legal owner of the land if the land cannot be developed due to any unforeseen reason, the tenure of the 'Supervision Agreement' can be flexibly extended, but this factum alone does not in any way dilutes the title of the owner of the piece of land. 6. It is also one of the submissions of Appellant No. 1 that land sold by it to various buyers is acquired by Appellant No.1 from its own resources. Appellant No. 1 supervises and develops the land sold to buyers when the latter express a desire to that effect. Such a practice is stated to be common in the real estate sector and it results in achieving benefits of economies of scale. 7. Further, Appellant No. 1 submits that the amount of money received by it from various buyers of land is classified as consideration against 'stock in trade' and not as deposits received from the general public or loan or borrowing from creditors. Thus, the submission is that it is purely a case of transaction of sale and purchase of land and no more. By no stretch of the imagination can it be termed as a Collective Investment Scheme since none of the four ingredients specified ....
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....; (b) In the case of PGF, the company continued to retain absolute control over the land, whereas, Appellant No. 1 develops, works and supervises the land in terms of a Supervision Agreement entered into by and between Appellant No. 1 and its customers / clients, which is not compulsorily renewed and upon the expiry of the same, the customers/clients have complete control over the land; (c) In the case of PGF, sample agreement does not disclose how much would be the cost of the land and how much money would be spent on development, whereas, in case of Appellant No. 1 where is a separate agreement for working, development and supervision of land; amount paid for land and amount for working, development and supervision of land are distinct and clearly demarcated; (d) In the case of PGF, there was no development of land, whereas, in case of Appellant No. 1 there is substantial development of land; not disputed by SEBI or by any customer/client; (e) In the case of PGF, sale deed executed, no registration; agreement mentions, without any specific time stipulation, that sale deed will be executed in favou....
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....t order in the matter, in terms of, inter alia, paragraph 21 of the Show Cause Notice dated November 21, 2012 issued to the Appellants by the Respondent. However, this submission was not recorded in the order dated June 5, 2013 by the High Court probably due to inadvertence. By order dated June 5, 2013 passed in Writ Petition No. 3917 of 2013, the Hon'ble High Court of Delhi, inter alia, granted time to Appellant No. 1 to file a reply to the Show Cause Notice before the Respondent on or before June 11, 2013 and the matter was directed to be heard by the Respondent on or before June 18, 2013 and a final order was directed to be passed on June 26, 2013. 10. Learned senior counsel, Mr. Rustomjee, appearing for the Respondent submits that they have perused documents, including a sample application form in which details of the customer are captured and a deed of indenture wherein the consideration to be paid by the investor is recorded. The deed of indenture does not mention the area of plot being purchased by the customer; moreover, "wherever the share of the customer is mentioned, it is always denoted as proportionate undivided interest and that the purchaser shall not be entitled ....
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....p; ii. The plot of land as mentioned in the conveyance deed cannot be identified. The investor does not know where his property is a he gets only an undivided interest in a large land holding; iii. On termination of the development agreement, there is no indication that the land will get conveyed fully to the investor. On the other hand, the investor gets the option, either to extend his tenure of development/supervision or to request the Company to find a suitable purchaser; iv. The Company guarantees a certain value below which the property would not be acquired back from him. v. Pursuant to entering into the development agreement, the investor has no right to interfere with the working, managing, controlling and supervising of the said plot in any manner whatsoever. He only gets a right to inspect the land and that too the entire land holding and not his plot as the same cannot be identified as mentioned above, and the inspection could be done with due notice and intimation to the company." 12. On the basis of the abovesaid analysis of records the Respondent submits that the busine....
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....investors; (iv) the investors do not have day to day control over the management and operation of the scheme or arrangement. (3) Notwithstanding anything contained in sub-section (2), any scheme or arrangement- (i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State; (ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934); (iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938), applies; (iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (19 of 1952); (v) under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956); &....
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....e regulations shall carry on or sponsor or launch a collective investment scheme. 73. (1) An existing collective investment scheme which: (a) has failed to make an application for registration to the Board; or (b) has not been granted provisional registration by the Board; or (c) having obtained provisional registration fails to comply with the provisions of regulation 71; shall wind up the existing scheme. (2) The existing Collective Investment Scheme to be wound up under sub-regulation (1) shall send an information memorandum to the investors who have subscribed to the schemes, within two months from the date of receipt of intimation from the Board, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount if determined. (3) The information memorandum referred to in sub-regulation (2) shall be dated and signed by all the directors of the scheme. (4) The Board may specify such other disclosures to be....
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.... or failure to comply with the provisions of Regulation 71, once provisional registration is obtained from SEBI. Finally, Regulation 73 provides that in case a company carrying on business in the nature of a CIS does not wish to obtain provisional registration with the SEBI, it may devise a scheme of repayment of money collected from investors in accordance with the CIS Regulations. 17. At this stage it would be pertinent to note a submission, regarding the interpretation of said Regulation 73, by Mr. Kapur, the learned senior counsel appearing for the Appellants, that it applies 'only' to CISs which were in existence in the year 1999 when the CIS Regulations were legally enforced by publication in the Official Gazette. We have thoroughly pondered over this submission and even revisited the CIS Regulations to unearth their true import. And we note that the CIS Regulations in question were promulgated by the Government of India to protect the interests of lacs of gullible investors who are prompted to invest in such schemes by advertisement, publicity etc. Therefore, we are of the considered opinion that a wider interpretation, which is in tune with the underlying purpose envisag....
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....he appellants, however, failed to supply any material till date to demonstrate as to how and in what manner any of the lands said to have been sold to its customers were developed and thereby any of the customer was or would be benefited by such development. It is imperative that the transaction of the PGF Limited vis-a-vis its customers has necessarily to be examined as to its genuineness by subjecting itself to the statutory requirement of registration with the second respondent followed by its monitoring under the regulations framed by the second respondent. All the above factors disclose that the activity of sale and development of agricultural land propounded by the PGF Limited based on the terms contained in the application and the agreement signed by the customers is nothing but a scheme/arrangement. Apart from the sale consideration, which is hardly 1/3rd of the amount collected from the customers, the remaining 2/3rd is pooled by the PGF Limited for the so called development/improvement of the land sold in multiples of units to different customers. Such pooled funds and the units of lands are part of such scheme/arrangement under the guise of development of land. It is qui....
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....on, enquiry and investigation of the premises of the PGF Limited in its registered office or any of its other offices wherever located and also examine the account books other records and based on such inspection, enquiry and investigation issue any further directions in accordance with law. Whatever amount deposited by the PGF Limited pursuant to the interim orders of this Court relating to joint venture scheme shall be kept in deposit by the second respondent in an Interest Bearing Escrow Account of a Nationalized Bank. The second respondent shall also verify the records of the PGF Limited relating to the refund of deposits of the customers who invested in the joint venture schemes and ascertain the correctness of such claim and based on such verification in the event of any default noted, appropriate further action shall be taken against the PGF Limited for settlement of the monies payable to such of those investors who participated in any such joint venture schemes operated by the PGF Limited. It will also be open to the second respondent while carrying out the above said exercise to claim for any further payment to be made by the PGF Limited towards settlement of such claims o....
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..... The details mentioned therein disclose that the total amount received by the PGF Limited under different schemes from 01.01.1997 to 31.12.1997 was approximately Rs.186.84 crores. Its paid up capital was stated to be Rs. 94,90,000/-and it mobilized Rs.815.23 crores under joint venture schemes from 01.04.1996 to 30.06.2002. The future liabilities towards joint venture schemes was projected in a sum of Rs.655.41 crores. Total outstanding liabilities payable to investors under the old closed schemes as on 30.06.2002 was stated to be Rs.497 crores. As against the above, till 31.10.2002, the PGF Limited stated to have made a net payment of Rs.115.93 crores leaving the balance due in a sum of Rs.393.69 crores approximately. The above details have been noted by the second respondent while mentioning the submission of the PGF Limited in its order dated 06.12.2002. Thus, we are convinced that the PGF Limited deliberately did not furnish the amounts till this date what was collected from the customers who made their investments in the so-called venture of sale and development of agricultural lands. Therefore, it is explicit that the PGF Limited was playing a hide and seek not only before th....
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....ors of high returns in the form of profits which may be immovable property. The following extract evidences the said finding:- "AND WHEREAS the said COMPANY has undertaken certain development of the said land and has caused the same to be divided into several plots and has been carrying on diverse types and kinds of activities thereat, giving substantial yields and profits." 22. The investors therefore seem to be contributing to the scheme with the clear view of receiving profits, whether in the form of returns or of property whose value increases owing to the developmental activities carried on by the Appellants. At this stage it is pertinent to quote the Hon'ble Punjab and Haryana High Court, which held in the case of P.G.F. Ltd. (supra) that, "when each customer/investor is a recipient of 'property' it is apparent that each customer/investor is admittedly a recipient of one of the benefits contemplated under Section 11AA(2)(ii), namely, 'property'". Further, we note that the 'Certificate of Property' which happens to be the only instrument held by the investor, states clearly that "the Estimated value of the said undivided share after development i....
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....an obligation to apply for registration with the SEBI as per the requirements laid down in the CIS Regulations and the SEBI Act. In this connection, it is pertinent to note that in the interpretation of such regulatory measures, like the CIS Regulations in hand, the most important task is to determine the 'pith and substance' of the provisions concerned, i.e., their true and essential character. The whole scheme of CIS as enshrined in the SEBI Act, 1992 and the CIS Regulations, 1999 as already discussed hereinabove is the welfare of millions of innocent investors by duly protecting their interests. The legislative intent and idea of the Parliament as well as SEBI seem to bring more transparency to the affairs of various CISs by duly regulating the same. Closing or winding up such CISs is an extreme measure to be resorted to in rare cases of adamant companies who do not wish to abide by the CIS Regulations, in the matter of registration and other conditionalities laid down therein. 25. In light of the above, we have no hesitation in upholding the impugned order dated June 21, 2013 finding no legal infirmity with the same. Now, keeping in view the large number of investors involve....
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..... 27. Mr. S. K. Kapur, learned senior counsel, submitted on behalf of the Appellants that the Respondent has no authority in law or under the two circulars to return the request of the Appellants without considering it as per the procedure established by law. In this context, it is argued that a consent application can be returned only on the grounds mentioned in Clauses 8 and 9 of circular dated May 25, 2012 for rectification and resubmission. 28. On the other hand, learned senior counsel for the Respondent, Mr. Rustomjee, submits that this appeal itself is not maintainable. Learned senior counsel submits that paragraph 21, as contained in SCN dated November 21, 2012 is a "standard form" clause and as such would not give a right to any person to get his matter resolved through the consent mechanism. 29. Having heard both the learned counsel for the parties at length, we are of the considered opinion that, in the facts and circumstances of the case, SEBI should not have returned the request of the Appellants made pursuant to paragraph 21 of the SCN and in accordance with the two circulars dated April 20, 2007 and May 25, 2012 issued by SEBI for a consent order un-ceremonio....
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....he Appellants mobilized money from investors without registration with SEBI, in violation of Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations and seeking an explanation as to why directions under Section 11 and 11B of the SEBI Act read with Regulation 65 of the CIS Regulations, not be issued to the Appellants. Paragraph 3 of SEBI's note contains Regulation 73 of the CIS Regulations, which authorises SEBI to direct the Appellants in a given case to wind up a CIS scheme and refund money to investors within a specified period, in case any existing company operating a CIS has failed to make an application for registration. It is suggested in paragraph 3 of SEBI's note that "it may not be appropriate to consider applications (in respect of CIS violations) without the applicant(s) first making the refund to the investors, as mentioned in CIS Regulations. Only thereafter, if it may desire so, it can seek a settlement of enforcement proceedings. However, it appears in the present case that no such refunds have been made". 33. Thus, paragraph 2 speaks of allegations against the Appellants and also deals with directions to be issued to a company which has violated Se....