TaxTMI 
TaxTMI 
2015 (11) TMI 591
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....ia (Collective Investment Schemes) Regulations, 1999 ("CIS Regulations" for short). By the said order, appellant inter alia, is directed to wind up the said CIS and refund the monies collected but not paid to the investors. In addition, the appellant is also directed to pay the amount of profits/income earned, if any, that is due to the investors as per the terms of its offer or pay interest at the rate of 10% per annum on the amount invested from the date of investment till the date of refund, whichever is higher. 2. Facts relevant for the purpose of present appeal as set out in the memorandum of appeal are as follows:- a) Appellant is a company registered under the Companies Act, 1956. Appellant is a leading auction house and archive in the country and has been primarily engaged in the business of holding public auction of artworks for several years which has been the major source of revenue for the appellant. Appellant is also engaged in the business of providing investment advisory and art custodial management services. b) By a Trust Deed dated March 10, 2006 the appellant settled a private Trust called Osian's Art Fund ("Trust" for convenience) under the Indian Trusts....
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....taining certificate of registration as required under Section 12 (1B) read with Section 11(2)(c) of SEBI Act and Regulation 3 of CIS Regulations, SEBI issued a show cause notice to the appellant on October 12, 2007. The Trustee (Oseta) wide its letter dated December 21, 2007 assumed the responsibility to respond to the show cause notice and filed its reply for itself and on behalf of the appellant. Subsequently, personal hearing was also granted. On February 13, 2008 SEBI issued a press release stating therein that the investments made in Art Funds constitute CIS and are governed by the CIS Regulations framed by SEBI. h) In the meantime, the Respondent No. 2 filed a complaint before SEBI in relation to his investment of Rs. 25 lac in the scheme managed by the appellant. SEBI by its letter dated January 31, 2011 informed the Respondent No. 2 that the said complaint did not fall within the purview of SEBI. Thereupon, Respondent No. 2 filed a writ petition before the Madras High Court which was dismissed on April 16, 2012 with liberty to the Respondent No. 2 to challenge SEBI's letter dated January 31, 2011 by filing an appeal before this Tribunal. Accordingly, the Respondent No. 2....
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....erence that the legislature clearly so intended. Since the expression 'Collective Investment Scheme' under Section 11AA of the SEBI Act is restricted to any scheme or arrangement made or offered by any company, SEBI is not justified in holding that Section 11AA is applicable to a scheme made or offered by a Trust. d) It is not in dispute that Mutual Funds established by any Trust fall within the regulatory power of SEBI and therefore, in respect of Mutual Funds, Venture Capital Funds or Alternative Investments Funds established by a Trust or a company, SEBI has framed SEBI (Mutual Funds) Regulations, 1996, SEBI (Venture Capital Funds) Regulations, 1996, SEBI (Alternate Investment Companies) Regulations, 2012 respectively. Since Art Fund does not fall within the regulatory power of SEBI, no regulation has been framed in that behalf. Therefore, SEBI is not justified in applying the CIS Regulations to the Art Fund made or offered by the Trust. e) In the present case, the Art Fund is launched by the appellant for and on behalf of the Trust which is governed by the provisions contained under the Indian Trusts Act, 1882. Neither the SEBI Act nor the CIS Regulations authorize SEB....
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....n the returns. Some of the investors have approached the Civil Courts/ Consumer Forums and initiated criminal proceedings to recover their amounts and such Courts/Forums have entertained the claims of such investors. Therefore, the liability to pay to the investors under the scheme being a Civil liability, in case of dispute, such dispute could be adjudicated only by a Civil Court and not by SEBI. Therefore the impugned order passed by SEBI against the appellant is without jurisdiction. k) Provisions of SEBI Act are not intended to override the provisions of the Indian Trusts Act. Neither the CIS Regulations nor Section 11AA of SEBI Act seek to regulate the manner in which unincorporated entities raise funds. The Art Fund settled by a private Trust does not fall within the ambit of SEBI Act or the CIS Regulations. l) CIS Regulations read with Section 11AA of SEBI Act clearly provide that the applicability of the CIS Regulations is restricted to issuance of units to the general public and do not envisage an offer made to a select set of investors under a private placement. In the present case, the scheme was launched only to select set of investors (high net worth investors) b....
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.... of the Trust cannot be considered as CIS, because, firstly, Section 11AA and CIS Regulations apply only to a scheme launched or sponsored by a company. Secondly, those provisions apply only to plantations and agro industries. Thirdly, those provisions apply only in case of solicitation, mobilization of investments from public and not in case of investment through private placement and fourthly, the units offered by the Art Fund are not securities as contemplated under the SEBI Act and hence SEBI has no jurisdiction to pass an order against the appellant. o) Although Section 11AA(2) is amended by substituting the word 'company' with the word 'person' with retrospective effect from 18.07.2013 and a proviso is added to Section 11AA(1) with retrospective effect from 18.07.2013, the said amendments would have no relevance to the facts of present case, because, the scheme offered by the appellant as AMC of the Trust in the year 2006 came to an end in the year 2009, that is, much prior to the Amendment of Section 11AA with effect from 18.07.2013. Since the legislature has specifically brought into force the above amendments with effect from 18.07.2013, it is not open to the SEBI to co....
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....king of Collective Investment Schemes by taking such measures as it deems fit. Sub-Section (1B) inserted to Section 12 of the SEBI Act by the Securities Laws (Amendment) Act, 1995 with effect from 25.01.1995 provides that no person shall sponsor or cause to be sponsored or carry on or cause to be carried on a Collective Investment Scheme unless that person holds a certificate of registration from SEBI in accordance with the regulations framed by SEBI. From the aforesaid provisions it is clear that SEBI is the regulatory authority for CIS. b) On the basis of Dave Committee Report, SEBI has framed and notified the CIS Regulations with effect from 15.10.1999. As per Regulation 3 of CIS Regulation no person other than a Collective Investment Management Company which has obtained a certificate under the CIS Regulations can carry on or sponsor or launch a CIS Regulations. Since appellant is operating a CIS without obtaining certificate from SEBI, appellant is guilty of violating SEBI Act and CIS Regulations. c) Expression 'Collective Investment Scheme' is defined under Section 11AA of SEBI Act which is inserted with effect from 22.02.2000. Reference to a 'company' in the opening wo....
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....of Respondent No.2 while adopting the arguments advanced by counsel for SEBI, submitted that under Section 11AA of SEBI Act, CIS can only be made or offered by a company and therefore, in the present case, the CIS made or offered by the Trust is unlawful. He submits that taking a narrow view that under Section 11AA(2) jurisdiction of SEBI is limited to the scheme or arrangement made or offered by a company would amount to defeating the object with which SEBI Act is enacted. Under the SEBI Act it is the duty of SEBI to protect the interest of investors as a whole. Section 11(2)(c) read with Section12(1B) of SEBI Act as also the statement of objects and reasons for inserting Section 11AA clearly provide that a scheme or arrangement made or offered by a company alone would be eligible to obtain a certificate of registration from SEBI & no other entity would be eligible to obtain certificate of registration. Moreover Section 11AA(2) has been amended with retrospective effect from 18.7.2013 by deleting the word 'company' and substituting the word 'person'. Therefore, reading Section 11AA(2) with regulation 3 of CIS Regulations it becomes clear that any scheme or arrangement made or offe....
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....g in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of subsection (2) of section 30." (emphasis supplied) Section 11AA inserted to SEBI Act by Securities Laws (Amendment) Act 1999 (w.e.f. 22.2.2000) "11AA. Collective investment scheme:- (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) shall be a collective investment scheme. (2) Any scheme or arrangement made or offered by any company under which,- (i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement; (ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement; (iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on....
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....the investors to participate in the scheme or arrangements by way of subscriptions and to receive profits or income or produce arising from the management of such property or the investments made thereof; and (b) in which the subscriptions of the investors by whatever name called, are pooled, and are utilized for the purposes of the schemes or the arrangements; and (c) in which the property or such subscriptions are managed on behalf of the investors, who do not have day to day control over the management or operation of the scheme, whether or not such properties or subscriptions and the investments made thereof are evidenced by identifiable properties or otherwise; Provided that following shall not be deemed to be a collective investment scheme: (a) acceptance of deposits by companies under section 58A of the Companies Act, 1956 (1 of 1956) or by Non-Banking Financial Companies as defined in section 45-I of the Reserve Bank of India Act, 1934 ( 2 of 1934 ); b) acceptance of funds by Chit Funds in terms of the Chit Funds Act, 1982 (40 of 1982); (c) acceptance of funds by companies declared as Nidhi companies under section 620A of the Companies Act, 1956, ( 1 of 19....
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.... as per Section 11AA(1), the expression 'Collective Investment Scheme' would mean any scheme or arrangement made or offered by any entity which satisfies the conditions set out under Section 11AA(2). Section 11AA(2) sets out four conditions in relation to any scheme or arrangement made or offered by any company. Fact that Section 11AA(2) refers to any scheme or arrangement made or offered by any 'company' would not mean that the jurisdiction of SEBI to regulate CIS is restricted to any scheme or arrangement made or offered by any company, because, Section 11AA(2) merely sets out the conditions applicable to any scheme or arrangement made or offered by an entity to which SEBI, under CIS Regulations would grant registration for running a CIS. Section 11AA(2) merely enumerates the conditions applicable to a CIS in consonance with the provisions that were contained under the CIS Regulations. 13. Appellants however contend that since Section 11AA(2) begins with the words "any scheme or arrangement made or offered by any company", it must be held that the expression "Collective Investment Scheme" defined under Section 11AA(1) is restricted only to a scheme or arrangement made or offer....
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....as expressly conferred power on SEBI to regulate CIS made or offered by any entity and even Section 11AA(1) defines the expression 'CIS' to mean any scheme or arrangement made or offered by any entity which satisfy the conditions set out under Section 11AA(2), it would be improper to hold that Section 11AA(2) restricts the power of SEBI to regulate CIS made or offered by any company. If the argument of the appellant is accepted it would mean that the provisions of SEBI Act are mutually contradictory i.e. on one hand Section 11(1) read with Section 11(2)(c) confer power on SEBI to regulate CIS made or offered by any entity, whereas, on the other hand, Section 11AA(2) restricts the power of SEBI to regulate any CIS made or offered by any company. Such an argument of the appellant which renders the provisions of the SEBI Act mutually contradictory and runs counter to the object with which SEBI Act is enacted, cannot be accepted. 15. Apart from the above, Section 12(1B) inserted to the SEBI Act with effect from 25.1.1995 provides that no person shall sponsor/carry on any CIS unless he obtains a certificate of registration from SEBI in accordance with the regulations framed by SEBI. ....
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....e or arrangement of a collective investment management company which satisfy the conditions set out under Section 11AA(2) would be entitled to carry on CIS by obtaining registration from SEBI. Therefore, after the CIS Regulations coming into force and after insertion of Section 11AA, running CIS by any entity other than a collective investment management company without obtaining registration from SEBI would be in violation of SEBI Act. Consequently, argument of the appellant that the scheme sponsored by the appellant as AMC of the Trust which satisfies the conditions set out under Section 11AA(2) falls outside the purview of SEBI cannot be accepted. 17. It is relevant to note that section 11AA(3) inter alia provides that notwithstanding anything contained in Section 11AA(2), any scheme or arrangement made or offered by a cooperative society registered under the Cooperative Societies Act, 1912 or under any law relating to cooperative societies for the time being in force in any state and any scheme or arrangement made by any of the entities specified therein shall not be a Collective Investment Scheme. Thus, Section 11AA(3) carves out exception and provides that notwithstanding ....
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....) for the purpose of pooling of capital from the public for collective investment by way of acquisition, holding, management, trading or disposal of Indian as well as foreign art or any other property including antiquities whatsoever, for the purpose of having the effect of providing facilities for the participation by persons as beneficiaries in such properties or investments and in the profits of income arising therefrom. In the Confidential Information Memorandum ('CIM' for short) under the head 'Summary' it is stated that the scheme, plans to collect money from eligible investors and plans to invest the same in art works. Admittedly Rs. 102.40 crores collected from the investors have been pooled and utilized for the purpose of purchasing art works which is the purpose of the scheme. The CIM speaks of the Fund having the objective of generating significant medium and long term income and capital growth from its portfolio. Paragraph A.2 of Chapter V of the CIM speaks of the Fund striving to 'create significant wealth' and intending to 'gauge financial return for its investors'. These facts on record clearly establish that the first two conditions set out under Section 11AA(2) are....
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....00 reiterates the same position. Therefore, fact that Section 11AA(2) sets out the conditions applicable to a company, it cannot be inferred that the powers of SEBI is restricted only to regulate CIS made or offered by a company, especially when the provisions contained in Section 11(1) & 11(2)(c) specially empower SEBI to regulate CIS run by any entity. In these circumstances, accepting the contention of the appellant that the powers conferred on SEBI is restricted to regulate CIS made or offered by any company, would be contrary to the express provisions contained in Section 11(1), 11(2)(c) & 11AA(1) of SEBI Act and the CIS Regulations and hence, the argument of the appellant cannot be accepted. 23. Fact that SEBI has framed separate regulations in relation to Mutual Funds, Venture Capital Funds or Alternative Investment Funds and the fact that no independent regulations have been framed in respect of Art Fund, cannot be a ground to infer that the Art Fund falls outside the purview of SEBI. In the absence of any independent regulations framed in respect of Art Funds, it is obvious that the Art Funds which satisfy the conditions set out under Section 11AA(2) would be governed b....
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....2006 as AMC of the Trust, appellant had launched the Art Fund by inviting subscriptions from various privately placed investors to enable the appellant to pool the funds received and invest the same in art works. In view of the close proximity between the appellant and the Trustee of the Trust and in view of the fact that Mr. Neville Tuli, Founder and Chairman of the appellant is also the Chief Advisor of the Art Fund, it is held in the impugned order that the Art Fund is sponsored by the appellant as an arrangement to launch its scheme which involves investment contracts in the nature of CIS, while de-facto management and control of the scheme remains with the appellant. It is further held that the appellant has sponsored and caused to sponsor/ caused to carry on a CIS through arrangement of a private Trust without obtaining the certification of registration from SEBI as contemplated under the CIS Regulations. In view of the close proximity between the appellant and the Trustee as also the AMC (appellant itself) no fault can be found with the decision of SEBI in holding that the appellant had adopted a modus operandi of operating CIS through the medium of a Trust. It appears that ....
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....ould be covered under CIS and the provisions of SEBI Act and CIS Regulations would apply accordingly. Similarly, fact that there are no Appraising Agencies or Credit Rating Agencies approved by SEBI to appraise or rate the assets of the Art Funds would have no relevance because, having operated CIS without following the provisions contained in the SEBI Act and the regulations made thereunder, appellant cannot escape liability by alleging that the CIS Regulations are unworkable in case of Art Funds. Any scheme or arrangement made or offered by any company which satisfy the conditions set out under Section 11AA(2) must follow the procedure prescribed under CIS Regulations. For all the aforesaid reasons, in the facts of present case, decision of SEBI in holding that the scheme floated by the appellant constitutes CIS and since the said scheme was operated without obtaining registration from SEBI, appellant has contravened the provisions of the SEBI Act and CIS Regulations cannot be faulted. 29. Question then to be considered is, by the impugned order dated April 15, 2013, apart from restraining the appellant from accessing the capital market whether SEBI is justified in directing t....
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....of 10% per annum from the date of investment till the date of refund, whichever is higher. 33. Except finding fault with the appellant in not seeking registration before operating the scheme, no fault is found in the scheme operated by the appellant. In other words, SEBI does not find fault with the scheme of the appellant which neither offered guaranteed return nor offered interest on the amount invested. In such a case, on what basis appellant is directed to refund the amount invested with interest at the rate of 10% per annum is not set out in the impugned order. 34. It is relevant to note that even after issuing a press note on February 13, 2008, SEBI itself was not sure till 2013 as to whether the scheme in question is covered under CIS or not. In fact when respondent no. 2 who had invested in the scheme had complained against the appellant, SEBI by its communication dated 31.01.2011 informed the respondent no. 2 that the scheme was not covered under CIS and therefore the investors who have invested in the scheme of the appellant cannot seek redressal of their grievances from SEBI. It is only when this Tribunal on 29.11.2012 set aside the said communication dated 31.01.2....