TaxTMI 
TaxTMI 
2017 (5) TMI 1481
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....these appeals, as such, with the consent of the parties, have been heard together and are being disposed of by this common order. For the sake of convenience, Pancard Clubs Ltd. i.e. Appeal No. 52 of 2016 is taken as the lead case. 2. Pancard Clubs Limited ('Appellant'), a group company of the Panoramic Group of companies, is an unlisted public company, which is engaged in the business of owning, developing and operating hotels, clubs and resorts across India and offering different holiday options and six of its directors, namely, Mr. Sudhir Shankar Moravekar, Ms. Shobha Ratnakar Barde, Ms. Usha Arun Tari, Mr. Manish Kalidas Gandhi, Mr. Chandrasen Ganpatrao Bhise, Mr. Ramachandran Ramakrishnan, (collectively referred to as the 'Appellants'), have approached this Tribunal against the order dated February 29, 2016 ('Impugned Order') passed by Securities and Exchange Board of India ('SEBI') directing the Appellants to inter-alia, refund the monies to the tune of Rs. 7,035 crore, collected from the investors within three months from the passing of the impugned order, and further directing the Appellants to wind up the Collective Investment Scheme ('CIS') operated by them under the g....
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....on 65 of the CIS Regulations should not be issued against them for the said violations. The Appellants were granted an opportunity to inspect certain documents on February 08, 2016 that the Respondent had referred to before issuing the SCN and in the spirit of natural justice, a personal hearing was scheduled on February 10, 2016. Subsequently, on a careful scrutiny of the facts and circumstances of the matter, the Respondent issued the impugned order on February 29, 2016. 5. The Appellants challenged the impugned order alleging that the holiday plans/schemes offered to its clients was indeed not a CIS, on the grounds that such plans/schemes did not satisfy the criteria required to be classified as a CIS. 6. With reference to Section 11AA of the SEBI act, the Appellants contend that first and foremost, the holiday plans offered to its customers entitle them to the utilization of room nights and/or other services, thereby, making the contract between the Company and the customers purely a contract for services. As a result, selling holiday plans/schemes for consideration cannot be termed as 'pooling of funds' within the meaning of section 11AA of the SEBI Act and, therefore, s....
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....n of gifting such services to friends or family too. According to the Appellants, these factors support their submission that the customers who have invested in the holiday plans/schemes are in control of the day-to-day management or operation of the schemes they choose within the meaning of clause (iv) of subsection 2 of section 11AA of the SEBI Act. 8. The Appellants refer to the Explanation to Section 12 (1B) of the SEBI Act, which reads as follows: ".... a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer". As per the provisions of this explanation, the Appellants argue that since the holiday plans/schemes provided to its customers contained the element of insurance, the entire plan/scheme cannot be considered to be within the meaning of a CIS, thereby, falling outside the jurisdiction of SEBI altogether. 9. Lastly, the Appellant submits that in the event SEBI concludes that the Company's holiday schemes are CIS, the Company should be permitted, under Reg....
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....ontained in whole or in part at its sole discretion or according to the prevailing market conditions/cost factors. As a result, the Respondent submits that the Appellants have complete control over the contributions and the scheme i.e. the management and operation of the scheme is in the hands of the Appellants and not the customer/investor. 12. As far as the jurisdiction of SEBI with respect to the Explanation to Section 12 (1B) of the SEBI Act is concerned, the Respondent submits that the Appellants obtained the insurance cover by payment of premium to the respective insurance companies and then offered it to its customers. Further, the Respondent submits that if the construction offered by the Appellants were to be considered, a bank could start offering accident insurance along with a deposit and claim that RBI could not regulate it. 13. With respect to the applicability of Regulation 73 of the CIS Regulations in favour of the Appellant, the Respondent submits that only existing CISs can resort to the provisions of the aforesaid Regulation. 14. We have heard both the learned counsel for the parties at length and minutely perused a copy of the appeal along with document....
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.... Act, 1952 (19 of 1952); (v) under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956); (vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956 (1 of 1956); (vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit Fund Act, 1982 (40 of 1982); (viii) under which contributions made are in the nature of subscription to a mutual fund; [(ix) such other scheme or arrangement which the Central Government may, in consultation with the Board, notify, shall not be a collective investment scheme.]" Section 12 1(B) of the SEBI Act "No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations: Provided that any person sponsoring or causing to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment schemes operat....
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....ate of the information memorandum to continue with the collective investment scheme. (7) The investors who give positive consent under subregulation (6), shall continue with the collective investment scheme at their risk and responsibility : Provided that if the positive consent to continue with the collective investment scheme, is received from only twentyfive per cent or less of the total number of existing investors, the collective investment scheme shall be wound up. (8) The payment to the investors, shall be made within three months of the date of the information memorandum. (9) On completion of the winding up, the existing collective investment scheme shall file with the Board such reports, as may be specified by the Board." 16. The concept of CIS was envisaged at a time when innocent investors were getting lured into investing their life savings in schemes floated by various entities, assuring such investors of huge profits. The Dave Committee was formulated to draft a report that propounded the regulation of such entities in order to safeguard the interests of investors and based on the recommendations of this committee, the CIS Regula....
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....g this to the facts of the present case, first and foremost, as regards the contributions made by investors being pooled and used for the scheme, the Appellants argue that since the contract between the Company and the investors is purely for service (construed on the basis of the entitlement conferred on the investors to utilize room nights), selling holiday plans/schemes for consideration cannot be termed as 'pooling of funds' and therefore, would not classify as a scheme or arrangement either. They further argue that owing to the agreement being a service agreement, they are free to utilize the money received from the scheme in any form or fashion. In our considered view, the argument put forth by the Appellants fails to take away from the fact that the share capital of the Company stands at a meagre INR 50 lakh, while the money mobilized under their holiday scheme is over INR 7,000 crore. Further, investments to the tune of over INR 1000 crore have been made towards acquiring hotels and resorts, thereby expanding their inventory of properties on offer in the holiday scheme by utilizing the proceeds of the impugned scheme. Needless to say that the corpus of money accumulated by ....
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....ace which involves pooling of the investments of the Appellants". 19. In the matter of PGF Ltd. vs Union of India and Others, a scheme to purchase and develop pockets of land was floated by inviting investors to invest their money in the scheme. Subject to the fulfilment of other conditions as per law, the Apex court declared the scheme operated by PGF to be a CIS under the guise of sale and development of land. In the matter of NGHI Developers, the Tribunal stated that irrespective of whether the money collected is utilized for the purpose of buying land or developing land that has already been purchased, the fact still remains that money collected from investors is pooled to buy/develop land, thereby, establishing the existence of a scheme. 20. Applying the ratio delivered in the matters mentioned above, we find that the collection of monies from applicants of the holiday scheme floated by the Appellants and further utilizing a portion of that contribution towards expanding the scheme in question satisfies the first criterion under Section 11AA (2). 21. Coming to the second condition that defines a scheme as a CIS, we observe in the instant matter that the schemes launch....
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....stant matter, the surrender value offered to investors harbours the terms of refund of deposit along with an interest component. Additionally, based on the statistics provided by the Appellants on the schemes floated by them, we see that a whopping 97% of investors availed the benefits of the surrender value as opposed to the services offered under the scheme. In our considered opinion, we find that a large chunk of investors established a pecuniary interest in the holiday scheme with the intention of exercising the option of 'surrender value' and receiving a profit on their investment, however small. Therefore, we hold that the condition mentioned under Section 11AA(2)(ii) of the SEBI Act is fulfilled by the scheme in question viz. the customers/investors in the CIS invested their money in the scheme with the intention to draw profits from the scheme. 24. With respect to the third criterion defining a CIS under Section 11 AA (2) of the SEBI act viz. that the investments are managed by the company in question on behalf of the investors, the Appellants contend that the contributions made by customers are not managed by the Appellants in as much as the customers have complete auto....
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....nvestors brings out the true nature of the scheme in question. Clause 16 of the said document categorically states that the Appellant reserves the right to modify/alter/amend/revoke the benefits/privileges and or the terms and conditions contained in whole or in part at its sole discretion or according to the prevailing market conditions/cost factors. It is, therefore, clearly borne out that the Company has complete control over activities pertaining to the scheme as is rightly brought forth by the Respondent in its submission with reference to clause 16 of the brochure/offer document of the scheme. The underlying philosophy of the fourth ingredient is that the day to day management of the money pooled under the scheme and the scheme's working in general is at the company's discretion, and not the investors. The investors, in this case, have no say in the day to day control of the scheme or over their investments. Once the contributions are made to the Company, those contributions are completely under the Appellant's control and management. In our considered opinion, clause 16 proves beyond any doubt that complete control is conferred over the day to day management and operation of....
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....umstances of the case." 28. The Respondent on the other hand has relied on the matter of PACL Ltd vs SEBI, an extract of which is reproduced herein: "42. Strong reliance was placed by counsel for appellants on decision of this Tribunal in case of Alchemist Infra Reality Ltd. (supra). In that case, the scheme floated by Alchemist, after the CIS Regulations came into force was held to be CIS and since the said CIS was carried on without obtaining registration from SEBI, the CIS was ordered to be wound up under Section 11,11B of SEBI Act read with regulation 65 and 73 of CIS Regulations. While upholding the order of SEBI and rejecting the argument of Alchemist that regulation 73 cannot be applied to a CIS floated after the CIS Regulations came into force, this Tribunal in para 17 held that the provisions for winding up contained in regulation 73 is applicable to CIS existing at the time when the CIS Regulations were introduced as also to the CIS which may have been launched at any point of time thereafter. Whether a CIS floated and operated after the CIS Regulations came into force without obtaining registration from SEBI was entitled to seek registration under regulation ....
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....ion should not be followed. The relevant portion of the judgement is reproduced herein: "37........ However, where a person in the guise of carrying on real estate business is found to be carrying CIS which is sham and detrimental to the interests of investors, then, permitting such person to seek registration or permitting that person to wind up the scheme by following the procedure prescribed under the CIS Regulations would be travesty of justice and wholly prejudicial to the interests of investors." 31. From an analysis of the facts of both matters viz. Alchemist and PACL, it is evident that the two are in stark contrast to each other. The CISs under PACL were declared to be sham transactions and detrimental to the interest of its investors, and thus, ordered to be wound up and money returned to investors, without directing the procedure provided in Regulation 73 and Regulation 68 of the CIS Regulations be followed. On the other hand, the CISs launched under Alchemist did not threaten the interest of its investors as sham transactions in any manner. In the case of Alchemist, this Tribunal saw the transactions between Alchemist and its investors as genuine transfers u....
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....f the SEBI Act, reveals that the same was brought in, on account of past experience of 'the Board', and the dire need to protect the interests of investors. Secondly because, the language of subSection (1B) of Section 12 of the SEBI Act is clear and unambiguous - it allowed existing collective investment scheme(s) entrepreneurs, to continue with the same by creating an exception in their favour, through the proviso under Section 12(1B). And it barred new operators from commencing collective investment scheme(s), till after they had obtained a certificate of registration. Thirdly because, of the use of negative words in sub-Section (1B) - "No person shall...", denotes mandatory intent, with reference to those not already engaged in collective investment operations. Fourthly because, of the use of negative words in conjunction with the word "shall", further makes the legislative intent absolutely clear, and also, mandatory, with reference to those not already engaged in collective investment operations. And fifthly because, contravention of Section 12(1B) entails penal consequences, and therefore, cannot be construed as directory." "68. In view of the conclusions recorded he....
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....d in the matter have never been party before SEBI and they have never produced the necessary documents before SEBI, they were not impleaded as a formal party but have been given a right of hearing by us. Learned counsel Shri Rabindra Hazari argued on behalf of the investors stating that he had ample material to prove that the appellants had diverted huge funds to other entities owned and controlled by the appellants themselves and that the investors had been left in the lurch. The interveners submitted that they were doubtful of whether the Appellant company would be able to repay all its investors the amount of approx Rs. 7035 crores. The Appellant has disposed of its assets to repay investors disregarding several conditions that were to be complied with as put forth by SEBI before such disposal. Our attention is also drawn towards the fact that the appellants transferred these investments to other schemes but have given a false affidavit that investors have voluntarily switched over to the non refundable schemes. This seems to be an afterthought manoeuvring by the appellants with a view to deprive the investors of benefits which were originally promised by the appellants under th....