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2017 (5) TMI 1481 - AT - Companies LawHoliday schemes launched - club membership - SEBI directed the appellant to refund the money - Held that - A perusal of the brochure made available to investors 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 the scheme on the Appellant-Company and not the investors. From an analysis of the facts and circumstances of the instant matter and the provisions of Section 11AA of the SEBI Act, we find that the holiday schemes launched by the Appellants fall squarely within the definition of a CIS as set out in Section 11AA(2) of the SEBI Act. We, therefore, have no hesitation in upholding the said finding of the Respondent in the Impugned Order. An existing CIS means a CIS which is in operation as on January 25, 1995. In the case of the Appellants in the instant matter the company was incorporated only in 1997 and the schemes under question were started around 2001-2002. As such the appellant is clearly not an existing CIS and cannot derive any benefits from the same. Therefore, in the facts and circumstances of the present matter wherein the CIS, in violation of the Regulations, collected a rather enormous amount of approx 7000 crores, we find that the investors interest will not be served by making Regulation 73 applicable. The Impugned Order, therefore, deserves to be upheld. 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 the earlier schemes which in fact govern the relationships/obligations and entitlements. The Interveners through their misc. applications have brought on record, though belatedly before this Tribunal, instances where the original receipts and the other documents of the investors were collected by the appellant company leaving the investors high and dry even without the documents. Shri Hazari has shown us many documents to bring home his points. The additional documents which the interveners wanted to bring on record were not produced before SEBI while the proceedings were going on for many years. However, Shri Hazari has fairly submitted that he would fully support the SEBI order so that the interest of all investors in the appellants various schemes could be protected effectively and since we are going to dismiss the appeals by upholding the order of SEBI, all these intervention applications shall, accordingly, stand disposed of. The Impugned Order is, accordingly, upheld and the appeals are hereby dismissed.
Issues Involved:
1. Classification of the holiday schemes/plans as Collective Investment Schemes (CIS). 2. Compliance with Section 11AA and Section 12(1B) of the SEBI Act. 3. Applicability of Regulation 73 of the CIS Regulations. 4. Jurisdiction and regulatory power of SEBI over the schemes. 5. Investor protection and repayment of collected funds. Issue-wise Detailed Analysis: 1. Classification of the Holiday Schemes/Plans as CIS: The primary issue was whether the holiday schemes/plans floated by the appellants fall under the definition of CIS as per Section 11AA of the SEBI Act. The tribunal analyzed the four conditions under Section 11AA(2) that classify a scheme as CIS: pooling of funds, intention of profit, management of contributions on behalf of investors, and lack of investor control over the scheme. The tribunal found that the contributions made by investors were pooled and used for the scheme, satisfying the first criterion. The presence of a "surrender value" feature, which allowed investors to redeem unutilized room nights for a higher value than the initial investment, indicated that the schemes were intended for profit, fulfilling the second criterion. The third criterion was met as the appellants managed the contributions by investing in properties and paying surrender values, with no evidence of customers managing their investments. Finally, the fourth criterion was satisfied as the appellants had complete control over the management and operation of the schemes, as evidenced by the brochure's clause allowing the company to modify terms at its discretion. 2. Compliance with Section 11AA and Section 12(1B) of the SEBI Act: The tribunal upheld SEBI's finding that the appellants violated Section 12(1B) of the SEBI Act by operating a CIS without obtaining the necessary registration. The appellants' argument that their schemes were service contracts and not CIS was rejected. The tribunal emphasized that the holiday schemes fell squarely within the definition of CIS under Section 11AA(2) of the SEBI Act, thus requiring registration under Section 12(1B). 3. Applicability of Regulation 73 of the CIS Regulations: The appellants argued that if their schemes were classified as CIS, they should be allowed to submit a draft information memorandum under Regulation 73 of the CIS Regulations. However, the tribunal noted that Regulation 73 applies to existing CISs that were in operation before the CIS Regulations came into force. Since the appellants' schemes were launched after the CIS Regulations were implemented, they were not considered "existing CISs" and could not benefit from Regulation 73. The tribunal also referenced the Supreme Court's interpretation in SEBI vs. Gaurav Varshney, which clarified that Regulation 73 applies only to CISs in operation as of January 25, 1995. 4. Jurisdiction and Regulatory Power of SEBI over the Schemes: The tribunal affirmed SEBI's jurisdiction and regulatory power over the appellants' schemes. The appellants' contention that their schemes fell outside SEBI's jurisdiction due to the inclusion of an insurance component was rejected. The tribunal held that offering insurance benefits along with the schemes did not exempt them from being classified as CIS under SEBI's regulatory framework. 5. Investor Protection and Repayment of Collected Funds: The tribunal upheld SEBI's order directing the appellants to refund the collected funds to investors. The tribunal noted that the appellants had mobilized a substantial amount of approximately ?7035 crore from investors and had diverted funds to other entities controlled by them. The interveners, representing affected investors, expressed doubts about the appellants' ability to repay the collected funds and highlighted instances of fund diversion and false affidavits. The tribunal emphasized the importance of protecting investors' interests and ensuring the repayment of collected funds. Conclusion: The tribunal dismissed the appeals and upheld SEBI's order, directing the appellants to refund the collected funds to investors and wind up the CIS. The tribunal found that the holiday schemes launched by the appellants met the criteria for classification as CIS under Section 11AA of the SEBI Act and that the appellants had violated Section 12(1B) by operating the schemes without registration. The tribunal also ruled that Regulation 73 did not apply to the appellants' schemes, as they were not "existing CISs." The tribunal emphasized the need to protect investors' interests and ensure the repayment of collected funds.
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