2014 (7) TMI 1246 - Board - Companies Law

Fraudulent fund mobilization - activities of collective investment scheme in terms of Section 11 AA of the SEBI Act - Held that - It is noted that PCL was advised to respond to the preliminary enquiry conducted by SEBI, through SEBI letters dated September 17, 2013 and emails dated March 13, 2014 and April 03, 2014. However, on all these occasions, PCL delayed submission of the requisite information and also failed to furnish the scheme wise list of investors and their contact numbers and addresses as sought by SEBI. In these circumstances, find that reasonable opportunity has been afforded to PCL to respond to SEBI. When considered in the context of the abovementioned prima facie finding, the inescapable conclusion is that non-submission of the information especially scheme wise list of investors and their contact numbers and addresses to SEBI is nothing but an attempt to conceal the true nature and operation of the fund mobilizing activity of PCL. From the material available on record, it is observed that Mr. Sudhir Shankar Moravekar (PANAADPM2933M), Mrs. Shobha Ratnakar Barde (PAN-ASLPB1204C), Mrs. Usha Arun Tari (PAN-ABYPT8841M), Shri. Manish Kalidas Gandhi (PAN-AITPG8933H), Shri. Chandrasen Ganpatrao Bhise (PAN-AADPB6103E) and Shri Ramachandran Ramakrishnan (PAN-AAIPR9196G) are the Promoters/Directors/persons in charge of the business of PCL. Further, in order to safeguard the assets/property acquired by PCL and its promoters/directors using the funds collected from the investing public until full facts and materials are brought and final decision is taken in the matter, it is incumbent on SEBI to take preventive action by way of an immediate measure. In the light of the above, I find no other alternative but to take recourse to an interim order against PCL and its Directors for preventing them from further carrying on with its existing fund mobilizing activity by launching collective investment scheme , without obtaining registration from SEBI in accordance with law. We in exercise of the powers conferred upon me under sections 11(1), 11B and 11(4) of the SEBI Act read with Regulation 65 of CIS Regulations, hereby direct PCL and its Directors, namely, Mr. Sudhir Shankar Moravekar (PANAADPM2933M), Mrs. Shobha Ratnakar Barde (PAN-ASLPB1204C), Mrs. Usha Arun Tari (PAN-ABYPT8841M), Shri. Manish Kalidas Gandhi (PAN-AITPG8933H), Shri. Chandrasen Ganpatrao Bhise (PAN-AADPB6103E) and Shri Ramachandran Ramakrishnan (PAN-AAIPR9196G) not to collect any fresh money from investors under its existing scheme; not to launch any new schemes or plans or float any new companies to raise fresh moneys; to immediately submit the full inventory of the assets obtained through money raised by PCL; not to dispose of or alienate any of the properties/assets obtained directly or indirectly through money raised by PCL; not to divert any funds raised from public at large, kept in bank account(s) and/or in the custody of PCL or group companies or promoters or LLPs or Proprietary concerns or any person directly or indirectly controlled through shareholding or management by PCL ; to furnish all the information/details sought by SEBI within 15 days from the date of receipt of this order, including, i. Details of amount mobilized and refunded till date, ii. Scheme wise list of investors, investment amount and addresses with contact numbers, if any. iii. Details of agents along with address, money mobilized and commission paid

Summary

Issues Involved:
1. Whether Pancard Clubs Limited (PCL) is operating a 'collective investment scheme' under Section 11AA of the SEBI Act, 1992.
2. Compliance with SEBI regulations regarding registration for collective investment schemes.
3. The necessity for interim measures to protect investors.

Detailed Analysis:

1. Whether PCL is operating a 'collective investment scheme' under Section 11AA of the SEBI Act, 1992:

Preliminary Inquiry and Submissions:
SEBI received complaints alleging fraudulent fund mobilization by PCL. SEBI sought detailed information from PCL, which responded with documents and submissions denying that its business constituted a collective investment scheme. PCL claimed to be in the business of marketing time share products and denied pooling funds from the public.

Examination of PCL's Schemes:
PCL offered various holiday schemes with fixed tariffs and surrender options for unutilized room nights. The schemes included:
- Relax Holiday (3.3 years)
- Delight Holiday (6.3 years)
- New Royal Holiday (9 years)
- New Regular Holiday (10 years)
- New Premium Holiday (10 years)
- Sunrise Holiday (5 years)
- Dezire Holiday (37 months)
- Divine Holiday (66 months)

Financial Analysis:
PCL's financial statements for 2009-2013 showed significant amounts mobilized under these schemes, with very low utilization of room nights by investors. Most investors received money back with returns, indicating a profit motive rather than utilization of services.

Legal Interpretation:
Under Section 11AA of the SEBI Act, a scheme is a collective investment scheme if:
- Contributions are pooled and utilized solely for the scheme.
- Investors contribute with a view to receive profits or returns.
- The scheme is managed on behalf of investors.
- Investors do not have day-to-day control over the scheme.

Findings:
PCL's schemes met all four conditions:
- Contributions were pooled for the schemes.
- Investors expected returns, not just services.
- PCL managed the schemes.
- Investors had no control over management.

2. Compliance with SEBI regulations regarding registration for collective investment schemes:

Regulatory Requirements:
Section 12(1B) of the SEBI Act and Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 prohibit carrying on collective investment schemes without SEBI registration.

Non-Compliance:
PCL did not obtain the necessary registration for its schemes, thereby violating SEBI regulations.

3. The necessity for interim measures to protect investors:

Investor Protection:
Given the prima facie finding that PCL's schemes were collective investment schemes and the lack of SEBI registration, interim measures were necessary to protect investors from potential fraud.

Interim Order:
SEBI directed PCL and its directors to:
- Cease collecting fresh money under existing schemes.
- Not launch new schemes or companies.
- Submit a full inventory of assets obtained through the schemes.
- Not dispose of or alienate any assets.
- Not divert funds raised from the public.
- Furnish detailed information to SEBI within 15 days.

Further Actions:
The order is without prejudice to SEBI's right to take further action. PCL and its directors were given 21 days to respond and request a personal hearing.

Conclusion:
The judgment determined that PCL's holiday schemes constituted a collective investment scheme under Section 11AA of the SEBI Act. PCL failed to comply with SEBI's registration requirements, necessitating interim measures to protect investors and prevent further fund mobilization.