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2016 (2) TMI 1121 - Board - Companies LawSchemes launched and carried as Collective Investment Scheme ( CIS ) u/s 11AA of the Securities and Exchange Board of India Act, 1992 - the Company had operated such CIS without registration from SEBI as mandated under section 12(1B) of the SEBI Act and regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 - the board of directors responsible for the conduct of the business of a company and liable for any non-compliance of law and such liability shall devolve on individual directors - Held that - Scheme/s launched and operated by the Company through which the Company mobilizes monies from public and pools the same with respect to its activities including the schemes. The submissions regarding the claim made by the Income Tax Department and the Service Tax Department are therefore extraneous to the matter. In view of the above discussion, do not see merit in the submissions of the Company and accordingly hold that the first condition under section 11AA(2)(i) of the SEBI Act is satisfied. Considering that the scheme offers the benefit called the surrender value (higher in value than the contribution of investor) and also as more than 97% of the customers have received the surrender value, and further that the Company has admittedly offered insurance benefits to its customers, it can be definitely said that the customer have made the contributions or payments to the schemes of the Company with a view to receive benefits/profits/income, from such scheme or arrangement. Second condition does not mention about any rates of return that would be required to classify a scheme as a CIS. It only mentions profits, income, produce or property, whether movable or immovable from such scheme or arrangement . Therefore, if a return is received in the form of monetary value, produce or property from a scheme, the scheme in question is said to have satisfied this condition. In view of the above, conclude that the schemes, as alleged in the SCN, satisfy the second condition under section 11AA(2)(ii) of the SEBI Act. As can be seen, the facts of the case already decided by the Hon ble SAT and the refundable schemes operated by the Company in the present case are similar. Therefore, it is clear that the schemes of the Company being in the nature of room nights/holiday options are CIS in terms of section 11AA of the SEBI Act. The schemes of the Company, as alleged in the SCN, are collective investment schemes in terms of section 11AA(1) and (2) of the SEBI Act. The Company has not obtained registration as required under section 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations. In view of the findings and conclusions and in exercise of the powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992 and Sections 11(1), 11B and 11(4) thereof and regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999, hereby dispose off the SCN dated August 24, 2015 issued to the Company and directors with the following directions (a) Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan, shall abstain from collecting any money from the investors or launch or carry out any Collective Investment Schemes including the scheme which have been identified as a Collective Investment Scheme in this Order. (b) Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan shall wind up the existing Collective Investment Schemes and refund through Bank Demand Draft or Pay Order , the money collected by the said company under the schemes with returns which are due to its investors as per the terms of offer within a period of three months from the date of this Order and thereafter within a period of fifteen days, submit a winding up and repayment report to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, including the trail of funds claimed to be refunded, bank account statements indicating refund to the investors and receipt from the investors acknowledging such refunds. In case the Company has made refunds, it shall produce the proof for such repayment as directed above and also submit a certificate from Chartered Accountant as directed in sub-paragraph (d) below. (c) Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan, shall not alienate or dispose off or sell any of the assets of the Company, except for the purpose of making refunds to its investors as directed above. (d) After completing the aforesaid repayments in terms of sub-paragraph (b) above, the Company, Pancard Clubs Limited shall file a certificate of such completion with SEBI, within a period of 15 days, from two independent peer reviewed Chartered Accountants who are in the panel of any public authority or public institution. For the purpose of this Order, a peer reviewed Chartered Accountant shall mean a Chartered Accountant, who has been categorized so by the Institute of Chartered Accountants of India ( ICAI ). (e) Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan are also directed to provide a full inventory of all their assets and properties and details of all their bank accounts, demat accounts and holdings of shares/securities, if held in physical form. (f) Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan are restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market for a period of 4 years. (g) In the event of failure by Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan, to comply with the above directions, the following actions shall follow - Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan shall remain restrained from accessing the securities market and would further be prohibited from buying, selling or otherwise dealing in securities, even after the period of 4 years of restraint imposed in sub-paragraph (f) above, till all the Collective Investment Schemes of the Company are wound up and all the monies mobilized through such schemes are refunded to its investors with returns which are due to them. - SEBI would make a reference to the State Government/Local Police to register a civil/criminal case against the Company, its promoters, directors and its managers/persons in-charge of the business and its schemes, for offences of fraud, cheating, criminal breach of trust and misappropriation of public funds; - SEBI would make a reference to the Ministry of Corporate Affairs, to initiate the process of winding up of the Company. - SEBI would make a reference to the Ministry of Corporate Affairs to restrain above-mentioned noticee directors from being directors in other companies. - SEBI shall initiate attachment and recovery proceedings under the SEBI Act and rules and regulations framed thereunder against the Company and others responsible. This order shall come into force with immediate effect. As we note that SEBI has already initiated adjudication proceedings against the Company for launching and carrying on unregistered CIS activities and the same is pending. Additionally, this Order shall be without prejudice to the right of SEBI to initiate prosecution proceedings under section 24 of the Securities and Exchange Board of India Act, 1992 against Pancard Clubs Limited and its directors Sudhir Shankar Morvekar, Shoba Ratnakar Barde, Usha Arun Tari, Manish Kalidas Gandhi, Chandrasen Ganpatrao Bhise and Ramachandran Ramakrishnan including other persons who are in default, for the violations as found in this Order.
Issues Involved:
1. Whether the schemes of the Company are Collective Investment Schemes (CIS) under section 11AA of the SEBI Act. 2. Whether SEBI has jurisdiction over the Company's schemes. 3. Whether the Company and its directors violated section 12(1B) of the SEBI Act and regulations 3 and 65 of the CIS Regulations. 4. Whether the Company should be allowed to follow the procedure under regulation 73 of the CIS Regulations. 5. Appropriate directions and actions to be taken against the Company and its directors. Issue-wise Detailed Analysis: 1. Whether the schemes of the Company are Collective Investment Schemes (CIS) under section 11AA of the SEBI Act: The judgment found that the schemes offered by the Company, which involved pooling of funds from investors to provide room nights and a surrender value higher than the initial contribution, satisfied the conditions of a CIS under section 11AA(2) of the SEBI Act. The schemes involved pooling of contributions, investors expecting returns in the form of surrender value, management of the pooled funds by the Company, and lack of day-to-day control by investors over the schemes. Therefore, the schemes were deemed to be CIS. 2. Whether SEBI has jurisdiction over the Company's schemes: SEBI's jurisdiction was upheld, rejecting the Company's argument that their schemes were excluded under the explanation to section 12(1B) due to the inclusion of insurance benefits. The judgment clarified that the exemption applies only to products issued by insurers combining investment and insurance. Since the Company is not an insurer, SEBI has jurisdiction over the schemes. 3. Whether the Company and its directors violated section 12(1B) of the SEBI Act and regulations 3 and 65 of the CIS Regulations: The Company and its directors were found to have violated section 12(1B) of the SEBI Act and regulations 3 and 65 of the CIS Regulations by operating unregistered CIS. The directors, being responsible for the conduct of the Company's business, were held liable for these violations. 4. Whether the Company should be allowed to follow the procedure under regulation 73 of the CIS Regulations: The judgment rejected the Company's request to follow the procedure under regulation 73, which applies to existing CIS at the time the regulations were introduced. The Company's schemes, launched after the CIS Regulations came into force, did not qualify for this provision. The judgment relied on the Hon'ble SAT's clarification in the PACL case, stating regulation 73 does not apply to CIS floated after the regulations came into effect. 5. Appropriate directions and actions to be taken against the Company and its directors: The Company and its directors were directed to wind up the CIS and refund the money collected from investors with due returns within three months. They were also restrained from accessing the securities market for four years and prohibited from buying, selling, or dealing in securities. The judgment included provisions for further actions in case of non-compliance, such as initiating civil/criminal cases, referring the matter to the Ministry of Corporate Affairs for winding up the Company, and initiating attachment and recovery proceedings. Conclusion: The judgment concluded that the Company's schemes are CIS and directed the Company and its directors to wind up the schemes and refund the investors. SEBI's jurisdiction was affirmed, and the directors were held liable for the violations. The request to follow regulation 73 was denied, and stringent directions were issued to ensure compliance and protect investors' interests.
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