2013 (7) TMI 279 - HC - Companies Law

Regulation 2(1)(s) of SEBI Regulations, 1999 - Collective Investment Schemes - Computation of net worth - whether Article 14 ultra vires insofar as it excludes the funds created for revaluation while determining the net worth of the company and other reliefs - Held that - Contentions put forth on Article 14 are unacceptable. The Regulations are made in exercise of the powers conferred under Section 30, read with Sections 11 and 19 of the Securities and Exchange Board of India Act, 1992. It is in pursuance of the objects sought to be achieved, that the regulations prescribe, the conditions for eligibility for a certificate, wherein the applicant should have a net worth of not less than Rs.5 crores. The exclusion of funds created out of revaluation in terms of the definition of Regulation 2(1)(s), cannot be said to be arbitrary or an artificial definition. The object sought to be achieved in defining net worth to exclude the funds created out of revaluation, is to protect the interest of the investors. The protection of the interests of the investors is sought to be achieved by defining net worth , which means the aggregate capital and free reserves and excluding the funds created out of revaluation. The funds created on revaluation would at times amount to an artificial valuation and not the true value. That the interest of the investors would necessarily be affected if net worth includes such revaluation. Therefore, net worth has been defined to exclude such a revaluation. Hence, the contention of arbitrariness by offending Article 14 or the right to do business under Article-19(l)(g) is unsustainable. Appeal dismissed.

Summary

Issues Involved:

1. Validity of Regulation 2(1)(s) of SEBI (Collective Investment Schemes) Regulations, 1999 under Article 14 of the Constitution of India.
2. Compliance with Regulation 9(c) regarding the 'net worth' requirement.
3. Impact of excluding revaluation funds on the 'net worth' calculation.
4. Right to carry on business under Article 19(1)(g) of the Constitution of India.

Issue-wise Detailed Analysis:

1. Validity of Regulation 2(1)(s) under Article 14 of the Constitution of India:

The appellants sought a declaration that Regulation 2(1)(s) of SEBI Regulations, 1999 is ultra vires Article 14 of the Constitution of India, arguing that excluding funds created for revaluation while determining 'net worth' is arbitrary and causes injustice. The court examined the definition of 'net worth' in Regulation 2(1)(s), which excludes revaluation funds, and found it consistent with similar definitions in other enactments like the Indian Companies Act and the Sick Industrial Companies (Special Provision) Act, 1985. The court concluded that the definition is simple, clear, and unambiguous, and does not violate Article 14.

2. Compliance with Regulation 9(c) regarding the 'net worth' requirement:

Regulation 9(c) stipulates that an applicant must have a 'net worth' of not less than Rs.5 crores, with a minimum of Rs.3 crores at the time of application, increasing to Rs.5 crores within three years. The appellant failed to meet this requirement, leading to a directive to wind up the scheme and repay investors. The court upheld this condition, emphasizing that it is necessary for the orderly and healthy growth of the securities market and for investor protection.

3. Impact of excluding revaluation funds on the 'net worth' calculation:

The appellant argued that excluding revaluation funds from 'net worth' calculation is unfair and leads to a lower 'net worth' than the actual value, which would be greater than Rs.5 crores if revaluation was included. The court found that including revaluation funds could result in artificial valuations not reflecting true value, potentially harming investor interests. Therefore, the exclusion of revaluation funds is justified to protect investors, and the definition of 'net worth' is fair and reasonable.

4. Right to carry on business under Article 19(1)(g) of the Constitution of India:

The appellant contended that the regulation infringes on their right to carry on business. The court held that the right to carry on business is not absolute and can be regulated in the interest of the public. The regulations, formed under the SEBI Act, aim to protect investor interests and ensure the orderly growth of the securities market. Thus, the conditions imposed by the regulations, including the 'net worth' requirement, are necessary and do not violate Article 19(1)(g).

Conclusion:

The court found no merit in the appeal, upholding the Learned Single Judge's decision. The regulations were deemed consistent with the SEBI Act's objectives, and the conditions for 'net worth' were justified to protect investor interests. The appeal was dismissed, affirming the requirement for the appellant to wind up the scheme and repay investors.