2013 (11) TMI 884 - AT - Companies Law

Registration under Section 12(1B) of the SEBI Act, 1992 and Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 - Appellant launched Collective Investment Schemes without obtaining any registration - Collective investment scheme as defined under Section 2(ba) read along with Section 11AA of the SEBI Act - vires of Section 11AA of the SEBI Act challenged - Whether or not the business carried on by the Appellants is in the nature of CIS - Held that - contributions of the customers are quite evidently pooled together and then utilized for the purposes of the scheme carried on by the Appellants. The fact that neither the area nor the location of a particular plot of land being supposedly sold to the investor is mentioned in the Certificate of Property provided for our perusal demonstrates that the money received from a particular investor is not utilized for the purchase and development of one particular plot, but for all the land owned by the Appellants in general. Even from the application form we observe that there is no space ear-marked therein with respect to specifics of the plot allotted to the investors. Further, the plot of land has all along been denoted as a proportionate undivided interest . All of the above denotes that the business of the Appellants is not really in the nature of regular real estate. Appellants unequivocally assure the investors of high returns in the form of profits which may be immovable property - The investors therefore seem to be contributing to the scheme with the clear view of receiving profits, whether in the form of returns or of property whose value increases owing to the developmental activities carried on by the Appellants - when each customer/investor is a recipient of property it is apparent that each customer/investor is admittedly a recipient of one of the benefits contemplated under Section 11AA(2)(ii), namely, property . Certificate of Property is more in the nature of a certificate of investment - certificate falls completely within the scope of the definition of the terms securities as provided in Section 2(h) of SCRA which as amended by the Securities Laws (Amendment) Act, 2004, w.e.f. October 12, 2004, now includes units or any other instrument issued by any Collective Investment Scheme to the investors in such schemes. Therefore, the certificate issued to the investors readily falls within the meaning of the expression securities . Property in question, the investment involved and the management thereof are all in the hands of the Appellants with the customers having no role to play whatsoever, since the scheme is operated by the Appellants on the customers behalf. In this connection, we note that the Supervision Agreement executed between the Appellants and their customers states that during the period of development, although the customer may inspect the land, he would so only after informing the company of such intention and after giving due notice to the Appellants. Further, the agreement in question also states that there shall be no interference of the investor as regards the working, management, control and supervision of the land in question in any manner. Further, the fact that a power of attorney giving an authorized representative of the Appellants the authority to execute documents and deeds on behalf of the customer is executed by all investors proves beyond a shred of doubt that the property along with the contribution received under the scheme is managed by the Appellants. Role of the customers is no more than that of hapless investors, standing and observing the show from the sidelines as it is run by the Appellants - Appellants were/are under an obligation to apply for registration with the SEBI as per the requirements laid down in the CIS Regulations and the SEBI Act. In this connection, it is pertinent to note that in the interpretation of such regulatory measures, like the CIS Regulations in hand, the most important task is to determine the pith and substance of the provisions concerned, i.e., their true and essential character - Closing or winding up such CISs is an extreme measure to be resorted to in rare cases of adamant companies who do not wish to abide by the CIS Regulations, in the matter of registration and other conditionalities laid down therein. Considering the large number population involved and the long and tedious process of implementing the scheme of repayment involved which would entail a number of steps before money is finally received by the investors, including going through more than one and a half applications; ascertaining the amount / money to be paid in each and every case; disposing off the property; writing and dispatching cheques to the investors etc., we are inclined to grant them a longer period of time than that provided by SEBI - Order modified - Decided partly in favour of appellant.

Summary

Issues Involved:
1. Challenge to the rejection of the request for a consent order.
2. Challenge to the impugned order declaring the appellant's business as a Collective Investment Scheme (CIS) without SEBI registration.

Detailed Analysis:

Issue 1: Challenge to the Rejection of the Request for a Consent Order

Background:
The Appellants challenged the Respondent's outright rejection of their request for a consent order without any consideration, as mandated by SEBI circulars dated April 20, 2007, and May 25, 2012.

Arguments by Appellants:
- The Respondent had no legal authority to return the consent application without due consideration as per the established procedure.
- The consent application should only be returned for rectification based on specific deficiencies as mentioned in Clauses 8 and 9 of the circular dated May 25, 2012.

Arguments by Respondent:
- The appeal is not maintainable as the clause in the Show Cause Notice (SCN) inviting the consent application is a standard form clause and does not guarantee the right to a consent order.

Tribunal's Findings:
- The Respondent should have processed the consent application as per the procedure established by law and sought an extension of time from the High Court of Delhi if necessary.
- The Tribunal found the Respondent's action of returning the consent application without processing it unreasonable and directed that the consent application should have been considered properly.

Conclusion:
The Tribunal ruled that the Respondent's action of returning the consent application was not justified, and the application should have been processed as per the established legal procedure.

Issue 2: Challenge to the Impugned Order Declaring the Business as CIS

Background:
The Appellants challenged the impugned order dated June 21, 2013, which declared that the Appellant No. 1 had launched CIS without obtaining SEBI registration, violating Section 12(1B) of the SEBI Act, 1992, and Regulation 3 of the CIS Regulations, 1999.

Arguments by Appellants:
- Appellant No. 1 argued that it was engaged in the sale and development of land and not in any securities or CIS as defined under the SEBI Act.
- The business transactions involved the sale of land and subsequent development under a Supervision Agreement, which is a common practice in the real estate sector.
- The money received was classified as consideration for 'stock in trade' and not as deposits or loans from the public.
- The Appellants distinguished their case from the PGF Ltd. case, arguing that their transactions did not meet the criteria of a CIS.

Arguments by Respondent:
- The Respondent argued that the business carried on by the Appellants met all the conditions of a CIS as per Section 11AA of the SEBI Act.
- The contributions from investors were pooled and managed by the Appellants, and the investors had no day-to-day control over the scheme.
- The investors were assured of returns or appreciation in the value of the land, indicating the presence of a CIS.

Tribunal's Findings:
- The Tribunal analyzed the provisions of Sections 11AA and 12(1B) of the SEBI Act and Regulations 3 and 73 of the CIS Regulations.
- The Tribunal found that the scheme carried on by the Appellants involved pooling of investor contributions, management of the scheme by the Appellants, and assurance of returns, fitting the definition of a CIS.
- The Tribunal upheld the impugned order, declaring the Appellant's business as a CIS requiring SEBI registration.

Conclusion:
The Tribunal dismissed the appeal, upholding the impugned order. However, considering the large number of investors and the complexity of the repayment process, the Tribunal extended the time frame for compliance to eighteen months, with periodic progress reports to be submitted to SEBI.

Final Order:
- Appeal No. 123 of 2013: The Tribunal directed SEBI to consider the consent application as per the established legal procedure.
- Appeal No. 124 of 2013: The Tribunal dismissed the appeal, upholding the impugned order but extended the compliance period to eighteen months with periodic reporting to SEBI.