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2015 (11) TMI 591 - AT - Companies LawGuilty of sponsoring and managing Collective Investment Scheme without obtaining certificate of registration from SEBI - contravention of Section 12(1B) of the Securities and Exchange Board of India Act, 1992 and Regulation 3 of the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 - Held that - Except finding fault with the appellant in not seeking registration before operating the scheme, no fault is found in the scheme operated by the appellant. In other words, SEBI does not find fault with the scheme of the appellant which neither offered guaranteed return nor offered interest on the amount invested. In such a case, on what basis appellant is directed to refund the amount invested with interest at the rate of 10% per annum is not set out in the impugned order. It is relevant to note that even after issuing a press note on February 13, 2008, SEBI itself was not sure till 2013 as to whether the scheme in question is covered under CIS or not. In fact when respondent no. 2 who had invested in the scheme had complained against the appellant, SEBI by its communication dated 31.01.2011 informed the respondent no. 2 that the scheme was not covered under CIS and therefore the investors who have invested in the scheme of the appellant cannot seek redressal of their grievances from SEBI. It is only when this Tribunal on 29.11.2012 set aside the said communication dated 31.01.2011 and directed SEBI to reexamine the issue afresh in accordance with law, SEBI has passed the impugned order on April 15, 2013 holding that the scheme floated by the appellant is covered under CIS. Thus decision of SEBI that the scheme in question does not fall within the purview of SEBI held the field till SEBI changed its stand and passed the impugned order on April 15, 2013. In such a case, for the error committed by SEBI in misconstruing its own regulations and for the inordinate delay on part of SEBI in arriving at correct conclusion whether the appellant can be penalized by directing to refund the amount with interest at the rate of 10% from the date of investment needs consideration, especially when the scheme has come to an end in the year 2010 and the terms of the said scheme neither offered guaranteed return nor offered interest on the amount invested. Although regulation 65 of CIS Regulations empower SEBI to direct refund with interest in appropriate cases, how in the facts of present case, directing refund of the amount invested with interest is justified, is not set out in the impugned order. Explanation given by the appellant that due to recession in the market the art works could not be sold at a profit is not doubted in the impugned order. In such a case, it is not known as to on what basis direction to pay amount of profits/income to the investors is given. Even counsel for respondent no. 2 finds fault with the impugned order, and submits that the WTM has not done the work of ascertaining the profits if any, at the time when the scheme ended and further submits that NAV (ex-income) ought to have been taken into consideration by the WTM while passing the impugned order. Thus while upholding the impugned order of SEBI to the extent it holds that the scheme operated by the appellant during the period from 2006 to 2010 constituted CIS, we set aside the directions contained in the impugned order to the extent it directs the appellant to refund the monies collected by it under the said scheme but remaining unpaid to all the investors and also set aside the direction given by SEBI to the appellant to pay profits/income due to the investors or pay interest at the rate of 10% per annum from the date of investment till the date of refund, whichever is higher and direct SEBI to decide those issues afresh after affording an opportunity of hearing to the appellant and the respondent no. 2.
Issues Involved:
1. Whether the Art Fund sponsored by the appellant constitutes a Collective Investment Scheme (CIS) under Section 11AA of the SEBI Act. 2. Whether SEBI has jurisdiction to regulate the Art Fund. 3. Whether the appellant violated SEBI Act and CIS Regulations by operating the Art Fund without obtaining registration. 4. Whether SEBI's directive to wind up the CIS and refund the monies with interest is justified. Issue-wise Detailed Analysis: 1. Whether the Art Fund sponsored by the appellant constitutes a Collective Investment Scheme (CIS) under Section 11AA of the SEBI Act: The Tribunal held that the Art Fund sponsored by the appellant satisfies the conditions laid out under Section 11AA(2) of the SEBI Act, which defines a CIS. The conditions include pooling contributions from investors, utilizing these contributions for the scheme, managing the pooled funds on behalf of investors, and investors not having day-to-day control over the management of the scheme. The Tribunal found that the Art Fund met all these criteria, as it pooled Rs. 102.40 crores from 656 investors, utilized these funds to purchase artworks, and managed the investments without the investors having day-to-day control. 2. Whether SEBI has jurisdiction to regulate the Art Fund: The Tribunal concluded that SEBI has jurisdiction to regulate the Art Fund. Section 11(1) and Section 11(2)(c) of the SEBI Act empower SEBI to protect the interests of all investors in securities, including those in CIS. The Tribunal rejected the appellant's argument that the term "company" in Section 11AA(2) restricts SEBI's jurisdiction to schemes offered by companies only. It clarified that the term "any scheme" under Section 11AA(1) is broad enough to cover schemes offered by any entity, not just companies. The Tribunal also noted that Section 11AA(3) carves out exceptions for certain entities but does not include private trusts, thus affirming SEBI's jurisdiction over the Art Fund. 3. Whether the appellant violated SEBI Act and CIS Regulations by operating the Art Fund without obtaining registration: The Tribunal found that the appellant violated the SEBI Act and CIS Regulations by operating the Art Fund without obtaining the necessary registration. Section 12(1B) of the SEBI Act mandates that no person shall sponsor or carry on a CIS without a certificate of registration from SEBI. The Tribunal noted that the appellant, as the sponsor and Asset Management Company (AMC) of the Trust, was responsible for managing the Art Fund and had close ties with the Trustee Company. This arrangement was seen as a modus operandi to run a CIS through a private trust, which required SEBI registration. 4. Whether SEBI's directive to wind up the CIS and refund the monies with interest is justified: The Tribunal partially upheld SEBI's directive. While it agreed with SEBI's decision to classify the Art Fund as a CIS and noted the appellant's failure to obtain registration, it found SEBI's directive to refund the monies with interest at 10% per annum problematic. The Tribunal highlighted that the scheme had ended in January 2010, and SEBI itself was uncertain about the scheme's status until 2013. It also noted that the scheme did not guarantee returns or interest on investments. Consequently, the Tribunal set aside the directive to refund the monies with interest and directed SEBI to reconsider this issue after hearing both parties. Conclusion: The Tribunal upheld SEBI's decision that the Art Fund constituted a CIS and that the appellant violated the SEBI Act and CIS Regulations by operating the scheme without registration. However, it set aside SEBI's directive to refund the monies with interest and directed SEBI to re-evaluate this aspect after hearing the parties involved. The appeal was partly allowed, with no order as to costs.
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