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2016 (2) TMI 1272 - AT - SEBIEx-parte interim order - prima facie view of SEBI that the business carried on by the appellants constituted CIS - whether SEBI by its confirmatory order dated August 24, 2015 is justified in continuing the directions contained in the ex-parte interim order dated June 3, 2015 until further orders? - whether SEBI is justified in turning down a request made by the Appellant by way of a Miscellaneous Application before this Tribunal seeking registration as CIS under the CIS Regulations, without prejudice to its right to contend that the schemes operated by it are not covered under CIS? - HELD THAT - Appellants pending further investigation have agreed to be regulated by SEBI without prejudice to their rights and contentions that the schemes in question are not covered under CIS, we direct the appellants to make a without prejudice application seeking registration in respect of the refundable schemes in question preferably within one week from today and further direct SEBI to grant provisional registration to the Appellants as per the procedure prescribed under the CIS Regulations so that interest of investors/customers do not suffer, especially when it is found by SEBI that the business carried on by the appellants prima facie to be in accordance with law except that the said business is carried on without seeking registration from SEBI. Depending on the investigation report, SEBI may consider grant of final registration to the Appellants in accordance with law in due course of time. Needless to say that SEBI shall make an endeavor to complete the pending investigation expeditiously against the appellants so that the prima facie view of SEBI regarding the business activities of the appellants attains finality before hand in one way or the other. For all the aforesaid reasons, while upholding the prima facie view of SEBI that the business carried on by the appellants constituted CIS, we set aside the directions given by SEBI in the impugned orders dated June 3, 2015 and August 24, 2015 and direct the Appellants to make an application for registration with SEBI in respect of the refundable schemes covered by the CIS Regulations, and further direct SEBI to grant provisional certificate of registration as provided under the CIS Regulations forthwith, and eventually on receipt of final investigation report, if found appropriate, grant final registration as per law, so that the schemes being operated by the Appellants are henceforth regulated so that the investors' interests are effectively and properly protected by SEBI. Till the date of granting provisional registration, the Appellants may continue to receive subscription amount from the investors under the existing schemes. Accounts/records of the amounts collected thereunder, shall be maintained in a separate account and appellants shall not launch any new scheme except in accordance with law. The appellants shall also not alienate or create any encumbrance or third party rights on any of their properties except for repayment to the customers/investors
Issues Involved:
1. Justification of SEBI's confirmatory order dated August 24, 2015. 2. SEBI's refusal to register the appellant under CIS Regulations. 3. Compliance with Tribunal's directions. 4. Prima facie case of CIS against the appellants. 5. Consideration of balance of convenience and irreparable loss. 6. Use of powers under Sections 11(1), 11B, and 11(4) of the SEBI Act. 7. Allegations based on commonality of directors. 8. Non-disclosure of complaints to the appellant. 9. Consideration of the order against Royal Twinkle Star Club Ltd. 10. Appellant's request for registration under CIS Regulations. Issue-wise Detailed Analysis: 1. Justification of SEBI's Confirmatory Order: The Tribunal examined whether SEBI's confirmatory order dated August 24, 2015, which reiterated the ex-parte interim order dated June 3, 2015, was justified. The Tribunal noted that SEBI had passed the confirmatory order after hearing the appellants and considering their submissions. However, the appellants argued that the confirmatory order was merely a reiteration of the interim order and did not consider their submissions adequately. The Tribunal found that the confirmatory order lacked detailed analysis and failed to address the appellants' contentions comprehensively. 2. SEBI's Refusal to Register the Appellant under CIS Regulations: The appellants contended that SEBI unjustifiably refused their request for registration under CIS Regulations. The Tribunal emphasized the legislative purpose of registering and regulating collective investment schemes (CIS) to protect investors' interests. It noted that SEBI had unearthed several unregistered CIS cases over the years and stressed the importance of regulating such schemes. The Tribunal directed SEBI to grant provisional registration to the appellants, allowing them to continue their schemes under SEBI's regulation. 3. Compliance with Tribunal's Directions: The appellants argued that SEBI did not comply with the Tribunal's directions in its order dated August 6, 2015. The Tribunal had directed SEBI to hear the appellants and pass a final order by August 24, 2015. The Tribunal found that SEBI's confirmatory order did not constitute a final order as directed, and the hearing provided to the appellants was inadequate. The Tribunal concluded that SEBI's actions violated the principles of natural justice. 4. Prima Facie Case of CIS Against the Appellants: The Tribunal examined whether SEBI had established a prima facie case that the appellants' time-sharing business constituted a CIS. SEBI argued that the appellants' schemes met the criteria for CIS under Section 11AA of the SEBI Act. The Tribunal found that SEBI's prima facie view was based on prudent and rational considerations. However, it noted that SEBI should have considered the appellants' submissions and material more thoroughly before reaching a conclusion. 5. Consideration of Balance of Convenience and Irreparable Loss: The appellants contended that SEBI's actions caused irreparable loss to their business and affected around 4.5 lakh members. The Tribunal noted that SEBI had not adequately considered the balance of convenience and irreparable loss in its confirmatory order. The Tribunal emphasized the need to protect investors' interests while ensuring that the appellants' business operations were not unduly disrupted. 6. Use of Powers Under Sections 11(1), 11B, and 11(4) of the SEBI Act: The appellants argued that SEBI's powers under Sections 11(1), 11B, and 11(4) of the SEBI Act should be used sparingly and in cases of extreme urgency. The Tribunal acknowledged this principle but found that SEBI had sufficient material to form a prima facie view that the appellants' activities fell under CIS. The Tribunal stressed the importance of expediting the investigation to reach a final conclusion. 7. Allegations Based on Commonality of Directors: The appellants contended that SEBI's allegations based on the commonality of directors between their company and Royal Twinkle Star Club Ltd. were unfounded. The Tribunal found that SEBI had not provided sufficient material to substantiate the connection between the two companies. It noted that the commonality of directors alone was insufficient to establish a link between the companies' activities. 8. Non-Disclosure of Complaints to the Appellant: The appellants argued that SEBI had not disclosed the complaints that triggered the investigation. The Tribunal found merit in this contention, noting that SEBI had provided incomplete copies of complaints without giving the appellants an opportunity to address them. The Tribunal directed SEBI to supply legible copies of the complaints to the appellants. 9. Consideration of the Order Against Royal Twinkle Star Club Ltd.: The appellants argued that SEBI had relied on an order against Royal Twinkle Star Club Ltd. without providing them a copy of the order. The Tribunal found that SEBI's reliance on the order without giving the appellants an opportunity to respond was a violation of natural justice. The Tribunal emphasized the need for fair play and transparency in SEBI's actions. 10. Appellant's Request for Registration Under CIS Regulations: The Tribunal considered the appellants' request to seek registration under CIS Regulations without prejudice to their contention that their schemes were not covered under CIS. The Tribunal directed the appellants to apply for registration and instructed SEBI to grant provisional registration. This would allow the appellants to continue their schemes under SEBI's regulation, ensuring investor protection while the investigation continued. Conclusion: The Tribunal upheld SEBI's prima facie view that the appellants' business constituted CIS but set aside SEBI's directions in the impugned orders. It directed the appellants to apply for registration under CIS Regulations and instructed SEBI to grant provisional registration. The Tribunal emphasized the need for SEBI to complete the investigation expeditiously and ensure investor protection. The appeals were disposed of with no order as to costs, and the miscellaneous applications were declared infructuous.
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