2015 (6) TMI 1256 - Board - SEBI

Mis-selling of schemes to the public - Ponzi Scheme - company refused to refund the money invested by the complainant in June 2012, when the complainant approached the company for refund of the money as she wanted to discontinue with the plan - preliminary inquiry into whether or not Citrus is carrying on activities of 'collective investment scheme' in terms of Section 11AA of the SEBI Act - HELD THAT - Promoters/Directors/persons in charge of the business of Citrus. Incidentally, the same Directors are also the promoter/directors of Royal Twinkle against whom directions were passed by SEBI on March 07, 2014. Furthermore, SEBI has received several investor complaints against Citrus alleging that Directors of Royal Twinkle are now running their collective investment schemes through Citrus. It is obvious that the schemes launched by Royal Twinkle and Citrus are identical in nature and the same management is running the schemes of both the companies i.e. Royal Twinkle and Citrus. This fact is in direct contravention of the assertion made in the company's letter wherein they stated that they have not offered similar holiday plans through its associates, group etc. This indicates that Citrus is deliberately making false/misleading statements. At this juncture, SEBI cannot be a mere spectator ignoring the investor complaints- specially in the light of the fact that the quantum of funds mobilized from public is a pretty sizeable ₹ 777.04 Crores as on March 31, 2013. As detailed before, Citrus has steadfastly refused to give the latest and relevant information to SEBI despite being given several opportunities to do so. The trail of all these events as well as the conduct of Citrus lead me to draw a prima facie inference that the refusal to give information is nothing but an attempt to conceal the real nature of its fund mobilizing activities. Protecting the interests of investors is the first and foremost mandate for SEBI. Therefore, steps have to be taken in the instant matter to ensure that only legitimate investment activities are carried on by Citrus and no investors are defrauded. Further, in order to safeguard the assets/property acquired by Citrus and its promoters/directors using the funds collected from the investing public until full facts and materials are brought and final decision is taken in the matter, it is incumbent on SEBI to take preventive action by way of an immediate measure. Thus no other alternative but to take recourse to an interim order against Citrus and its Directors for preventing them from further carrying on with its existing fund mobilizing activity by launching 'collective investment scheme', without obtaining registration from SEBI in accordance with law. This order shall be treated as a show cause notice and Citrus and its Directors may show cause as to why the plans/schemes identified in this order should not be held as a 'collective investment scheme' in terms of the Section 11AA of the SEBI Act and the CIS Regulations and why appropriate directions under the SEBI Act and CIS Regulations, including directions in terms of Regulations 65 and 73 of the CIS Regulations should not be issued against them. Citrus and its abovementioned Directors may, within 21 days from the date of receipt of this Order, file their reply.

Summary

Issues Involved:
1. Allegations of Citrus Check Inns Limited running a "Ponzi Scheme" and "mis-selling" its schemes.
2. SEBI's investigation into whether Citrus's activities constitute a "collective investment scheme" under Section 11AA of the SEBI Act.
3. Non-cooperation of Citrus in providing required information to SEBI.
4. Determination of whether Citrus's mobilization of funds falls under the ambit of 'collective investment scheme'.
5. SEBI's interim order and directions to Citrus and its Directors.

Issue-wise Detailed Analysis:

1. Allegations of Citrus Check Inns Limited running a "Ponzi Scheme" and "mis-selling" its schemes:
SEBI received a complaint on January 17, 2014, alleging that Citrus Check Inns Limited was operating a "Ponzi Scheme" and mis-selling its schemes to the public. The complainant mentioned that the company refused to refund the money invested in June 2012, stating that the refund would only be provided after 4 to 5 years without interest.

2. SEBI's investigation into whether Citrus's activities constitute a "collective investment scheme" under Section 11AA of the SEBI Act:
SEBI initiated a preliminary inquiry to determine if Citrus was carrying out activities of a 'collective investment scheme' as per Section 11AA of the SEBI Act. SEBI sought various documents and information from Citrus, including the Memorandum and Articles of Association, details of directors, brochures, application forms, and financial statements. Despite multiple extensions, Citrus delayed providing the complete information.

3. Non-cooperation of Citrus in providing required information to SEBI:
Citrus repeatedly sought extensions and failed to submit the required information within the stipulated time. SEBI issued multiple reminders, but Citrus only partially complied. SEBI noted that Citrus was not cooperating and was attempting to conceal the true nature of its fund mobilizing activities.

4. Determination of whether Citrus's mobilization of funds falls under the ambit of 'collective investment scheme':
SEBI examined the material available and found that Citrus's schemes had the characteristics of a 'collective investment scheme' as defined under Section 11AA(2) of the SEBI Act. The schemes involved pooling of funds from investors with a promise of returns or holiday points, which could be redeemed in cash. The investors did not have day-to-day control over the management and operation of the schemes, and the funds were managed on their behalf by Citrus.

5. SEBI's interim order and directions to Citrus and its Directors:
SEBI concluded that the mobilization of funds by Citrus under its various holiday plans constituted a 'collective investment scheme' without obtaining the necessary registration. SEBI issued an interim order directing Citrus and its Directors to:
- Not collect any fresh money from investors under existing schemes.
- Not launch any new schemes or plans.
- Not raise fresh money from any other existing company within the group.
- Not float any new companies to raise fresh money under such schemes.
- Submit a full inventory of assets obtained through the money raised.
- Not dispose of or alienate any properties/assets obtained through the money raised.
- Not divert any funds raised from the public.
- Furnish all requested information within 15 days.

The order was to take immediate effect and remain in force until further notice. Citrus and its Directors were also given 21 days to respond to the order and indicate if they desired a personal hearing.