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2016 (3) TMI 764 - AT - Companies LawRegistration as CIS under the CIS Regulations - Regulations framed by SEBI - 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 - 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. However, the 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 rejection of the appellant's request for registration under CIS Regulations. 3. Compliance with procedural fairness and natural justice. 4. Prima facie classification of the appellant's business as a Collective Investment Scheme (CIS). 5. Consideration of balance of convenience and irreparable loss. 6. SEBI's exercise of powers under Sections 11(1), 11B, and 11(4) of the SEBI Act, 1992. 7. Allegations of fund diversion and commonality of directors between the appellant and another company. 8. SEBI's reliance on complaints and documents not disclosed to the appellant. Detailed Analysis: 1. Justification of SEBI's Confirmatory Order: The Tribunal examined whether SEBI was justified in continuing the directions from the ex-parte interim order dated June 3, 2015. The confirmatory order dated August 24, 2015 reiterated the earlier directions without adequately considering the appellant's submissions and materials. The Tribunal noted that the confirmatory order should have addressed the appellant's arguments and evidence, which it failed to do, thus rendering the process seemingly perfunctory. 2. SEBI's Rejection of Registration Request: The appellant's request for registration under CIS Regulations was rejected by SEBI. The Tribunal highlighted the legislative intent behind the CIS Regulations, emphasizing the need to register and regulate such schemes to protect investors. Given that only one company had been registered under CIS Regulations since their inception, the Tribunal urged SEBI to permit the appellant to seek registration, even if belatedly, to ensure regulatory oversight and investor protection. 3. Compliance with Procedural Fairness and Natural Justice: The Tribunal found that SEBI violated principles of natural justice by not providing the appellant with complete copies of complaints and other documents relied upon in the show cause notice. The Tribunal directed SEBI to supply these documents to the appellant and ensure a fair hearing process. Additionally, the Tribunal criticized SEBI for relying on an order dated August 21, 2015, pertaining to another company, without providing the appellant an opportunity to respond to it. 4. Prima Facie Classification as CIS: The Tribunal upheld SEBI's prima facie view that the appellant's business constituted a CIS under Section 11AA of the SEBI Act, 1992. The Tribunal noted that the appellant's schemes involved elements of refund with promised returns, distinguishing them from similar schemes by other companies that did not offer such refunds. However, the Tribunal also recognized the need for a detailed investigation to reach a final conclusion. 5. Consideration of Balance of Convenience and Irreparable Loss: The Tribunal observed that SEBI failed to consider the balance of convenience and the potential irreparable loss to the appellant and its members. The appellant argued that continuing the schemes was in the larger interest of its 4.5 lakh members, and abrupt cessation would cause significant harm. The Tribunal directed SEBI to take these factors into account during the investigation and decision-making process. 6. SEBI's Exercise of Powers: The Tribunal scrutinized SEBI's use of powers under Sections 11(1), 11B, and 11(4) of the SEBI Act, 1992. It emphasized that such powers should be invoked sparingly and only in cases of extreme urgency. The Tribunal found that while SEBI had some basis for its actions, the delay in passing the impugned order and the lack of clear, uncontroverted material weakened SEBI's case. 7. Allegations of Fund Diversion and Commonality of Directors: The Tribunal noted that SEBI's allegations of fund diversion and commonality of directors between the appellant and another company (Royal Twinkle Star Club Ltd.) were not substantiated with sufficient material. The Tribunal referred to the Supreme Court's judgment in Commissioner of Central Excise, Bangalore vs. Brindavan Beverages Pvt. Ltd., emphasizing that vague and unsubstantiated allegations could not form the basis for adverse action. 8. SEBI's Reliance on Undisclosed Complaints: The Tribunal found merit in the appellant's contention that SEBI relied on complaints and documents not fully disclosed to the appellant, violating principles of natural justice. The Tribunal directed SEBI to provide complete copies of all relied-upon documents and ensure that the appellant had a fair opportunity to respond. Conclusion: The Tribunal set aside SEBI's directions in the impugned orders dated June 3, 2015, and August 24, 2015. It directed the appellant to apply for registration under CIS Regulations and SEBI to grant provisional registration, ensuring regulatory oversight and investor protection. The Tribunal emphasized the need for SEBI to complete its investigation expeditiously and make a final determination based on a thorough and fair process.
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