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2019 (8) TMI 1143 - AT - SEBIRunning a Collective investment scheme CIS without obtaining the certificate of registration - order of refund of the monies collected illegally under the CIS Scheme - direction of WTM directing refund of the monies collected under the CIS - appellant seeking to circulate the information memorandum under Regulation 73 to its investors - HELD THAT - Regulation 73 is not applicable in the instant case in as much as it was not an existing scheme as on the date of incorporation of the Regulations which came into effect on January 25, 1995. The appellant s CIS scheme came into effect much after 2005. In SEBI vs. Gaurav Varshney and Ors. . 2016 (7) TMI 642 - SUPREME COURT has categorically held that an existing collective investment scheme within the meaning of Section 12(1B) as also within the meaning of collective investment regulations, comprise of only such collective investment scheme which has come into existence prior to January 25, 1995. In the instant case, the appellant s scheme came into existence much after January 25, 1995 and, thus, Regulation 73 of the CIS Regulations is not applicable. Once there is an order to refund the money collected by the appellant under the scheme, the question of circulating the information memorandum to the contributories under Regulation 73(6) and requiring the contributors / investors to give their consent under Regulation 73(7) does not arise. Such exercise would be defeating the order of refund of the monies collected illegally under the CIS Scheme. Merely quoting a wrong provision of the Statute while exercising power under an Act would not invalidate the order passed by the authority if it is shown that such order could be passed under other provisions of the Statute When there was a clear cut direction of WTM directing refund of the monies collected under the CIS, the question of continuing with the scheme by distribution of information memorandum under Regulation 73 does not arise. The application of the appellant seeking to circulate the information memorandum under Regulation 73 to its investors was patently misconceived and was rightly rejected. Request for extension of time to refund the monies, we are of the opinion that the WTM rightly rejected the application. Enough latitude has been given to the appellant to refund the amount. More than five years have elapsed and the order of SEBI dated June 21, 2013 is yet to be implemented in full. Upon consideration of the material that has been brought on record, we find that even though the independent auditor was appointed on August 6, 2015, for almost three months, the appellant did not schedule a meeting with the auditor. As a result, the auditor had to intimate SEBI that they were unable to continue with the audit on account of non-cooperation by the appellant. Based on this non-cooperation, a show cause notice dated November 20, 2015 was issued to show cause as to why the order dated May 27, 2015 should not be revived. In this show cause notice, it was categorically indicated that the auditor had made request on September 2, 2015, October 6, 2015, October 20, 2015 and November 2, 2015 for holding a meeting which the appellant failed to adhere. The record also indicates that the audit recommenced on March 21, 2016 and inspite of auditor taking a sample of 49282 out of 257477 investors, the company failed to provide the necessary certificates and only provided 8471 certificates and that too without providing the bank statements for cross verification. Appellant resorted to all kinds of dilatory tactics in not getting the repayments verified, namely, whether the appellant had actually refunded the amount to the investors. WTM also took note of the income tax report in which it was indicated that monies have not been refunded to the investors and have been diverted to a sister company of the appellant. In the light of the conduct of the appellant, we are of the opinion that admittedly the entire amount has not been repaid to the investors and whatever has been alleged by the appellant to have been repaid has not been verified. The appellant is guilty of adopting dilatory tactics in getting the repayments verified. Thus, we are of the opinion that the application for extension of time to refund the amount was rightly rejected. It may be stated here that more than ₹ 1900 crores were collected which till date has not been refunded inspite of the order being passed by SEBI on June 21, 2013. Thus, no relief can be granted to the appellant.
Issues Involved:
1. Whether the appellant's operations constituted a collective investment scheme (CIS) under Section 11AA of the SEBI Act. 2. Legality of SEBI's order directing the appellant to refund money to investors. 3. Applicability of Regulation 73 of the CIS Regulations to the appellant's scheme. 4. Request for extension of time to refund the money to investors. 5. Alleged non-cooperation by the appellant with the appointed auditor. Issue-wise Detailed Analysis: 1. Whether the appellant's operations constituted a collective investment scheme (CIS) under Section 11AA of the SEBI Act: The Securities and Exchange Board of India (SEBI) issued a show cause notice to the appellant, a public limited company, alleging that it was running a collective investment scheme without obtaining the necessary certificate of registration. The Whole Time Member (WTM) of SEBI, after considering the evidence and hearing, concluded that the appellant's operations were indeed in the nature of a collective investment scheme as defined under Section 11AA of the SEBI Act. Consequently, SEBI directed the appellant to refund the money collected from its investors within three months. 2. Legality of SEBI's order directing the appellant to refund money to investors: The appellant challenged SEBI's order, but the Tribunal upheld SEBI's findings regarding the nature of the appellant's operations as a collective investment scheme. The Tribunal allowed the appellant 18 months to refund the money collected from investors and granted liberty to seek further extension if required. The appellant's subsequent appeal to the Supreme Court was dismissed as withdrawn, making SEBI's order final. SEBI later rejected the appellant's application for an extension of time and permission to circulate an information memorandum, directing attachment and recovery proceedings for noncompliance. 3. Applicability of Regulation 73 of the CIS Regulations to the appellant's scheme: The appellant contended that SEBI committed an error in rejecting the application to circulate the information memorandum under Regulation 73 of the CIS Regulations. However, the Tribunal found this contention "patently misconceived." The Tribunal clarified that Regulation 73 pertains to existing collective investment schemes as of January 25, 1995, and the appellant's scheme, which came into existence much later, did not qualify as an existing scheme. The Tribunal cited the Supreme Court's ruling in SEBI vs. Gaurav Varshney, which held that Regulation 73 applies only to schemes existing before January 25, 1995. Therefore, Regulation 73 was not applicable to the appellant's scheme. 4. Request for extension of time to refund the money to investors: The Tribunal found that the WTM rightly rejected the appellant's application for an extension of time to refund the money. SEBI had initially directed the appellant to refund the money within three months, and the Tribunal had extended this period by 18 months. Despite this, the appellant failed to refund the amount within the stipulated time. The Tribunal noted that more than five years had elapsed since SEBI's order, and the appellant had resorted to dilatory tactics to avoid repayment. The Tribunal concluded that the application for an extension was rightly rejected. 5. Alleged non-cooperation by the appellant with the appointed auditor: The Tribunal observed that SEBI appointed an independent auditor to verify the payments made by the appellant to investors. The appellant allegedly did not cooperate with the auditor, leading to a show cause notice from SEBI. The auditor's interim report indicated that the appellant failed to provide necessary data for verification. The Tribunal found that the appellant's non-cooperation and dilatory tactics hindered the verification process. Consequently, the WTM's decision to reject the application for an extension of time was justified. Conclusion: The Tribunal dismissed the appeal, affirming SEBI's orders and rejecting the appellant's contentions regarding the applicability of Regulation 73 and the request for an extension of time. The Tribunal emphasized that the appellant's non-cooperation and dilatory tactics justified the rejection of their requests. The appeal failed, and all miscellaneous applications were deemed infructuous and rejected.
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