2024 (11) TMI 529 - HC - SEBI

PIL seeking several reliefs to deal with the menace of entities issuing financial instruments like Agro Bonds, Plantation Bonds, etc. (Financial Schemes) luring investors with promises of high returns but without any tangible securities leaving the investors in a lurch - SEBI instituted this Public Interest Litigation when there was no effective regulatory and statutory framework to control the mushrooming number of entities indulging in such financial schemes HELD THAT - By orders made in this petition, the Deputy Commissioner of Police was appointed as the Investigating Officer and directed to file reports in sealed covers at the final hearing. However, we could find no such reports in the file, and ultimately, it turned out that the Deputy Commissioner of Police did not file any such Reports. Accordingly, we adjourned the matter to enable the learned A.P.P. to obtain instructions. We find that the Reserve Bank of India was directed to appoint three auditors to investigate the affairs of the first respondent Company. One of the auditors submitted its report to the Deputy Commissioner of Police. However, no inquiry report has been filed as directed in our order dated 16.06.1998. Therefore, this direction should be complied with within eight weeks of today by filing the inquiry report before the Company Court in company petition no. 226/1998. Official Liquidator oversees respondents nos.1 to 5 and 7 properties. He should take steps in the best interest of the investors, make reports to the Company Court, and hereafter act under the orders and guidance of the Company Court. The issue of attachment, sale, etc., of the assets of respondents nos.1 to 5 and 7 will now be considered by the Company Court in Company Petition No. 226/1998. The further issues of repayment of the invested amounts or at least proportionate invested amounts will also be dealt with in the Company Petition in terms of the procedure prescribed. This will involve inviting of claims, adjudication of claims, formulation of schemes, etc. The pending notices of motion and civil applications do not survive and are disposed of. However, this does not preclude any parties from filing similar notices of motion, interim applications, etc., in Company Petition. This petition is accordingly disposed of after detagging the Company Petition

Summary

Issues:
SEBI's PIL seeking reliefs for entities issuing financial schemes, absence of regulatory framework, assets of a company under winding-up, compliance with court directions, detagging Company Petition No. 226/1998.

Analysis:
The High Court of Bombay heard a Public Interest Litigation (PIL) filed by SEBI to address the issue of entities issuing financial instruments without proper securities, leaving investors in distress. SEBI highlighted the absence of an effective regulatory framework to control such schemes, leading to the institution of the PIL. The court noted that while amendments to the SEBI Act in 1995 prohibited new Collective Investment Schemes (CIS) without SEBI registration, specific regulations for regulating CIS were not in place at the time. SEBI sought relief against a company that collected a significant amount through various schemes but failed to honor commitments, resulting in the appointment of an Official Liquidator to oversee the winding-up process.

The court acknowledged the progress made in formulating regulations such as the Securities and Exchange Board of India (Collective Investment Scheme) Regulations, 1999, which addressed the issues raised in the PIL. Consequently, the parties agreed that the PIL could be disposed of, and Company Petition No. 226/1998 should be detagged for consideration by the Company Court under established principles of Company Law and the 1999 regulations. The court agreed with this approach, emphasizing the need for the Company Court to review reports by the Liquidator and address non-compliance issues with court directions.

Regarding compliance with court directions, the court noted the absence of reports from the Investigating Officer and auditors appointed to investigate the company's affairs. It directed the Deputy Commissioner of Police to file necessary reports within eight weeks and instructed the Reserve Bank of India to submit the inquiry report as directed. The Official Liquidator was tasked with acting in the investors' best interests, reporting to the Company Court, and following court orders regarding the attachment and sale of assets. The court emphasized that issues related to repayment of invested amounts would be addressed in the Company Petition through prescribed procedures.

Finally, the court disposed of pending notices of motion and civil applications, clarifying that parties could file similar applications in Company Petition No. 226/1998. The PIL was concluded by detagging Company Petition No. 226/1998 and directing the Registry to place it before the Company Court for further proceedings. All parties were instructed to act based on the court's order, and no costs were awarded in the judgment.