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TMI Blog2015 (6) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... bscribers, their social status, their annual income, etc to find out how many persons have genuinely subscribed for membership for availing the benefit of stay in the hotel. On the basis of incoherent material produced by the petitioner like format of the membership it is not possible to agree with the contention that the scheme is only a holiday management scheme and does not come under the purview of the collective investment scheme more so because of the fact that there is a term in the contract of refund of money with a lucrative rate of interest. If the interest on deposit was the alluring factor on the part of the investors then the case would squarely fall under sub-clause (ii) of sub-Section 2 of Section 11AA of the SEBI Act. These facts constitute a mixed question of law and fact and has to be decided by SEBI. We find that there was no difficulty for the petitioner to have submitted to this jurisdiction of the SEBI and produced all the records to convince the SEBI that the scheme is genuinely a holiday management scheme and does not constitute a collective investment scheme and thus could have excluded themselves from the jurisdiction of SEBI. Second contention that the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers cannot anticipate and foresee every kind of situation that may arise in the operation of the provisions of the enactment. Therefore it is always the legislative policy to give a delegated power in every enactment to the authorities to operate the provisions of the Act. Such a provision in itself cannot be considered illegal unless any regulation or rule is made by the delegated authority is in conflict with the main provision then such regulation can be held bad. The power to lay down the conditions regarding the scheme or arrangement in the context of the provisions of the Securities and Exchange Board of India Act, 1992 and the subjects it deals with cannot be considered as uncanalised and excessive delegation. In that view of the matter the writ petition is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinafter referred to as "RVRECL"). As per the aforesaid letter, RVHEL and RVRECL were stated to have collectively raised ₹1006.70 Crores from the public till February 2012. Further, RVHEL was stated to have launched a scheme titled Rose Valley Holiday Membership Plan (hereinafter referred to as "HMP") in the year 2010. Under the HMP, an investor can book a holiday package through payment of monthly installments and upon maturity or completion of tenure for monthly installments, such investor can either avail of the facilities i.e. room accommodation and services or opt for maturity payment i.e. a return on the investment with annualized interest. A brochure, application form containing the terms and conditions of the HMP alongwith a confirmation Certificate evidencing subscription to such HMP, were also annexed with the aforesaid letter. 2. As a matter of preliminary enquiry in order to ascertain whether or not RVHEL was carrying on activities of a 'collective investment scheme', SEBI vide letter dated March 1, 2013, advised RVHEL to submit the following documents relating to the HMP, by March 15, 2013, viz. - i. Total number of individuals who have subscribed to the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r - "Your letter under reference (SEBI letter dated March 19, 2013) is without Jurisdiction and uncalled for. It appears from your above letter that you are attempting to wrongfully proceed against us in a pre-decided manner by giving reference as 'Schemes of Rose Valley Hotels and Entertainments Ltd. without registration of SEBI'. From the correspondence exchanged between yourself and us it is clear that you have not even considered the business of Rose Valley Hotels and Entertainments Ltd. coming under the purview of SEBI Act in any manner whatsoever. We deny that it is incorrect to say that the scheme of Rose Valley Hotels and Entertainments Ltd. do not come under your purview as alleged. We deny that you have any jurisdiction to enquire into the affairs of the company which as per your admission does not come under your purview. …". 6. While the preliminary inquiry was in progress, SEBI received an ad interim Order dated June 12, 2013 (hereinafter referred to as "Interim Order"), from the Government of Tripura. Vide the aforesaid Order, which was passed by the Sub-Divisional Magistrate Sadar, West Tripura (hereinafter referred to as "SDM, West Tripura") in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the HMP offered by RVHEL is a 'collective investment scheme' in accordance with section 11AA of the SEBI Act. 7.2 Section 11AA of the SEBI Act reads as follows: "(1) Any scheme or arrangement which satisfies the conditions referred to in subsection (2) shall be a collective investment scheme. (2) Any scheme or arrangement made or offered by any company under which, (i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized solely for the purposes of the scheme or arrangement; (ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement; (iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors; (iv) the investors do not have day to day control over the management and operation of the scheme or arrangement." 7.3. RVHEL has submitted that it is in 'Time Share' business and therefore will not come under SEBI's purview. On this ground, RVHEL has refused to submit documents i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such investors for maturity payment, on time. 7.4 From the abovementioned details in respect of the HMP offered by RVHEL, I note that - i. RVHEL operates investment plans through the HMP, which it offers to the public. The contribution in the form of monthly installments made by investors in response to plans offered under the HMP are pooled and utilized for the purpose of the HMP; ii. Such contributions towards plans offered under the HMP are made by the investors with a view to receive profits or income in the form of returns with annualized interest i.e. maturity payment. iii. The resorts and hotels, which are part of the HMP, are wholly owned and managed by RVHEL Further, the contributions made by investors to the HMP are managed on their behalf, by RVHEL. iv. RVHEL has complete control on the plans offered by it under the HMP. In view of the above, I find that the HMP has all the ingredients of a 'collective investment scheme' as defined in section 11AA of the SEBI Act, as reproduced at para 7.2 supra, for ready reference. 7.5 RVHEL has submitted that SEBI does not have any jurisdiction to enquire into its affairs since SEBI has admitted before the Joint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of 'collective investment scheme' as defined under section 11AA of the SEBI Act. 7.7 I note that in terms of section 12(1B) of the SEBI Act, "no person shall sponsor or cause to be sponsored or cause to be carried on a 'collective investment scheme' unless he obtains a certificate of registration from the Board in accordance with the regulations". Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as "CIS Regulations"), provides that no person other than a Collective Investment Management Company which has obtained a certificate under the CIS Regulations shall carry on or sponsor or launch a 'collective investment scheme'. Therefore, a person can launch or sponsor or cause to sponsor a 'collective investment scheme' only if it is registered with SEBI as a Collective Investment Management Company. In my view, therefore, the launching/floating/sponsoring or causing to sponsor any 'collective investment scheme' by any 'person' without obtaining the certificate of registration in terms of the provisions of the CIS Regulations is in contravention of section 12(1B) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es; d. not to divert any funds raised from public at large which are kept in bank account(s) and/or in the custody of the company. 11. The above directions shall take effect immediately and shall be in force until further orders. 12. This Order shall also be treated as a show cause notice. RVHEL and its Directors may show cause as to 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 taken against them. 13. RVHEL and its Directors shall, within 15 days from the date of receipt of this Order, file their reply, if any, to this order. RVHEL and its Directors may also indicate, in such reply, whether they wish to avail an opportunity of personal hearing in the matter. Place: Mumbai. Date: July 10, 2013. S. RAMAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA" 3) The petitioner aggrieved by the said order has filed this writ petition praying the following reliefs. "I) Issue Rule, calling upon the respondents and each one of them, to show cause as to why a Writ of Mandamus and/or in the nature thereof, shall not be issued, for mandating/directing them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The membership fees for various category of Membership will appear from the chart appended to the application for Membership. 4. The membership is offered on the basis of Advance booking of room of various hotels/resorts of the Company. 5. The intending members can pay the membership fees as prepaid booking or by way of monthly installments. In case of monthly installments the facilities of membership can be availed only upon payment of all installments. 6. In case of installment payment after receiving the Payment of 1st installment the Company will issue an acknowledgement Pay-in-slip for such Payment in respect of provisional membership and subsequently issue a "ROSE VALLEY HOLIDAY MEMBERSHIP PLAN CERTIFICATE and CARD", in confirmation of facilities to be provided by the Company in favour of the applicant after 15 days but within 30 days. 7. ROSE VALLEY HOLIDAY PLAN MEMBER will be entitled to benefit as provided under the respective Membership plan for a couple legally related and for 2(two) children upto 12 yrs of age. For the proof of identification of spouse & children, 2 Nos. of Stamp size current photograph are to be furnished to the Company along with the duly c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es etc. 15. Correspondence will be made with the applicants at the address given in the Application Form but in case of any change thereof should be intimated by the applicant to the Company for the convenience of the parties. 16. The concerned applicant in respect of the Plan is to inform to the Company on the prescribed Form about his/her final desire to avail room accommodation & services etc after the payment of last installments and the Company after getting such information, will issue a clearance certificate for final confirmation within 7(seven) days(subject to availability of rooms) mentioning the name of Hotel/Resorts as well as schedule of arrival and departure. 17. Plan once issued cannot be cancelled and booking money paid shall not be claimed before the expiry of the tenure of such respective plan. 18. Applicants are requested to read carefully the Application Form, Plan of the Company and Terms & Conditions as contained therein and satisfy himself/herself before making the application for booking of a room accommodation & services etc. 19. Rose Valley Hotels & Entertainments Ltd will provide accidental Insurance Coverage for minimum of ₹ 25,000/-(Rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers made in the writ petition. (i) The subscriptions collected under the HMP would not come within the purview of the collective investment scheme as envisaged in section 11AA(2) of the Securities and Exchange Board of India Act, 1992. (ii) The terms of the contract in the HMP scheme envisage coverage of accident risk to the subscriber of a scheme for a period of 1 to 2 years by a policy of insurance. The insurance component offered under the scheme makes the entire scheme excluded from the purview of the collective investment scheme in view of the provisions contained in Explanation to Section 12(1)(1B) of the SEBI Act. (iii) The SEBI under Section 11B of the Act could not have passed the ad-interim ex-parte order. The power to issue directions under Section 11(B) will arise only after making or causing to be made an enquiry and upon satisfaction of the requisites under Section 11(B) interim orders could be passed. (iv) When the notice is issued by the SEBI a single member of it could not have passed the ad-interim ex-parte order without a specific authorisation in writing to that effect in view of the provisions contained in Section 19 of the Act. 6) The conditions stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of sub-section (2) of section 30.]. [Explanation. - For the removal of doubts, it is hereby declared that, for the purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer]". The contract of HMP scheme imbibes coverage of accident insurance to the investor. In view of the Explanation to sub-Section (1B) whenever a contract provides a component of insurance such investments would be excluded from the purview of the collective investment scheme. A document is produced containing the terms of the contract which stipulates the benefit of accident risk insurance coverage. Therefore the HMP scheme cannot be termed as a collective investment scheme within the definition of subSection (2) of Section 11AA of the Securities and Exchange Board of India Act, 1992. 8) With reference to the interim order passed by the SEBI the learned senior c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge or selfregulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach after passing of an order on an application made for approval, by the Judicial Magistrate of first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached. (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2A), take any of the measures speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme". Proviso to sub-Section (2A) of Section 11AA:- "Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act". It is argued that in the first place the amended provisions would not apply to the case of the petitioner since the investments are all made prior to the coming into force of the amended provisions, however, seriously challenged the validity of the amended proviso to sub-Section(1) of Section 11AA on the ground that it militates against the provisions of sub-Section (2) of Section 11AA which lays down the cumulative conditions to constitute the collective investment scheme under the Act. The amendment which incorporates proviso to sub-Section (1) of Section 11AA has overriding effect and limits the effect and purport of the substantive provision in sub-Section (2) of Section 11AA. In this regard it is argued that a proviso to a Section or sub-Section should always be subordinate to the Section or sub-Section and it cannot eclipse or overr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) The term "that the investor would avail the benefit of stay in a hotel for a certain period on completion of the investment period" is nothing but a camouflage and perfidious stipulation. The rate of interest offered on the refund is very lucrative and attractive ~ 17.65 per cent per annum, almost double the rate offered by banks on deposits! (iv) The averments made in the petition regarding the bona fide and genuineness of the terms of the scheme are only self-serving statements; there is no credible material placed to show about how many members have actually availed the HMP benefit. (v) The stipulation which gives discretion to the petitioner to decide the refund is only a make-believe stipulation to escape from the purview of being called a collective investment scheme. (vi) The petitioner has not furnished all the names and identities of all the investors to prove the bona fide and genuineness of the scheme and how many members have subscribed to different categories of the scheme. (vii) The insurance component investment under the terms of the scheme is only limited for 1 to 2 years whereas the scheme would be for 3 to 5 years. Copies of the insurance policy p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sections 11(1) and 11B are delegated to be exercised by the whole-time member, therefore submitted that the contention that the whole-time member has no power to pass the impugned order is an untenable argument. The prayer in the writ petition against the police not to investigate into the matter is untenable, when the transactions in question constitute a crime the police will have the jurisdiction to investigate, more so when an FIR is registered. In fact petitioner's counsel did not focus this argument on this aspect. Opinion 18) It is admitted fact that there are 21.90 lakh investors under the HMP scheme. The petitioner's company has produced only a format of an application for subscriptions belatedly. The names and identities of all the investors under the HMP scheme is not furnished. The terms of the scheme give the benefit of holiday stay in the hotels to the members after they have successfully paid the entire amount agreed under the scheme. In the alternative the terms also enable the members to take refund of the amount invested with interest at the rate of 17.6 per cent per annum. The terms of the scheme disclose that the refund of deposited amount with interest will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave excluded themselves from the jurisdiction of SEBI. 21) The second contention that the members under the scheme are covered with accident insurance for a period of 1 to 2 years thus it is argued that in view of the insurance component and in view of Explanation to subSection (1B) of Section 12 of the Securities and Exchange Board of India Act, 1992 the scheme does not constitute collective investment scheme appears to be untenable argument; the petitioner has not produce all the necessary and credible material to show that the insurance coverage is genuine and it covers all the investors. The holiday investment scheme ranges between 3 to 5 years, whereas the insurance coverage is only for 1 to 2 years. The entire subscription period is not covered by the accident insurance. The petitioner has not produced all the policies issued by the insurers in respect of all the investors. Since the insurance certificates produced are vague and there is no details of names and identities of the members whose risk is covered under the said policies the plea of insurance accident coverage appears to be a facade contrived by the petitioner to keep the scheme outside the definition of the colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Justice further referred to the mischief which was aimed at by the Legislature in enacting the proviso. In recent times businessmen were known to buy speculative losses in order to reduce their profits and the Legislature wanted to put an end to that mischief which could only be done by preventing the assessee from reducing his profits by speculative losses. The Bombay decision was followed by the Madhya Pradesh High Court in Commissioner Income Tax, Nagpur v. Ram Gopal Kanhaiya Lal as also by the Division Bench of the Punjab High Court in Manohar Lal Munshi Lal v. Commissioner of Income' Tax, New Delhi. The matter ultimately went to a Full Bench of the Punjab High Court in Commissioner of Income Tax v. Ram Swarup in which after reviewing the entire case law and examining the various aspects relevant to the question the view expressed by Chagla, C.J. in the Bombay case was accepted as correct. Similarly in Jummar Lal Surajkaran v. Commissioner of Income Tax, Hanuman Investment Company v. Commissioner of Income Tax, and Joseph' John v. Commissioner of Income Tax, the considerations which prevailed in Keshavlal Pramchand's case were accepted as correct". 25) The Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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