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TMI Blog2015 (8) TMI 1499X X X X Extracts X X X X X X X X Extracts X X X X ..... e hearing shall be restricted to the question as to whether the prima facie view contained in the ex parte ad interim order dated June 3, 2015 on the grounds set out therein can be sustained after hearing the appellants or not. 5. It is made clear that if the WTM of SEBI fails to hear the appellants on or before August 13, 2015 and fails to pass and communicate the final order on or before August 24, 2015, the ex parte ad interim order dated June 3, 2015 shall forthwith come to an end directed the noticees to file reply to the interim order, if any, on or before August 10, 2015, SEBI to hear the noticees on or before August 13, 2015 and pass appropriate order thereon and communicate the same to on or before August 24, 2015...." [Emphasis Supplied] 2. In compliance with the directions of Hon'ble SAT, SEBI communicated the date of personal hearing as August 10, 2015, to the noticees. The noticees requested to postpone the hearing. The request of the noticees was considered and the date of personal hearing was rescheduled to August 13, 2015. 3. A brief background of the case is given below: "a. Securities and Exchange Board of India (hereinafter referred to as 'SEBI' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the following: i. Full list of "customers"/investors with complete particularssuch as PAN, address, telephone numbers etc., ii. Details of rooms available for occupancy/accommodationprovided/projected to be provided, iii. Year-wise number of "customers"/investors (1) who haveactually availed the holiday accommodation under the plan(s)/subscribed to the plan(s) (2) who have encashed their points into cash. iv. Details of assets held by Citrus and its group companies, v. Full details of Mirah Group (as stated in the Clause 29 ofthe "Offer Document") including full inventory of its assets, vi. Details of charges created on its assets by Citrus, vii. Details of amounts mobilized as on March 31, 2014 andMarch 31, 2015 under its various Holiday plans/schemes, viii. Details of commission paid on amounts mobilized above, ix. Details of agents along with their addresses, etc., x. Audited Accounts for the financial years i.e. FY 2012-13,2013-14, and 2014-15; xi. Income Tax returns for FY 2012-13, 2013-14, and 2014-15; xii. Details of fund transfers within group companies and associates and its directors for the year 2012-2013, 20132014 and 2014-2015. 30. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors on August 10, 2015. The same was communicated to Citrus vide letter dated July 14, 2015. However, Citrus vide its letter dated July 16, 2015, intimated about the date of hearing in the appeal filed before Hon'ble SAT, against the interim order, as September 01, 2015 and requested for postponement of the personal hearing after such date. Vide this letter the notices requested for inspection of the relied upon documents and submitted that any personal hearing at this stage would be premature. f. SEBI vide e-mail dated August 05, 2015, forwarded the copies of the complaints to Citrus. In the meantime, Hon'ble SAT vide its order dated August 06, 2015, had directed SEBI to decide the case of the Company, whether the prima facie view contained in the interim order can be sustained after the personal hearing. In compliance with the order of Hon'ble SAT and the timelines fixed, SEBI vide email dated August 07, 2015, communicated the earlier fixed date of personal hearing i.e. August 10, 2015, to the noticees. The noticees vide email dated August 07, 2015, submitted that in terms of the order of Hon'ble SAT, they are entitled to file the reply within working hours of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereinafter referred to as 'Royal') on March 07, 2014. Citrus is in the business of 'sale of holidays'. When a customer makes payment to Citrus, he purchases a holiday entitlement certificate/holiday plan/time share holiday. Citrus has approximately 4,50,000 members/holiday seekers under different holiday plans and as on March 31, 2013, it had generated sales/revenue to the tune of Rs. 770 Crores. Further, as of March 31, 2015, the amount generated though sales/revenue is about Rs. 1,600 Crores and the payments from the members/holiday seekers are often in the form of equated monthly installments. Citrus has an inventory of 2,33,965 rooms available for use by its customers. Citrus, after deducting various expenses incurred for achieving the sales of the holiday plans, earns certain profit on such sales and also pays income tax on the said profit. The income tax authorities have recognized and assessed the amounts received from customers as sales proceeds. c. The activities mentioned in the Memorandum of Association of Citrus areessentially connected to the time share activities and therefore no exception could have been taken to the same. The time share plans offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 03, 2015. Citrus is using its assets only in the ordinary course of business and Citrus has not disposed off any of its assets after the passing of the Order. f. SEBI has not demonstrated the manner in which the business of Citrus ishampering the interest of alleged investors. Further, there was no emergent situation or case of extreme urgency for passing of the interim order as SEBI had received the first complaint dated January 17, 2014. SEBI had entered into extensive correspondence with Citrus from February 18, 2014, however, there was no mention of any complaints and has failed to provide Citrus with the copies of the complaint. It was incumbent upon SEBI to provide the copies of the complaints to Citrus to enable it to redress and/or respond to the alleged grievances. Citrus vide its letters dated August 07, 2014 and August 22, 2014, had sought an opportunity for personal hearing before SEBI. However, SEBI had failed to give any opportunity for personal hearing and suddenly after a considerable period of 18 months has, without any justification or reasons, passed the Order. The interim order could have been passed only on compliance with the principles laid down by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The interim order forces Citrus to commit breach of its contractual obligation, as Citrus without availability of fund will not be in a position to provide the hotel rooms at deep discounted rates. i. The Hon'ble Gauhati High Court had taken a prima facie view that the activities of timeshare business does not fall within the purview of the term 'CIS'as defined under SEBI Act and that SEBI does not have jurisdiction to take any action in the affairs of the business of the company involved therein. Hon'ble Gauhati High Court vide order dated August 01, 2013, read with order dated November 06, 2013 (continued from time to time) had stayed/suspended Respondent's directions with regards to collections of monies etc. SEBI had appealed against the above referred order dated August 01, 2013, by way of Special Leave Petition (SLP) No. 3724 of 2014 to the Hon'ble Supreme Court. The Hon'ble Supreme Court was pleased to dismiss the SLP. Thus, the prima facie findings of Hon'ble Gauhati High Court that timeshare companies do not fall within the purview of the term 'CIS'are binding on SEBI. j. The action of SEBI is discriminatory as it has not initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trus is in the business of selling holiday plans/time share plans and neither invites subscription nor has any investors. Citrus is engaged in the business of selling of holiday packages/time share holidays and has no investors. All persons who purchase their holidays from Citrus are the customers of Citrus. The hotel room/facilities/resorts are owned by its group companies/business associates. Citrus does not own any hotel facilities. The holiday plan/time share plans offered by Citrus in order to fall within the purview of the definition of CIS, it must meet all the requirements enumerated in Section 11AA(2) of the SEBI Act. o. The amount received from a customer is shown as sale proceeds by Citrusas Citrus is selling the holiday plan and the customer is purchasing the same. The sale of holiday plan by Citrus is recorded as 'sale proceeds in the books of account of Citrus and is not credited to any sort of subscription fund or share capital fund. The sale of holiday plan by Citrus is a 'sale at discounted price'. There is nothing unusual in selling a hotel room at below the rack rate i.e. at a discounted rate. Citrus, after deducting various expenses incurred for ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e money may be used for the purposes other than 'providing holiday plan/time share holidays'. All the above ingredients of 'pooling' are absent in totality as regards the transaction of purchase of holiday entitlement certificate from Citrus by a customer. r. Under the holiday plans/time share holidays of Citrus, the amounts paid bythe customers entitle them to redeem points which can be used for holidays and dining out options. In the event of the customer choosing not to avail these services he may avail of the rent out option i.e. the plan holder is allowed to 'rent out' unutilised portion of the holidays if he wishes for, full rent out option or for partial rent out option. The unutilised portion of the holiday plan facilities are rented out by Citrus in the open market and rent so realized is paid to the plan holder/customer opting for this facility. In such cases the value of the facilities rented out shall not exceed the original value of the plan. 'Sale of holiday entitlement certificate' is inherent to the transaction, while refund of money to its customers is 'contingent to the transaction'. The customers under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une 03, 2015, on the grounds set out therein can be sustained after hearing the appellants or not'. Therefore, I proceed further to consider the same, in the light of submissions made by Citrus and the material available on record in seriatim: "A. Directions in the interim order are causing irreparable loss to the reputation and goodwill of Citrus, etc.: SEBI initiated enquiry against Citrus in 2014 beginning. For the same, relevant information were sought from Citrus vide SEBI letter dated February 18, 2014, in order to confirm whether the alleged business activities of Citrus are in the nature of CIS. A prima facie finding was made in the interim order that Citrus allegedly runs a CIS, based on the information/evidences obtained from the Company itself. During the enquiry, the scale of operation of Citrus as seen from the amount raised i.e. Rs. 777.04 crore as on March 31, 2013 was also considered. The main concern for SEBI, while passing the interim order was protection of investors, that the investors should not be victims of the unregistered CIS operations of the Company. This factor, in my opinion, always weighs above any possible loss of reputation and goodwill of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 2012 and neither had it been accepting any new customers on and from April 2012. Interestingly, during the enquiry, it was revealed that Citrus commenced its business in April 2012 (admitted by Citrus). These facts pointed towards a strong suspicion that Mr. Omprakash Basantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis in order to divert the attention of SEBI, in the matter of Royal had started the fund mobilization activities through Citrus. On an analysis of the documents submitted by the Company, SEBI reached the prima facie conclusion that Citrus is operating CIS, without obtaining the certificate of registration. Thus, in order to prevent any diversion of the assets/property acquired by Citrus and its promoters/directors using the funds collected from the investing public, in order to prevent any irreparable loss to the investors of the Company who had invested their life savings in Citrus and to ensure that only legitimate investment activities are carried out by Citrus, SEBI, felt it was necessary to intervene and protect the interest of the investors. C. Non furnishing of the Complaints The Company has submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Citrus after seeking extension of time for submitting the details on various occasions i.e. March 03, 2014, March 20, 2014, April 21, 2014 and May 28, 2014 submitted certain details on June 19, 2014 i.e., the Memorandum and Articles of Association of the Company, details of the past and present directors of the Company, copies of brochures/application forms of a few holiday plans of Citrus, certified copies of audited financial statements and income tax returns for the financial years 2011-12 and 2012-13. - SEBI vide its letter dated July 23, 2014 and August 05, 2014, hadissued reminders to Citrus for furnishing of the remaining information which were not received. Vide letter dated August 07, 2014, Citrus submitted certain other information i.e. copies of the additional brochures/application forms of the remaining holiday plans, copies of the application forms that are required to be submitted by the customers while purchasing the holiday plans of Citrus, copies of holiday entitlement certificates and total amount of plan-wise sale by Citrus as on March 31, 2013. - SEBI vide its letter dated August 14, 2014, again advised Citrus tofurnish the information, as was asked vide l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s letter dated January 30, 2015, submitted the details regarding the plans of the Company (i.e. Sapphire, Orange, Lemon, Fragrance and Emerald) and sought time to submit the specific information as asked. - Further, vide e-mails dated March 05, 2015 and March 19, 2015,Citrus again sought time for submitting the information. However, Citrus failed to submit the information relating to 'number of customers who had actually availed the services (accommodation) under the plans as sought by SEBI, despite repeated reminders prima facie appeared to be a deliberate tactic. The interim order in this regard has also noted that 'non-submission of the information to SEBI by Citrus is nothing but an attempt to conceal the true nature and operation of the fund mobilizing activity of Citrus.' The said information was an important link for determining the business model of Citrus. In such circumstances, SEBI could not have waited further to issue interim directions in order to prevent further damage to the investors of the Citrus, by way of the alleged unregistered CIS activities." In the light of the above discussion, it will be incorrect to say that non furnishing of the inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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." [Emphasis supplied] 8. The noticees have further argued that the SEBI Act and CIS Regulations deal with securities, which are marketable on the securities market and relate only to movable assets like shares, bonds, derivatives, units of mutual fund schemes, etc. It has been said that the transactions of sale of holiday plans would clearly not fall within the ambit of such activity and therefore there being no activity related to securities, the business of Citrus could not be regulated by SEBI. This submission of the noticees is contrary to the material available on record and the applicable law. In terms of Section 11AA(2) of the SEBI Act, a scheme shall be a CIS, if it satisfies all the four conditions mentioned therein. Therefore, it is immaterial whether an entity issues an instrument or security, to be regarded as a CIS. Further, Regulation 2(z)(dd) of the CIS Regulations defines the word 'unit' to include 'any instrument issued under a scheme, by whatever name called, denoting the value of the subscription of unit holder'. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have been identified as a Collective Investment Scheme in this Order. b. Royal Twinkle Star Club Limited and its Directors, namely, Mr. Omprakash Basantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis are restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market for a period of four (4) years. c. Royal Twinkle Star Club Limited and its Directors, namely, Mr. OmprakashBasantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis shall wind up the existing Collective Investment Schemes and refund the money collected by the said company under the schemes with returns which are due to its investors as per the terms of offer within a period of three months from the date of this Order and thereafter within a period of fifteen days, submit a winding up and repayment report to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, including the trail of funds claimed to be refunded, bank account statements indicating refund to the investors and receipt from the investors acknowledging such refunds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be allowed to carry on with their fund mobilization activities from the public under any guise. 11. In the light of the discussion above, the documents and details available on record, the prima facie view taken in the interim order is correct. Further, the directions of not collecting any funds from the investors under the existing schemes/existing company within the group and not to launch any new schemes or plans, is in the interest of lay investors who may fall in the trap of the alleged schemes of the Company. In so far as existing investors as concerned, SEBI has directed that the Company shall not dispose of or alienate any of the properties/assets obtained directly or indirectly through money raised by Citrus and not to divert the funds raised from public. It was necessary for SEBI that such unauthorized collection of money be stopped immediately in order to prevent further damage to the general public by unregistered CIS activities. As the activities of the Company and its directors are prima facie found to be illegal and in violation of the SEBI directions, revoking the directions issued vide the interim order, at this stage will not be in the interest of the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X
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