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TMI Blog2022 (3) TMI 1449X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order does not show any iota of evidence that the appellant was involved in the illegal mobilisation of funds after he joined as a Director. Admittedly, the appellant was appointed as a Director in 2010. Majority of the schemes floated by the Company was already launched prior to the appellant s appointment as a Director. There is no finding by the Adjudicating Officer that such and such scheme was launched during the period when the appellant became a Director nor there is any finding that the appellant was responsible in the mobilisation of the funds under those schemes. The finding that no evidentiary proof has been filed by the appellant that he is not an officer in default or that he did not attend the board meeting when such scheme was launched is patently erroneous. The burden has wrongly been placed upon the appellant. A charge has been levelled against the appellant, namely, violation of Regulation 4(2)(t). The responsibility to prove the charge is upon the prosecution, namely, upon SEBI. It is for the respondent to prove that the appellant was an officer in default or that he attended the meeting when a scheme was launched. It cannot be presumed that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Regulations, 1999 (hereinafter referred to as the CIS Regulations ) and Regulation 4 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (hereinafter referred to as the PFTUP Regulations ). 2. The facts leading to the filing of the present appeal are as follows. In 1997, Pancard Clubs Ltd. was incorporated as an unlisted public limited Company. The Company floated various time sharing schemes i.e. selling of rooms for a fixed duration of nights/days depending upon the scheme opted by its customers. The shareholding pattern of the Company was as under: Sr. No. Name of Shareholder No.of shares % of shareholding 1. Mr. Sudhir Moravekar 500,100 99.78% 2. Smt. Viidya S. Moravekar 600 0.12% 3. Mrs. Manda M. Phatarpekar 100 0.02% 4 . Mrs. Usha S. Tari 100 0.02% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring activities was not a CIS. In this regard, SEBI addressed a letter dated 2nd February, 2013 to MCA stating that the Company did not fall under SEBI CIS Regulations. 8. On 2nd July, 2013, a complaint was filed by a former Member of Parliament alleging that the Company was carrying on a time sharing business in the garb of a CIS. SEBI replied to this MP on 21st October, 2013 intimating that they had examined the matter of the Company and had concluded that the same did not attract SEBI CIS Regulations. 9. However, SEBI again re-examined the matter and on 26th June, 2014 a show cause notice and thereafter on 10th June, 2016 a supplementary show cause notice was issued alleging violation of the provisions of Section 12(1B) of the SEBI Act read with Regulation 3 of CIS Regulations and Regulation 4(2)(t) of the PFUTP Regulations. During these adjudication proceedings, an ex-parte order dated 31st July, 2014 was passed directing PCL to stop all their businesses. This order was challenged in an appeal before this Tribunal by the Company and its Directors. By an order of 17th September, 2014 the ex-parte ad-interim order dated 31st July, 2014 was set aside and SEBI was directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 12(1B) of the SEBI Act and that all the four conditions of Section 11(AA)(2) were present in the time sharing scheme run by the Company and, therefore, the said scheme was a Collective Investment Scheme which was violative of Section 12(1B) of the SEBI Act since it was not registered under the CIS Regulation. The Adjudicating Officer further found that the Directors including the appellant were responsible for the conduct of business and failed to give evidentiary proof that they are not officers in default nor filed any evidentiary proof to show that they did not attend the board meeting when the scheme was launched and, therefore, all the Directors are officers in default and are responsible for the illegal mobilisation of the funds and have violated Regulations 4(2)(t) of the PFUTP Regulations. 14. We have heard Ms. Shradha Achliya, Advocate for the appellant and Mr. Shyam Mehta, Senior Advocate assisted by Mr. Mihir Mody, Mr. Arnav Misra and Mr. Mayur Jaisingh, Advocates for the Respondent. 15. In so far as the finding of the Adjudicating Officer that the time sharing business of the Company is a Collective Investment Scheme we find that the same issue was held ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent, (7) deceptive behaviour by a person depriving another of informed consent or full participation, (8) a false statement made without reasonable ground for believing it to be true. (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And fraudulent shall be construed accordingly; Nothing contained in this clause shall apply to any general comments made in good faith in regard to- (a) the economic policy of the government (b) the economic situation of the country (c) trends in the securities market; (d) any other matter of a like nature whether such comments are made in public or in private; 18. A perusal of the definition of fraud means that where a person induces another person or connives with him or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is no finding that the Company did not have any designated person or Managing Director and, therefore, all Directors would be deemed to be officers in default. In this regard, the decision of this Tribunal in Sayanti Sen v. SEBI, appeal no.163 of 2018 dated 9th August, 2019 is fully applicable. The relevant portion of the same is extracted hereunder: 10. Before proceeding further it would be essential to extract a few provisions of the Companies Act. For facility, Section 5 and Section 73 of the Companies Act is extracted hereunder:- Section 5 Meaning of officer who is in default 5. For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression officer who is in default means all the following officers of the company, namely: (a) the managing director or managing directors; (b) the whole-time director or whole-time directors; (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, all the directors of the company would be officers in default. 23. We also find that the charge of illegal mobilisation against the Directors is patently erroneous. Till 2013 SEBI itself was under a belief that the time sharing business carried by the Company was not a Collective Investment Scheme but a legitimate business. This fact is not only admitted by SEBI but is also recorded in the order of this Tribunal while setting aside the ex-parte ad-interim order. The said finding are extracted hereunder: 13...It is important to note that the Respondent admits in its counter affidavit that prior to 2013, SEBI was of the view that time share schemes did not come within the purview of Section 11AA of the SEBI Act . .. 20. The Respondent submits that prior to 2013 it was of the view that time share schemes were not covered by Section 11AA of the SEBI Act and hence did not constitute a CIS. The Respondent came to this conclusion via a macro examination of the activities of the, as opposed to an in-depth micro examination of every scheme of the Appellant individually. However, a development took place in the law related to Section 11AA when the Hon ble Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t till 2013 as SEBI was not sure whether such Time Sharing Scheme of a Club and Members would come within the ambit of CIS or not. However, it changed its mind thereafter and started investigating a couple of such schemes including the Rose Valley matter. SEBI may be within its right to change its stand on the interpretation of law after a lapse of more than a decade and such a change may not hold to be illegal and bad only on the ground of the principle of estoppel. We will, therefore, repel the contention of the Appellant on this count. But the crucial point to be considered is whether SEBI is entitled to change its stand by taking a somersault and suddenly pass an adverse order with serious civil consequences without affording an opportunity of being heard to the affected person. 55. To sum up, in the present case, Appellant has been knocking on the doors of SEBI since 2001 by seeking its decision on the question as to whether the time sharing business carried on by the Appellant is covered under CIS or not. Although no formal order was issued in the year 2001, it is now admitted by counsel for SEBI that since the very beginning SEBI was of the opinion that time sharing busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instant case the show cause notice alleges violation of the CIS Regulations and penalty to be imposed under Section 15HA. For facility, the same is extracted hereunder: 15HA.Penalty for fraudulent and unfair trade practices .- If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty not exceeding which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. 26. Penalty under Section 15HA can be imposed if a person indulges in fraudulent or unfair trade practices. We have already held that the appellant has not indulged in fraudulent and unfair trade practice and, therefore, no penalty under Section 15HA could be imposed. 27. In the light of the aforesaid, the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed. Attachment orders, if any, on the appellant s demat account, bank account etc. shall be lifted forthwith. All the misc. applications are also accordingly disposed of. In the circumstances of the case parties shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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