BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: G.ANANTHARAMAN, WHOLE TIME MEMBER
ORDER
UNDER SECTION 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATIONS 65 AND 73 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 1999 AGAINST M/S HIGHWAY USERS’ CENTRES (INDIA) LTD.
Date of Final Hearing: November 21, 2006
Appearances :
For noticee : Shri Surendhra Khandhar, Director
For Securities and Exchange Board of India: Shri Santosh Sharma, Dy. General Manager.
1.0 BACKGROUND
1.1 M/s Highway Users’ Centres (India) Limited (hereinafter referred to as the company) is a company registered under the provisions of the Companies Act, 1956 having its registered office at India Printing Office, 42, Ambekar Marg, Wadala, Mumbai- 400031. Securities and Exchange Board of India (hereinafter referred to as SEBI) received complaints from investors pertaining to the non payment of the principal and interest of their investments in Highway Infrastructure Development Bond of the company. In one of its letters dated February 4, 2002 (addressed to an investor), the company had stated that “The Company’s experience to develop resorts in remote areas has led the Company to launch investment schemes which are now under the purview of SEBI (Collective Investment Schemes) Regulations, 1999.”
1.2 In terms of Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as the CIS Regulations), no person other than a Collective Investment Management Company, which has obtained a certificate of registration shall carry on or sponsor or launch a collective investment scheme. Despite the same, the company had neither filed any information with SEBI nor did it apply for registration for carrying on a collective investment scheme. As the Company had not obtained a certificate of registration from SEBI to launch a Collective Investment Scheme, a notice dated July 18, 2002, was issued to the company asking it to show cause as to why the action mentioned therein should not be initiated against it and its promoters/directors/persons in charge of the scheme(s) in terms of the provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the Act) and the CIS Regulations made thereunder.
1.3 The company vide its reply dated August 30, 2002 inter alia contended that as it was not operating any collective investment scheme, the provisions of the CIS Regulations were not applicable to it. It was further claimed that no money was mobilized from the investors or the public under the collective investment schemes and therefore, it was not required to file any information with SEBI.
1.4 SEBI had also provided various opportunities of hearing and finally the matter was heard on February 12, 2003. Shri Burzin Somandy, Advocate represented the company before SEBI on the said date of hearing and made submissions on its behalf on the lines of the reply filed by the company. As requested by the company, an opportunity of inspection of documents was also granted by SEBI, pursuant to the said hearing and the same was availed by the company on February 14, 2003. Copies of investor complaints received by SEBI against the company and which were forwarded to the company earlier were once again sent to the company by SEBI. Although M/s Vinod Mistry & Co, Advocates for the company, vide its letter dated February 21, 2003, confirmed the perusal of the documents, they did not send any further communication in this regard.
1.5 In the facts and circumstances, SEBI vide order dated April 24, 2003, in exercise of powers conferred under Section 11 B of the Act read with Regulation 65 of the CIS Regulations, inter alia directed the company to wind up its existing scheme(s) and refund the money collected under the scheme(s) with returns which were due to the investors as per the terms of offer within a period of one month from the date of the said order. It was also ordered that, if the company failed to comply with the said directions, the following actions would follow:
a. Initiation of prosecution proceedings, under Section 24 of the SEBI Act, 1992, against the company I its promoters I directors I managers I persons in charge of the business of its scheme( s),
b. Debarring the company I its promoters/ directors I managers I persons in charge of the business of its schemes (s) from operating in the capital market and accessing the capital market for a period of 5 years
c. Writing to the State Government I local police to register civil/ criminal cases against the company and its promoters I directors for apparent offences of fraud, cheating, criminal breach of trust and misappropriation of public funds, and
d. Writing to the department of company affairs, to initiate the process of winding up of the company.
1.6 The aforesaid order of SEBI was challenged by the company before the Hon’ble Securities Appellate Tribunal (hereinafter referred to as SAT). SAT vide order dated September 01, 2004 disposed off the said appeal with the following observation:
“5. These are entirely the matters that the respondent must adjudicate upon in accordance with law. It would not be open for this Court to look at the documents and pass orders. The proper authority would be SEBI to decide the matter. In that limited view of the matter, we have no alternative except to set aside the impugned order, remand it to the respondent for a fresh hearing. The respondent shall, after hearing the appellant, dispose of the matter as expeditiously as possible in accordance with law. It is also made clear that during the pendency of the disposal, the appellant shall not access the capital market.
6. All contentions left open. If the respondent relies on any fresh documents other than those that are already relied on while passing the impugned order, needless to say, the appellant shall have access to copies of those documents to enable it to defend itself.”
2.0 HEARING
2.1 As directed by the SAT, the company was granted an opportunity of hearing by SEBI on November 24, 2004, but it had failed to appear on the said date. SEBI had further granted one more opportunity of hearing to the company on July 26, 2005. However, the letter intimating the said date of hearing was returned undelivered with the comments "party shifted". The same letter which was once again sent through registered post was returned back with an endorsement "refused". In order to comply with the directions of SAT, yet another opportunity of hearing was provided to the company by SEBI on October 18, 2006. However, as requested by the company the hearing was adjourned to November 21, 2006. Shri Surendra Khandhar, the Director of the company appeared before me and made submissions on the basis of the replies filed by the company. He also submitted that the company had not launched any scheme which comes under the purview of CIS Regulations. He clarified that the Highway Infrastructure Development Bond (HIDB Bond) and the bond certificates were issued in the name of Suman Motels Ltd.
2.2 The company has also filed written submissions vide letter dated December 4, 2006. It is inter alia submitted that Highway Users’ Centres (India) Ltd. is a closely held limited company and it was decided to offer shares of the company by way of private placement through a letter marked for “private circulation only”. Further, it is clarified that the company issued share certificates to the friends and relatives on private placement basis to the allottees of the shares. The company contended that it had neither circulated any brochure nor mobilized funds from investors/ public under collective investment scheme contravening the norms and regulations formulated by SEBI. The company further clarified that letters (investor complaints) shown to it during the time of the hearing were not issued by it but issued by some other company.
2.3 The company urged that though the said letters were given to it for inspection and comments, the copies of the said letters were not provided to it. The company further contended that HIDB Bond was not issued by it. The company stated that the allegations leveled against it are false, baseless and without any substance. In view of the above submissions, the company requested SEBI to drop the proceedings.
3.0 CONSIDERATION OF ISSUES AND FINDINGS
3.1 I have considered the show cause notice sent to the company, its replies, the order of SEBI dated April 24, 2003, the order of SAT dated September 1, 2004 and other relevant materials ( copies of which were either provided to the company or given for inspection) available on record. In the facts and circumstances the following issues are framed for consideration:
a) Whether the company has mobilized money from the public under the collective investment schemes?
b) Whether the company had complied with the provisions of the CIS Regulations?
3.2 The CIS Regulations which was notified under the Act came into force with effect from October 15, 1999. The collective investments schemes, prior to the said notification were guided by various guidelines/circular issued by the Government of India/SEBI from time to time. In this context, reference is made to the press release dated November 18, 1997 issued by the Government of India in which it was inter alia directed that all the schemes through which instruments such as agro bonds, plantation bonds etc. were issued, to be treated as a collective investment scheme and would come under the regulatory purview of the SEBI. Thereafter, SEBI had issued a press release dated November 26, 1997. In the said Press release dated November 26, 1997, it was inter alia specified that “While the regulations for mutual fund schemes have been notified by SEBI, regulations for collective investment schemes including plantation schemes require to be notified in view of the press release issued by the Central Government. These regulations are under preparation and will be issued in due course, first in draft form for the public discussion and later in the final form. Till these regulations are notified, as a result of the provisions of section 12(1B) of the SEBI Act no person can sponsor or cause to be sponsored any new collective investment scheme and raise further fund.” In this regard SEBI had also issued a public notice on December 18, 1997 in all the leading newspapers of India. In the said public notice, SEBI advised the then existing collective investment schemes which were desirous of taking the benefit of the proviso to Section 12(1B) of the Act and continue their operation, to file the necessary information (such as terms and conditions of the schemes launched, funds raised through all the schemes, details of the background of the promoters/sponsors etc.) about their schemes by January 15, 1998.
3.3 SEBI had further issued a press release on February 24, 1998 under Section 11B read with the proviso to Section 12(1B) of the Act and directed that “no existing collective investment scheme shall mobilize any money from the public or from the investors under their existing schemes unless the instruments of such scheme carries a rating from any on one of the following credit rating agencies…………….”.
3.4 It is also to be mentioned here that the Hon’ble High Court of Delhi in the case of S.D. Bhattacharya and others Vs. Union of India and Others, vide its order dated October 7, 1998 issued the following directions which were applicable to all the plantation/agro based companies/ entities situated all over India:
i) Plantation companies, agro companies and companies running Collective Investment Schemes shall get themselves credit rated from credit rating companies approved by SEBI.
ii) The companies shall furnish a list of their assets and liabilities.
iii) The companies shall furnish the list of their present Directors along with details of their assets including date, cost and present value of acquisitions.
iv) The companies are restrained from selling, disposing of and/or alienating their immovable properties or parting with the possession of the same. The Directors of these companies would also be interdicted from transferring their immovable properties in any manner whatsoever. They should also not part with the possession thereof.
v) The companies shall not float new schemes to raise further funds without the permission of the court.
vi) In so far as the existing schemes are concerned, the companies should strictly comply with the Circular of SEBI dated February 24, 1998
3.5 Subsequently vide order dated October, 13, 1998, the High Court further clarified that the aforesaid directions issued by it on October 07, 1998 would apply to all the plantation companies running collective investment schemes irrespective of the fact whether their names were mentioned in the court proceedings or not. Thereafter, vide its order passed on October 29, 1998, the court clarified that in the event of the failure to comply with its earlier directions within the stipulated time, the question of initiation of proceedings for contempt of court and attachment of properties/appointment of receiver of the defaulting companies shall be considered.
3.6 The aforesaid order / directions of the Hon’ble High Court of Delhi were made available to the public / plantation/agro based companies/entities, by SEBI by way of newspaper advertisement/notice which was published in all editions of the Indian Express on October 21, 1998 and November 9, 1998. Therefore, all companies / entities running collective investment schemes were required to file information with SEBI and to comply with the aforesaid guidelines/ circulars issued by the Central Government and SEBI including the SEBI circular dated February 24, 1998. In view of the above, the company was supposed to comply with the same even prior to the notification of the CIS Regulations, as it was mobilizing funds from the public under collective investment schemes. Even the Hon’ble Delhi High Court’s direction in October 1998 which was prior to the notification of the CIS Regulations needed to be complied with.
3.7 In terms of Section 11 AA of the Act, any scheme or arrangement made or offered by a company that satisfies the following conditions shall be a collective investment scheme:
i. the contributions, or payments made by the investors, by whatever name called, are pooled and utilised 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 moveable 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 the operation of the scheme or arrangement
3.8 Further as per Section 12(1B) of the Act, no entity is permitted to carry on or sponsor or launch a collective investment scheme without obtaining a certificate of registration, in terms of the provisions of the CIS Regulations. In terms of regulation 3 of the CIS Regulations, no person other than a Collective Investment Management Company, which has obtained a certificate of registration shall carry on or sponsor or launch a collective investment scheme. Further under the provisions contained in Chapter IX of the CIS Regulations, no existing collective investment scheme is permitted to launch any new scheme or raise money from the investors even under the existing schemes, unless a certificate of registration is granted to it by SEBI under the CIS Regulations. In terms of regulation 68(1) of the CIS Regulations, every collective investment scheme which was in operation at the time of commencement of the CIS Regulations, shall be deemed to be an existing collective investment scheme and would be required to comply with the provisions of Chapter IX of the CIS Regulations including Regulations 73 and 74 of the CIS Regulations. The method and manner of obtaining the registration are specified in the CIS Regulations and existing collective investment scheme (existing at the time of notification of the CIS Regulations) entity was required to make an application within a period of 2 months from the date of notification of the CIS Regulations. However, the said period was extended from time to time by SEBI. SEBI had also issued several press releases and newspaper advertisements/ notices from time to time in all the leading newspapers of India for the information of all the investors and the persons concerned.
3.9 In terms of Regulation 73 of the CIS Regulations, the entity which was operating as an existing collective investment scheme and failed to make an application for registration with SEBI, was required to wind up its schemes and repay its investors in the manner specified therein. Further under Regulation 74 of the CIS Regulations, the entity operating an existing collective investment scheme and which was not desirous of obtaining provisional registration from SEBI, was required to formulate a scheme of repayment and make repayment to the existing investors in the manner specified in Regulation 73.
3.10 To sum up, all the companies/ entities that were running collective investment schemes before or after the notification of CIS Regulations has to comply with the provisions of the Guidelines/Circulars/Hon’ble Delhi High Court’s directions /CIS Regulations as the case may be.
3.11 The company in its written submission dated December 4, 2006 has contended that the HIDB Bond was not issued by it. In this context, I note the relevant extracts from the letter dated February 20, 2001 sent by Suman Motels Ltd. (signed by Shri S.M Khandhar, in his capacity as Managing Director) to SEBI that “HIDB was launched by our associate company Highway Users Centres (India) Ltd. Collections under the schemes had been invested in Suman Motels Ltd. through unsecured loans represented in both the company’s accounts.
Highway Users Centres (India) Ltd. has transferred an amount of Rs.1053.00 lakhs collected from investors under the scheme to Suman Motels Ltd. during the years 1995 – 1998. Total number of investors under the scheme work out to 17026”.
3.12 The said Shri Surendra Kandhar represented the company before me on November 21, 2006 and made submissions on behalf of it. I also note that the said Suman Motels Ltd. and the company were sharing the same registered office address i.e India Printing House, 42 Ambekar Marg, Wadala, Mumbai 400 031. The letterhead of the said Suman Motels Ltd. also bears the same address. It is not disputed by the company, that the said Suman Motels Ltd. is connected to it. I also note that the money was mobilized from the public by issuing HIDB Bond through a brochure. However, no information was filed either by the company or by Suman Motels Ltd. with SEBI in respect of the said HIDB Bond. On a perusal of the letter dated November 24, 2000 issued by Suman Motels Ltd. to one Shri Nelson Augustine, Advocate, it can be seen that the HIDB Bond was that of the company and not of Suman Motels Ltd. It was also admitted in the said letter that the said bond would come under the collective investment schemes and were controlled by the CIS Regulations.
3.13 I also note that SEBI had ordered M/s Suman Motels Limited (in respect of the Suman Earth Bond), to wind up its collective investment schemes and repay the investors in accordance with the provisions of the Regulations within a period of one month from the date of the said order. The appeal filed by Suman Motels Ltd. was dismissed by SAT and SEBI’s order was upheld. Thereafter, SEBI has initiated action including criminal prosecution against M/s Suman Motels Ltd. for non compliance of SEBI orders and provisions of CIS Regulations. In the facts and circumstances, the contention of the company in the written submission that schemes in question were not run by it, is not acceptable and the same is liable for rejection.
3.14 SEBI vide letter dated December 14, 2004 advised the company to furnish various information (including the details of the schemes) /documents in order to examine its contention that it was not operating any collective investment schemes. The company though vide letter dated December 31, 2004, replied to the said letter, it had not submitted any information / documents as advised by SEBI. In view of this, SEBI vide letter dated January 10, 2005, once again advised the company to submit the required information /documents. However, no reply has been received from the company in this regard so far.
3.15 I observe that in the complaint sent by one of the investors namely, Ms. Snehal P. Jakatdar against the company, she had enclosed copies of certain documents including copies of the Bond Certificates issued to her by the company and the company had admitted the receipt of the same in its letter dated February 04, 2002 addressed to the said Ms. Snehal P. Jakatdar. The said documents were already forwarded to the company. The said documents were again shown to Shri Surendra Khandhar at the time of the hearing. The main features of the scheme as indicated by the terms and conditions mentioned in the copies of the Bond Certificates enclosed with the aforesaid letter of the investor, interalia are as follows:
1. The minimum amount of investment in the Bond is Rs. 5,000/-
and thereafter in multiples of Rs. 1,000/-.
2. The Bond will mature on completion of 4 years from the date of the Bond. The maturity amount of the Bond is double the amount of investment.
3. At any time after maturity, the Bond holder shall submit the Bond alongwith all the securities bearing the corresponding distinctive numbers of the company. The payment will be made by the Company to the Bond holder, in about 15 days from the date of submission of set of complete documents.
4. The company guarantees a return of 11 % p.a.
5. The company will cause the amount utilised for development
of infrastructure on highways.
3.16 It has to be examined as to whether the schemes run by the company were in the nature of a collective investment scheme so as to make it to comply with the provisions of the CIS Regulations. In this context, I note that the company vide its letter dated February 4, 2002 addressed to one of the investors (Ms. Snehal P Jakatdarm) had admitted that it was running investment schemes which were under the purview of CIS Regulations. I note from the copy of the Highway Infrastructure Development Bond (HIDB Bond) issued to the aforesaid Ms. Snehal P Jakatdarm, that the said Bond was issued in the month of January, 1998. The scheme of the company was for the development of infrastructure on highways and the payment made by the investor was utilised for that scheme. The investor had subscribed to the bond with a view to gaining some return and the company also had guaranteed a return of 11 % p.a. Further, since it is the company which is utilising the amount for the scheme, the investment of the investor is managed on behalf of the investors by the company. The investor also does not have day to day control over the management and operation of the scheme as the scheme of development of infrastructure on highways is run by the company. On a perusal of the aforesaid terms and conditions of the scheme of the company, it becomes crystal clear that the scheme satisfies all the conditions of a collective investment scheme as defined in the Act.
3.17 In the facts and circumstances, it is fairly established that the schemes run by the company were in the nature of collective investment schemes governed under the provisions of the CIS Regulations.
3.18 I note that although several press releases and newspaper advertisements/notices were issued by SEBI from time to time in the leading newspapers of India bringing to the notice of the investors and the persons concerned, the various instructions issued by SEBI/Central Government from time to time in respect of the functioning of the collective investment schemes, the company had failed to comply with the said instructions. Even after the notification of the CIS Regulations, the company had not bothered to comply with the provisions mentioned therein. The company neither applied for registration nor wound up the schemes in terms of the provisions of the CIS Regulations. It is clear that a collective investment scheme which was in operation on the date of the notification of the CIS Regulations has three options i.e. (i) to get registered with SEBI or (ii) wind up the schemes or (iii) formulate a scheme of repayment and make such repayment. The company had failed to get it registered with SEBI and further failed to wind up its schemes and repay its investors and continued with the schemes without filing the necessary information /application seeking registration with SEBI. The complaint received by SEBI against the company was forwarded to it. However, the same was not redressed by the company Despite forwarding the same to the company on its request, the company has failed to act upon the same. Therefore, it is fairly established that the company has not complied with the provisions of Section 12(1B) of the Act and Regulation 5(1) read with Regulations 68 (1), 68 (2), 73 & 74 of the CIS Regulations.
4.0 ORDER
4.1 In view of the foregoing, I, in exercise of powers conferred upon me under Section 11 B and 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 65 read with 73 of Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999, hereby direct the M/s Highway Users’ Centres (India) Limited, to wind up its existing collective investment scheme(s) and refund the money collected by it under the scheme(s) with returns which are due to the investors as per the terms of offer within a period of one month from the date of this order, failing which the following actions would follow:
(i) Initiation of prosecution proceedings, under Section 24 of the SEBI Act, 1992, against the company / its promoters / directors / managers /persons in charge of the business of its scheme(s),
(ii) Debarring the company / its promoters/ directors / managers / persons in charge of the business of its schemes (s) from operating in the capital market and accessing the capital market for a period of 5 years,
(iii) Writing to the State Government / local police to register civil /criminal cases against the company and its promoters / directors for apparent offences of fraud, cheating, criminal breach of trust and misappropriation of public funds, and
(iv) Writing to the Department of Company Affairs, to initiate the process of winding up of the company.
This order shall come into force with immediate effect.
G. ANANTHARAMAN
WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA
PLACE: MUMBAI
DATE: 27-02-2007