In the matter of Ion Exchange Enviro Farms Ltd

May 05, 2006

Orders : Orders of SAT

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No. 1 of 2004

Date of Decision

05/05/2006

Ion Exchange Enviro Farms Ltd.

……Appellant

Versus

Securities & Exchange Board of India

……Respondent

Present : Mr. Paresh M. Joshi, Advocate for the appellants.

Mr. Subhash Jha, Advocate with Mr. Jimesh Shah, Advocate for the respondent

Coram:

Justice N.K. Sodhi, Presiding Officer

C. Bhattacharya, Member

R. N. Bhardwaj, Member

Per: Justice N.K. Sodhi, Presiding Officer

This order will dispose of a bunch of 9 Appeals nos. 75 of 2003, 1, 48, 49, 50, 51, 52, 53 and 54 of 2004 filed under Section15T of the Securities and Exchange Board of India Act, 1992 (for short the Act) in which common questions of law and fact arise. Learned counsel for the parties are agreed that the decision in Appeal no. 1 of 2004 will govern the other cases as well. Since arguments were addressed in Appeal no. 1 of 2004 the facts are being taken from this case.

2. The Ion Exchange Enviro Farm Ltd. (hereinafter called “the Company”) is the appellant before us. It ventured into organic farming as, according to it, this system of agriculture had been increasingly adapted in the western countries including Japan and Australia and that the chemicals some of which are very toxic have polluted the water which is used for irrigation resulting in environmental damage of soil and water by the use of chemical fertilisers and pesticides. Pursuant to this objective, it acquired during the period from 1995 to 1997, 2014.49 acres of cultivable wastelands comprised in 15 projects spread over the states of Maharashtra, Goa and Tamil Nadu. The lands are said to have been purchased from the funds of the Company in the names of its nominees who were its employees. 1196.7 acres of land had been sold to several individuals during the period from 1995 to 1998 and these sales were made after brochures and advertisements had been issued and circulated inviting persons to purchase lands whom the Company calls as “weekend farmers”. Agreements in the standard forms were executed and individual conveyance deeds were also executed by the purchasers and it is stated that the land was duly registered in the name of the purchasers and mutated in their name. It is common ground between the parties that even though the lands sold by the Company through its nominees were registered in the names of the purchasers, their development, planting and maintenance was to be undertaken exclusively by the Company for a period of five years. This was a part of the agreement between the Company and the purchasers. It was open to the purchasers to terminate the agreement at any time and take over the responsibility themselves. It is also not in dispute that the Company is managing about 951.09 acres of land for and on behalf of the purchasers. The crops that are grown on the waste lands are mangoes and cashews.

3. While the aforesaid scheme was being operated by the Company for the benefit of the investors, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (hereinafter called the Regulations) came into force. Chapter IX of the Regulations deals with existing collective investment schemes like the one which was being operated by the Company. Regulation 68 in this chapter requires that any person who has been operating a collective investment scheme at the commencement of the Regulations shall have to comply with the provisions of this Chapter. It further provides that the existing investment scheme shall make an application to the Board in the manner specified in Regulation 5. It is common ground between the parties that the Company applied to the Board seeking provisional registration as per its letter dated 1.6.2000. It made a declaration which was signed by its directors stating inter alia that “the schemes of the applicant company are in the nature of collective investment schemes.” The request of the Company was considered by the Board and it was decided to grant provisional registration as required under Regulation 71 of the Regulations. This decision was communicated to the Company by letter dated 13.2.2001 wherein the Board stated as under:

“Having regard to the application and other details submitted by you, as an existing Collective Investment Scheme, you have been considered eligible for grant of provisional registration under the provision of Regulation 70(1) read with Regulation 71(1) of the captioned Regulations. Accordingly, you are hereby granted provisional registration under the provisions of Regulation 71(1) of the captioned Regulations.

The provisional registration has been granted to you subject to the following conditions, inter alia, as specified in Regulation 71 of the captioned Regulations:

a) You shall not launch any new scheme or raise money from the investors even under the existing scheme(s).

b) You shall get your existing scheme(s) rated by a credit rating agency within one year from the date of grant of provisional registration.

c) You shall get your existing scheme(s) audited by an auditor within a period of one year from the date of grant of provisional registration.

d) You shall get your existing scheme(s) appraised by an appraising agency within a period of one year from the date of grant of provisional registration.

e) You shall create a trust and appoint trustees in the manner specified in Chapter IV of the captioned Regulations within a period of one year from the date of grant of provisional registration.

f) …………….”

On receipt of the aforesaid communication the Company informed the Board as per letter dated 27.2.2001 that it would comply with the conditions of Regulation 71 and a written undertaking in this regard had been submitted. Since the Company did not comply with the conditions laid down in Regulation 71 the Board granted extension of provisional registration for a further period of 6 months to enable the Company to comply with the requirements of law. Even during this extended period the Company was unable to comply with the requirements of Regulation 71 in as much as it failed to create a trust and appoint trustees in the manner specified in Chapter IV of the Regulations within a period of one year from the date of grant of provisional registration. It also could not get its existing scheme appraised by an appraising agency. Regulation 73 provides that an existing collective investment scheme which having obtained provisional registration fails to comply with the provisions of Regulation 71 shall wind up the existing scheme. The Company without complying with the provisions of Regulation 71 applied to the Board seeking exemption from the provisions of the said Regulations. As there is no provision to exempt any scheme from the provisions of Regulation 71 the Board obviously could not grant such a request. The Board then by its letter dated 7.1.2003 called upon the Company to show cause why the provisional registration granted to it be not revoked and before passing such an order an opportunity of hearing was provided to the Company requiring it to appear before the Chairman of the Board. After hearing the Company and taking note of the submissions made on its behalf the Board by is order dated 27.11.2003 directed the Company to refund the money collected by it under the scheme within a period of 1 month from the date of the order failing which prosecution would be initiated under Section 24 of the Act. The Company was also told that it along with its promoters, directors, managers and persons in charge of its business of running this scheme shall be debarred from dealing in securities and accessing the capital market for a period of five years. The Company was further informed that the State government and other authorities would be told to register civil/criminal cases against it for fraud etc. It is against this order that the present appeal has been filed.

4. We have heard the learned counsel for the parties. It was not seriously disputed before us that the scheme that was being operated by the Company is a collective investment scheme within the meaning of the Regulations as it satisfies all the requirements of Section 11AA of the Act. Section 11AA provides that any scheme or arrangement which satisfies the conditions referred to in sub-section (2) thereof shall be a collective investment scheme. The conditions referred to in sub-section (2) are as under:-

(i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized 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.

5. Having regard to the nature of the scheme which is being operated by the Company we have no doubt that all the aforesaid requirements stand satisfied and that the scheme operated by the Company is a collective investment scheme. Since it is an existing scheme within the meaning of Chapter IX of the Regulations it had to comply with the provisions of that Chapter which includes Regulation 71. It was conceded on behalf of the Company that it has not been able to comply with the requirements of Regulation 71 since it was unable to create a trust and appoint trustees in the manner specified in Chapter IV. It was further conceded that it could not get its schemes appraised by an appraising agency within the stipulated period. It is thus clear that the Company did not comply with the provisions of Regulation 71 and therefore in terms of Regulation 73 it had to be wound up in the manner prescribed therein. A reading of this Regulation would make it clear that the Company was required to send an information memorandum to its investors within two months from the date of receipt of intimation from the Board detailing the state of affairs of the scheme and the amount repayable to each investor and the manner in which the amount had been determined. This was not done. The Board was therefore right in issuing a show cause notice on 7.1.2003 proposing to revoke the provisional registration. Obviously, the Company had not complied with the provisions of the Regulations and therefore the direction issued by the Board to refund the amount to the investors cannot be found fault with. The Company is directed to wind up the scheme and refund the amount to the investors as directed by the Board.

6. We are however of the view that the directions issued by the Board under Section 4(3) read with Sections 11 and 11B of the Act cannot be sustained. The learned counsel appearing for the Board referred to the provisions of Regulation 65 to contend that in the interest of the securities market and the investors and without prejudice to its right to initiate action under Chapter VIII of the Regulations, the Board could give such directions as it deems fit in order to ensure effective observance of the Regulations. We are prima facie of the view that Regulation 65 does not apply to existing schemes for which a separate chapter namely Chapter IX has been incorporated in the Regulations and it is that Chapter which exclusively governs such schemes. However, it is not necessary for us to deliberate any further on this issue because we are of the view that the directions issued under Sections 11 and 11B could not be issued without affording an opportunity of hearing to the Company, its promoters, directors, managers and persons in charge of operating the scheme. In the instant case, the notice was issued on 7.1.2003 by which the Company had been called upon to show cause why the provisional registration be not revoked. The notice did not call upon the Company to show cause why directions be not issued to it under Sections 11 and 11B of the Act. We have perused the show cause notice and find that not a word is stated therein regarding the directions which the Board was proposing to issue to the Company, its directors and officers. Before any direction could be issued under Sections 11 and 11B the least that is required is that the Company and all those against whom such directions are sought to be issued should be afforded an opportunity of hearing and that they should be put on guard that if they are unable to give satisfactory explanation directions under the said provisions could be issued. No such notice was issued to the Company and its officers and they were not put on guard in so far as directions under Sections 11 and 11B are concerned. The principles of natural justice stood violated and for this reason alone the impugned directions deserve to be set aside.

7. In the result, Appeal No. 1 of 2004 is partly allowed, the impugned order in so far as it directs the company / its directors and officers to refund the amount to the investors is upheld. The directions issued under Sections 11 and 11B of the Act debarring the company, its promoters, directors, managers and persons incharge of its business of running the schemes from dealing in securities and accessing the capital market for a period of 5 years are set aside leaving it open to the Board to proceed in accordance with law. Appeal No. 75 of 2003 filed by the Company is dismissed. Appeals nos. 48, 49, 50, 51, 52, 53 and 54 of 2004 are allowed. Parties are left to bear their own costs.

sd/-

Justice N.K. Sodhi
Presiding Officer

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C. Bhattacharya
Member

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R.N. Bhardwaj
Member