SEBI | Funds Mobilised and Total Assets- Private, Public & UTI

BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

APPEAL NO. 31/2001

In the matter of:

M/s. PCS Industries Ltd Appellant

Vs.

Securities & Exchange Board of India Respondent

APPEARANCE

Mr. Pravin Samdani
Advocate
I/B. Dave & Girish & Co.,

Mr.A.S.Velpanur
Vice President

Mr. J.T.Shah
Company Secretary
PCS Industries Ltd for Appellant

Mr.Ananta Barua
Jt.Legal Adviser, SEBI

Mr.Vinay Chauhan
Legal Officer, SEBI for Respondent

(In the matter of appeal arising out of the order dated 10.5.2001 made by the Adjudicating Officer, Securities & Exchange Board of India)

ORDER

PCS Industries Ltd., the Appellant herein, is a company registered under the Companies Act. The Appellant holds a certificate of registration granted by the Securities and Exchange Board of India (the Respondent herein), to act as a Category I Registrar to the Issue (RTI) and Share Transfer Agent (STA).

In August, 1994, CRB Mutual Fund, a mutual fund sponsored by CRB Capital markets Ltd., launched a scheme namely CRB Mutual Fund Arihant Mangal, to raise monies from the public through sale of 1, 010 lakh units of ten rupees each. An offer document was issued for the purpose. The issue opened on 19^th August 1994 and closed on 5^th September 1994. In the said offer document the Appellant�s name was shown as Registrar to the Issue.

Respondent in its capacity as market regulator carries out inspection of the records of the intermediaries registered with it, mainly with a view to ascertain the extent of compliance of the statutory requirements by them. The Appellant was subjected to an inspection. The inspection team reported that during the inspection the Appellant could not produce any valid agreement which was required to be entered into by it with CRB Mutual Fund to act as RTI and STA in the public issue of Arihant Mangal scheme and also the relevant records pertaining to the share transfer work of the scheme undertaken by it. Subsequently the Respondent appointed an Adjudicating Officer for holding an inquiry, to ascertain as to whether the Appellant had fulfilled the statutory requirement such as entering into an agreement with the issuer etc., and impose suitable monetary penalty if considered necessary, in terms of section 15B of the Securities and Exchange Board of India Act, 1992 (the SEBI Act).

The Adjudicating Officer, on completion of inquiry concluded that the Appellant had failed to comply with the requirements of section 15B read with rule 4(1)(b) of the Securities and Exchange Board of India (Registrar to an Issue and Share Transfer Agents) Rules, 1993, (the 1993 Rules) and imposed a monetary penalty of five lakh rupees on the Appellant vide order dated 10.5.2001. The said order is under challenge in the present appeal.

Shri Pravin Samdani learned Counsel appearing for the Appellant denied the charges against the Appellant and urged to set aside the order, mainly on the ground that the provisions of the 1993 Rules are not attracted. Citing the offer document, Shri Samdani submitted that the obligation of the Appellant was limited to processing applications for units collected and received by CRB Mutual Fund and their agents and forwarded to the Appellant, in addition to printing unit certificates and delivering the same to the mailers appointed by the said fund; that the Appellant was not responsible for collecting applications from investors. He submitted that the role of the Appellant was limited to merely undertaking data processing activities in relation to the applications received and forwarded by the said mutual fund. In this context he produced a notice bearing No.6586/94 dated 19.11.1992 issued by the Bombay Stock Exchange, therein it has been stated that the transfer documents in respect of the units will be accepted at the office of the mutual fund, to show that the transfer documents for effecting transfer of units were to be accepted at the office of the mutual fund and not at the office of the Appellant, that if the Appellant was the STA as claimed by the Respondent, the collection office of transfer documents had to be the Appellant�s office and not the fund�s office. Learned Counsel produced a copy of a letter dated 25.1.1995, and stated that the Appellant in response to the inquiry of CRB Mutual Fund, forwarded to them a copy of the draft terms and conditions subject to which the Appellant was agreeable to render the services of STA to the scheme and stated that this clearly shows that the Appellant never did render the services of STA to the scheme, for otherwise the need for submitting draft terms and conditions as late as in January, 1995 would not have arisen. He further stated that in pursuance to the discussions held between the CRB Mutual Fund and the Appellant, the Appellant revised the charges for rendering the services and vide its letter dated 22.7.1996 sent two copies of MOU, duly signed, offering the services as unit transfer agents for a period of 3 years with effect from 1.1.1995 to 31.12.1998. Learned Counsel stated that since the mutual fund was unable to pay the charges, the Appellant was not agreeable to undertake data processing activities any further and hence sought to terminate the arrangement vide its letter dated 29.5.1997, a copy of which was produced. He also stated that the Respondent vide its letter dated 24.9.1997 had sought certain clarifications, based on the observations made by Kalyaniwalla & Mistry, Chartered Accountants, who had conducted the inspection of the scheme, and the position was fully explained by the Appellant, vide letter dated 14.10.1997, copies of these two letters were also produced.

Learned Counsel submitted that the services rendered by the Appellant in relation to the scheme do not fall within the scope of the rules. He submitted that the expression �issue� has been defined in rule 2(d) as meaning inter alia, an offer of sale or purchase of securities by any body corporate or by any other person or group of persons on its or his or their behalf, as the case may be, to or from the public or the holder of securities of such body corporate or person or group of persons. Shri Samdani further submitted that the expression "issue" refers to an offer of sale or purchase of securities. The expression "securities" has not been defined in the SEBI Act or in the rules, but adopted as available in the Securities Contracts (Regulation) Act, 1956 (SCR Act). In this context he referred to the said definition and in particular the security referred to in clause (ib) of section 2(h) of SCR Act that �units or any other instrument issued by any collective investment scheme to the investors in such schemes�, and also stated that the expression collective investment scheme has been defined under section 2(ba) and 11AA (2) of the SEBI Act, as meaning inter alia any scheme or arrangement made or offered by any company. According to the learned Counsel on a combined reading of sections 2(ba) and section 11AA of the SEBI Act and section 2(h) of SCR Act, the expression �securities� includes, inter alia, any instrument issued under any scheme or arrangement by a company. He stated that the mutual fund is not a company, that units were offered by it within the meaning of Securities and Exchange Board of India (Mutual Fund) Regulations, 1996 (the 1996 Regulations). He further stated that in terms of sub section (3) of section 11AA any scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund shall not be collective investment scheme, that accordingly units issued under a scheme of a mutual fund are clearly outside the purview of units or any other instrument issued by a collective investment scheme and thereby outside the scope of section 2(h). Shri Samdani submitted that in view of the said legal position units offered by a mutual fund under its scheme are not securities under the said provisions, and hence the services rendered by the Appellant with regard to issue/transfer of units of CRB Mutual Fund would fall outside the scope of the 1993 Rules, that the Respondent has therefore no powers, authority or jurisdiction to conduct any enquiry or impose any penalty on the Appellant. Shri Samdani further submitted that in terms of the definition of the expression �issue� in rule 2(d), the issuer should be either a body corporate or a person or group of persons, that an offer of units by a mutual fund is neither an offer by a body corporate or by a person or group of persons, and hence on this ground also, the order deserves to be set aside.

Learned Counsel further submitted that the expression �Share Transfer Agent� has been defined in the 1993 Rules to mean any person, who on behalf of any body corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities, that the Appellant had not undertaken any such services that it was doing only �data processing�, and therefore the Appellant cannot be regarded as a STA within the meaning of that expression, in respect of the units issued by CRB Mutual Fund .

Shri Samdani submitted that the Respondent had in the year 1997 caused inspection of the records of the Appellant and based on the inspection report, the Respondent had raised certain queries vide letter dated 24.9.1997 to which the Appellant replied vide letter dated 14.10.1997, that in the reply the Appellant had stated the fact that the Appellant did not act as STA of CRB Mutual Fund, and that the explanation was accepted by the Respondent, and thereafter Respondent even granted a certificate of renewal to the Appellant with retrospective effect i.e., from 1.8.1997. According to Shri Samdani the Respondent therefore is estopped from raising the matter again.

The learned Counsel stated that the provisions of section15B of the Act are penal in nature, that it has been well settled by authority that the terms of a statute imposing penalties must be construed strictly and if the meaning of the word used is doubtful, the doubt should be resolved in favour of the accused. In support of the said proposition he cited House of Lord�s in Rosenbaum v Burgoyne (1964) 2 All ER 988) and Chancery Division in Re H.P.C Products Ltd (1962) 1 All ER 38)

Shri Ananta Barua, learned representative of the Respondent, reiterated the background of the case and facts as stated in paras 2 to 9 of the Respondent�s written reply to the appeal. He submitted that the fact that the Appellant had acted Registrar to the Issue of Arihant Mangal Scheme is born out of the disclosure made in the offer document, that the Appellant�s name has been shown therein as the Registrar to the Issue, that Shri Velpanur, Vice President and the authorised representative of the Appellant had also admitted this fact during his deposition. Shri Barua stated that in terms of rule 4(b) of the 1993 Rules, every RTI is required to enter into a valid agreement with the issuer before taking up the assignment to act as RTI. According to Shri Barua though the Appellant was called upon to produce the agreement entered into with CRB Mutual Fund in this regard, the Appellant could not produce the agreement or any document to establish that the requisite agreement existed.

Referring to the Appellant�s role as STA, Shri Barua submitted that the fact that it had acted as STA, is evident from the facts on record, that in connection with its application for renewal of registration as category I RTI and STA, the Appellant had forwarded a list of the clients for whom it rendered services as RTI and STA, therein CRB Mutual Fund has been shown as one of the clients. He referred to the list at Annexure �C� to the reply. Referring to the letter dated 22.7.1996 which is Annexure �D� to the reply, Shri Barua stated that from what mentioned therein, it is clear that the Appellant was appointed as RTI and STA to Arihant Mangal scheme. He also stated that the Appellant itself had written to CRB Mutual Fund on 22.2.1997, as could be seen from the letter placed as Annexure �E�, that due to exigencies, the Registrar�s and Transfer Agent's work of the mutual fund was being shifted from its premises at Saki Naka to some other premises in the neighbourhood. He also stated that from the letter dated 29.5.1997 produced and relied on by the Appellant, it is clear that the contractual agreement was in force even on that day, otherwise they would not have stated about the termination of the agreement. Shri Barua also cited Shri Velpanur�s statement that "we had sent the Memorandum of Understanding (MOU) to the company for signature and the acknowledged copy is not available on record", to show that the Appellant was in position as RTA and STA. He cited the letter dated 22.7.1996 whereby the Appellant had admittedly forwarded a copy of the MOU to CRB Mutual Fund for its signature wherein it has been stated that "As per your request we are pleased to revise our charges for the Registrar and Transfer work for Arihant Mangal Scheme as per schedule II. These charges along with mutually agreed terms and conditions are being sent to you in the form of MOU (as per SEBI requirement). This MOU is valid for a period of three years i.e. with effect from 1.1.1995 to 31.12.1998". Shri Barua stated that it is evident from this letter that the Appellant was carrying out unit transfer work for CRB Mutual Fund since the issue was over in 1994, that as per the mutual fund�s request it submitted revised charges for the said assignment and also sent MOU as per mutually agreed terms and conditions.

With reference to the Appellant�s contention that the Appellant is not subject to the regime of the 1993 Rules for the reason that units are not securities and issuer is not a body corporate, Shri Barua submitted that this contention cannot be raised in the appeal, as it was not raised before the inspection team or the adjudicating officer. He refuted the Appellant�s contention that the rules are not applicable to the Appellant in the instant case. Shri Barua referred to the definition of the expression "security" in the SCR Act and submitted that the units issued by mutual funds are securities. In this context he referred to section 11(2)(c) of the SEBI Act and stated that collective investment scheme includes mutual funds, that definition of securities at section 2(h)(ib) in the SCR Act also includes units or other instrument issued by any collective investment scheme to the investors in such schemes. He submitted that mutual fund is also a collective investment scheme. He further submitted that units of mutual funds are marketable securities, they are listed on the stock exchanges and also freely transferable as per the Regulations. According to Shri Barua the units in Arihant Mangal Scheme were issued by CRB Trustee Ltd, which is a company, that since the units are issued by a company, the same also fulfills the requirements of section 2 (h)(i) of SCR Act that "shares, scrips, stocks bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate". Shri Barua referred to the �guidelines for Mutual Funds� issued by the Ministry of Finance, Government of India on 14.2.1992 and stated that one of the requirements of the said guidelines is to list the close ended schemes of mutual fund on exchanges thereby implying that the units are securities. He referred to two other Government circulars dated 13.8.1986 and 5.1.1989 conveying Government approval for listing of the units of the schemes floated by Unit Trust of India. Shri Barua also cited the view expressed by Special Court (Trial of Offences relating to Transactions in Securities) in AK Menon v Fairgrowth Finance services Ltd (1994) 81 Co.cases 508 (at pg.528) to establish that units are securities.

Referring to the Appellant�s contention that it does not fall under the definition of rule 2(e) and 2(g) as RTI or STA and that offer of units made by the mutual fund under the scheme is not an �issue' in terms of rule 2(d), Shri Barua submitted that the version cannot be accepted in view of the scheme of the mutual fund regulations. In this context he referred to the concept of Mutual Fund, Sponsor, Trustee, Asset Management Company and Custodian, recognized under the Regulations and the duties and functions assigned to each one of them. He submitted that the Appellant is not out of the reach of the Regulations and that since it has failed to comply with the requirements of the law, the penal consequences provided for the failure are applicable. Shri Barua submitted that in the pleadings the Appellant has not challenged the findings of the Adjudicating Officer, but only jurisdiction has been questioned and therefore the Appellant cannot raise the same in the arguments at this stage.

In fairness to the parties, it has to be stated that they did not object to the opposite party producing letters/notices etc. relied on them, at the time of argument, though they were not filed earlier with the appeal/reply. Therefore I have taken on record the letters/notices, etc., referred to in their submissions.

Shri Barua�s preliminary objection that since the Appellants had not raised the question of applicability of the rules, to the case before the adjudicating Officer and the inspecting team, it cannot advance such an argument at this stage is devoid of merit. The jurisdictional matter raised by the Appellant being a question of law, the Appellant is at liberty to raise the same before the Tribunal. Shri Barua�s yet another objection is that the Appellant had not contested the finding of fact made by the Adjudicating Officer in its pleading is contrary to the facts. In the appeal memorandum the Appellant had explained the factual position as to the nature of its relationship with/role in the issue of units of Arihant Mangal Scheme and contested the conclusion drawn by the Adjudicating Officer. Therefore Shri Barua�s objection on this count also fails.

On a perusal of the offer document relating to Arihant Mangal Scheme filed by the Respondent along with its reply it is seen that CRB Mutual Fund was constituted as a Trust under the Indian Trust Act, 1882, and the trust deed was registered under the Registration Act, 1908. CRB Capital Markets Ltd. the Sponsor of the mutual fund is also the Settlor and CRB Trustee Ltd, is the Trustee of the said Trust. It has been stated in the offer document that CRB Trustee Ltd, is a limited company incorporated under the Companies Act and that pursuant to the Trust Deed registered on 15.12.1993, the said CRB Trustee Ltd, has been appointed as Trustee for CRB Mutual Fund. It has been clearly stated in the offer document that �A corpus fund has been formed to be held upon on trust by the Trustee Company�. Duties and responsibilities of the Trustee also have been enumerated therein. One of such duties and responsibilities is that "The trustee shall take into their custody and/or control all the capital, assets, property of the scheme floated by Mutual Fund and hold the same in trust for the unit holders in accordance with the Trust deed, Regulations for Mutual Funds, Guidelines and Circulars issued by SEBI from time to time", that "the Trustee shall act at all times in the interest of the unit holders".

CRB Trustee Ltd, has appointed CRB Asset Management company Ltd., another public limited company registered under the Companies Act, to supervise the operations of CRB Mutual Fund and manage the assets of the CRB Mutual Fund�s schemes. Under the Investment Management Agreement executed between the parties, the said asset management company is required to provide assistance to CRB Mutual Fund in the offering of the scheme�s units, day to day investment management of the fund in accordance with the scheme�s objectives and developing and managing other schemes. Under the said agreement, it is the duty of the said asset management company to frame and launch new schemes from time to time as approved by the Trustee.

It has been stated in the offer document that "the units under the scheme will be listed in marketable lot of 100 units on Stock Exchanges at Bombay, Calcutta, Delhi, Madras and Jaipur�� The Trustee may at its discretion list the Units under the scheme on any other Stock Exchanges and/or National Stock Exchange, if possible, as they may feel necessary". It has also been mentioned that "units under the scheme will be freely transferable between parties eligible to invest in this scheme��".

The offer document also discloses appointment of the Appellant as the Registrar to the Issue. There is an affirmative statement under the heading "Registrar to the Issue" that "PCS Industries Ltd has been appointed as the Registrar to the Issue. The trustee and AMC have ensured that the Registrar has adequate facilities to discharge responsibilities with regard to processing of applications, dispatch of unit certificates to unit holders within the time limit prescribed in the Mutual Fund Regulations and also sufficient capacity to handle investors complaints".

To get a proper answer to the question as to whether the unit issued by CRB Mutual Fund is a �security� in terms of section 2(h) of the SCR Act and that, the Appellant is a RTI and STA in terms of rules 2(e) and 2(g) of the Rules, it is necessary to test the factual position referred to above with reference to the provisions of the Act, the 1993 Rules and 1996 Regulations.

The expression �security� has not been specifically defined in the SEBI Act. It has adopted the definition as provided in section 2 of the SCR Act.

According to section 2(h) of the SCR Act;

"Securities" include - shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes ;

Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

rights or interest in securities.

Collective investment scheme referred at clause (ib) above has been defined in section 2(ba) of the SEBI Act as "any scheme or arrangement which satisfies the conditions specified in section 11AA". Section 11AA is extracted below:

"Collective investment scheme. 11AA. (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (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 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;

(ii) 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.

(3) Notwithstanding anything contained in sub-section (2), any scheme or arrangement-

(i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State;

(ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);

(iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938), applies;

(iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (19 of 1952);

(v) under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956);

(vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956 (1 of 1956);

(vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit Fund Act, 1982 (40 of 1982);

(viii) under which contributions made are in the nature of subscription to a mutual fund;

shall not be a collective investment scheme."

Since we are examining the nature of �units� to consider as to whether they are securities or not, it is necessary to have a look at the Regulations governing mutual funds. In this context it is to be noted that the 1993 Mutual Fund Regulations, which was in position when the Arihant Mangal Scheme was floated, was repealed by the 1996 Regulations. The core provisions discussed below are substantially same in both the Regulations.

According to regulation 2(q) of the 1996 Regulations �Mutual Fund� means "a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments". This definition is an expanded and clarificatory version of the definition provided in the 1993 Regulation, retaining the substantive portion intact. According to the said Regulation "mutual fund means a fund established in the form of a Trust by a sponsor to raise monies by the Trustee through the sale of units to the public under one or more schemes for investing in securities in accordance with these regulations".

As per regulation 2(z) �unit� means the interest of the unit holders in a scheme, which consists of each unit representing one undivided share in the assets of a scheme (1993 and 1996 Regulations are substantially same but for using the word unit holders in the 1996 Regulations in the place of �investors� used in the 1993 Regulations). The Regulation, has also defined the expression �trustees� in regulation 2(y) that � Trustees" mean the Board of Trustees or the Trustee company who hold the property of the Mutual Fund in trust for the benefit of the unit holders. According to 1993 Regulation �trustee means a person who holds the property of the mutual fund in trust for the benefit of the unit holders�.

In the light of the definition of the expression �securities� and the nature of the units described in the Regulations we have to consider as to whether the units of Arihant Mangal scheme are securities under section 2(h) of SCR Act. Shri Samdani had focussed his submission only to clause (ib) of section 2(h) to establish that the units issued by mutual funds are separate and distinct from the units issued by collective investment schemes as section 11AA(3) specifically excluded units issued by mutual funds from the ambit of the section. I fully agree with the learned counsel�s submission in this regard. But he has overlooked the wide scope of the definition of securities in section 2(h) Shri Barua�s argument that collective investment scheme includes mutual funds in terms of section 11(2)(c) and therefore the units issued by mutual funds are covered under section 2h(ib) is untenable in view of the exclusion of the units issued by Mutual funds in section 11AA of the Act. He has placed wrong reliance on the two Government letters dated 13.8.1986 and 5.1.1989 as the same relate to listing of units of Unit Trust of India Similarly the Government guidelines for mutual funds dated 14.2.1992 relied on by him is also of no use as the same does not in any way support his argument. The special court�s decision in AK Menon�s case (supra) referred to by Shri Barua is also of little help as the observation made by the Hon�ble Court therein is also with reference to the units of Unit Trust of India. It has to be noted that Unit Trust of India is a body corporate in terms of section 2(7) of the Companies Act. It is settled that units issued by Unit Trust of India are securities. Shri Barua�s submission that the units issued by mutual funds are covered under clause (i) of section 2(h) is also not acceptable in view of the limited scope of the said clause that it pertains to "securities in or of any incorporated or other body corporate". A mutual fund being a trust is not a company or other body corporate.

We have seen from the definition of units in the 1996 Regulations that unit means the interest of unit holders in a scheme representing one undivided share in the assets of a scheme. These units are listed on the stock exchanges and freely transferable and therefore freely marketable. But for certain rights and obligations embedded to the shares issued by public companies, these units are generally like the shares of companies from the angle of marketability. The units are also, issued, listed demated, traded and transferred like shares and debentures issued by companies. In this context it is also to be noted that the units of the same character issued by Unit Trust of India are considered as securities. The units of collective investment scheme have also been specifically included in the definition. By its very nature unit of a mutual fund is not basically different from the units of mutual funds floated by Unit Trust of India. This similarity should not be ignored while considering the units of mutual fund vis-à-vis the definition of securities in section 2(h). The definition as it could be seen from the text extracted above, is an inclusive definition and not an exhaustive one. It is thus not self contained. The categories of securities enumerated under the section are specific cases. It is not a close-ended definition. The scope of inclusive definition has been examined by the Hon�ble Supreme Court in several of its decisions. To quote one, is the view expressed in S K Gupta vs. K P Jain (1979) 3 SCC 54. In this case the Hon�ble Court was examining the scope of the definition �modify� in section 2(29) of the Companies Act which stated �modify and modification shall include the making of additions and omissions". The observation made by the Hon�ble Court is extracted below:

"24. The noticeable feature of this definition is that it is an inclusive definition and, where in a definition clause, the word �include� is used, it is so done in order to enlarge the meaning of the words or phrases occurring in the body of the statute and when it is so used, these words or phrases must be construed as comprehending not only such things which they signify according to their natural import, but also those things which the interpretation clause declares that they shall include (see Dilworth v. Commissioner of Stamps (1899) AC 99,105). Where in a definition section of a statute a word is defined to mean a certain thing, wherever that word is used in that statute, it shall mean what is stated in the definitions unless the context otherwise requires. But where the definition is an inclusive definition, the word not only bears its ordinary, popular and natural sense whenever that would be applicable but it also bears its extended statutory meeting. At any rate, such expansive definition should be so construed as not cutting down the enacting provisions of an Act unless the phrase is absolutely clear in having opposite effect (see Jobbins v. Middlesex County Council (1948) 2 All ER 610). Where the definition of an expression in a definition clause is preceded by the words �unless the context otherwise requires�, normally the definition given in the section should be applied and given effect to but this normal rule may, however, be departed from if there be something in the context to show that the definition should not be applied (see Khanna, J., in Indira Nehru Gandhi v. Raj Narain (1975 supp. SCC 1, 97). It would thus appear that ordinarily one has to adhere to the definition and if it is an expansive definition the same should be adhered to. The frame of any definition more often than not is capable of being made flexible but the precision and certainty in law requires that it should not be made loose and kept tight as far as possible (see Kalya Singh v. Genda Lal (1976) 1 SCC 304, 309)" In RBI v. Peerless General Finance Co.Ltd (1996) 1 SCC 642, Hon�ble Supreme Court while examining the scope of section 45K (3) of the Reserve Bank of India Act, had observed that "it is thus evident that the words in respect of any matters relating to or connected with the receipt of deposits in section 45K(3) confer a wide power on the Bank to issue directions and the said power is not restricted or limited to receipt of deposits only. The amplitude of this p power cannot be curtailed by the words "including the rates of interest payable in such deposits and the period for which deposits may be received" in section 45K(3). It is no doubt, true that the word "including" is generally used in extensive sense to bring within the ambit of the provisions matters referred to in the inclusive clause which normally would not have been covered by the provision. But that is not always so. Many times the legislature uses an inclusive phrase to specifically include a matter by way of abundant caution. Having regard to the object and purpose underlying the enactment of section 45K, we are unable to construe the words "including the rate of interest payable on such deposits and the periods for which deposition may be received" as restricting the ambit of the words "in respect of any matters relating to or connected with the receipt of deposits" which in our opinion must be given their natural meaning as construed by this Court in Peerless II. This means that the Bank has been given the power to issue directions in respect of any matter relating to or connected with the receipt of deposits".

It is settled legal position that the word �include� would be given wide interpretation so as to bring within its ambit exhaustively all entries akin to or analogous to those enumerated in the section. In other words by employing the inclusive definition, the legislature intended to bring in, by legal fiction, something within the accepted connotation though not specifically included within its ambit. While interpreting the scope of section 2(h), the following observation made by the Hon�ble Court in Reserve Bank of India v. Peerless General Finance and Investment Co. (1987) 1 SCC 424 has to be remembered:

"Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted". Precisely, that is why one should know the object of defining the expression "securities" and the purpose of enacting SEBI Act. It is to be noted that the objective of SEBI Act is to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of and to regulate the securities market. Section 11 of the Act empowers the Board, within the framework of the legislation, to take such measures as it thinks fit for pursuing the above stated objective. In exercise of the said power the Respondent has made the Mutual Fund Regulations. The thrust of the Mutual Fund Regulations is to protect the interests of the unit holders, something akin to protection of shareholders� interests in companies as provided in other Regulations made by the Respondent. Mutual funds are increasingly popular as an institution, which takes care of the investment requirement of small investors who generally lack expertise on their own in the securities market. According to the published reports, starting with an asset base of Rs. 25 crores in 1964, the industry has grown exponentially to Rs. 90, 587 crores at the end of March 2001. The number of households owning units of mutual funds exceeds the number of households owning equity and debentures, At the end of March, 1999, according to SEBI � NCAER SURVEY on Indian Investors (2000) published recently, 23 million unit holders had invested in units of mutual funds, as against 19 million individual investors in equity or debentures issued by companies. This itself indicates the importance of mutual fund industry and the need to protect the interest of unit holders of mutual funds. The Regulations have been framed with the said objective in view. Therefore, having regard to the object and purpose underlying the SEBI Act, and the relevant Rules and the Regulations, the expression �securities� need be given a meaningful interpretation. The reach of the definition of the word �security� under section 2(h) of the SCR Act being an inclusive definition is very wide. All securities which are marketable and which have an ease or facility of selling and/or which have a high degree of liquidity and or/are capable of being sold in a market i.e. stock exchange are considered to be included. Units of mutual funds certainly come under this. To hold that the units are not securities in terms of section 2(h) would be in effect curtailing and restricting the ambit of the definition, against the legislative intent. In my view units issued by mutual funds are securities as defined under section 2(h) of SCR Act.

The next question is as to whether the Appellant is a RTI and STA in terms of the 1993 Rules. For the purpose let us have a look at to the relevant rules extracted below.

"2(e) "Registrar to an issue" means the person appointed by a body corporate or any person or group of persons to carry on the following activities on its or their behalf, namely:
(i) collecting applications from investors in respect of an issue

(ii) keeping a proper record of applications and monies received from investors or paid to the seller of the securities; and

(iii) assisting body corporate or person or group of persons in:

(a) determining the basis of allotment of securities in consultation with the stock exchange;

(b) finalising the list of persons entitled to allotment of securities

(c) processing and dispatching allotment letters, refund orders or certificates and other related documents in respect of the issue"

2(g) "Share Transfer Agent" means- (i) any person who on behalf of any body corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities;

(ii) a department or division ( by whatever name called) of a body corporate performing the activities referred to in sub clause (i) if at any time the total number of the holders of its securities issued exceed one lakh.

Both these definitions refer to the expression �issue�/issued. The said expression has been defined in 2(d) of the Rules as follows: "Issue" means an offer of sale or purchase of securities by any body corporate or by any other person or group of persons on its or their behalf, as the case may be, to or from the public or the holders of securities of such body corporate or persons or group of persons. Since these definitions refer to �body corporate� it is necessary to know as to what is a body corporate. Since there is no specific definition of the expression in the SCR Act the definition provided in the Companies act is applicable. Section 2(7) of the Companies Act, 1956 defines the words as follows: "Body corporate" or corporation includes a company incorporated outside India but does not include-

(a) a corporation sole;

(b) a co-operative society registered under any law relating to co.operative societies and

any other body corporate (not being a company as defined in this Act) which the Central Government may by notification in the Official Gazette specify in this behalf."

It is to be noted that there is also an inclusive definition.

Section 11(2)(c) of the SEBI Act empowers the Respondent to take measures to provide for registering and regulating the working of venture capital funds and collective investment schemes including mutual funds. The Respondent has notified separate regulations to regulate the venture capital funds, collective investment schemes and mutual funds. As per the Mutual Fund Regulations, as already discussed above mutual fund means a fund established in the form of a trust to raise monies through the sale of units to the public. Further, the Regulation stipulates that a mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908 and executed by the sponsor in favour of the trustees named in such an instrument. Concept of Trust has been defined in the Indian Trust s Act, 1882:

According to section 3 of the Indian Trusts Act, a trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another, or of another and the owner. The person who reposes or declares the confidence is called the �author of the trust�, the person who accepts the confidence is called �the trustee�, the person for whose benefit the confidence is accepted is called �the beneficiary�, the subject matter of the trust is called �trust property� or �trust money�, the beneficial interest or interest of the beneficiary is his right against the trustee as owner of the trust property, and the instrument, if any, by which the trust is declared is called the �instrument of trust�.

Thus it is clear that a trust is only an obligation annexed to the ownership of property. It is not a juristic personality, which can sue or be sued. The properties of the Trust are vested in the Trustees and the Trustees transact for the Trust. This position is clear from the scheme of the Mutual Fund Regulations. In terms of the Regulations the Trust deed is required to provide that the Trustee shall take into custody or under their control all the property of the schemes of the mutual fund and hold it in trust for the unit holder. It is the Trustee who appoints the asset Management Company. The asset Management Company is responsible for floating schemes for mutual funds after approval of the same by the Trustees. The Registrar to the Issue is also appointed by the Trustees. It is thus clear that it is the Trustee who holds the key role in managing the mutual fund.

A mutual fund being a trust by itself cannot act on its own. It has to act through the Trustees. In this context it is also to be noted that as per the 1993 Regulations, which was in position in 1994 at the time of making public offer of units in Arihant Mangal Scheme, a "mutual fund means a fund established by a sponsor, to raise monies by the Trustees through the sale of units to the public under one or more schemes ��" (emphasis supplied).It is thus clear that it was the Trustee who was raising monies and not the Trust. In this background we have to see whether the public offer of units made in the Arihant Mangal scheme is an �issue� in terms of the rule 2(d).

In the light of the conclusion already arrived at that the units of mutual funds are securities,� offer or sale or purchase of securities� referred to in rule 2(d) include offer of units as well. The offer is made by the asset management company, CRB Asset Management Co. Ltd., in the instant case, which is a body corporate acting on behalf of CRB Trustees Ltd, also a body corporate, being the Trustees of CRB Mutual Funds. Therefore taking into consideration the scheme of the Mutual Fund Regulations and the factual position that the CRB Asset Management Co Ltd had issued the units on behalf of the CRB Trustees Ltd., the Trustees of CRB Mutual Fund, I am of the view that the public offer of the units of Arihant Mangal Scheme made vide the offer document is an issue in terms of rule 2(d).

As already mentioned, the Appellant was appointed as Registrar to the Issue of the units of Arihant Mangal Scheme was by CRB Trustees Ltd. The appointment is evidenced from the disclosure made in the offer document. It goes without saying that such an appointment should be to carry out the activities referred to in rule 2(e). The argument that the Appellant had not undertaken all those activities, is not a ground to consider that the Appellant was not appointed as Registrar to the Issue. The offer document is a statutory document. The statement made therein is a valid statement unless it is established with evidence that it is factually incorrect. Appellant has not challenged the authenticity of the statement relating to its appointment as Registrar to the Issue made in the offer document. It thus stands conclusively established that the Trustees had appointed the Appellant as Registrar to the issue. The Trustee in the instant case is a body corporate and it had issued the units. Therefore the Appellant in the instant case, squarely fit into the definition of Registrar to an Issue provided in rule 2(e).

A Share Transfer Agent in terms of rule 2(g) means (i) any person who on behalf of any body corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities. As in the case of RTI, STA is also appointed by the Trustees, CRB Trustees Ltd in the instant case. The nature of work referred to in the definition is with reference to issue of units made on behalf of the CRB Trustees Ltd., the Trustees of the CRB Mutual fund. Therefore viewed from the legal angle it is clear that the Appellant is covered under rule 2 (g). The Appellant�s argument that it was doing data processing work alone is contrary to its admission in the pleadings.

With reference to the agreement to act as Share Transfer Agent, as per the Appellant�s own version it could not produce any valid agreement regarding its appointment as STA before the inspecting team and the Adjudicating Officer for the reason that the MOU�s as signed and sent by it to CRB Mutual Fund were not received back duly executed. The Adjudicating Officer has elaborately discussed the factual position in this regard in para 2 of the order. She has relied on the documents and the deposition made by Shri Velpanur, Vice President of the Appellant, to fortify her conclusion that the Appellant had failed to enter into an agreement before taking up the assignment as Share Transfer Agent. The following factual position recorded by the Adjudicating officer supports the fact that the Appellant had acted as STA and that no valid agreement in terms of rule 4 (1)(b) was executed:

"This letter dated 29.5.07 also corroborates the statements made by Shri Velpanur during inspection that they carried out the transfer work till May 8, 1997 and thereafter terminated the transfer agents contract vide their letter dated May 29, 1997.

PCS has further submitted that as MOU sent by them to CRB MF vide there letter dated July 22, 1996 was not signed and sent back by CRB MF, they did not carry out transfer work for them, but, limited service of data processing was rendered by PCS on CRB�s request.

It is observed that the PCS�s letter no. PCS/CRBMF/96/740 dated July 22, 1996 whereby, they forwarded a copy of MOU to CRB MF for their signature, clearly mentions that � "As per your request we are pleased to revise our charges for the Registrars and Transfer work for Arihant Mangal Schemes as per schedule II. These charges along with mutually agreed terms and conditions are being sent to you in the form of MOU (as per SEBI requirement). This MOU is valid for a period of three years w.e.f 01.01.1995 to 31.12.1998". It appears from this letter that PCS was carrying out share unit transfer work for CRB MF since the issue was over in 1994, though as per CRB'� request they submitted their revised charges for the said assignment and also sent MOU as per mutually agreed terms and conditions.

Though PCS has submitted that they did not act as STA as MOU was not signed and returned by CRB MF, but this is belied by the fact, that in response to the query during inspection, as to why they are not able to produce record pertaining to transfer of units of the MF from 1.1.97 to till date, it was submitted that � "We have terminated the contract as transfer agents vide our letter dated May 29, 1997, copy of which has been sent to SEBI as well as the stock exchange. Thereafter the records were moved to our Sakinaka office and collection of records was undertaken on receipt of your advice regarding your inspection. We shall make efforts to trace out the other records, which are as on date not available. Once records are traced out, we undertake to produce the records to SEBI."

It is beyond comprehension that when PCS was not acting as STA, how were they in possession of relevant record (as assured to be produced) even in January 1999, when the inspection took place. Not only this, it is noted from the record that during inspection PCS produced details of transfers carried out by them. It is also seen that in the inspection report, (a copy of which was also given to PCS) an observation has been made that � "The intermediary could produce details of 47 transfers involving 20300 units of the scheme which were effected during 1^st January 1997 and 8^th may 1997 starting from transfer sl. No. 351 to 397. These details were available in its database. It was noted that neither the inward date regarding receipt of transfer requests nor inward number was appearing in the system. Intermediary could not produce its inward register for scrutiny of the inspection team which was required to ascertain that whether the above referred 47 cases were the only transfer requests received during the period. From the available records, the above referred 47 transfers affected during the period, appeared to be normal routine transfers and no notable discrepancy was observed."
Inspection report further observed that � "with regard to share transfer work of the scheme the intermediary confirmed that after May 08, 1997 they have not affected any transfer and finally vide their letter no. PCS/97 dated May 29, 1997 they terminated their contract with the company. Since the inward register was not made available to the Inspection Team the authenticity of the declaration given by the intermediary that they have not effected any transfer of the units of the Scheme after May 08, 1997 could not verified."

These observations remain unrebutted. The following para in the Memorandum of appeal itself indicates that the Appellant had undertaken the activities of Share Transfer Agent.

"The Appellant states that the Appellant rendered limited data processing service as and when required by CRB MF. The Appellant further states that the Appellant data processed the certificates with the transfer deeds which were directly received by CRB MF and upon completion of the said data processing service, the certificates and transfer deeds were returned to CRB MF and the mailing of the unit certificates was undertaken directly by CRB MF. The Appellant states that except for some stray / rare and exceptional case wherein the Appellant received transfer forms from unit holders who deposited the same with the Appellants, the Appellants have not rendered any other service other than that of data processing. The Appellant states that the value of transfer forms received and processed from unit holders are negligible and though the Appellant was under no obligation to do so, the same was done merely to assist CRB MF in the course of their activities."(emphasis supplied) It is also seen from the document annexed to the reply of the Respondent, that with its application for renewal of registration as category I RTI and STA, the Appellant had forwarded a list of its clients for whom it rendered transfer agency services. In the said list name of "CRB Mutual Fund (Arihant Mangal)" has been clearly mentioned. Since the functions of RTI cease on completion of the public issue and the related actions such as posting of unit certificates, refund of money etc., the post allotment activities relating to transfer of units, redemption etc., cannot be attributed to RTI but only to STA. So the reference in the list obviously should be to the services rendered as STA. In the light of the factual position discussed in the report and the Appellants own admission, there is no reason to differ with the findings of the Adjudicating Officer that the Appellant had acted as STA to the Arihant Mangal scheme, without executing an agreement as required in rule 4(1)(b).

In terms of section 12(1B) of the SEBI Act, certificate of registration is required to be obtained from SEBI to carry on the business of mutual funds. Conditions for grant or renewal of certificate for the purpose of section 12 of the Act has been stipulated in rule 4. One of such conditions at clause (b) of rule 4 is that the Registrar to an Issue or Share Transfer Agent, shall enter into a valid agreement with the body corporate or the person or group of persons for or on whose behalf he is buying or selling or dealing in securities as Registrar to an Issue or as a Transfer Agent, defining amongst other things the allocation of duties and responsibilities between him and such body corporate or persons or group of persons as the case may be.

Failure to comply with the requirements of entering into the requisite agreement in terms of rule 4 (1)(b) would invite the penalty provided in section 15B of the Act, according to which "If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty not exceeding five lakh rupees for every such failure. In terms of section 15I, Adjudicating Officer appointed by SEBI is empowered to impose the monetary penalty following the requirements stipulated in the said section 15I.

As already stated, it is clear in the light of the disclosure made in the offer document that the Appellant was appointed as the Registrar to the Issue. The Appellant has not produced any agreement executed between the Appellant and Trustees before taking up the assignment as RTI for the issue of units in 1994. In the absence of any evidence to establish that the Appellant had entered into a valid agreement as required in terms of rule 4(1)(b) the Adjudicating Officer�s inference that the Appellant had not entered into such an agreement and the conclusion that the Appellant has violated rule 4(1)(b) need be upheld. It is also clear from the factual position discussed in the impugned order that the Appellant before or even during the currency of its assignment as STA to Arihant Mangal Scheme had not entered into the requisite agreement.

The failure to enter into agreement is on two counts � i.e. as RTI and STA. Even though section 15B provides for a maximum penalty of five lakh rupees for each failure, the Adjudicating Officer has chosen to levy a total penalty of rupees five lakhs for both the failures. Therefore it cannot be said that the quantum of penalty imposed is unreasonable.

Shri Samdani�s contention that the Respondent is estopped from proceeding against the Appellant for the reason that taking into consideration the explanation given by the Appellant on the alleged violation of rule 4(1)(b) the Respondent had granted renewal of the registration to the Appellant to act as RTI and STA from 1997 is untenable. An adjudication under section 15I is an independent action. The fact that SEBI had renewed the certificate of registration does not absolve the Appellant from the charge of non-compliance of the requirements of rule 4(1)(b). There is no estoppal against law.

For the reasons stated above, the appeal fails.

(C.ACHUTHAN)
PRESIDING OFFICER

Place: MUMBAI
Date: October 5, 2001