In the matter of:

M/s. Surabhi Agro Tech. Ltd.                                              Appellant
Vs.
Securities and Exchange Board of India                             Respondent

 
APPEARANCE:

Shri P.G. Lad
Advocate                                                                                for Appellant

Shri Praveen Trivedi
Asst. Legal Advisor, SEBI                                                     for Respondent

 
(Appeal arising out of the order dated 01.08.2001 made by the Securities and Exchange Board of India)

The Appellant is a public limited company registered under the Companies Act, 1956.  The main objects of the Appellant as per its Memorandum of Association interalia includes �business of farming, agro forestry, horticulture, floriculture, sericulture� etc. and also develop lands and properties by cultivating, planting, farming etc of its own or with the money received for the purpose from others.  It is an admitted fact that the activities of the Appellant are in the nature of collective investment schemes covered under the SEBI (Collective Investments Schemes) Regulations 1999 (the Regulations).  The Appellant is stated to be carrying on its activities on an all India basis with properties located in various parts of the country.

The Respondent is a statutory Board established under the Securities and Exchange Board of India Act, 1992( the Act). The object of the said Act is 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 enumerates the functions of the Respondent.  The section mandates the Respondent to protect the interests of investors by such measures as  it  thinks fit. Registering and regulating collective investment schemes is one of the measures, which the Respondent is empowered to take. The Respondent in exercise of the powers so vested  has notified the Securities and Exchange Board of  India (Collective Investment Schemes) Regulations, 1999 ( the 1999 Regulation) which came into force from October 15, 1999.  The said Regulation provides for registration of the existing collective investment schemes and also  the new schemes. The Regulation also provides certain measures to regulate the activities of the said schemes.  Though the  Act provided for registration etc., of the collective investment schemes, till  October 15, 1999 this requirement could not be enforced as the requisite regulation was not in position. Statutory requirement in this regard is clear from the provisions of section 12(1B) of the Act as extracted below:

�No person shall sponsor or cause to be sponsored  or carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless  he obtains a certificate of registration from the Board in accordance with the regulations:

Provided that any person  sponsoring or causing to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment schemes operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate  of registration was required prior to such commencement, may continue to operate  till such time regulations are made under clause (d) of sub-section (2) of section 30.�

11AA.(1)   Any  scheme or arrangement which satisfied 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;

(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.

(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  demand 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 contact 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 the 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;

The 1999 Regulation provides for regulating the new entrant collective investment schemes and the existing collective investment schemes. As per regulation 5  �any person  who immediately prior to the commencement of the Regulations was operating a scheme, shall subject to the provision of chapter IX of the Regulations make an application to the  Board for the grant of certificate  within a period of 2 months from such date�. Regulation 9 specifies the conditions/ eligibility to get the certificate of registration in respect of the new schemes. Chapter IX prescribes the requirements to be followed by the collective investment schemes which were operating on the date of notification of the  Regulations (i.e. 15.10.1999). In fact Chapter IX by  itself,  to some extent  is  a self contained code as far as the existing collective investment schemes are concerned. Since this chapter has a bearing on the issues involved in the appeal, the provisions  enumerated therein are extracted below:

�68. Existing schemes to obtain provisional registration- (1) Any person who has been operating a collective investment scheme at the time of commencement of these regulations shall be deemed to be an existing collective investment scheme and shall also comply with the provisions of this Chapter.

Explanation- The expression �operating a collective investment scheme� shall include carrying out the obligations undertaken in the various documents entered into with the investors who have subscribed to the scheme.

(2)   An existing collective investment scheme shall make an application to the Board in the manner specified in regulation 5.

(3)   The application made under sub-regulation (2) shall be dealt  with in any of the following manner:-

(a) by grant of provisional registration by the Board under sub-regulation (1) of regulation 71;

(b) by grant of a certificate of registration by the Board under regulation 10;

(c)  by rejection of the application for registration by the Board under regulation 12.

70. Consideration of application for grant of provisional registration.- (1)  The applicant for the purpose of being considered eligible for the grant of provisional registration shall satisfy the Board that-

(a) the scheme of the applicant are in the nature of collective investment schemes;

(b) the affairs of the applicant are not being conducted in a manner detrimental to the interest of existing investors;

(c)  the applicant has at least 50% independent directors at the time of making the application.

Explanation.-�Independent directors� shall mean directors who are not associates of the persons operating the existing collective investment scheme;

(d)  any person, directly or indirectly connected with it has not been granted registration by the Board under the Act.

(3)   The Board shall recover from the applicant such expenses including fees paid to the auditor, appraising agency as may be incurred by it for the purposes of inspecting the schemes, books of accounts, records and documents of the applicant.

(4)   The Board on being satisfied that the requirements specified in sub-regulation (1)  are not fulfilled may reject the applications and the applicant thereupon shall wind up its existing  scheme(s) in the manner specified in regulation 73.

71. Grant of provisional registration.- (1)  The Board after being satisfied that the conditions specified in regulation 70 are fulfilled may grant provisional registration to the applicant subject to the following conditions, namely:-

(a)  the applicant  shall get the existing schemes rated by a credit rating agency within one year from the date of grant of provisional registration.

(b)  the applicant shall get the existing schemes audited by an auditor within a period of one year from the date of grant of provisional registration;

(c)   the applicant shall get existing schemes appraised by an appraising agency within a period of one year from the date of grant of provisional registration;

(d)  the applicant shall create a trust and appoint trustee in the manner specified in Chapter IV of these regulations within a period of one year from the date of grant of provisional registration;

(e)   the applicant shall comply with accounting and valuation norms in respect of schemes floated before the commencement of these regulations as specified in Part II of the Ninth Schedule within a period of one year from the date of provisional registration;

(f)    the applicant shall meet the minimum net worth of Rupees one crore within one year from the date of grant of provisional registration which shall be increased by Rupees one crore each within two years, three years, four years, and five years from the date of grant of provisional registration;

(g)  the applicant shall not dispose of the scheme property except for meeting obligations arising under the offer document of the scheme;

(h)  the applicant shall comply with the conditions specified in regulation 11;

(i)    such other conditions which the Board may impose.

(3)   The applicant who has been considered eligible for the grant of provisional registration by the Board, shall pay provisional registration fee as per the Second Schedule.

(4)   An applicant who after grant of provisional registration fails to comply with the conditions as specified in sub-regulation (1) and regulation 9 shall not be considered eligible for the grant of certificate of registration under regulation 10 and shall wind up the scheme in the manner specified in regulation 73.

72. Registration to existing scheme.- (1)  An existing Collective investment Scheme which satisfies the Board that the requirements specified in regulation 9 and the conditions specified under regulation 71 have been fulfilled, shall be granted a certificate of registration under regulation 10 upon payment of registration fees as specified in paragraph 2 of the Second Schedule and on such terms and conditions as may be specified by the Board.

(2)   An existing collective investment scheme which has been granted certificate of registration under sub-regulation (1) may be allowed to float new schemes on such terms and conditions as may be specified by the Board

73.  Manner of repayment and winding up.- (1)  An existing collective investment scheme which,-

(a)   has failed to make an application for registration to the Board; or

(b)   has not been granted provisional registration by the Board; or

(c)   having obtained provisional registration fails to comply with the provisions of regulation 71;

(2)   The existing collective investment scheme to be wound up under sub-regulation (1) shall send an information memorandum to the investors who have subscribed to the schemes, within two months from the date of receipt of intimation from the Board, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined.

(3)   The information memorandum referred to in sub-regulation (2) shall be dated and signed by all the directors of the scheme.

(4)   The Board may specify such other disclosures to be made in the information memorandum, as it deems fit.

(5)   The information memorandum shall be sent to the investors within one week from the date of the information memorandum.

(6)   The information memorandum shall explicitly state that investors desirous of continuing with the scheme shall have to give a positive consent within one month from the date of the information memorandum to continue with the scheme.

(7)   The investors who give positive consent under sub-regulation (6), shall continue with the scheme at their risk and responsibility:

Provided that if the positive consent to continue with the scheme, is received from only twenty-five per cent or less of the total number of existing investors, the scheme shall be wound up.

(8)   The payment to the investors, shall be made within three months of the date of the information memorandum.

(9)   On completion of the winding up, the existing collective investment scheme shall file with the Board such reports, as may be specified by the Board.

74.  Existing scheme not desirous of obtaining registration to repay.-  An existing collective investment scheme which is not desirous of obtaining provisional registration from the Board shall formulate a scheme of repayment and make such repayment to the existing investors in the manner specified in regulation 73.�

On a perusal of the above cited regulations, it is clear that a collective investment scheme which  was in operation on the appointed day i.e. 15.10.1999  has three options i.e. (a) get registered with the Respondent  or (b) wind up the schemes or (c) formulate a scheme of repayment and   make such repayment.

Since the Appellant being an existing collective investment scheme, it was required to get registered with the Respondent under regulation 72 or wound up in terms of regulation 73 or comply with the requirements of regulation 74.  The Appellant decided to get registered and accordingly the Appellant made an application on 27.6.2000 to the Respondent for grant of provisional registration.  The Respondent examined the application and communicated its views there on to the Appellant vide its letter dated 1.8.2001.  The Appellant claiming to be aggrieved by the said letter filed the present appeal on 24.9.2001 praying that the Respondent�s said order dated 1.8.2001 be quashed and the Respondent be directed to issue provisional registration certificate under the regulations.  The impugned order/decision of the Respondent is as under:

�Sub: M/s. Surbhi Agro Tech Ltd. � hearing held on July 9, 2001 before Chairman SEBI � Rejection of application for provisional registration under SEBI (Collective Investment Schemes) Regulations, 1999.

Please refer to your application for grant of provisional registration with SEBI under the provisions of the captioned regulations received at SEBI.  NRO on 27.6.2000, subsequent correspondence with you and opportunities of personal hearing before the Chairman, SEBI granted to you on 27.11.2000, 14.6.2001 and 9.7.2001 of which the second hearing was not availed.  The hearing on 9.7.2001 was attended by Sh. Alphons Raja Reddy and Sh. J.K.Rana.

Having regard to the submissions made during the hearing and after considering the details available on record, it is noted that you do not fulfil the requirements of regulation 70(1)(b),(c) & (d) of the captioned Regulations.  In view of the above, SEBI has rejected your aforesaid application.

In terms of regulation 73, as an existing Collective Investment Scheme, you are now required to wind up your existing schemes and make repayments to the investors.  Accordingly in terms of regulation 73(2) you are required to send an information memorandum to the investors, who have subscribed to your scheme(s) within 2 months from the date of receipt of this intimation.

Further on completion of the winding up and repayment to the investors in terms of regulation 73, you are required to file a detailed report in the format (copy enclosed) specified by SEBI so as to reach SEBI within 3 months of the date of the information memorandum.  Kindly note that the �Winding up & Repayment Report� to be filed should be on your letterhead duly signed by all the directors (who had signed the Information Memorandum) and duly certified by your Statutory Auditors.  Please note that a part of the report as at Annexure �A� is to be maintained by you, for the minimum period of 5 years from the date of information memorandum at your end and therefore should not be sent to SEBI.

Please acknowledge receipt of this intimation.�

Shri Praveen Trivedi learned Representative of the Respondent explained the public interest involved in regulating the collective investment schemes and also the legal provisions applicable to the Appellant.  In this context he referred to several Writ Petitions in the High court filed by investors including (W. 3352/98 S.D. Bhattacharya Vs. UOI) in the Hon�ble Delhi High Court and the directions issued by the Hon�ble High Court therein.  Shri Trivedi submitted that the Appellant is totally unconcerned about the plight of the investors who had put their hard earned money in the schemes.  He submitted that the Respondent had received quite a large number of complaints against the Appellant, Learned Representative stated that change in management or ownership of the Appellant does not obviate the need for complying with the requirements of the regulation that the regulations are meant to ensure proper management of the schemes and thereby ensure protection to the investors.  He referred to the correspondence exchanged between the Appellant and the Respondent, show cause notices issued to the Appellant and also the press releases of the Respondent requiring the Appellant and other collective investment schemes to comply with the statutory requirements within the specified time frame.

Shri Trivedi submitted that the application for provisional registration filed by the Appellant was rejected in the interest of investors after giving the Appellant enough opportunities to comply with the requirements.  He submitted that the Appellant has failed to satisfy the Respondent that its affairs are not being conducted in a manner detrimental to the interest of the investors.

I have carefully considered the submissions made by the parties � written and oral.  It is seen from the Respondent�s order dated 1.8.2001 that the Respondent had examined the material before it and based on the same came to the conclusion that the Appellant did not fulfil the requirements of regulation 70(1)(b)(c) and (d) and the application was rejected.

According to regulation 70(1) �the applicant for the purpose of being considered eligible for the grant of provisional registration shall satisfy the Board that:-

�(a)  the scheme of the applicant are in the nature of collective investment schemes.

(b)  the affairs of the applicant are not being conducted in a manner detrimental to the interest of existing investors.

(c)  the applicant has at least 50% independent directors at the time of making the application

Explanation:- Independent directors shall mean directors who are not associates of the persons operating the existing collective investment schemes.�

Regulations requires Appellant to satisfy the requirements set out in clauses (a) to (d) of regulation 70(1) and the Respondent has demonstrated the Appellant�s failure in this regard.  I do not find any justification for this Tribunal in the light of the facts of the case to interfere in the matter, and allow the Appellant�s prayer.

For the reasons stated above the appeal is dismissed.
 

Place: Mumbai
Date  : July 17, 2002