MUMBAI
APPEAL NO.8/2001
In the matter of:
Venus Greeneries Ltd Appellant
Vs.
Securities
& Exchange Board of India
Respondent
APPEARANCE
Mr.
Arun Kumar
Advocate
for Appellant
Mr.
S.V.Krishna Mohan
Division
Chief, SEBI
Mr.Praveen
Trivedi
Asstt.
Legal Adviser,
SEBI
for Respondent
(Appeal arising out of the order dated 7.12.2000 made by the Chairman, Securities & Exchange Board of India)
ORDER
The Appellant is a public limited company registered with the Registrar of Companies, Bihar. Paid up capital of the Appellant, as per its Balance Sheet as on 31.3.2000 is Rs.17.07 lakhs, comprising 1, 70, 700 equity shares of Rs.10 each. The Appellant is stated to be a "plantation company". It had launched three collective investment schemes. In terms of the Securities and Exchange Board of India Act, 1992 (the Act) and the Securities and Exchange Board of India (Collective Investment Schemes) Regulations 1999 (the 1999 Regulations), the Respondent is mandated to regulate the working of collective investment schemes. According to the Respondent�s version the Appellant had failed to comply with the statutory requirements and on that premises it issued the impugned order under section 11B of the Act read with regulations 65 and 73 of the 1999 Regulations. The impugned order appears to be a standard order issued by the Respondent to all those existing collective investment schemes, which according to the Respondent had failed to comply with the requirements of the Regulations. The order is not specifically addressed to the Appellant. But the forwarding letter is addressed to the Appellant. Full text of the short order which is under challenge is as under: -
DIRECTIONS UNDER SECTION 11B OF THE SEBI ACT 1992 READ WITH REGULATIONS 65 & 73 OF SEBI (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS, 1999.
You had filed information/details with SEBI regarding your Collective Investment Schemes pursuant to SEBI Press Release dated November 26, 1997 and/or public notice dated December 18,1997 and/or our letter. Subsequent to the notification of SEBI (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as the said regulations) dated October 15, 1999, any person who immediately prior to the commencement of these regulations was operating a Collective Investment Scheme(s), shall make an application to SEBI for grant of registration within a period of two months from the date of notification, under the provisions of the said Regulations.
SEBI having regard to the interest of the investors and requests received from various entities, extended the last date for submitting application by existing entities upto March 31, 2000 and the same was intimated by SEBI vide a press release and a public notice. However, you did not apply for grant of registration with SEBI as provided under the said Regulations.
As per regulation 73(1) of the said regulations an existing Collective Investment Scheme, which has failed to make an application for registration with SEBI, shall wind up the existing scheme(s) and repay the investors.
Further as per regulation 74, an existing Collective Investment Scheme, which is not desirous of obtaining provisional registration from SEBI shall formulate a scheme of repayment and make such repayment to the existing investors in the manner specified in Regulation 73.
SEBI vide letter dated December 15, 1999/December 29, 1999 and also by way of a public notice dated December 10, 1999, had given individual intimation in terms of regulation 73(2) which casts an obligation on you to send an Information Memorandum to all the investors detailing the state of affairs of the scheme(s), the amount repayable to each investor and the manner in which such amount is determined. Accordingly, you were required to send the Information Memorandum to the investor latest by February 28, 2000. You have neither applied for registration under SEBI (Collective Investment Scheme) Regulation, 1999 nor have taken any step for winding up of the schemes in the manner provided under the said Regulation for repayment to the investors. It is, therefore, noted that you have prima facie violated the provisions of section 12(1B) of SEBI Act, 1992 and regulation 5(1) read with regulation 68(1), 68(2), 73 and 74 of SEBI (Collective Investment Schemes) Regulations, 1999.
SEBI also issued a public notice dated March 31, 2000, in the newspaper inviting your attention to the aforesaid position.
Further, a notice dated May 12, 2000, was issued to you asking you to show cause as to why the action as stated therein be not initiated against you. However, you have neither replied to this show cause notice nor have you responded to the news paper publication.
Now, therefore,
in exercise of the powers conferred upon me under section 11B of SEBI Act,
1992 I hereby direct you to refund the money collected under the scheme
(s) with returns, which is due to the investors as per the terms of the
offer within a period of one month from the date of this Order failing
which the following actions would follow: -
- You/promoters/directors/managers/persons
in charge of the business of your scheme would be debarred from operating
in the capital market for a period of 5 years.
Writing to the State Governments/local police to register civil/criminal cases against you for apparent offences of fraud, cheating, criminal breach of trust and misappropriation of public funds.
Writing
to the Department of Company Affairs to initiate the process of winding
up of your company".
Appellant�s Counsel was present only on 5.7.2001 and 8.10.2001.Even though present on 5.7.2001, he sought adjournment. Since the appeal was being dragged on, the Tribunal had to inform the Appellant of the consequences of remaining unrepresented at the scheduled hearings and seeking adjournment routinely. In the minutes dated 7.9.2001 fixing the case on 8.10.2001, a copy of which was sent to the Appellant, the Tribunal recorded as follows:
"Appellant
is not present even today. The appeal was filed on 9.2.2001 and the Respondent�s
reply was served on the party around 12.3.2001. Thereafter the case was
posted for disposal on 17.4.2001. On that date the Appellant did not appear
but asked for adjournment by three months. Matter was adjourned to 11.6.2001.
Appellant did not appear on 11.6.2001, neither did he request for any adjournment.
Case was again adjourned to 5.7.2001. On 5.7.2001 Mr. Arun Kumar, advocate
for the Appellant attended and sought adjournment. Matter adjourned to
20.8.2001. On that day no one appeared for the Appellant, neither there
was any request from the Appellant for adjournment. Matter was again adjourned
to today i.e. 7.9.2001. Yesterday by fax the Appellant�s counsel has informed
the Tribunal that he is suffering from jaundice and as such not in a position
to attend the hearing today. He seeks adjournment of the case by one month.
Respondent has serious objection in granting extension. They feel that
under one alibi or other the Appellant is dodging refund of money to the
detriment of the investors. I have noted the apprehension of the Respondent.
However, one more opportunity is given to the Appellant in the light of
the request that the Counsel is not in a position to appear today on personal
grounds. Posted at 11.00 a.m. on 8.10.2001."
The Appellant
on 5.7.2001 filed a rejoinder and on 17.8.2001 a photocopy of the Respondent�s
order dated 2.7.2001 was also filed in the Tribunal.
As already
stated, the impugned order is a general order meant to apply to all those
collective investment schemes, who according to the Respondent had either
failed to seek registration under the Regulations or did not take any steps
for winding up of the Schemes in the manner provided therein. The impugned
order is directed to those schemes which had not responded to the Respondent�s
letter dated 15.12.1999/29.12.1999, public notice issued in the news papers
on 31.3.2000 and the show cause notice issued on 12.5.2000.
It is
seen from the pleadings that there is a Civil Writ Petition No.3352/98
pending before the Hon�ble Delhi High Court in which the Appellant and
the Respondent have been made parties. However, the Representative of the
Respondent categorically stated that the impugned order and the resultant
appeal are not covered under the said CWP and the matter is not subjudice.
Based on the said submission, the present appeal was taken up for consideration.
According
to Shri Arun Kumar, learned Counsel appearing for the Appellant, the Appellant
had launched 3 collective investment schemes namely (1) Green Value Unit,
(2) Master Green Unit and (3) Early Encash Green Unit. In respect of Green
Value Unit Scheme and Master Green Unit Scheme, the Appellant has not promised
any monetary return, but the investors were assured of giving certain fixed
volume of wood in return of their investment after ten years from the date
of their investment and in respect of the third scheme i.e. Early Encash
Green Unit, the investors were assured of some monetary return after 6
years of their investment. According to Shri Kumar, the Appellant has neither
launched any new scheme nor raised fresh funds from the public in the existing
schemes since 1.4.1998. Shri Kumar stated that the total amount so far
mobilised from investors was only Rs.21.38 lakhs, and out of which a sum
of Rs.4.95 lakhs has already been returned to the investors concerned.
According to the learned Counsel, the Appellant has also invested its own
funds to the extent of Rs.19.45 lakhs which is more than the money raised
from the public and as such the Appellant is also interested in properly
managing the scheme to get the yield. He also submitted that all the particulars
/information sought by the Respondent were duly furnished, but the Appellant
could not respond to the Respondent�s letters dated 15.12.1999 and 29.12.1999
as the same did not reach the Appellant. The learned Counsel also stated
that since the public notice issued by the Respondent on 10.12.1999 was
not seen by the Appellant, the requirements of the same could not be complied
with.
Learned
Counsel submitted that it is not practically possible to wind up the schemes
at this stage because the funds received from the public have already been
invested in the schemes for procuring land planting and nourishing the
trees, that the trees are only partially grown up being only 3 years old
having no commercial uses and that Forest Act also prohibits cutting of
partly grown trees.
Referring
to the instructions to get credit rating of the schemes done by one of
the accredited credit rating agencies, the learned Counsel submitted that
the said requirement as per the Respondent�s letter was only necessary
in case the Appellant was to mobilise funds from the public, that since
the Appellant had no plan to mobilise funds from the public, as per the
Respondent�s own version credit rating was not required to be made. He
further submitted that in any case, for a small company like the Appellant
credit rating by accredited agencies is not possible as the cost involved
being prohibitive. According to the learned Counsel, CRISIL one of the
credit rating agencies whom the Appellant had approached for the purpose
quoted Rs. 1 lakh as initial fee and Rs.60, 000/- per year as surveillance
fee, that since the Appellant�s scheme is for 10 years the total expenditure
on this account alone over the period of 10 years would be Rs.7 lakhs,
which if accepted would result in erosion of the funds of the scheme otherwise
available to the unit holders
Learned
Counsel submitted that inspite of several press releases and advertisements
issued by the Respondent, the Appellant has not received even a single
complaint, which goes to show the investor confidence in the scheme.
Shri Kumar
submitted that, though only 3000 plants were assured by the Appellant to
its investors, it has planted 60, 000 Semal plants in its project, which
would show the strength of the scheme and the money of the investors is
safe.
The learned
Counsel submitted that since the impugned order has been passed without
providing an opportunity of being heard, the order is in violation of the
principles of natural justice and on this ground alone, the order is liable
to be set aside.
Learned
Counsel submitted that compliance of the impugned order is not only practically
possible but also would not be in the interest of investors. According
to him it is not in the interest of the investors to wind up the scheme
at present as the scheme is for 10 years and the plants are too young to
be cut and sold, to realiase money to make refunds. According to him unless
these plants are chopped off and sold, there is no way to raise money to
meet with the requirements of the impugned order. Learned Counsel submitted
that in the interest of the investors, the existing schemes be permitted
to continue to its maturity and the Respondent�s directions having adverse
effect on the scheme and the interest of investors be set aside.
Shri Krishna
Mohan, learned Representative of the Respondent explained in detail the
back ground in which the Respondent entered the scene to regulate the working
of collective investment schemes. He explained the havoc caused by certain
collective investment schemes, looting the innocent investors by promising
moon on earth and the concern raised by the Courts and the Government in
the matter. He referred to several writ petitions filed by investor associations
in various High Courts against the collective investment schemes, to show
the gravity of the situation. Shri Krishna Mohan submitted that though
efforts were made to control these schemes quite sometime ago because of
certain limitations nothing much could be done to regulate plantation schemes
and the like schemes. It was only on notification of the Regulations in
October 1999 and also after making amendment to the Act in 1999, focussed
action could be initiated against the errant collective investment schemes.
Shri Krishna
Mohan submitted that in terms of section 12(1B) of the Act Collective Investment
Schemes are prohibited from carrying on their activities without obtaining
certificate of registration from the Respondent. Section 11(2)(c) of the
Act empowers the Respondent to regulate collective investment schemes,
that in exercise of the power vested in it, the 1999 Regulations was notified
on 15.10.1999. In this context he referred to the 1999 Regulations and
submitted that those collective investment schemes in existence on the
date of notification of the Regulations are left with limited options �
either to get registered or to be wound up in the manner provided in the
Regulations. According to the learned Representative since the Appellant
has made it clear that it cannot get registered, the course of action left
open to it is to wind up the scheme and distribute the income realised
to the investors. In this context, he referred to the direction given by
the Hon�ble Delhi High Court, in CWP No.3352/98-SD. Bhattacharya &
Ors. v. SEBI. & Ors. vide its order dated 7.10.1998 and stated that
in so far as the existing schemes are concerned they are required to strictly
comply with the circular of the Respondent dated 24.2.1998 vide the said
circular existing collective investment schemes were directed to not to
mobilise any money from the public or from the investors under the existing
schemes unless the instruments of such scheme carries a rating from one
of the four credit rating agencies stated therein. He submitted that the
Appellant�s letter dated 23.11.1998 clearly states that it had not mobilised
any funds since 1.4.1998 thereby meaning that they had mobilised money
upto April1, 1998 in violation of the said circular.
Shri Krishna
Mohan submitted that the Respondent had intimated the Appellant regarding
the orders dated 7.10.1998 and 13.10.1998 of the Hon�ble High Court of
Delhi in CWP 3352/98, that the Respondent had also sent a letter on 10.12.1999
to the Appellant requesting it to apply for registration or wind up the
existing scheme and repay the amount to the investors, that the consequences
of non compliance of the said requirements were also stated in the said
letter. He further stated that on 29.12.1999, the Respondent had directed
the Appellant to send the information memorandum to the investors regarding
repayment within two months. Shri Krishna Mohan stated that the Respondent�s
letters of 12.5.2000 and 31.7.2001 asking the Appellant to furnish the
repayment report, addressed to the last known address was returned undelivered.
Learned
Representative submitted that even though the Respondent had informed the
Appellant about the notification of the 1999 Regulations and the requirement
of the said Regulations that no existing collective investment scheme shall
launch any new scheme or raise money from the investors without obtaining
a certificate of registration from the Respondent the Appellant did not
take any steps to obtain registration, that it was in this context the
Respondent issued the impugned order under Regulation 65 for protecting
the interests of the investors.
Shri Krishna
Mohan submitted that the Respondent had not violated the principles of
natural justice in as much as it had issued letters to the notified address
of the Appellant and public notice was also issued requesting all the collective
investment schemes in operation to comply with the requirements of the
Regulations, that there is every reason to believe that the Appellant was
deliberately avoiding letters from the Respondent as these letters were
inconvenient to the Appellant. Appellant cannot say that it did not receive
the letters or that it did not see the public notice issued in the Newspapers,
that feigning ignorance of the instructions is only an alibi to escape
the penal consequences of non compliance of the Regulations.
Shri Krishna
Mohan submitted that the order is issued in compliance with the directions
of the Hon�ble Delhi High Court in CWP 3352/98 and in terms of the 1999
Regulations and as such requires to be saved.
I have carefully considered the rival contentions and my views are as follows:
It is an admitted fact that the Appellant is managing collective investment schemes which are subject to the regulatory measures provided in the 1999 Regulations. As the scheme was already working on the date of notification of the Regulations on 15.10.1999, it is an existing scheme attracting the provisions of Chapter IX of the Regulations. In Chapter IX of the Regulations the steps required to be taken by the existing collective investment schemes have been stated. In this context it is to be noted that in terms of section 12(1B) of the Act:
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."
The Respondent notified the 1999 Regulations on 15.10.1999. 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 1999 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 raised in the appeal the provisions enumerated therein are extracted below:
- (2)
An existing collective investment scheme shall make an application to the
Board in the manner specified in regulation 5.
- (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.
- No
scheme to be launched until grant of registration -
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 scheme;
(d) any person, directly or indirectly connected with it has not been granted registration by the Board under the Act.
- (2)
The Board for the purposes of grant of provisional registration may, inter
alia, inspect the schemes, books of accounts, records and documents of
the applicant.
(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. (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.
- (2)
The applicant shall give a written undertaking to the Board to comply with
the conditions specified in sub-regulation (1).
(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.
- Registration
to existing scheme-
72. (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.
Manner
of repayment and winding up -
73. (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.
It is
evident from the averments in the appeal memorandum and the submissions
made by the learned Counsel for the Appellant that it is not in a position
to get the schemes registered as per the Regulations for the main reason
that its networth is very small and also not possible to raise it to the
minimum net worth of rupees one crore required to reach within a year.
Further it was also submitted that the fund position of the Appellant was
not strong enough to meet the cost of getting the schemes credit rated
by the accredited agencies.
The second
alternative, that is, winding up of the scheme has also not been favoured
by the Appellant for the reason that it would not be in the interests of
the investors to chop off the partly grown plants and sell the wood. Learned
Counsel had submitted that the trees are hardly 3 years old and to be profitable
at least 10 years� growth is required. Learned Counsel had also submitted
that the Appellant has not raised funds from the public or from the existing
investors towards the scheme since April 1998.
Shri Kumar
had submitted that the investors have full confidence in the schemes and
that is why nobody has made any complaint against the schemes to the Appellant
or to the Respondent. If what the Appellant says is correct, why it has
not thought of following the course of action provided in regulation 74?
According to the said regulation an existing collective investment scheme
which is not desirous of obtaining provisional registration is entitled
to formulate a scheme of repayment and make such repayment to the existing
investors with the consent of not less than 75% of the investors, in the
manner specified in regulation 73 (text extracted above). Reluctance to
pursue the course of action under regulation 74 remains unexplained.
It is
evident from the Appellant�s own version that it has not complied with
the requirements of Chapter IX applicable to the existing collective investment
schemes. The Appellant�s contention that the order has been passed without
giving any opportunity of being heard and as such violative of the principles
of natural justice is unfounded in as much as it is on record that the
Respondent had issued notices to the Appellant at its registered office
requesting to comply with the statutory requirements. These letters were
stated to be returned undelivered to the Respondent. The fact that the
communication issued to the Appellant�s registered office address used
to return undelivered is corroborated by the fact that even the notices
issued by the Tribunal too had the same fate. The communications were addressed
to the office address given by the Appellant and it is for the Appellant
to make proper arrangements to receive letters etc. at its notified office.
It is on record that the Respondent before issuing the impugned order had
also issued public notice in the newspapers giving opportunity to all those
existing collective investment schemes including the Appellant to represent
to the Respondent, if they so desired, in the matter. It is difficult to
believe that the Appellant�s management had missed such a prominently displayed
notice in the newspapers circulated in Patna.
Therefore,
feigning ignorance of the notice and questioning the validity of the order
on the ground of breach of the rules of natural justice is untenable.
In terms of regulation 65, the Respondent is empowered to issue the following directions.
- (a)
requiring the person concerned not to collect any money from investors
or to launch any scheme;
(b) prohibiting the person concerned from disposing of any of the properties of the scheme acquired in violation of these regulations;
(c) requiring the person concerned to dispose of the assets of the scheme in a manner as may be specified in the directions;
(d) requiring the person concerned to refund any money or the assets to the concerned investors alongwith the requisite interest or otherwise, collected under the scheme;
(e) prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period."
In the
light of the facts of the case stated above, non - compliance of the requirements
of the provisions under Chapter IX by the Appellant stands established.
The impugned order is as per the powers available to the Respondent under
regulation 65. Therefore the order is to be sustained.
The appeal
is dismissed.
PRESIDING OFFICER
Date: November 28, 2001