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IN THE
SECURITIES APPELLATE TRIBUNAL MUMBAI
Appeal No: 59 of 2005
CORAM ��������� Justice Kumar Rajaratnam, Presiding
Officer ��������� C. Bhattacharya, Member ��������� R.N. Bhardwaj,
Member Per:��� Justice
Kumar Rajaratnam, Presiding Officer 1.
The
appeal is taken up for final disposal with the consent of parties. 2.
The
appellant being aggrieved by the order of SEBI dated 3.
The
facts leading to the passing of the impugned order may be briefly stated as
follows: 4.
The
appellant M/s. Guru Teak Investment ( 5.
Section
11AA dealing with Collective Investment Scheme was introduced by Act 31 of 1999
w.e.f. 6.
It
may not be necessary for the purpose of this case to deal with the definition
of what a Collective Investment Scheme is, since the appellant themselves have
sought provisional registration under the Scheme as it wanted to comply with
all the directions contained in the Regulations. However, it may not be out of
place to mention that certain scheme or arrangement were
exempted from the provisions of Collective Investment Scheme. They are set out
in sub-clause (3) which reads as follows: �(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.]� As can be
seen number of activities which resemble Collective Investment Scheme were not
to be treated as Collective Investment Scheme. 7.
Let
us now briefly deal with the regulations. The regulations dealing with Collective
Investment Scheme divide the schemes basically between the existing schemes and
the new schemes that came into force after Section 11AA was introduced. Since
the appellant had been running an existing scheme from the year 1996 the
appellant immediately on coming to know of the provisions of the Act and the
Regulations therein made an application to the respondent for registration as
provided under Regulation 71(1). The respondent by communication dated (i)
Company
shall get existing schemes rated by a Credit rating agency within one year from
the date of grant of provisional registration; (ii)
The
company shall not launch any new scheme or raise money from the investors under
the existing scheme; (iii)
Company
shall get the existing schemes audited by an auditor within one year from the
grant of provisional registration; (iv)
Company
shall get the existing schemes appraised by�
appraising agency within one year; (v)
Company
shall create trust and appoint trustees as specified in Chapter IV of
Regulations within one year; (vi)
Company
shall comply with accounting and valuation norms as provided in Part II of the
ninth schedule of the Regulations within one year; (vii)
Company
shall meet a minimum net worth of Rs. One Crore within one year and will increase the same by Rs. One Crore each within two,
three, four and five years; (viii) Company do not dispose of the Scheme
Property except for meeting obligation arising under the offer document; (ix)
Company
to comply with conditions in Regulation 11 of the Regulations and to inform
SEBI regarding any material change; (x)
Company
to comply with the code of conduct and all other guidelines issued by the SEBI; (xi)
Company
to maintain books and documents as per Regulation 40 of the Regulations; (xii)
Company
to abide by Regulations as amended from time to time. 8.
It
is not denied on a perusal of the impugned order that the appellant had
complied with most of the conditions imposed on the appellant while granting
provisional registration. e.g., credit rating of the scheme
have been conducted by the credit rating agency ICRA Limited. The
schemes had been audited by SSB & Associates, Chartered Accountant. A trust
had been formed with Trust Deed dated 9.
It
appears that all other conditions regarding compliances with accounting norms,
maintenance of books of accounts have also been complied with, however, not to
the satisfaction of the respondent. 10.
There
was a host of communication exchanged between the appellant and the
respondent.� We shall briefly refer to
the communication between the appellant and the respondent. 11.
Annexure
�M� is the communication addressed by SEBI dated �This has
reference to the provisional registration granted to you by SEBI vide letter
dated July 9, 2001 subject to the conditions inter-alia
as specified in Regulation 71 of the captioned Regulations. �As you
have failed to comply conditions laid down under Regulation 71 of the said
Regulations, SEBI has advised you, vide letter dated November 27, 2003, to
submit winding up and repayment report as per Regulation 73 of the said
Regulations. You have failed to wind up your schemes and repay the investors
and submit report to SEBI, thereby you have violated the provisions of above
mentioned Regulations/SEBI Act. �However,
before proceeding further as per the provisions of the above said
Regulations/SEBI Act for violation of said Regulations, you are hereby granted
an opportunity before Chairman, SEBI on November 5, 2004 at 4.30 p.m. at our
Head Office, address of which is mentioned below: �SEBI Mittal Court, �B� Wing 224, Nariman Point Mumbai � 400 021 �Please
acknowledge receipt of this letter and confirm your appearance to us.� 12.
The
appellant by letter dated 13.
Three
days after the hearing, the appellant on �We thank
you for giving us an opportunity to represent our case before you and also for
giving us a patience (sic) hearing to
air our views on Friday, 5th November, 2004. �We also
thank you for giving us a further time of 30 days to fulfill the requirements
laid down at the time of giving us the Provisional Registration Certificate. �We assure
you that we will take all necessary steps to get the requirement documentation
completed before the period of 30 days and submit the same to your office.� 14.
Finally
on �Kindly
find enclosed with respect to the Compliance under Regulation 71(1) of the SEBI
(Collective Investment Schemes) Regulations, 1999 as per the Annexure enclosed
hereto. The Provisional Registration Certificate was granted to the Company on �If any other document are
required by SEBI for granting Permanent Certificate, we will furnish the same. �Kindly process the documents and do the
needful for getting the permanent Registration Certificate.� (italics by Court) 15.
The
appellant, along with this letter, enclosed all the annexures
that were required by SEBI. The annexures are
extracted at page 64 of the paper book and reads as follows: �ANNEXURES
16.
On
a perusal of the annexures it appears that the
appellant had taken pains to comply with all the requirements of the
respondent.� The appellant had also, as
can be seen at Annexure �T�, clearly stated that any other documents are
required for the grant of permanent certificate the appellant would furnish the
same. 17.
SEBI
without even requiring the appellant to furnish further documents, if it so
desires, straightaway directed the appellant by the impugned order
to wind up the scheme. The perusal of the impugned order at paragraph 10 recognised that the company has claimed to have employed
50,000 field executives and had given employment to unemployed in the rural area
and that it was encouraging nearly 30,000 villages in Karnataka to plant more
and more trees to maintain ecological balance. The impugned order also states
at paragraph 10 that the appellant has been awarded 18.
In
the background of the documents submitted, various statements have been made by
the respondent in the impugned order without any reference to any materials
either on record or through investigation of SEBI. 19.
The
condition No.1 was that the appellant shall not launch new schemes or raise
money from the investors. Finding of SEBI was that the company had mobilized Rs. 52.53 crores during the
period 20.
Curiously
condition No.2 deals with the requirement of credit rating. Admittedly credit
rating by ICRA has been given and the rating says �high risk�.� There is nothing in the regulation or under
the provisions of the Act to compel a scheme to be wound up merely because the
rating indicates high risk. 21.
Mr.
Naganand, learned Sr. Counsel for the appellant
vehemently submits that all schemes which involves growth of teak are, as a
matter of routine, treated as high risk.�
He also submitted that there is no bar for a company to deal in
collective investment schemes involving the growth of teak trees merely because
the rating indicates high risk provided the investing publics are made to know
the rating.� He further submitted that
all dealings in the stock market / derivative market are also considered as
high risk.� All that was required was to
inform the investors that a rating has been given and that the rating indicates
that it is high risk. This is what the Act and the Regulations require. 22.
On
a careful perusal of the Regulations the only requirement is that the company shall
get existing schemes rated by credit rating agency within one year from the
date of granting provisional registration, which has been subsequently extended
to two years w.e.f. 17/01/2002.� It would have been appropriate for SEBI to
have asked the company to make a publication in newspaper or to inform the
investors that the rating indicates high risk and leave it at that.� 23.
The
third condition was that the company had to submit audit report within one year
which has been subsequently extended to two years w.e.f.
24.
Condition
No.4 relates to appraisal by an appraising agency the time limit for which has
also since been extended by two years.�
Here also the complaint of SEBI was that it was not done within the
prescribed time limit. It is, however, common ground that the existing schemes
were in fact appraised by the Agricultural Finance Corporation. This condition
No.4 on which the impugned order is based cannot be sustained only on the
ground of delay in the facts and circumstances of the case. 25.
Condition
No.5 is purely a matter of internal administration and does not find place in
the Regulation 71(1). It is extraneous to the provisions of the Regulations. 26.
Condition
No. 6 is a valid issue which will have to be gone into by SEBI. It is admitted
that there was a Trust created but the Trustees were not registered with SEBI as
Debenture Trustees under the SEBI (Debenture Trustee) Regulations, 1993. The
explanation by the appellant is that no names were forthcoming until recently.
The learned senior counsel for the appellant fairly submitted that the names
are now available on the website and the learned senior counsel for the
appellant has offered to induct the Trustees recommended by SEBI as Trustees on
the Board of the Trust.� It would be
appropriate for SEBI to consider this aspect of the matter and give time to
enable the appellant to comply with condition No.6 and also give the name of
the Trustees who will have to be taken on the Board of the Trust.� That, in our view, would meet the ends of
justice with regard to complying with the condition No.6. 27.
Condition
No.7 is a valid condition and the learned senior counsel for the appellant
submitted that the accounting and valuation will be done scheme-wise and it
would be open to SEBI to direct the appellant to audit each of the schemes
separately and submit the same to the respondent within a reasonable time.� 28.
Condition
No.8 speaks about net worth certificate. The learned senior counsel for the
appellant submitted that he will comply with condition No.8 if some time is
given. SEBI may give sufficient time to the appellant to produce authenticated
information as required by SEBI. 29.
Condition
No.10 would arise only when certificate is granted. It appears to us that
Regulation 11 which refers to condition No. 10 has no application to
provisional registration. 30.
Condition
No.11 refers to the code of conduct. Even if there was such a code of conduct,
there is no material in the impugned order to show that the company continued
to collect money from the investors and violated the code of conduct. 31.
Condition
No. 12 relates maintenance of proper books of accounts and documents as
specified in Regulation 40. It would be appropriate for SEBI to grant such time
as it thinks fit for complying with condition No. 12.� However, it would have to be borne in mind
that condition No.12 will apply only when registration is granted. Regulation
2(h) defines Collective Investment Management Company, which reads as follows: �2(h)�� Collective Investment Management Company�
means a company incorporated under the Companies Act, 1956 (1 of 1956) and
registered with the Board under these regulations, whose object is to organise, operate and manage a collective investment
scheme;� 32.
Condition
No.13 in the impugned order, appears to us a condition that can be imposed only
at the time of grant of registration and not at the time of provisional
registration.� Needless to say given the
necessary time and if registration is given in accordance with law, the
appellant shall comply with the SEBI (Collective Investment Scheme) Regulations
with respect to schemes carried on by the company. 33.
The
learned senior counsel for the respondent Mr. Satpute
submitted that the order passed by the Chairman of SEBI is perfectly in
accordance with the Act and Regulations and defended the order vehemently. 34.
The
learned senior counsel for the appellant Mr. Naganand
further submitted that the company had voluntarily come forward to seek
provisional registration and provisional registration was granted. He submitted
that there are many companies dealing in teak, which have not come forward to
seek provisional registration. The appellant had come forward to seek
provisional registration in good faith and its bonafide
could not be doubted. The company seeks to comply with all the requirements of
SEBI in accordance with law if sufficient time was granted.� Learned counsel submitted that after the
impugned order was passed and even before it, a sum of Rs.
95 lakhs have been repaid to investors who sought
full refund. This was to show the bonafide of the
appellant that there was no investor grievance. The appellant further submitted
that the appellant employs more than 1200 persons for maintaining the
plantations.� The appellant spent
enormous amount of money in manure, fertilizers, pesticides, etc., to keep the
plantations in good and healthy conditions. If these inputs are not provided
the entire amount spent would be lost.�
The plants are irrigated by using modern dripping irrigations. Hundreds
of labourers are employed to look after the
plantations and to supply of manures and other materials. 250 persons are
employed on monthly salary.� In these
circumstances it was submitted that no useful purpose will be served by winding
up the scheme.� It was submitted that the
appellant be given time by SEBI to rehabilitate and make the scheme workable so
that the investors are benefited. The learned senior counsel for the appellant
also assures and agrees that if there are any person wanting their money back
they would have no hesitation in refunding the money forthwith. He further
submitted that the impugned order was passed without taking the human factors
into account and without realizing that thousands of people would be without
employment and without realizing that there were no investor complaints. The
learned senior counsel also submitted that Regulation 73 of the Regulations
gives the liberty to continue with the scheme provided that not less than 25%
of the investors give consent to continue with the scheme at their own risk and
responsibility. Learned counsel Mr. Naganand further submitted
that more than 20% have already given their consent to continue the scheme at
their own risk and these consent letters will be passed on to SEBI. The learned
counsel for the appellant also relied on the judgment of the Rajasthan High
Court in Civil Writ Petition No. 6735 of 1999 in the case of PACL India Ltd. & Ors. Vs. 35.
�However we are proceeding on the footing that
the appellant falls within the definition of Collective Investment Scheme as
defined in Section 11AA of the SEBI Act. Therefore we are dealing with the
matter strictly in accordance with the Regulations, 1999.� Since we feel SEBI has passed an order
without proper application of mind and without taking into account welfare of
investors and without a proper appreciation of the objective of the Regulations
dealing with Collective Investment Scheme, we accordingly set aside the
impugned order and remand the matter to SEBI for fresh disposal in accordance
with law.� 36.
An
application has been filed by the appellant dated �Application under Rule 21 of Securities
Appellate Tribunal (Procedure) Rules 2000, the Appellant herein begs to submit
as follows : �1.�� ��� The
appellant has preferred this appeal against the orders dt. �2.� ���� It
is submitted that the appellant has complied with the orders of this Hon'ble authority and has deposited a sum of Rs.50,00,000/- (Fifty lakhs Only) as
directed in the interim orders and the appellant has been complying with the
other terms and conditions stated in the interim orders. �3.�� ��� The
appellant submits that it had invested the amounts collected by it under the
schemes completely and it did not have liquid funds even to deposit the amount
of Rs. 50,00,000/- (Fifty Lakhs Only). However, the Managing Director of Appellate
Company arranged for the amount by means of borrowals
from his well wishers and relatives and deposited the same to comply with the
orders. It is essential to note that these schemes are mainly and totally
related to agricultural operations. The appellant has to maintain the entire
teak plants which are being grown in its various plantations. If it is not
properly looked after, the entire teak trees will be ruined and the amounts
already spent on them will become worthless. To maintain these plantations, the
appellant is bound to spend heavy amounts on its staff and run its offices
efficiently. The maintaining of the plantations and keeping the back office
operation requires good amount of money. Actually, the appellant has employed
more than 1,200 persons for maintaining the plantations and required records in
its office. �4.�� ��� The
appellant submits that it has to apply manure, fertilizers, pesticides, etc.,
to keep the plantations in good and healthy conditions. It these inputs are not
provided the entire amount spent for bringing the plantations to its present
conditions will be lost. The Plants have to be irrigated by using modern drip irrigation
technique. This involves payments for maintenance and electricity. �5.�� ��� It
is submitted that the appellant has to employ hundreds of labourers
for looking after the plantations, for the supply manure and other materials,
protection from theft and natural calamities. Apart from these things the
appellant has to run and maintain number of divisional offices and branches.
The appellant has employed more than 250 members who have to be paid every
month regularly their salaries. �6.������ The appellant has to execute documents and bonds in favour of the investors. These office expenses itself works
out more than Rs.3,00,000/- (Three
Lakhs Only) per month. It is necessary to mention
that the company is incurring expenses to an extent of 1,71,49,5727-(One
Crore Seventy One Lakhs
Forty Nine Thousand Five Hundred and Seventy Two Only) per month. On its operations as detailed in the amended statement. In
addition on account of certain adverse publicity for the company undertaken by
certain vested interest during the pendency of this
appeal, several investors demanded refund of their money. After the interim
order was passed in this appeal on 11.03.2005, the Appellant has repaid Rs. 96,51,991-00 to such
investors. No other investors have demanded the repayment till date. �7.�� ��� It
is submitted that in view of the terms imposed by this Hon'ble
Tribunal, the appellant was forced to stop its business of accepting deposits
and it is depending upon the borrowing to meet its day to day commitments with
great difficulty. The appellant herein has partially met its expenses during
the last 83 days and it has become very difficult to continue the affairs of
the company in the same manner. The monthly inflow into the company which has
been curtailed by the interim order is around 8 crores.
This is adversely affecting the cash flow position of the Appellant Company. �8.�� ��� The
appellant submits unless the condition of the interim order is not modified
through which the appellant can carry on its business, the entire investments made
in the plantations will be lost and a day may come when the investors will not
be able to recover any amount, even if this appeal is decided against the
appellant. To safeguard the interest of the depositors, it is essential that
the appellant should be permitted to run its business in its usual course by
modifying the interim orders suitably. It is necessary for the appellant to
make it clear that the modification of the interim orders will benefit the
investors more than the appellant. In the circumstances the appellant prays
that this Hon'ble tribunal be pleased to suitably
modify the interim orders dt.
�9.������ If the orders are not modified all the
employees of the appellant company and also nearly 50,000 people will be losing
their income and their livelihood. More than 50,000 families will go without
food and shelter without any fault on their part. ����������� Wherefore the appellant prays that this Hon�ble Authority be pleased to suitably modify the interim
orders dated 37.
The
appellant has also deposited with the respondent a sum of Rs.
50 lakhs on 38.
No
order as to costs.
Place: Mumbai Date:�� */as |
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