SAT | Companies cannot run CIS Scheme without registering it with SEBI

Securities Appellate Tribunal (SAT): Justice Tarun Agarwala (Presiding Officer) and Dr C.K.G. Nair (Member) justified the penalty imposed by SEBI on the appellants under Section 15-J of SEBI Act.

The appellants challenged the order of the Adjudicating Officer (AO) of SEBI. The order directed them to pay a penalty of Rs 25 Lakhs for running a Collective Investment Scheme (CIS) without SEBI registration and thereby violating Section 12(1-B) of the SEBI Act, 1992 and Regulation 3 of the SEBI (Collective Investment Scheme) Regulations, 1999 (CIS Regulations).

The appellants collected money from a large number of investors for a solar power project in Rubavali village as a joint venture project/scheme. SEBI asked them to furnish details and documents of the project since the appellants were involved in mobilizing funds without obtaining SEBI registration under CIS Regulations, 1999. The appellants denied running a CIS post which SEBI sought further documents regardless of the scheme being CIS or not. SEBI later passed an ex-parte ad-interim order under Section 11 and 11-B of the SEBI and passed the final order concluding that the appellants were engaged in activities covered under CIS without obtaining registration. This order was challenged by the appellants. The Tribunal directed the appellants to file a proposal for the refund of the entire amount before the Recovery Officer without going into the question of whether they are covered under the CIS Regulations, 1999 as sought by the appellants. They submitted original documents of land to SEBI and the auction process was initiated. Later, the AO issued a show cause notice seeking why an enquiry should not be held and penalty be not imposed under Section 15-D(a) of the SEBI Act and Regulation 3 of CIS Regulations, 1999.

The appellant argued that they entered into agreements with investors to expand their business. They further contended that the appellants and the other parties were collectively managing the business, and therefore they were not running any CIS. On the same grounds, SEBI had no jurisdiction in the matter. A substantial amount has already been recovered by SEBI through auctions. Their final contention was that a penalty of Rs 25 was too harsh. SEBI submitted that the penalty imposed is reasonable as under Section 15-D(a) as the penalty imposable at the relevant time was Rs 1 lakh for each day subject to a maximum of Rs 1 crore and therefore the penalty is just and reasonable.

The Tribunal dismissed the appeal and directed the appellants to pay the penalty. They held that the law does not prevent SEBI from initiating parallel proceedings to direct the appellants to complete the process of repayment to the investors. They further held that submission of joint venture agreement is not proof of joint management of the business since the investors will have no say in the management of the business. The appellants were running CIS in terms of its definition under Section 11-AA(2), 12(1-B) of SEBI Act, 1992 without obtaining a certificate of registration for running such a scheme.[Shree Sai Space Creations Ltd. v. Securities & Exchange Board of India, 2019 SCC OnLine SAT 105, decided on 01-08-2019]

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