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Securities and Exchange Board of India (SEBI): Ananta Barua, Whole Time Member, issued directions holding the Directors of Zeestar liable for accepting money under the Collective Investment Scheme when they weren’t possessing the registrations for the same.

It was brought to the attention of SEBI that Zeestar Limousines Ltd. was collecting money from the public under a Collective Investment Scheme. On examination of the matter, SEBI prima facie found that the scheme of Zeestar was in the nature of collective investment scheme (“CIS”), as defined under Section 11-AA of the Securities and Exchange Board of India Act, 1992. Accordingly, SEBI initiated proceedings under Sections 11 and 11-B of the SEBI Act against the Company.

On December 11, 2015 an order was passed by SEBI which said that the launching/ floating/ sponsoring/ causing to sponsor of any ‘collective investment scheme’ by any ‘person’ without obtaining the certificate of registration in terms of the provisions of the CIS Regulations is in contravention of Section 12(1-B) of the SEBI Act and Regulation 3 of the CIS Regulations and Zeestar had launched a CIS without obtaining certificate of registration from SEBI, which contravened the provisions of the said section and regulation. SEBI pronounced such order as all the four conditions specified under Section 11-AA(2) of the SEBI Act were satisfied in the instant case, the schemes/plans promoted, launched, carried on and operated by the Company were in the nature of CIS in terms of Section 11-AA(1) and they  were carried on without any formal registration.

After passing certain directions against the Company, SEBI had advised that proceedings may be initiated against the Directors of Zeestar as well.

Accordingly, SEBI issued show-cause notice to the Directors of the Company, as to why appropriate directions under Sections 11(1) and 11-B of SEBI Act, 1992 may not be issued against them for contravention of Section 12(B) of SEBI Act, 1992 and Regulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999 by Zeestar.

The opportunity of personal hearing was granted to all the directors and the service of the hearing notice was directly done through paper publication.  None of the directors turned up for the scheduled hearing nor did any of them file a reply to the show-cause notice. The findings of the order passed against Zeestar were not challenged within the time specified under Section 15-T of the SEBI Act, 1992 for filing appeal in the appellate forum. Further, time to file such appeal also lapsed.

The Tribunal held that all the Directors (except one who joined in the year 2010) were the Directors of Zeestar since 2008. The Board of Directors is primarily responsible for the management of the affairs of a company and raising and utilisation of the funds. The Directors held these positions while Zeestar was running the unregistered CIS and were still holding the position of ‘Director’ to date and as such, they were found guilty as alleged.

Hence, the Directors are liable, jointly and severally with the Company, to make a refund of the money collected by Zeestar to investors.  [Zeestar Limousines Ltd., In Re; 2019 SCC OnLine SEBI 147; decided on 25-09-2019]

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Securities Appellate Tribunal (SAT): A Division Bench of Justice Tarun Agarwala, (Presiding Officer) and Dr C. K. G. Nair (Member), upheld the order passed by Securities and Exchange Board of India (SEBI) for rejecting the representation filed by the appellants.

SEBI passed an order in 2015 holding that “Kalpbut Real Estate Limited” was engaged in operating Collective Investment Scheme (CIS) by mobilizing funds from the public in contravention of Section 12(1B) of the Securities and Exchange Board of India Act, 1992 and consequently, in order to protect the interest of the investors in the securities market, SEBI directed the company and its directors to wind up the collective investment schemes and refund the money collected within the period of three months.

This order was challenged before the Tribunal which was disposed of on the strength of the submission made by the appellants that irrespective of the fact as to whether their scheme was CIS or not, the appellants were willing to refund the amount to the investors. On the basis of this statement, in 2017 the Tribunal permitted the appellants to make the representation setting out in details the names of the investors and quantum of the amount already refunded and the mode and the manner in which the balance amount would be refunded.

This list of payments made did not indicate the manner and the mode of repayment and consequently, SEBI directed the appellants to provide details of the manner in which the payments were to be made. Since no details were supplied, the representation of the appellants was rejected in 2019. The appellants filed an appeal to challenge this.

Tribunal was of the opinion that the list which was perused by SEBI only had the date and the amount mentioned in it. There were no details as to how that amount was to be paid, viz, by way of cash or by cheque or by RTGS, etc., was not indicated. Specific details were asked by SEBI, but the same was not done. Thus, the list came into scrutiny. Further, nothing was indicated with regard to the mode and the manner in which the balance amount would be refunded.

Therefore, the Tribunal held that the representation filed by the appellants was rightly rejected and that there was no error of law made by SEBI in rejecting the same.[Kalpbut Real Estate Ltd. v. Securities and Exchange Board of India, 2019 SCC OnLine SAT 164, decided on 22-08-2019]

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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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Securities and Exchange Board of India (SEBI): The Board comprising S.K. Mohanty whole time member, concluded that launching/ floating/ sponsoring / causing to sponsor any ‘collective investment scheme’ (CIS) by any person requires obtaining of a requisite certificate of registration from SEBI.

Maitreya Plotters and Structures Private Limited (MSPSL), a company engaged in the real estate business purchased large quantities of land in different States, divided it into smaller plots as per requirements of customers and then sold it. In the year 2013, it was found that MSPSL had illegally mobilized funds from the public through CIS without obtaining a certificate of registration from SEBI. 

The issue for determination was: whether mobilization of funds by MPSPL under its various schemes/plans for ‘purchase or booking of plots of land’ fell under the ambit of CIS in terms of Section 11AA of the SEBI Act, 1992. 

The Regulator noted that payments received from investors were pooled and utilized by MPSPL for its schemes. The property, that was part of its scheme, was managed by MSPSL on behalf of investors. An agreement entered into between investor and MPSPL vested it with the right to carry out development work on the plot, and investor was handed over the plot only after the said development was complete even if he had paid the entire consideration. Thus, investors were not aware of the plot allotted to them and did not have any control over utilization of funds for its development.

In view of the above, it was held that scheme offered by MPSPL was a CIS and required to be registered as mandated under Section 12(1B) of the Act.  MPSPL and its Directors were held jointly and severally liable to wind up its existing CIS and refund the contributions collected from investors with returns due to them and submit a report thereon to SEBI. [Maitreya Plotters and Structures (P) Ltd., In re,  WTM/SKM/EFD DRA1/06/2018-19, Order dated 31-01-2019]