Securities Appellate Tribunal
Suman Motels Ltd. vs Securities And Exchange Board Of India on 13 January, 2003
Equivalent citations: [2003]42SCL433(SAT)
ORDER
C. Achuthan, Presiding Officer
1. The present appeal is directed against the Respondent's order dated 19.7.2002. By the said order, the Appellant, which is operating Collective Investment Schemes, was directed to refund the money collected by it in the scheme(s) to the investors within one month from the date of the order. By the said order the Appellant has been informed of the consequences that would follow in case refund of money, as directed is not made.
2. The Appellant company was incorporated in the year 1984 as a private limited company. In 1989 it was converted into a public limited company. It is involved in resort and tourism activities. It is also involved in plantation activities. The Appellant had floated several Collective Investment Schemes. The fact that the Appellant is operating Collective Investment Schemes and as such amenable to the regulatory regime put in position by the Respondent is not in dispute.
3. 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, 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."
4. Collective investment scheme has been defined in section 11AA of the Act, as under:-
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.
(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 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;
shall not be a collective investment scheme".
5. 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.
69. No scheme to be launched until grant of registration.- No existing collective investment scheme shall launch any new scheme or raise money from the investors even under the existing scheme, unless a certificate of registration is granted to it by the Board under regulation10.
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.
(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. 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.
(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.
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;
shall wind up the existing scheme.
(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."
6. 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 scheme or (c) formulate a scheme of repayment and make such repayment.
7. Since the Appellant being an existing Collective Investment Scheme operator, it was required to get registered with the Respondent under regulation 72 or wind up in terms of regulation 73 or comply with the requirements of regulation 74. The Appellant decided not to get registered and opted to wind up the schemes. However, the Appellant failed to fulfill the requirements. The Respondent directed the Appellant to refund the money. This direction was conveyed by the impugned order, as extracted under:
"SEBI vide a letter dated December 29, 1999 and also by way of a public notice dated December 10, 1999, had given intimation to the Company in terms of Regulation 73 (2) which cast an obligation on it 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, the Company was required to send the Information Memorandum to the investors latest by February 28, 2000.
In the meanwhile, SEBI having regard to the interest of the investors and requests received from various entities, extended the last date for submitting application for grant of registration by existing entities upto March 31, 2000. The same was intimated by SEBI to the Company vide a letter, a press release and a public notice. However, the company still did not apply for grant of registration with SEBI in terms of the said regulations.
As a matter of fact, the Company, neither applied for registration under the said Regulations nor has taken any steps for winding up of the scheme(s) and making payment to the investors in the manner provided under the said Regulations and has prima facie violated the provisions of Section 12 (1B) of SEBI Act, 1992 and Regulations 5(1) read with Regulation 68(1), 68(2), 73 & 74 of the SEBI (Collective Investment Schemes) Regulations, 1999.
SEBI had also issued a public notice in various newspapers in this regard inviting attention of the concerned entities including the Company herein about the statutory requirements under the provisions of SEBI Act and the said Regulations.
Further, by way of a Show Cause Notice dated May 12, 2000, the Company was asked to show cause as to why the action mentioned therein be not initiated against it for the aforesaid violations/non-compliance. The Company vide its reply dated May 16, 2000 informed SEBI that Information Memorandum has been circulated to its members on 28-02-2000 and it has taken further steps for realizing the assets and for making payments to the investors. Further, the Company vide its letter dated October 4, 2000 submitted that it will be submitting the "Winding Up and Repayment Report" to SEBI in a short while. However, the Company has failed to wind up its Collective Investment Scheme(s) to make repayments to its investors and submit the "Winding Up and Repayment Report" to SEBI in accordance with the said Regulations, despite its confirmation to do so.
As requested the Company was granted personal hearings on February 6,2001, February 7, 2001 February 20, 2001 June 20, 2001, September 26, 2001 December 4, 2001, February 11, 2002 and on May 08, 2002 before Chairman, SEBI to explain the reason of such non compliance of the said Regulations. The said hearings were attended by the Company officials wherein they submitted that the Company does not want to continue with its Collective Investment Scheme (s) and therefore it has not applied for registration. However, they promised that the Company is taking all the steps for the repayment to the investors and sought further time for such repayment to the investors.
During the personal hearing on 26.09.2001, which was attended by Shri Mukhtar Hussain, Chairman and Shri Surnedra Khandhar, Managing Director of the Company, both of them had given a written assurance to SEBI, interalia, to the effect that the Company would make all the efforts to repay the investors at the earliest but not later than December 31, 2002, it would make an application in Company Application No. 340/2001 filed by it before the Hon'ble Bombay High Court amending the proposed scheme of repayment in terms of the aforesaid assurance and shall also publish this commitment in four newspapers within 45 days from the date of such commitment. During the hearing it was noted that the Company has made contradictory statements regarding the number of its Collective Investment Scheme(s), number of investors therein and amounts raised under its Collective Investment Scheme(s).
When the enquiry was made during the personal hearing on 08.05.2002 regarding the compliance of the aforesaid commitment, the officials of the Company could not offer any evidence to establish that they have complied with any of such commitment.
Therefore, having regard to submissions made by the Managing director of the Company during the said hearing and after taking into consideration the interest of investors, the Company was directed, interalia:
1. to take immediate steps to redress the investors complaints;
2. to take steps to fulfil its commitments dated September 26,2001, and
3. to submit a detailed compliance report with SEBI by May 20, 2002.
While the Company forwarded letter dated May 18, 2002 and July 8, 2002 submitting certain information, it has failed to comply with the aforesaid directions and file the compliance report in terms of directions given during personal hearings dtd. 08.05.2002.
Proceedings have been held on number of occasions. Opportunity has been given on several times. Having regard to the above, I am of the view that the Company has been given number of opportunities for making repayment to the investors. At every occasion, the representative of the company has assured SEBI that it would repay the investors and would take every possible action in this regard. However, the conduct of the company is such that it wants to pay lip service to what is committed to SEBI. Therefore, I am constrained to take a view, on the basis of the facts of the case, that the Company is not serious about fulfilling its promises and making the repayment to the investors. In any case, the fact remains at the Company, has not complied with SEBI (CIS) Regulations, 1999."
8. In the said context the Respondent passed the following order:
"In exercise of the power conferred upon me under section 11B of the SEBI Act, 1992 read with Regulation 65 of SEBI (CIS) regulations, I hereby direct the Company to refund the money collected under its Collective Investment 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:
1. Initiation of prosecution under section 24 of SEBI Act, 1992 which prescribed imprisonment for a term which may extend to one year, or with fine, or with both against the Company /its promoters/ its directors/managers/ persons in charge of the business of its scheme (s).
2. The company/ its promoters/ directors/ managers/ persons in charge of the business of its scheme(s) would be debarred from operating in the capital market and from accessing the capital market for a period of 5 years.
3. Writing to the state government/ local police to register civil/criminal cases against the Company/its promoters/ directors/managers/persons in charge of the business of its scheme(s) for the offences of fraud, cheating, criminal breach of trust, dishonest misappropriation of public funds.
4. Writing to the Department of Company affairs to initiate the process of winding up of the Company."
9. Claiming to be aggrieved by the said order, the Appellant has filed the present appeal inter alia seeking an order for quashing the impugned order and give opportunity of repaying its investors pursuant to the scheme suggested by the Appellant before the Hon'ble Bombay High Court in its petition under section 391/392 of the Companies Act, 1956. The Appellant had also prayed for an interim order restraining the Respondent taking any steps as stated in the impugned order. The prayer for interim order was considered and rejected by the Tribunal after hearing the parties, vide order dated 19.9.2002. Against the said order the Appellant filed an appeal in the Hon'ble Bombay High Court which was dismissed.
10. Shri Burzin Somandy, learned Counsel appearing for the Appellant briefly referred to the Appellant's profile and other background facts. He referred to the provisions of the 1999 Regulations, and in particular to the requirement in regulations 73 and 74 and submitted that since the Appellant did not desire to go ahead with the Collective Investment Schemes, it decided to formulate a scheme for repayment under regulation 73 and pursued the same. He referred to the correspondence the Appellant had with the Respondent detailed in the Memorandum of appeal and submitted that the Appellant was pursuing the matter vigorously, that it was not avoiding or delaying payment to the investors and that it was sincerely making efforts to comply with the requirements of the regulations and make payments to the investors Learned Counsel submitted that because of certain constraints, the Appellant is not in a position to make the refunds immediately, but given time, certainly refunds will be made and the Appellant had approached the Respondent justifying its request for grant of time to make the refunds.
11. Learned Counsel referred to this Tribunal's order dated 8.9.2000 in the appeal No. 11/2000 filed by the Appellant and stated that even though the Tribunal, while disposing of the appeal, had asked the Respondent to provide the requisite clarifications sought by the Appellant, the Respondent did not provide the same. He submitted that in the said order the Tribunal had observed that "if at all any punitive action is contemplated in the event of the companies referred to therein failing to comply with the statutory requirement, it will be taken only after following the requisite procedure, and not merely on the basis of the impugned Press release", that the Respondent has not followed the procedure before inflicting injury to the Appellant by passing the impugned order. He submitted that the impugned order has been passed without following the principles of natural justice in as much as the Appellant was not given enough opportunity of being heard and the Appellant was also not favoured with certain clarifications and guidances sought by it from the Respondent, despite the Tribunal's direction in its order dated 8.9.2000 in the appeal No. 11/2000 filed by the Appellant.
12. Learned Counsel submitted that the Respondent's order is a blanket order covering all the Collective Investment Schemes operated by the Appellant, whereas the show cause notice which has been adjudicated by the Respondent was only with reference to the Appellant's Earth Bond Scheme, that the proceedings relating to other schemes are pending and, therefore, the impugned order has gone beyond the purview of the show cause notice.
13. Learned Counsel submitted that the Appellant has already approached the Bombay High Court seeking sanction of a Scheme of Compromise/Arrangement under section 391/392 of the Companies Act, 1956 and for the purpose, meeting of the creditors was called more than once in the past, but the meetings could not be held because of disturbances caused by certain parties, that the meeting has been again called. He submitted that the said Scheme contemplates payment to the creditors in a phased manner and the Respondent passed the impugned order directing the Appellant to make refund to the investors without even waiting for the Hon'ble Court's order in the said matter, even though the Respondent was aware of the said pending petition
14. Shri Somandy submitted that the Appellant's representative had made submission before the Respondent's Chairman on 8.5.2002 and in the meeting the Respondent had advised the Appellant to repay the investors by 31.12.2002, that the Respondent is, therefore stopped from asking the Appellant to make refund within a month from the date of the order, that since the Respondent having granted time to make refund by31.12.2002, it can not insist for compliance of the provisions of regulation 73/74 at this stage, that too when the Appellant's petition under section 391/392 of the Companies Act, seeking grant of permission to the Scheme of Compromise is pending before the Hon'ble High Court.
15. Learned counsel referred to the Respondent's letter dated 10.12.99 forming part of the appeal book and stated that the Respondent had explained therein the provisions of regulation 73 and 74 and required the Appellant to send the information memorandum to the investors within 2 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, that the Appellant was also required to take steps to comply with the provisions of regulation 73 for repayment. Learned Counsel submitted that the Respondent by the said letter had thus given the option to the Appellant, that the Appellant vide its letter dated 28.1.2000 sought advice from the Respondent on certain issues and as there was no response again vide letter dated 10.2.2000 requested the Respondent "to expedite the matter and advise us regarding the next course of action that we should take in this regard". He referred to the Appellant's letter dated 18.2.2000 informing of the further course of action proposed to be taken relating to the information memorandum and stated that the Appellant's bonafides are clear from the follow up action it had taken. Learned Counsel submitted that it was not practically possible to dispose of the assets and meet the liabilities within a short period of just 2 months as required by the Respondent. He referred to the show cause notice dated 12.5.2000 issued by the Respondent and stated that the said notice did not refer to any of the steps taken by the Appellant, that the notice did not even refer to the information memorandum filed by the Appellant and of seeking clarification and advice from the Respondent. According to him the notice was issued without application of mind. He submitted that in the show cause notice it has been alleged that the Appellant had not applied for registration by 31.3.2000 and failed to take steps for winding up of the schemes in terms of the Regulations, that the said allegation is baseless, as is evident from the material on record, that the Appellant had filed copy of the information memorandum with the Respondent and this fact was again brought to the notice of the Respondent by the Appellant vide its letter dated 16.5.2000 in reply to the show cause notice dated 12.5.2000. He also referred to the Respondent's Press release dated 16.5.2000 granting time to the Collective Investment Scheme entities who had to compulsorily winding up their schemes and make payments to the investors by 28.5.2000 and stated that this is indicative of the fact that the Respondent is empowered to relax the requirements of the regulation and the Respondent should have granted more time to the Appellant to make refunds, by relaxing the requirement of the Regulation. He referred to the said Press release dated 16.5.2000 and stated that according to the said release "the remaining existing entities (those entities not applied for registration) who had earlier filed information memorandum with SEBI have to compulsorily wind up their schemes and make payment to the investors latest by May 28, 2000.", that having fixed 28.5.2000 as the due date for effecting payment, the Respondent cannot proceed against the Appellant in terms of the show cause notice dated 12.5.2000, that the said notice has been actually annulled as a result of the press release dated 16.5.2000, that in effect the said press release is to be considered as a fresh show cause notice.
16. Learned Counsel submitted that the Appellant had responded to the said press release vide its letter dated 25.5.2000 inter alia stating that the Appellant had been in continuous touch with the Respondent and had complied with all the requirements of the 1999 Regulations and that it was also pointed out that the information memorandum under the regulation had already been filed with the Respondent on 28.1.2000 and the Respondent's approval was also sought in this regard. He submitted that since there was no response from the Respondent, the Appellant filed an appeal ( No. 11/2000) in the Tribunal, that the said appeal was disposed of on 8.9.2000 inter alia asking the Respondent to provide necessary clarifications and guidance to the Appellant.
17. Learned Counsel submitted that the fact that the Respondent was aware of the actions taken by the Appellant is evidenced from the letters/materials furnished to the Respondent from time to time. He referred in particular to the letter dated 20.11.2000 and the winding up and repayment report, filed with the appeal memorandum. He claimed that the scheme mooted under section 391/392 of the Companies Act is also in the interest of the creditors. Learned Counsel referred to the Appellant's letter dated 10.8.2001 to the Respondent and submitted that from the said letter it is clear that the Respondent's Chairman was aware of the progress made by the Appellant, that with reference to the repayment schedule he had suggested that the Appellant should settle the amount to the tune of Rs.1.50 crores for two months, indicates that the Respondent itself had relaxed the requirements of the Regulations. In this connection he also referred to the letter dated 14.9.20001 of the Respondent on the Appellant's letter of 10.8.2001 and submitted that there is no denial of anything stated by the Appellant therein, including the relaxation for payment granted by the Chairman of the Respondent.
18. Learned Counsel submitted that on 14.5.20002, the Appellant requested the Respondent to provide a copy of the show cause notice dated 12.5.2000, so as to enable it to send a reply, in view of the fact that a new Chairman had been appointed, that the request for the copy of the notice was not acceded to. He referred to the copy of the minutes of the hearing granted by the Respondent's Chairman to the Appellant on 8.5.2002 annexed to the appeal and submitted that the said hearing was not in connection with the show cause notice. Referring to the said minutes he submitted that the Respondent itself had given time upto 31.12.2002 to make refunds.
19. Learned Counsel submitted that the Respondent's Chairman on 8.5.2002 had given the Appellant time upto 31.12.2002 to make the refunds and the same Chairman passed the impugned order on 19.7.2002 directing the Appellant to make refunds within a period of one month i.e. by 19.8.2002. According to him the extended period can not be curtailed by passing such an order.
20. Shri Kumar Desai, learned Counsel appearing for the Respondent submitted that since the Appellant was carrying on the activities of Collective Investment Schemes, it was bound to comply with the legal requirements applicable to such schemes and no specific advice to the Appellant from the Respondent was required to comply with the statutory requirements. He referred to the innumerable opportunities given to the Appellant to comply with the requirements of the Regulations, narrated in the Respondent's reply in the appeal. He submitted that the issuance of the impugned order was in the context of the Appellant's failure to comply with the requirements of the Regulation, that there is nothing in the impugned order which prevents the Appellant from making payment to the investors, that the Appellant is attempting to create an impression that it is not in a position to refund the money to the investors because of the impugned order. In this context Shri Desai referred to the operative portion of the impugned order and submitted that the direction therein is to refund the money collected under the scheme(s) with returns due to the investors within one month, and the Appellant was cautioned of the consequences that would visit in the event of failure to make the refund, but till the date the Appellant has not made refunds as directed in the said order, that under some pretext or the other the Appellant is delaying compliance of the said direction. In this context he referred to the litigation route resorted to by the Appellant.
21. Shri Desai referred to the Appellant's letter dated 20.2.2001 addressed to the Respondent giving details of its various Collective Investment Schemes viz. Property Shares Scheme, Mini Property Shares Scheme, Kanyadhan Scheme, Highway Infrastructure Development Bonds Scheme, Holiday Bond Scheme, Earth Bond Scheme, Earth Bond Plus Scheme, Hermitage Scheme, Farm Plots Scheme etc. and submitted that the Appellant has not produced any material to show that it had submitted information memorandum in respect of all the said schemes, that as per the regulations, the Appellant is required to furnish the information memorandum in respect of each scheme to the Respondent. He submitted that the Appellant has restricted its submissions only with reference to the Earth Bond Scheme, which is only one of the schemes, that the Show Cause Notice is not confined to only one particular scheme, as is being claimed by the Appellant, that in the notice the Appellant's failure to take steps for winding up of the scheme(s) has been clearly spelt out. He also referred to the order dated 19.7.2002 and stated that therein it has been stated that the Appellant had filed certain information/details with the Respondent regarding its investment scheme viz. Suman Earth Bond pursuant to the press release dated 12.11.1997, that there is no indication anywhere therein of the other schemes, that on a perusal of the said order it is clear that the Respondent has taken into consideration the factual position of non compliance of the requirements of regulation with respect to the other schemes as well. He referred to the "winding up and repayment report" dated 31.1.2001 filed by the Appellant and stated that according to the learned Counsel for the Appellant "other long term investments" referred to therein includes only Kanyadhan scheme and not other schemes. In this context he referred to the scheme of Compromise filed with the Hon'ble High Court wherein it has been stated that "there are in all 62552 unsecured creditors for investments in various schemes of the company".
22. Learned Counsel submitted that the show cause notice is regarding breach of the Regulations by the Appellant, as has been clearly stated in the notice, that in any case the fact remains that the Appellant has not complied with the requirements of 1999 Regulations and, therefore, the Appellant was directed to refund the money to the investors.
23. Learned Counsel referred to the provisions of Chapter IX of the Regulations and submitted that an existing Collective Investment Scheme has three options i.e. either register as a collective investment scheme, or in case not desirous of getting registered winding up as provided in regulation 73, or in terms of regulation 74 formulate a scheme of repayment and make such repayment to the existing investors in the specified manner, that though the Appellant voluntarily decided to opt for the winding up option provided under the regulation failed to comply with the payment requirements as provided therein adhering to the prescribed time frame. He submitted that the Appellant had sufficient time to comply with the requirements, as the regulation came into force on 15.10.1999 that even after 3 years, investors have not been given their money back despite the requirement of the Regulation. Learned Counsel submitted that on a perusal of the documents on record it is evident that the Appellant was engaged in fruitless correspondence rather than making fruitful efforts for meeting the requirements of law; the allegation that the Respondent did not provide necessary clarifications/guidance sought for is baseless, as is evident from the Appellant's own letter dated 21.11.2000 (annexed to the reply filed by the Respondent) addressed to the Respondent, wherein it has stated that "During our meeting, you have resolved all our relevant queries and as on date we do not have any specific query as such to be resolved" that this letter is subsequent to the date of the Tribunal's order dated 8.9.2000 referred to by the Appellant. Learned Counsel also referred to the irrelevance of the issues on which the Appellant wanted advice/clarification and referred to the following portion from the Appellant's letter dated 28.1.2000 by way of an illustration:
"As further required by regulation 73(1) if SEBI (CIS) Regulations 1999 we are submitting herewith information memorandum containing state of affairs of the scheme as on 31.12.1999, the amount repayable to each investor and the manner in which such amount is determined.
In connection with the amount repayable to the investors we seek your advice on the following issues:
(a) To winding up and repay the investors company will have to dispose off all the assets of the collective investment scheme.
(b) Amount repayable to each investor shall be determined on realisation of the sale proceeds of all assets, most of which are under development
(c) In the above circumstances, company may not be able to pay to the investors within the time prescribed by SEBI
(d) Company has assured returns and issued Post dated cheques to investors on the basis of running concern but now as the company is required to wind up midway the company is not in a position to fulfill the commitments of the returns assured.
Kindly give your views and advise on the above and also on information memorandum submitted herewith so as to enable us to send the same to all the investors."
24. Shri Desai submitted that these are not the issues on which SEBI is required to provide advice and that it was for the Appellant to do the needful to comply with the requirements. He submitted that the sole purpose of stretching correspondence by the Appellant was only to buy time and build up record to show the Appellant's so called "bonafides", that in any case the letter dated 21.11.2000 indicates that there was no more pending "queries".
25. Shri Desai refuted the Appellant's contention that the impugned order was passed without following the principles of natural justice. In this context he submitted that at least on 8 occasions, the Appellant was heard and its written submissions were also considered while passing the order. He referred to the following portion in the impugned order that "as requested the company was granted personal hearing on February 6, 2001, February 7, 2001, February 20, 2001, June 20,2001, September 26, 2001, December 4, 2001, February 11, 2002 and on May 8, 2002 before Chairman SEBI to explain the reason of such non compliance of the said Regulations. The said hearings were attended by the company officials wherein they submitted that the company does not want to continue with its Collective Investment Scheme (s) and therefore it has not applied for registration". Learned Counsel pointed out that the Appellant vide its letters had sought personal hearing that those were not informal hearings as stated by the Counsel for the Appellant, little realising that the matter which the Appellant represented in these meetings was the non compliance of the Regulations, for which the Show Cause Notice was served. Shri Desai pointed out that to what extent the Appellant can go is clear from its own letter dated 14.5.2002 requesting for a copy of the Show Cause Notice dated 12.5.2000 and the explanation of its counsel that it was necessitated in the context of change of guard in SEBI. He submitted that it is evident from the conduct of the Appellant that it is merely interested in delaying the payments. He submitted that before the Chairman the Appellant's representative had agreed to make the payment by 31.12.2002 and in the petition filed in the Hon'ble Bombay High Court the time bas been sought upto 2002.
26. Learned Counsel submitted that the Respondent had given time to the Appellant to make payments and that in case the payment has been made within the stipulated time the lapse would have been condoned as the Respondent is more interested in protecting the interest of investors, that the Appellant did not honour its commitment to pay or comply with the directions issued by the Respondent. He submitted that press release giving time to make refund, did not in any way annul the show cause notice under adjudication. Learned Counsel submitted that the measures mentioned in the order, proposed to be taken in the event of failure to comply with the direction to refund the money, have already been taken and that the order remains fully executed. Shri Desai submitted that the Appellant is making all efforts to stall the requirement of refunding money to the investors that the Appellant with that end in view has approached even the Board for Industrial and Financial Reconstruction for getting it registered as a sick undertaking to claim certain immunities and escape from legal proceedings for recovery of funds by the creditors.
27. Shri Desai also submitted that there are large number of complaints from the investors against the Appellant alleging non payment of money due to them.
28. I have carefully considered the rival contentions and the material on record before me.
29. Regulating Collective Investment Schemes was considered necessary by the authorities as a number of companies mobilised huge funds from the public by way of contribution to various schemes assuring lucrative returns and duped them eventually. There was big hue and cry. As there was no effective statutory regulatory provisions in position to discipline the activities of the Collective Investment Schemes, the Securities and Exchange Board of India (Respondent herein) in exercise of the powers vested in it, notified the 1999 Regulations on 15.10.1999. These regulations provide certain measures to regulate the activities of the Collective Investment Schemes which were operating on the date of notification of the Regulations and also those coming into the field post notification of the Regulation. Chapter IX of the Regulation is on the existing Collective Investment Schemes. The relevant provisions under Chapter IX of the Regulations have been extracted in the earlier part of this order. It is an undisputed fact that the Appellant was operating several Collective Investment Schemes on 15.10.1999. Therefore being an existing entity operating Collective Investment Schemes the provisions of Chapter IX are attracted to the Appellant and required compliance of the Regulations. The Regulations provide for registration for the schemes desirous of continuing and for winding up in respect of those schemes not desirous of continuing. The Appellant has admitted that it was not desirous of registering its schemes and had therefore, decided to wind up the same. It is seen from the information furnished by the Appellant that it had collected huge amounts by way of subscription from a large number of investors. As per the "Scheme of Compromise and/or Arrangement between Suman Motels Ltd., and its unsecured Creditors" prepared by the Appellant sometime in November 2001, there were "in all 62552 unsecured creditors for investments in various schemes of the company amounting totally 5195.56 lacs". Investor interest involved is thus substantial. It is also noted that there are quite a large number of complaints from the investors in these schemes. It is a fact that the Appellant has neither registered its schemes with SEBI nor wound up its affairs and returned the money to the investors till this date despite the time frame for the compliance provided in the Regulations is over long ago. The Appellant's argument that it has sufficient assets and if given more time it would clear all the liabilities is difficult to accept, in the light of its conduct during the last three years. The Appellant has not put forth any convincing evidence showing the genuine efforts made by it to return the money to the investors. There is also no indication to believe that the Appellant is doing something tangible to meet the grievances of its large number of investors. On the contrary it appears that the Appellant is more interested in stalling punitive action against it by resorting to the litigation route. The argument that it has filed a petition under section 391/392 of the Companies Act seeking court's sanction for a Compromise/Arrangement with the unsecured creditors and as such more time should be given to it to make refunds in terms of the Regulations is difficult to accept. The fact is that till date the Appellant has not refunded the money to the investors as required by Regulation 73 and there is no credible evidence to believe that refund is likely to be made in the near future.
30. The Appellant's submission that the impugned order was passed without providing opportunity of being heard is totally baseless. The factual position rebutting the said contention has been correctly set out in the order, as pointed out by the learned Counsel for the Appellant. In the order it has been recorded that "as requested the company was granted person hearing on February 6, 2001, February 7, 2001, February 20, 2001, June 20,2001, September 26, 2001, December 4, 2001, February 11, 2002 and on May 8, 2002 before Chairman SEBI to explain the reason of such non compliance of the said Regulations. The said hearings were attended by the company officials wherein they submitted that the company does not want to continue with its Collective Investment Scheme (s) and therefore it has not applied for registration". It is seen from the Appellant's letter dated 18.5.2002 forming part of the appeal book, that the Appellant had received the minutes of the meeting held on 8.5.2002. The Appellant's letter dated 14.5.2002 filed with the appeal also refers to its meeting on 8.5.2002 with the Chairman of SEBI and various earlier meetings. The Appellant vide letter dated 11.2.2002 had thanked the Chairman for giving opportunity of a personal hearing. Letter dated 20.6.2001 from the Appellant to the Chairman also thanks the him for giving opportunity of personal hearing. In the light of the Appellant's own admission, as revealed from the material on record, that the Appellant was heard on several occasions in the matter, it is rather strange to hear from its Counsel that the Respondent had passed the impugned order without hearing the Appellant. In this context it has also been noted that on 14.5.2002, the Appellant had requested the Respondent to provide a copy of the Show Cause Notice dated 12.5.2000 to enable it to send the necessary reply ! When the Appellant was confronted with evidence of having acted in the past on the show cause notice dated 12.5.2000, the answer was that it was considered necessary to get a copy of the notice again in view of the change of guard in SEBI ! This itself is a clear indication of the attitude of the Appellant. The argument that the Appellant had not been provided with necessary clarifications and guidances in terms of the observations made by this Tribunal in its order dated 8.9.2000 is also baseless. In the said order while dismissing the appeal this Tribunal had observed "Since the Appellant has sought certain clarifications to avoid complications in the process of acting under the Regulations, the Respondent may consider providing the same early so as to enable the Appellant to properly comply with the statutory requirements in the interest of the investors." The Appellant's letter dated 21.11.2000 to the Respondent exposes the Appellant in this regard. A copy of this letter has been filed in the proceedings by the Respondent. In the said letter it has been stated that :
"We refer to our meeting on 20.11.2000 and your letter no CIS/SM/18370/2000 dated 17.11.2000 and would like to state as under:
During the meeting you have resolved all our relevant queries and as on date we do not have any specific query as such to be resolved."
31. In this context, it is also to be noted that the said letter is dated 21.11.2000 (post the Tribunal's order) and after getting all the queries resolved, even after 2 years, the Appellant has not complied with the requirements of the Regulations.
32. The Appellant's contention that as per the press release dated 16.5.2000, the Respondent had extended the time to make payment to the investors latest by 28.5.2000 and the penal consequences were to follow on failure of the said requirement, the show cause notice dated 12.5.2000 remains nullified, is untenable as the show cause notice is on the failure on the part of the Appellant to comply with the requirements of the Regulation. . This is clear from the following allegation stated in the notice that: "It is noted that you have not applied for registration by March 31, 2000 and also appear to have failed to take steps for winding up of the Scheme(s) in terms of Regulations. You have, therefore, prima facie violated the provisions of Section 12 (1B) of SEBI Act, 73 and 74 of SEBI (Collective Investment Schemes) Regulations, 1999. You are, therefore, called upon to show cause as to why one or more or all of the following action (s) should not be initiated against you for the violations specified above."
33. The Appellant's argument that the show cause notice and the adjudication of the same was only with reference to one of the schemes viz. Suman Earth Bond Scheme and as such there can not be an order adversely affecting the operation of other schemes is also untenable for the reason that the Respondent's order is against the Appellant in the context of the Appellant's failure to comply with the requirements of the Regulations and that in the context of the failure having been proved, the Respondent is empowered to take action, as has been done in the instant case. It is not the Appellant's case that it has fully complied with the requirements of the Regulation even in respect of the Suman Earth Bond Scheme. The failure remains established. It has been admitted. The Respondent's order is therefore, justified.
34. Shri Somandy's argument that the Respondent is stopped from directing the Appellant to make payment to investors within a month is not acceptable, as there is no estoppel against law. Regulation requires refund to be made to the investors within the prescribed time. The impugned order directs the Appellant to comply with requirements of law in regard to refund of money to the investors. Taking into consideration, the investors interest paramount, the Respondent had extended the said requirement of law, subject to certain other conditions which are found recorded in the minutes of the meeting held on 8.5.2002. This was a package. These conditions are available from the copy of the minutes of the said meeting, filed by the Appellant.:
"The officials of the CIS Division informed that certain statements made by SML were not factually correct and produced a copy of the commitment dated September 26, 2001, signed by Mr. Mukhtar Hussain, Chairman, SML and Mr. Surendra Khandhar , MD, SML, which was furnished by SML during the hearing before SEBI. The contents were read out as under:
* "Suman Motels will make all efforts to honour the commitment of repayment made by Mr. S. M. Khandhar to investors on 22/9/2001 and will make full efforts to fulfill this commitment * Suman Motels hereby makes a commitment to utilise all proceeds of sale of properties and resorts and receipt of foreign loan for repayment of unsecured investors.
* Suman Motels will make an application to Hon'ble High Court for amendment of original petition No. 340/2001 incorporating the above terms of payment.
* All efforts will e made to repay the investors at the earliest but not later than 31st December, 2002.
* Suman Motels will publish this commitment in four newspapers within 45 days as signed advertisement.
35. Thereafter, on a query, SML admitted that it has not taken any steps to fulfil its aforesaid commitment such as approaching Hon'ble Court for modification of the scheme, publishing the commitment in newspapers. It was also pointed out by the officials of CIS Division that as on March 31, 2002, 626 complaints were pending against SML, the number is constantly increasing and there is no step by SML to redress the same. Further, letters by SML informing SEBI that investors are advised to visit SML office for further action, does not mean redressal. Further more, SML has not furnished any register to SEBI regarding repayment to its investors, as claimed by it.
"Having regard to the above and after taking into consideration the interests of the investors, Chairman, SEBI directed as under:
i)SML to immediately submit (but not later than May 20, 2002) to SEBI a copy of its registers of repayment claimed to have been made by it to its CIS investors.
ii) SML to take immediate steps to fulfil its aforesaid commitments. A detailed report on the steps taken along with the information/documents not submitted so far by it to SEBI to be filed by SML with SEBI on or before May 20, 2002.
iii) SML to submit to SEBI by May 20, 2002 a certificate from its statutory auditors regarding scheme wise repayment claimed to have been made by it to its investors of CIS.
iv) SML to discuss with IGF the suggestions made by IGF regarding early repayment to be made to its investors, modify its proposal (pertaining to the scheme of compromise filed by it earlier before the Hon'ble Court) after incorporating the said suggestions, move the Hon'ble High Court of Mumbai for the modification of the scheme of compromise and submit a copy of the modified scheme to SEBI by May 20, 2002.
v) SML to redress the grievances of investors which were forwarded by SEBI to it as well as of those investors who were present in the hearing and to submit a report to SEBI in this regard by May 20, 2002.
vi) SEBI to give a copy of the minutes of the personal hearing to SML."
36. There is nothing on record to show that the Appellant had complied with all those directions to avail of the said extended period to make refunds. Even the commitment made by it to repay, remains unfulfilled.
37. It is also undisputed that there are number of investor grievances pending against the Appellant and the Appellant has not taken any effective measures to redress those grievances:
On a careful consideration of all the material facts and the legal provisions applicable to the case, it can not be said that the Respondent's order directing the Appellant to refund the money to the investors is in any way faulty. The Respondent is mandated to protect the interest of investors. In my view in the light of the facts and circumstances of the case, if the Respondent had not issued such a direction, it could be viewed as dereliction of duty on the part of the Respondent. All that the Respondent in this order has directed to the Appellant to do is to comply with the requirements of regulation 73 within a specified time. The Appellant can not claim that it is not required to comply with the requirements of the Regulation and the Respondent entrusted with the duty of enforcing the Regulation should not enforce the same.
38. For the reasons stated above I do not find any justification for the Tribunal to interfere in the decision taken by the Respondent to protect the interests of the investors. The order is to be sustained.