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PACL Ltd. and Others Versus Securities and Exchange Board of India,

2015 (8) TMI 993 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Registration for operating CIS scheme – Winding up of scheme and refund on non-compliance – Whether SEBI was justified in holding that schemes floated by Applicant constitute Collective Investment Schemes under SEBI Act, 1992 and that Applicant and its promoters and directors, were liable to wind up said schemes – Held that:- By inserting Section 12(1B) to SEBI Act legislature has made it mandatory for any person to obtain certificate of registration for operating CIS – Thus, operating CIS witho .....

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ollected from investors cannot be faulted – Thus, Appellants directed to comply with directions contained in impugned order of SEBI – Application dismissed – Decided against Applicant. - Misc. Application No. 88 of 2015 And Misc Application No. 129 of 2015 And Misc. Application No. 171 of 2015 And Appeal No. 368 of 2014 - Dated:- 12-8-2015 - J.P. Devadharand Jog Singh, JJ. For The Appellant : Mr. Janak Dwarkadas, Senior Advocate with Mr. Rajiv Nayar, Senior Advocate, Mr. L. S. Shetty, Ms. N. L. .....

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ata, Senior Advocate with Mr. Mihir Mody, Mr. Rushin Kapadia, Ms. Shruti Chiniwar, Mr. Akshay Patil, Mr. Jayesh Ashar and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. ORDER Per: Justice J.P. Devadhar 1. Whether the Securities and Exchange Board of India ( SEBI for short) by its order dated 22.08.2014 is justified in holding that the schemes floated by PACL Ltd. ( PACL for short) constitute Collective Investment Schemes ( CIS for short) under the Securities and Exchange Board of India .....

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4 is filed by PACL and all other appeals are filed by the promoter/directors of PACL to challenge impugned order of SEBI dated 22.08.2014. Since the challenge in all these appeals is to the order of SEBI dated 22.08.2014, all these appeals are heard together and disposed of by this common order. 3. For the sake of convenience, facts set out in Appeal no. 368 of 2014 to the extent relevant are set out herein below:- a) PACL is a real estate company duly registered under the Companies Act, 1956 an .....

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to formulate draft Regulations for Collective Investment Scheme . On the basis of the said directions SEBI issued various press releases prohibiting companies from sponsoring or causing to be sponsored any new CIS till the Regulations were framed and notified by SEBI. c) In the year 1998, a Public Interest Litigation ( PIL for short) was filed before the Delhi High Court (CWP No. 3352 of 1998) wherein it was alleged that various companies including PACL were carrying on CIS without obtaining ce .....

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the PIL on the ground that the business carried on by PACL did not fall within the scope of CIS. f) On 15. 10. 1999 the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 ( CIS Regulations for short) were framed and notified by SEBI. Thereafter by its communications/ orders dated 30.11.1999 and 10.12.1999 SEBI informed that the schemes floated by PACL were covered under CIS Regulations and called upon PACL to comply with and abide by the CIS Regulations, fa .....

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y an order dated 21.12.1999 Rajasthan High Court stayed the operation of the two notices dated 30.11.1999 and dated 10.12.1999. Thereafter, by its final order dated 28.11.2003 the Rajasthan High Court held that none of the conditions set out under Section 11AA(2) were satisfied in the present case and accordingly quashed both the notices dated 30.11.1999 and 10.12.1999 issued by SEBI. i) In the meantime, Delhi High Court passed an order on 16.11.2000 in the PIL filed before it whereby Justice K. .....

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wner by virtue of agreement for sale in their favour by the erstwhile owners or pursuant to the Power of Attorney executed in favour of the representative of PACL by the erstwhile owner and paying full amount of consideration to the erstwhile owner. It was also recorded in the said report that the development work on the lands in question was found to be carried out by PACL and in some cases the development was complete and the customers had taken possession of the plots of land and constructed .....

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that all future sale deeds be executed and registered by PACL in favour of its customers under the supervision of Justice K. Swami Durai (Retd). l) Challenging the decision of the Rajasthan High Court dated 28.11.2003, wherein it was held that the sale and purchase transactions carried on by PACL are not covered under CIS, SEBI filed Civil Appeal before the Apex Court. By its order dated 26.02.2013, Apex Court set aside the decision of the Rajasthan High Court and directed that the notices date .....

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CL. m) Accordingly, SEBI conducted further investigation and issued a supplementary show cause notice on 14.06.2013 to PACL and its directors/former directors, calling upon them to show cause as to why the schemes of PACL should not be declared as CIS and if found to be CIS why appropriate action including direction under Section 11 and 11B of the SEBI Act read with Regulation 65 of the CIS Regulations should not be issued against them for not complying with the provisions contained under the CI .....

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ers to wind up the existing CIS and refund the monies which have been collected from the customers in violation of SEBI Act and the CIS Regulations, with promised return within a period of three months from the date of the said order. Challenging the aforesaid order all these appeals are filed. 4. Mr. Dwarkadas, learned Senior Advocate appearing on behalf of PACL argued by his oral and written submissions as follows:- a) Finding recorded in the impugned order that the appellant is running a CIS .....

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ed by PACL were utilized towards purchase of distinct plot of land, each of which was identifiable vis-à-vis a particular investor as noticed in the report of Justice K. Swami Durai. There is no finding that the funds received by PACL have been misused. To imply that there is any irregularity in the conduct of its business, without any evidence in that regard is baseless. Monies were not collected from the investors with an intention of pooling of funds is established from the report of J .....

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t once monies are invested with PACL, they completely lose their identity. In case of PACL, each investor is allotted an identifiable piece of land, albeit subject to certain contractual caveats at a date subsequent to when the amount was paid. It is not the case of SEBI that even in a single case, the land allotted to the investor does not actually exist. Therefore, fact that the land is allotted subsequent to payment cannot be a ground to infer that the funds are pooled. d) Fact that insignifi .....

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d shall be developed and based on its expertise in the field, is able to advise an estimated realizable value. The number of sale deeds executed cannot be of much consequence, because, what was being tested was the business model of PACL. As long as PACL was giving its customers option to get sale deeds executed and come into possession of their land, the fact that a significantly large number of customers chose not to do so and instead chose to sell their land and receive the monies, will not t .....

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K. Swami Durai, land was actually transferred to the investor, pursuant to duly registered sale deeds. In the absence of any specific case, where the related entities have refused to make the land held by them available for allotment/transfer to the investor, SEBI is not justified in contending that the availability of land for transfer is suspect. Since the business model involved purchase of mostly barren land and its proper treatment/development so as to make it arable and capable of benefici .....

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available assets because relevant documents are in the custody of CBI. g) Assuming that the business run by PACL constitutes CIS, WTM is no justified in passing the consequential directions specified in para 38 of the impugned order by ignoring the specific directions given by the Apex Court in its order dated 26.02.2013. When an issue is remitted/remanded for determination to a lower court with certain specific directions from the superior court, it is the bounden duty of such lower court to f .....

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dance with law and; iii) before taking any further action, give fresh notice to PACL. Since fresh notice is not issued after declaring that PACL is running a CIS, impugned order is in direct violation of the Apex Court directions. i) Supplementary show cause notice issued on June 14, 2013 to the effect that appropriate action including direction under Section 11 and 11B of SEBI Act read with regulation 65 of the CIS Regulations would be taken in the event that the schemes of PACL were found to b .....

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the Apex Court, SEBI ought to have sought clarification from the Apex Court. j) By disobeying the directions of the Apex Court and fusing what was otherwise contemplated as two separate hearing, the WTM has effectively taken away the right of the appellant to file an appeal and thus the impugned order is in violation of the principles of the natural justice. Relying on a decision of the Apex Court in case of Institute of Chartered Accountants of India vs L. K. Ratna reported in (1986) 4 SCC 537 .....

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al rule in Leary s case will not apply to the area of domestic jurisdiction or private contractual matters but will clearly apply to a public law situation. The present case, being a matter between a citizen and the state, clearly falls within the public law doctrine and therefore failure on part of WTM to follow the principles of natural justice in giving two stage hearing cannot be cured by hearing the appellants before this Tribunal. k) Impugned order passed by disregarding the directions giv .....

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d on by PACL constitutes CIS and therefore it was imperative to provide an opportunity to comply with the provisions of law regulating the activities of CIS. Pertinently, CIS in not a prohibited activity, but a regulated activity. It is not per se illegal and the public policy does not require that all CIS activity should be stopped. Therefore, without giving an opportunity to register, WTM could not have as a natural consequence directed to wind up the CIS carried on by PACL. By taking away PAC .....

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igh Court and thereafter by the Apex Court till the date of the impugned order, the WTM, after holding on 22.08.2014 that PACL is running a CIS, was duty bound to afford an opportunity to PACL to register its business and conduct CIS activity as per the provisions of law. During the course of hearing before this Tribunal, PACL had made without prejudice offer to seek registration under CIS Regulations, however, the same was turned down by SEBI on the ground that it is too late in the day to do s .....

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SEBI before this Tribunal and if aggrieved by the decision of this Tribunal to challenge the same before the Apex Court and till the issue of CIS is finally determined by this Tribunal and thereafter the Apex Court, the business of PACL could not be directed to be wound up. n) In partial compliance of the impugned order, PACL has halted the launch of any new schemes and halted collection of any further amounts from the subscribers to the already launched schemes as recorded in the affidavit dat .....

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gards the consequences of such determination amounts to clear violation i) of the procedure established in the CIS Regulations ii) of the order of Supreme Court dated 26.02.2013 iii) of the principles of natural justice. o) Argument of SEBI that Chapter IX of the CIS Regulations is applicable only to the CIS existing on the date on which CIS Regulations came into force and would not apply to CIS launched after the CIS Regulations came into force is contrary to the decision of this Tribunal in th .....

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ally provides for an opportunity of hearing even if registration is to be refused. p) Argument of SEBI that PACL has been operating CIS prior to 1999 and continued to operate those CIS even after 1999 without availing the opportunity of registration under CIS Regulations and thereafter, launched new schemes without registering under CIS Regulations is without any merit because i) PACL has always contended that it is not a CIS ii) that stand of PACL was upheld by Rajasthan High Court which quashe .....

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ng a CIS and therefore, occasion for PACL to seek registration arose only after the impugned order subject to right of appeal before this Tribunal. q) Fact that the two orders dated 30.11.1999 and 10.12.1999 which were quashed by the Rajasthan High Court are liable to be treated as show cause notices pursuant to the order of the Apex Court would not mean that the decision of SEBI contained in the orders dated 30.11.1999 and 10.12.1999 that PACL is running CIS, stand revived. In fact, the Apex Co .....

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ACL that the business carried on by it was CIS till the date of impugned order, argument of SEBI that the right to register under CIS Regulations is no longer available on account of the fact that PACL did not avail that opportunity is wholly without merit. r) Right to carry on business is a fundamental right and to deprive that right on account of not having registered as a CIS since 1999 would be wholly unjustified, especially when the finding that the business carried on by PACL was CIS is re .....

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t, because, the finding that PACL running CIS has been decided by the impugned order which is challenged in the present appeal. Since PACL has been carrying on business in a bonafide and legitimate manner duly permitted by orders of Rajasthan and Delhi High Courts. Right to seek registration in respect of CIS existing before the CIS Regulations came into force being an inherent right, SEBI is not justified in abrogating that right by the impugned order. t) Argument of SEBI that regulation 65 of .....

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gister itself as a CIS, as provided in regulation 68 to 72 of the CIS Regulations, which is an obvious and necessary precursor, to determining eligibility of PACL to register itself as a CIS. Winding up under the circumstances set out under regulation 73 is subject to following the procedure prescribed under regulation 73(2) to 73(8). Since the WTM has overlooked the above procedure, impugned order is liable to be quashed and set aside. By disregarding the procedure prescribed under Chapter IX, .....

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pter IX of CIS Regulations exist in regulations 65 and Section 11B of SEBI Act is untenable for two reasons. First, that is not the finding recorded in the impugned order. In the impugned order winding up is directed as a natural consequence to the finding that PACL is running a CIS. Second reason is that if the contention of SEBI is accepted, it would have the effect of rending entire Chapter IX nugatory. It is a cardinal principle of interpretation that a statute has to be read in a manner tha .....

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n unfettered by the decision the decision of the Apex Court, is without any merit, because, specific directions given by the Apex Court negate the above contentions raised by SEBI. The question of fact as to whether PACL is CIS or not is effectively decided for the first time by the impugned order, which gives PACL right to accept the order and seek registration or to challenge the decision that PACL is running CIS. Regulation 9, 9A, 10,11,12,68 and 70 of CIS Regulations set out separate and ind .....

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t running a CIS, then implementing the order of SEBI before such order being passed by this Tribunal or Apex Court would directly affect the fundamental right guaranteed by the Constitution to PACL to carry on its business. PACL is entitled to equal protection of law and in this case the law laid down in the CIS Regulations provides for an opportunity of registration and that opportunity is taken away arbitrarily in violation of Article 14 of the Constitution. x) Having rejected the without prej .....

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hout prejudice to all rights and contentions of PACL, the proposal and admissions made therein cannot be the basis to deprive or take away the right of PACL to register under the CIS Regulations, assuming such a right exists. y) Section 23 of the Evidence Act 1872 specifically provides that admissions will not be relevant where they are given with an express condition that such admissions will not be given in evidence. Consequently, the proposal submitted by PACL being explicitly without prejudi .....

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t be accepted as a whole or not at all. In the present case, since the proposal was categorically rejected, it was impermissible in law to rely on the admissions made in the said without prejudice proposal. In support of the above contention reliance is placed on a decision of the Apex Court in case of Haji C.H. Mohammad Koya vs T.K.S.M.A. Mathukoya reported in (1979) 2 SCC 8. aa) Assuming that the without prejudice proposal is liable to be treated as deemed proposal under regulation 74, even th .....

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scribed by the Hon ble Supreme Court of India in its order dated 26.02.2013 and hence fit to be set aside on this count only. Para 4 & 8 of the Apex Court order leave no manner of doubt that SEBI was required to follow a two stage procedure, first stage being determination of the question as to whether the business of PACL is covered under CIS and Second stage was to depend on the outcome of the first stage i.e. if PACL was running a CIS then to issue fresh notice and take fresh proceedings .....

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h the issues independently. b) There is no provision for determination by SEBI as to whether an entity is running a CIS or not. Therefore, the Apex Court devised the two stage procedure. In terms of the Apex Court order the WTM was bound to follow both the procedures. Since the WTM failed to follow the second procedure, impugned order is bad in law. c) Neither the SEBI Act nor the CIS Regulations postulate that running CIS is ipso facto illegal. The only requirement under those provisions is tha .....

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anner then, it has to be done in that matter alone and it is not open to SEBI to follow one part and ignore the other part. d) SEBI is not justified in contending that PACL has raised the plea of two stage procedure belatedly, because, there was no occasion for the appellants to presume that the WTM would not follow the two stage procedure prescribed by the Apex Court. It is only when it became apparent that the WTM may bypass the special procedure, the WTM was reminded of his obligation to foll .....

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e business activities of PACL are akin to that of real estate construction companies, which purchase land, make their plans for constructing flats, sell those planned to be constructed flats to customers and thereafter construct the flats. At the beginning of the transaction, customers of these companies are issued allotment letters and only when construction is complete, the customers have the option of getting sale deeds executed in their favour or they have the option of selling the flats, wh .....

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he case. g) The business activities of PACL do not satisfy the conditions prescribed under Section 11AA (2) of the SEBI Act, because, PACL admittedly has a huge land bank and therefore it is not as if the payment made by the investors is pooled for the purpose of the scheme. There is no question of making payment under the scheme to receive profit from the scheme as the transaction is simpliciter that of sale and purchase of land and it is just that the payment of consideration by the customer i .....

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erty and it is the customer who is in charge. The example of a transaction of sale and purchase of a flat would again be relevant in this context as the builder constructs the flats and retains it in his possession till all payments are made by the customer and thereafter, the flat is transferred to the customer, and the customer comes in control and is free to manage the flat. Similar is the case with PACL. However, if the meaning which is being sought to be given by SEBI to Section 11AA(2) (ii .....

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i) The fact that PACL has not been running a CIS is clearly demonstrated by the reports submitted by Justice K. Swami Durai. A perusal of the said final report (pgs 122-132 of the appeal paperbook) indicates that all the objections of SEBI were found to be unfounded and untenable . Justice K. Swami Durai visited the lands being sold by PACL to its customers and found that levelling and fencing had been done and irrigation facilities laid out. He also found that some customers of PACL, who were i .....

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gainst PACL. j) It has been admitted in no uncertain terms by SEBI that it is not challenging the correctness of Justice K. Swami Durai reports. If that is the case and the said reports clearly establish that activities of PACL are indeed genuine real estate transactions, then the WTM could not have held that PACL was running a CIS. If the findings recorded in Justice K. Swami Durai reports establish on a question of fact, that the transactions of PACL were indeed real estate transactions, then .....

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cases and in the balance 99.97% cases, sale deeds have not been executed and therefore report of Justice K. Swami Durai does not held PACL. What the report shows is that PACL was the owner and in possession of land, it was executing sale deeds in favour of its customers after developing the agricultural lands and the customers were coming into physical possession of their lands and doing whatever they wanted, be it constructing cottages, planting trees etc. This report therefore proves the bona .....

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e found with the business model of PACL per se. It is a real estate transaction simpliciter and cannot be held to be a CIS. l) Much has been said by contending that the land being sold is indeterminate and can be changed by PACL at any stage and therefore this is not a genuine real estate transaction. It is submitted that from the documents produced and relied by SEBI itself, which indeed were supplied to it by PACL, it is apparent that shortly after a customer approaches PACL, a specific plot i .....

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the customer based on some formula. It is submitted that argument is not correct because there in no material to show that there was any mathematical formula. Further, it is not as if some flats or big tracts of land are being sold that the location will make much of a difference to the value. What is in issue are very small sized barren agricultural plots mostly in rural areas. Moreover, being in the real estate industry for a long time, PACL has the necessary expertise to assess the value of .....

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uirement, in law, for running a CIS is registration with SEBI, and once that is done, there is no bar on running a CIS. When law provides that a CIS can seek registration and continue its activities then such a right cannot be taken away by the regulator. In the impugned judgment and order, the WTM has categorically held that natural consequence of his finding that PACL was running a CIS, would be to direct it to stop its activity and refund monies to is investors. When the Regulations provide t .....

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erson is running a CIS. p) SEBI had also originally offered registration to PACL by notices dated 30.11.1999 followed by second notice dated 10.12.1999. It is therefore apparent that at least in 1999, the understanding of SEBI also was that running a CIS is not illegal per se and even if PACL was running a CIS, it was only required to register itself with SEBI. Now that the Hon ble Supreme Court, by a consent order dated 26.02.2013, has revived these two notices dated 30.11.1999 and 10.12.1999, .....

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ed in the two notices. q) If at all SEBI was of the view that although the two notices had been revived but the opportunity of registration could still not be provided to PACL, despite the regulations and despite the order dated 26.02.2013, nothing prevented SEBI from seeking a clarification from the Hon ble Supreme Court. Failure to do so and its subsequent conduct, indicates that SEBI had decided that it cared two hoots about the orders of the Hon ble Supreme Court. The cavalier attitude of SE .....

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an a sham because SEBI had pre judged the issue. r) PACL cannot be faulted for trusting that the regulator would act in terms of its own notices and not resile, particularly when it had been directed to do so by the Hon ble Supreme Court. PACL could not have sought registration earlier because, on issuance of two notices/orders dated 30.11.1999 and 10.10.1999 which were stayed and ultimately set aside by the Rajasthan High Court. Till the Rajasthan High Court decision was set aside by the Apex C .....

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not avail this opportunity, it has missed the bus is without any merit. When there was a positive declaration that PACL is not running a CIS, then PACL was not expected to seek registration. Since the proceedings were pending before the WTM, SEBI could very easily have conveyed to PACL that it had a two month opportunity for registration. However, the WTM merrily proceeded without even a whisper in this regard. t) Regulations 68 to 72 provide for an existing CIS to seek registration and provide .....

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tion if granted, it had to be wound up in the specific manner provided by regulation 73. In such a case, regulation 73 provides for a detailed and specific procedure which has to be followed. As is evident, the entire procedure prescribed under Chapter IX, particularly regulation 73 has been given a complete go bye by the WTM in the impugned judgment and order. Regulation 73 had been placed in the statute book with a particular object and this object was to create a situation where the investors .....

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prescribed by regulation 73 cannot be given a go by. w) Argument of SEBI that powers under regulation 65 read with Section 11B of the Act override Chapter IX and justify the impugned directions is completely untenable. Regulation 65 is part of chapter dealing with Procedure in case of default . The invocation of powers under this chapter presuppose the existence of a default. In the present case, the question of any default would arise only after PACL is found to be a CIS. This determination ta .....

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of regulation 65. x) In any event, there is nothing in the regulations, which indicates that regulation 65 would override the provisions of Chapter IX. There is no quarrel with the proposition that SEBI wields wide powers under regulation 65 as also under Section 11B but that does not mean that these powers can be used to frustrate the other provisions of the regulations. An interpretation whose effect is that one provision completely abrogates another provision can never be a correct interpret .....

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are available in the present case and thus it can be safely said that there was no invocation of regulation 9(d) by SEBI and SEBI could not have invoked the said regulations. z) Argument of SEBI that PACL is not disclosing its assets despite directions by this Hon ble Tribunal is completely incorrect. In the affidavit filed before this Tribunal on 07.03.2015 it was pointed out that much prior to the impugned order being passed, CBI had raided the corporate office of PACL as also the store/godown .....

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tails of these assets on its own. What this entire exercise however shows is that the assets are substantial, that is why it is taking so long to prepare even seizure memos and they are safe, being in custody of the CBI. Accordingly, Mr. Nayar submitted that the impugned order ought to be quashed and set aside. 6. Mr. Subramaniam learned Senior Advocate appearing on behalf of appellants in Appeal No. 95 of 2015 while adopting the argument of the counsel for other appellants submitted orally and .....

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en satisfied, because, the statute does not contemplate that only part of the contributions pooled for acquiring the property be treated as CIS. In other words, if some of the properties conveyed to the customers on the basis of the contributions received from them are excluded, then, the requirement of Section 11AA(2)(i) cannot be said to have been complied with. b) PACL holds large land bank and enters into agreement with the customers for the development of the plot of land only. The business .....

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t all because, the said Section applies only if the contributions are pooled as a whole and not in part. c) Once the investments or property or contribution covered by Justice K. Swami Durai (Retd.) report are excluded, from the purview of CIS then it is apparent that the ingredient of Section 11AA(2)(iii) are also not complied with or available so as to hold that rest of the investments or property or contribution are covered by CIS. d) Report of Justice K. Swami Durai (Retd.) clearly shows tha .....

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on the one hand and holding that all the resources have been pooled, on the other hand, a finding which is unsustainable and impossible to arrive at. f) Regulations 68 to 74 contained in Chapter IX of the CIS Regulations envisage that where any company/person believes that the scheme floated by it does not fall within the mischief of Section 11AA, then it is open to SEBI on consideration of material facts to declare that the said scheme satisfies all the provisions of Section 11AA (2)(i) to (iv) .....

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provisional registration is not granted or, having obtained provisional registration has failed to comply with the conditions set out in regulation 71. In the impugned order, WTM of SEBI has ignored the procedure prescribed under regulation 73. i) In the impugned order PACL is denied an opportunity to repay to the existing investors in violation of regulation 74 read with regulation 73. j) Failure to give an opportunity to PACL to register under CIS Regulations is in contravention of the Apex Co .....

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Kamdar learned Advocate appearing on behalf of PACL Customer Association (Misc. Application No. 88 of 2015 in Appeal No. 368 of 2014) while adopting the arguments advanced by counsel for appellants tendered an affidavit filed by Mr. B.S. Rajawat on behalf of the Association. In that affidavit it is stated that as on date the Association represents more than 4.5 lac customers of PACL. It is stated in the affidavit that the members of the Association are satisfied with the activities of PACL qua .....

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he procedure prescribed under regulation 73 of the CIS regulations must be followed by forwarding the information memorandum to the customers so that they can make an informed decision as to what they would want to do with their money. It is further stated in the affidavit that by that time the Association is confident that more than 25% of the customers of PACL would want to continue with the schemes. 8. Mr. Gaurav Pachnanda learned Senior Advocate appearing on behalf of Mr. Balkaran Singh (app .....

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ingh, the said Mr. Balkaran Singh has been appointed as an Additional Director on the Board of PACL with effect from 5th February 2015 along with one Mr. Anil Choudhary Legha as Additional Director. Without allowing the application for impleadment, we permitted counsel for Mr. Balkaran Singh to make submissions as intervener. Accordingly, counsel for Mr. Balkaran Singh submitted that as per MOU dated 19th February 2015 Mr. Balkaran Singh was to hold 65% shareholding of PACL and the remaining 35% .....

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aying to customers counsel, for Mr. Balkaran Singh had no answer. 9. Mr. Padhi, learned Advocate appearing on behalf of applicant in Misc. Application No. 171 of 2015 in Appeal No. 368 of 2014 Vakola Welfare Association (Regd.) adopted arguments advanced by counsel for SEBI. 10. Mr. Khambata learned Senior Advocate appearing on behalf of SEBI extensively argued in support of the impugned order and also gave written submissions. Since we agree with most of the submissions, instead of separately r .....

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y Act 9 of 1995, Section 12(1B) inserted by Act 9 of 1995 and 11AA (1) & (2) inserted to SEBI Act by Act 31 of 1999 which read thus:- 11. Functions of Board (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein .....

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nsoring or causing to be sponsored, carrying or caused to be carried on any venture capital funds or collective investment scheme 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. (emphasis supplied) Section11AA(1)&(2)(with effect from 2 .....

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th 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. 14. Prior to insertion of Section 11AA to the SEBI Act with effect from 22.02.2000, the expression Collective .....

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to sponsor or carry on CIS after 25.01.1995 unless that person obtains a certificate of registration from SEBI. Proviso to Section 12(1B), however, permitted a person operating CIS prior to 25.01.1995 to continue with that CIS till such time regulations were made by SEBI. SEBI framed and notified CIS Regulations with effect from 15.10.1999. As per regulation 68 read with regulation 5 of CIS Regulations, a person operating a CIS on 15.10.1999 was obliged to make an application in the prescribed .....

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arying tenure, some of which have already been closed. 17. Since some of the schemes floated by PACL were existing on the date on which CIS Regulations came into force on 15.10.1999, PACL was required to seek registration within two months of CIS Regulations coming into force, only if the schemes were covered under CIS. When SEBI by its communications dated 30.11.1999 and 10.12.1999 informed that the schemes floated by PACL were covered under CIS and called upon PACL to comply with SEBI Act and .....

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ted 30.11.1999 and 10.12.1999 and ultimately by its order dated 28.11.2003, quashed the aforesaid communications of SEBI by holding that the schemes floated by PACL were not covered under CIS. In the meantime in a PIL filed before the Delhi High Court it was alleged that various companies including PACL were running CIS without obtaining certificate of registration from SEBI. On receiving report submitted by Justice Swami Durai (Retd.) to the effect that 14150 sale deeds executed by PACL in favo .....

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siness carried on by PACL falls under the category of CIS or not and depending upon that decision to proceed further in accordance with law after giving prior notice to PACL. Thereupon, SEBI carried out further investigation and issued supplementary show cause notice on 14.06.2013 and after giving personal hearing to the appellants passed the impugned order on 22.08.2014. 19. In the impugned order, it is observed that as per the schemes floated by PACL, the corpus was to be invested in barren la .....

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perts by demarcating, fencing, clearing, cultivating, planting and raising crops, trees, plants, saplings etc., use of fertilizers and pesticides, irrigation, harvesting and other activities allied and incidental thereto. At the time of investment by the investor, PACL neither had ownership of the land nor was it identified. Investment was invited on the assurance that PACL would arrange the land for the investor. PACL offered the land units at a uniform price irrespective of the location and co .....

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he scheme as provided under Section 11AA(2)(i) of the SEBI Act:- a) PACL collects money from customers/ investors against the purported sale of plot/land. The application form and the agreement are the primary documents taken by PACL from a customer for subscribing to its schemes. The documents such as application form and the agreement prepared by PACL contain a clause that the customer is applying for a plot of agricultural land and that the development and maintenance of the said plot shall b .....

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the land. If the transaction of PACL were real estate transactions, then PACL would have disclosed the location of the land/land availability at the time of application itself. By not providing such details at the time of application and informing about the same after passage of substantial time indicates that PACL pools the money received from the customers for purchasing the land. c) The registration letter also does not identify the land or even the specific State in which the land will be a .....

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to the customers by way of allotment letter, PACL reserves its right to change the location of the allotted of land. d) Argument of PACL that under the Cash Down Payment Plan ( CDPP Plan ) the land is allotted to the customers within a period generally not exceeding 270 days from the date of receipt of consideration and under the Investment Payment Plan ( IPP Plan ) the land is allotted within a period generally not exceeding 90 days from the date of receipt of 50% of the consideration amount, .....

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nted by PACL specifically provide that the land units offered to its investors being smaller in size and the land laws prohibit division of land into smaller units or division into smaller sizes may not be otherwise feasible or practical, the ownership of land will be transferred to the applicant/ land Unit Holder in joint holdings out of the larger land units as may be permissible. Thus, the customers/ investors would have the requisite shares along with other allottees/ transferees in a partic .....

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ump sets, temporary sheds, structures etc. Admittedly, PACL is an aggregator of land. Thus, the terms and conditions of the agreement which PACL enters into with its investors clearly shows that PACL pools the money collected from the customers for the purpose of its scheme i.e. procuring large tracts of land and developing the same. h) In the impugned order it is recorded that 64% of the total consideration is towards development and other charges and 36% of the consideration is towards the cos .....

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isfy the conditions set out under Section 11AA(2)(i) cannot be faulted. 21. Similarly decision of the WTM that the schemes run by PACL satisfy the conditions set out under Section 11AA(2)(ii) deserves acceptance for the following reasons:- a) Rule Book framed by PACL under the heading Aims & Objectives specified under Rule 2(d) offers maximum return on investment and benefit to the unit holders. Rule 5 provides that investment in PACL is a sound proposition as the price of the land is increa .....

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a view to receive profits, income produce or property. PACL had contended before SEBI that the Rule Book is replaced by a book called Pearls National Network . Neither before the WTM nor before this Tribunal the said book has been furnished. In these circumstances, in the absence of any material to contradict the contents of the Rule Book which is like a manual containing standard operating procedure, reliance placed on the said Rule Book cannot be faulted. b) Clause 4(a) of the printed applica .....

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ale deeds are held by the custodial services company and the customers only get a certified copy of the sale deed. Although PACL contended that the sale deeds are deposited with the custodial services company only in cases where the tenure of the agreement is continuing and further installments are yet to come, it is noticed in the impugned order that out of the 500 sample transactions provided by PACL, sale deeds of 334 customers who had opted for Cash Down Payment Plan, (where the entire consi .....

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lizable value is not specified by PACL. Assuming that PACL does not provide assured return, mere promise of expected value higher than the amount invested makes it clear that the contributions are made with a view to earning profit. Since the customers of PACL make contributions/ payment with a view to receive the profits, income and returns on their initial investments, decision of the WTM that the second condition stipulated under Section 11AA(2)(ii) of the SEBI Act stands satisfied cannot be .....

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tes that PACL would arrange for purchasing/ procuring land. Clause 3 of the agreement gives PACL right to develop and maintain the land. Clause 3 further stipulates that investors/customers shall not ordinarily interfere with the method and mode of development and maintenance of the land. The customer or investor merely has a right to tender suggestion. Clause 5 of the agreement stipulates that the land shall vest in the hands of PACL for development, cultivation or raising crops, planting trees .....

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together with 12.5% interest per annum from the date of agreement. The customer is not entitled to make any claim for any produce during the period of first six years. Thus, only customers who have opted for the plots beyond the period of six years have right to be credited with sale proceeds of the produce pertaining to the period beyond six years after deduction of direct/indirect harvesting, marketing, transportation cost, market taxes and levies etc. and service charges amounting to 5% of th .....

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o the customer after deducting 20% of the consideration comprising various cost and other incidental expenses. However, while repaying the customers who had preferred to opt out have been repaid almost exact amount of the expected value without making any deduction of 20% as stated in the agreement. d) Thus, the three main elements of the scheme floated by PACL i.e. i) acquisition of land ii) development of land iii) sale of land, are managed by PACL on behalf of the investors. e) Mr. Sukhdev Si .....

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emporary sheds, structures etc. g) Even-though the customer is stated to be an absolute owner and in exclusive possession of the agricultural land sold to him, in fact the customer has no exclusive ownership rights over the aforesaid facilities and in fact, has been barred from interfering with the aforesaid facilities and services in any manner, by the terms and conditions recorded in the sample agreements to sell and the sample sale deeds furnished by PACL. h) In all the 500 sample documents e .....

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out under Section 11AA(2)(iii) are satisfied cannot be faulted. 23. Decision of the WTM that the schemes run by PACL satisfy the condition set out under Section 11AA (2)(iv) deserves acceptance for the following reasons:- a) Clause 11 of the General Terms and Conditions of the application form stipulates that the possession of the land if allotted to the customer/investor would remain with PACL. Clause 13 stipulates that customers shall have right to retain or sell the land on expiry of the ten .....

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y of the trustees appointed by PACL. These conditions contained in the General Terms and Conditions of the application form are also incorporated in the agreement which the investor executes with PACL. b) Clause 1 of the agreement stipulates that only symbolic possession of the plot shall be handed over to the investors or customers immediately after the registration. Clause 3 of the agreement gives absolute discretion to PACL to manage development of the property including survey, demarcation, .....

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rds to 3000 square yards, it is not feasible for any investor to have control over the land of PACL or the development activities carried on by PACL. d) In all 500 random sample documents examined by SEBI, PACL had acquired special Power of Attorney in its favour from the purchaser. In the absence of any document produced by PACL evidencing implementation of the alleged self development option, the WTM has drawn adverse interference that PACL used to take special Power of Attorney from all the c .....

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re held with its custodial services company and that the customers only gets a certified copy of the sale deed for the reason that the tenure of the agreement being continuing and further installments are yet to be received. g) Clauses contained in the agreement to the effect that PACL shall have the right to develop and maintain the property and the customer shall not ordinarily interfere, clearly shows that the contribution/investment made by customers as well as plot of land are managed by PA .....

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affect sale and development of agricultural land, but to protect the interest of investors by regulating the schemes so that gullible investors reap the promised benefits and are not defrauded. Therefore, reliance placed by the WTM on decision of the Apex Court in case of PGF Ltd. cannot be faulted. 25. Strong reliance was placed by counsel for appellants on the report submitted by Justice K. Swami Durai (Retd.) to Delhi High Court on the basis of which the Delhi High Court had deleted the name .....

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onsidered by Justice K. Swami Durai. Only issue considered therein was, whether, the 14150 sale deeds executed by PACL were genuine or not. In fact pursuant to the subsequent order passed by Delhi High Court, Justice K. Swami Durai has verified and held that in all 19284 sale deeds executed by PACL in favour of its customers were genuine. Thus, neither Justice K. Swami Durai nor the Delhi High Court have considered the question as to whether the schemes floated by PACL constitute CIS or not. The .....

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refore, fact that 19284 sale deeds verified by Justice K. Swami Durai have been excluded from the purview of the impugned order would not in any affect the decision of SEBI in holding that the schemes floated by PACL constitute CIS. 27. It was strenuously argued by counsel for appellants that once part of the properties belonging to PACL are excluded from the purview of the impugned order (by accepting report of Justice K. Swami Durai) it cannot be said all conditions set out under Section 11AA .....

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as CIS under Section 11AA of SEBI Act. Accepting such an argument would defeat the object with which the provisions are enacted and would amount to promoting dishonesty. Secondly, 0.03% cases are left out not on the ground that those cases fall outside the purview of Section 11AA. Thirdly, even in respect of those cases, PACL has not obtained the encumbrance certificate as directed by Justice K. Swami Durai which would have established the status of the land holders after the sale deeds were reg .....

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year 1999 that the schemes of PACL are covered under CIS. Much water has flown thereafter. Various factors noticed in the impugned order passed after detailed investigation on 22.08.2014 were not before the Rajasthan High Court. Therefore, reliance placed on the Rajasthan High Court decision which is set aside by the Apex Court is totally misplaced. 29. Finding of fact recorded in the impugned order is that in t he guise of selling agricultural lands, PACL has collected 49,100 crore from 5.85 c .....

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PACL is unilaterally entitled to change the location of the plot allotted to a customer. Thus, a person to whom a plot of land is allotted in Tamil Nadu may be unilaterally altered by PACL and allotted a plot of land situate either at Orissa or Rajasthan. Since the agreement contained a buy-back option at a predetermined price, the WTM arrived at a conclusion that the alleged land transactions are nothing but sham CIS transactions. 30. SEBI was duty bound to protect the interest of investors by .....

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ecome victims of the schemes operated by PACL. The WTM was also justified in directing PACL to wind up the existing schemes and refund money to the customers with promised return. 31. The without prejudice proposal put up by PACL during the course of hearing before SEBI was merely an eye-wash, because in the said proposal nothing was disclosed as to how the claim of 5.85 crore customers from whom 49,100 crore was collected would be met in the next five years, especially when the value of the lan .....

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to arrange funds, counsel had no answer. In these circumstances, in our opinion, the WTM was justified in rejecting the without prejudice proposal made by PACL. 32. For all the aforesaid reasons the decision of SEBI in holding that PACL is not engaged in genuine sale of agricultural land but is engaged in running sham CIS and accordingly directing PACL to wind up its existing schemes and refund money to the customers with the promised returns cannot be faulted. 33. Appellants however strongly co .....

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ers dated 30.11.1999 and 10.12.1999 impugned in the writ petition filed before the High Court, which were set aside by the order impugned in these appeals, as well as, the order dated 24.06.2002 which order also got merged in the order impugned in these appeals, it was suggested to the learned counsel whether the impugned orders of the appellant dated 30.11.1999 and 10.12.1999, themselves can be treated as show cause notices and an opportunity to be extended afresh to the first respondent compan .....

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espondent Company as to whether it falls under the category of CIS or not and depending upon the ultimate order to be passed it may proceed further in accordance with law. The appellant shall before taking any further action give prior notice to the first respondent Company. 35. From the aforesaid order it is clear that the Apex Court required SEBI, first to hear PACL on the issue as to whether the schemes of PACL fall within the category of CIS or not and thereafter depending upon that decision .....

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eclude SEBI from exercising power under Section 11/11B in exceptional cases like the present one, if the transactions were found to be sham transactions and were detrimental to the interests of investors. In other words, while directing SEBI to follow the procedure prescribed under the CIS Regulations, Apex Court did not bar SEBI from exercising power under Section 11/11B of the SEBI Act, in the interest of investors if the situation so demands. 37. Where a person carries on business under a bon .....

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e prescribed under the CIS Regulations would be travesty of justice and wholly prejudicial to the interests of investors. 38. Argument of the appellants is that the Apex Court order contemplated two stage hearing i.e. in the first stage to pass an order on the question as to whether the schemes of PACL constitute CIS or not and if held to be CIS, then initiate second stage proceedings for passing consequential order, only if the decision of SEBI holding that the schemes of PACL are covered under .....

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espect of those schemes covered under CIS which are operated in a manner not detrimental to the interest of investors, the question of following the procedure prescribed under the CIS Regulations arises. Even in such cases, consequential order like provisional registration has to be passed immediately after holding that the schemes are covered under CIS and SEBI cannot wait till the issue relating to CIS is finally determined by the Apex Court. Any scheme once held to be covered under CIS has to .....

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SEBI Act read with regulation 65 of CIS Regulations immediately after concluding that the schemes floated by PACL are covered under CIS, cannot be faulted. Consequently, question of permitting registration under regulation 68 read with regulation 5 or to direct winding up under regulation 73/74 of the CIS Regulations did not arise in the present case. 40. It is contended on behalf of the appellants that in para 38 of the impugned order the WTM has erroneously held that the schemes operated by PA .....

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flage their activity as CIS (Page 311 & 322 of the Memorandum of Appeal). Since we concur with the view of SEBI that PACL in the guise of running real estate business was running CIS which was detrimental to the interest of investors, decision of SEBI in directing PACL to wind up its schemes and repay the money collected from the investors with promised return cannot be faulted. 41. It is contended on behalf of the appellants that the value of the total lands held by PACL as disclosed in the .....

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state the value of the lands in their custody, it is reasonable to hold that the barren lands acquired by PACL continues to be barren land. Thus, it is apparent that as against the amount of 49,100 crore collected from 5.85 crore investors promising them agricultural land, the value of the land held by PACL as on 31.03.2014 only is 11,706.96 crore. Since the lands held by PACL are wholly disproportionate to the amounts collected from the customers and there is nothing on record to suggest that P .....

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was held to be CIS and since the said CIS was carried on without obtaining registration from SEBI, the CIS was ordered to be wound up under Section 11,11B of SEBI Act read with regulation 65 and 73 of CIS Regulations. While upholding the order of SEBI and rejecting the argument of Alchemist that regulation 73 cannot be applied to a CIS floated after the CIS Regulations came into force, this Tribunal in para 17 held that the provisions for winding up contained in regulation 73 is applicable to CI .....

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IS floated after the CIS Regulations came into force without obtaining certificate of registration from SEBI is liable to be wound up under the regulation 65 read with regulation 73 of the CIS Regulations. Therefore, the argument that in view of the decision of this Tribunal in case of Alchemist Infra Realty Ltd. (supra) PACL has a right to seek registration under CIS Regulations cannot be accepted. 43. Argument of SEBI that the decision of this Tribunal in case of Alchemist Infra Realty Ltd. (s .....

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and not under regulation 73, then, in the first instance SEBI must have the audacity to state that its decision in case of Alchemist Infra Realty Ltd. (supra) to the extent it ordered winding under regulation 73 was per incuriam. SEBI cannot merely state that it has now altered its view and continue to contend that the decision of this Tribunal in case of Alchemist (supra) is per incuriam. In other words, without admitting that its decision in case of Alchemist directing winding up under Regulat .....

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g on business in accordance with law and in the present case, once it was found that the land transactions under the schemes operated by PACL were sham transactions and were detrimental to the interest of the investors, then it was the bounden duty of SEBI to direct winding up such schemes and direct PACL to refund the amount collected from the customers with promised return within the stipulated time. 45. In support of the contention that SEBI was bound to follow the directions contained in the .....

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under the CIS Regulations, even if the schemes were operated in a manner which were prejudicial to the interest of investors. Therefore, the directions given by the Apex Court in relation to the consequential order being subject to the powers of SEBI to take remedial measures in the interest of investors under Section 11/11B, in the facts of present case, no fault can be found with the decision impugned in these appeals. 46. Similarly, decision of the Apex Court in case of L.K. Ratna (supra) is .....

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l order under Section 11/11B of SEBI Act. Hence, the above decision has no relevance in the facts of present case. 47. Argument that once the schemes of PACL were held to be covered under CIS, regulation 74A was attracted and therefore PACL was entitled to seek registration within two months of CIS Regulations coming into force is also without any merit. Regulation 74A inserted to CIS Regulations with effect from 09.01.2014 is applicable only to deemed CIS covered under the proviso to Section 11 .....

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y scheme involving corpus amount of 100 crore or more which satisfy the conditions set out under Section 11AA(2) would be outside the purview of deeming fiction introduced under the proviso to Section 11AA(1). Regulation 74A is restricted to CIS which are deemed to be CIS under the proviso to Section 11AA(1) and 74A is not intended to offer amnesty to the CIS which were covered under Section 11AA(1) prior to the insertion of proviso to Section 11AA(1) of SEBI Act. Since the schemes operated by P .....

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tion represents more than 4.5 lac customers of PACL and the said customers are satisfied with the activities of PACL qua its customers. It is also stated that PACL has been allotting land to its customers faithfully. When questioned as to whether the members of the Association have got sale deeds executed in their favour even though the period specified in the schemes have expired, counsel for the Association had no answer. Since, all the sale deeds executed by PACL have been verified by Justice .....

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g CIS and refund the money collected from the customers with promised return cannot be faulted. 49. To sum up:- a) By inserting Section 12(1B) to SEBI Act legislature has made it mandatory for any person to obtain a certificate of registration for operating CIS with effect from 25.01.1995. In respect of CIS operating prior to insertion of Section 12(1B) for which no certificate of registration was required, proviso to Section 12(1B) provides that such CIS may continue to operate till such time r .....

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ulations came into force. b) Where a person is found to be operating a CIS after the CIS Regulations came into force, without obtaining a certificate of registration, then, in the interest of investors, SEBI may under Section 11/11B of SEBI Act direct that person either to wind up the CIS or comply with the CIS Regulations by seeking certificate of registration from SEBI. c) Admittedly, some of the schemes floated by PACL were existing on 15.10.1999. In respect of those schemes, PACL was require .....

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gulation 73/74 of the CIS Regulations. e) Since the aforesaid communications were stayed and ultimately set aside by the Rajasthan High Court on 28th November, 2003 on ground that the schemes floated by PACL were not CIS, PACL was not required to obtain certificate of registration from SEBI for operating the schemes floated by it. f) Apex Court on 26th February 2013 set aside the decision of the Rajasthan High Court dated 28th November, 2003 and directed SEBI to treat the communications dated 30 .....

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ing any future action SEBI was directed to give prior notice to PACL. Accordingly, on completion of investigation, SEBI issued supplementary show cause notice on 14th June, 2013 and after hearing the appellants impugned order was passed on 22.08.2014. g) For the reasons stated in the impugned order, decision of SEBI that in the guise of running real estate business, PACL is running sham CIS which are detrimental to the interest of investors and consequently directing PACL to wind up the existing .....

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