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2015 (8) TMI 993 - SECURITIES APPELLATE TRIBUNAL MUMBAI

2015 (8) TMI 993 - SECURITIES APPELLATE TRIBUNAL MUMBAI - TMI - 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 certifica .....

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compliance, direction to wind up existing CIS and refund money collected 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 wit .....

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cates i/b Parekh & Co. For The Respondent : Mr. Darius Khambata, 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 ( .....

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c question raised in all these appeals. 2. Appeal No. 368 of 2014 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 .....

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utory directions under Section 16 of the SEBI Act directing SEBI 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 co .....

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seeking deletion of its name from the list of the respondents in 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 call .....

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withdraw the notices dated 30.11.1999 and dated 10.12.1999. h) By 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 o .....

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ession of the said lands in question either as direct owner or owner 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 cust .....

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from the list of the respondents in the PIL and further directed 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 decisio .....

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fore taking any future action SEBI shall give prior notice to PACL. 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 t .....

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as a natural consequence directed PACL/its directors and promoters 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 rec .....

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ision is wholly distinguishable on facts, because, monies received 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 i .....

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emonstrate pooling of funds, it is incumbent on SEBI to show that 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 g .....

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en agricultural lands, PACL knows how and to what extent the land 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 ins .....

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when demanded. In fact in several cases, as verified by Justice 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 treat .....

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customers. PACL is unable to provide full disclosure of all its 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 .....

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CIS or not; ii) depending on that order proceed further in accordance 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 woul .....

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here was any doubt regarding the two stage hearing prescribed by 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 .....

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hile accepting the ratio of Leary s case has held that the general 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 Tribu .....

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s held for the first time on 22.08.2014 that the business carried 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 di .....

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rsuant to the orders passed by the Delhi High Court, Rajasthan High 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 d .....

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t PACL is legally entitled to challenge the impugned decision of 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 .....

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urther without giving a separate hearing to the appellants as regards 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 ca .....

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considering regulations 9,10 and 12 etc. Regulation 12 specifically 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) th .....

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time by the impugned order it is held by SEBI that PACL is running 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 10.12.19 .....

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ht up to 2013 and further there being no determination against PACL 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 whe .....

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PACL has been defying law since 1999, which is totally incorrect, 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 b .....

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o be a determination as to whether or not PACL is entitled to register 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 as .....

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u) Argument of SEBI that the power to wind up the CIS dehors Chapter 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 .....

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hat the powers of SEBI under regulation 65 and Section 11B remain 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 .....

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this Tribunal or ultimately the Apex Court holds that PACL is not 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 Art .....

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ected… . Since the proposal dated 11.08.2014 was made without 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, .....

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ns contained in the without prejudice proposal. An admission must 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 liab .....

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d judgment and order is passed in violation of the procedure prescribed 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 runn .....

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t aside in its entirety and require the WTM to decide afresh both 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 f .....

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t has prescribed a procedure for doing a thing in a particular manner 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 s .....

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edure has prejudiced not only PACL but also its investors. f) The 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 .....

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ave to be held to be running a CIS, which can certainly not be the 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 an .....

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ete and the sale deed is executed, PACL does not manage the property 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 .....

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, it could not have been held that PACL has been running a CIS. 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 .....

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03.2003 (pg 133-134 of appeal paperbook) discharged the notice against 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 .....

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o be accepted, it certifies the genuineness of only 0.03% of the 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 cot .....

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ds executed in their favour or choose to opt out, no fault can be 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 .....

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alue of plots but some return promised on the investment made by 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 lon .....

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acto not illegal and only registration is required. The only requirement, 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 a .....

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onies can never be the natural consequence of a finding that a person 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, .....

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s but would not provide PACL the opportunity specifically provided 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 .....

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ire exercise undertaken by the WTM was therefore nothing more than 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. Ti .....

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the second time in 2014 under regulation 74A and since PACL did 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 .....

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SEBI or failed to comply with conditions of provisional registration 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 obje .....

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vail because even if that were the case, even then the procedure 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 a .....

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d be no default and without default there would be no invocation 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 complet .....

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or invoking such power. Admittedly, none of above three grounds 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 .....

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ver was there, therefore PACL is handicapped in providing the details 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 ar .....

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all conditions set out under Section 11AA (2)(i) to (iv) have been 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 cust .....

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a case Section 11AA 2(i) & (ii) would have no application at 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 CI .....

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ts made by the customers from the purview of the impugned order 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 sc .....

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arises only if there is failure to apply for registration or if 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 r .....

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the impugned order is liable to be quashed and set aside. 7. Mr. 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 o .....

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ACL does not seek registration or registration is refused then the 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 learne .....

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brata Bhattacharya and Mr. Gurjant Singh Gill and Mr. Balkaran Singh, 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 .....

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d as to how much time would be required to arrange funds for repaying 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. Sinc .....

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ontentions, we may quote Section 11(1), 11(2)© as amended by 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 generali .....

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in accordance with the regulations: Provided that any person sponsoring 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 3 .....

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ments 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. 14. Prior to insertion of Section 11AA to the .....

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on 12(1B) inserted with effect from 25.01.1995 barred any person 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 .....

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on 15.12.1997. Remaining schemes floated after 01.10.2002 had varying 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 cov .....

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n High Court initially stayed the said communications of SEBI dated 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 (Ret .....

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otices and pass fresh order on the question as to whether the business 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 sch .....

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maintain the lands in consultation with agro consultants and experts 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 l .....

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by the investors were pooled and utilized for the purposes of the 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 a .....

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cation/agreement, PACL is only making arrangements for procuring 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 .....

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are treated as a homogeneous commodity. While allotting the land 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 da .....

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itions of the application form and clause 1 of the Agreement printed 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 requ .....

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gation and drainage system, pipelines, electrical lines, motor pump 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 a .....

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cumstances, decision of WTM that the schemes floated by PACL satisfy 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 i .....

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evident that the investments were sought from the investors with 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 Ru .....

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on expiry of the agreement. On execution of the sale deed, the sale 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 w .....

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by PACL. d) Criteria for fixing the expected value/estimated realizable 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 .....

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egistration letter itself. The recitals of the agreement stipulates 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 PA .....

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the agreed manner the investor would be entitled to get refund 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 .....

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yments received under the said plan are refundable immediately to 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, a .....

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drainage system, pipelines, electrical lines, motor pump sets, temporary 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 sa .....

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f the scheme, on behalf of the investors and hence condition set 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 .....

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ed, the title deeds of the land shall be kept in the safe custody 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 ma .....

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in number, own small pieces of lands ranging from 150 square yards 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 .....

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ecution of the sale deed PACL has stated t hat, the sale deeds are 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/invest .....

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the Apex Court order, object of Section 11AA is not intended to 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 .....

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were covered under CIS or not, was neither an issue raised nor considered 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 t .....

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obtained by PACL in respect of 19284 sale deeds registered. Therefore, 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 Dur .....

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ount of 0.03% investors being excluded, PACL cannot be declared 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 establis .....

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s rendered while considering the prima facie view of SEBI in the 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 .....

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n which it is situated. Apart from the above, under the schemes, 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. .....

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ng money from the investors so that no more gullible investors become 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 .....

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be arranged and how much time Mr. Balkaran Singh would require 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 promis .....

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After hearing the respective counsel and after noticing the orders 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 .....

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ass fresh orders as regards the business activity of the first respondent 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 ca .....

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of the CIS Regulations. Apex Court decision, however, did not preclude 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 situatio .....

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ting that person to wind up the scheme by following the procedure 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 dec .....

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iate direction under Section 11/11B of SEBI Act. It is only in respect 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 .....

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cision of SEBI in invoking jurisdiction under Section 11/11B of 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 or .....

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it is running real estate business is a facade and sham to camouflage 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 th .....

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ands are in the custody of PACL and if appellants are unable to 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 fro .....

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floated by Alchemist, after the CIS Regulations came into force 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 provisio .....

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cided by SEBI as also by this Tribunal in Alchemist was that a CIS 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 dec .....

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Alchemist winding up could be ordered only under regulation 65 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 .....

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y merit because right to carry on business is subject to carrying 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 contenti .....

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consider granting registration or winding up the schemes of PACL 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. Simila .....

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er hearing the appellants it was deemed fit to pass consequential 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 appli .....

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tion 74A coming into force. Obviously, pooling of funds under any 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 .....

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Customer Association stating therein that at present the Association 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, a .....

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ordingly directing PACL and its directors to wind up the existing 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) .....

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rtificate of registration from SEBI is illegal after the CIS Regulations 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 exist .....

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up the schemes and repay to the customers as stipulated under regulation 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 Novem .....

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t decision proceed further in accordance with law and before taking 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 i .....

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