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Citrus Check Inns Ltd. and Others Versus Securities and Exchange Board of India

2016 (3) TMI 764 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Registration as CIS under the CIS Regulations - Regulations framed by SEBI - whether SEBI is justified in turning down a request made by the Appellant by way of a Miscellaneous Application before this Tribunal seeking registration as CIS under the CIS Regulations, without prejudice to its right to contend that the schemes operated by it are not covered under CIS? - Held that:- We direct the appellants to make a without prejudice application seeking registration in respect of the refundable schem .....

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consider grant of final registration to the Appellants in accordance with law in due course of time. Needless to say that SEBI shall make an endeavor to complete the pending investigation expeditiously against the appellants so that the prima facie view of SEBI regarding the business activities of the appellants attains finality before hand in one way or the other.

For all the aforesaid reasons, while upholding the prima facie view of SEBI that the business carried on by the appellant .....

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law, so that the schemes being operated by the Appellants are henceforth regulated so that the investors’ interests are effectively and properly protected by SEBI. Till the date of granting provisional registration, the Appellants may continue to receive subscription amount from the investors under the existing schemes. However, the accounts / records of the amounts collected thereunder, shall be maintained in a separate account and appellants shall not launch any new scheme except in accordanc .....

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Co. For The Respondent : Mr. J. P. Sen, Senior Advocate with Mr. Tomu Francis, Advocate Per : Jog Singh 1. The question that falls for our consideration in these two appeals is whether SEBI by its confirmatory order dated August 24, 2015 is justified in continuing the directions contained in the ex-parte interim order dated June 3, 2015 until further orders. Connected with this is the issue as to whether SEBI is justified in turning down a request made by the Appellant by way of a Miscellaneous .....

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2015 and 359 of 2015 in which the Appellants challenged the ad-interim ex-parte order / directions, which, according to the Appellants, practically amounted to abrupt and arbitrary closure of the business bringing everything to a standstill without first hearing the Appellants. 3. By the ex-parte ad-interim order dated June 3, 2015, the appellant company and its Directors were called upon to do or to abstain from doing something. The same is relevant and is reproduced hereinbelow for the sake o .....

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assets obtained directly or indirectly through money raised by Citrus; • Not to divert any funds raised from public at large, kept in bank account(s) and / or in the custody of Citrus or group companies or promoters or LLPs or Proprietary concerns or any person directly or indirectly controlled through shareholding or management by citrus; • To furnish all the information / details sought by SEBI within 15 days from the date of receipt of this order including the following :- • Fu .....

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tated in Clause 29 of the Offer Document ). • Details of charges created on its assets by Citrus. • Details of amounts mobilized as on March 31, 2014 and March 31, 2015 under its various holiday plans / schemes. • Details of commission paid on amounts mobilized above. • Details of agents along with their addresses etc. • Audited accounts for the financial year i.e. FY 2012-13, 2013-14 and 2014-15. • Income tax returns for FY 2012-13, 2013-14 and 2014-15. • Deta .....

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, 2015, In this view of the matter, without going into the merits of the case, we direct the appellants to file their reply, if any, on or before August 10, 2015 and the WTM of SEBI is directed to hear the appellants on or before August 13, 2015 and thereafter pass appropriate order thereon and communicate the same to the appellants on or before August 24, 2015. It is made clear that the hearing shall be restricted to the question as to whether the prima facie view contained in the ex-parte ad i .....

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arned WTM of the Respondent has passed the present impugned order dated August 24, 2015, after hearing them and seeking their written submissions, basically reiterating the earlier ad-interim ex-parte order dated June 3, 2015 passed against the Appellants. The operative portion of the order dated August 24, 2015 is also reproduced below :- 12. As also noted earlier the documents / details submitted by the Company have to be examined in detail, in the light of submissions made and the discussion .....

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mpany is in the nature of CIS as prima facie observed in the interim order. SEBI is advised to expeditiously conclude the investigation and proceed in accordance with law. 13. In view of the foregoing, I , in exercise of the powers conferred upon me under sections 11(1), 11(4) and 11B of the SEBI Act, 1992 read with Regulation 65 of SEBI (Collective Investment Schemes) Regulations, 1999, hereby confirm the directions issued vide the SEBI interim order dated June 03, 2015 against Citrus Check Inn .....

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ri Pradeep Sancheti, who appeared with Mr. C. D. Mehta and Ms. Rashida Sawliwala, learned advocates, has urged that there is no compliance with the directions of this Tribunal contained in its order dated August 6, 2015. The opportunity given by the learned WTM to the appellant before passing the impugned order is no more than a farce. No final order as directed by this Tribunal has been passed by the respondent in compliance with the directions of the tribunal but a so-called confirmatory order .....

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business amounted to a CIS. This has not been done and as such the prima facie view is based on conjecture, surmises and even suspicion. Similarly, the submissions of the appellants before the learned WTM regarding balance of convenience, which lies in favour of the appellants to continue the schemes in the larger interest of about 4.5 lacs members and irreparable loss that would be caused to the appellants and its members if the ad-interim ex-parte order is not recalled or modified, have been c .....

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on presented by SEBI. The Appellant carries on two types of time-sharing schemes and some of them do not involve any element of refund of profit and hence no promise of any return by the Appellant. Such schemes have always treated as not covered by the CIS Regulations or the definition thereof in Section 11 AA by SEBI itself. (c) That the impugned order is based on conjectures and farfetched surmises that have not been justified in the order by analysing the facts of the present case. The impugn .....

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have, however, been sent to the Appellant during the pendency of proceedings before this Tribunal on or around August 6, 2015. (e) The Royal Twinkle Star Club Ltd. and the appellant are two distinct entities. The circumstances surrounding the former cannot be used to make the case against the appellant stronger. Moreover, the SCN does not make any reference to the schemes of Royal Twinkle Star Club Ltd., and as such reliance placed by the Respondent on an order dated August 21, 2015 in respect .....

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mpugned order that there seems to be diversion of funds collected from the investors / members based on the audited Profit and Loss A/c and balance sheets submitted by the appellant himself has been arrived at in violation of the law laid down by the Hon ble Supreme Court in S. L. Kapoor Vs Jagmohan reported in AIR 1981 SC page 153 particularly paragraph 16 thereof. The submission of the appellant is that the respondent could not have drawn a conclusion merely on the basis of certain material wi .....

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d the material and written submissions preferred by the appellants during that hearing are all meaningless because nothing has been considered by the learned WTM in passing the so called confirmatory order and has simply reiterated the stand taken by SEBI in the ad-interim ex-parte order. In this connection, our attention has been drawn towards the judgment of Hon ble Supreme Court in the case of Nandkishore Vs State of Bihar reported in (1978) 3 SCC page 366 at paragraph 19 and the case of Bank .....

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ant has referred to following judgments :- • Pancard Clubs Ltd. vs. SEBI (SAT Appeal No. 254 of 2014 dated September 17, 2014) • Zenith Infotech Ltd. & Ors. Vs. SEBI & Ors. (SAT Appeal No. 59 of 2013 dated July 23, 2013) • Commissioner of Central Excise, Bangalore vs. Brindavan Beverages Pvt. Ltd. & Ors. (2007) 5 SCC 388 • M. A. Jackson vs. Collector of Customs (1998) 1 SCC 198 • Union of India and Anr. Vs. GTC Industries Ltd. Bombay (2003) 5 SCC 106 • S .....

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by the learned WTM after affording an opportunity of hearing to the appellant as per the directions of this Tribunal. The appellant has availed of this opportunity and has even furnished written submissions. Therefore, he cannot challenge the same before this Tribunal as the main issue as to whether the activities of the appellant fall within the definition of CIS has been under investigation of SEBI and final view has yet to be arrived at. It is only with a view to protect the investors intere .....

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tained registration with SEBI prior to commencement of its activities of time sharing business as the same are in the nature of the CIS. We may, however, pertinently note that the appellants request for applying registration under the CIS Regulations during the course of hearing, of course, without prejudice to their rights and contentions raised in their appeal, was flatly turned down by the learned senior counsel on instruction from his client i.e. the Respondent. 15. Shri Sen further contende .....

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Ltd. and its directors, who are common with the Appellant, not to carry on with the CIS Schemes earlier floated by Royal Twinkle Star Club Ltd. The order in the case of Royal Twinkle Star Club Ltd. also restrains its directors from accessing the capital market. It is also submitted on behalf of the Respondent that pursuant to plans / schemes of Citrus as well as Royal Twinkle, a substantial amount is redeemable. Further, elaborating this point, it is contended by Shri Sen that in case of redeem .....

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I Developers India Ltd. & Ors. Vs. SEBI (SAT Appeal No. 225 of 2012 dated July 23, 2013) • Maitreya Services Pvt. Ltd. & Ors. Vs. SEBI (SAT Appeal No. 88 of 2013 dated July 23, 2015) • Alchemist Infra Realty Ltd. & Ors. Vs. SEBI (SAT Appeal No. 124 of 2013 dated July 23, 2013) • Rose Valley Hotels and Entertainment Ltd. & Ors. Vs. State of Assam & Ors. (Writ Petition No. 4298 of 2013 in the Hon ble Guwahati High Court at Guwahati dated June 29, 2015) 18. We hav .....

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can be termed as nonrefundable schemes. The dispute now remains only with respect to other refundable schemes floated by the appellants. 19. We would like to deal and analyse the main contentions advanced on behalf of the appellants by Shri Sancheti reproduced herein above in paras 7(a) to para 7(f) and the response of Shri Sen on behalf of SEBI in respect of each of those submissions and our findings thereon. 20. Regarding 7(a) that there was no emergent situation or extreme urgency for invoki .....

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ine manner and even for coming to a prima facie view as regards the nature of the appellants activities of time sharing business to fall within the definition of CIS, there has to be sufficient material / evidence on record which could have motivated the respondent to form such a prima facie view which, in turn, has far-reaching and damaging effect on the appellant s business. Such a prima facie view or prima facie finding by the respondent either in the show cause notice or in the impugned orde .....

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he ex-parte order came to be passed against it. Since the investigation itself is going on in the matter undertaken by SEBI and has not yet achieved finality, both the parties should cooperate in expediting the matter so that the respondent can pass final orders after completing fact finding exercise as per law. 21. In this connection, Shri Sancheti has also relied upon judgment of this Tribunal in the case of Pancard (supra). That decision is somewhat distinguishable on facts, because, at the t .....

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ati High Court by recording that if interest on deposit under the scheme is the alluring factor on part of the investor, then the case would squarely fall under Section 11AA(2)(ii) of SEBI Act. In view of above distinguishing factor which took place subsequent to our order in case of Pancard appellants are not justified in relying on the order passed in case of Pancard. 22. As regards 7(b), it was submitted that the time sharing business carried on by the appellant does not amount to CIS. There .....

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continue to operate similar schemes but the appellants are restrained form operating similar schemes. It is true that the WTM of SEBI has failed to consider these arguments in the confirmatory order. However, during the course of arguments it is brought to our notice that in the schemes floated by Club Mahindra, Sterling Resorts, Country Club etc. there is no provision for refunding the amount invested with promised return, whereas, in certain schemes operated by appellants, there is provision .....

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neither any information in the nature of comparative data or analysis with regard to the similarities / dissimilarities of the holiday plan of the two companies was furnished by the respondent to the appellant nor any summary statement or material was sought from the appellant by the learned WTM before passing the impugned order. In this regard we may pertinently refer to the judgment of Hon ble Supreme Court in the case of Commissioner of Central Excise, Bangalore Vs Brindavan Beverages (P) Ltd .....

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le that is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice. In the instant case, what the appellant has tried to highlight is the alleged connection between the various concerns. That is not sufficient to proceed against the respondents unless it is shown that they were parties to the arrangements, if any. As no sufficient material much less any material has been placed on record to substantiate the stand of the appe .....

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indavan Beverages the Hon ble Supreme Court was pleased to set aside the SCN in that case. However, in the case in hand, we find that irrespective of certain differences in the schemes of both the companies, the basic concept in the schemes of both companies is identical. 25. As regards 7(d), that the basis of SCN seems to be certain complaints mentioned therein which have not been supplied to the appellant before hand and in totality. After hearing the parties and perusing the material produced .....

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llants on those complaints before passing the impugned order. This according to the appellant, amounts to violation of the principles of natural justice. Similarly, copy of the reference received from RBI received on December 17, 2014 as mentioned in the SCN has never been supplied to the appellants though relied upon by the respondent. 26. After considering the rival submissions of the parties on this point, we find some force in the contention raised by Shri Sancheti. We note that the Hon ble .....

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o supply legible copy of the material / complaints relied upon by it in the show cause notice forthwith and before starting investigation in question. 27. As regards 7(e) it is contended that the respondent has travelled beyond the show cause notice inasmuch as it has taken into consideration an order dated August 21, 2015 pertaining to Royal Twinkle Star Club Ltd. after the appellant had already concluded hearing on August 13, 2015 when no such order dated August 21, 2015 could have been in exi .....

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sued by Royal Twinkle mentioning therein various schemes to be floated by Citrus. This factual aspect also needs to be considered by the WTM duly appreciating the rival contentions of the parties. The Appellant has been contending all along that the commonality of directors alone may not per se lead to a conclusion that the two companies are intimately connected or interdependent. It has been maintained by the Appellant that the two companies have completely different and exclusive legal identit .....

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no mention of salient features of various schemes earlier floated by Royal Twinkle Star Club Ltd. and later on by Citrus. It is a matter of record that Royal Twinkle closed its operations prior to the commencement of the new and re-modelled schemes launched by Citrus. Prima facie, both the companies are different and have separate legal existence. In this connection, the judgment of Hon ble Supreme Court, in the case of Brindavan Beverages (supra) has already been discussed hereinabove. 28. Furt .....

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registration from SEBI without prejudice to its contention that the schemes are not covered under CIS. Shri Sen, learned senior counsel for SEBI, on instructions, submitted that since the appellants have operated CIS in violation of CIS Regulations without seeking registration within the time stipulated therein, the question of permitting the appellants to seek registration at this belated stage does not arise. 30. When we look at the historical background of the concept of Collective Investment .....

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of registration from the SEBI was obtained in accordance with the Regulations. Such Regulations, however, came into existence only in the year 1999 which also mandated registration of various collective investment schemes hitherto remained unregulated. It is, thus, evident that the fundamental legislative purpose in entrusting SEBI with the affairs of various collective investment schemes companies is to register and regulate them under the Regulations so that the interest of crores and crores .....

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hat company has become defunct. It is a matter of records that since 1999 till date SEBI has unearthed several cases, where the companies are found to have floated and operated CIS without registration and without being regulated by SEBI. Obviously it means that the companies prefer to float and operate CIS without being registered and without being regulated by SEBI. It is only when crores and crores of investors after investing crores and crores of rupees in various schemes have approached SEB .....

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e number of customers are substantially using the holiday plans. The number of users in the last three years has constantly increased from about 800-900 in the first year to about 3500 in the second year. The number of users has crossed 73000 members in the third year. In the fourth and fifth year the appellant is expecting that atleast 50 % of the members would be using the holiday plans, which would substantially reduce the liability of the appellant to refund the money as per the basic modali .....

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after holding the investigation into the whole matter as directed by the learned WTM in para 12 of the impugned order itself. 34. Similarly, the appellant has stated on oath in his affidavit that he would not deal with the assets except for the purpose of meeting day-to-day obligations and liabilities in the normal course of business. The appellant also undertakes to maintain a separate account of amounts which the appellant might receive in respect of existing schemes. The same would also be f .....

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this order, the learned WTM has placed reliance on the findings in respect of the order dated August 21, 2015 passed by Respondent, against Royal Twinkle Star Club Ltd., which is a different company. We are of the considered opinion that without supplying a copy of the order dated August 21, 2015, to the Appellant, and seeking its response thereto, the learned WTM should not have passed the impugned order in a hurry, if the said order of Royal Twinkle was to be considered so essential to be reli .....

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ave agreed to be regulated by SEBI without prejudice to their rights and contentions that the schemes in question are not covered under CIS, we direct the appellants to make a without prejudice application seeking registration in respect of the refundable schemes in question preferably within one week from today and further direct SEBI to grant provisional registration to the Appellants as per the procedure prescribed under the CIS Regulations so that interest of investors / customers do not suf .....

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