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2016 (3) TMI 835 - SECURITIES APPELLATE TRIBUNAL MUMBAI

2016 (3) TMI 835 - SECURITIES APPELLATE TRIBUNAL MUMBAI - TMI - Invalid CIS scheme - non seeking registration with SEBI - collection of subscription amount after the ex-parte interim order - refund to investors - Held that:- While upholding the decision of SEBI that the Appellants have floated and operated CIS without registering with SEBI and hence in violation of CIS Regulations, since the schemes are closed by the Appellants voluntarily and substantial amount is refunded to the investors, we .....

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ant : Mr. Pradeep Sancheti, Senior Advocate a/w Mr. Neville Lashkari, Advocate i/b Ms. Sonu Tandon Advocate For The Respondent : Mr. J. P. Sen, Senior Advocate a/w Mr. Tomu Francis, Advocate 1. These two Appeals have been preferred by Appellants against a common impugned order dated 21st August, 2015 passed by the Respondent against them. Appellant in Appeal No.436 of 2015, namely, Royal Twinkle Star Club Private Ltd. (hereinafter RTSCL) is an unlisted company whereas four Appellants in Appeal N .....

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ities market by imposing a prohibition of four years in this regard. The precise directions issued by the said impugned order dated 21st August, 2015 are reproduced below:- a. Royal Twinkle Star Club Limited and its Directors, namely, Mr. Omprakash Basantlal Goenka [PAN: AECPG3854J], Mr. Prakash Ganpat Utekar [PAN: AALPU9100E], Mr. Venkatraman Natrajan [PAN: ACUPV4686K] and Mr. Narayan Shivram Kotnis [PAN: ABIPK5022D] shall abstain from collecting any money from the investors or launch or carry .....

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lub Limited and its Directors, namely, Mr. Omprakash Basantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis shall wind up the existing Collective Investment Schemes and refund the money collected by the said company under the schemes with returns which are due to its investors as per the terms of offer within a period of three months from the date of this Order and thereafter within a period of fifteen days, submit a winding up and repayment report t .....

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al Twinkle Star Club Limited except for the purpose of making refunds to its investors as directed above. e. Royal Twinkle Star Club Limited and its Directors, namely, Mr. Omprakash Basantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis are also directed to provide a full inventory of all their assets and properties and details of all their bank accounts, demat accounts and holdings of shares/securities, if held in physical form. f. In the event of f .....

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uld further be prohibited from buying, selling or otherwise dealing in securities, even after the period of four (4) years of restraint imposed in paragraph 18(b) above, till all the Collective Investment Schemes of Royal Twinkle Star Club Limited are wound up and all the monies mobilized through such schemes are refunded to its investors with returns which are due to them. - SEBI would make a reference to the State Government/ Local Police to register a civil/ criminal case against Royal Twinkl .....

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he sake of convenience and with the consent of the parties, Appeal No.436 of 2015 preferred by the Appellant-company against the impugned order is taken as the lead case. 3. Briefly stated the facts of the case are that; the Appellant-company started its business of selling of holidays plans on 6th May, 2008. The Appellant i.e. RTSCL belongs to Mirah Group of Companies which is stated to be engaged in various business activities, including the business of running hotels and restaurants since the .....

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schemes. Whereas in the nonrefundable schemes, fixed amount is taken from the customers/investors towards holiday plan to be utilized by the said customer/investor within a specified period and failing which the Appellant will not refund the amount on the expiry of the period. It was pointed out to us that most of the other schemes run by Mahindra Resorts, Sterling Resorts, etc. are non-refundable and beyond the purview of the concept of CIS as envisaged under Section 11A of the Securities and .....

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1/6/2012 was, accordingly, issued by the Respondent to the Appellant seeking various information incorporated therein. Appellant by letter dated 15/6/2012, while supplying the requisite information/documents to the Respondent, submitted that it was an unlisted company with no intention of ever getting listed on any Stock Exchange and hence was beyond the purview of SEBI as such. It was part of the larger Mirah Group of Companies and was incorporated as a hospitality solution provider. In the mea .....

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ondent invoking powers under Section 11(1) 11B and 11(4) of the SEBI Act, 1992 read with Regulation 65 of the CIS Regulations, 1999 directing the Appellant and its Directors:- a. not to collect any more money from investors including under the existing schemes; b. not to launch any new schemes; c. not to dispose of any of the properties or alienate any of the assets of the schemes; d. not to divert any funds raised from public at large which are kept in bank account(s) and/or in the custody of t .....

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y found that no action was necessary in the matter, after conducting investigation under Section 209(A) of the Companies Act, 1956. The Appellant represented against this ex-parte order cum showcause notice dated 7th March, 2014 by filing various submissions before the Respondent. At this stage, Appellant was also given an opportunity of personal hearing during the pendency of the connected Appeals before this Tribunal. Thereafter, the impugned order dated 21st August, 2015 came to be passed aga .....

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-company do not fall within the ambit of CIS as envisaged under Section 11 A of the SEBI Act, 1992. The finding in the impugned order to this effect is therefore, contended to be wrong and contrary to law and facts of the present case. It is also submitted by the Appellant that the Ld. WTM has failed to take into consideration the underlying object in floating somewhat unique holiday / time-sharing plans which are more befitting to the common man s aspirations of utilizing / undertaking holiday .....

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ized in various hotels, restaurants run under the aegis of the larger Mirah Group. There is therefore, no purchase of holiday plan or time-sharing holidays for the purpose of making profits. The amount is liable to be returned to the customers, only in the eventuality of the holidays being not availed by the customers due to reason attributable to the customers and hence, beyond the control of the Appellant. Therefore, refund of any money to such customers, is a matter of good gesture on the par .....

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sing timesharing holiday plans from the Appellant. 8. The Appellant s next contention is that the investigation undertaken by the SEBI in the present matter was to determine the nature of the business activities of the Appellant in the context of CIS Regulations on the basis of certain complaints. These complaints were never supplied to the Appellants and fragmented copies, that too without the details of the complainants, on the directions of this Tribunal, were furnished during the course of t .....

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stigated the complaints and in its inspection report opined that the Appellant-company had not defrauded any purchaser of the holiday plans. 9. Yet another argument is advanced by Shri Sancheti for quashing of the show-cause notice itself on the ground of violation of the principles of natural justice. It is contended that the Appellants have been punished, inter alia, for a period of Four years from entering the capital market, without there being any whisper of imposing such an extreme penalty .....

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w-cause notice to this effect, if it was not mentioned in the original show-cause notice. In our view, the issue of debarment would have become mere academic exercise, if the Appellant had admittedly closed its business activities of enrolling fresh members / customers on 31st March 2012 itself. At this stage, it is pertinent to note that the four Directors who are Appellants before us, in Appeal No. 437 of 2015, namely Shri Omprakash Basantlal Goenka, Shri Prakash Ganpat Utekar, Shri Venkataram .....

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ctors for a period of four years. 10. Although various points/grounds have been urged in the Appeal by the Appellant, but during the course of hearing Shri Pradip Sancheti, learned Senior Counsel for the Appellant, mainly, submitted that since there was no mention of debarment of Appellants from accessing the securities market in the SCN, no adverse order could be passed by the Respondent without putting the Appellants to notice in respect thereof. In this connection, Shri Sancheti has relied up .....

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aid and/or the customers have availed the time sharing schemes for which they had paid the money in question. For remaining 30%, Shri Sancheti has pleaded for two years time so as to enable the Appellant to discharge its contractual obligations towards the remaining customers either by offering them benefit of time sharing schemes or refunding the money in question. 11. Shri J.P. Sen, learned Senior Counsel for the Respondent, submitted that the Apex Court s verdict in Gorkha Security Services L .....

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which the Appellant, a partnership firm was providing security services to a hospital which was working under the administration of Government of NCT of Delhi. There was a contract of providing security services by the Appellant therein to the hospital under a contract for a monthly payment. The contract expired on 1st September 2012 but the Appellant continued to render services to the hospital till 31st July 2013. The hospital had called upon the Appellant to submit as regards, the provident f .....

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irm has not only failed to provide minimum wages and extend the statutory benefits and abide by the labour laws, but also failed to provide satisfactory services and failed to submit the required information/ document, as and when called for and also being pre-requisite under the tender terms and conditions, and have rendered this hospital at the risk by deputing the less security personnels that too without prior intimation of the credentials of the deployed staff and police verification, as su .....

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ip;……………………. (i) A penalty of ₹ 3000/- (Rupees Three Thousand only) under clause 27 (c) of the T&C, on account of public complaints. (ii) A penalty of ₹ 41,826/- (Rupees Forty One Thousand Eight Hundred Twenty Six only) under Clause 27 (c) (a) (i) on account of unsatisfactory performance and not abiding by the statutory requirements. (iii) A penalty of forfeiture of performance guarantees amounting to ₹ 3,70,000/- (Rup .....

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payment of wages, EPF and ESI etc. in spite of opportunities given over the years, hence, it is ordered to release the payment only @ ₹ 4,000/- per month per person plus applicable taxes after deducting the penalty imposed at 1 & 2 above and withhold rest of the payment of bills to the extent of amount over and above ₹ 4,000/- per month per person, till the payment of full wages to the employees and submissions of the proof of disbursing minimum prescribed wages and depositing t .....

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ed action of blacklisting, was rejected by learned Single Judge. On preferring Letters Patent Appeal before the learned Division Bench of the High Court, the view of the Single Bench got affirmed and the LPA was dismissed. This is how Gorkha approached the Hon ble Supreme Court and the question posed before the Hon ble Supreme Court was as to whether the action of blacklisting could be taken without specifically proposing / contemplating such a harsh action in the Show Cause Notice. The Hon ble .....

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e Central issue, however, pertains to the requirement of stating the action which is proposed to be taken. The fundamental purpose behind the serving of Show Cause Notice is to make the noticee understand the precise case set up against him which he has to meet. This would require the statement of imputations detailing out the alleged breaches and defaults he has committed, so that he gets an opportunity to rebut the same. Another requirement, according to us, is the nature of action which is pr .....

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meet the grounds on which the action is proposed against him. No doubt, the High Court is justified to this extent. However, it is equally important to mention as to what would be the consequence if the noticee does not satisfactorily meet the grounds on which an action is proposed. To put it otherwise, we are of the opinion that in order to fulfill the requirements of principles of natural justice, a show cause notice should meet the following two requirements viz: i) The material/ grounds to b .....

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orkha s case and held that merely because of the reason that Clause 27 ………… empowers the department to impose such a penalty would not mean that this specific penalty can be imposed, without putting the defaulting contractor to notice to this effect….. this Show Cause Notice is conspicuously silent about the blacklisting action….. This is how the Hon ble Supreme Court categorically held that without any specific stipulation in this behalf, the Respondent .....

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be not taken, final order can be passed blacklisting such a person only on the premise that this is one of the actions so stated in the provisions of NIT. 16. Similarly, in Para 33 of Gorkha judgment, Hon ble Supreme Court has repelled the contention of the Learned ASG, to the effect that no prejudice was caused to the Appellant in that case by not mentioning the proposed action of blacklisting against Gorkha in the Show Cause Notice. In this connection, Hon ble Supreme Court analyzed the judgm .....

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prejudice to the appellant. Moreover, had the action of black listing being specifically proposed in the show cause notice, the appellant could have mentioned as to why such extreme penalty is not justified. It could have come out with extenuating circumstances defending such an action even if the defaults were there and the Department was not satisfied with the explanation qua the defaults. It could have even pleaded with the Department not to blacklist the appellant or do it for a lesser peri .....

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ncement on existing jurisprudence relating of the principles of natural justice. The concept of principles of natural justice in the matter of granting effective and proper opportunity to an entity against whom an extreme order of blacklisting or debarment, as in the case in hand, is likely to be passed for a specific period. After a detailed analysis of the jurisprudence on the subject, the Hon ble Supreme Court has categorically held that to fulfill the requirement of principles of natural jus .....

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doubtedly, there is power vested in the Respondent by Regulation 65 of CIS Regulations to, inter alia, debar an entity from entering the market. No period is prescribed. Therefore, in all fairness, while issuing the SCN, the Respondent should have mentioned the maximum period for which entity could also be debarred, in case the charge was proved. However, applicability of the judgment of Hon ble Supreme Court in the case of Gorkha to the facts of present case need not be gone into because, Couns .....

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rict the debarment till date, so that the directors of RTSCL who are also directors of CCIL can continue with the schemes operated by CCIL by seeking registration from SEBI under the CIS Regulations. 19. Thus, the time sharing schemes initiated by RTSCL on 6/5/2008 had already been closed on 31/3/2012 long before issuance of the show-cause notice dated 7th March, 2014. Appellant has not enrolled a single new member after 31/3/2012 in any of the erstwhile schemes run by RTSCL. However, we also no .....

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selected about 500 members and verified from them about the conduct of the Appellant in the matter of repayment to them. Learned Senor Counsel Shri Sen fairly submitted before us that no negative comments were received from the people which could be contacted by the SEBI. Therefore, the conduct of the Appellants seems to be good. Similarly, the Appellants have filed an affidavit before the Court categorically stating that the remaining likely contractual liability to repay to those customers wh .....

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this order. In the meanwhile, the Appellant shall not encumber or dispose of its assets except for the purpose of making payment of dues to its members and/or running its routine business. During this period of 24 months, the Appellant shall be entitled to continue to receive EMIs from the willing members as per the contract for availing facility of time sharing schemes in question. 21. To sum up, the decision of SEBI that the schemes floated and operated by the Appellants constituted CIS and o .....

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ter dated 9/6/2014 had intimated the same to SEBI, but SEBI did not consider it necessary to stop the Appellants from collecting the subscription amount from the members who had subscribed to the schemes prior to 31/3/2012. Instead of directing the Appellants to stop collecting equated monthly installments, the WTM of SEBI, by the impugned order dated 21/8/2015 had directed SEBI to look into the matter. Be that as it may. It must be told to the credit of the Appellants that on our pointing out t .....

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