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TMI Blog2015 (6) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... its hotels for a period between 3 and 4 days with extra payment for food and other entertainments. The terms of the scheme also declare that after completion of the subscribed period if for any reason the subscriber is unable to avail the benefit of stay in hotels the amounts subscribed would be refunded with an agreed rate of interest as per the agreement. 2) In the writ petition the total number of subscription to the scheme is not stated. However, it is stated that about 2,50,000 persons in the state of Assam have subscribed to the HMP scheme. One of the subscribers lodged a complaint against the petitioner company alleging fraud. The Bureau of Investigation(Economic Offences) of the state of Assam took up investigation, conducted raids and searches and in course of the investigation has found the petitioner company collected about Rs. 1006.70 crore till February, 2012 from various subscribers. The documents seized in the search proceedings were sent to the Security Exchange Board of India(SEBI) and on the basis of which the SEBI passed the impugned order which is as follows. "WTM/SR/ERO - CIS/11/07/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not come under the purview of SEBI. In this regard, RVHEL drew reference to a meeting organised on February 11, 2013, at the instance of the Secretary, Institutional Finance and Programme Implementation Department, Government of Jharkhand at Ranchi (hereinafter referred to as "Joint Secretary, Govt. of Jharkhand") to discuss the business activities of RVHEL, which was attended by representatives of SEBI and RVHEL. RVHEL submitted that since the SEBI representative present at such meeting had mentioned that 'Time Share' Schemes do not come under SEBI purview, it was at a loss to understand the reasons behind SEBI's advice to furnish various information in connection with the 'Time Share' business. 4. Subsequent to receipt of the abovementioned letter dated March 15, 2013, SEBI vide letter dated March 19, 2013, replied to RVHEL as under - i. It was incorrect to state that SEBI had already concluded that the scheme of RVHEL did not come under its purview since the object of the meeting organised on February 11, 2013, was to brief the Joint Secretary, Govt. of Jharkhand, on the Writ Petition pending at Kolkata High Court between SEBI and RVRECL. ii. Immediately after the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plan or schemes of the Rose Valley Hotels and Entertainments Ltd., or of any other subsidiary comprised in the Rose Valley Group, until requisite statutory registrations, licenses and permissions are obtained, and produced to the satisfaction of the Competent Authority as defined under the Financial Establishments Act and until such restriction is revoked by a subsequent Order. 2. The Rose Valley, Agartala, shall make all due payment of entitlements of all its existing depositors against the plans/schemes such depositors hold under any nomenclature by the 31st July, 2013 and submit a compliance report accordingly to the Competent Authority as defined under the Financial Establishments Act. 3. Rose Valley Hotels and Entertainments Ltd., the Rose Valley Group as a collective entity, or any of the subsidiary companies of the Rose Valley Group, including the Directors and Associates, are hereby restrained from executing sale, transfer or alter the moveable and immoveable properties listed in the Statement annexed hereto and marked as Annexure - A, and any other moveable or immoveable properties subsisting or under construction anywhere in Tripura that is not mentioned in the Annexu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation and services, at resorts or hotels owned and managed by RVHEL. iii. The HMP plan once subscribed to, cannot be cancelled nor can the money paid in lieu of the facilities offered be claimed, before the expiry of tenure for such plan. iv. Upon maturity or completion of tenure for payment of monthly installments in respect of the relevant HMP plan, the investor becomes entitled to the facilities offered therein. However, such investor may also cancel the HMP booking upon maturity or completion of tenure for monthly installments, in lieu of maturity payment for non-utilization of the facilities i.e. the equivalent accumulated credit value under the HMP inclusive of annualized interest. For example, when an investor opts for maturity payment in the event of cancellation of the HMP booking under a particular scheme (HA4-5-STD), after making the payment of 60 monthly installments of Rs.500 each, he would get a refund of Rs. 48,000, which is a return of 17.65% of annualized interest to the investor. v. The rates of annualized interest offered under the various membership plans of the HMP is reproduced below - Type of Membership Plan Annualised Interest Standard 11.96% - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RVHEL was also informed that pursuant to the aforesaid meeting, SEBI had written to that authority vide letter dated February 13, 2013, to advise RVHEL to furnish relevant documents in order for SEBI to ascertain whether it comes under the purview of 'collective investment schemes' as specified in the SEBI Act. 7.6 I note that although RVHEL has submitted that it is in 'Time Share' business and therefore outside SEBI's purview, the main characteristics of a 'collective investment scheme' are found in the HMP offered by it. In this context, it may be pertinent to refer to the observations of the Hon'ble Supreme Court of India in P.G.F Limited & Ors. vs. UOI & Anr. (MANU/SC/0247/2013), wherein it had observed: "...sub-section (2) of Section 11 AA, which defines a collective investment scheme disclose that it is not restricted to any particular commercial activity such as in a shop or any other commercial establishment or even agricultural operation or transportation or shipping or entertainment industry etc. The definition only seeks to ascertain and identify any scheme or arrangement, irrespective of the nature of business, which attracts investors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1AA of the SEBI Act without obtaining a certificate of registration from SEBI as required under section 12(1B) of the SEBI Act and the CIS Regulations. I, therefore, find that SEBI has full jurisdiction to proceed against RVHEL in the instant matter. 8. I note that RVHEL was advised to respond to the preliminary enquiry conducted by SEBI, on two occasions through SEBI letters dated March 1, 2013 and March 19, 2013. However, on both occasions, RVHEL did not cooperate with SEBI as is evident from its refusal to submit the documents sought vide the aforesaid letters. In these circumstances, I find that reasonable opportunity has been afforded to RVHEL to respond to SEBI and its refusal do so, when considered in the context of the abovementioned prima facie finding, leads me to believe that such refusal to submit the information sought was only to conceal the true nature and operation of the fund mobilising activity under the HMP. 9. Protecting the interests of investors is the first and foremost mandate for SEBI and therefore, steps have to be taken in the instant matter to ensure only legitimate investment activities are carried on by RVHEL and no investors are defrauded. In ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be issued, for directing them, to transmit the records, relevant to the subject matter of this writ petition, for rendering substantive and conscionable justice to the petitioners, and for quashing/setting aside the impugned Order/Show Cause Notice dated 11.07.2013(Annexure-P6 supra). III) Issue Rule, calling upon the respondents and each one of them, to show cause as to why a Writ of Prohibition and/or in the nature thereof, may be issued, for restraining/prohibiting them, from acting in any manner, in furtherance of the impugned Order/Show Cause Notice dated 11.07.2013(Annexure-P6 supra). IV) In the Ad-interim and thereafter, on hearing the parties, in the Interim, an Order in terms of i. ii. & iii above. V) After hearing the parties, be pleased to make the Rule absolute in terms of i. ii. and iii above. VI) Call for the records appertaining to this petition. VII) Costs of and incidental to this proceeding. VIII) Any other Relief(s) as to this Hon'ble High Court may deem fit and proper". 4) In course of hearing of the matter the petitioner has filed the contract document(between the subscriber and the petitioner) in which the following terms and conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding upon the parties. 10. All bookings are subject to availability and payment of full membership fees. Subject to availability of rooms the Company shall issue itinerary mentioning the name of the hotel/resorts and room no. as per choice of member as well as schedule of arrival and departure(according to check-out time) respectively at least 7(seven) days before their arrival at such hotel/resorts. Applicant may enjoy such accommodation and service after 30 days of enrolment to the plan according to the Company norms as per the respective Plan. 11. Service includes one Breakfast and two bottles of packaged drinking water daily and non-alcoholic welcome drink on arrival. All meals shall be charged at a discount of 10% on Menu rate. 12. ROSE VALLEY HOLIDAY PLAN MEMBER may due to an emergency which needs to be informed to the management seven days prior to final confirmation date, cancel the booking of such accommodation & services with a letter of request to the Company mentioning about his/her reason and intention for the purpose and on such situation the concerned applicant may be entitled to the total equivalent sum under the plan for unutilization of such accommodation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Above Rs. 25,000/- Rs. 50,000/- 20. However, for 1(one) year plan under "Standard - S4" the Insurance Coverage will be for a period of only one year. 21. Applicant(s) are requested to note that the discount, services and other facilities provided for shall be in force till utilization and without any interruption but subject to act of God or by other reasons beyond the reasonable control of the Company. 22. Applicant(s) is/are at liberty to gift his/her/their room accommodation to his/her/their friends or relatives or at option he/she/they may also opt to transfer or sell it to any one with the consent of the Company. In this event, third party should be considered and referred to as "Guest" but subject to consent of the applicant(s). 23. For the convenience of the applicant(s), for selling out their room accommodation, if required, he/she/they may contact Rose Valley Travels(P) Ltd. Perhaps, they may charge a nominal amount as against their services in respect of our Membership Plan. 24. On the event of death of the applicant, the nominee or in absence of the nominee, the legal heir(s)/successor(s) of the applicant is/are entitled to the benefits in respect of the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.". It is argued that the conditions stipulated in sub-Section (2) of Section 11AA have to be cumulatively fulfilled to constitute a collective investment scheme. The HMP scheme launched by the petitioner does not qualify to be constituted as a collective investment scheme. The conditions mentioned in sub-Section (2) do not apply to the HMP scheme, in particular with reference to clause (ii) it is submitted that under the HMP scheme the investor does not receive any profit ~ whether movable or immovable ~ from such scheme or arrangement. The investor is only permitted to stay in a hotel for a particular number of days and such a stay in the hotel amounts to a licence. The consideration for the investment cannot be construed as profit, income, produce or property. 7) The learned senior counsel referred to the provisions of sub-Section (1B) of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions,- (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.]. It is argued that the nature of interim order that the SEBI is empowered to pass under Section 11B of the Securities and Exchange Board of India Act, 1992 does not empower the SEBI to pass the ad interim order in question. The provisions of Section 11B of the Act declare that an interim order could be passed only after making or causing to be made an inquiry and if the Board is satisfied the interim orders could be passed, however, in this case the interim order passed is beyond the purview of the powers invested under Section 11B and that ad interim order passed is made within an enquiry coupled with the satisfaction of the Board. 9) The learned senior counsel further referred to the provisions of Section 11(4) of the Securities and Exchange Board of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to such intermediaries or persons concerned.]". Clause (a) deals with suspending the trading of any security in a recognised stock exchange. The investment in question made does not come within the definition of "securities" in the Act. Clause (b) deals with restraining persons from accessing the securities market and prohibiting any person associated with securities market to buy, sell or deal in securities. The investment in question is not a security within the definition of "securities" in the Act. Clause (d) deals with impounding and retaining the proceeds or securities in respect of any transaction which is under investigation. In the instant case the directions issued also do not conform to the requirement of clause (d). Besides, under Section 11B no ad interim direction can be issued by SEBI without making any enquiry or causing to be made any inquiry into the matter therefore the interim order passed is dehors the powers conferred by the statute. 10) It is admitted in the submissions that the petitioner did refund to some of the investors with interest because wild rumours were spread about some Ponzi schemes the investors started demanding the refund of their investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision ~ and J.K. Industries v. Chief Inspector of Police(1996) 6 SCC 665 para 34 ~ it is laid down that a proviso should not be read as providing something by an addition to the main provision. Therefore the proviso which sweepingly encompasses any type of investment in any scheme which is more than Rs. 100 crore which is called as collective investment scheme is illegal and bad in law. 12) The incorporated sub-Section 2A to Section 11A empowers the SEBI to make regulations to lay down conditions in respect of any scheme or arrangement. Such a power to make regulations suffers from vice of excessive delegation. It is for the statute to lay down the conditions and such a power cannot be delegated to levy. In this regard the learned senior counsel relied on the decisions of the Supreme Court in Harishankar Bagka and another v. State of Madhya Pradesh(1955) 1 SCR 380 para 9, and Hamdard Dawakhana v. Union of India(1960) 2 SCR 671 para 28 to 34. 13) Sri Somik Deb, the instructing counsel, submitted that under Section 19 when the SEBI has initiated proceedings therefore a single member could not have passed the impugned order without a specific authorisation. The impugned order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident insurance is only a ploy devised by the petitioner to make-believe that the contract imbibes a component of insurance only to escape from the clutches of law and avoid the jurisdiction of the SEBI. 15) With regard to the directions issued in the impugned order the learned counsel for the SEBI relied on Regulation 65 of the Securities and Exchange Board of India(Collective Investment Schemes) Regulations, 1999, which reads as follows. "65. The Board may, in the interests of the securities market and the investors and without prejudice to its right to initiate action under this Chapter, including initiation of criminal prosecution under section 24 of the Act, give such directions as it deems fit in order to ensure effective observance of these regulations, including directions: (a) requiring the person concerned not to collect any money from investors or to launch any scheme; (b) prohibiting the person concerned from disposing of any of the properties of the scheme acquired in violation of these regulations; (c) requiring the person concerned to dispose of the assets of the scheme in a manner as may be specified in the directions; (d) requiring the person concerned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tigations have been directed, therefore to save the morale of the petitioner's company without hassles refunds have been made to four lakh investors. 19) There is no credible material placed by the petitioner to convince the court that all the members who have subscribed had the dominant intention of enjoying the stay at the hotels. Only on the basis of the format of an application for subscription of membership it cannot be conclusively held that the scheme is only for enjoying the stay in the hotels. It could have been held so if there was no alternative term of refund of deposit with a lucrative rate of interest of 17.6 per cent per annum. This aspect of the matter requires a detailed enquiry about the names and identities of all the subscribers, their social status, their annual income, etc to find out how many persons have genuinely subscribed for membership for availing the benefit of stay in the hotel. On the basis of incoherent material produced by the petitioner like format of the membership it is not possible to agree with the contention that the scheme is only a holiday management scheme and does not come under the purview of the collective investment scheme more so bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Board are delegated to the Whole-time Member under Sections 11(1), 11(3), 11(4) and 11B of the SEBI Act, therefore the third argument in this regard does not hold water. 23) With regard to the incorporation of proviso to sub-Section (1) of Section 11AA of the Act, though it has prospective effect, despite lengthy arguments were canvassed it is the contention that the proviso incorporated to sub-Section (1) of Section 11AA curtails and limits the substantive provisions of sub-Section (2) of Section 11AA of the Act. In this regard it is argued that any proviso to a Section or sub-Section which has effect of expanding or limiting the principal provision or which frustrates the main provision would be bad in law. The decisions of the Supreme Court in Dwarka, Madhu, and JK Industries(supra) are relied on. 24) On the contrary, in CIT v. Jagannath Mahadeo Prasad(AIR 1969 SC 209) the Supreme Court in para 3 has made the following observations. "The argument was elaborated further by referring to the true nature and function of a .proviso which was to except or take out a particular portion from the field dealt with by the section. Chagla, C.J., who delivered the judgment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enactment; (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable; (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and (4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision". 26) The ratio laid down in Sundaram case(supra) is followed by the Supreme Court in Swedish Match AB and another v. Securities & Exchange Board of India and another[(2004) 11 SCC 641]. Similarly the Supreme Court in Southern Petrochemical Industries Co Ltd v. Electricity Inspector and E.T.I.O. and others (MANU/SC/2333/2007) has followed the ratio laid down in Sundaram case(supra). In para 104 of the judgment the Supreme Court has made the following observations. "104. Once the aforementioned conclusion is arrived at, it would not be necessary to construe the proviso appended to Sub-section (1) of Section 20 in its own language. Proviso, as is well known, has four ..... X X X X Extracts X X X X X X X X Extracts X X X X
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