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NGHI Developers India Limited, Mr. Pipal Singh, Mr. Bakshish Singh and Avtar Singh Versus Securities and Exchange Board of India

2013 (7) TMI 1078 - SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI

Appeal No. 225 of 2012 - Dated:- 23-7-2013 - Jog Singh and A.S. Lamba, Members, JJ. For Appellant: Mr. R.S. Loona, Mr. O.P. Singal, Mr. Abhishek Borgikar and Ms. Abhaya Gurumurthy, Advocates For Respondents: Mr. Shiraz Rustomjee, Senior Advocate and Mr. Yogesh Chande, Advocate JUDGMENT Jog Singh, Member 1. The instant appeal is preferred by NGHI Developers India Limited ("Appellant No. 1"), Mr. Pipal Singh ("Appellant No. 2") and "Bakshish Singh" ("Appellant No .....

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them. Brief facts leading to the dispute are that Appellant No. 1 is a public limited company incorporated under the Companies Act, 1956 and claims to be engaged in the business of sale and purchase of real estate and its development. It has an authorized share capital of ₹ 2 crore as on March 31, 2011 along with a paid up capital of ₹ 50 lac. On receiving complaints regarding the Appellants' activities of collecting money from the public, the Respondent conducted an investigati .....

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Appellants from further launching any CIS and directing them to stop collection of money in any form from the public. The order stated that it was to be treated as a Show Cause Notice and called upon the Appellants to explain as to why the schemes floated by them should not be held to be CISs under Section 11AA of the SEBI Act and the SEBI (Collective Investment Schemes) Regulations, 1999 ("CIS Regulations"), and why appropriate action should not be taken against them. 2. The Appellant .....

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r in the matter. An opportunity of personal hearing was also granted to the Appellant by the Respondent on October 23, 2012 when Appellant No. 2 along with other representatives appeared before the Respondent and made their submissions. During the hearing copies of the complaints, relying on which the Respondent had initiated an inquiry into the Appellants' working, were handed over to the Appellants. The Respondent asked for copies of registered sale deeds executed between Appellant No. 1 a .....

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n Payment Plan and Installment Payment Plan. In case the customer opts for Cash Down Payment, land is allotted to him within 279 days of the date of the agreement and in case of the Installment Payment Plan, land is allotted within 90 days of the receipt of 50% of the plot's cost including developmental charges. Once the money is received an allotment letter is issued in terms of the provisions of the agreement between the parties. The Appellant submits that no pooling of monies is envisaged .....

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pondent such as the agreement and the allotment letter clearly show that the intention of the parties was to enter into a contract of sale and purchase of land, and the fact that no sale deed has been executed does not mean allotment letters are not binding or valid. It is submitted that the agreement provides for execution of a sale deed "only on the expiry of minimum stipulated period" which the company claims to have not yet expired. The Appellant submits that the Respondent has err .....

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r of registration to confirm the booking of a particular piece of land. This letter cannot be construed as any certificate signifying investment. 6. It is also submitted by Appellants that there is no allocation of profits among purchasers of land flowing from the alleged scheme. Nor does Appellant No. 1 guarantee any returns to its customers. Regarding the Respondent's allegation that Appellant No. 1 has the right to "discontinue, change, amend, and modify the plan", the Appellant .....

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various customers of merely selling and purchasing land. 7. We now deal with the submissions of the Respondent in brief. The Respondent submits that the standard agreement discusses the schemes of the Appellants regarding development of land through plantation and irrigation which signifies that the land shall clearly remain in use of the Appellants. The Appellants also take responsibility for sales of produce from the land the proceeds of which shall be given to the customers. Therefore, the s .....

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the sale proceeds accrue to the customers, the Appellants deduct a certain amount as wastage of produce during harvesting/handling before delivery or sale as the case may be. This evidences the sharing of income. The Respondent submits that the plots of land developed by the Appellants are not sold at different prices, rather it appears from the scheme carried on by the Appellants that the land is sold as "a homogeneous commodity at a fixed price, which is feasible only if the land transact .....

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indeed launched CISs to collect money from the public. 9. Finally, the Respondent submits that the Appellants have carried on CISs without first getting registered with SEBI and obtaining a Certificate of registration under Section 12(1B) of the SEBI Act and the CIS Regulations. It is, therefore, the Respondent's submission that the Appellants have carried on business in the nature of CISs while deliberately violating the law. 10. We have heard the counsel for both the parties at length and .....

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ceived from the public with the promoters putting in small amounts of their own money. In order to regulate such entities and their businesses, the Government issued a press release dated November 18, 1997 identifying schemes which would be treated as Collective Investment Schemes under the SEBI Act, 1992. SEBI was tasked with formulating regulations to govern CISs which would lead to furtherance of licit investment in the securities market. 12. With this goal, a committee was formed under the d .....

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the SEBI Act and the CIS Regulations were framed. CIS Regulations were framed primarily for the protection of investors in the schemes launched by various entities seeking to dupe bonafide investors into putting their life savings at risk by promising high returns. CISs, although initially conceived in the context of agro and plantation industries, were not confined to the same and given a wider definition by the legislature in all its wisdom when the law was finally spelt out in terms of the de .....

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ections 11AA and 12(1B) of the SEBI Act alongwith Regulations 3, 73 and 74 of the CIS Regulations being pertinent to the case in hand are reproduced hereinbelow:- Securities and Exchange Board of India Act, 1992:- 11AA. (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) shall be a collective investment scheme. (2) Any scheme or arrangement made or offered by any company under which,- (i) the contributions, or payments made by the investors, by whatever na .....

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over the management and operation of the scheme or arrangement. (3) Notwithstanding anything contained in sub-section (2), any scheme or arrangement- (i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State; (ii) under which deposits are accepted by non-banking financial companies as de .....

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as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956 (1 of 1956); (vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit Fund Act, 1982 (40 of 1982); (viii) under which contributions made are in the nature of subscription to a mutual fund; shall not be a collective investment scheme. 12(1B) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective inv .....

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y continue to operate till such time regulations are made under clause (d) of subsection (2) of section 30. [Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer.] (2) Every application for .....

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hese regulations shall carry on or sponsor or launch a collective investment scheme. 73. (1) An existing collective investment scheme which: (a) has failed to make an application for registration to the Board; or (b) has not been granted provisional registration by the Board; or (c) having obtained provisional registration fails to comply with the provisions of regulation 71; shall wind up the existing scheme. (2) The existing Collective Investment Scheme to be wound up under sub-regulation (1) .....

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ion memorandum, as it deems fit. (5) The information memorandum shall be sent to the investors within one week from the date of the information memorandum. (6) The information memorandum shall explicitly state that investors desirous of continuing with the scheme shall have to give a positive consent within one month from the date of the information memorandum to continue with the scheme. (7) The investors who give positive consent under sub-regulation (6), shall continue with the scheme at thei .....

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llective investment scheme which is not desirous of obtaining provisional registration from the Board shall formulate a scheme of repayment and make such repayment to the existing investors in the manner specified in regulation 73. 14. We see from the provisions reproduced above that Section 11AA lays down the conditions which need to be satisfied before any scheme or arrangement launched by a particular company can be called a CIS, viz., the money collected from investors should be pooled and t .....

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or arrangement in the nature of a CIS, shall do so only after obtaining a certificate of registration from SEBI. Further, Regulation 3 of the CIS Regulations, states that only a Collective Investment Management Company shall sponsor CISs. Regulation 73 provides for the winding up of an existing scheme in certain cases viz., failure to make an application for registration to SEBI; refusal of SEBI to grant provisional registration; or failure to comply with the provisions of Regulation 71 once pr .....

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me Court's judgment in the case of PGF Ltd. vs. Union of India and Ors. reported in [ (2013) AIR SCW 2420]. At this stage, it is pertinent to reproduce certain paragraphs of the Hon'ble Supreme Court's judgment which expertly deal with the basic ingredients of a CIS:- 51. A conspectus consideration of the scheme of development of the land purchased by the customers at the instance of the PGF Limited and the promised development under the agreement disclose that there was wholesale un .....

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elopment and attracted by such anticipated appreciation in land value, which is nothing but a return to be acquired by the customers after making the purchase of the land based on the development assured by the PGF Limited, part with their monies in the fond hope that such a promise would be fulfilled after successful development of the bits of land purchased by them. 52. The above conclusion of ours can be culled out from the sample documents placed by the appellants before the Court. The appel .....

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ring under the regulations framed by the second respondent. All the above factors disclose that the activity of sale and development of agricultural land propounded by the PGF Limited based on the terms contained in the application and the agreement signed by the customers is nothing but a scheme/arrangement. Apart from the sale consideration, which is hardly 1/3rd of the amount collected from the customers, the remaining 2/3rd is pooled by the PGF Limited for the so called development/improveme .....

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oped land would get appreciated to an enormous extent and thereby the customer would be greatly benefited monetarily at the time of its sale at a later point of time. It is needless to state that as per the agreement between the customer and the PGF Limited, it is the responsibility of the PGF Limited to carry out the developmental activity in the land and thereby the PGF Limited undertook to manage the scheme/arrangement on behalf of the customers. Having regard to the location of the lands sol .....

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stment scheme under Section 2(ba) read along with Section 11AA of the SEBI Act was perfectly justified and hence, we do not find any flaw in the said conclusion." 53. We, therefore, hold that Section 11AA of the SEBI Act is constitutionally valid. We also hold that the activity of the PGF Limited, namely, the sale and development of agricultural land squarely falls within the definition of collective investment scheme under Section 2(ba) read along with Section 11AA(ii) of the SEBI Act and .....

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as from 01.02.2000 is correct or not by holding necessary inspection, enquiry and investigation of the premises of the PGF Limited in its registered office or any of its other offices wherever located and also examine the account books other records and based on such inspection, enquiry and investigation issue any further directions in accordance with law. Whatever amount deposited by the PGF Limited pursuant to the interim orders of this Court relating to joint venture scheme shall be kept in .....

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who participated in any such joint venture schemes operated by the PGF Limited. It will also be open to the second respondent while carrying out the above said exercise to claim for any further payment to be made by the PGF Limited towards settlement of such claims of the participants of the joint venture schemes and charge interest for any delayed/defaulted payments. As far as the deposit made by the PGF Limited with the second respondent on the ground that the such amount could not be disburse .....

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d to be frivolous and vexatious in every respect, right from its initiation in the High Court by challenging the vires of Section 11AA of the SEBI Act without any substantive grounds and in that process prolonged this litigation for more than a decade and thereby provided scope for defrauding its customers who invested their hard earned money in the scheme of sale of land and its development and since we have found that the appellants had not approached the Court with clean hands and there being .....

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39;s need, but not every man's greed. -Mahatma Gandhi- The greed of gain has no time or limit to its capaciousness. Its one object is to produce and consume. It has pity neither for beautiful nature nor for living human beings. It is ruthlessly ready without a moment's hesitation to crush beauty and life out of them, molding them into money." -Rabindranath Tagore- 55. In this respect, it will be worthwhile to note what the PGF Limited disclosed before the second respondent in its le .....

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41 crores. Total outstanding liabilities payable to investors under the old closed schemes as on 30.06.2002 was stated to be ₹ 497 crores. As against the above, till 31.10.2002, the PGF Limited stated to have made a net payment of ₹ 115.93 crores leaving the balance due in a sum of ₹ 393.69 crores approximately. The above details have been noted by the second respondent while mentioning the submission of the PGF Limited in its order dated 06.12.2002. Thus, we are convinced that .....

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the details of any development it made in respect of the lands alleged to have been sold to its customers. There is also no valid reason for not disclosing the details before the court. As in one of its activities, namely, joint venture scheme alone, it had mobilized ₹ 815.23 crores, it can be easily visualized that in its activities of sale and development of land such mobilization would have far exceeded several thousand crores. In such circumstances, the appeal is liable to be dismisse .....

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e same time, PGF did not offer any documents which evidenced any part of development of land as promised to its customers. On perusing copies of agreements entered into between PGF Limited and its customers, and applications made for purposes of investing in the business, it was held that the business of PGF Ltd. was undeniably in the nature of a scheme or arrangement. It was also stated that funds were pooled under the pretext of land development while giving customers the impression that once .....

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epaid a large amount of money under the closed schemes, which led to the inference that the PGF Ltd. was deliberately holding on to the hard earned money of the investors with the intent to defraud such bonafide investors. The judgment stressed upon the fact that inspite of repeatedly being asked for documents providing details of development being undertaken by the company, no information was put forth by the representatives of PGF Ltd. nor was any acceptable reason provided regarding such inab .....

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reasons which are dealt with hereinbelow. The Appellants submit that in the present case the land is first purchased by the Appellants with its own funds. With respect to this submission, we state that the concept of CIS as envisaged by the legislature does not take into account any such variable. The fact stands that the money collected from the customers of the Appellants ostensibly for the purpose of purchase of land is pooled together and then utilized for the purposes of the scheme, whether .....

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s. This leads to the conclusion that there is in fact a scheme in place which involves pooling of the investments of the Appellants. 19. Next, the Appellants contend that PGF Ltd. had issued unit certificates which have not been issued by the Appellants in the present case. In this connection it is pertinent to reproduce Regulation 2(dd) of the CIS Regulations which defines the word "unit":- 2(dd)). "unit" includes any instrument issued under a scheme, by whatever name called .....

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of the concept of CIS. The CIS Regulations lay down certain conditions to be adhered to by companies floating CISs, one of which is Regulation 32 which provides that the company in question ought to issue unit certificates at the earliest. The failure to do so without in the first place seeking registration with SEBI cannot by any stretch of the imagination be considered a valid reason to bring the schemes launched by the Appellants out of the scope of CISs. If this ludicrous submission of the .....

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se of PGF Ltd., the sale deeds executed did not contain particulars of land sold to the buyers; and finally, that the agreements provided for transfer by joint sale deed. As far as these three contentions are concerned, we find that all of these can be rejected on the simple ground that not a single registered sale deed has been provided even to this Tribunal by the Appellants which would evidence a genuine transfer of land in case of even a single investor out of the alleged 30,785 investors. I .....

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lot of land allotted to the alleged buyer would continue to vest in the Appellants. If the right to transfer a particular plot of land does not change hands from the Appellants to its customers, we fail to see how it can be deemed to be a bonafide transfer of land. Further, in PGF Ltd., as is noted above, the Hon'ble Supreme Court reached the finding that the company itself was managing the daily operations regarding the land with no control vested in the buyers. Similarly, in the case befor .....

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mportant task is to determine the 'pith and substance' i.e. their essential and true character. The whole scheme of CIS as enshrined in the SEBI Act, 1992 and the CIS Regulations, 1999 as already discussed hereinabove is the welfare of millions of innocent investors by duly protecting their interests therein. The legislative intent and idea of the Parliament as well as SEBI seem to bring more transparency in the affairs of various CISs by duly regulating the same and not to wipe them out .....

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