TMI Blog2013 (7) TMI 1085X X X X Extracts X X X X X X X X Extracts X X X X ..... months from the date of the Impugned Order, along with a winding up and repayment report to SEBI in accordance with the CIS Regulations. 2. Brief facts leading to the dispute are that Appellant No. 1, Maitreya Services Private Limited, is a Company incorporated under the Companies Act, 1956 purportedly engaged in the business of real estate. The Income Tax Office vide letter dated September 21, 2010 informed SEBI of the alleged violation of the SEBI Act and the CIS Regulations by Appellant No. 1. Attached to the said letter were documents substantiating the claims of the I. T. Office. SEBI started an inquiry into the business of Appellant No. 1 on the basis of the letter and documents sent by the I. T. Office. In relation to the inquiry, the Respondent sent a few letters dated October 13, 2010; November 18, 2010; December 1, 2010; January 3, 2011; January 11, 2011; May 19, 2011 and June 9, 2011 to Appellant No. 1 seeking some documents which would help establish whether or not the business dealings of the Appellants would fall under the definition of a CIS. The Appellants submitted some of the required documents annexed with letter dated December 2, 2010 requesting the Responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant was asked for a copy of its statement of accounts along with a copy of its balance sheet, both of which were provided to the Respondent on June 15, 2012 and July 12, 2012 respectively. 3. We now come to the Appellants case. The Appellants submit that the CIS Regulations apply to businesses pertaining to plantation and agricultural activities and they were brought into force to deal with entities whose modus operandi was to issue bonds on collection of money from the public. For this reason, the reliance placed by the Respondent on PGF Ltd. vs. Union of India, decided by the Supreme Court on March 12, 2013, has been refuted by the Appellants since PGF Ltd. was a company engaged in plantation activities. It is submitted that the sale and purchase of land does not fall within the purview of the CIS Regulations. The Appellants submit that it does not offer any exorbitantly high returns to its buyers but an acceptable figure of 12% per annum. The funds raised are not utilized only for development of the alleged schemes but also go towards ongoing corporate expenses and other business activities of Appellant No. 1 . It is submitted that the Respondent erred while examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome investors only in FY 2010-11, when its scheme came under inquiry by the Office of Income Tax and SEBI The Respondent further submits that as per the auditor s report, Appellant No. 1 had been incurring losses over the last few years, and inspite of being in such a situation sought investments from customers promising them high returns. 5. It is submitted by the Respondent that the schemes carried on by the Appellants, on the pretext of a real estate business, are in the nature of CISs. In this context, it is pertinent to reproduce paragraph 31 of the Impugned Order demonstrating how the plans and schemes launched by the Appellants are not pure real estate business . 31. I note the MSPL has claimed that its schemes/plans are pure real estate business. In my view, a typical real estate business might satisfy one or more but not all of the above four conditions. In common parlance, in a real estate business the agreement to sell is executed for purchase of the immoveable property that is identified and distinguished. Right, title and interest of purchaser in the identified and distinguished immoveable property is created at the time of executing the agreement to sell. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contributions or payments 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. (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 defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934); (iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938), applies; (iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment 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) shall send an information memorandum to the investors who have subscribed to the schemes, within two months from the date of receipt of intimation from the Board, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount if determined. (3) The information memorandum referred to in sub-regulation (2) shall be dated and signed by all the directors of the scheme. (4) The Board may specify such other disclosures to be made in the information 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 positiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 uncertainty in the transactions to the disadvantage of the investor concerned. The above factors and the factors, which weighed with the Division Bench in this respect definitely disclose that PGF Limited under the guise of sale and development of agricultural land in units of 150 sq. yrds. i.e. 1350 sq. ft. and its multiples offered to develop the land by planting plant, trees etc., and thereby the customers were assured of a high amount of appreciation in the value of the land after its development 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that the nature of activity of the PGF Limited under the guise of sale and development of agricultural land did fall under the definition of collective investment 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 consequently the order of the second respondent dated 06.12.2002 is perfectly justified and there is no scope to interfere with the same. In the light of our above conclusions, the PGF Limited has to comply with the directions contained in last paragraph of the order of the second respondent dated 06.12.2002. We also hold that while ensuring compliance of the order dated 06.12.2002, the second respondent shall also examine the claim of the PGF Limited that it had stopped its joint venture scheme as from 01.02.2000 is correct o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lants had not approached the Court with clean hands and there being very many incongruities in its documents placed before the Court as well as suppression of various factors in respect of the so called development of agricultural land, we are of the view that even while dismissing the Civil Appeal, the PGF Limited should be mulcted with the exemplary costs. We also feel it appropriate to quote what Mahatma Gandhi and the great poet Rabindranath Tagore mentioned about the greediness of human being which are as under: Earth provides enough to satisfy every man 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 letter dated 15.01.1998 alongwith the covering letter dated 20.05.2002. The details mentioned therein disclose that the total amount re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the land is developed by the company, the customers will be in a position to sell it at a significantly higher price as compared to the amount that was put in by them, initially. 12. Moreover, it was stated that pieces of land sold to various customers, were spread over such diverse locations, all over India, as to make the idea of the customers having any control over the management of the land inconceivable, rather impractical. The Hon ble Supreme Court also noted that the company had not repaid 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 judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to purchase the land, as opposed to demanding their investments back along with the exponentially high returns promised to them, only after SEBI started conducting its investigation into the affairs of the Appellants in 2010, which leads us to the undeniable conclusion that the investors predominantly contributed to the Appellants scheme in the hope that high profits would eventually accrue to them under the said arrangement. 16. Further, we appreciate the parallelism drawn between the PGF Ltd. matter and the case before us, in as much as even in the case of PGF Ltd. the daily control and management over the scheme and business in general is exclusively in the hands of the Appellants, with the customers only playing the role of interested by-standers, with a lot at risk. This is evidenced by certain clauses found in the memorandum of understanding signed between the Appellants and their customers. The clauses concerned have been reproduced below :- a) The applicants shall have no right to participate in the development of the land unit and the company shall exclusively look after the development of the land unit. (b) The applicants shall not be entitled take possessio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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