TMI Blog2015 (8) TMI 1499X X X X Extracts X X X X X X X X Extracts X X X X ..... rs are prima facie found to be illegal and in violation of the SEBI directions, revoking the directions issued vide the interim order, at this stage will not be in the interest of the investors. Further, as also discussed above, in terms of the SEBI order dated August 21, 2015 in the matter of Royal Twinkle Star Club Limited, the directors of the Citrus namely Mr. Omprakash Basantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis cannot be permitted to carry out any fund mobilization activity. In view of the same, in my considered opinion revoking/modifying the directions issued vide the interim order in any form is not appropriate. 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 in the interim order. In view of the same, I am convinced that the directions in the interim order in respect of the entities need to be continued, till further directions. These directions have been imposed in the interest of investors and to ensure that the noticees do not continue with the money mobilization activities through its plans/schemes. SEBI is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der thereon and communicate the same to on or before August 24, 2015.... [Emphasis Supplied] 2. In compliance with the directions of Hon'ble SAT, SEBI communicated the date of personal hearing as August 10, 2015, to the noticees. The noticees requested to postpone the hearing. The request of the noticees was considered and the date of personal hearing was rescheduled to August 13, 2015. 3. A brief background of the case is given below: a. Securities and Exchange Board of India (hereinafter referred to as 'SEBI') had, prima facie found that one Citrus Check Inns Limited (hereinafter referred to as 'the Company' or 'Citrus') is engaged in mobilization of funds 'under its various holiday plans with a promise of return/holiday points, when considered in light of the other features', which is in the nature of a Collective Investment Scheme (hereinafter referred to as 'CIS') as defined in Section 11AA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the SEBI Act') without obtaining a certificate of registration as required under Section 12(1B) of the SEBI Act and Regulation 3 of the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts assets by Citrus, vii. Details of amounts mobilized as on March 31, 2014 andMarch 31, 2015 under its various Holiday plans/schemes, viii. Details of commission paid on amounts mobilized above, ix. Details of agents along with their addresses, etc., x. Audited Accounts for the financial years i.e. FY 2012-13,2013-14, and 2014-15; xi. Income Tax returns for FY 2012-13, 2013-14, and 2014-15; xii. Details of fund transfers within group companies and associates and its directors for the year 2012-2013, 20132014 and 2014-2015. 30. The above directions shall take effect immediately and shall be in force until further orders. 31. This order shall be treated as a show cause notice and Citrus and its Directors may show cause as to why the plans/schemes identified in this order should not be held as a 'collective investment scheme in terms of the Section 11AA of the SEBI Act and the CIS Regulations and why appropriate directions under the SEBI Act and CIS Regulations, including directions in terms of Regulations 65 and 73 of the CIS Regulations should not be issued against them. 32. Citrus and its abovementioned Directors may, within 21 days from the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated August 06, 2015, had directed SEBI to decide the case of the Company, whether the prima facie view contained in the interim order can be sustained after the personal hearing. In compliance with the order of Hon'ble SAT and the timelines fixed, SEBI vide email dated August 07, 2015, communicated the earlier fixed date of personal hearing i.e. August 10, 2015, to the noticees. The noticees vide email dated August 07, 2015, submitted that in terms of the order of Hon'ble SAT, they are entitled to file the reply within working hours of August 10, 2015 and requested to postpone the hearing. The request of the noticees was considered and the date of personal hearing was rescheduled to August 13, 2015. 4. Thereafter, the noticees vide letter dated August 10, 2015, submitted the reply to the interim order. In the reply, Citrus sought for the inspection of the complaints and the reference from RBI dated December 17, 2014, at the time of hearing. On the date fixed for the personal hearing i.e. August 13, 2015, the documents for inspection were kept ready, as per the request of the noticees. For the personal hearing Mr. Mukesh S. Thakur and Mr. Umesh Vartak, the authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an inventory of 2,33,965 rooms available for use by its customers. Citrus, after deducting various expenses incurred for achieving the sales of the holiday plans, earns certain profit on such sales and also pays income tax on the said profit. The income tax authorities have recognized and assessed the amounts received from customers as sales proceeds. c. The activities mentioned in the Memorandum of Association of Citrus areessentially connected to the time share activities and therefore no exception could have been taken to the same. The time share plans offered by established companies had multiple restrictions. The Company had to offer new and innovative schemes as opposed to that of the established companies. Therefore, Citrus introduced a different concept, which was easy to understand, operate and offered flexibility to the customers. As there was no 'week concept', no limitation on account of amount, nothing like high/low season, rates for purchase of the holidays were independent of season, holidays were at the sole discretion of the purchaser, any number of days could be used at a time, customer was free to purchase another plan while continuing with one plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the complaint. It was incumbent upon SEBI to provide the copies of the complaints to Citrus to enable it to redress and/or respond to the alleged grievances. Citrus vide its letters dated August 07, 2014 and August 22, 2014, had sought an opportunity for personal hearing before SEBI. However, SEBI had failed to give any opportunity for personal hearing and suddenly after a considerable period of 18 months has, without any justification or reasons, passed the Order. The interim order could have been passed only on compliance with the principles laid down by the Hon'ble SAT in its order dated September 17, 2014 in the matter of Pancard Club Limited v. SEBI [Appeal No. 254 of 2014]. g. Citrus vide its letter dated July 16, 2015, had called upon SEBI to provideit with inspection of documents as referred to in the said Order. SEBI till date has not given inspection of the original documents as referred to in the said order and only the copies of four complaints were forwarded to Citrus vide email dated August 05, 2015, which are incomplete. They neither contain the personal details nor bear any signatures. It is difficult to verify the authenticity of such complaints as Citrus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (continued from time to time) had stayed/suspended Respondent's directions with regards to collections of monies etc. SEBI had appealed against the above referred order dated August 01, 2013, by way of Special Leave Petition (SLP) No. 3724 of 2014 to the Hon'ble Supreme Court. The Hon'ble Supreme Court was pleased to dismiss the SLP. Thus, the prima facie findings of Hon'ble Gauhati High Court that timeshare companies do not fall within the purview of the term 'CIS'are binding on SEBI. j. The action of SEBI is discriminatory as it has not initiated any proceedings against other similarly placed companies which are also running Time Share Schemes such as Club Mahindra, Sterling Resorts, Country Club, etc. The interim Order is in violation of the Article 19(1)(g) and Article 14 of the Constitution of India. SEBI has acted arbitrarily and in an unreasonable manner by passing the interim order as companies carrying similar businesses like Rose Valley Hotels and Entertainments Limited continue to do their business pursuant to order dated August 01, 2013 and November 06, 2013 passed by the Hon'ble High Court at Gauhati. Further, Pancard Clubs Limited was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. o. The amount received from a customer is shown as sale proceeds by Citrusas Citrus is selling the holiday plan and the customer is purchasing the same. The sale of holiday plan by Citrus is recorded as 'sale proceeds in the books of account of Citrus and is not credited to any sort of subscription fund or share capital fund. The sale of holiday plan by Citrus is a 'sale at discounted price'. There is nothing unusual in selling a hotel room at below the rack rate i.e. at a discounted rate. Citrus, after deducting various expenses incurred for achieving the sales of the holiday plans, earns certain amount of profit on such sales and also pays income tax on the said profit. p. The customers of Citrus are entitled to substantial discounts on hotel roomtariffs and holiday plans if they use holiday facilities. Keeping in mind the high rate of lapse of benefits/facilities in time share holidays, Citrus has adopted the marketing strategy of repurchasing unused/partly used holidays by returning/refunding the amount paid by them to the customers if they do not avail/partly avail the facilities/benefits offered. q. The term 'pooled' is neither defined in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he holidays if he wishes for, full rent out option or for partial rent out option. The unutilised portion of the holiday plan facilities are rented out by Citrus in the open market and rent so realized is paid to the plan holder/customer opting for this facility. In such cases the value of the facilities rented out shall not exceed the original value of the plan. 'Sale of holiday entitlement certificate' is inherent to the transaction, while refund of money to its customers is 'contingent to the transaction'. The customers under the scheme/arrangement are only entitled to use the holiday plans. s. Citrus is neither an agent nor does it have any investors. When a schemeis 'managed on behalf of investors', the manager/management is required to give to the beneficiaries its report stating the status and financial position of the affairs managed by him. However, Citrus has neither contracted to give such report to its customers nor has it given any such report. The customers of Citrus had wide discretionary powers to use the benefits derived by them from holiday entitlement certificates/holiday plans/time share holidays. Citrus has never exercised its discret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as made in the interim order that Citrus allegedly runs a CIS, based on the information/evidences obtained from the Company itself. During the enquiry, the scale of operation of Citrus as seen from the amount raised i.e. ₹ 777.04 crore as on March 31, 2013 was also considered. The main concern for SEBI, while passing the interim order was protection of investors, that the investors should not be victims of the unregistered CIS operations of the Company. This factor, in my opinion, always weighs above any possible loss of reputation and goodwill of the persons/companies running such schemes. B. No emergent situation or extreme urgency In this regard, I note that in the past SEBI had issued the interim directions in various cases of CIS, wherein it was prima facie found that the funds were mobilised by the companies from the innocent investors without having valid registration, for such activities. I note that the purpose of issuing interim order is not an exercise of arbitrary discretion as alleged by Citrus in its submissions, rather the same is only a measure for investor protection. When SEBI takes cognisance of illegal mobilisation of money by companies from innocent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout obtaining the certificate of registration. Thus, in order to prevent any diversion of the assets/property acquired by Citrus and its promoters/directors using the funds collected from the investing public, in order to prevent any irreparable loss to the investors of the Company who had invested their life savings in Citrus and to ensure that only legitimate investment activities are carried out by Citrus, SEBI, felt it was necessary to intervene and protect the interest of the investors. C. Non furnishing of the Complaints The Company has submitted that non furnishing of the copies of complaints has denied the Company an opportunity to present their defence. I note that the copies of complaints have already been given to Citrus on August 05, 2015 and the reply was filed by Citrus, pursuant to the same. However, it must be understood that every enquiry has a trigger point and that the complaints were only a trigger point for SEBI's examination into the details of the activities by Citrus (alleged to be in the nature of CIS). The interim order of SEBI was based on an independent analysis of the documents submitted by Citrus itself. On analyzing these details, SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the remaining information which were not received. Vide letter dated August 07, 2014, Citrus submitted certain other information i.e. copies of the additional brochures/application forms of the remaining holiday plans, copies of the application forms that are required to be submitted by the customers while purchasing the holiday plans of Citrus, copies of holiday entitlement certificates and total amount of plan-wise sale by Citrus as on March 31, 2013. - SEBI vide its letter dated August 14, 2014, again advised Citrus tofurnish the information, as was asked vide letter dated February 18, 2014 and certain additional information i.e. the details (numbers of rooms available, etc.) about the accommodation provided/projected to be provided, total number of individuals/customers who have actually availed the services (accommodation) under the plan(s) subscribed to the plan(s) and the details of assets held by Citrus. As per the interim order, after seeking extension, Citrus vide its letter dated September 25, 2014, made following submissions: a. The annual room inventory (owned by the group companies) at 11 locations are 233965. Apart from this, company has tie ups with its busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted that 'non-submission of the information to SEBI by Citrus is nothing but an attempt to conceal the true nature and operation of the fund mobilizing activity of Citrus.' The said information was an important link for determining the business model of Citrus. In such circumstances, SEBI could not have waited further to issue interim directions in order to prevent further damage to the investors of the Citrus, by way of the alleged unregistered CIS activities. In the light of the above discussion, it will be incorrect to say that non furnishing of the information was the sole reason for SEBI to have issued the interim order. As has been described, the reasons for issuing the interim order are various and has been discussed in the foregoing paragraphs but protection of the investors was the first and foremost. Further, the prima facie view taken on the 'plans/holiday plans of Citrus continues to sustain. 7. I also note that the order of Hon'ble Gauhati High Court in the matter of Rose Valley Hotels Entertainments Limited Ors. v. State of Assam, wherein a prima facie view was taken that the activities of time share business does not fall within the purvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEBI. This submission of the noticees is contrary to the material available on record and the applicable law. In terms of Section 11AA(2) of the SEBI Act, a scheme shall be a CIS, if it satisfies all the four conditions mentioned therein. Therefore, it is immaterial whether an entity issues an instrument or security, to be regarded as a CIS. Further, Regulation 2(z)(dd) of the CIS Regulations defines the word 'unit' to include 'any instrument issued under a scheme, by whatever name called, denoting the value of the subscription of unit holder'. 9. Additional details post interim order: Having considered the above, now, I proceed further and consider the details as submitted by the Company after passing of the interim order. a. As per the admission of the Company, the investors have deposited ₹ 1,600 crore with the Company as on March 31, 2015 (₹ 777.04 crore as on March 31, 2013). This is a fresh information and requires to be examined in detail so as to make final conclusions on the same. b. It is noted that the Company has submitted a list of its agents and suchlist runs into 59,506 pages and contains the name of 12,55,548 agents, which is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, including the trail of funds claimed to be refunded, bank account statements indicating refund to the investors and receipt from the investors acknowledging such refunds. d. Royal Twinkle Star Club Limited and its Directors, namely, Mr. OmprakashBasantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis shall not alienate or dispose off or sell any of the assets of Royal 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. OmprakashBasantlal 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 properti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company shall not dispose of or alienate any of the properties/assets obtained directly or indirectly through money raised by Citrus and not to divert the funds raised from public. It was necessary for SEBI that such unauthorized collection of money be stopped immediately in order to prevent further damage to the general public by unregistered CIS activities. As the activities of the Company and its directors are prima facie found to be illegal and in violation of the SEBI directions, revoking the directions issued vide the interim order, at this stage will not be in the interest of the investors. Further, as also discussed above, in terms of the SEBI order dated August 21, 2015 in the matter of Royal Twinkle Star Club Limited, the directors of the Citrus namely Mr. Omprakash Basantlal Goenka, Mr. Prakash Ganpat Utekar, Mr. Venkatraman Natrajan and Mr. Narayan Shivram Kotnis cannot be permitted to carry out any fund mobilization activity. In view of the same, in my considered opinion revoking/modifying the directions issued vide the interim order in any form is not appropriate. 12. As also noted earlier the documents/details submitted by the Company have to be examined in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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