Alchemist Infra Realty Ltd. vs Sebi

Date of Hearing : 30.07.2019 Date of Decision : 13.08.2019

Misc. Application No. 149 of 2016 And Misc. Application No. 83 of 2017 And Misc. Application No. 129 of 2017 And Appeal No. 203 of 2016

Alchemist Infra Realty Ltd. 723, DLF Tower "A", Jasola District Centre, New Delhi - 110 044. ...... Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...... Respondent

Mr. Rajiv Nayyar, Senior Advocate with Mr. Saurabh Seth, Mr. Surendra Dube, Mr. Shatadru Chakraborty, Mrs. Gauri Memon, Advocates i/b M/s. Nankani & Associates for the Appellant. Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody, Mr. Sushant Yadav, Mr. Tabish Mooman, Advocates i/b K Ashar & Co. for Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C. K. G. Nair, Member Justice M. T. Joshi, Judicial Member 2

Per : Justice Tarun Agarwala, Presiding Officer

1.

The facts leading to the filing of the appeal is that the appellant

is a public limited company and was carrying on the business of

development of high quality infrastructure and real estate in and

around India. Securities and Exchange Board of India (hereinafter

referred to as, 'SEBI') issued a show cause notice dated November

21, 2012, contending that the appellant was found to be running a

collective investment scheme as defined under Section 11(AA) of the

Securities and Exchange Board of India Act, 1992 (hereinafter

referred to as, 'SEBI Act') without obtaining the certificate of

registration and, accordingly, required the appellant to show cause as

to why direction should not be issued under Section 11 and 11B of

the SEBI Act read with Regulation 65 of the Securities and Exchange

Board of India (Collective Investment Schemes) Regulations, 1999

(hereinafter referred to as, 'CIS Regulations'). The Whole Time

Member (hereinafter referred to as, 'WTM') after considering the

reply and the evidence that was brought on record and after giving

them an opportunity of hearing passed an order dated June 21, 2013

holding that the operations of the appellant were in the nature of

collective investment scheme as defined under Section 11A of the

SEBI Act and directed the appellant to refund the money collected

from its investors within three months from the date of the order. 3

2. The appellant being aggrieved by the said order filed an appeal.

The Tribunal by an order dated July 23, 2013 upheld the findings of

SEBI with regards to the nature of operations of the appellant being a

collective investment scheme. The Tribunal further allowed the

appellant 18 months' time to refund the money collected from the

investors. The Tribunal also granted liberty to the appellant to seek

further extension of time, if so required.

3. The appellant being aggrieved by the order of this Tribunal

filed a Civil Appeal before the Hon'ble Supreme Court of India.

This appeal was dismissed as withdrawn by an order dated

September 5, 2014 giving the liberty to the appellant to work out the

remedy elsewhere. Thus, the order of SEBI holding that the

operations of the appellant as a collective investment scheme without

obtaining a certificate of registration was illegal and consequential

direction to stop the scheme and refund the amount to the investors

became final.

4. Based on the order of the Tribunal dated July 23, 2013, the

appellant filed an application dated January 22, 2015 seeking

extension of time in order to complete the process of refund. The

appellant in this application also sought permission to circulate an

information memorandum in terms of Regulation 73 of the CIS

Regulations. This application was rejected by SEBI by an order 4

dated May 27, 2015 declining the request for extension of time and

also refusing permission to circulate an information memorandum.

The impugned order further directed that attachment and recovery

proceedings should be initiated against the company for non-

compliance of its order dated June 21, 2013.

5. The appellant challenged the order dated May 27, 2015 passed

by SEBI before this Tribunal in Appeal No. 298 of 2015. This

Tribunal by an order dated June 15, 2015 set aside the order of SEBI

dated May 27, 2015 and directed SEBI to verify the claim made by

the appellant regarding refund. The Tribunal directed the appellant

to furnish the particulars demanded by SEBI vide its various letters

for the purpose of verifying the claim. If such particulars were

furnished by the appellant, SEBI was required to verify the same and

pass appropriate orders on the application of the appellant. It was

stated that if the appellant failed to furnish the requisite particulars

within the stipulated time the order of SEBI dated May 27, 2015

would revive.

6. It is alleged that pursuant to the order of the Tribunal dated

June 15, 2015 the requisite information was submitted within the

stipulated period. Thereafter, the appellant again made a fresh

representation dated August 7, 2015 seeking permission to circulate 5

an information memorandum under Regulation 73 of the CIS

Regulations.

7. Pursuant to the requisite information submitted, SEBI

appointed an independent auditor dated August 6, 2015 in order to

verify the payments made by the appellant to the investors. Since the

appellant was not cooperating with the auditor, SEBI issued a show

cause notice dated November 20, 2015 to show cause as to why the

order of SEBI dated May 27, 2015 should not be revived. The

appellant submitted its reply contending that they are making the

payments to the investors and that they have already moved an

application seeking further time. The hearing was concluded on April

2, 2016. It transpires that an interim audit report dated May 28, 2016

was submitted to SEBI indicating the methodology for scrutinising

the payments made to the investors by the company. The report

indicated that the auditor had to discontinue the audit as requisite

data was not being supplied by the appellant and even as on the date

of the submission of the interim audit report, out of a sample

selection of 49282 certificates the appellant had only provided the

details of 8471.

8. Based on the said report and other extenuating circumstances,

the WTM rejected the application of the appellant seeking further

extension of time to implement the SEBI's order of June 21, 2013 for 6

refund of money to the investors. The request to circulate an

information memorandum under Regulation 73 of the CIS

Regulations was also rejected. The appellant being aggrieved by the

said order dated June 14, 2016 has filed the present appeal.

9. We have heard Shri Rajiv Nayyar, the learned senior counsel

for the appellant and Shri Shyam Mehta, the learned senior counsel

for the respondent at some length.

10. It was contended that the WTM committed a manifest error in

rejecting the application seeking to circulate the information

memorandum as prescribed under Regulation 73 of the CIS

Regulations. It was contended that the order of SEBI dated June 21,

2013 was an order passed under Regulations 65 and 73 of the CIS

Regulations which was affirmed by the Tribunal by its order dated

July 23, 2013 in which a specific finding has been given by the

Tribunal holding that the Regulation 73 is applicable to the

appellant's investment scheme. It was further contended that SEBI

in its counter affidavit filed before the Hon'ble Supreme Court

admitted that the Regulation 73 is required to be followed.

11. In our view, the contention raised by the learned senior counsel

for the appellant is patently misconceived and cannot be accepted. 7

Before proceeding, it would be appropriate to extract the operative

portion of the order passed by the WTM dated June 21, 2013 :

"50. Therefore, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 and sections 11 and 11B thereof and regulations 65 and 73 of the SEBI (Collective Investment Schemes) Regulations 1999, hereby issue the following directions to safeguard the interest of the investors:

(a) Alchemist Infra Realty Limited shall not collect any money from investors or launch or carry out any scheme which has been identified as a collective investment scheme in this Order.

(b) Alchemist Infra Realty Limited and its directors including Mr. Brij Mohan Mahajan, Mr. Sunil KantiKar and Mr. Narayan Madhav Kumar 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 submit a winding up and repayment report to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, failing which the following actions shall follow :

(i) SEBI would initiate prosecution proceedings under section 24 and adjudication proceedings under Chapter VI of the Securities and Exchange Board of India Act, 1992 against Alchemist Infra Realty and its directors;

(ii) SEBI would make a reference to the State Government/Local Police to register a civil/criminal case against Alchemist Infra Realty Limited and its directors and its managers/persons in-charge of the business and its schemes for offences of fraud, cheating, criminal breach of trust and misappropriation of public funds; and 8

(iii) SEBI would make a reference to the Ministry of Corporate Affairs, to initiate the process of winding up of the company, Alchemist Infra Realty Limited.

(c) Alchemist Infra Realty Limited and its directors Mr. Brij Mohan Mahajan, Mr. Narayan Madhav Kumar, Mr. Balvir Singh, Mr. Chandra Shekhar Chauhan and Mr. Sunil KantiKar are restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market till all the collective investment schemes are would up by the Company and all the monies mobilized through such schemes are refunded to its investors with returns which are due to them."

12. A perusal of the order of SEBI indicates that the order has been

purported to be issued under Sections 11 and 11B of the SEBI Act

read with Regulations 65 and 73 of the CIS Regulations. We are,

however, of the opinion that Regulation 73 has wrongly been quoted

in the order in as much as we find that the directions have been

issued only under Sections 11 and 11B of the SEBI Act read with the

Regulation 65 of the CIS Regulations.

13. In this regard, it would be appropriate to extract the provisions

of Regulations 65 and 73 of the CIS Regulations, as it stood during

the relevant period 2012-2013 hereunder :-

"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 9

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 to refund any money or the assets to the concerned investors along with the requisite interest or otherwise, collected under the scheme;

(e) prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period."

"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) 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 10

each investor and the manner in which such amount is 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 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 their risk and responsibility :

Provided that if the positive consent to continue with the scheme, is received from only twenty-five per cent or less of the total number of existing investors, the scheme shall be wound up.

(8) The payment to the investors, shall be made within three months of the date of the information memorandum.

(9) On completion of the winding up, the existing collective investment scheme shall file with the Board such reports, as may be specified by the Board."

14. Regulation 65 is under Chapter VIII of CIS Regulations

wherein the procedure has been propounded for action in case of

default. The directions contained in the order of SEBI dated June 21, 11

2013 as extracted above is in terms of the directions provided under

Regulation 65 of CIS Regulations.

15. Regulation 73 has been provided under Chapter IX of the CIS

Regulations under the heading existing collective schemes and where

existing schemes failed to comply with the provisions under

Regulations 71 and 72 then the said existing collective schemes were

required to be wound up. The information memorandum

contemplated under Regulation 73(6) is to provide an option to the

contributors as to whether they would like to continue with the

collective investment schemes or not.

16. In our opinion, Regulation 73 is not applicable in the instant

case in as much as it was not an existing scheme as on the date of

incorporation of the Regulations which came into effect on January

25, 1995. The appellant's CIS scheme came into effect much after

2005. The Hon'ble Supreme Court in SEBI vs. Gaurav Varshney

and Ors. [(2016) 14 SCC 430] has categorically held that an existing

collective investment scheme within the meaning of Section 12(1B)

as also within the meaning of collective investment regulations,

comprise of only such collective investment scheme which has come

into existence prior to January 25, 1995. In the instant case, the

appellant's scheme came into existence much after January 25, 1995

and, thus, Regulation 73 of the CIS Regulations is not applicable. 12

17. Further, once there is an order to refund the money collected

by the appellant under the scheme, the question of circulating the

information memorandum to the contributories under Regulation

73(6) and requiring the contributors / investors to give their consent

under Regulation 73(7) does not arise. Such exercise would be

defeating the order of refund of the monies collected illegally under

the CIS Scheme.

18. We are further of the view that merely quoting a wrong

provision of the Statute while exercising power under an Act would

not invalidate the order passed by the authority if it is shown that

such order could be passed under other provisions of the Statute.

This principle has been approved by the Hon'ble Supreme Court in

the catena of cases and recently in Kedar Shashikant Deshpande

and Ors. vs. Bhor Municipal Council and Ors. [(2011) 2 SCC

654]. In our view, Regulation 73 has wrongly been quoted in the

order of SEBI. No directions have been issued under Regulation 73

and the directions issued are under Sections 11 and 11B of the SEBI

Act read with Regulation 65 of the CIS Regulations.

19. In this regard, we also find that the arguments on Regulation

73 and its applicability was raised by the appellant before the

Tribunal which was unnecessary and was not required since no

direction under Regulation 73 was issued. However, since 13

arguments were raised, the Tribunal dealt with it which is reflected in

the order of the Tribunal. In our opinion, the decision by the

Tribunal on Regulation 73 was unnecessary to the decision of the

case and, therefore, is not precedential. In our opinion, a judicial

comment made during the course of delivering a judicial opinion in

passing and which was not necessary to the issue is an 'obiter dicta'

and has no precedential value. Thus, no benefit can be taken by the

appellant merely because the Tribunal considered the provisions of

Regulation 73 of the CIS Regulations. Similarly, the mere fact that

an officer of SEBI in his affidavit before the Hon'ble Supreme Court

of India has stated that the provisions of Regulation 73 are applicable

cannot be made binding upon the respondent nor can it overreach the

provisions of law. In any case, the law on Regulation 73 has now

been settled by the Hon'ble Supreme Court in the Gaurav Varshney

case (supra).

20. In the light of the aforesaid, we are of the opinion that when

there was a clear cut direction of WTM directing refund of the

monies collected under the CIS, the question of continuing with the

scheme by distribution of information memorandum under

Regulation 73 does not arise. The application of the appellant

seeking to circulate the information memorandum under Regulation

73 to its investors was patently misconceived and was rightly

rejected.

14

21. With regard to the request for extension of time to refund the

monies, we are of the opinion that the WTM rightly rejected the

application. Enough latitude has been given to the appellant to

refund the amount. More than five years have elapsed and the order

of SEBI dated June 21, 2013 is yet to be implemented in full.

22. In this regard, we find that SEBI in its order dated June 21,

2013 had directed the appellant to refund the amount to its investors

within three months. This period of three months was extended by

18 months by the Tribunal by its order dated July 23, 2013. Before

the expiry of 18 months, the appellant moved an application dated

January 22, 2015 for extension which was rejected by SEBI by its

order dated May 27, 2015. The said order of May 27, 2015 was set

aside by this Tribunal with the direction that necessary details of

repayment would be provided by the appellant which shall be

verified by SEBI. This Tribunal also directed that if necessary

details were not provided then the order dated May 27, 2015 would

revive.

23. It was contended by the appellant that necessary details were

provided to the WTM who instead of verifying itself, appointed an

independent auditor on August 6, 2015 for verification. It was

alleged that before it could be verified, the impugned order was

passed in violation of principles of natural justice. 15

24. In our view, upon consideration of the material that has been

brought on record, we find that even though the independent auditor

was appointed on August 6, 2015, for almost three months, the

appellant did not schedule a meeting with the auditor. As a result,

the auditor had to intimate SEBI that they were unable to continue

with the audit on account of non-cooperation by the appellant. Based

on this non-cooperation, a show cause notice dated November 20,

2015 was issued to show cause as to why the order dated May 27,

2015 should not be revived. In this show cause notice, it was

categorically indicated that the auditor had made request on

September 2, 2015, October 6, 2015, October 20, 2015 and

November 2, 2015 for holding a meeting which the appellant failed

to adhere. The record also indicates that the audit recommenced on

March 21, 2016 and inspite of auditor taking a sample of 49282 out

of 257477 investors, the company failed to provide the necessary

certificates and only provided 8471 certificates and that too without

providing the bank statements for cross verification.

25. In the light of the aforesaid, we are of the view that the

appellant resorted to all kinds of dilatory tactics in not getting the

repayments verified, namely, whether the appellant had actually

refunded the amount to the investors. The WTM also took note of

the income tax report in which it was indicated that monies have not 16

been refunded to the investors and have been diverted to a sister

company of the appellant. In the light of the conduct of the

appellant, we are of the opinion that admittedly the entire amount has

not been repaid to the investors and whatever has been alleged by the

appellant to have been repaid has not been verified. The appellant is

guilty of adopting dilatory tactics in getting the repayments verified.

26. Thus, we are of the opinion that the application for extension of

time to refund the amount was rightly rejected. It may be stated here

that more than Rs. 1900 crores were collected which till date has not

been refunded inspite of the order being passed by SEBI on June 21,

2013. Thus, no relief can be granted to the appellant.

27. Before parting, we would like to observe that the hearing

before the WTM concluded on April 6, 2016. The interim audit

report is dated May 28, 2016 which the WTM considered. In our

opinion, if a document comes to existence after the conclusion of the

hearing, the said document cannot be taken into consideration unless

an opportunity is given to the appellant which in the instant case is

non-existent. However, reliance on the interim audit report will not

invalidate the impugned order as in our opinion, sufficient time was

allowed to the appellant to refund the amount which they miserably

failed to do so.

17

28. In view of the aforesaid, the appeal fails and is accordingly

dismissed. As a result, all Misc. Applications have become

infructuous and are accordingly rejected.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member

13.08.2019 Prepared & Compared by PTM