Order in the matter of M/s Zeestar Limouzines Limited

WTM/PS/108/CIS-NRO/DEC/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 read with Regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999 In the matter of Zeestar Limouzines Limited [AAACZ3468J] In respect of Zeestar Limouzines Limited and its unit Star Auto Cabs 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) on receipt of a complaint came to know that one Star Auto Cabs (hereinafter referred to as ‘Star’), a unit of Zeestar Limouzines Limited (hereinafter referred to as ‘Zeestar’/ ‘the Company’) is collecting money from the public. SEBI vide its letter dated November 03, 2010, advised Star to submit certain details/ documents including its Memorandum and Articles of Association, brochures pertaining to the schemes, sample copies of registration letter and allotment letter, sample agreements, scheme wise amount mobilization, details of regulatory approvals sought, details of the past and present directors, balance sheets and profit and loss accounts for the past three years, annual returns, etc. As no information was forthcoming, SEBI vide another letter dated January 03, 2011, again asked the said details from Star. Thereafter, SEBI also issued reminder letters dated March 24, 2011, June 02, 2011 and September 08, 2011 to Zeestar, which had returned undelivered.

2. In the meantime, SEBI also carried out the physical inspection of the available address of the Company and found the premises locked with a sign board of ‘Zeestar Beverages Co.’ instead of Star Auto Cabs or Zeestar Limouzines Limited. SEBI proceeded with its examination based on the documents available on record and the documents received from the Registrar of Companies/ documents obtained from Ministry of Corporate Affairs.

3. On consideration of the documents available on record, SEBI prima facie found that the scheme/ arrangement of Star are in the nature of collective investment scheme (hereinafter referred to as ‘CIS’). Thereafter, a show cause notice (hereinafter referred to as ‘SCN’) dated

February 05, 2015, was issued to Zeestar advising it to show cause as to why appropriate directions under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) should not be issued against it for the alleged violations of Star Auto Cabs, a unit of Zeestar. The SCN indicated that the Company may send its reply within 21 days from the receipt of the SCN failing which it shall be presumed that the Company does not have any explanation to offer and that the proceedings will be concluded ex parte on the basis of the material available on record.

4. The SCN issued to the Company had returned undelivered. In view of the same, attempts were made to deliver the SCN by hand delivery/ pasting on the last known addresses of the Company. Thereafter, SEBI also issued a public notice in the newspapers namely ‘Times of India’ (English edition) and ‘Nav Bharat Times’ (Hindi edition) on April 15, 2015. As no reply was forthcoming, SEBI proceeded further and granted an opportunity of personal hearing to the Company on June 25, 2015. The date of personal hearing was also communicated vide the public notice on June 21, 2015, in the newspapers namely ‘Times of India’ and ‘Navbharat Times’. The Company was advised that in case they fail to appear before SEBI on the aforesaid date, then the matter would be proceeded ex-parte on the basis of material available on record. The Company failed to turn up for the personal hearing. Considering that reasonable opportunities were already afforded to the Company for making the submissions in the matter, I proceed further as against it on the basis of the material available on record.

5. I have considered the SCN issued in the matter and the material available on record. It is noted that the Company was incorporated on September 08, 2008. The registered office of the Company is situated at A-116, Ground Floor, Lajpat Nagar – 1, Delhi. The documents available on record are the pamphlet of the Company (providing the details of investment options), advertisement, registration form, agreement and bank guarantee. Let me now consider these documents: a. The first document is a pamphlet which provides the ‘details of investment options’ and reads as under: Table A Vehicle Booking amt. P.M. income Time period Total income Resale amt. Final income Indica 1,42,990 7,150 48 months 3,43,200 25,000 3,68,200

Fiesta/ Logan 1,75,990 9,360 48 months 4,49,280 30,000 4,79,280 Winger 1,97,990 10,200 48 months 4,89,600 36,000 5,25,600 Maruti SX4 2,19,990 12,200 48 months 5,85,600 37,000 6,22,600 Tavera 2,74,990 15,300 48 months 7,34,400 45,000 7,79,400 Innova 3,29,990 18,600 48 months 8,92,800 52,000 9,44,800 Hercules crane 5,49,990 21,001 48 months 10,08,048 62,000 10,70,048 Tata 4018 7,69,990 28,701 48 months 13,77,648 72,000 14,49,648 (Cargo Vessel) JCB 9,89,990 36,901 48 months 17,71,248 82,000 18,53,248 Tata 1618 (LPK 12,09,990 45,101 48 months 21,64,848 92,000 22,56,848 Dumper) Note: 1. All Bank Guarantee’s will be issued for the period of Six Months and follow on the same period till the full term as requested by the client at the time of registration. 2. Bank Guarantee agreement will not be changed once agreed upon at the time of the registration. From the above, it is noted that the Company clearly mentioned the monthly income on the amount paid for the specified term. The table above, also finds mention of the resale amount of the vehicle.

b. The relevant portion of the advertisement reads ‘Invest in Radio-Taxis for ‘Sure’ n ‘Safe’ monthly fixed income as the future of Radio-taxi business is growing day-by-day in major metro and ‘B’ Grade cities all over India’.

c. The investors of the Company had applied for the schemes of the Company through a ‘registration form’. I have perused the sample copy of the same and find that the same is a pre-printed document having fields for name and address of the applicant, vehicle name, vehicle booking amount, payment details, cheque amount per month, option for bank guarantee, etc.

d. On submission of the registration form, the investor enters into an agreement. The ‘agreement’ is between Star Auto Cabs (a unit of Zeestar) (referred as lessee) and the investor/ customer (referred as lessor). The relevant clauses of the agreement are as under: “… In consideration of the rent/ hire hereby reserved and the other term and condition, covenants and agreement herein contained and on the part of the lessee Motor Vehicle or margins amounts towards purchase of Motor Vehicle subject to terms and conditions: …. Bank instalments, fuel, maintenance and driver will be paid by LESSEE for the entire period of contract no interest on margin amount will be paid.

1. PERIOD OF CONTRACT … MONTHS, commencing from … and the contract shall not be terminated before the end of the above period except as provided herein by mutual consent by either side giving three months notice by paying the termination charges. Note: Bank Guarantee term will not be terminated till six months from the time of issue at any cost or under any circumstances. Balance Agreement can be terminated at charges as applicable. However no termination or cancellation of the whole contract can be done later than three months from the date of agreement thereafter the agreement shall remain firm and the same cannot be cancelled by the LESSOR under any circumstances.

TERMS OF PAYMENT 2. a) Monthly Rent/ Hire charges of Rs. … per vehicle less deduction @ … all taxes, Bank Charges as applicable and agreed at the time of the contract between LESSEE and LESSOR. Net amount payable Rs. … for the time of one year Bank Guarantee of five year Bank Guarantee will be paid by the LESSOR as required by the LESSEE at the time of the contract. In case of one year bank guarantee net amount of Rs. … will be paid after expiry of the Bank Guarantee. In case of five years Bank Guarantee net amount paid will be mentioned as above. b) Monthly Rent/ Hire Charges of Rs. … per month per vehicle. Such rent shall be paid on …. and the subsequent rent to be paid on or before the … of every succeeding month regularly during the entire term of agreement (without Bank Guarantee option). c) Monthly Rent/ Hire Charges of Rs. … per month per vehicle less deduction @ 20% taxes plus Bank Charges as applicable. Net amount of Rs. … (payable for the total time of Bank Guarantee) such rent shall be paid. d) Monthly Rent/ Hire Charges of Rs. … per month per vehicle less deduction @ 30% taxes plus Bank Charges.

Net Amount of Rs. … (payable till the total time period of Bank Guarantee till such rent shall be paid. e) If the LESSEE making any default in payment for subsequent three months from the date of the payment of LESSEE will pay the interest of the rate of 24% per annum on default amount till payment and interest is paid. f) Bank Installments for the entire loan period will be paid by the lessee in addition to his Charges/ Benefits as per the agreement to the LESSOR as mentioned above. 3. Insurance to be covered and affected by the LESSSEE/ Registered for the entire period of agreement. 4. Maintenance shall be responsibility of the LESSEE for the entire period of the agreement. 5. All types of fuels during the validity of the agreement shall be responsibility of the LESSEE including Engine Oils, etc. 6. Driver for operating the vehicle during the validity of the agreement shall be the responsibility of the LESSEE also to ensure to engage the services of the licensed driver and make all statutory dues clear of the same. 7. Buy back the company will pay prefix amount for the resale of the vehicle as agreed upon for the various segments.

8. a) Theft/ Accident/ Loss Claim upon the intimation by the LESSEE, the LESSOR/ Registered owner will initiate claim with the insurance company in the events of the Accidents, Damage and Necessary Documents would be provided by the LESSEE. b) If any of the eventualities as stated in this clause occurs and notwithstanding the same the LESSOR shall continue to receive from the LESSEE the monthly fix rentals. …

11. Termination: In case of termination after 90 days the LESSOR undertakes to loose all the benefits under this contract and agrees to the said clause. … LESSEE’s COVENANTS … 1. Take the delivery of the vehicle and sign the delivery and acceptance certificate provided by the LESSOR and upon signing of the acceptance certificate the LESSEE shall thereafter not be entitle to raise any objections whatsoever even about the condition of the vehicle. 2. Pay the rent/ benefits as stipulated in the agreement. 3. Use the vehicle for its bonafide business purpose only and not for unlawful or illegal activities and in such an event the LESSEE is solely responsible for the legal and other consequences thereof. … 5. Not to make addition or alterations to vehicle without the written consent of the LESSOR. 6. Not to transfer or assign, mortgage, charge, encumber, sell or otherwise dispose of the vehicle or any interest therein not to create nor allow to be create an lien on vehicle. 7. Not to claim any amount by way of deduction or allowance under the INCOME TAX ACT or any other LAW, STATUTE, RULE or Regulations.

8. Permit the LESSOR to terminate the agreement forthwith and take possession of the vehicle let out on hire form the LESSEE in the event of failure or default by the LESSEE of any terms and conditions of the agreement or any policy of the Company. One more document forms part of the ‘agreement’ i.e. with the subject: ‘CAR LEASING SCHEME/ FINANCE & INVESTMENT SCHEME’. The relevant clauses of the same are as under: “…. As per the policy and scheme of our company after accepting the earnest money on the basis of documents made available by you subject to brand of vehicle opted by you the company approaches and recommends to the financial institutions for rendering financial assistance for purchase of vehicle and only thereafter the vehicle is purchased and put on hire basis. However, in many cases it is found that the documents submitted by the customers/ clients are not sufficient enough to get assistance from the financial institutions for the balance consideration in respect of purchase price of the vehicle and it is in these circumstances as per the verbal consent given by you and as per the terms of agreement we utilize the entire amount paid by you in our finance and investment scheme and continue with our commitments without any default. … CONFRIMATION SLIP/ NOC I, … hereby confirm my investment according to the agreement and finance and investment scheme of the company, if in any case, something mishappens with me or I am unable to continue with the agreement due to any reason, hence, I hereby announce my son, … as the nominee of the agreement.” e. As discussed in the ‘agreement’ and pamphlet, the Company gives its investors the option to choose the scheme with the bank guarantee.

I have perused the sample bank guarantee document issued by a Bank and relevant portion of the same has been reproduced below:

“This is reference to agreement between M/s Star Auto Cabs … (hereinafter called applicant) and …. (hereinafter called beneficiary). We the …. at the request of M/s Star Auto Cabs guarantee to undertake to pay immediately on demand from beneficiary amount not exceeding Rs. …. This guarantee shall be valid up to 4 years and after that our liability under this bank guarantee will extinguish. The applicant is into the business of taking investments from individuals and gives monthly payouts to them on the investment amount. The beneficiary can revoke this Bank Guarantee if two payments of the applicant in consecutive months are not honored with. … 1. Our liability under this Bank Guarantee shall not exceed Rs. ….. 2. This Bank Guarantee shall be valid up to …. (said expiry date); and 3. We are liable to pay the guaranteed amount or any part there of under this bank guarantee only and only if you serve upon us a written claim or demand on or before …. (inclusive of claim period) at our office at ... where after it ceases to be in effect in all respects whether or not the original bank guarantee document is returned to us or not.:” 6. I note that the Company had replied neither to the correspondences of SEBI nor to the SCN.

The above discussion of the documents available on record, reveals that the Company had offered investment schemes whereby the investor had to pay initial amount towards booking/ purchase of a vehicle. I also note the following in respect of the schemes of the Company i.e.; a. The Company offered monthly returns to the investor for a period of 48 months. The Company also offered short term plans for 12/ 18 months. b. On receipt of the money from the investor, the Company approached a bank for loan for the purchase of vehicle. The vehicle so purchased is put on hire basis by the Company. c. The specification/ details of the vehicle purchased from the moneys of the investors were not mentioned in the ‘agreement’. Further, the registration field (for the vehicle) in the ‘agreement’ finds mention of ‘company ownership’. d. The bank instalments for the entire loan period of the vehicle were said to be paid by the Company. e. The Company had assured monthly rent/ hire charges (allowing an option for deductions at certain percentage if the investor had availed the facility of bank guarantee besides taxes, bank charges, etc.) to its investors and had issued post-dated cheques to them pursuant to the agreement.

In case of default in making monthly rent as per the agreement, the Company was liable to pay the interest at the rate of 24% per annum on the defaulted amount. f. The maintenance of the vehicle including the fuels and engaging a driver during the validity of the agreement was taken care by the Company. g. The Company also had buy back scheme wherein the fixed amount for the resale of the vehicle is paid to the investor. h. In case of theft/ accidents/ loss of the vehicle the Company assures its investors the stated monthly rentals. i. The Company had taken the NoC (no objection certificate) from its investors for utilising the entire amount paid for finance and investment schemes.

From the discussed details, it can be inferred that the schemes of the Company were in the nature of an investment scheme. 7. Now I proceed to deal with the charges levelled against the Company and also to test the characteristics of the impugned schemes/ plans floated and carried on by the Company against the four conditions under Section 11AA(2) of the SEBI Act as alleged in the SCN. To conclude whether a scheme is a CIS or not, all the four conditions under Section 11AA(2) of the SEBI Act should be satisfied.

i. The first condition is that the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement. The Company had accepted money from the public under its various schemes/ plans which entails payment of booking amount towards purchase of vehicles. The investor earns monthly income besides resale amount. The Company issues receipt in respect of the amount received from the investor towards purchase of the opted vehicle. As per the scheme, the Company purchases the vehicles by using the booking amount and availing finance from the banks. It is important to note that the Company had not mentioned the specification/ registration details of the vehicle (i.e. make, color, engine number, chasis number, registration number, etc.) in the agreement. Further, there is no document on record to show that the Company had provided the vehicle details to its investors. In view of the same, it can be said that the vehicle said to be allotted to the customers were unidentified.

Further, the Company had advertised about its ‘radio taxis’ business and for the same it had started mobilizing funds from the investors. From the same, it can be inferred that the funds so mobilized were pooled and utilized for the purchase of the vehicle. The ‘agreement’ also states that in case, the documents submitted by the investors are not sufficient to get assistance from the financial institutions for the balance amount in respect of the purchase of vehicle then the entire amount is utilized by the Company in its finance and investment scheme. From the discussion, it can be concluded that the ‘contributions, or payments made by the investors, are pooled and utilised by Zeestar for the purposes of the scheme or arrangement’. Thus, satisfying the first condition as stipulated in Section 11AA(2)(i) of the SEBI Act.

ii. The second condition is that the 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. The ‘details of the investment options’ as seen from the pamphlet (Table A) clearly states the per month income for the 48 month period of the scheme for respective category of the vehicle. From the said table, it is also seen that the same also provides for resale amount to be provided at the end of the term. The Company also issued postdated cheques to the investors and provided bank guarantees for the respective investors. Therefore, it is concluded that the contributions or payments are made to the scheme of the Company with a view to receive profits, income, produce or property from such scheme. The scheme of the Company therefore satisfies the second condition under Section 11AA(2) of the SEBI Act.

iii. The third condition is that the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors. The fourth condition is that the investors do not have day to day control over the management and operation of the scheme or arrangement. With respect to the above said conditions, I note that the investors of the Company were not provided with the vehicle details. The relevant clauses in the ‘agreement’ that the instalment for the entire loan period of vehicle and insurance/ maintenance/ fuel for such vehicle was the responsibility of the Company suggests that the management of the vehicle remains with the Company. The Company under the agreement retains the right to sublease/ rent the vehicle to a third party. From the same, it can be concluded that the investors do not have day to day control over the arrangement and operation of the scheme offered by the Company. The investor only decides the scheme and has no role in the acquisition of the vehicle. The investments of the investors were managed and utilized by the Company. As per the scheme, the vehicle remains with the Company and at the end of the term of the scheme the customer only gets the resale amount in addition to the monthly rent/ hire charges as promised. Such day to day control over management and operations of such scheme were also looked and exercised by the Company and its directors. In view of the same, it can be concluded that the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors and the investors do not have day-to-day control over the management and operation of the scheme or arrangement. Thus, the scheme of the Company also satisfies the third and fourth conditions under Section 11AA (2) of the SEBI Act.

As all the four conditions specified under Section 11AA(2) of the SEBI Act are satisfied in this case, the schemes/ plans promoted, launched, carried on and operated by the Company are in the nature of CIS in terms of Section 11AA(1).

8. Section 12(1B) of the SEBI Act mandates that no person, shall sponsor or cause to be sponsored or carry on or caused to be carried on any CIS unless it obtains a certificate of registration from SEBI in accordance with the CIS Regulations. The Company has clearly failed to do so. Regulation 3 of the CIS Regulations provides that no person other than a Collective Investment Management Company which has obtained a certificate under the said regulations shall carry on or sponsor or launch a 'CIS'. A person can launch or sponsor or cause to sponsor a CIS only if it is registered with SEBI as a Collective Investment Management Company. Therefore, the launching/ floating/ sponsoring/ causing to sponsor any 'collective investment scheme' by any 'person' without obtaining the certificate of registration in terms of the provisions of the CIS Regulations is in contravention of Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations. I note that Zeestar had launched CIS without obtaining certificate of registration from SEBI, it contravened the provisions of Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations.

9. In view of the observations made in this Order, 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 Regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999, hereby issue the following directions, in the interest of justice: a. Zeestar Limouzines Limited [AAACZ3468J] shall abstain from collecting any money from the investors or launch or carry out any Collective Investment Schemes including the schemes which have been identified as a Collective Investment Scheme in this Order. b. Zeestar Limouzines Limited 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 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. c. Zeestar Limouzines Limited shall not alienate or dispose off or sell any of the assets of the Company except for the purpose of making refunds to its investors as directed above. d. Zeestar Limouzines Limited are also directed to provide a full inventory of all their assets and properties and details of all their bank accounts, demat accounts and holdings of shares/securities, if held in physical form. e. Zeestar Limouzines Limited is restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market and launching any scheme for mobilization of funds in any manner for a period of four years. f. In the event of failure by Zeestar Limouzines Limited to comply with the above directions, the following actions shall follow: - Zeestar Limouzines Limited shall remain restrained from accessing the securities market and would further be prohibited from buying, selling or otherwise dealing in securities, even after the period of four years of restraint imposed in paragraph 9(e) above, till all the Collective Investment Schemes of the Company are wound up and all the monies mobilized through such schemes are refunded to its investors with returns which are due to them. - SEBI would make a reference to the State Government/ Local Police to register a civil/ criminal case against Zeestar Limouzines Limited, its promoters, 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 - SEBI would make a reference to the Ministry of Corporate Affairs, to initiate the process of winding up of the company, Zeestar Limouzines Limited. - SEBI shall initiate attachment and recovery proceedings under the SEBI Act and rules and regulations framed thereunder.

10. This order shall come into force with immediate effect.

11. This Order shall be without prejudice to the right of SEBI to initiate prosecution proceedings under Section 24 and adjudication proceedings under Chapter VIA of the Securities and Exchange Board of India Act, 1992 against Zeestar Limouzines Limited including other persons who are in default, for the violations as found in this Order.

12. With respect to the contravention of Regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, SEBI may examine whether to initiate appropriate proceedings under Sections 11(4) and 11B of the SEBI Act read with Regulation 65(e) of the CIS Regulations and Chapter VI A of the SEBI Act against Zeestar Limouzines Limited.

13. Copy of this Order shall be forwarded to the stock exchanges and depositories for necessary action.

Date: December 11th, 2015 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA