Order in the matter of Nikhara Bharath Construction Company Limited

Order in the matter of Nikhara Bharat Construction Company Limited

WTM/AB/EFD-1/DRA-3/01/ 2019-20

SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: ANANTA BARUA, WHOLE TIME MEMBER FINAL ORDER Under Sections 11(1), 11(4) 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 Nikhara Bharath Construction Company Ltd.

In respect of:

Sr. Noticee(s) PAN Details No. 1. M/s. Nikhara Bharath Construction Company Ltd AACCN1626J 2. Mr. Kodandarama Pillaiah, Managing Director ABVPP2512L 3. Ms. Bharathi Balakrishna Murthy ACBPB6181A 4. Ms. Sreedevi Balakrishnamurthy BVVPS2216P 5. Ms. Mohankumari Subramanyam ALSPM2250Q 6. Ms. Vijayalkshmi Injeti ACUPV6299E 7. Mr. Prabhakar Yedatoarai Chandrashekar Rao AARPP3760D 8. Ms. Rathnamma EXPIRED 9. Ms. Banumathi Venkatesan Rathnavelu ABNPR4706L 10. Ms. Asha Anantha Prasad AHGPA5142A 11. Mr. Mothganahalli Vishwanthashastry Jothy AKNPM9208L 12. Mr. Christopher Benjamin ABWPB5703A 13. Ms. Rukmini Sridhar EXPIRED 14. Mr. M K Vikram AKCPA7671F 15. Mr. T B subramanyam AFBPS2566P 16. Mr. Mysore Puttaramarao Anantha Padmanabha AASPP5487A 17. Mr. Aswathanarayana Murlidhar EXPIRED

The aforesaid entities are hereinafter referred to by their respective names/serial numbers or collectively as “the Noticees”.

BACKGROUND:

1. Based on a complaint received against Nikhara Bharath Construction Company Ltd. (hereinafter referred to as "Nikhara/NBCCL/Company"), Securities and Exchange Board of India (hereinafter referred to as "SEBI/ Board") conducted a preliminary enquiry and, thereafter, passed an ad interim ex-parte order dated June 12, 2014 (hereinafter referred to as ‘Interim Order’) against NBCCL and its directors namely; Mr. Kodandarama Pillaiah (Noticee No. 2), Ms. Bharathi Balakrishna Murthy (Noticee No. 3) and Ms. Sreedevi Balakrishnamurthy (the Noticee No. 4) directing, inter alia, not to collect any money from investors under its existing schemes, not to launch any new scheme and to submit the details of assets and amounts collected from the investors.

2. Subsequently, SEBI vide Order dated August 21, 2015 (hereinafter referred to as ‘Confirmatory Order’), while allowing the Company to execute sale deed in favour of buyers who had made the payments for purchasing land plots, confirmed the interim order dated June 12, 2014 and ordered for conducting an investigation into the entire business operation of the Company to find out whether the activities of the Company are in the nature of Collective Investment Scheme (hereinafter referred to as ‘CIS’).

SHOW CAUSE NOTICE, REPLY AND HEARING :

3. Based on the findings of the investigation, a show cause notice dated February 28, 2018 (hereinafter referred to as ‘SCN’) was issued to the Noticees alleging violations of Section 12(1)(B) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act, 1992’) read with Regulation 3 and 69 of the SEBI (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as ‘CIS Regulations, 1999’) and additionally Noticee No. 1 to 4 were also alleged to have violated Regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations, 2003’). The Noticees were called upon to show cause as to why the schemes being operated under various projects of the Noticee No. 1 should not be considered as unregistered CIS and why appropriate action including directions under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992 read with Regulation 65 of the CIS Regulations, 1999 should not be issued against them. The copies of the documents, relied upon in the SCN, were also enclosed therewith and provided to the Noticees.

4. Noticee No. 1 to 4 submitted their reply vide letter dated April 02, 2018 wherein among other mentioned that the Noticee No. 8, 13 and 17 have expired and, therefore, requested to drop the proceedings against them. Noticee No. 5 and 12 replied vide their letter dated March 27, 2018. No response or proof of delivery of SCN was received from Noticee No. 6, 7, 9, 10, 11, 14, 15 and 16 and, therefore, newspaper publication was made on September 30, 2018 for serving the SCN against them in Hindu and Patrika, Bengaluru edition and in one vernacular newspaper Vijay Karnataka.

5. In compliance with the principles of natural justice, the Noticees were provided an opportunity of personal hearing on December 24, 2018 when Ms. Shilpa Shah, Advocate from M/s Singhania and Partner appeared for and on behalf of all the Noticees except the Noticee No. 8, 13 and 17 (who were stated to have been expired). Mr. Kodandarama Pillaiah, Managing Director of NBCCL also appeared in person. During the course of hearing, the Advocate reiterated the stand taken in the reply dated April 02, 2018 and submitted that their clients are not carrying out any scheme in the nature of CIS and that they are engaged in a real estate business wherein agricultural lands are purchased from farmers and after getting conversion of the same in non-agricultural land, carrying out developmental work, the land/ plots are sold to the buyer under execution of registered sale deed which were registered with the competent Registrar. The buyers are transferred all the rights, title and possession of the specified land which is given in schedule to the registered deed. It was also submitted that till date, registration has been done in favour of 1256 buyers and that the details of each of registration can be accessed and verified on official website of registration department. It was also contended that names of the buyers are mutated in the records of revenue of the Government and as such the ownership rights are vested in the registered buyers and not with the Noticee No. 1.

6. During the course of hearing, the Advocate assured to provide the details of land purchased from the farmers, source of money for lands purchased, details of registration through which lands are sold to the buyers etc. The Noticee No. 1 vide letter dated March 21, 2019 has filed written submissions almost reiterating the same stand taken in reply dated April 02, 2018 and those submitted during the course of hearing held on December 24, 2018. Along with the written submissions dated March 21, 2019, the Noticee No. 1 has also submitted Annexures 1 to 4 containing PAN details of all the directors, details of lands purchased by the Company from various farmers, project-wise details of land plots sold to the buyers under registered sale deeds, copies of encumbrance certificates showing registration of sale deeds, etc.

7. The major contentions raised by the Noticees vide replies dated April 02, 2018, March 27, 2018 and written submissions dated March 21, 2019 are summarised as under:

a. The Company denied mobilizing any funds from investors, either overtly or covertly, under any scheme or scheme under the purview of Section 11AA of the SEBI Act, 1992.

b. As part of its business activity, the Company (i) acquires agricultural land parcels from various farmers, (ii) converts such land into non-agricultural plots (known as NA plots in the real-estate industry) after complying with legal and regulatory formalities, (iii) sells the land plots to the buyers as farm plots/farm house plots or residential plots, and (iv) depending on the project plan, develops farm houses, small farms with trees and infrastructure like roads, drainage, sewage and common amenities like club houses, swimming pool, parks and other entertainment facilities.

c. The Company identifies low cost lands and then acquires the same from the farmers with its own funds and thereafter take up the steps for conversion of land into non-agricultural lands. After sanction of final conversion order from local authorities, the Company prepares plans for selling these plots to prospective buyers. At times, marketing and selling plans are also made in anticipation of early receipt of approvals from the authority. The Company has submitted the details of lands purchased for eight projects in following format (there are various land parcels purchased by the company in each of the projects. Details of first purchase of land parcels in each of the projects is mentioned below on sample basis):

Table – 1 {Details of Land parcels purchased by the Company (on sample basis)} Mandya @ B Housr Sr. Farmer Name Sy. No. Extent Regd. Doc Date Amount Source No. 1. Anil Kumar MS 50/p30 1.00 11521/06- 15-12-2006 110000 Share capital and 07 Sale proceeds R R Nagar (other property) of Rs. 41,25,000/- Adadakulapalli (PenuKonda Fort I) 1. Gopal Reddy/ 13 2.75 3061/2007 01-09-2007 66000 Sale proceeds – Nandini/Shantham KSRTC (other ma/ Nirmala property) of Rs. 70,00,000/- Narayanpura (Bandlapur) 1. Polineni 49/3 3.36 920/2007 14-03-2007 101000 RR Nagar (other Ramchandrappa/ property) of Rs. Somshekar/ 41,25,000/- Gopala Challapalli 1. K 100-3A 3.00 3760/2007 28-09-2007 72000 Share Capital Aswarthnarayana/ introduced and Sale k Subramanayam proceeds – KSRTC (other property) Gorantla (Gownivaripalli)

1. Monorama 343- 0.5-1/4, 2547/2007 28-05-2007 476500 Share Capital 3/485/4 4.37- introduced and Sale 96 1/2, 5.10 proceeds – KSRTC (other property) Amadagur Phase I 1. Shiva Reddy 2 9.00 6924 13-11-2013 5,40,000 Share Capital introduced and Overdraft facility at NSCCL Thummala (Amadagur Phase -II) 1. Amarnath Reddy 942 12.53 3043 03-04-2013 752000 Share Capital and Others introduced Sakaleshpura 1. Rampariyan 72/2B, 7.05/ 2810 05-03-2012 11418750 Overdraft facility at 9, 73 6.10/ NSCCL 12.00 d. As per SCN, out of 1334 persons who had booked the plot, the land plots are transferred in favour of 1256 buyers by execution of sale deeds. In this regard, the Company has shown in Annexure A to the reply dated April 02, 2018 that advance was collected from the proposed buyers only after the land plots purchased by the Company in its own name form the farmers. Thereafter, the lands are appropriately divided, marked and demarcated into standard areas of around 5000 sq.ft. and 5450 sq.ft. per plot of land which are advertised for sale to the buyers. It was stated by the Company that receipt of money from buyers are spread over a period of time and after completion of payment, the Company executes a Sale Deed in favour of the buyer conveying all right, title in the plot of land in favour of the buyers. As per the table given in Annexure A to the reply dated April 02, 2018, the date of land purchased by the Company and the date when collection of advance commenced in respect of eight projects are as under:

Table – 2 (Commencement of purchase of Land Parcels by the Company and acceptance of advance) Sr. Project Name Commencement of Commencement of No. purchase of Land Advance Collection Parcels by the from the buyer Company 1. 1Mandya @ B Housr 15/12/2006 03/03/2007. 2. 2Adadakulapalli 01/09/2007 02/02/2008. (PenuKonda Fort I) 3. 3Narayanpura 14/03/2007 03/03/2007** . (Bandlapur) 4. 4Gownivaripalli 28/05/2007 03/01/2013. 5. 5Challapalli 28/09/2007 29/10/2012. 6. 6Amadagur Phase I 13/11/2013 08/01/2014. 7. 7Thummala (Amadagur 03/04/2013 22/03/2014. Phase -II) 8. 8Sakaleshpura 05/03/2012 24/05/2012. ** Admitted that advance of Rs. 1,00,000/- was accepted before the purchase of land e. The price of plot of land is determined by the Company taking into consideration many factors including acquisition price, cost of conversion to Non- Agriculture plots, marketing cost, cost incurred in development and maintenance etc. After receipt of complete payment from the buyers, the land plot is transferred in the name of buyer through execution of sale deed. The Company has submitted the details of lands plots sold to all the 1256 buyers in eight projects in following format. As a sample purpose, the details of one buyer from each project are as under:

Table – 3

{Details of Land plots sold to the buyers (on sample basis)} Mandya @ B Housr Sr. Name of the Buyer Plot No. Doc. No. Doc. Date Doc. No. Amount 1. Kanchana Palmand 1 9887 05-12-2011 148000 Adadakulapalli (Penukonda Fort I) 1. Rathnamma 12 22007 03-07-2013 124000 (Ramakrishna) Narayanpura (Bandlapur) 1. Rathna & 1A 1021 11-06-2014 93000 Santhaveeraiah Gownivaripalli 1. Yashoda 1 3344 22-11-2013 95000 Challapalli 1. Chandrakala C V 1 2763 14-11-2013 95000 Amadagur Phase I 1. Krishna Urs 1 2853 16-04-2014 150000 Thummala (Amadagur Phase -II) 1. Anjanamma 5 3030 24-04-2015 384000 Sakaleshpura 1. Va sudev B V 4 2355 18-02-2014 110000 f. The Company does not receive funds from a group of people at one point in time to create or mobilize a ‘pool of funds’. The funds received by the Company (as and when it does) are deployed almost immediately for various business purposes and development of projects and there is no pool of funds created for any specific project which is akin to a typical real estate business.

g. In support of the contention that the lands are sold to 1256 buyers, the Company has submitted the detailed list (in above format) of all 1256 buyers along with encumbrance certificate which mention description of property, date of execution, market value, name of the parties (executant and claimant), document number and the year. The Company has further stated that, once the plots are sold by the Company, the buyers are in absolute control and possession of the plots and also have the absolute discretion to maintain the plot of land acquired by them from the Company, on their own or through their resources/third party or may request the Company to maintain the same on their behalf. The Company takes the responsibility for maintenance of the project site for an initial period of five years.

h. Referring to the relevant portion of the sale deed, the Company has stated that the buyers of the plot of land have complete control over the land plot and are free to do they wanted to do over it. After execution of absolute sale deed, the Company does not reserve any right of buy-back of plot of land nor restrict or interfere in any right entitlement or ownership of buyer.

i. Out of 1256 plot buyers, the MOU was entered into only with 209 buyers which constitutes 17% only on optional basis and the other buyers at their discretion may maintain his/ her plot of land either by themselves or through any third party.

j. Requirement of NOC from the Company for transfer of plot from one person to another person and payment of 5% from both the parties is a charge for service like a real estate broker.

k. The Company admitted that some of the lands are owned and registered in the name of the Directors, however, it is stated that the same was done as per matter of convenience and held by them in fiduciary capacity. No personal gain has been made by the director.

l. SCN has incorrectly mentioned that there was no demarcation of land. The plots had stone laid with number on it. It is standard practice that demarcation is carried out by fixing demarcation stone at four boundaries. Law does not mandate to demarcate land by way of fencing or erecting boundary.

m. Refund of money was made in respect of four projects. In projects at viz. Channapatna, Ramanagara and Mandya Highway, the refund was made due to non-getting requisite approvals and in project at Panukonda-II, the customers who had booked plots in that project were allotted in another project known as Adadakulapalli, as per their request.

n. The Company denied the allegation that the investors are from different parts of the country and stated that about 90% of the buyers are from Bangalore and rest 10% buyers also have their families/ base in Bangalore.

o. The buyers insist on verifying title records before taking decision on buying of any land or making any payments to the Company. No real estate can first collect money from buyers and then start the process of land acquisition. The Company had purchased most of the lands except an isolated instance where an amount of Rs. One Lakh was received from one buyer in Narayanpura project. The amount taken prior to completion of purchase transaction is very meagre vis-à-vis funds used for the purchase of lands i.e. less than 0.0029%.

p. The Company denied that money received from new investor was used to repay another investors. It mentioned that like in any other business, there is inflow of money and nowhere inflow and outflow is maintained separately and pay-outs are made from internal generation of funds. But the same does not imply that the existing buyers will be deprived of rights agreed upon under their respective absolute sale deeds. The Company provided a table in Annexure – G to its reply dated April 02, 2018 which is reproduced, as below:

Table-4 {Details of Amount Collected and Refund made in four projects} Table 7: Project and Year wise Amount Collected/Refunded Channapatna Amount Amount Remarks Amount Collected : 8449911 Refunded : 7145111 1304800 Neelesh Nelim Plot Shifted to Adadakulapalli No.115 500000 Fort I Ramesh S R 540000 Refunded Interest on TDS 264800 1304800 0

Table 7 : Project and Year wise Amount Collected/ Refunded Ramanagara Amount Amount Remarks

Amount Collected : 20436099 Refunded : 18946099 1490000 Anitha Kumari R Shifted to Amadagur Lot No.225 50000 Phase I (Regd) Chandramma S N Shifted to Sakaleshpura Plot No.40 20000 (Regd) Mala Satyanarayan Shifted to Mandya Farm Plot No.65 & 66 200000 House Shifted to Adadakulapalli S Avinasha 1100000 Fort I Shankar Narayan Shifted to Mandya Farm Plot No.78 & 79 100000 House Shifted to Chandramma S Suvarnamma S N N for Sakaleshpura Plot Plot No.40 20000 40. Regd 1490000 0 Table 7 : Project and Year wise Amount Collected/ Refunded Uukonda (Fort II Amount Amount Remarks

Amount Collected : 4196750 Refunded : 295500 3901250 Anuradha G Joshi Shifted to Adadakulapalli Plot No.46 160000 For I (Regd) Anuradha G Joshi Shifted to Adadakulapalli Plot No.47 390000 For I (Regd) Anuradha G Joshi Shifted to Adadakulapalli Plot No.48 390000 For I (Regd) Nagesh Sai Babu Shifted to Adadakulapalli Plot No.72 290000 For I (Regd) Rachana Ramesh Shifted to Adadakulapalli Rao Plot No.212 500000 For I (Regd) Saif Ullah Khan Plot Shifted to Adadakulapalli No.73 550000 For I Srinivasaiah Setty Shifted to Adadakulapalli Plot No.65 500000 For I (Regd) Monica Sabrina Plot Shifted to Adadakulapalli No 69 500000 For I (Regd) Ramesh Babu D S Olot No.94 621250 Refunded 3901250 q. It can be seen from the Table-8 of the SCN that yield generated from Mango trees are insignificant when compared to the sale consideration paid by the buyers. The yield is so low that no customer has purchased the plots keeping the yield or return in the mind. The Company at no point of time has assured any returns/ profits to its buyers either in the sale deed or in the MOU. The Table-8 given in the SCN is reproduced herein as below:

Table – 5 (Value of agricultural produce received by the buyers in Challapli project as noted by investigating authority) No. of Total Plot Sl. No. Customers Name Mango (Amount No. Plants in Rs.) 1 1 Chandrakala C V 18 306 2 3 Gayathri 17 289 3 4 Shamala 15 255 4 5 Venkataramudu P 15 255 5 6 Dr. Srinivas K 14 238 6 8 Vinod Kumar P 12 204 7 10 Nageena Taj 11 187 Shantha Bai and Shakar 8 12 12 204 Battur 9 15 Kavya S 11 187 10 16 Sridhar Dixith S 12 204 11 17 Sarvamangala 14 238 12 18 Poornima H 10 170 13 19 Poornima 12 204 14 20 Prasanna N R 13 221 r. The Company has stated that it has purchased land from its own sources. The Company has provided a detail statement of purchases and accruals in Annexure 2(a) to its written submissions dated March 21, 2019 which is reproduced as under: Table - 6 (Statement of Land Purchased by the Company and Accruals)

Internal Accruals

Internal Internal Accruals Accruals – Purchas Othe Loans Full Sale – Purchase es r (receive Other Yea Share Value Of Purchase s Prop d and Accrua Totals r Capital Regd. s Cumulati erty refunde ls Plots ve Sale d) (2) (1) (a) (b) (c) (d) (e) (a+b+c+d 2-1 (3) +e) 2004 - .0 1513000 0 0 0 1513000 1513000 1513000 2005 2005 - 0 1670000 0 1484610 0 0 3154610 3154610 4667610 2006 2006 41250 - - 5194000 2727000 132079 0 5499469 305469 4973079 00* 1484610 2007 2007 1238335 70000 - 402000 7436039 2334 0 14840373 2457023 7430102 0 00* 2008 2008 - - 5243500 674500 0 166168 721000 2930148 -2313352 5116750 5120520 2009 2009 - 2630700 452000 0 6382556 438134 9611633 16884323 14253623 19370373 2010 2010 - 2214500 330000 0 6677862 807758 10964800 18780420 16565920 35936293 2011 2011 2047835 3817550 - 1500 0 881016 29396495 68454511 47976161 83912454 0 0 2012 2012 - 1200000 225474 14743269 - 3985125 0 2445682 77707342 67505364 63520239 0 5 3 2013 3 2013 1847465 1690538 173043 22592202 - 0 0 78328164 96963980 78489330 0 4 2 3 2014 2014 - 1135591 342245 20686863 15406427 37998629 - 0 0 4487090 165420183 3 2 1 0 3 2015 0 Tota 8196008 1977000 11125 983521 42008706 37998629 1129098 461946381 l 8 0 000 8 5 3 Note:  Sale Proceeds of Residential Plot @ Rajarajeshwari Nagar, Banglalore owned by the Company  Sale Proceeds of Residential Plot with house @ KSRTC, Bangalore owned by the Company s. In the Confirmatory Order dated August 21, 2015, Whole Time Member, SEBI appreciated that the Company’s business is sale of land, since copies of registered deeds were produced before him, and had held that hindering any genuine execution and registration of sale deed in favour of buyers would not be reasonable. This shows that the Company’s business activities are not satisfying any of the conditions of Section 11AA of the SEBI Act, 1992. If selling of lands was CIS then SEBI would not have permitted the Company to register the sale deeds in favour of buyers. The very act of according permission for registration indicates that SEBI was convinced that the business of the Company was in the nature of real estate.

t. The Hon’ble High Court of Rajasthan in PACL India Pvt. Ltd. vs. Union of India 2004 49 SCL 250 Raj has observed that as per words used in Sub-section (1) of Section 11AA, the scheme or arrangement should satisfy all the 4 conditions then only scheme of company can be said to be covered under the definition of “CIS”.

u. The law laid down by the Hon’ble Supreme Court in the matter of PGF Ltd. has been relied upon by SEBI in the Interim Order which has no application in the present matter, which is involved in real estate business.

v. The Company is represented by the Board of Directors consisting of Mr. Kodandarama Pillaiah, Ms. Bharathi Balakrishna Murthy and Ms. Sreedevi Balakrishnamurthy. However, the day to day business of the Company are carried out by Mr. Kodandarama Pillaiah who is Chairman and Managing Director of the Company. The Noticee No. 5 to 17 are the persons who were part of the Board of Directors during the period of 2004 to 2013 and all of them were only non-executive directors and that they were neither involved in day to day business of the Company nor paid any remuneration.

w. The Company has denied the allegation that by not obtaining registration with SEBI, the Company has violated the provisions of SEBI Act, 1992, SEBI CIS Regulations, 1999 or SEBI PFUTP Regulations, 2003.

x. The Company has suffered irreparable loss and hardship due to Interim Order, as it is unable to sell the remaining unsold plots in the existing projects (eight) and launching any new project. It has suffered severe financial losses including loss of business opportunities. Its survival and existence is now under further threat in view of the present proceedings.

y. Noticee Nos. 5 and 12, vide their separate letters dated March 27, 2018, have stated that they were non-executing directors and, as such, not involved in day to day business of the Company and that they were also not paid by the Company.

CONSIDERATION OF ISSUES AND FINDINGS:

8. I have perused the Interim Order dated June 12, 2014, Confirmatory Order dated August 21, 2015, SCN dated February 28, 2018 along with the documents annexed therewith, the replies dated April 02, 2018, March 27, 2018 filed by the Noticees and considered the submissions made during the course of hearing on December 24, 2018 and written submissions dated March 21, 2019 along with documents annexed therewith. The question now arises as to whether the activities carried out by Noticee No. 1 was in the nature of CIS which could attract the violation of provisions of SEBI Act, 1992 and Regulations, as alleged in the SCN dated February 28, 2018.

9. Section 12(1B) of the SEBI Act, 1992 restricts any person from carrying any collective investment scheme unless he obtains a certificate of registration from the Board in accordance with the regulations. As per provisions of SEBI CIS Regulations, 1999, a CIS can be launched only by a SEBI registered Collective Investment Management Scheme (hereinafter referred to as ‘CIMC’) by filing the offer document with SEBI and a CIS has to be constituted in the form of a trust. The CIMC needs to appoint a trustee who is registered with SEBI as a debenture trustee under SEBI (Debenture Trustee) Regulations, 1993 and also to obtain credit rating from a credit rating agency. The money payable towards subscription of units of CIS has to be made through cheque, demand draft or other banking channel and not in cash. CIMC is required to issue freely transferable unit certificates, to the investors, which are to be listed on the stock exchange. Further, the CIMC can launch only close ended scheme with minimum duration of three calendar years. Before going into all these details, it would be appropriate to examine as to whether the activities carried out by the Company falls within the definition of ‘collective investment scheme’ which has been defined in Section 11 AA of the SEBI Act, 1992, as under:

“11AA(1) Any scheme or arrangement which satisfies the conditions referred to in subsection (2) or sub-section (2A) 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 name called, are pooled and utilized solely for the purposes of the scheme or arrangement; (ii) 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; (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.”

10. The allegations made in the SCN and replies made by the Company are analysed in respect of each of the four ingredients contemplated under Section 11AA (2) of the SEBI Act, 1992.

A. Pooling of Contributions for the purpose of scheme:

a. The SCN mentions that the Company has mobilized Rs. 61.54 Cr. from twelve projects and, out of this, Rs. 57.23 Cr. was mobilised from the eight projects (mentioned in Table-1 and Table-2 of the SCN). It is alleged that the money mobilization was started from the year 2006-07 for four projects and for the remaining projects from the year 2012-13 onwards but the actual accruals of the Company do not match with the land acquisition made by the Company. It is also mentioned that the money mobilised in respect of four projects (reproduced at Table-4 in para 7(p) above) were refunded without selling any land for making refund and, therefore, it is alleged that the money pooled from the investors was used by the Company to acquire the lands and refund made to the investors.

b. With respect to the above allegations made in the SCN, I note that the Company has stated that it is engaged in the real estate business where it identifies low cost agricultural land, purchases the land from villagers/farmers, converts such land into non-agricultural plots, carry out certain developmental work and then sells the plots of lands to prospective buyers as farm plots/farm house plots or residential plots. It has also stated that, before selling, the lands are appropriately divided, marked and demarcated into standards size (around 5000 sq.ft. and 5450 sq.ft. per plot) and after receipt of sale price from the buyers, the Company executes sale deeds in favour of the buyer conveying all right, title in the plot of land in favour of the buyers and the Company does not reserve any right of buy back. The Company has also stated that once the plots are sold by the Company, the buyers are in absolute control and possession of the plots and also have the absolute discretion to maintain the plot of land purchased by them from the Company, on their own or through their resources/ third party or may request the Company to maintain the same on their behalf. I find that the Company has purchased land parcels in eight projects {Mandya @ B Housr, Adadakulapalli (PenuKonda Fort I), Narayanpura (Bandlapur), Challapalli, Gorantla (Gownivaripalli), Amadagur Phase I, Thummala (Amadagur Phase -II), Sakaleshpura} which started from the year 2006-07, as shown on sample basis in Table -1 at para 7(c) above.

c. I note that the land plots purchased by the Company in eight projects, as referred above, are demarcated and undertaken for development by the Company and, thereafter, started selling to the buyer from the year 2011-12. I find that, out of 1334 persons who had booked the plot, the land plots are sold to 1256 buyers by the Company through execution of registered sale deeds in favour of respective buyers. It is on record that the Company vide letter dated March 25, 2015 had submitted 107 copies of sale deeds evidencing land parcels purchased by it and also submitted 42 copies of sale deeds, on sample basis, whereby land plots are sold to the buyers by the Company. I further note that, taking the same on record, vide Confirmatory Order dated August 21, 2015, the Company was allowed to execute and register sale deeds in respect of such buyers who had already made the payments.

d. In this respect, the Company vide written submissions dated March 21, 2019 has furnished a list of those 1256 buyers providing the registration details which includes name of the buyer, Plot No., Document No. (registration), Document date (execution date) and the sale value, which is reproduced on sample basis in Table -3 at para 7(e) above. Along with the list, the Company has also submitted copies of encumbrance certificates in respect of transfer of land plots made in six projects {Adadakulapalli (PenuKonda Fort I), Narayanpura (Bandlapur), Challapalli, Gorantla (Gownivaripalli), Amadagur Phase I, Thummala (Amadagur Phase -II)}. The copies of these encumbrance certificates are apparently printed from the official website of registration department which provides description of property, date of execution, market value, name of the parties (executant and claimant), document number and the year of execution of sale deeds.

e. I note that, during the course of investigation, the investigating authority has verified the genuineness of the sale deeds, for thirty buyers on random basis, on the official website of registration department of Govt. of Andhra Pradesh (http://registration.ap.gov.in) and confirmed that the sale deeds were duly executed in the name of those buyers which were mentioned by the Company.

f. I also note that the Company in Annexure- A to the reply dated April 02, 2018, has provided a table detailing the dates of land parcels purchased by the Company, as shown in Table-1 at para 7(c) above, in respect of said eight projects, and also the dates when collection of advance was commenced in that project, which is reproduced in Table-2 at para 7(d) above. The said tables reveal that, out of the eight projects, in seven projects it has started accepting advance after the date of purchasing land in the name of the Company. In respect of one project i.e. Narayanapura, the Company has admitted that an advance of Rs. 1,00,000/- was accepted from one buyer eleven days before the date of land purchased by the Company for that project, which is an exceptional case.

g. In respect of accruals of money, the Company has provided a table in Annexure -2(a) of written submission dated March 21, 2019 detailing the cost of cumulative purchase matching with the internal accruals. The said table is reproduced in Table-6 at para 7(r) above. Further, in Annexure – 2 to the written submissions dated March 21, 2019, the Company has also provided the details of land purchased by the Company and also the source of funds, which is reproduced on sample basis in Table-1 at para 7(c) above. In Annexure –A to reply dated April 02, 2018 (which is reproduced in Table-2 at para 7(d) above) the Company has submitted the dates when land parcels were purchased for each of those eight projects and the date when Company started accepting advance for selling land plots in those projects. From the said tables, I note that the Company started purchasing land parcels in the year 2006-07 and the advance was accepted from the buyers thereafter in respect of each of the eight projects (except one instance which is mentioned in sub-para (f) above). Further, I find that the Company has stated that the land parcels were purchased by its own sources like infusing share capital, availing over draft facility, sale proceeds of land plots in other projects etc. and not from the money collected from the buyers.

In this support, the Company in Annexure – 2 to tis written submission dated March 21, 2019 has provided the details of land purchased by it and also the source of funds {which is reproduced on sample basis in Table-1 at para 7(c) above}. I also note that, as observed in para 10(A)(b) to (e) above, after purchase of land parcels by the company and after carrying out demarcation, plotting etc., the same are sold to the buyers through execution of registered sale deeds in favour of each of buyers, as detailed in Table-3 at para 7(e) above. I find that these activities involved actual sale and purchase of land plots wherein the Company first purchased land plots from the farmers and after undertaking developmental work, demarcation etc., the same are sold to the buyers through execution of registered sale deeds. Thus, there was no pooling of funds from the buyers for the purchase of land by the Company. The plots were already purchased in the name of the Company, as detailed in Table- 1 at para 7(c) above, which was subsequently sold to the buyers, as detailed in Table-3 at para 7(e) above in support of which the Company has provided details of sale transactions which are referred to in para 10(A)(c) above.

The land plots transferred in the name of the buyers through execution of registered sale deeds cannot be considered as allotment of units of a scheme by the Company.

h. In respect of the allegation that money received from new investor was used to repay to another investors, the Company has stated that necessary approvals were not received for four projects {(Channapatna, Ramanagara, Uukonda (Fort II) and Mandya Highway} for which refunds were made to the proposed buyers who had made advance payments for purchase of land plots in the said four projects. The Company has also provided a table in Annexure G to its reply dated April 02, 2018 (reproduced in Table-4 at para 7(p) above) showing that the same amount, which was collected from the investors, were refunded to the proposed buyers of those four projects and the balance amount shown in Table-7 of the SCN in respect of three projects {(Channapatna, Ramanagara, Uukonda (Fort II)}, were adjusted for shifting and selling the land plots to those buyers in other projects of the Company, as shown in Table-4 at para 7(p) above. I also note from Table-4 at para 7(p) above that the same amounts, which were collected as advance, were refunded to the proposed buyers except to those who were given land plots in other projects. Thus, the allegation that the money pooled from the investors were utilised for the purpose of scheme is not substantiated.

B. Contributions made with a view to receive profits :

a. Based on sample check carried out by the investigating authority for project of the Company at Challapalli, the SCN has alleged that the Company was distributing agriculture income to the buyers as shown in Table No. 8 of the SCN {(which is reproduced at Table-5 in para 7(q) above} for the year 2013- 14. The SCN also alleged that the Company was refunding investor’s money with interest. In this background, it is alleged in the SCN that the investors were getting returns.

b. In respect of aforesaid allegation made in the SCN, I note that the income distribution, as shown in Table-8 of the SCN (which is reproduced at Table-5 in para 7(q) above), varies between Rs. 170 to Rs. 306 for the annual year 2013- 14. As noted in para 10(A) above, the Company was engaged in sale and purchase of land wherein land parcels were first purchased by the Company and, after carrying out demarcation, developmental work etc., money was accepted from the buyers for selling the same and after receipt of payment from the buyers, the land plots are transferred in favour of buyers through execution of registered sale deeds. The Company has also stated that once the land plots are sold by the Company, the buyers are in absolute control and possession of the plots and also have the absolute discretion to maintain the same on their own or through any third party or may request the Company to maintain the same on their behalf. The Company has also stated that it takes the responsibility for maintenance of the project site for initial period of five years, however, after execution of sale deeds the buyers are absolute owner of the land plots and free to maintain the same either himself or through any third party or through the Company and that after sale of land plots, the Company acts merely as a service provider.

I note that out of 1256 buyers, 209 buyers entered into MOU with the Company for managing their land plots. Thus, the allegation that the buyers were receiving agricultural produce was in fact the produce arising out of the land plots owned by the buyers themselves. It was not the case that contributions were pooled and managed by the Company out of which buyers were receiving profit. Further, the value of income generated, as shown in Table-8 of the SCN (reproduced at Table-5 at para 7(q) above), is so insignificant that hardly any buyer would get attracted to invest his money for receiving merely that much of profit. Instead, the advances were made for the purpose of purchasing land plots. In respect of allegation that the Company was making refund to the investors with interest, I note that in para 10(A)(i) above, it is observed from the details provided by the Company that the refund made in respect of four projects, where approval could not be obtained by the Company, were apparently on actual basis, as reproduced in Table-4 at para 7(p) above. Thus, it cannot be concluded that the buyers were making the advances with a view to receive any kind of profit.

C. Contributions are managed on behalf of the investors and the investors do not have day to day control:

a. The SCN has noted that out of 1256 buyers, MOUs were entered into with 209 buyers which imposed restrictions on the buyers such as constructible area, obtaining NOC from the Company before any alienation/sale and payment of 5% of the last declared price. It was also alleged that the income from agricultural produce/plantation was proportionately distributed (including number of trees) amongst the buyers/investors based on the size of land of investor and not the actual produce that is obtained from the land plot owned by the investor. SCN also mention that the plots on the project sites were not demarcated/fenced and had a stone laid with a number on it. In this background, the SCN alleged that the Company was managing the contributions pooled form the investors.

b. In respect of the aforesaid allegation made in the SCN, I note that, as observed in para 10(A) above, the land plots are owned by the buyers and the plots are also duly identified and located in the schedule to the registered sale deeds with four side boundaries of the plot. I also note that the Company has stated that once the land plots are sold by the Company, the buyers are in absolute control and possession of the plots and also have the absolute discretion to maintain the same on their own or through any third party. Further, out of 1256 buyers, separate MOUs were executed with 209 buyers (which constitutes 17% ). SCN has also alleged that Company had collected money for development and maintenance of land from all 1256 buyers irrespective of whether MOU was signed or not. In this respect, I note that the Company has admitted that the price of land depends upon various factors like acquisition price, cost of conversion to Non- Agriculture plots, cost incurred in development and maintenance etc. The relevant fact here is that the land plots are transferred in the name of the buyers through execution of registered sale deeds, as shown in Table-3 at para 7(e) above. The Company has also stated that it takes the responsibility for maintenance of the project site for initial period of five years, however, after execution of sale deeds the buyers are absolute owner of the land plots and free to maintain the same either himself or through any third party or through the Company and that after sale of land plots, the Company acts merely as a service provider. As noted in para 10(A) above, there was no pooling of fund for the purpose of purchasing the land by the Company and it is also not the cases that the contributions are managed by the Company. I further note that 209 buyers have opted to engage the Company to maintain their land plots under separate MOUs. Thus, as the land plots are owned by the buyers, the buyers have control in the management of the land plots owned by them by virtue of the registered sale deeds executed by the Company in favour of the buyers.

11. In para 9 above, the definition of CIS, as given in Section 11AA (2) of the SEBI Act, 1992 has been reproduced. As per the said definition, it is necessary that all the four ingredients mentioned in the section should exist in the alleged scheme or arrangement for determining the same as ‘CIS’. In this connection, I note the following rulings of Hon’ble Supreme Court and of Hon’ble Securities Appellate Tribunal (SAT):

a. The Hon’ble Supreme Court in the matter of PGF Limited Vs. Union of India & Anr. (Civil Appeal No. 6572 of 2004), vide Order dated March 12, 2013, has observed as under:

“35. ……. A reading of the said provision discloses that it talks of any scheme or arrangement, which would fall within the definition of a collective investment scheme. Section 2 (ba) under the definition clause states that a collective investment scheme would mean any scheme or arrangement, which satisfies the conditions specified in Section 11AA.

b. In the matter of PACL Ltd. vs. SEBI (SAT Appeal No. 368 of 2014), the Hon’ble SAT vide its Order dated August 12, 2015 has observed as under: “23. …….Thus, in the facts of present case since all conditions set out under Section 11AA(2) are satisfied the WTM of SEBI was justified in holding that the schemes operated by PACL constituted CIS……..”

c. In the matter of Ossian Connoisseur of Art Private Limited vs. SEB ( SAT Appeal No. 62 of 2013), the Hon’ble SAT vide Order dated October 13, 2015 observed that: “20……………… Thus, the facts on record demonstrate beyond shadow of doubt that all the conditions set out under Section 11AA(2) are satisfied in the present case and hence no fault can be found with the decision of SEBI that the scheme floated by the appellant constitutes CIS…………………”

d. The Hon’ble SAT vide its Order dated May 12, 2017 passed in the matter of Pancard Clubs Ltd. vs. SEBI (SAT Appeal No. 52 0f 2016) has observed as under: “17. A reading of Section 11AA of the SEBI Act shows us the conditions which need to be fulfilled before any scheme launched by an entity is classified as a CIS viz. first, monies collected by investors are pooled and utilized for the purposes of the scheme; second, the investors contribute to a scheme with the intention of receiving profits in the form of money, produce or property; third, the contributions from investors are being managed on their behalf and lastly; and fourth, the investors have no control over the day to day management and operations of the scheme. ……………………………… 18. ………….It is pertinent to note that these conditions, when looked at individually, might seem to be fulfilled by a number of entities. However, in order to classify a scheme as a CIS, the aforementioned conditions need to be fulfilled collectively by a particular scheme. Therefore, any scheme that satisfies all four conditions under Section 11AA(2)(ii) comes under the definition of a CIS.

12. I note that the present proceedings were initiated based upon a complaint received by SEBI vide an email dated April 30, 2013 alleging illegal mobilization of money made by the Company. In this respect, the Company has stated that the said complainant had neither purchased land plots from the Company nor made any advance for the same. The investigation has also noted that except the said initial single complaint, no further complaint was received by SEBI against the Company.

13. I, further, note that the SCN has not referred to any offer document issued by the Company soliciting money form the investors on the assurance of any return. In this respect, it has been brought to my notice that, the Company had provided Brochures for the projects and advertisement made in two Newspaper (in Deccan Herald on April 25 and May 16, 2014 and one in Kannada Newspaper) before the investigating authority. The Brochures referred to standard feature available in the projects with the layout and states additional feature as plant/ tree at the plots. The Brochures did not contain the consideration amount but mentioned that the land plots are available for immediate registration with free maintenance for five years. It also states that the corner plots would cost extra 10%. The said advertisement given in newspaper also states that the same and, in addition, mentioned about loan facility, 10 gm gold coins. I note that the Company has stated in the Brochures that the land plots are available for immediate registration. Further, as detailed in para 7(d) above, it is noted that the Company was accepting advance only after purchasing land parcels and, as noted in para 10(B) above, the Company has transferred the land plots in favour of more than 95% buyers by execution of registered sale deeds. Therefore, the advertisement made in the Newspaper and the Brochures of the Company appears to have been issued for inviting the buyers to purchase the land which were already owned by the Company. The offer of loan facility, Gold coin and free maintenance, etc. are apparently in the nature of incentive for attracting the buyers to purchase the land plots and the same cannot be considered as assurance of any kind of return or profit.

14. For determining any scheme or arrangement as CIS, it has to be considered as to whether it involves investment component which is made in a scheme or common arrangement with an expectation to receive profit to be generated from the efforts of management of that scheme or arrangement. In case of a CIS, the purpose of pooling money through offer document and accepting advance from investors is to raise capital which is to be used in respect of that scheme and investor makes investment, not for immediate utility, with an expectation of receiving profit in future and the investor also bears the risk of loss, in case management’s efforts are not successful. It is also necessary that the Company which is operating the scheme represents/ advertise among the proposed investors that they have the skill and expertise which will increase the value of investment and thereby create an expectation of generating profit among the prospective investors. The investors cannot ask for transfer of assets of schemes in his own name.

15. In view of the above facts and circumstances, I find that the Company is engaged in actual purchase and sale of land plots and, in this connection, the Company carries out certain developmental activities on the land plots like construction of road, drainage, sewage etc., as prevalent in the real estate sector. Thus, the business activities carried out by the Company does not contain all of the ingredients of CIS. In terms of rulings of Hon’ble Supreme Court and Hon’ble SAT, as referred to in para 11 above, in order to classify a scheme as a CIS, all the four conditions i.e. contributions are pooled from the investors, investments are made with a view to receive profit, contributions are managed by the Company on behalf of investors and the investors do not have day to day control over the operation of the scheme, need to be fulfilled collectively by a particular scheme. I find that all of the four conditions do not exist in the aforesaid business activities of the Company and, therefore, the same cannot be treated as CIS, as defined in Section 11AA (2) of the SEBI Act, 1992. Hence, in view of the above facts and circumstances of the case, the directions made in the Interim Order dated June 12, 2014 and Confirmatory Order dated August 21, 2015 cannot be continued.

16. I, further, note that the Government of India had constituted an Inter – Ministerial Group (IMG) for identifying gaps in the existing regulatory framework for deposit taking activities and to suggest administrative/ legislative measures including formulation of a new law to cover all relevant aspects of ‘deposit taking’. IMG submitted its report to the Government of India recommending a number of measures including legislation of a comprehensive Central Law called the “Banning of Unregulated Deposit Schemes and Protection of Depositors Interest Bill. The IMG also recommended that the proposed Regulator under Real Estate (Regulation and Development) Bill should provide adequate regulatory over-sight over illegal deposit and/ or advance taking activities in the real estate sector.

17. The Real Estate (Regulation and Development) Act, 2016 (‘RERA Act, 2016’) has been enacted with a view to regulate and promote the real estate sector by regulating the transactions between buyers and promoters of residential as well as commercial projects. The said Act also provides for establishment of "Real Estate Regulatory Authority" (RERA) at state level for monitoring the real estate sector and adjudicating disputes relating to Real Estate Projects. It is noted from the respective official websites that Govt. of Andhra Pradesh and Govt. of Karnataka (where land plots of the Company are situated) have notified the Rules under RERA Act, 2016. It is noted in para 10(A)(h) that the Company has refunded the advance received from the buyers in respect of four projects {(Channapatna, Ramanagara, Uukonda (Fort II) and Mandya Highway} where necessary approvals could not be obtained by the Company. Thus, if there is any complaint of buyers in respect of non-receipt of refund of their advance from the Company or non-execution of sale deed after taking advance or non-delivery of possession of land plots or non-fulfilling of terms of MOU etc., if any, the findings made in this Order shall not constrain the complainant from approaching the above or any other authorities.

18. During the course of hearing, the copies of death certificates of Noticee No. 8, 13 and 17 were submitted stating that they have expired, hence the proceedings initiated against the said three noticees stands abated.

DIRECTIONS:

19. Under the above circumstances, the show cause notice dated February 28, 2018 issued to the Noticees stands disposed of in terms of the observations made in above paras 15 and 18.

20. A copy of this Order shall be forwarded to the Noticees.

DATE: April 09, 2019 ANANTA BARUA PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA