Order in the matter of Nikhara Bharath Construction Company Ltd

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 Nikhara Bharath Construction Company Ltd. (CIN No. U70200KA2004PLC034675) and its Directors viz. Mr. Kodandarama Pillaiah (DIN No. 00548550), Ms. Bharathi Balakrishna Murthy (DIN No.00548571) and Ms. Sreedevi Balakrishnamurthy (DIN No. 00548882). 1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") received an email dated April 30, 2013 alleging illegal mobilization of funds from public by the Company, Nikhara Bharath Construction Company Ltd. (hereinafter referred to as "Nikhara") under its "Grow Tree Scheme"/"Tree Booking Scheme".

2. As a matter of preliminary enquiry into the alleged mobilization of funds by Nikhara, SEBI, vide letter dated May 7, 2013, advised Nikhara to explain the details of the schemes operated by it.

2.1 In reply to the aforesaid letter, Nikhara, vide letter dated May 15, 2013 submitted inter alia as under, • Nikhara was established in 2004 and is engaged in the activities relating to real estate and development of farmland and related activities. • Substantial part of the revenue is generated out of the sale of farmland plots. • It is not engaged in the activities relating to 'collective investment scheme' since its incorporation and hence furnishing of details of scheme does not arise.

2.2 SEBI vide letter dated June 3, 2013 required Nikhara to furnish copies of brochures/pamphlets etc. in respect of the scheme in addition to the details of the scheme sought vide earlier letter dated May 15, 2013. In reply to this, Nikhara, vide letter dated July 5, 2013 while reiterating the submissions made in its earlier reply dated

May 15, 2013, informed that "The company intended to start the "Tree Booking Scheme" few months ago. Since the project was not viable, we have shelved the scheme. No brochures/pamphlets were printed or any advertisement for such scheme was given in the past."

2.3 In continuation to the aforesaid letter, Nikhara, vide letter dated October 10, 2013, inter alia furnished following additional submissions/information, in respect of its business activities, • "…ours is a real estate development and sales business and the land is converted and sold and registered with sub-registrar offices under jurisdiction in favour of buyers, it does not fall under the definition of collective investment scheme • We are not receiving any contributions or payments from plot owners. However, we are recovering maintenance charges for Maintenance of property as per the agreement [MOU] with the investors. • Since the plots are sold and registered it is the property of the plot owners and hence it does not fall under the CIS scheme • The plot owners are individual owners with complete rights to manage, sell and transfer. However, the properties are located away from the city the same is managed as per MOU"

2.3.1 Nikhara also furnished following documents along with the aforesaid letter, • Copy of "Sale Deed", • Copy of Memorandum of Understanding ("MOU") entered into with its customers, • Copy of an "Allotment Letter" issued to a customer/investor.

3. I have carefully perused the documents and materials available on record such as, correspondence exchanged between SEBI and Nikhara along with the documents contained therein; the submissions made by Nikhara; the complaints received by SEBI against Nikhara along with the documents in relation to its alleged mobilization of funds. In this context, the issue for determination in the instant matter is whether the mobilization of funds by Nikhara is a ‘collective investment scheme’ in accordance with Section 11AA of the SEBI Act, 1992 (hereinafter referred to as "SEBI Act").

3.1 On an examination of the material available on record, it is prima facie observed that:

i. Nikhara Bharath Construction Company Ltd. was incorporated on September 13, 2004. As per the details available on the website of Nikhara Group, the registered office of Nikhara is at No. 27, 10th Main, Srinagar (Near Bus Terminus), Bangalore -560050.

ii. Nikhara, vide its letter dated October 10, 2013 to SEBI, informed that it is carrying out real estate development and sales business and the land is converted and sold in favour of "customers"/investors. For this purpose, Nikhara enters into an "MoU" with the investor for maintenance of the property and for this maintenance charges are collected from the customers as per "MoU".

iii. Following clauses are noted in the sample copy of "MoU",

• "This memorandum…will be in force for a period of 5 years from the date of registration of the property mentioned in the schedule hereunder. • The First party herein undertakes to take complete care of plants and trees viz. 15 numbers of Mango, 10 numbers of Phyllantus ………..existing in the schedule property of dimension equal to 5000 sq.ft without charging any amount towards the maintenance of the same for the above said period of 5 years. Sites with bigger dimension would proportionately get more number of trees. The 100% yield on such plantation would be given to the second party. • After completion of 5 years period, the second party has to pay maintenance charges to the First Party @ `3.00 per Sq. ft per annum which is subject to revision at every 5 years. • The total sale consideration is `2,50,000/- out of which the registered valuation is `45000/- and the balance of `2,05,000/- is towards development and maintenance expenditure. • At the time of selling the plot by the second party, NOC shall be obtained from the first party by paying maintenance charges of 5% each by both the seller and the purchaser. The percentage is calculated on the basis of the last printed price by the first party. • In case, the second party intends to put up any residential construction in the schedule property, the area of construction shall not exceed 1000 sq,ft on the ground floor and 1000 sq. ft in the first floor with the base of 5000 sq.ft, increasing proportionately for bigger dimesion…..

iv. After receiving the amount from investors, Nikhara issues "Allotment Letters" to them. Following are the clauses noted from the copy of "Allotment Letter",

• "Booking of Plot No. 81 situated at Gownivaripalli Village, Gorantla Mandal, Ananthapur Dist. Andhra Pradesh State on 22-03-2014 is confirmed as under: • The said plot No. 81 would be registered after obtaining the approval from the Government authorities."

v. From the various clauses of the "MOU" and "Allotment Letter" issued by Nikhara to certain "customers"/investors (furnished by Nikhara vide its letter dated October 10, 2013 to SEBI), it is observed that even after receiving the total consideration towards the sale consideration of the plot, the registration of the said plot would be done only after obtaining the approvals from government authorities. Further, it is observed that the so-called sale consideration of the plot/land is only 1/3rd of the amount collected from the "customer"/investor and the remaining 2/3rd is pooled for the so-called development and maintenance charges. It is also noted that Nikhara has not furnished the copy of "MOU" entered into between the aforesaid "customers"/investors to whom it has issued the "Allotment Letter". Further, it is observed that the "customer"/investor does not have the right to sell the plot without NOC from Nikhara, which is obtained after paying 5% as maintenance charges to Nikhara by both the "customers"/investors and the buyer. Further, the said percentage is calculated on the basis of the last printed price of the property decided by Nikhara.

4. The aforementioned features of the so-called "Real Estate Development and Sales Business" by Nikhara appear to be a "scheme" rather than real estate business. In view of this, the aforementioned details of the "scheme" offered by Nikhara, have to be considered in light of Section 11AA of the SEBI Act. The aforesaid Section 11AA, which provides for the conditions to determine whether a scheme or arrangement is a ‘collective investment scheme’, reads as follows:

“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.”

4.1 In the context of the abovementioned Section 11AA of the SEBI Act, the "scheme" offered by Nikhara, is examined as under:

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.

On analysing various clauses of the "MoU" and also the "sale deed", it is observed that only 20% of the total amount collected from "customers"/investors is towards the sale consideration of the plot/land and the remaining 80% of the total amount collected from the "customer"/investor are pooled and utilized towards the charges for development/maintenance of the plot/land sold in multiples of units to the "customers"/investors, assuring 100% yield. For instance, out of total amount of `2,50,000/- collected by Nikhara, `45,000/- is towards the consideration of the plot/land and the remaining `2,05000/- is towards development and maintenance expenditure by Nikhara. Apart from the initial development charges, Nikhara is collecting a maintenance charge of `3 per sq.ft. after the completion of 5 years period. Further, from the copy of the "Allotment Letter" issued by Nikhara to its "customer"/investor (furnished by Nikhara to SEBI), indicates that even after the receipt of total sale consideration of the plot/land (which is yet to be demarcated and identified), from the "customer"/investor, Nikhara has not executed any sale deed. Nikhara only agrees to transfer the land after obtaining approvals from the government authorities. The right of ownership and free transferability right of the "customer"/investor over the plot/land is restricted by certain clauses in the "MOU". As per the said clause, in order to sell the property, the "customer"/investor has to obtain the NOC from Nikhara and for this, he/she has to pay 5% of the of the last printed price (decided by Nikhara) to Nikhara. Therefore, it is clear that the real intention of the entity is to pool and utilize the contribution/funds received from the "customers"/investors solely for the purpose of the scheme. I, therefore, find that the instant "scheme" satisfies the first condition stipulated in Section 11AA(2)(i) of the SEBI Act.

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.

As has been observed in the preceding paragraph, the investors are paying 80% of the total amount towards the maintenance and development of the plot/land and as per the MoU, the "customer"/investor has been assured of 100% yield on the plantations carried out by Nikhara on the land. Further, in case the "customer"/investor opts to plant additional number of trees in the property, the net yield would be shared on a 50:50 basis between Nikhara and the investor. From this, it is clear that the assurance by Nikhara regarding the 100% yield on the development made by it on the land/plot is nothing but return/profit to "customers"/investors in the form of 100% yield upon development of the plot/land by Nikhara by growing plants trees, saplings etc. From this, it is inferred that such contributions are made by the "customer"/investor with an intention to earn profits from such "scheme". I, therefore, find that the instant "scheme" also satisfies the second condition stipulated in Section 11AA(2)(ii) of the SEBI Act.

iii. The property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors, and iv. The investors do not have day-to-day control over the management and operation of the scheme or arrangement.

It is admitted by Nikhara that it collects contributions/funds from the "customers"/investors by way of maintenance and development charges and by executing the "MOU", the plot/land forming part of the scheme are being managed on behalf of the "customers"/investors. Moreover, Nikhara vide its letter dated October 10,

2013 admitted that the "since the projects are located away from the city, the properties are managed by the company on behalf of plot owners." Further Clause 2 of the "MOU" states that Nikhara will undertake the development of the land/plot by planting trees, plants etc. and the "customer"/investor would be given 100% yield on such plantation. It is observed that even the right of ownership and free transferability of the "customer"/investor over the said land/plot is restricted by certain clauses in the "MOU", which stipulate that in order to sell the property, the "customer"/investor has to obtain NOC from Nikhara and for this, he/she has to pay 5% of the last printed price decided by Nikhara. Therefore, it is observed that the contributions/funds collected from the "customers"/investors for the "scheme" is managed by Nikhara on behalf of the "customers"/investors and the "customers"/investors do not have any day to day control over the management and operation of the scheme. I, therefore, find that the instant "scheme" also satisfies the conditions stipulated in Section 11AA(2)(iii) and (iv) of the SEBI Act.

4.2 The aforesaid observations lead to the conclusion that the "scheme" of development and maintenance of real estate offered by Nikhara with a resultant promise of returns when considered in light of peculiar characteristics and features of such scheme, as discussed in the preceding paragraphs, prima facie satisfies all four conditions specified in Section 11AA (2) of the SEBI Act. Therefore, I find that Nikhara is engaged in the fund mobilizing activity from public, which is in the nature of a ‘collective investment scheme’ as defined in Section 11AA of the SEBI Act.

5. In this context, it is relevant to refer to the observations of the Hon'ble Supreme Court of India in the matter of P.G.F Limited & Ors. vs. UOI & Anr. (MANU/SC/0247/2013), wherein the Hon’ble Court had occasion to adjudge on a scheme having features similar to the instant Scheme towards "Purchase, development and maintenance of plot”, as a 'collective investment scheme' under Section 11AA of the SEBI Act. The Hon'ble Supreme Court of India had observed that:

“A conspectus consideration of the scheme of development of the land purchased by the customers at the instance of the PGF Limited and the promised development under the agreement disclose that there was wholesale uncertainty in the transactions to the disadvantage of the investor concerned. ……..PGFL under the guise of sale and development of agricultural land in units of 150 sq. yards. i.e. 1350 sq. ft. and its multiples offered to develop the land by planting plant, trees etc. and thereby the customers were assured of a high amount of appreciation in the value of the land after its development and attracted by such anticipated appreciation in land value, which is nothing but a return to be acquired by the customers after making the purchase of the land based on the development assured by the PGF Limited, part with their monies in the fond hope that such a promise would be fulfilled after successful development of the bits of land purchased by them. ...................... Apart from the sale consideration, which is hardly 1/3rd of the amount collected from the customers, the remaining 2/3rd is pooled by the PGF Limited for the so called development/improvement of the land sold in multiples of units to different customers. Such pooled funds and the units of lands are part of such scheme/arrangement under the guise of development of land............. In these circumstances, the conclusion of the Division Bench in holding that the nature of activity of the PGF Limited under the guise of sale and development of agricultural land did fall under the definition of collective investment scheme under Section 2(ba) read along with Section 11AA of the SEBI Act was perfectly justified and hence, we do not find any flaw in the said conclusion. …

6. The features of the instant "scheme" for the development and maintenance of plot offered by Nikhara, as discussed in the preceding paragraphs, when considered in light of the abovementioned observations of the Hon'ble Supreme Court of India, indicate that the activity of fund mobilization by Nikhara under such ‘Scheme’ with a resultant promise of returns, prima facie falls within the ambit of 'collective investment scheme' as defined under Section 11AA of the SEBI Act.

7. Having found that Nikhara is carrying out fund mobilization by way of ‘collective investment scheme’, I proceed further to examine the contentions put forth by Nikhara in respect of its ‘Scheme’. As stated in the earlier paragraph, the main contention raised by Nikhara, vide letter dated October 10, 2013 is that it is carrying out "Real estate development and Sales Business" and since the land is converted, sold and registered with sub-registrar offices in favour of the buyers, it does not fall under the definition of "collective investment scheme". In this context, I have examined the details of the "MOU" and the "Allotment Letter" and I am of the opinion that merely calling any scheme as a real estate business or transaction is not determinative of its true nature and character, and the same has to be determined with reference to the terms and conditions of such scheme, which articulate the intention of the parties. In the instant matter, it is observed that even though the plot/land is transferred to the "customer"/investor by executing "sale deed", the actual possession of the land/plot is with Nikhara on the basis of the "MOU". As per the "MOU", the said land/plot would be developed and maintained by Nikhara and the "customer"/investor is entitled only for the yield on the plantations carried out by Nikhara. It is observed that 80% of the total consideration collected by Nikhara from the "customer"/investor is towards the development and maintenance charges and the remaining 20% is towards the sale consideration. Further, for selling the property, the "customer"/investor has to obtain NOC from Nikhara and also has to pay 5% of the last printed price of the land/plot decided by Nikhara. From the above, it is clear that Nikhara has no intention to create absolute ownership rights on the plot/land, which are freely transferable, as in the case of real estate.

7.1 Therefore, in my view the fund mobilizing activity of Nikhara, which is in the nature of a ‘collective investment scheme’ as defined in Section 11AA of the SEBI Act, promising an estimated returns/profit, has been camouflaged by Nikhara by terming it as a "real estate development and sales business" only to mislead and attract investment from general public. The 'scheme' in essence satisfies all the conditions of a 'collective investment scheme' as defined in Section 11AA of the SEBI Act. Therefore, the contention put forth by Nikhara that it is carrying out a "real estate development and sales business" is not acceptable.

8. Nikhara was advised to respond to the preliminary examination conducted by SEBI, on various occasions through SEBI letters and reminders dated May 07, 2013, June 03, 2013, etc. However, Nikhara did not cooperate with SEBI as is evident from the non-furnishing of various vital information and documents viz. the details of the scheme operated by it, brochures, pamphlets etc of the scheme. In these circumstances, I find that reasonable opportunity has been afforded to Nikhara to respond to SEBI and the refusal of Nikhara to do so, when considered in the context of the abovementioned prima facie finding, indicates that such refusal to furnish the information sought by SEBI was only to conceal the true nature and operation of its fund mobilizing activity.

9. Protecting the interest of investors is the first and foremost mandate for SEBI. Under the circumstances, SEBI has to take immediate steps to prevent activities of companies or entities defrauding investors and damaging the orderly development of the securities market. I, therefore, note that Nikhara has to be prevented from carrying on with the 'collective investment scheme' activities without obtaining due registration from SEBI in accordance with law. It is further noted Mr. Kodandarama Pilliah, Mrs. Bharathi Balakrishna Murthy and Mrs. Sreedevi Balakrishnamurthy are the Directors of Nikhara.

10. In view of the above, I, in exercise of the powers conferred upon me under Section 11(4) and 11B of the SEBI Act, 1992 and Regulation 65 of CIS Regulations, hereby direct Nikhara Bharath Construction Company Ltd. (CIN: U70200KA2004PLC034675) and its Directors viz. Mr. Kodandarama Pilliah (DIN No. 00548550), Mrs. Bharathi Balakrishna Murthy (DIN No.00548571) and Mrs. Sreedevi Balakrishnamurthy (DIN No. 00548882).

a. not to collect any money from investors from its existing "scheme" or to launch any new "scheme";

b. to immediately submit the full inventory of the assets owned by Nikhara out of the amounts collected from the "customers"/investors under its existing "scheme";

c.not to dispose of any of the properties or alienate the assets of the existing "scheme";

d. not to divert any funds raised from public at large, kept in bank account(s) and/or in the custody of the company;

e.to furnish all the information/details sought by SEBI within 15 days from the date of receipt of this order, including, i. Details of amount mobilized and refunded till date, ii. Scheme wise list of investors and their contact numbers and addresses and, iii. PAN Nos. of the aforementioned Directors.

11. The above directions shall take effect immediately and shall be in force until further orders.

12. This order is without prejudice to the right of SEBI to take any other action that may be initiated against Nikhara and its Directors, in accordance with law.

13. The prima facie observations contained in this Order are made on the basis of the material available on record. Nikhara and its aforesaid directors shall, within 15 days from the date of receipt of this Order, file their reply, if any, to the prima facie observations made herein. Nikhara and its aforesaid directors may also indicate, in such reply, whether they wish to avail an opportunity of personal hearing in the matter.

S RAMAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: June 12, 2014