Order in the matter of Nikhara Bharath Construction Compay Ltd and its Directors

WTM/PS/43/IMD-CIS/AUG/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 and regulation 65 of the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 In respect of – 1. Nikhara Bharat Construction Company Limited (CIN: U70200KA2004PLC034675), and its directors 2. Mr. Kodandarama Pillaiah (DIN No. 00548550), 3. Ms. Bharathi Balakrishna Murthy (DIN No.00548571) and 4. Ms. Sreedevi Balakrishnamurthy (DIN No. 00548882)

1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”), vide an ex-parte interim Order dated June 12, 2014 (hereinafter referred to as “the interim order”) prima facie observed that the fund mobilization activity of the company, Nikhara Bharat Construction Company Limited (hereinafter referred to as “the Company”) through its alleged ‘scheme’ for development and maintenance of plots is a ‘Collective Investment Scheme’ (“CIS”) in terms of section 11AA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “the SEBI Act”).

2. In order to protect the investors and prevent the Company from carrying on with the CIS activities without obtaining registration from SEBI in accordance with law, SEBI vide the aforesaid interim order had issued the following directions:

“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. ……………”

3. The interim order was passed without prejudice to the right of SEBI to take any other action that may be initiated against the Company and its directors, Mr. Kodandarama Pilliah, Mrs. Bharathi Balakrishna Murthy and Mrs. Sreedevi Balakrishnamurthy (for convenience the company and its directors are collectively referred to as ‘noticees’), in accordance with law. The interim order advised the noticees to file their response and also indicate whether they wish to avail an opportunity of personal hearing in the matter.

4. The Company filed its response to the interim order vide letter dated August 07, 2015 inter alia making the following submissions:

(a) The Company submitted that it is a public limited company, incorporated in the year 2004, having a paid-up share capital of Rs.1,97,71,000/- comprising 19,77,100 equity shares of Rs.10/- each. The Board of Directors of the Company comprises of Mr. Kodandarama Pillaiah, Ms. Bharathi Balakrishna Murthy and Ms. Sreedevi Balakrishnamurthy. The management of the Company lies with the above directors. The day to day affairs of the Company are carried out by and under the supervision of Mr. Kodandarama Pillaiah, the Chairman and Managing Director. The other two directors are non-executive directors who neither look into everyday management nor are the decision and policy makers of the Company.

(b) 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.

(c) The business of the Company has been misunderstood. It appeared that SEBI had relied only on two documents – the Allotment Letter and the Memorandum of Understanding (“MoU”), while completely ignoring the Absolute Sale Deed.

(d) The Company has not launched any Project or Scheme known as “Grow Tree scheme”/”Tree Booking Scheme” ever. Though the Company was considering the launch of such a project, the same was abandoned at the conceptual stage itself as it was found to be unviable. The complaint received by SEBI vide the e-mail dated April 30, 2013 refers to a project that was already shelved off by the Company.

(e) As part of its business activity, the Company (i) acquires agricultural land, (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 plots to of lands to prospective 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. The Company integrates certain functions of real estate, farming and hospitality for its own unique business model.

(f) According to the Company, it is engaged in real estate development of the following:

(i) Residential plot (ii) Farm plots/Farm house plots and (iii) Coffee plantation plots.

(g) The Company made the following submissions with respect to its Residential plots: The Company acquires agricultural lands in small fragments directly from owners or farmers through a well-organized network of mediators and aggregators in an identified area. The land is purchased with the own funds/internal accruals.

Pursuant to such acquisition, applications are made to the local authorities for (i) conversion of agricultural lands into NA plots and (ii) approval of the layout plan for the residential dwelling purpose. After receipt of sanction of the layout plan and 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.

After negotiations with the prospective buyers, the Company executes an Absolute Sale Deed in favour of the buyers of the plots of land thereby conveyancing the absolute right, title and interests in the plot of land to the buyers. The Sale Deed is appropriately stamped and registered with the Sub-Registrar of Assurances of the area. On execution and registration of the sale deed, the Company hands over peaceful and vacant possession of the land to the buyer. The price of plot of land is determined by the Company taking into consideration many factors including acquisition price, cost of conversion to NA plots, marketing cost, cost incurred in development and maintenance etc.

The Company presently has residential plot projects at Mandya (B. Hosur), Mandya (Kaalenahalli), Channapatna and Ramanagara in Karnataka. As on the date of this reply, approvals were received only for the Mandya (B. Hosur) project for conversion into NA plot and layout plan. As approval was not received for other projects, the Company has refunded the booking amount received in respect of the said projects.

(h) Regarding its Farm plots/Farm House plots, the Company submitted the following: The Company identifies low cost lands for such projects after careful verification of the location, nearness to small and important towns, nearness to state and national highways, soil fertility and water availability in and around such land.

Small and large parcels of land are purchased directly from the landowners or farmers in the name of Company over a period of time. Once a contiguous area of land is acquired, the Company conducts land survey, demarcation of plots and fencing of the project site. Applications are made to the local authority for conversion into NA plots.

The Company then deploys earth excavators, road rollers, pump-sets, weed cutters and other machinery for development of the land. The Company deploys technology, machines and manpower to convert the agricultural lands into farm lands.

The lands are appropriately divided, marked and demarcated into standards area of around 5000 sq.ft. and 5450 sq.ft. per plot of land. These plots are sold to prospective buyers at various stages of development. On receipt of sale consideration, the Company executes a Sale Deed in favour of the buyer thereby conveying all right, title in the plot of land in favour of the buyers. The plots are not sold en bloc to buyers but sold at various points of time.

Once the plots are sold along with the trees planted by the Company, the buyers are in absolute control and possession of the plots sold to them.

(i) Submissions of the Company with respect to its Coffee Plantation Project: The Company has only one such project located at Sakleshpura, Hassan District, Karnataka called the ‘Sakleshpura Project’, which is a 15-20 year old coffee plantation and certified as a coffee plantation by government authorities. The Company acquired this land in the year 2012 out of its funds on an “as is where is basis” after making full payment to the previous owners.

(j) The following is the list of projects of the Company as on the date of filing of the reply: Sr. No. Name of project Location Nature of project 1 Mandya, B. Hosur Mandya, Karnataka Residential layout 2 Adadakulapalli (Fort I) Penukonda, Andhra Farm plot Pradesh (A.P.) 3 Penukonda (Fort II) Penukonda, A.P. Farm plot 4 Narayanapura Bandlapalli, A.P. Farm plot 5 Chellapalli Somandepalli, A.P. Farm plot 6 Gownivaripalli Chilamathur, A.P. Farm plot 7 Amadagur (Phase I) Kadiri, A.P. Farm plot 8 Amadagur (Phase II) Thummala, Kadiri, A.P. Farm plot

9 Sakaleshpura Sakaleshpura, Karnataka Coffee plantation (k) As regards its development and maintenance of project sites, the Company submitted that- The buyer or the plot owner has 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. The Company acts as a ‘service provider’ to the buyers post sale of plots.

Every project has a permanent labour force depending on the size of the project. In addition to permanent labourers, the Company deploys contract labour for specialized works. The Company also appoints project managers who supervise the work. The Company also appoints horticultural consultants to visit each of the project sites including farm plots projects of the Company and advice measures to ensure healthy growth of trees and plants.

The construction of infrastructure and amenities are outsourced to specialist contractors. Architects engaged for the purpose co-ordinate and oversee the construction activities along with in-house civil engineers. Electricity, water, plumbing and irrigation lines are managed by third party contractors.

The Company has a well-organized and systemized team and all administrative operations are coordinated from the Company’s office in Bengaluru. In order to assess the business activities of the Company on the ground and to understand the business of the Company, the Company has requested SEBI officials to inspect the project sites so as to satisfy themselves of the nature of business undertaken by the Company.

(l) Regarding the fund flow for its business activities, the Company submitted that– The entire process from identifying the plots of land for acquisition and the actual purchase of the project land is undertaken by the Company with its own funds/internal accruals. The Company undertakes development of infrastructure soon after the purchase of lands from its own funds and consideration received, if any, from the sale of plots of land to prospective buyers. The Company commences the development of other amenities after the development of basic infrastructure.

The Company also deploys its own funds for advertisement and marketing of the project site in newspapers, radio and television.

The Company does not receive any monies from buyers of the plots at one point in time and is spread over a period of time depending upon the interest of prospective buyers in acquiring and owning such plots of land. It was therefore evident that 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.

(m) The following were the submissions with respect to the observations made in the interim order: (i) Entering into a MoU is optional in nature at the choice of the buyers. Approximately 76% of the buyers have not entered into the MoU or any other arrangement with the Company. As on the date of the reply, the Company has a total of 866 buyers who own and possess plots at various projects. Out of the said 866, only 209 buyers have executed MoU with the Company, which is approximately 24%. (ii) The maintenance of plots purchased by buyers are taken care of by the Company which is part of the total sale consideration. The Company maintains the plots owned by the buyers for a period of 5 years irrespective of whether or not the Company has entered into the MoU with them. The term of MoU can be extended or renewed after the initial period of 5 years. However, the buyer may at his discretion maintain his plot either by himself or through third party contractor. (iii)The MoU does not override the Sale Deed. On receipt of the sale consideration from the buyer, the Company executes an absolute sale deed with the buyers, conveying all rights, title and interest in the plot to the buyers. This sale deed is stamped and registered with the Sub-Registrar. Pursuant to the execution of the sale deed, the Company does not have rights whatsoever over the plot sold to the buyer.

(iv)SEBI while examining the nature of business carried out by the Company has not looked into the sale deed executed by the Company in favour of the buyers. (v) The Company enters into the MoU as it is practically difficult for the buyers to maintain the plots themselves. The buyers are also free to maintain their plots. The MoU further provides an option to the buyer to engage the Company for maintaining the plot on payment of Rs.3/- per sq.ft. per annum as maintenance charges post completion of the first five years of acquisition. However, as the development and completion of the infrastructure and amenities take nearly 5 years, the Company is obligated to maintain it for the initial period. (vi)The total sale consideration received by the Company is appropriated towards sale value of plot and the balance is towards development and maintenance charges for the period of 5 years. The consideration received from buyers is utilized for the development and maintenance of plots. (vii) The MoU further mentions about the requirement of NOC from the Company for any transfer of plot from one person to another.

The same requires 5% maintenance charges from both the transacting parties. The 5% charges are fees for providing such services which is more in the nature of brokerage fees, processing and administrative charges. Imposing such charges is prevalent in the real-estate industry. (viii) The buyer can carry out residential construction to the extent permissible under law. (ix)It is not compulsory for conversion of agricultural lands into NA (Non-Agricultural) plots being typical farm house plots. However, in order to facilitate its buyers and save them from regulatory hassles in future, the Company ensures and facilities the conversion. (x) Allotment letters are issued in very few cases where the execution and registration of the plot is not undertaken immediately by the buyer. Sale deeds are executed and registered for all buyers to whom allotment letters were issued. (xi)The Company has not delayed registration of any sale deed. If at all there was a delay, the same was majorly because of the buyers’ preference of a propitious day for registration of sale deeds. (xii) Regarding the alleged pooling of funds, the Company has contended that it does not receive consideration from its buyers at one point in time for one set of investors and therefore does not create a ‘pool of funds’ and attribute the same for acquisition and development of land.

(xiii) The business of the Company is not carried out under any ‘scheme’ or ‘arrangement’ falling under the auspices of a CIS under section 11AA of the SEBI Act.

Submissions made regarding its contention that its business does not fall within the purview of section 11AA of the SEBI Act: (a) The Company denied having ‘pooling of contributions or payments’ of investors. The entire process of identifying the plots to purchase these plots from the land owners is carried out by the Company from its own funds. (b) Amenities provided at the project sites and other business expenses are akin to typical real estate business. (c) Such utilization of funds cannot be construed as pooling and utilization of funds for any particular scheme or arrangement. (d) The Company had 1135 ‘fully paid’ buyers as on the date of the reply, out of which 866 sale deeds have been executed and registered. However, 269 sale deeds are yet to be executed majorly on account of the buyers having a propitious date. There is clear demarcation of plots of land belonging to each buyer and many of the plot owners have put up barbed wire fencing. (e) In majority of the sale transactions, the consideration is received from the buyer only after a substantial portion of the business cycle of the Company is completed. It was reiterated that the Company does not receive funds from a group of people at the same point in time, whereby it can create ‘pool of funds’ and attribute the same for acquisition or development of land. (f) The Company contended that as there is no scheme and pooling of funds from buyers at any stage in the business cycle of the Company and also as the consideration received from investors is towards sale consideration and development and maintenance expenses of the plot and project site, section 11AA(2)(i) of the SEBI Act is not applicable to it. (g) As regards applicability of section 11AA(ii) of the SEBI Act, the Company stated that in lieu of the consideration, the Company executes and registers sale deed in favour of the buyer and conveys all right, interest along with ownership and possession in the plot of land. The buyer gives the consideration not with the objective of receiving any profits, income or produce but simply to own a farm land. This is a typical real estate transaction.

(h) The Company never provided any assurance or promise of 100% yield on investment as mentioned in the interim order at any point in time to the buyers. The mention of the words “100% yield” in the MoU refers to ‘produce’ derived from the trees at the plots of land which cannot be linked to investment made by the buyers for purchase of plots. As an example, a plot of land has 15-20 mango trees, which would take 5-6 years to give produce. Once it starts giving produce, on an average the mango tree may yield 500-600 mangoes every alternate season. Therefore, this produce has no link to the investment. If coffee is produced, it would not be more than 30 kgs of consumable coffee. Likewise, sandalwood or silver-oak trees take more than 15 years to grow and the same would be limited in number owing to the smaller area of the plot. Therefore, the produce from the plot of land owned and possessed by a buyer is insignificant and should not be associated or related with any ‘yield’ or ‘benefit’ in money terms from the plot. (i) In the MoU, there is no assurance of any return on investment. Further, any produce from trees shall belong to the buyer and the Company has no right whatsoever in any manner either on the plot or on the produce from such trees.

Therefore, according to the Company, section 11AA(2)(ii) of the SEBI Act is not applicable. (j) The MoU also provides that 50% of the yield (produce) will be taken by the Company as service fees so far as additional trees, if planted and maintained by the Company as desired by the buyer, as the Company spends enormous amount of time, efforts and material in maintaining the plots. A provision has been made in the MoU for a right to adjust portion of the benefit towards maintenance charges from sale of produce. The consideration in the form of produce cannot be termed as “earning profits” as it is simply a form of remuneration in kind for the services provided by the Company. Where company is not maintaining the plot even when it had provided the buyer with additional trees as per his request, it is not entitled to share of produce as the buyer maintains the plot himself or through his third party contractor. (k) The Company’s farm house plots/farm plots are essentially based on the concept of “luxury farming” or “week-end farming” which is common in developed countries like USA, Europe and Australia and now upcoming in India.

In a typical luxury farming or week-end farming, which may be regarded as a second home for the week-end, a developer provides to the buyer (i) plot of cultivable land, (ii) infrastructure and (iii) amenities to enable the buyer and his family and friends to experience the joy of farming and owning trees and plants. The provision of amenities is made to enable the buyer and his family and friends to enjoy their stay with all the facilities such as fine dining, music and dance floors, party halls, swimming pools etc. The Company integrates real estate, farming and hospitality to bring an experience of luxury farming to its buyers. (l) With respect of “property, contribution or investment being managed on behalf of the investors”, the Company stated that it does not manage property, contribution or investment on behalf of the buyers. The Company only facilities the buyers by providing maintenance services for the plot of land purchased by the buyer only at the desire and request of the buyer. While Company offers to maintain the plot for 5 years, the buyers decides and confirms on the same.

(m)Consideration for the development and maintenance of the project site by the Company is part and parcel of the entire consideration payable by the buyer. Development and consideration is part and parcel of the business and cannot be looked at in isolation. Company is open to its projects being managed by an association of buyers elected or selected by majority of the buyers of the plots once development is completed. Therefore, according to the Company, section 11AA(2)(iii) of the SEBI Act is not applicable to it. (n) As regards the observation in the interim order that “the investors do not have day-to-day control over management and operation”, the Company submitted that control over the plots remain with the buyer as they are the legal owners of such plots. The Company submitted that buyers at Mandya Project have constructed residential dwellings at project site and are residing there. Buyers also have free access to their respective plots. (o) According to the Company, it was therefore evident that the Company does not fulfil the essential ingredients of section 11AA(2)(iv) of the SEBI Act.

(p) The Company submitted that it was incorrect to construe that the Company satisfied the four conditions under section 11AA(2). It submitted that its business activities are in relation to sale and development of land and cannot be termed as a CIS. An assured return by an entity running an investment scheme is a sine qua non for any CIS, while the Company has not assured any return to the buyers or any return from sale of produce from trees and plants grown in the buyer’s plot. (q) The Company also submitted that the Allotment Letter and MoU contain general business clauses and have been prepared without seeking any legal advice and have been prepared internally to safeguard the interests of the Company and buyers. The terms used in these documents are vague and therefore the nature of business operations should not be concluded based only on these two documents. The “last printed price” was only an information communicated to the selling owner that the price of the plot/land would fetch as there is practically no other source through which the true market value of the plot could be determined.

(r) The Company also referred to clause 7 of the MoU – “The statutory taxes like Revenue tax, Electricity, Water etc should be borne by the second party as and when demand raised by the local Panchayath/Government authorities”, and submitted that the said clauses makes it apparent that the ownership and possession of the plot is with the buyer. (s) The company submitted that the assessed value of plot is not the market value of plot. Therefore, according to it, the observation that 20% of the consideration paid by buyer is sale consideration and balance 805 is towards pooled fund was incorrect. (t) The Company stated that it submitted the following with this reply - (i) Inventory of assets (ii) Details of amount received from sale of plots from its projects (iii) Project-wise list of buyers and ther contact details (iv) PAN numbers of directors of Company.

(u) The Company also submitted – (i) only 24% out of the total buyers have been allotted plots under Allotment letter and sale deeds have been subsequently entered for such buyers and (ii) approx. 76% of the buyers of plot have not entered into MoU (v) The Company submitted that the observations made in PGF Limited vs. Union of India by the Hon’ble Supreme Court are not applicable to it for the following reasons: (i) In PGF, the sale of land was not made immediately, whereas the Company sells the plot immediately and is dependent on any contingencies (ii) In PGF, the company had absolute control over the land, which is not the case with in this case (iii) In PGF, the sample agreement did not disclose the cost of land. In this case, the Company clearly mentions the same (iv) In PGF, there is no development of land. In this case, there is substantial development (v) In PGF, there were no sale deeds. (vi) In PGF, joint sale deeds were executed, which is not the case here. (vii) In PGF, there were uncertainty in the transactions to the disadvantage of the investors, where it is not the case here.

(viii) In PGF, customers were assured of high amount of appreciation in the value of land after its development. In this case, the Company does not guarantee returns whether by appreciation of value of investments nor any returns from sale of produce from trees and plants.

(w)The Company also stated that it has submitted the following in compilation I- (i) Closing inventory of current projects (ii) Closing inventory of potential projects (iii) Buyers list with addresses and phone numbers (iv) Project-wise amount received (v) Project-wise amount received and refunded and (vi) PAN of directors

Documents in compilation II: (i) List of land acquisitions (ii) List of sale of plots of land-year wise (iii) List of expenditure for development of infrastructure, development and amenities (iv) List of administrative costs (v) List of allotment letter issued and executed and (vi) List of MoU’s executed

Documents in compilation III: (i) Land conversion letters (current projects) (ii) Photos-project wise (iii) Consultant reports (iv) Soil reports (v) Layout / building plans and (vi) Advertisement material (x) In view of the submissions, the Company requested SEBI to withdraw the interim order and requested for an opportunity of personal hearing.

5. An opportunity of personal hearing was afforded to the Company on March 11, 2015, when the noticees were represented by Mr. Sanjay Israni, Advocate, Ms. Shilpa Shah, Advocate, Mr. Kodandarama Pillaiah and others. The representatives made submissions on the lines of the reply filed by the Company. As requested, a copy of the complaint referred to in paragraph 1 of interim order was directed to be provided by SEBI. The Company was advised in the personal hearing to submit the following information/documents: a) Registered sale deeds to show that the Company was/is the owner of the plots of land which are claimed to be sold to its customers. b) Copies of registered sale deeds (with proof of stamp duty paid) for the following 21 plots in the Mandya Project of the company: Plot nos. - 4, 11, 15, 20, 23, 32, 47, 64, 74, 78, 88, 96, 101, 105, 118, 124, 132, 140, 146, 150, 154 and 158. c) Copies of the registered sale deeds (with proof of stamp duty paid) for the following plots in the Company's Penakonda project: Plot nos. - 33A, 349, 349B and 351A. d) What were the rates at which plots were sold by the Company at different periods of time? Relevant proof, in the nature of registered sale deeds (as samples), to be submitted. e) What were the values (sale price) of plots across various projects at a given point of time? The Company is directed to give this information for various points of time? Relevant proof also to be submitted.

6. The Company vide its letter dated March 25, 2015 submitted that the complainant was neither its customer nor connected with it and that the said person has mischievously made the complaint without being aware about the business of the Company. The Company also stated that it annexed documents and made the following submissions: (i) Copies of 107 sale deeds evidencing purchase of lands by Company at various places, which were later converted into NA plots. (ii) Copies of 18 sale deeds executed in favour of buyers in its Mandya Project. Out of 22 plots for which information/documents were directed in the hearing, only 18 were registered. Documents with respect to remaining four not given as three plots were not released by the local authorities for registration and for the fourth plot the customer had taken refund of the advance amount.

(iii)Copies of three sale deeds (for plot nos. 29, 108, 315) in favour of buyers pertaining to Adadakulapalli Fort I) Project at Penukonda. (iv)Copies of sale deeds of plot nos. 90, 128, 399 executed in favour of buyers in Penukonda project. (v) Copies of sale deeds of plot nos. 69A, 93, 128 executed in favour of buyers in Narayanapura project at Bandlapalli. (vi)Copies of 3 sale deeds (plot nos. 3, 20, 78) executed in favour of buyers in Challapalli project. (vii) Copies of 3 sale deeds (plot nos. 14, 63, 87) executed in favour of buyers in Gownivaripalli project. (viii) Copies of 3 sale deeds (plot nos. 115, 213, 244) executed in favour of buyers in Amadagur (Phase I) project. (ix)Copies of 3 sale deeds (plot nos. 78, 85, 127) executed in favour of buyers in Amadnagur (Phase II) project at Thunmala. (x) Copies of 3 sale deeds (plot nos. 28, 29, 109) executed in favour of buyers in Sakaleshpura project. (xi)The details of rates at which plots of land were sold by the Company at various buyers at different points in time along with 18 sale deeds. (xii)The sale price of plots across various projects at a given point in time along with copies of booking receipts and 9 sale deeds. (xiii) The sale price of plots of land across various projects at different points in time along with copies of booking receipts and 19 sale deeds in favour of buyers.

7. The Company was afforded another opportunity of personal hearing when the representatives made submissions and sought liberty to file written submissions. The request was allowed and the personal hearing was concluded. Thereafter, vide letter dated May 28, 2015, the Company, while reiterating its earlier submissions, submitted that – (i) It has sold 1361 plots to its buyers out of which 1185 plots (nearly 87%) have been registered by the Company as on the date of the submissions. (ii) The Company till date has not received any complaint whatsoever from its buyers regarding any financial or property related issue or in-appropriateness. The Company submitted that it does not use or divert any funds received from buyers into speculative activities or high interest bearing instruments or arrangements and utilizes its own funds and those of buyers in its own business as and when required for projects. The Company has a clean record before regulatory authorities and buyers.

8. I have considered the observations made in the interim order, the submissions and documents of the Company and material on record. The interim order has referred to the sample “MoU” which the Company enters into with its customer and the “Allotment Letter”. The said MoU has inter alia the following clauses/provisions: “……… • 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 dimension…..”

The Allotment Letter states that plot would be registered after obtaining approval from the government authorities. In this regard, the following from the Allotment Letter is noted – "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."

9. The interim order has discussed as to how the business activities of the Company is a “scheme” and the manner in which the activities of the Company satisfy the 4 conditions enumerated in section 11AA(2) of the SEBI Act to consider whether a ‘scheme’ is a CIS or not. The Company’s primary contention is that it is engaged in real estate business and its business model is in the nature of “luxury farming” week-end farming”, a concept borrowed from USA/Europe and is developing in our country. The Company had provided copies of sale deeds claiming to relate to the lands acquired by it and also with respect to its buyers to whom plots were sold. The Company has enclosed sale deeds pertaining to its projects in Adadakulapalli Fort I at Penukonda, Penukonda project, Narayanapura Project at Bandlapalli, Challapalli project, Gownivaripalli project, Amadagur Phase I and II projects, Sakaleshpura project. All these were produced by the Company to support its contention that it is engaged only in real estate business.

10. I note that the interim order has observed – “………………. 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. “ As regards the clause “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” in the MoU, the Company has admitted that the total sale consideration received by the Company is appropriated towards sale value of plot and the balance is towards development and maintenance charges for the period of 5 years. Though the Company states that the buyer can maintain the plot himself, considering the submission that the Company would take 5 years to complete the development of land comprising the plots, it appears that the buyer has to compulsorily pay for the development and maintenance charges. It can also be seen that in addition to the sale consideration, the Company receives almost 4 times that of the sale value towards development and maintenance. This sum, as per the Company, is for the maintenance for a period of 5 years. This characteristic therefore indicates that the transactions of the Company is not a plain vanilla real estate transaction.

11. I also note that the Company has imposed fetters when a customer wishes to transfer his plot. According to the Company, the customer has to obtain ‘NOC’ for the proposed sale/transfer and pay 5% of the amount (called the ‘last printed price’, which is decided by the Company) to the Company. The Company states that such charges are in the nature of brokerage, processing and administrative charges. As the Company does not undertake or identifies a buyer for its customer, there seems to be no justification for the 5% charges being levied as brokerage. These conditions therefor restrict the free transferability of the plot by the customer if he is the owner of the same as contended by the Company.

12. As regards the profit or income or produce as mentioned in section 11AA(2)(ii) of the SEBI Act, the Company has admitted that the buyer is entitled to the produce from the trees and plants in the plot. However, the Company contends that such produce is insignificant and should not be associated or related to any “yield” in money terms from the plot. The Company has also contended that its buyer, having purchased the plot, is entitled to such produce from trees and plants. The Company further contended that it never provided any assurance or promise of 100% yield on investment. In this regard, I note that the MoU states that “The 100% yield on such plantation would be given to the second party”. According to the Company, such yield is very miniscule. In this regard, I also note that the Company has admitted having coffee plantations. Further, as mentioned above, the investor has to compulsorily agree to the Company developing and maintain the plot even after purchase. The element of ‘development’ and ‘maintenance’ is a necessary component in a transaction with the Company. Even as per the Company, there is a benefit or return to the Customer, though the same is contended to be very less in value. I also note that the Company has refunded monies to its customers and has accepted booking of plots before obtaining approval for government authorities.

13. The interim order has also discussed as to how the conditions (iii) {i.e. the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors} and (iv) {i.e. the investors do not have day-to-day control over the management and operation of the scheme or arrangement.}under section 11AA(2) are satisfied by the Company. The relevant observations are reproduced below: “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.”

The Company has submitted that development and maintenance is part and parcel of the entire consideration payable by the buyer and therefore cannot be looked in isolation. Therefore, even after sale and transfer of ownership and possession of a plot of land to a customer, the Company still reserves its right over such property through the ‘development and maintenance’ agreement. Therefore, the submissions made by the Company in this regard would indicate that the scheme or business of the Company is not that of pure real estate.

14. From the foregoing discussions, it is observed that the activities of the Company are prima facie in the nature of CIS. However, the Company contends that it is engaged only in real estate and has produced copies of sale deeds executed and registered in favour of its customers who purchased plots from it. The Company has also contended that its buyers are the owners of the plots as they are only liable to pay the taxes and statutory dues in respect of their plots. The Company has further contended that the interim order does not appreciate the correct nature of its business as it has based the findings on the MoU and Allotment letter. According to the Company, only 24% of its buyers have been allotted plots under the Allotment letter and that 76% of its buyers have not entered into any MoU or any other arrangement with the Company. The Company has also provided the following documents/details: (a) Closing inventory of current projects (b) Closing inventory of potential projects (c) Buyers list with addresses and phone numbers (d) Project-wise amount received (e) Project-wise amount received and refunded and (f) List of land acquisitions (g) List of sale of plots of land-year wise (h) List of expenditure for development of infrastructure, development and amenities (i) List of administrative costs (j) List of allotment letter issued and executed and (k) List of MoU’s executed (l) Land conversion letters (current projects) (m)Photos-project wise (n) Consultant reports (o) Soil reports (p) Layout / building plans and (q) Advertisement material

The Company had also contended that the complainant (who had sent the e-mail alleging illegal mobilization of funds from public by the Company under its “Grow Tree scheme/Tree Booking scheme”) was not its customer or related to it and had made the complaint without any basis. The Company further contended that they had conceptualized a scheme in Grow Tree Scheme, which was shelved and the Company did not mobilize any money under the same. A finding on this issue, at this stage, would be difficult in the absence of an examination by SEBI into the same.

15. Considering the observations made in the interim order based on documents including MoU and the allotment letter and the submissions made by the Company pursuant to the interim order and documents including copies of sale deeds submitted by it, it appears that the Company has indeed registered a number of sale deeds for the plots sold. However, there are certain facts such as the registered value of the plots being a fraction (about 1/5th) of the amount collected and clauses about giving produce of the land, pointing out towards CIS activity. It therefore becomes necessary to examine the entire gamut of the Company’s operations and business. The documents submitted by the Company also require an examination by SEBI in the light of prima facie observation that the Company is engaged in CIS activities in contravention of the SEBI Act and CIS Regulations. Therefore, taking a final view at this stage as to whether the Company is operating CIS would not be appropriate as the case requires a deeper examination.

16. In such circumstances, it would be necessary that SEBI conducts an investigation into the entire business operations of the Company to find whether the activities of the Company are in the nature of CIS as prima facie observed in the interim order and whether such activities are carried out in violation of the securities laws. The investigation shall examine all the submissions and documents produced by the Company and also seek further documents as required including undertaking inspection of records and premises. A final view could be taken based on the findings of the investigation.

17. After observing that a full-fledged investigation is required into the business of the Company, it becomes necessary for me to consider whether the interim directions need to confirmed as is against the Company and its directors or should any modification be made. While reviewing such interim directions, it becomes necessary to ensure that the directions do not cause hindrance to any genuine execution and registration of sale deeds and at the same time to also ensure that the interest of general/public investors are taken care and protected. As regards the directions issued vide the interim order, I note that the Company and its directors were inter alia restrained – (i) from collecting any money from investors from its existing "scheme" or to launch any new "scheme"; (ii) from disposing off any of the properties or alienate the assets of the existing "scheme" and (iii)from diverting not to divert any funds raised from public at large, kept in bank account(s) and/or in the custody of the company.

In this regard, I note that the Company has produced copies of registered sale deeds to prove that it has sold plots to customers. Therefore, hindering any such genuine execution and registration of sale deeds in favour of customers who purchase plots from the Company would not be reasonable. At the same time, I have also noted that the Company– (i) is mobilizing money from investors by taking 4 times the actual sale consideration from investors towards the development and maintenance of the plot, (ii) making the development and maintenance of the plots as part and parcel of the transaction and mandating the customers to engage it for a minimum period of 5 years to maintain the plots on payment of substantial consideration which is 4 times the sale value and (iii)imposing fetters in respect of transfer by the customers even after purchase by the customer.

The above factors indicate that a part of the Company’s business is that of sale of land but there are also pointers towards a CIS like activity. Therefore, allowing the Company and its directors to continue with their collection of money from the public investors/customers is not conducive to the interest of investors.

From the above discussions, I am of the view that – (i) the Company may be allowed to execute and register sale deeds where the customer has already made payments; and (ii) prohibit the Company from collecting/mobilizing money from investors/buyers/customers, directly or indirectly, through any mode.

18. In view of the foregoing, I, in exercise of the powers upon me under section 11, 11(4) and 11B of the SEBI Act read with regulation 65 of CIS Regulations, hereby confirm the interim directions issued vide the interim order dated June 12, 2014 against the Company, Nikhara Bharath Construction Company Limited (CIN: U70200KA2004PLC034675) and its Directors namely,. Mr. Kodandarama Pilliah (DIN No. 00548550), Mrs. Bharathi Balakrishna Murthy (DIN No.00548571) and Mrs. Sreedevi Balakrishnamurthy (DIN No. 00548882), subject to the modification that nothing in the interim order shall not cause any hindrance to the Company in respect of execution and registration of sale deeds in respect of customers from whom it had already collected the monies.

19. The Company is also directed to report to SEBI on a monthly basis the – a) Sale deeds executed and registered by it in favour of customers; b) The sale consideration received from such buyers of plots; c) Details of plots sold.

20. SEBI is directed to conclude the investigation expeditiously and initiate further action in the matter, as may be deemed necessary in accordance with law. A separate Order shall be issued for appointing the Investigation Authority.

21. This Order shall come into force with immediate effect and continue to be in force will further directions by SEBI.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Date : August 21, 2015 Place : Mumbai