Order in the matter of Orient Resorts (India) Pvt. Ltd.

WTM/RKA/WRO/48/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 read with regulations 65 of the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 in the matter of Orient Resorts (India) Pvt. Ltd. Appearance: For Noticees: Shri J. J. Bhatt, Advocate Shri Brahm Dev Amarnath Shukla, Managing Director Shri Darshanbhai A. Shah, Director

For SEBI: Shri Santosh Shukla, Joint Legal Adviser Shri Sudeep Mishra, Dy. General Manager Shri Durgesh Kumar Thakur, Asst. Legal Adviser Shri Ankon Ray, Asst. Legal Adviser 1. Securities and Exchange Board of India (hereinafter referred to as 'SEBI') had received a complaint alleging that Orient Resorts (India) Private Limited (hereinafter referred to as 'Orient') had raised an amount of more than `10 crore from the public (more than 50,000 investors) through collective investment schemes (CIS) without obtaining the certificate of registration from SEBI. In order to examine whether the activities of Orient would fall within the ambit of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the 'SEBI Act') and SEBI (Collective Investment Schemes) Regulations, 1999 ('CIS Regulations'), SEBI undertook inquiry in the activities of Orient and vide letter dated July 30, 2007 sought documents and information about schemes of Orient from it and members of its Advisory Board. 2. While no information was received from members of its Advisory Board, Orient, vide its letter dated August 18, 2007, replied that it was not collecting money from public for any plantation scheme and sought time for submitting information sought by SEBI.

However, Orient did not provide the required information, despite sufficient time provided to it. After reminded by SEBI, Orient, vide letter dated May 30, 2011 requested for copies of the earlier correspondence issued to it. However, it again failed to provide the requisite information despite receipt of all requested correspondence furnished by SEBI to it. Therefore, SEBI issued another reminder dated June 29, 2011 to Orient to submit the information within seven days of the receipt of the said letter. Orient vide its letter dated August 26, 2011 requested for fifteen days time. However, it again failed to submit the required information within such time. Therefore, another reminder was issued by SEBI to it, on September 27, 2011. It was also informed to Orient that non-compliance would tantamount to the violation of the provisions of section 11(2)(i) of the SEBI Act. 3. In the meanwhile, SEBI had received several complaints from investors during August- November 2011 against Orient enclosing copies of brochures and promotional material issued by it. Subsequently, representatives of Orient, including one Mr. Dharmesh Patel, had visited the offices of SEBI, Western Regional Office at Ahmedabad on October 13, 2011. The details of complaints which were available with SEBI against Orient were handed over to them.

Further, they were advised to remain present on October 20, 2011 along with the information sought. However, no one appeared for the meeting scheduled on October 20, 2011. Vide letter dated October 22, 2011 Orient furnished partial information and requested for further time till November 15, 2011 for providing the remaining information and represented that the scheme of teak sapling sale had taken place in 1993 and had been wound up in 1998, i.e. before the commencement of the CIS Regulations. However, it again failed to furnish the information sought by SEBI even after expiry of time undertaken by it. 4. Therefore, the matter was examined on the basis of material available on record and the following were prima facie observed : a. Orient had launched a scheme under name Vanashree Teak Bumper Profits Scheme (the Scheme) in the year 1993. b. The Scheme called for an investment of `910.00 per unit for a period of 18 years from the investors. c. The money collected was pooled towards setting up of a teak plantation. d. The Scheme claimed that the investors would receive `91000.00 for every `910.00 invested for one unit. e. Orient had issued Teak Sapling Sale Certificate / Unit Certificate to the investors. f. The units so issued were easily transferable on payment of a service fee of `15. g. The teak trees were not investor-wise identifiable. h. The plantation would be managed by Orient with the help of an Advisory Board.

5. On the basis of the information available on record it was prima facie observed that Orient had sponsored its Scheme in the nature of CIS without obtaining certificate of registration from SEBI in terms of section 12(1B) thereof and regulation 3 of the CIS Regulations. Accordingly, a Show Cause Notice (SCN) dated November 27, 2012 was issued to Orient, its directors and members of its Advisory Board (hereinafter collectively referred to as 'the noticees') calling upon them to show cause as to why suitable action(s) as contemplated therein should not be initiated against them for the violation of section 12(1B) of the SEBI Act and regulation 3 and 5 of the CIS Regulations.

6. Orient, vide its letter dated December 21, 2012, submitted its reply to the SCN. An opportunity of personal hearing was granted to the noticees on July 11, 2013. Mr. J. J. Bhatt, advocate, Shri Brahm Dev Amarnath Shukla, Managing Director and Mr. Darshanbhai A. Shah appeared on the behalf of the Orient and made submissions. Liberty was granted to the noticees to file written submission in the matter. Orient vide letter dated July 19, 2013 filed its written submissions in the matter. 7. In its replies the Orient has inter alia submitted as under: a. It had launched the scheme in the year 1993 wherein the unit holders were sold teak tree sapling at `910 each. As per the scheme this amount of Rs. 910 per unit had to be refunded to the investors in 5 years. It was clearly disclosed in the scheme to all investors that there would be no indicative realisation. b. There was no promise to pay the investors `91000 per unit after a period of 18 years. The statement in its brochures to that effect was merely the expected realizable value worked out with the help of agricultural experts. c. The interest @8% on ₹910 i.e. money collected per unit that worked out to be `364 was to be utilized for plantation of teak wood and management of the scheme. d. The entire plantation in the scheme has been managed by Orient with the help of one Tree Growers Co-operative Society with support of local tribal people. e. The units issued under the Scheme were transferable. f. Orient has implemented the scheme as promised to the investors and has not cheated the investors by making false promises.

It has actually planted over 60,000 trees. The money collected from investors was refunded after 5 years from the date of collection as promised. The money accrued by way of interest @8% on ₹910 i.e. money collected per unit worked out to be `364 per unit and the same was utilized to maintain the teak plantation. g. The scheme was launched 7 years prior to commencement of the CIS Regulations, 1999 and the refund was completed in the year 1997-98, before the CIS Regulations came into force. It has not launched or operated any CIS and has not carried out any new investment activity involving pooled investment, assured returns etc. after commencement of the CIS Regulations. Therefore, Orient was under a belief that it was not necessary for it to register itself with SEBI. h. The scheme was closed in 1998 on refund of the contribution i.e. Rs. 910 per unit to the investors. It was a fait accompli situation. The SCN had been issued in 2012 after the scheme period is over and there is no cause of action in the matter as contemplated in the SCN. i. Non-registration under CIS Regulations did not cause any adverse effect on anyone and no prejudice was caused to the unit holders.

Had Orient registered itself and cut the trees which had then grown to only 10-15% its actual size, it would have acted against the interest of the unit holders. j. As Orient was new to teak plantation, it decided to seek the expert advice of specialists in the area of teak plantation. The members of the Advisory Board were orally requested to be advisors on honorary basis in terms of Board Resolution dated February 30, 1992. Once the scheme was established and refunds were issued, the Advisory Board got dissolved. k. Now the teak trees are fully grown up ready for cutting but under Gujarat Government Circular no. TRS 2060-9863-A3 dated February 11, 1961 permission is required from the Divisional Forest Officer (DFO) for cutting those trees even if they are in private lands. Vide letters dated April 15, 2012 and July 15, 2013 Orient has requested for permission to cut down the teak trees. Permission is yet to be received from the DFO. After cutting the trees it will be able to refund the agreed monies to the investors. l. In a 2013 judgment, the District Consumer Disputes Redressal Forum, Bharuch, has ordered Orient to hand over possession of 1 teak tree per unit to the 2 complainants after deduction of expenses incurred by Orient.

8. I have carefully considered the SCN, replies of the noticees and relevant material on record. In order to deal with the issues involved in the matter, I deem it necessary to refer to the scheme of the SEBI Act, and CIS Regulations along with the background in which the regulations were framed. Section 11 of the SEBI Act has empowered SEBI to take such 'measures' as it deems fit for carrying out its objectives and duties. In terms of section 11(2)(c) of the SEBI Act, the 'measures' referred to in section 11(1) may provide for registering and regulating the working of CIS. Section 12(1B) which came into force on January 25, 1995, mandates that 'no person' shall sponsor or cause to be sponsoring any CIS unless he obtains certificate of registration from the Board in accordance with the regulations.

9. During the late 1990s the Government of India noticed that certain entities were soliciting investments and issuing instruments such as agro bonds, plantation bonds, etc. by offering very high rates of return, which were inconsistent with the normal rate of returns in such schemes. Such entities mobilized huge amounts from the public and then mis-utilized (misappropriated) these funds, for the purposes not disclosed at the time of soliciting these investments from public, thereby not only causing loss to the investors who lost their savings to such unscrupulous entities, but also eroding the confidence of the general public. Considering the high element of risk associated with such schemes, the Central Government felt that it was necessary to set up appropriate Regulatory framework to regulate such entities. Hence, in order to protect the interest of the investors and to ensure that only legitimate investment activities are carried on, vide press release dated November

18, 1997, the Central Government communicated its decision that schemes through which instruments such as agro bonds, plantation bonds, etc., are issued by different entities would be treated as 'Schemes' under the provisions of the SEBI Act and directed SEBI to formulate Regulations for the purpose of regulating these CIS. It is in this back ground SEBI framed the CIS Regulations.

10. Regulation 3 of the CIS Regulations mandated that: "no person other than a Collective Investment Management Company which has obtained a certificate under these regulations shall carry on or sponsor or launch a collective investment scheme." I note that section 12(1B) and regulation 3 both start with negative words "No person………" which clearly indicates that their provisions are mandatory. They have clothed their command in negative form which insists on compliance with their provisions as they are enacted. Further, non compliance of these provisions is an offence under section 24 of the SEBI Act. I, therefore, am of the view that sponsoring or causing to be sponsored, carrying or causing to be carried on any collective investment schemes without registration in accordance with CIS Regulations is illegal and consequences provided in law to deal with such illegality must follow.

11. I further note that neither section 12(1B) of the SEBI Act nor regulation 3 of CIS Regulation exempt collective investment scheme operating prior to their commencement. In terms of the proviso to section 12(1B) any person sponsoring or causing to be sponsored, carrying or causing to be carried on any collective investment schemes operating prior to amendment of 1995, could continue to operate till such time regulations were made by SEBI for regulating CIS. Thus, any collective investment scheme carried on, launched or sponsored caused to be carried on launched or sponsored prior to January 25, 1995 could operate till the SEBI notified CIS Regulations. Once the CIS Regulations were notified, all these collective investment schemes were to follow the mandate of provisions of section 12(1B) read with the CIS Regulations. In terms of regulation 5 of CIS Regulations any collective investment scheme operating prior to commencement of CIS Regulations was under obligation to apply for registration to the Board for the grant of a certificate within a period of two months from the commencement of the CIS Regulations.

12. In case such collective investment scheme is not desirous of obtaining registration from SEBI, regulation 74 of the CIS Regulations mandates it repay in the manner provided under regulation 73. I, therefore, am of the view that a collective investment scheme operating prior to commencement of CIS Regulations was obligated to either obtian registration from SEBI in accordance with CIS Regulations or repay the investors in the manner provided in regulation 73.

13. Now, the questions that needs to be examined is whether the scheme of Orient in this case was a collective investment scheme as defined in CIS Regulations and SEBI Act and whether it was operating immediately prior to commencement of CIS Regulations. I note that regulation 2(2) of the CIS Regulations (prior to its amendment on February 14, 2000 provided that in order to determine whether any scheme is a CIS, the following conditions should be satisfied:-

'(a) the purpose of which is to enable the investors to participate in the scheme or arrangements by way of subscriptions and to receive profits or income or produce arising from the management of such property or the investments made thereof; and (b) in which the subscriptions of the investors by whatever name called, are pooled, and are utilized for the purposes of the schemes or the arrangements; and (c) in which the property or such subscriptions are managed on behalf of the investors, who do not have day to day control over the management or operation of the scheme, whether or not such properties or subscriptions and the investments made thereof are evidenced by identifiable or otherwise;'

14. Subsequently, by Securities Law (Amendment) Act, 1999, section 11AA was inserted in SEBI Act, which defined CIS. The definition was provided as a clarificatory provision. Relevant provisions of section 11AA of the SEBI Act state as follows: "(1) Any scheme or arrangement which satisfies the conditions referred to in subsection (2) 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 …………………………………………………………………………………………….' 15. I note that regulation 2(2) of CIS Regulation as it was existing prior to February 14, 2000 and section 11AA both provide for the following four essential ingredients for determining any scheme as collective investment scheme- (a) Pooling of investments / contribution / subscription by investors and utilisation thereof exclusively for the purpose of the scheme; (b) The investment / contribution / subscription is made by the investors with the view to receive profit or income or produce from the scheme / property;

(c) The investment / property / scheme is managed on behalf of the investors; (d) The investors do not have day to day control over the operation of the scheme. 16. In this case, under its scheme, the Orient issued and circulated application forms along with brochure containing terms and conditions of its schemes and the contributions were invited from public to contribute ` 910 per unit of teak tree. While the original contribution was to be refunded in 5 years, the interest thereon @8% was to be used for utilisation exclusively for the purposes of the scheme i.e. the plantation of the teak trees, their maintenance and management. The Orient had issued Teak Sapling Sale Certificate / unit certificates to the investors against their contribution. Further, the units are transferable. 17. From the terms and conditions of the scheme and copy of the agreement between the investor and Orient, I note that Orient has made several statements, declarations, and announcements enticing the investors and soliciting contribution from public with a view to receive profit, income, returns. For instance, in its brochures it had announced as following: "Just invest ₹ 910/- and own a teak tree.

The money invested for Vanashree will be received back on completion of 5 years. What is more? Receive your ₹ 91000/after 18 years and become a "Lakhpati". I, therefore, find that the scheme in question was launched to enable the investors to participate in the scheme with a view to receive profit. The scheme does not necessarily involve sale of teak tree per se at the time of pooling of investments or subsequently as sought to be contented by the Orient. 18. I, further note that under the scheme of Orient, the teak trees in its plantation were not identifiable according to investors' interest in the tree. The investors do not manage the teak plantation, contribution or investment forming part of schemes at any stage under the schemes. Admittedly, the contribution / investment, teak plantation and all activities under the scheme are managed by Orient itself on behalf of the investors. 19. It is also admitted fact that the investors did not have any say in identifying the place where of teak plantation, number and quantity teak trees to be planted, management and maintenance of the teak trees.

Admittedly, it is Orient who with the help of its Advisory Board was having day to day control over management and operation of the scheme. I, further note that the facts leading to determination of its scheme as collective investment scheme have not been disputed or contested by Orient.

20. In view of the above, I find that the scheme of Orient satisfies all the ingredients of regulation 2(2) of the CIS Regulations, section 11AA of the SEBI Act and also of section 2(h) of the Securities Contracts (Regulation) Act, 1956. Therefore, its scheme is a collective investment scheme.

21. Now, I proceed to examine whether Orient was operating its scheme immediately prior to commencement of CIS Regulations so as to be within ambit of section 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations. Admittedly, the scheme in question was launched on December 19, 1992 when though SEBI Act was in force, section 12(1B) and CIS Regulations were not in force. As on that date, there was no violation of SEBI Act or CIS Regulations. The Orient has claimed that it had refunded the contribution money i.e. ` 910 per unit in 1998 as promised in the scheme and its scheme was closed on account of such refund i.e. before the commencement of the CIS Regulations. I find that admittedly, the scheme in question was in operation in 1995 when the mandatory obligation under section 12(1B) of the SEBI Act came into force and the scheme in question could avail the benefit of the proviso to section 12(1B) till the CIS Regulations were notified. In this case, I note that the scheme in question not only involve repayment of contribution money in 5 years, it also involved returns to the investors from the plantation scheme as promised to them.

Furthermore, the interest accrued on their investment has been utilised for the purposes of the scheme with a view to pass on income or profit out of the scheme to the investors. Therefore, in my view, the scheme in question is not yet closed and is in operation. The scheme in question was in operation when the CIS Regulations were notified. Thus, the Orient was under mandatory obligation to obtain registration from SEBI in accordance with CIS Regulations and, as permitted under regulation 5, to make application in that regard within two months from the date of commencement of the CIS Regulations. 22. I find that Orient has neither sought registration from SEBI as a Collective Investment Management Company nor has it wound up its schemes as per the provisions of regulation 73 and 74 of the CIS Regulations and thereby it has contravened provisions of section 12(1B) of the SEBI Act and regulation 3, 5, 73 and 74 of the CIS Regulations. 23. I note that the 18 years period stipulated in the scheme has expired and Orient has not yet made repayment of profit, income to investors as promised by it.

Orient has submitted that as per Gujarat Government Circular no. TRS 2060-9863-A3 dated 11/2/1961 it has sought permission from DFO to cut down the teak trees in order to repay the investors but the permission is yet to be granted. I find that Gujarat Government Circular no. TRS 2060- 9863-A3 dated 11/2/1961 was in force even at the time of inviting subscription from the public in the scheme of Orient. However, Orient had chosen to not disclose this condition anywhere in its publicity materials or Teak Sapling Sale Certificate / unit certificates issued by it to the investors. In my view, this is a material fact which would have had a strong bearing on the investment decision of the investors. I find that the Orient has illegally continued the scheme in contravention of the provisions of the SEBI Act and the CIS Regulations. Further, the scheme period is over and income or profit or produce to investors is not contingent upon the cutting of the trees as per the scheme. Nevertheless, if it was so, the Orient had to take appropriate steps before the expiry of 18 years and should have ensured the repayment to investors in terms of its scheme.

In this regard, I further note that the District Consumer Forum, Bharuch has also directed Orient to handover the position of one teak tree per unit to two complainants after deduction of expenses incurred by it. Thus, it is not mandatory for Orient to wait for permission of DFO in order to pass on the agreed income, profit or produce in the scheme to the investors. 24. In my view for the above act and omissions which have led to the contravention of the provisions of SEBI Act and CIS Regulations, the Orient and the persons in charge of its affairs and management of the scheme are liable. I note that while the other directors of Orient have not responded to the SCN, Mr. Dharshanbhai Arvindbhai Shah has submitted that he had resigned from the post of director with effect from November 17, 2008. He has filed a copy of Form number 32 claiming to be filed with Registrar of Companies. I note that no such Form 32 is available on "www.mca.gov.in/MCA21 that has the data of change in directors of all companies. Thus, his claim can not be accepted with certainty. I further note that find that Mr. Dharshanbhai Arvindbhai Shah was Managing Director of Orient when the scheme in question was launched and he continued as such at least till 2008 as claimed by him.

Thus, his resignation in the year 2008 cannot absolve him from the liabilities for the acts and omissions found in this case and he is liable for the same being the managing director of Orient during the relevant time. 25. From the Board resolution dated February 30, 1992 I note that the Advisory Board Members, viz. Dr. V.J. Patel, Shri R. S. Bhatt, Shri B. K. Zala, Shri Sanat Mehta and Shri Hasmukh Shah, were not in day to day control and management of Orient. They had only advisory role in the scheme and the Advisory Board was dissolved during the year 1997-98. I, therefore, find that there is no need to pass any direction under section 11 and 11B of the SEBI Act against them. The SCN, to the extent it pertains to them, is accordingly disposed of. 26. In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992 hereby issue following directions under section 11 and 11B of the said Act read with regulations 65 and 73 of Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 :- i. Orient Resorts (India) Private Limited and its directors Shri Brahm Dev Amarnath Shukla and Mr. Dilpesh V. Shah to wind up its scheme and to repay the income or returns to the investors or transfer the produce i.e. one teak tree per unit to them, as represented under the scheme, within a period of three months from the date of this order, failing which the following actions shall follow:

a. SEBI would initiate prosecution proceedings under section 24 and adjudication proceedings under Chapter VI of the SEBI Act against them. b. A reference would be made to the State Government/ local police to register a civil/ criminal case against them for apparent offences of fraud, cheating, criminal breach of trust and misappropriation of public funds, and c. Making a reference to the Ministry of Corporate Affairs, to initiate the process of winding up of Orient Resorts (India) Pvt. Ltd. d. Without prejudice to the above, SEBI shall also initiate attachment and recovery proceedings under section 28A of the SEBI Act. ii. Orient Resorts (India) Private Limited, Mr. Darshanbhai Arvindbhai Shah (former Managing Director) and Shri Brahm Dev Amarnath Shukla and Mr. Dilpesh V. Shah are directed to not to access the securities market and are further restrained and prohibited from buying, selling or otherwise dealing in the securities for a period of three years. 27. A copy of this order shall be forwarded to the stock exchanges and depositories for necessary action. 28. This order shall come into force with immediate effect.

PLACE : MUMBAI RAJEEV KUMAR AGARWAL DATE : November 26th, 2013 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA