Order in the matter of Sai Multi Services and its Proprietor, Mr. Sanjay B Tenginkai

WTM/PS/28/EFD/CIS/MAY/2016

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 Sai Multi Services and its Proprietor, Mr. Sanjay B Tenginkai (PAN: AFDPT9966L).

1. Securities and Exchange Board of India (“SEBI”), vide an ex-parte interim Order dated December 02, 2014 (“interim order”), had prima facie observed that Mr. Sanjay B. Tenginkai through his proprietorship concern, M/s. Sai Mutli Services (“noticees”) was illegally mobilizing funds from the public through schemes in the nature of Collective Investment Schemes (“CISs”) without obtaining certificate of registration from SEBI and contravened section 12(1B) of the Securities and Exchange Board of India Act, 1992 (“the SEBI Act”) and regulation 3 of the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (“the CIS Regulations”). The noticee was also alleged to have contravened regulation 4(2)(t) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003 (“the PFUTP Regulations”).

2. The interim order alleged that the noticee failed to provide the details regarding the total amount mobilized from investors and that it was known from the Sai Multi Services Investors’ Protection Society that the noticee had collected funds to the tune of Rs.4.2 crore from investors. In order to protect the investors and to prevent the noticee from continuing with his mobilization under the impugned CIS, SEBI issued the interim order, wherein the following directions were passed:

“In view of the forgoing, I, in exercise of the powers conferred upon me under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992 read with Regulation 65 of CIS Regulations, hereby direct Sai Multi Services and its Proprietor, Mr. Sanjay B Tenginkai, (PAN: AFDPT9966L):

a. not to collect any money from investors including under the existing "scheme"; b. not to launch any new schemes or float any new companies/proprietary concern to raise fresh moneys; c. to immediately submit the full inventory of the assets owned by Mr.Sanjay B Tenginkai and his proprietary concern, Sai Multi Services, out of the amounts collected from the investors under its existing "scheme"; d. not to dispose of any of the properties or alienate the assets of the existing "scheme"; e. not to divert any funds raised from public at large, kept in bank account(s) and/or in the custody of Mr.Sanjay B Tenginkai or in the name of his Proprietary concern viz. Sai Multi Services; f. to furnish all the information/details sought by SEBI within 15 days from the date of receipt of this order, including, i. Details of the scheme along with all the documents/materials pertaining to the scheme offered by Sai Multi Services viz. copies of MOU, Letter of agreement, etc. ii. Details of the amount mobilized and refunded till date, and, iii. Scheme wise list of investors and their contact numbers and addresses”.

3. The interim order came into force with immediate effect. The noticees were advised to file reply in respect of the interim order and to also indicate whether they desired to avail an opportunity of personal hearing. It is noted that the interim order sent to the address of the noticees through speed post returned with remark “left/not known”.

4. Thereafter, SEBI had affixed the interim order on September 2015 at the premises where the noticees were operating as per information available with SEBI. However, despite the same, the noticees failed to submit any response. In accordance with the principles of natural justice, the noticees were afforded an opportunity of personal hearing on February 01, 2016. As no response was received from the noticees, SEBI made a public notice through newspapers (in The New Indian Express, Belgaum Edition and also in Vijayvani (local daily) in vernacular language on January 13, 2016) regarding the proceedings initiated vide the interim and the personal hearing. However, even after the public notice, the noticees have not responded. Accordingly, I deem it appropriate to proceed and decide the case on merits on the basis of material available on record.

5. I have considered the interim order and other material available on record. I note that the following observations made in the interim order:

i. Sai Multi Services collects money from the public for its project/scheme called “GFBF and SM Scheme” for buying buffaloes of “Morra” breed (stated to produce approx. 7 to 15 litres per day) and the investors are assured guaranteed monthly return by selling the milk produced from these buffaloes.

ii. The investors who are interested in the aforesaid project are made to enter into an Memorandum of Understanding (MoU) with Sai Multi Services.

iii. The following clauses from the MoU are relevant to be noted:

1. THE PROMOTERS “The scheme is promoted by Shri Sanjay B Tengnikai. Mr.Sanjay B. Tenginkai Managing Director of the company with structured well diversified portfolio with quality professional advice with guaranteed commitment. The company was started in 2005 at Belgaum, Karnataka....

2. PLACE OF BUSINESS a. The promoters have infrastructure consisting of agricultural land, cattle shed and other facilities at Jamboti and Belgaum. The Promoters have developed infrastructure which can generate huge profits...... 3. FINANCIAL ASPECTS OF THE PROJECT a. The project is agro based project. The project is based on buying buffaloes of “Morra” breed. The particular breed is known for giving output of milk of approximately 7 to 15 litres per day for a period 5-7 months in a year. The promoters have planned to have 2000 number of buffaloes and expect to generate 1400 litres of milk per day which can be sold in the open market or through a franchisee b. The Promoters have already invested an amount of Rs.20 lacs besides time and effort to set up the Project. The notional cost of time and effort is calculated as Rs.20 lacs. Besides this, the Promoters are going to spend a lot of time and effort on developing the Project.

3.1 Requirement of Funds The project is an agro based project and requires further funds to the tune of Rs.25 crores over a period of 24 months. Looking at the recessionary market and risk factors involved, banks are not willing to finance the project..... After the second year of operation the proprietors will convert the proprietorship concern into a public/private limited company with adequate share capital. The promoter will then offer the equity to the investors for appropriate face value....... The project at present can be financed only with the funding by private investors who are willing to invest in the project with returns……

3.2 Anticipated Profit in the Project

The daily milk output is expected to be around 14,000 litres. Looking at present price of milk which is at Rs.20/- to Rs.25/-, there will be generation of revenue of Rs.3 lacs/- per day. The cost of maintenance of the buffaloes, investment, daily expenditure will be approximately Rs.125/- per buffalo. Therefore, the expected cost would be Rs.1, 25,000/- per day. The expected revenue generation will be approximately Rs.1,75,000/- per day. Therefore, the Anticipated Profit per day is expected to be Rs.150000- per day.....

Based on this Profit, investors are assured monthly returns. a. Fixed Monthly Return: In the first month of the investment, the investor will be entitled to a return of 2% on investment. From the second month, there will be a minimum return on investment of 2% per month.

b. Profit Sharing returns: Besides minimum returns as set out hereinabove, there shall be profit sharing. The profit sharing returns are expected to be between 2% to 10% depending on monthly revenue generation. At the end of every month, Promoters will calculate generation of profits in the month. Based on the profit so calculated, additional percentage of return on investments shall be disbursed on monthly basis...

4. LOCK IN PERIOD

The lock-in period of the investment is 12 months from the date of investment. .After the period of 12 months, any withdrawal of the amount invested will be subject to certain amount of allocation to be decided by the Promoters at their sole discretion.

7. RISK FACTORS a. THE PROJECT IS AN AGRO-BASED PROJECT. THEREFORE, THE PROJECT CARRIES ALL RISKS WHICH ARE ASSOCIATED WITH AN AGRO BASED PROJECT. b. THE PROJECT IS BASED ON PROCUREMENT OF MINIMUM 1,000 BUFFALLOES OF MORRA BREED. THE SAID BREED IS SUSCEPTIBLE TO CERTAIN DISEASES. THEREFORE, THE LIFE OF THE ANIMAL MAY VARY DEPENDING ON THE DISEASES. c. THE PROJECT IS BASED ON MILKING PERIOD OF 7 MONTHS PER ANIMAL. DUE TO VARIOUS REASONS..... d. THE PROMOTER HAS THE RIGHT TO STOP THE BUSINESS AT ANY TIME, NOTWITHSTANDING THE LOCK-IN PERIOD OF 12 MONTHS WITHOUT GIVING ANY NOTICE TO THE INVESTORS IF THE PROJECT BECOMES UNVIABLE OR RUNNING OF THE PROJECT IS NOT POSSIBLE FOR VARIOUS REASONS... DISCLAIMER: “The promoters will not be personally liable for any of the amounts. Therefore, no investors shall have the right to initiate proceeding against the promoter in his personal capacity. Right to raise loans, hypothecate animals, infrastructure, etc shall always remain with the promoters... The promoters have the right to make any amendments, modifications, alterations or additions to the scheme ...without any notice or previous consent of the investors.”

iv. As per the sample “Letter of Agreement” that is issued after an investor subscribes to the “GFBF and SM Scheme”, states the following:

“I, ..... (Name of the Customer/Investor), have gone through the GFBF and SM Scheme. I have seen the contents of the Scheme. The contents of the Scheme as well as risk factors are explained to me and I have understood the same.

After knowing the risk factors and the fact that returns on my investment depend on various conditions mentioned in the Scheme, I am requesting you to accept an amount of Rs........ as an investment in the GFBF and SM Scheme. I hereby undertake that if I do not get the returns on the investment, I will not hold the promoters as responsible. Accordingly, with full knowledge and understanding, I am investing my money”

6. In the light of the above observations, it is to be determined whether the schemes launched and operated by the noticees are in the nature of Collective Investment Scheme as defined under section 11AA of the SEBI Act. The provisions of section 11AA are referred and reproduced herein below: “Collective investment scheme. 11AA. (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) or sub-section (2A) shall be a collective investment scheme: Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme.

(2) Any scheme or arrangement made or offered by any person under which,— (i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized 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 (2A) Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act.

(3) Notwithstanding anything contained in sub-section (2) or sub-section (2A), any scheme or arrangement— (i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State; (ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of section 45- I of the Reserve Bank of India Act, 1934 (2 of 1934); (iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938), applies; (iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (19 of 1952); (v) under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956); (vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956 (1 of 1956); (vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit Fund Act, 1982 (40 of 1982); (viii) under which contributions made are in the nature of subscription to a mutual fund; (ix) such other scheme or arrangement which the Central Government may, in consultation with the Board, notify,] shall not be a collective investment scheme”.

7. The first condition, under section 11AA(2) of the SEBI Act, is that the contributions or payments made by the investors by whatever name called are pooled and utilized for the purposes of the scheme or arrangement. The noticees have represented, in the MoU, that based on their experience and knowledge, they have decided to launch the project named “gfbf and sm” which is an agro-based project. The project was based on buying buffaloes of Morra breed and have planned to have 2000 buffaloes and expect to generate 14000 litres of milk per day. They have also represented that they have invested Rs.20 lakh and that the project requires further funds to the tune of Rs.25 crore over a period of 24 months. They have also stated that the project could be financed only with the funding by private investors who are willing to invest in the project with returns. The MoU has also mentioned about the ‘Anticipated Profit in the Project’. The investors have also invested in the said project based on such returns and risk conditions. From the above, it can be concluded that the noticees have solicited funds for the project and that the contributions or subscriptions are pooled from the investors and utilised for the purposes of the scheme, which is the ‘gfbf and sm’ project. In view of the above, I conclude that the first condition under section 11AA(2)(i) of the SEBI Act is satisfied.

8. The second condition under section 11AA(2) of the SEBI Act is that the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement. As mentioned in the observations in the previous paragraph, the noticees have solicited funds from investors for the project. The MoU specifically mentions about the profits. The said portion is mentioned below: “Anticipated Profit in the Project The daily milk output is expected to be around 14,000 litres. Looking at present price of milk which is at Rs.20/- to Rs.25/-, there will be generation of revenue of Rs.3 lacs/- per day. The cost of maintenance of the buffaloes, investment, daily expenditure will be approximately Rs.125/- per buffalo. Therefore, the expected cost would be Rs.1, 25,000/- per day. The expected revenue generation will be approximately Rs.1,75,000/- per day. Therefore, the Anticipated Profit per day is expected to be Rs.150000- per day.....

Based on this Profit, investors are assured monthly returns. a. Fixed Monthly Return: In the first month of the investment, the investor will be entitled to a return of 2% on investment. From the second month, there will be a minimum return on investment of 2% per month. b. Profit Sharing returns: Besides minimum returns as set out hereinabove, there shall be profit sharing. The profit sharing returns are expected to be between 2% to 10% depending on monthly revenue generation. At the end of every month, Promoters will calculate generation of profits in the month. Based on the profit so calculated, additional percentage of return on investments shall be disbursed on monthly basis... c. The disbursement of payment shall be as far as possible online and in exceptional circumstances the Promoters reserve the right to pay the amounts by Cheque or by cash. The above said clauses clearly prove that the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits/income/produce from such scheme or arrangement. Therefore, the second condition under section 11AA(2)(ii) of the SEBI Act is also satisfied by the ‘scheme’ operated by the noticees.

9. The third and fourth conditions under section 11AA(2) are that the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors, and the investors do not have day-to-day control over the management and operation of the scheme or arrangement. The interim order has observed “…….the management and operation of the entire scheme, which involves buying buffaloes, selling the milk in the open market and also realization of profit, rests solely with Sai Multi Services and the investors have hardly any role to play therein”. I have perused the MoU and note that various clauses therein clearly indicate that all the planning and implementation of the scheme/project is by the noticees. The noticees have also stipulated “lock-in period” wherein the investments of investor are locked-in for a period of 12 months and that any withdrawal of the amount is at the sole discretion of the noticees. The noticees have the right to stop the business at any point in time. The MoU also states that the noticees would not be liable for any amounts (paid by the investor) and that the investors do not have the right to initiate proceedings against the noticees. The noticees also have the right to amalgamate, merge, transfer, assign business with any other party. They also have the right to make any amendments, modifications, alterations or additions to the scheme without notice or previous consent of the investors.

All the above observations prove that the contribution from the investors in the project is managed by the noticees on behalf of the investors and that the investors do not have any day-to-day control over the management and operation of the scheme. I accordingly conclude that the ‘scheme’ satisfies the third and fourth conditions stipulated in section 11AA(2)of the SEBI Act.

10. From the above findings and observations, I conclude that the ‘scheme’ offered by the noticees with a promise of ‘return’ satisfies all the four conditions specified in section 11AA (2) of the SEBI Act and therefore qualify as a Collective Investment Scheme as defined under the said section read with the CIS Regulations. I also refer to the following observation of the Hon’ble Supreme Court in the matter of PGF Limited vs. UoI and another (ref. MANU/SC/0247/2013):

"…..the Parliament thought it fit to introduce Section 11AA in the Act in order to ensure that any such scheme put to public notice is not intended to defraud such gullible investors and also to monitor the operation of such schemes and arrangements based on the regulations framed under Section 11AA of the Act."

11. The requirement of registration and regulation of collective investment schemes as mandated under section 11(2)(c) and 12 of the SEBI Act therefore assumes much importance. The Hon'ble Supreme Court further observed "Inasmuch as the said Section 11AA seeks to cover, in general, any scheme or arrangement providing for certain consequences specified therein vis-a-vis the investors and the promoters…….,”. The Hon’ble Supreme Court further observed "A reading of sub-Section (3) of Section 11AA also throws some light on this aspect, wherein it is provided that those institutions and schemes governed by sub-clause (i) to (viii) of sub- Section (3) of Section 11AA will not fall under the definition of collective investment scheme. ........... Therefore, by specifically stipulating the various ingredients for bringing any scheme or arrangement under the definition of collective investment scheme as stipulated under sub- Section (2) of Section 11AA, when the Parliament specifically carved out such of those schemes or arrangements governed by other statutes to be excluded from the operation of Section 11AA, one can easily visualize that the purport of the enactment was to ensure that no one who seeks to collect and deal with the monies of any other individual under the guise of providing a fantastic return or profit or any other benefit does not indulge in such transactions with any ulterior motive of defrauding such innocent investors and that having regard to the mode and manner of operation of such business activities announced, those who seek to promote such schemes are brought within the control of an effective State machinery in order to ensure proper working of such schemes."

12. To launch or carry on the activity of CIS and mobilize public funds from such schemes, it is mandatory under law to obtain a certificate of registration from SEBI. Section 12(1B) of the SEBI Act mandates that no person, shall sponsor or cause to be sponsored or carry on or caused to be carried on any CIS unless it obtains a certificate of registration from SEBI in accordance with the CIS Regulations. Regulation 3 of the CIS Regulations provides that no person other than a Collective Investment Management Company which has obtained a certificate under the said regulations shall carry on or sponsor or launch a 'collective investment scheme'. A person can launch or sponsor or cause to sponsor a collective investment scheme only if it is registered with SEBI as a Collective Investment Management Company. Therefore, the launching/ floating/ sponsoring/ causing to sponsor any 'collective investment scheme' by any 'person' without obtaining the certificate of registration in terms of the provisions of the CIS Regulations is in contravention of section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations. Sai Multi Services or its proprietor Mr. Sanjay B. Tenginkai do not have a certificate of registration as mandated under law and have launched CIS without obtaining certificate of registration from SEBI, thereby contravening the provisions of section 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations. Therefore, having concluded that the activities of the noticees are CIS in terms of section 11AA of the SEBI Act and that the same were carried out without obtaining registration from SEBI, suitable enforcement action should necessarily follow in the interest of investors.

13. I also note that in terms of regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and includes illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person. This provision in the above Regulations has been brought into effect from September 06, 2013. Accordingly, it could be held that by mobilizing public funds through CIS without obtaining registration from SEBI as required under section 12(1B) of the SEBI Act read with regulation 3 of the CIS Regulations, after the provision coming into force, the Company has contravened the above provision.

14. As mentioned in this Order, the noticees have not responded to the interim order. They have also not provided the details sought by SEBI including details of the investors, amounts mobilised from them and their whereabouts. It is important to refer to the following observation made in the interim order “From the news reports and information provided by Sai Multi Services Investor’s Protection Society, Gulbarga that Sai Multi Services has collected around `4.2 crores from the investors”. Considering the violations committed by the noticees in launching and operating CIS without obtaining registration from SEBI and the huge amounts said to be collected by them from the investors, I find that appropriate directions needs to be issued.

15. In view of the foregoing, in the interest of investors and the securities market, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 and Sections 11(1), 11B and 11(4) thereof and regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999, hereby issue the following directions: (a) Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai shall abstain, either directly or indirectly, from collecting any money from the investors or launch or carry out any Collective Investment Schemes including the scheme which have been identified as a Collective Investment Scheme in this Order.

(b) Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai shall wind up the existing Collective Investment Schemes and refund through ‘Bank Demand Draft’ or ‘Pay Order’, the money collected by the said company under the schemes with returns which are due to its investors as per the terms of offer within a period of three months from the date of this Order and thereafter within a period of fifteen days, submit a winding up and repayment report to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, including the trail of funds claimed to be refunded, bank account statements indicating refund to the investors and receipt from the investors acknowledging such refunds.

(c) Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai are permitted to sell their assets only for the sole purpose of making the refunds as directed above and deposit the proceeds in an Escrow Account opened with a nationalised Bank.

(d) After completing the aforesaid repayments in terms of sub-paragraph (b) above, Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai shall file a certificate of such completion with SEBI, within a period of 15 days, from two independent peer reviewed Chartered Accountants who are in the panel of any public authority or public institution. For the purpose of this Order, a peer reviewed Chartered Accountant shall mean a Chartered Accountant, who has been categorized so by the Institute of Chartered Accountants of India (‘ICAI’).

(e) Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai are also directed to provide a full inventory of all their assets and properties and details of all their bank accounts, demat accounts and holdings of shares/ securities, if held in physical form.

(f) Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai are restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market for a period of 4 years.

(g) In the event of failure by Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai to comply with the above directions, the following actions shall follow:

- Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai shall remain restrained from accessing the securities market and would further be prohibited from buying, selling or otherwise dealing in securities, even after the period of 4 years of restraint imposed in sub-paragraph (f) above, till all the Collective Investment Schemes are wound up and all the monies mobilized through such schemes are refunded to its investors with returns which are due to them.

- SEBI would make a reference to the State Government/ Local Police to register a civil/ criminal case against Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai, for offences of fraud, cheating, criminal breach of trust and misappropriation of public funds;

- SEBI would make a reference to the Ministry of Corporate Affairs to restrain Mr. Sanjay B. Tenginkai from continuing as a director or become a director in companies.

- SEBI shall initiate attachment and recovery proceedings under the SEBI Act and rules and regulations framed thereunder against the Company and others responsible.

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

17. This Order shall be without prejudice to the right of SEBI to initiate prosecution proceedings under Section 24 and adjudication proceedings under Chapter VIA of the Securities and Exchange Board of India Act, 1992 against Sai Multi Services and its proprietor Mr. Sanjay B. Tenginkai, for the violations as found in this Order.

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

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Date: May 10th, 2016 Place: Mumbai