Order in the matter of Shubham Karoti foods Private Limited

UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 65 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (COLLECTIVE INVESTMENT SCHEME) REGULATIONS, 1999, AGAINST SHUBHAM KAROTI FOODS PRIVATE LIMITED (PAN: AAQCS5807E) AND ITS DIRECTORS, MR. SOMIT KISHANCHANDRA SAXENA (PAN: BCQPS5051J) AND MR. SUDHIR NATHURAM PAWAR (PAN: AIIPP3823E). Date of Hearing: August 21, 2015 Appearances: For Noticees: Shri Somit Kishanchandra Saxena For SEBI: Dr. Anitha Anoop, Deputy General Manager. Mr. N. Murugan, Assistant General Manager. Mr. Abhiraj Arora, Manager 1.1 Shubham Karoti Foods Private Limited (hereinafter referred to as "SKFPL" or “company”) was incorporated on September 13, 2011 under the Companies Act, 1956 (CIN:U15411PN2011PTC140932) having its registered office in 154/4, Office No. 2, 1st Floor, Highway Tower, Bombay Pune Road, Kalbhor Nagar, Pune - 411035, Maharashtra. 1.2 Securities and Exchange Board of India (hereinafter referred to as "SEBI") had received a reference dated November 20, 2013 from the Reserve Bank of India, Ahmedabad in respect of SKFPL, stating that the company engaged in the business of tea, groundnut, soya oil, mineral water etc. in Maharashtra is collecting funds from common people in Silvassa.

1.3 On enquiry, SEBI, prima facie found that SKFPL is engaged in fund mobilizing activities from the public, which is in the nature of a Collective Investment Scheme without obtaining a certificate of registration from SEBI. Therefore, SEBI, vide an interim ex-parte Order dated August 8, 2014 (hereinafter referred to as ‘interim order’) passed the directions against SKFPL and its directors, namely, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar (hereinafter collectively referred to as ‘noticees’). 2.1 Prima facie findings/Allegations: The noticees were mobilizing funds under the camouflage of “Joint venture” from the public by way of various Single & Monthly Foods Plans/schemes either with lump-sum or installment payment. The investors/associates interested to invest in the said “Joint venture” make contributions to the company and enter into a Joint Venture Agreement called as “Agreement to Sell” with SKFPL. 2.2 Such contribution is dependent on the plan that an "associate" or investor may opt for. An illustrative plan from each category is shown in the following tables below: Single Foods Scheme for 1 year (SFS-1)

Unit Consideration Qty. of Accidental Total tea to be purchased Death Bonus Maturity Maturit Insurance 3% y in Kg. ( in `) 50 50 Kg 1.50 57.5 Kg 59 Kg 10000 100 100 Kg K3.g0 0 115 Kg 118 Kg 20000 250 250 Kg K7.g5 0 287.5 Kg 295 Kg 50000 500 500 Kg K1g5 575 Kg 590 Kg 100000 One Unit = One Kg, ratKesg o f 1Kg Tea = Rs 200/-

Monthly Foods Scheme for 1 year (MFS-1)

Consideration Total Accidental Monthly Qtly. Half Yr Yearly Bonus Unit Qty. of tea to Maturity Maturity in Death installment Installment Instal lmentInstallment 3% be purchased Kg. Insurance 30 30 Kg 500 1500 2980 59501.50 Kg 33.9 Kg 35.4 Nil 60 60 Kg 1000 3000 5960 119003.00 Kg 67.8Kg 70.8 Nil 90 90 Kg 1500 6000 8940 178504.50 Kg 101.7 Kg 106.2 Nil 120 120 Kg 2000 12000 11920 238006 Kg 135.6 Kg 141.6 Nil 240 240 Kg 4000 16000 23840 4760012 Kg 271.2 Kg 283.2 Nil

2.3 The contribution so made by "associates" or investors in response to the plans offered under the “Joint Venture” i.e. participation in the form of instalments (monthly, quarterly, half yearly and yearly ) or in single payment scheme, also represents units of tea and each unit is equivalent to one kilo gram of tea. 2.4 The investors on the payment of contribution (participation) are issued Certificate of Investment (hereinafter referred to as “Certificate”) by SKFPL. The money termed as participation value is to be utilized for the schemes of the Company. As against such contribution, the associate is promised a return (expected refund of participation) on maturity subject to the fulfillment of terms and conditions of the Certificate. At the end of the maturity period, i.e., completion of relevant payment plan, the "associate" or investor will be entitled to withdraw or renew the contribution indicated in the Certificate along with bonus. For example, a person who makes payment equal to 30 units of tea by paying Rs. 6000/- which is equivalent to 35.40 kg of tea, is eligible to get Rs. 7080. Similarly, an "associate" or investor opting for subscription to the Single payment scheme is required to make a total contribution of Rs. 10,000/- at the beginning of the year and the expected return for such investment is Rs. 11,800/- at the end of the year. 2.5 Further, it is observed that SKFPL carries out the activities of the scheme on behalf of individual or organization on a contractual/ Joint Venture basis. Hence, contributions made by "associates" or investors under the various plans offered therein, are managed on behalf of SKFPL.

2.6 In view of the above attributes of the scheme, it was alleged that the contributions were collected from the investors under the Schemes launched by the Company and the same is pooled and utilized in Joint venture which is a camouflage for the fund raising activity. The investments were made by the investors with a view to receive returns from the schemes. The property, contribution or investment forming part of the Schemes/Plans were managed by SKFPL on behalf of investors and the investors did not have any day-to-day control over the management of the schemes. As stipulated under section 11AA of the Securities and Exchange Board of India Act, 1992 for collective investment schemes, SKFPL is required to get a certificate of registration from SEBI under Section 12(1B) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘the SEBI Act')’ and Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as ‘the CIS Regulations’). However no registration was sought by the noticees from SEBI. 2.7 The mobilization of funds from the public, was also prima facie found to be a fraudulent practice in terms of Regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’). SKFPL and its directors were alleged to be responsible for the illegalities. 2.8 In view of the prima facie, findings on the violations, vide the said interim order dated August 8, 2014, the noticees were directed:- a. not to collect any more money from investors including under the existing schemes; b. not to launch any new schemes; c. not to dispose of any of the properties or alienate any of the assets of the schemes; d. not to divert any funds raised from public at large, kept in bank account(s) and/or in the custody of SKPL or group companies or promoters or LLPs or Proprietary concerns or any person directly or indirectly controlled through shareholding or management by SKPL;

e. furnish all information regarding the schemes with details of the investors and also details of insurance policies and compensation given under the policies as part of the schemes. 3.1 The noticees, in the said interim order, were advised to file their replies within a period of 21 days from the date of receipt of the interim order and also to indicate whether they wish to avail an opportunity of personal hearing in the matter. 4.1 Service of the interim order: The copy of the interim order was sent to the noticees vide letters dated August 11, 2014 through Speed Post. In response to the interim order, Shri Sudhir Pawar and Shri Somit Saxena (directors of SKFPL) vide letter dated August 28, 2014 submitted that they would submit all the documents by September 30, 2014. 4.2 Opportunity of personal hearing: SEBI vide letter dated August 3, 2015, intimated that the noticees will be given an opportunity of being heard on August 21, 2015. 4.3 In the said personal hearing on August 21, 2015, Shri Somit Kishanchandra Saxena, the director of the company appeared and submitted that the business is closed and they are in the process of repaying and had already repaid 25% of the money collected from around 1000 investors.

He undertook to file authority letters on behalf of the Company and Mr. Sudhir Nathuram Pawar. Thereafter, vide e-mail dated August 25, 2015, Shri Somit Kishanchandra Saxena forwarded the necessary authority letter for the Company. However, no authority in respect of Mr. Sudhir Nathuram Pawar was filed. 4.4 The Reply of the noticees: The noticees have not submitted any reply on the merits disputing the allegations recorded in the Interim order. However, the noticees vide letter dated August 28, 2014 wrote that they will submit the required information and documents by September 30, 2014. Since noticees have not submitted any replies or information, SEBI vide letters dated October 1, 2014 intimated the same to the noticees. During the course of hearing, the Noticees requested one week’s time to file written submissions. The Noticees vide e-mail dated August 31, 2015 submitted a copy of letter dated September 1, 2015 addressed to Registrar of Companies, Pune stating that: a. After order of SEBI, SKFPL has stopped collecting money from investors; b. No new schemes have been launched from the date of the order c. There is no disposal of assets/properties after the order. d. No diversion of funds has been done and the company is currently only doing trading business. e. The detailed compensation and investors list will be submitted within 15 days.

5.1 Thus, it is observed that no reply on merit has been filed subsequent to the interim order. Therefore, I proceed to consider the matter on the basis of material available on record. I have considered the allegations and materials on record. On perusal of the same, the following questions arise for consideration. Each question is dealt with separately under different headings. 1. Whether the noticees have launched and are running the arrangement/scheme as alleged? 2. Whether the major attributes of the arrangement fall within the definition of collective investment schemes as defined in section 11AA of SEBI Act? 3. If so, whether the noticees have violated Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations’ and Regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003. 9.1 Whether the noticees have launched and are running the arrangement/scheme as alleged? 9.2 As brought out in the interim order, in paragraph 3, SKFPL vide its letters dated December 11, 2013, December 30, 2013 and January 18, 2014 submitted various documents.

SKFPL has given the Brochure of the Company having details regarding various schemes, Sample copy of Certificate given to investors having general terms & conditions, Sample copy of Business Application form; Sample copy of Agreement for sale. On perusal of these documents, I find that the Company has floated various Single & Monthly Foods Plans/schemes either with lump-sum or installment payment. The investors/associates who are interested to invest in the said “Joint venture” makes contributions to the company. The Company issues a Certificate to those investors called as associates. Joint Venture Agreement called as “Agreement to Sell” deed is also made between Company and Joint Venturer. 9.3 On perusal of the brochure, I further find that the Company has floated the schemes in such a way that the contributions paid by the investors are consideration for purchasing the tea. Following the parallel of booking immovable property such as “flats” or plots, the company in its brochure advertised the booking can be done for its food products. It further stated that on completion of the term, the food products would be returned to the joint venture.

An agreement to sell also is entered by the Company in order to give an impression that the company is taking money as sale consideration either by lump sum or by installments. Further, it is stated in its “general terms and conditions” printed on the backside of the sample “certificate” submitted by the Company, that “the customer has the right to take the delivery or sell the (food products) of Shubam Karoti as he/ she may deems fit, on the expiry of the agreement. To facilitate easy liquidity, Company provides to customer(s) the marketing services for sale of “food items”. Customers intending to have these marketing services for selling/disposing their “SUBHAM KAROTI FOODS PVT LTD.”, shall submit an application in writing at least 90 days before the expiry of the term of agreement, authorizing the company to sell food products at the price as may be mutually agreed upon”. Similar confusing clause is also found in “Business Application form” submitted by the Company. 9.4 I find that the clause has been couched in a confusing way, such that no effective right is granted under this clause.

Moreover, in the agreement to sell, there is no mention of what product is being sold and the quantity that is being sold. Surprisingly, without even identifying the product, the “agreement to sell” states that the product will be allotted on the expiry of half of the tenure of the plan while the “certificate” given by the company provides for the expected sum payable. The “terms and conditions” attached to the Brochure submitted by the Company shows that joint venture will be repaid on the expiry of the due date. In an arrangement of mere sale of products there is no need for expected sum payable. If the representation in the brochure coupled with the “certificate” and the “business application form” and “agreement to sell” are accepted together, it would mean that the company would pay back the expected sum along with the product which does not make any commercial sense. It is clear that the arrangement is not of sale of products. This is further evidenced from the fact that the amount paid is locked in for a period of the tenure of agreement further as stated in the brochure. The Joint venture cannot be cancelled before the expiry of the term.

If cancelled, the Company will charge 25% of the Consideration charges and the balance will be paid to the joint-venturer along with interest at 4% per annum on expiry of the term. All these clearly show that the nature of payment is not sale consideration towards purchase. SEBI in its letters dated 28.11.2013 and 07.03.2014 sought specific details regarding procurement or production of tea by SKFPL and also details regarding delivery of tea units along with list of investors to whom tea units were delivered. However, SKFPL did not submit such details. The Company which is running installment schemes does not have any trade receivables as on March 31, 2012 and March 31, 2013. It is highly improbable, that the entire amount of installment was paid by the investors at the end of financial year leaving the trade receivable as nil. Hence, the so called arrangement of sale is only a camouflage for its fund raising activities. It is noted that instead of indicating the money to be paid by the investor, the same is indirectly stated in terms of payment for particular units of tea while one unit of tea is fixed as Rs. 200. 9.5 In view of the above, I find that the noticees have launched and are running the arrangement/scheme as alleged in the interim order.

10.1 Whether the major attributes of the arrangement fall within the definition of collective investment schemes as defined in section 11AA of SEBI Act? 10.2 Though no submissions on the merits have been made, I proceed to consider now whether the four conditions mentioned in section 11AA (2) of SEBI Act are satisfied in the instant arrangement. Section 11AA of SEBI Act reads as follows:

"(1) Any scheme or arrangement which satisfies the conditions referred to in subsection (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 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. [(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 ii. under which deposits are accepted by non-banking financial companies iii. being a contract of insurance iv. providing for any scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund v. under which deposits are accepted under section 58A of the Companies Act, 1956 vi. under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society 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."

10.3 Perusal of the above section shows that any arrangement or scheme to be considered as collective investment scheme has to satisfy the four conditions mentioned in section 11AA(2) of SEBI Act and the same should not fall within any of the exceptions mentioned in section 11AA(3) of SEBI Act. 10.4 Regarding the first requirement of pooling of the contributions and utilization of the same for the scheme, as found out earlier, though SKFPL has given an impression that the contribution is sale consideration, the same was only a camouflage. 10.5 The brochure refers to joint venture of booking the company’s food products. Therefore, the question as to the attributes of such joint venture is firstly considered. In this regard, reference may be made to the observation of the Hon'ble Supreme Court of India in New Horizons Ltd. Vs Union of India (1995(1) SSC 478) as quoted in M/S. Gammon India Ltd vs Commnr. Of Customs, Mumbai (decision dated 6 July, 2011) regarding the nature of a joint venture. The Hon'ble S.C. observed "The expression 'Joint venture'…connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connections therewith, and duty, which may be altered by agreement, to share both in profit and losses" 10.6 In the instant scheme, though reference is made to the word joint venture, the reference is only in respect of joint venture to book the company’s food products. It is inconceivable that a joint venture structure could be employed for buying the company’s products, even assumed for a while.

10.7 It is more of an arrangement that provides for expected monetary return under the name of "Expected Sum payable on Expiry of Term", specified in the various plans. Under the instant schemes offered by SKFPL, there is no documentary proof to show that there is an element of shared control. Therefore, I find that reference made by SKFPL in its brochure is of any significance to indicate that the schemes of SKFPL is joint venture in nature. 10.8 In view of this, the reference made as “sale consideration” or “joint venture” does not alter the legal nature of money received, from being the “contributions” of the investors, within the meaning of section 11AA(2) of SEBI Act. Section 11AA(2) (1) stating that “the contributions, or payments made by the investors, by whatever name called,” makes it very clear that the terminology of the contributions of the investors does not matter. As a matter of law, what matters is whether such contributions envisages pooling and utilization for the purpose of the scheme or arrangement. The fact that the “Expected Sum payable on Expiry of Term” is dependent on the amount of money invested and the period for which it stay invested, shows that contribution collected by SKFPL is pooled together by the company for giving the investors the monetary return termed by the Company as “Expected Sum payable on Expiry of Term”.

10.9 Further the fact that investors do not have discretion to cancel the arrangement, at any point of time, and take back their entire money indicates, the money contributed by the investors stay pooled. The fact that the arrangement can be cancelled and the Company would charge 25% of the Consideration charges and the balance would be paid to the “joint-venturer” along with interest at 4% per annum on expiry of the term only shows that whatever money contributed stay pooled till the expiry of the tenure of the plan/arrangement. Therefore, it cannot be said that the investor has any right of cancellation exercisable at any point of time in its true spirit of the term. 10.10 As regards, the second requirement, that contributions/payments were made by the investors with a view to receive profits, income, produce or movable or immovable property from such scheme, I have already noted earlier, the company agreed with the investor that it would pay an “Expected Sum payable on Expiry of Term” on maturity. 10.11 It is noted that the one unit of tea is equal to Rs. 200. For 30 Kg of tea is equal to Rs. 6000. Under the Scheme of MFS-1, Rs. 6,000 is the scheme size.

If monthly payment Rs. 500 is made for 12 months then entire Rs. 6,000 should be paid. In case of quarterly payment of Rs. 1,500/- then a total amount of Rs. 6,000 should be paid. In case of half yearly payment of Rs. 2,980, a total payment of Rs. 5,960 should be made. In case of lump-sum payment only Rs. 5950 should be paid. At the time of maturity, a total amount equal Rs. 7080 would be paid by the company which is equal to 35.40 units of tea (inclusive of 3% bonus). The Company has also provided for ‘Accidental Death Insurance’ in its Schemes, represented in its brochures for the public. 10.12 As noted earlier, the entire scheme is camaflouged as sale of products such as tea. However, on perusal of the balance sheet of the Company, I find that the company has no inventories, instead has current liabilities. This further shows that the company has only the investments made by investors, which are shown as ‘current liabilities’. However, in this instance no accidental death insurance is paid to the investor. In this way, depending upon the quantum of amount invested and the period of investment, varying amounts are offered as returns in different plans as stated in the abovementioned tables mentioned in para 2.2.

10.13 Thus, I find that in the instant scheme, contributions/payments were made by the investors with a view to receive “income” or “profits” from such scheme. 10.14 As regards the third requirement that the property, contribution or investment forming part of the scheme, whether identifiable or not, is managed on behalf of the investors, and the fourth requirement that the investors do not have the day to day control over the management and operation of the scheme, I find that there are no documentary proof in any of the documents submitted by the Company to show that, the day to day control is with the investors. In view of that, I find that the investors do not have any right or day-to-day, control over the management and operation of the scheme or arrangement.

10.15 As far as the management of the contribution of the investor is concerned, as per the brochure of SKFPL, it carries out the activities of the scheme on behalf of individual or organization on a contractual/ Joint Venture basis. Though the arrangement is not joint venture, the arrangement is carried out on behalf of the investors. Hence, contributions made by "associates" or investors under the various plans offered therein, are managed on behalf of SKFPL. The investor also does not have complete discretion to take away his money at any time until the period of expiry of the term. The said money is managed by SKFPL in order to provide monetary return. Therefore, it is clear that such contribution is managed on behalf of the investor. 10.16 Hence I find that the instant arrangement/scheme satisfies the third and fourth conditions for Collective Investment Scheme ("CIS"). 10.17 In view of the satisfaction of the all the four conditions, I find that the instant arrangement/schemes falls within the definition of collective investment schemes. As all the four conditions specified under section 11AA(2) of the SEBI Act are satisfied in this case, the schemes/ plans promoted, launched, carried on and operated by the noticees are in the nature of CIS in terms of section 11AA(1).

In this regard, it would be relevant to place reliance on the observations of the Hon'ble Supreme Court, made in the matter of PGF Limited &Ors. Vs. Union of India &Anrs. (Civil Appeal No. 6572 of 2004): "Therefore, the paramount object of the Parliament in enacting the SEBI Act itself and in particular the addition of Section 11AA was with a view to protect the gullible investors most of whom are poor and uneducated or retired personnel or those who belong to middle income group and who seek to invest their hard earned retirement benefits or savings in such schemes with a view to earn some sustained benefits or with the fond hope that such investment will get appreciated in course of time. Certain other Section of the people who are worstly affected are those who belong to the middle income group who again make such investments in order to earn some extra financial benefits and thereby improve their standard of living and on very many occasions to cater to the need of the educational career of their children. 38. Since it was noticed in the early 90s that there was mushroom growth of attractive schemes or arrangements, which persuaded the above vulnerable group getting attracted towards such schemes and arrangements, which weakness was encashed by the promoters of such schemes and arrangements who lure them to part with their savings by falling as a prey to the sweet coated words of such frauds, 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. ... ... ...

40. It will have to be stated with particular reference to the activity of the PGF Limited, namely, sale and development of agricultural land as a collective investment scheme, the implication of Section 11AA was not intended to affect the development of agricultural land or any other operation connected therewith or put any spokes in such sale-cum-development of such agricultural land. It has to be borne in mind that by seeking to cover any scheme or arrangement by way of collective investment scheme either in the field of agricultural or any other commercial activity, the purport is only to ensure that the scheme providing for investment in the form of rupee, anna or paise gets registered with the authority concerned and the provision would further seek to regulate such schemes in order to ensure that any such investment based on any promise under the scheme or arrangement is truly operated upon in a lawful manner and that by operating such scheme or arrangement the person who makes the investment is able to really reap the benefit and that he is not defrauded ... ... It is, therefore, apparent that all other schemes/arrangements operated by all others, namely, other than those who are governed by sub-section 3 of Section 11AA are to be controlled in order to ensure proper working of the scheme primarily in the interest of the investors.

... ... 42. Therefore, in reality what sub-section (2) of Section 11AA intends to achieve is only to safeguard the interest of the investors whenever any scheme or arrangement is announced by such promoters by making a thorough study of such schemes and arrangements before registering such schemes with the SEBI and also later on monitor such schemes and arrangements in order to ensure proper statutory control over such promoters and whatever investment made by any individual is provided necessary protection for their investments in the event of such schemes or arrangements either being successfully operated upon or by any misfortune happen to be abandoned, where again there would be sufficient safeguards made for an assured refund of investments made, if not in full, at least a part of it. ... ... In the light of our above conclusions on this ground it will have to be held that Section 11AA is a valid provision, not suffering from any infirmity, as it does not intrude into the specific activities of sale of agricultural land and its development. ... ... It is needless to state that as per the agreement between the customer and the PGF Limited, it is the responsibility of the PGF Limited to carry out the developmental activity in the land and thereby the PGF Limited undertook to manage the scheme/arrangement on behalf of the customers. Having regard to the location of the lands sold in units to the customers, which are located in different states while the customers are stated to be from different parts of the country it is well-neigh possible for the customers to have day to day control over the management and operation of the scheme/arrangement. In these circumstances, the conclusion of the Division Bench in holding that the nature of activity of the PGF Limited under the guise of sale and development of agricultural land did fall under the definition of collective investment scheme under Section 2(ba) read along with Section 11AA of the SEBI Act was perfectly justified and hence, we do not find any flaw in the said conclusion. ... ....

53. We, therefore, hold that Section 11AA of the SEBI Act is constitutionally valid. We also hold that the activity of the PGF Limited, namely, the sale and development of agricultural land squarely falls within the definition of collective investment scheme under Section 2(ba) read along with Section 11AA (ii) of the SEBI Act and consequently the order of the second respondent dated 06.12.2002 is perfectly justified and there is no scope to interfere with the same. In the light of our above conclusions, the PGF Limited has to comply with the directions contained in last paragraph of the order of the second respondent dated 06.12.2002 ... ..." 11.1 If so, whether the noticees have violated Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations’ and Regulation 4(2)(t) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003? 11.2 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.

The prohibition is on every person. 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 'CIS'. A person can launch or sponsor or cause to sponsor a CIS 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. 11.3 I find that the noticees have launched and are carrying on collective investment schemes, without obtaining certificate of registration from SEBI. Therefore, the noticees have contravened the provisions of Section 12(1B) of the SEBI Act and Regulation 3 of the CIS Regulations. 11.4 In respect of the allegation of violation of reg. 4(2)(t) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 (FUTP Regulations, 2003), it may be noted that the FUTP Regulations was amended with effect from Sept 06, 2013 and clause (t) to reg.

4(2) was inserted which reads as follows:- 4. Prohibition of manipulative, fraudulent and unfair trade practices (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely (a)… "(t) 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." 11.5 Subsequent to introduction of reg. 4(2) (t) of FUTP Regulations, 2003, the illegal mobilisation of funds by means of collective investment schemes are deemed to be fraudulent. The company carrying on unregistered collective investment schemes and all those persons who are directors as on the date of introduction of reg. 4(2) (t) of FUTP Regulations, 2003 will be liable for action, for violation of reg. 4(2) (t) of FUTP Regulations, 2003. In the present case, the Company or any of the directors have not disputed the allegation violation of reg. 4(2) (t) of FUTP Regulations, 2003. There is no material on record that the Company has stopped collecting funds.

Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar are the directors from the inception. Therefore, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar, being the directors, as on Sept 06, 2013 and the Company have violated reg. 4(2) (t) of FUTP Regulations. 11.6 I find from the material on record that Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar are the directors of SKFPL. I note that the above directors were on the Board of the Company during such time when the Company had been collecting monies and running CIS schemes. Therefore, they are responsible for the violations along with the Company. 11.7 In view of the violation committed by such directors and the company, they are liable, to wind up the scheme and repay the amount collected along with the company with promised returns, to abstain from collecting any money from the investors or launch or carry out any Collective Investment Schemes and to be restrained from accessing the securities market or to be prohibited from buying, selling or otherwise dealing in securities market and therefore necessary consequential directions are required to be passed by SEBI to that effect.

12.1 In view of the observations made in this order, 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) Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar, shall abstain from collecting any money from the investors or launch or carry out any Collective Investment Schemes including the schemes which have been identified as a Collective Investment Schemes in this Order. b) Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar 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) Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar, shall not alienate or dispose off or sell any of the assets of Shubham Karoti Foods Private Limited except for the purpose of making refunds to its investors as directed above.

d) After completing the aforesaid repayments, as directed in sub-paragraph (ii) above, Shubham Karoti Foods Private Limited 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) Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar, 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) Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar, 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.

12.2 In the event of failure by Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar, to comply with the above directions a) Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar 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 paragraph 12.1 (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. b) SEBI would make a reference to the State Government/ Local Police to register a civil/ criminal case against Shubham Karoti Foods Private Limited and its directors, its promoters, directors and its managers/ persons in-charge of the business and its schemes, for offences of fraud, cheating, criminal breach of trust and misappropriation of public funds; and c) SEBI would make a reference to the Ministry of Corporate Affairs, to initiate the process of winding up of the company, Shubham Karoti Foods Private Limited d) SEBI shall initiate attachment and recovery proceedings under the SEBI Act and rules and regulations framed there-under.

13. 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 Shubham Karoti Foods Private Limited and its directors, Mr. Somit Kishanchandra Saxena and Mr. Sudhir Nathuram Pawar including other persons who are in default, for the violations as found in this Order. 14. This order shall come into force with immediate effect. 15. Copy of this Order shall be forwarded to the stock exchanges and depositories for necessary action.

DATE : February 17th, 2016 PRASHANT SARAN PLACE : Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA