Order in the matter of Sun-Plant Agro LImited

ORDER UNDER SECTION 11B OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) received a letter dated December 7, 2009 from the Director of the Economic Offences Investigation Cell, Government of West Bengal stating that M/s. Sun-Plant Agro Limited (hereinafter referred to as ‘the company’/ ‘Sun Plant’) had been raising funds in certain districts of West Bengal, and as such was allegedly running a CIS scheme without obtaining a Certificate of Registration from SEBI. Preliminary enquiries in this regard were made with the company. Details of mobilization of funds were sought to examine the applicability of the SEBI (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as the ‘CIS Regulations’) and to ensure that the interest of investors is adequately protected. In the course of the enquiry, it was observed that it prima facie appeared that the company was running CIS scheme without obtaining a certificate of registration from SEBI in violation of Regulation 3 of the CIS Regulations read with Section 11AA of the SEBI Act, 1992.

2. Based on the preliminary findings, SEBI had, vide its ad interim ex-parte Order dated October 21, 2010 (hereinafter referred to as the ‘interim order’), directed the company: a. not to collect any money from investors or to launch any scheme; b. not to dispose of any of the properties or alienate assets of the scheme; c. not to divert any fund raised from public at large kept in bank account and/or in the custody of the company.

3. Pursuant to the interim order, the company was granted an opportunity of personal hearing. Accordingly, Sun Plant, through its authorized representatives, appeared before me on December 10, 2010 and made oral and written submissions. The company was, on request, granted 10 days’ time to file further written submissions, if any. Accordingly, the same was filed by the company vide their letter dated December 20, 2010. The submissions of the company, inter alia, are as follows: a. The company does not carry on any business in ‘Securities’ as defined under the SEBI Act, 1992 or the Securities Contract (Regulation) Act, 1956 and as such SEBI has no jurisdiction to initiate any proceedings. b. Trees sold to purchasers are distinctly identifiable. c. The purchaser himself can sell the trees. The Title Certificate is also transferable. d. The company is merely nourishing the immature trees at the discretion of the purchaser. The management of the property never lies with or under control of the company. There is no embargo or restriction on the purchasers maintaining their own trees.

4. I have carefully considered the replies of the company, details filed by them during the hearing and other material available on record. The company has submitted that it is involved in the sale of trees to investors and that it is maintaining the same on behalf of the purchasers as per a Memorandum of Understanding (MOU) between the purchasers and the company. The company is also involved in the cultivation of Jatropha trees for production and sale of Bio Diesel.

5. The company had received the following amount against the cost of trees since 2003-04. Year No of Customers Amount Received Against Cost of Trees (Rs.) 2003-04 25554 5.57 crore 2004-05 22600 7.47 crore 2005-06 23367 9.77 crore 2006-07 19800 10.59 crore 2007-08 29537 11.73 crore 2008-09 30470 24.21 crore 2009-10 40654 Figure not given

6. Based on the submissions made by the company, I note the following: e. An investor can purchase any number of trees at a price of Rs. 1050/- per tree. The receipt for purchase mentions “Tree Maintenance & Sale Agreement”. f. The terms of the Scheme make it mandatory for purchasers to execute a Mutual Memorandum of Understanding (MMOU) setting out obligations of the purchasers of tree and Sun Plant. g. As per the MMOU, the purchasers have authorized the company to supervise and look after the trees, subject to natural calamities, as they live at locations far from the project site and it will be difficult to look after the day to day growth and maintenance of the trees. h. The total period of such supervision, maintenance and taking care of the growth for the plant is fixed for seven years. i. The purchaser is entitled to 15 Cft wood at the end of seven years and the rest will be retained by the company. j. From the audited accounts submitted by Sun Plant, it is found that the company has received 21.48 crore from sale of plant and jatropha seed in the year 2007-08 and the amount for the same is 22.5 crore for the year 2008-09.

7. I note that Section 11AA of the SEBI Act, 1992 provides that any scheme or arrangement which satisfies the following conditions shall be a collective investment scheme a. 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;

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

8. Accordingly, the issues that arise for my consideration are: a. Whether 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? b. Whether the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property? c. Whether the property, contribution or investment forming part of the scheme or arrangement, whether identifiable or not, is managed on behalf of the investors and whether the investors have day to day control over the management and operation of the scheme or arrangement?

9. Whether 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?

a. I note that the company has submitted that it does not pool the deposits collected from the purchasers. It is further submitted that each tree bears a distinctive number and the same is mentioned on the certificate/ tree maintenance and sales agreement. The copies of certificates (along with the tree numbers) submitted have been issued from September 2010 onwards.

b. I observe from the copies of the application forms and photographs submitted by Sun Plant that the tree numbers are of three to four digits without any prefixes or suffixes. I also note that as per the copy of the insurance policy submitted for the periods March 31, 2009 - March 30, 2010 and November 23, 2009 - November 22, 2010, the total number of plants are 9,34,791. It is not clear how the tree numbers will indicate different varieties of trees and location of trees in the absence of such identifiable means.

c. Further, during the personal hearing Shri A K Singh, Managing Director of Sun Plant submitted that while the company maintains the trees purchased by individuals, there is no separate maintenance accounts for each purchaser. This makes it evident that the company is maintaining the trees through a pool account and thus the submission of the company that the deposits collected from the purchasers are not pooled is not correct.

d. In view of the above, I find that the title is not distinctly identifiable. The contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement.

10. Whether the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property?

a. I note that as per the MMOU, the purchaser is entitled to 15Cft wood or its present market value of Rs 2500 at the end of seven years. Hence the return on investment is being provided at the end of the scheme in the form of wood (which the purchaser can sell and get cash in return) or in cash at present value.

b. In this regard, the company has submitted that the finding, that a return on investment is being provided at the end of the scheme in the form of wood or cash at present value, is incorrect. In support of its argument, the company has drawn my attention to clauses 6 and 8 of the document setting out the ‘terms and conditions for purchase of tree(s) and their further maintenance’. While clause 6 provides that the purchaser must surrender his ‘Title Certificate to the company on completion of due date with the option to sell your tree(s) by yourself or by the company’, clause 8 sets out that the ‘Certificate is transferable, subject to prior permission of the company’.

c. I note that neither of the two clauses shed any light on how the aforesaid finding is incorrect. The mere right of the ‘purchasers’ to sell the tree(s) themselves, as per clause 6 does not indicate that a return on investment is not being provided. It simply means that the ‘purchaser’/ investor may take the return on investment in the form of wood also.

d. Further, transferability of the Certificate of Title is also irrelevant as a counter to the finding that a return on investment is being provided. If a Certificate of Title is transferred, it only means that the transferee will be entitled to such return, and nothing more.

e. Thus, it is evident that the contributions or payments are made to the scheme or arrangement by the investors with a view to receive profits, income, produce or property.

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

a. I note that the MMOU is a prerequisite for investment in the product. The MMOU provides for the purchaser appointing the company ‘to supervise, look after’ the trees. Thus the management of the properties lies with Sun-Plant, and investors do not have any day to day or direct control on the management of the trees.

b. The company has submitted that there is no embargo or restriction on the purchasers maintaining their own trees. The company merely maintains and takes care of the immature trees at the discretion of the purchaser. The management of the property does not lie with or under control of the company. The company has submitted 2 letters from investors in support of its argument, wherein the investors have expressed an interest in purchasing trees subject to the condition that they themselves are permitted to look after and maintain their trees. These are followed by letters wherein each of the same two investors expresses his inability to take care and maintain his tree(s) and requests the company to take over the reigns so far as the maintenance of the tree(s) is concerned. The aforementioned letters from investors are also accompanied by the ‘Tree Purchase

Application Forms(s)’. Clause 3 of the same document clearly lays down that the trees will require further maintenance for 5-6 years and the purchaser of the tree will give liberty to the company for maintenance of the tree purchased by him. In the light of the above, the letters do not support the contention of the company.

c. I note that the company had filed an application with SEBI for grant of provisional registration pursuant to the notification of the CIS Regulations on October 15, 1999. The application of the company for provisional registration under the said Regulations was rejected by SEBI. Following this, on July 09, 2003 the company submitted a Winding Up and Repayment Report in terms of Regulation 73 of the CIS Regulations stating that it has repaid the money to investors in its schemes. On perusal of the ‘Tree Purchase Application Forms(s)’ mentioned in the previous paragraph, it appears that the company has submitted copies of application forms of the earlier scheme which was wound up in 2003 pursuant to SEBI directions, instead of those pertaining to the scheme currently under consideration. Several inconsistencies, including those listed below, are noticed: i. The cheque is to be drawn in the name of ‘Sun Plant Agro Finance Ltd., Katihar’. This was the name of the entity which wound up its schemes in 2003. ii. Cost of each tree as mentioned in the form is Rs. 500/-, whereas the cost of each plant as per the present scheme is Rs. 1,050/-. iii. The maintenance period as mentioned in the above referred forms is 5-6 years and the forms also inter alia state that the purchaser would be bound to give 50% of the wood of tree subject to a maximum of 15 cft. to the company against maintenance charge, whereas, according to the present scheme the maintenance period is 7 years and the purchaser would get 15 cft of wood or its present market value of Rs. 2500/- after the period. Thus it appears that these investors/‘purchasers’ had applied to the earlier scheme which was wound up in 2003, and therefore these letters are irrelevant to the present proceedings.

d. In view of the foregoing, it can only be concluded that investment forming part of the scheme or arrangement is managed by the company 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

12. The company has also contended that SEBI has no jurisdiction to initiate any proceedings as the company does not carry on any business in ‘Securities’ as defined under the SEBI Act, 1992 or the Securities Contract (Regulation) Act, 1956 and as such. This contention is not tenable as under the SEBI Act, 1992, SEBI has specific powers to regulate collective investment schemes.

13. Thus, in view of the foregoing, I find the company is raising funds in the name of sale of plants. It ‘sells’ plants to a purchaser, maintains the plants and thereafter provides return on the amount invested at the end of the scheme in the form of wood or cash, without any identity or ear-marking of the particular plant, which is sold. These activities of the scheme clearly make it a CIS, defined under Section 11AA of the SEBI Act read with Regulation 3 of the CIS Regulations.

14. In view of the same, I, in exercise of the powers conferred upon me under Section 11B and 19 of the SEBI Act, 1992 and Regulation 65 read with 73 of the CIS Regulations, hereby confirm the ex-parte interim Order dated October 21, 2010 and direct the company to wind up its existing collective scheme(s) and refund the money collected by it under the scheme(s) with returns which are due to the investors as per the terms of the offer in the manner specified in Regulation 73 of the CIS regulations, within three months from the date of this Order, failing which the following actions would follow:

i) Initiation of prosecution proceedings, under section 24 of the Securities and Exchange Board of India Act, 1992, against the company/its promoters/directors/managers / persons in charge of the business of its scheme(s), ii) Debarring the company/its promoters/directors/managers / persons in charge of the business of its scheme(s) from operating in the capital market and accessing the capital market for a period of five years, iii) Making reference to the state government / local police to register civil / criminal cases against the company and its promoters/directors for apparent offences of fraud, cheating, criminal breach of trust and misappropriation of public funds, and iv) Making a reference to the Ministry of Corporate Affairs, to initiate the process of winding up of the company.

15. For the specific purposes of the repayment/refund of the moneys to the investors as directed above, those directions as mentioned in the interim order dated October 21, 2010 in as much as it relates to disposal of properties of the scheme, the operation of the interim order is modified to allow Sun Plant to meet the liabilities of the refunds to the investors in accordance with these directions.

DATE: May 03, 2011 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA