Osian’S-Connoisseurs Of Art Private ... vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Order Reserved On: 10.09.2015 Date of Decision : 13.10.2015

Appeal No. 62 of 2013

Osian's-Connoisseurs of Art Private Limited G2B- Nariman Bhavan, Nariman Point, Mumbai- 400 021 ...Appellant

Versus

1.

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai -400 051

2. A. K. Muthuswamy, S/o. Late Mr. Krishnamurthy, Old No. 30, New No. 67, Bishop Garden, Raja Annamalaipuram, Chennai- 600 028 Tamil Nadu ...Respondents

Mr. Janak Dwarkadas, Senior Advocate with Mr. Vyapak Desai and Mr. Siddharth Ratho, Advocates i/b Nishith Desai Associates for the Appellant.

Mr. Shiraz Rustomjee, Senior Advocate with Mr. Tomu Francis, Advocate for Respondent No. 1

Mr. Mahadevan Krishna Iyer, Advocate for Respondent No. 2

CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member

Per: Justice J.P. Devadhar

1. Appellant is aggrieved by the order passed by the Whole Time

Member ("WTM" for short) of Securities and Exchange Board of India 2

("SEBI" for short) on April 15, 2013. By that order the appellant is held

guilty of sponsoring and managing "Collective Investment Scheme"

("CIS" for short) without obtaining certificate of registration from SEBI,

in contravention of Section 12(1B) of the Securities and Exchange

Board of India Act, 1992 ("SEBI Act" for short) and Regulation 3 of the

Securities and Exchange Board of India (Collective Investment

Schemes) Regulations, 1999 ("CIS Regulations" for short). By the said

order, appellant inter alia, is directed to wind up the said CIS and refund

the monies collected but not paid to the investors. In addition, the

appellant is also directed to pay the amount of profits/income earned, if

any, that is due to the investors as per the terms of its offer or pay

interest at the rate of 10% per annum on the amount invested from the

date of investment till the date of refund, whichever is higher.

2. Facts relevant for the purpose of present appeal as set out in the

memorandum of appeal are as follows:-

a) Appellant is a company registered under the

Companies Act, 1956. Appellant is a leading auction

house and archive in the country and has been

primarily engaged in the business of holding public

auction of artworks for several years which has been

the major source of revenue for the appellant.

Appellant is also engaged in the business of

providing investment advisory and art custodial

management services.

3

b) By a Trust Deed dated March 10, 2006 the appellant

settled a private Trust called Osian's Art Fund

("Trust" for convenience) under the Indian Trusts

Act, 1882 under which Oseta Investments Trustee

Company Private Limited ("Trustee" for

convenience) was appointed as a Trustee to the Trust.

The Trustee in turn appointed the appellant as Asset

Management Company ("AMC" for short) of the

Trust. Thus, the appellant is the sponsor and AMC of

the Trust.

c) Sometime in June 2006 the appellant as AMC of the

Trust launched a fund called "The Osian's Art Fund

Scheme Contemporary 1" ("Art Fund" for short) by

inviting subscriptions from various privately placed

investors to enable the appellant to make investments

in artworks (paintings, sculpture, graphic art and

drawings) of various artists. The objective of the

scheme was to collect capital from select private

high-net worth investors for investment by way of

acquisition, holding, management, trading or

disposal of Indian as well as foreign art or any other

property whatsoever including antiquities for the

purpose of providing facilities for the participation

by persons as beneficiaries in such properties or 4

investments and in the profits or income arising

therefrom. From the aforesaid scheme in all ` 102.40

crore was collected by the appellant from 656

investors for the purpose of acquiring artworks.

d) Prior to the launching of the scheme the appellant

had formal meeting with SEBI's Director

Mr. Pradeep Kar on February 15, 2006 and also had

informal discussions and correspondence with SEBI

on the question as to whether the scheme would

attract registration under any of the regulations

framed by SEBI. However, no response was

received by the appellant from SEBI in that behalf.

e) Pursuant to the Asset Management Agreement dated

June 08, 2006 executed by and between the appellant

and the Trustee of the Trust, the appellant as AMC of

the Trust has been managing the Art Fund after

obtaining approval from the Board of the Trustee

Company from time to time.

f) With a view to understand the nature of activities

carried on by the appellant, SEBI by its letter dated

June 18, 2007 sought certain information from the

appellant which was furnished by the appellant on

July 3, 2007.

5

g) On perusal of the information furnished by the

appellant, SEBI formed a prima facie opinion that the

scheme/fund which was floated and managed by the

appellant is a CIS covered under Section 11AA of

the SEBI Act, 1992. Since the said CIS was managed

by the appellant without obtaining certificate of

registration as required under Section 12 (1B) read

with Section 11(2)(c) of SEBI Act and Regulation 3

of CIS Regulations, SEBI issued a show cause notice

to the appellant on October 12, 2007. The Trustee

(Oseta) wide its letter dated December 21, 2007

assumed the responsibility to respond to the show

cause notice and filed its reply for itself and on

behalf of the appellant. Subsequently, personal

hearing was also granted. On February 13, 2008

SEBI issued a press release stating therein that the

investments made in Art Funds constitute CIS and

are governed by the CIS Regulations framed by

SEBI.

h) In the meantime, the Respondent No. 2 filed a

complaint before SEBI in relation to his investment

of Rs. 25 lac in the scheme managed by the

appellant. SEBI by its letter dated January 31, 2011

informed the Respondent No. 2 that the said 6

complaint did not fall within the purview of SEBI.

Thereupon, Respondent No. 2 filed a writ petition

before the Madras High Court which was dismissed

on April 16, 2012 with liberty to the Respondent No.

2 to challenge SEBI's letter dated January 31, 2011

by filing an appeal before this Tribunal. Accordingly,

the Respondent No. 2 filed an appeal before this

Tribunal. By an order dated November 29, 2012 this

Tribunal allowed the appeal by setting aside the

SEBI's letter dated January 31, 2011 and directed

SEBI to re-examine the matter and pass appropriate

order after hearing both the parties. Accordingly, the

matter was reheard and by a common order dated

April 15, 2013, SEBI has disposed of the show cause

notice issued to the appellant on October 12, 2007 as

also the complaint filed by Respondent No. 2 against

the appellant before SEBI. Appellant has filed the

present appeal to challenge the said order dated April

15, 2013.

3. Mr. Dwarkadas, learned Senior Advocate appearing on behalf of

the appellant submitted as follows:-

a) When the Art Fund was sponsored and launched by

the appellant as AMC of the Trust in the year 2006,

there was no legal regime existing to govern the 7

functioning of the Art Fund and hence SEBI is not

justified in passing the impugned order against the

appellant.

b) Section 11AA of the SEBI Act inserted with effect

from 22.02.2000 defines CIS as any scheme or

arrangement made or offered by any company under

which the contributions or payments by the investors

are pooled or utilized for the purposes of the scheme

or arrangement. Expression 'Company' is not

defined under the SEBI Act, 1992. In view of Section

2(2) of SEBI Act read with Section 2A of the

Securities Contracts (Regulation) Act, 1956, the

expression 'Company' under Section 11AA of SEBI

Act, 1992 would have to be construed as a company

registered under the Companies Act, 1956. Thus,

jurisdiction of SEBI under Section 11AA of SEBI

Act is in relation to schemes made or offered by any

company registered under the Companies Act, 1956.

In the present case, the CIS is made/offered by the

Trust and hence the same would fall outside the

purview of SEBI Act.

c) Apex Court in case of Harbhajan Singh v. Press

Council of India and Ors. (AIR 2002 SC 1351), Dadi

Jagannadham vs. Jammulu Ramulu and Ors. [(2001) 8

7 SCC 71], Grasim Industries Ltd. v. Collector of

Customs, Bombay (AIR 2002 SC 1706), and

Assessing Authority-cum-excise and Taxation

Officer, Gurgaon and Anr. V. East India Cotton Mfg.

Co. Ltd., Faridabad [(1981) 3SCC 531] has held that

a statute must be construed according to its plain

language and neither should anything be added nor

subtracted unless there are adequate grounds to

justify the inference that the legislature clearly so

intended. Since the expression 'Collective

Investment Scheme' under Section 11AA of the

SEBI Act is restricted to any scheme or arrangement

made or offered by any company, SEBI is not

justified in holding that Section 11AA is applicable

to a scheme made or offered by a Trust.

d) It is not in dispute that Mutual Funds established by

any Trust fall within the regulatory power of SEBI

and therefore, in respect of Mutual Funds, Venture

Capital Funds or Alternative Investments Funds

established by a Trust or a company, SEBI has

framed SEBI (Mutual Funds) Regulations, 1996,

SEBI (Venture Capital Funds) Regulations, 1996,

SEBI (Alternate Investment Companies)

Regulations, 2012 respectively. Since Art Fund does 9

not fall within the regulatory power of SEBI, no

regulation has been framed in that behalf. Therefore,

SEBI is not justified in applying the CIS Regulations

to the Art Fund made or offered by the Trust.

e) In the present case, the Art Fund is launched by the

appellant for and on behalf of the Trust which is

governed by the provisions contained under the

Indian Trusts Act, 1882. Neither the SEBI Act nor

the CIS Regulations authorize SEBI to regulate the

functioning of a private Trust and, therefore, the

impugned order passed by SEBI in relation to a

scheme offered by a Trust is without jurisdiction.

f) CIS Regulations have been framed by SEBI on the

basis of Dave Committee report which was meant to

govern plantation and agro schemes only, which

envisage investment features' such as high returns,

distribution channels, tax implication etc. for

investments in plantation schemes and does not refer

to the Art Funds.

g) As an AMC of the Trust, the appellant was only

entrusted with the duty to manage the funds of the

Art Fund and was not responsible for making

payments. Since the corpus of the Art Fund belonged 10

to the Trust, SEBI is not justified in passing the

impugned order against the appellant.

h) Mr. Neville Tuli currently owns about 34.66% shares

of the appellant company and Mrs. Swaraj Tuli owns

99% shares of the Trustee Company. Both the

appellant company and the Trustee Company are

distinct legal entities and there is neither interse

shareholding nor the two entities have common

promoters/shareholders. Therefore, in the impugned

order the WTM of SEBI has gravely erred in making

observation with respect to the shareholding pattern

and control of the appellant company.

i) The Trust is set up for the benefit of the beneficiaries

(more than 650 investors) who have invested in the

Art Fund for the purpose of acquiring artworks.

There is no dispute that the units of the Art Fund

have been validly created under the Indian Trusts

Act, 1882. As per the Indian Trust Act, the Trustees

are under an obligation to transfer the subject matter

of the Trust to the beneficiaries upon the dissolution

of the Trust. Moreover, as per the Indian Trust Act

and as per the Deed of Trust, the Trustees are obliged

to act in accordance with the Deed of Trust and

discharge their obligations towards the Beneficiaries. 11

SEBI which is not otherwise empowered to regulate

the functioning of a Trust would not become entitled

to regulate a Trust merely because, the beneficiaries

of the Trust are more than 50 in number.

j) It is not the case of SEBI that the scheme managed

by the appellant on behalf of the Trust is a bogus

scheme or intended to defraud the investors. In fact

at all times, the appellant has declared the NAV (Net

Asset Value) and repaid amounts to the investors to

the extent possible depending on the returns. Some of

the investors have approached the Civil Courts/

Consumer Forums and initiated criminal proceedings

to recover their amounts and such Courts/Forums

have entertained the claims of such investors.

Therefore, the liability to pay to the investors under

the scheme being a Civil liability, in case of dispute,

such dispute could be adjudicated only by a Civil

Court and not by SEBI. Therefore the impugned

order passed by SEBI against the appellant is without

jurisdiction.

k) Provisions of SEBI Act are not intended to override

the provisions of the Indian Trusts Act. Neither the

CIS Regulations nor Section 11AA of SEBI Act seek

to regulate the manner in which unincorporated 12

entities raise funds. The Art Fund settled by a private

Trust does not fall within the ambit of SEBI Act or

the CIS Regulations.

l) CIS Regulations read with Section 11AA of SEBI

Act clearly provide that the applicability of the CIS

Regulations is restricted to issuance of units to the

general public and do not envisage an offer made to a

select set of investors under a private placement. In

the present case, the scheme was launched only to

select set of investors (high net worth investors) by

way of private placement with a minimum

investment of ` 25 lac and therefore the scheme

offered to select set of investors cannot be treated as

CIS.

m) Reliance placed by SEBI on the decision of the Apex

Court in case of PGF Ltd. vs. Union of India (AIR

2013 S.C. 3702) and Sahara Indian Real Estate

Corporations Ltd. & Ors vs. SEBI (2013) 1 SCC

page 1 is misplaced. The Apex Court decision in case

of PGF Ltd. (Supra) has no relevance to the present

case, as in that case, there was a guaranteed return to

be provided by PGF, whereas, in the present case, the

confidential information memorandum issued by the

appellant clearly states that there would be no 13

guaranteed return. Similarly, in case of Sahara India

(Supra) the Apex Court has held that the purpose of

SEBI Act is to protect the rights of public investors

in the securities market. In the present case the offer

is made to a select set of investors under a private

placement and therefore, decision of Apex Court in

case of Sahara India (Supra) would have no

application to the present case.

n) The Art Fund sponsored by the appellant is

distinguishable from CIS for the following reasons:-

i) The schemes sponsored by the appellant

do not prescribe a maximum

subscription level and allotment is not

undertaken on a proportionate basis,

whereas, under CIS, maximum

subscription level is specified and

allotment is required to be undertaken

on a proportionate basis.

ii) CIS Regulations do not necessitate

calculation of NAV and there is no

underlying requirement to value

investments or the units by calculating

NAV on on-going basis, whereas, NAV

is the fundamental characteristic of the 14

valuation of the units issued by the Art

Funds.

iii) Regulation 2(1)(y) (as it then stood)

read with Regulation 24(2) of the CIS

Regulations mandate that a scheme

floated in accordance with the CIS

Regulations must necessarily be rated

by a Credit Rating Agency and

appraised by an Appraising Agency.

Currently in India there are no

Appraising Agencies or Credit rating

agencies approved by SEBI to appraise

or rate the assets of the Art Funds. In the

absence of any known mechanism for

rating art based schemes by credit rating

agencies, the imposition of the CIS

Regulations upon the operation of such

schemes would be incongruous and

impracticable.

iv) The Art Fund sponsored by the

appellant as AMC of the Trust cannot be

considered as CIS, because, firstly,

Section 11AA and CIS Regulations

apply only to a scheme launched or 15

sponsored by a company. Secondly,

those provisions apply only to

plantations and agro industries. Thirdly,

those provisions apply only in case of

solicitation, mobilization of investments

from public and not in case of

investment through private placement

and fourthly, the units offered by the Art

Fund are not securities as contemplated

under the SEBI Act and hence SEBI has

no jurisdiction to pass an order against

the appellant.

o) Although Section 11AA(2) is amended by

substituting the word 'company' with the word

'person' with retrospective effect from 18.07.2013

and a proviso is added to Section 11AA(1) with

retrospective effect from 18.07.2013, the said

amendments would have no relevance to the facts of

present case, because, the scheme offered by the

appellant as AMC of the Trust in the year 2006 came

to an end in the year 2009, that is, much prior to the

Amendment of Section 11AA with effect from

18.07.2013. Since the legislature has specifically

brought into force the above amendments with effect

from 18.07.2013, it is not open to the SEBI to 16

contend that the said amendments must be applied

retrospectively even for the period prior to

18.07.2013.

p) The SEBI (Venture Capital Funds) Regulations, 1996

and SEBI (Alternate Investment Companies)

Regulations, 2012 framed by SEBI do not

contemplate guaranteed payment of either the

principle amount of investment or interest or both.

Where a company registered under the SEBI

(Alternate Investment Companies) Regulations, 2012

is unable to liquidate its assets and return the money

to the investors, the trustee is permitted to make in-

specie distribution of the assets of the fund amongst

the investors pro-rata to their investment in the fund,

subject to approval of the 75% of the contributors. In

the absence of any regulation framed by SEBI, in

respect of Art Fund, the impugned order passed by

the WTM of SEBI is highly prejudicial to the

appellant as the appellant is ordered to make

payment to the investors based on either the NAV or

the principle amount with 10% interest thereon from

the date of investment till the date of refund

whichever is higher.

17

Accordingly, it is submitted that in the facts of present case, since the

Art Fund sponsored and managed by the appellant is not covered under

CIS Regulations and in any event, since no scheme sponsored by the

appellant is operating as on date, the impugned order be quashed and set

aside. For the inordinate delay on part of SEBI in arriving at a

conclusion that the scheme managed by the appellant falls under CIS

Regulations, the appellant cannot be made to suffer by directing the

appellant to pay to the investors on the basis of NAV or on the basis of

principle amount with 10% interest, especially when the art market has

crashed and as per the information memorandum, the investors were not

entitled to guaranteed return. It is further submitted that as and when the

market improves, the balance artworks lying with the appellant would be

sold and the sale proceeds would be distributed amongst the investors

whose claims are not yet settled.

4. Mr. Rustomjee, learned Senior Advocate appearing on behalf of

the Respondent No. 1 on the other hand submitted as follows:-

a) Under Section 11(2)(c) of the SEBI Act enacted with

effect from 30.01.1992, it is the duty of SEBI to

protect the interests of investors in securities and to

promote the development of, and to regulate the

securities market as well as the working of Collective

Investment Schemes by taking such measures as it

deems fit. Sub-Section (1B) inserted to Section 12 of

the SEBI Act by the Securities Laws (Amendment) 18

Act, 1995 with effect from 25.01.1995 provides that

no person shall sponsor or cause to be sponsored or

carry on or cause to be carried on a Collective

Investment Scheme unless that person holds a

certificate of registration from SEBI in accordance

with the regulations framed by SEBI. From the

aforesaid provisions it is clear that SEBI is the

regulatory authority for CIS.

b) On the basis of Dave Committee Report, SEBI has

framed and notified the CIS Regulations with effect

from 15.10.1999. As per Regulation 3 of CIS

Regulation no person other than a Collective

Investment Management Company which has

obtained a certificate under the CIS Regulations can

carry on or sponsor or launch a CIS Regulations.

Since appellant is operating a CIS without obtaining

certificate from SEBI, appellant is guilty of violating

SEBI Act and CIS Regulations.

c) Expression 'Collective Investment Scheme' is

defined under Section 11AA of SEBI Act which is

inserted with effect from 22.02.2000. Reference to a

'company' in the opening words of Section 11AA(2)

is intended to reiterate the position that it is only a

Collective Investment Management company which 19

is entitled to obtain a certificate for carrying on a

CIS. Section 11AA(2) cannot be construed to mean

that the CIS carried on by an entity other than a

company falls outside the purview of SEBI Act and

the CIS Regulations. To construe that Section 11 AA

restricts the power of SEBI to regulate CIS made or

offered by a company alone would render Section

12(1B) of the SEBI Act and Regulations 3 and 4 of

the CIS Regulations otiose and would also run

counter to the intent and the object of the SEBI Act

and the CIS Regulations.

d) On 13.02.2008 SEBI had issued a press release, inter

alia stating therein that Art Funds/Schemes were CIS

and that floating such schemes without obtaining

registration from SEBI would be in violation of

Section 12 of SEBI Act read with Section 11 and

Section AA of SEBI Act. Inspite of the said press

release the appellant has failed to apply for and

obtain registration under CIS Regulations.

e) By Securities Laws (Amendment) Act 2014, Section

11AA has been amended inter alia, by replacing the

word 'company' with the word 'person' in Section

11AA(2) with retrospective effect from 18.07.2013.

By the said Amendment Act, Section 11AA of SEBI 20

Act has also been amended by inserting, inter alia, a

proviso to Section 11AA (1) to the effect 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) of Section 11AA,

involving a corpus amount of one hundred crore

rupees or more shall be deemed to be a Collective

Investment Scheme. Replacing the word 'company'

with the word 'person' by the above Amendment

Act, is clarificatory in nature and the said

Amendment clarifies the position that the CIS

schemes sponsored or launched by any person would

fall within the purview of the SEBI Act and the CIS

Regulations.

f) The scheme floated by the appellant fulfils all the

conditions set out under Section 11AA(2) of SEBI

Act and therefore, the decision of SEBI in holding

that the scheme floated by SEBI falls within the

scope of CIS cannot be faulted.

Accordingly, counsel for SEBI submitted that there is no infirmity in the

impugned order and hence, the appeal be dismissed with costs.

5. Mr. K. Mahadevan Iyer, learned Advocate appearing on behalf of

Respondent No.2 while adopting the arguments advanced by counsel for 21

SEBI, submitted that under Section 11AA of SEBI Act, CIS can only be

made or offered by a company and therefore, in the present case, the CIS

made or offered by the Trust is unlawful. He submits that taking a

narrow view that under Section 11AA(2) jurisdiction of SEBI is limited

to the scheme or arrangement made or offered by a company would

amount to defeating the object with which SEBI Act is enacted. Under

the SEBI Act it is the duty of SEBI to protect the interest of investors as

a whole. Section 11(2)(c) read with Section12(1B) of SEBI Act as also

the statement of objects and reasons for inserting Section 11AA clearly

provide that a scheme or arrangement made or offered by a company

alone would be eligible to obtain a certificate of registration from SEBI

& no other entity would be eligible to obtain certificate of registration.

Moreover Section 11AA(2) has been amended with retrospective effect

from 18.7.2013 by deleting the word 'company' and substituting the

word 'person'. Therefore, reading Section 11AA(2) with regulation 3 of

CIS Regulations it becomes clear that any scheme or arrangement made

or offered by any company which fulfils the conditions set out under

Section 11AA(2) would be eligible for registration from SEBI.

6. Advocate for Respondent no.2 further submitted that as held by

the Apex Court in case of Sahara India Ltd. (supra), SEBI Act is a

Special Act and a complete code in itself containing elaborate provisions

to protect interest of investors, which has to be read in harmony with the

provisions of any other law for the time being in force. Therefore, even

if the Trust is governed by the Indian Trust Act, functions of the Trust 22

relating to the payments to the beneficiaries would be governed by the

SEBI Act. Similarly in view of the decision of the Apex Court in case

of Sahara India Ltd. (supra), collecting funds from 656 investors would

be a public issue falling within the scope of SEBI Act and CIS

Regulations. Accordingly, it is submitted by counsel for respondent

no.2 that the appeal is without any merit and hence be dismissed with

cost and SEBI be directed to implement the impugned order forthwith.

7. We have carefully considered rival submissions.

8. Before dealing with the merits of rival contentions it would be

appropriate to quote some of the relevant provisions contained in the

SEBI Act and CIS Regulations which read thus:

Section 11(1) and 11(2)(c) (w.e.f. 30.1.1992)

"11. Functions of Board:-

(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for-

(a)......................

(b)......................

(c) registering and regulating the working of collective investment schemes including mutual funds;"

(emphasis supplied) 23 Section 12(1B) (w.e.f. 25.1.1995)

"Section 12(1B) No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds or collective investment scheme including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations:

Provided that any person sponsoring or cause to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment scheme operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of sub- section (2) of section 30."

(emphasis supplied)

Section 11AA inserted to SEBI Act by Securities Laws (Amendment) Act 1999 (w.e.f. 22.2.2000)

"11AA. Collective investment scheme:-

(1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (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 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;

24 (iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement

(3) Notwithstanding anything contained in sub-section (2), 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; shall not be a collective investment scheme."

(emphasis supplied)

9. Before defining the expression 'Collective Investment Scheme'

by inserting Section 11AA to SEBI Act with effect from 22.2.2000, that 25

expression was defined under the CIS Regulations which came into

force with effect from 15.10.1999. Regulation 2(1)(i), 2(2) and

regulation 3 of the CIS Regulations read thus:-

Regulation 2(1)(i), 2(2) & 2(3) of CIS Regulations 1999

(as originally framed)

"2. (1) In these regulations, unless the context otherwise

requires:-

(a) to (h) ....................................

(i) "collective investment scheme" has the meaning assigned to it by sub-regulation (2) of this regulation;"

(2) In these regulations, unless the context otherwise requires "collective investment scheme" means any scheme or arrangement with respect to property of any description-

(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 properties or otherwise;

Provided that following shall not be deemed to be a collective investment scheme:

(a) acceptance of deposits by companies under section 58A of the Companies Act, 1956 (1 of 1956) or by Non-Banking 26

Financial Companies as defined in section 45-I of the Reserve Bank of India Act, 1934 ( 2 of 1934 );

b) acceptance of funds by Chit Funds in terms of the Chit Funds Act, 1982 (40 of 1982);

(c) acceptance of funds by companies declared as Nidhi companies under section 620A of the Companies Act, 1956, ( 1 of 1956 ), as per directions issued under, section 637A of the said Act;

(d) contracts of insurance under the Insurance Act, 1938 ( 4 of 1938 );

(e) any scheme of the employer as per Employees' Provident Fund and Miscellaneous Provisions Act, 1952, (19 of 1952); or any other recognized Provident Fund under the Income Tax Act, 1961;

(f) arrangements of cooperative societies under the Cooperative Societies Act, 1912 ( 2 of 1912 ) including Cooperative Societies registered under any Provincial Act or State Act for the time being in force;

(g) any scheme under Securities and Exchange Board of India (Mutual Funds ) Regulations, 1996; or

(h) any other scheme or arrangement specifically exempted by the Board, from the operation of these regulations."

3. No Person Other than Collective Investment Management Company to Launch Scheme - 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."

10. After the insertion of Section 11AA by Securities Laws

(Amendment) Act, 1999 (31 of 1999), regulation 2(2) of the CIS

Regulations has been substituted by SEBI (Collective Investment

Schemes) (Amendment) Regulations, 2000 as follows:- 27

Regulation 2(2) of CIS Regulations 1999 as substituted with effect from 14.02.2000

"2.2 In these regulations the expression 'collective

investment scheme' shall have the same meaning

as assigned to it under Section 11AA of the Act."

Thus, the expression 'collective investment scheme' was initially

defined under the CIS Regulations, 1999 thereafter, by inserting Section

11AA the expression 'Collective Investment Scheme was defined under

the SEBI Act' with effect from 22.02.2000.

11. With this background, we may now consider the first question

raised in this appeal, namely, whether SEBI is justified in holding that

the Art Fund sponsored by the appellant as AMC of the Trust constitutes

CIS under Section 11AA of SEBI Act 1992.

12. Section 11AA (1) inserted to SEBI Act with effect from

22.2.2000 provides that any scheme or arrangement which satisfy the

conditions set out under Section 11AA(2) would be a CIS. Section

11AA(1) does not specify that the scheme or arrangement made or

offered by any particular entity which satisfy the conditions set out

under Section 11AA(2) would be a CIS. Thus, as per Section 11AA(1),

the expression 'Collective Investment Scheme' would mean any scheme

or arrangement made or offered by any entity which satisfies the

conditions set out under Section 11AA(2). Section 11AA(2) sets out

four conditions in relation to any scheme or arrangement made or 28

offered by any company. Fact that Section 11AA(2) refers to any

scheme or arrangement made or offered by any 'company' would not

mean that the jurisdiction of SEBI to regulate CIS is restricted to any

scheme or arrangement made or offered by any company, because,

Section 11AA(2) merely sets out the conditions applicable to any

scheme or arrangement made or offered by an entity to which SEBI,

under CIS Regulations would grant registration for running a CIS.

Section 11AA(2) merely enumerates the conditions applicable to a CIS

in consonance with the provisions that were contained under the CIS

Regulations.

13. Appellants however contend that since Section 11AA(2) begins

with the words "any scheme or arrangement made or offered by any

company", it must be held that the expression "Collective Investment

Scheme" defined under Section 11AA(1) is restricted only to a scheme

or arrangement made or offered by any company which satisfy the

conditions set out under Section 11AA(2). It is contended that in the

present case the scheme is floated on behalf of a Trust and not by a

company and therefore the scheme in question falls outside the purview

of SEBI Act. There is no merit in the above contention because, as

noted earlier, the expression 'Collective Investment Scheme' defined

under Section 11AA(1) is wide enough to cover any scheme or

arrangement made or offered by any entity and is not restricted to any

scheme or arrangement made or offered by any company. The words

'any scheme' under Section 11AA(1) is wide enough to cover any 29

scheme made or offered by any entity. Since SEBI is empowered under

the SEBI Act to regulate CIS made or offered by any entity and SEBI

has framed CIS Regulations in the year 1999 and in the said regulations

it is provided that no person other than a collective investment

management company which has obtained a certificate under CIS

Regulations shall carry on CIS, Section 11AA inserted to SEBI Act with

effect from 22.02.2000 reiterates that any scheme or arrangement made

or offered by any entity which satisfies the conditions set out under

Section 11AA(2) would be CIS, however, only a collective investment

management company which satisfies the conditions set out under

Section 11AA(2) shall be eligible to obtain registration from SEBI for

operating CIS.

14. Above reasoning is further fortified from Section 11(1) and

Section 11(2)(c) of SEBI Act which provide that it shall be the duty of

SEBI to protect the interests of all investors in 'securities' by regulating

the securities market including the investors in the collective investment

schemes. Expression 'securities' as per Section 2(i) of the SEBI Act,

shall have the meaning assigned to it in Section 2 of the Securities

Contracts (Regulation) Act, 1956 ('SCRA' for short). As per Section

2(h) (ib) of SCRA, the expression 'securities' include, inter alia, units or

any other instrument issued by any collective investment scheme to the

investors in such schemes. Thus, under the SEBI Act, SEBI is duty

bound to protect the interest of all investors who invest in Collective

Investment Schemes and not merely the interest of investors who invest 30

in any scheme or arrangement made or offered by any company.

Therefore, when the legislature under Section 11(1) read with Section

11(2)(c) has expressly conferred power on SEBI to regulate CIS made or

offered by any entity and even Section 11AA(1) defines the expression

'CIS' to mean any scheme or arrangement made or offered by any entity

which satisfy the conditions set out under Section 11AA(2), it would be

improper to hold that Section 11AA(2) restricts the power of SEBI to

regulate CIS made or offered by any company. If the argument of the

appellant is accepted it would mean that the provisions of SEBI Act are

mutually contradictory i.e. on one hand Section 11(1) read with Section

11(2)(c) confer power on SEBI to regulate CIS made or offered by any

entity, whereas, on the other hand, Section 11AA(2) restricts the power

of SEBI to regulate any CIS made or offered by any company. Such an

argument of the appellant which renders the provisions of the SEBI Act

mutually contradictory and runs counter to the object with which SEBI

Act is enacted, cannot be accepted.

15. Apart from the above, Section 12(1B) inserted to the SEBI Act

with effect from 25.1.1995 provides that no person shall sponsor/carry

on any CIS unless he obtains a certificate of registration from SEBI in

accordance with the regulations framed by SEBI. Proviso to Section

12(1B) provides that any person sponsoring/carrying on any CIS prior to

the insertion of Section 12(1B) may continue to operate the CIS till such

time regulations are framed by SEBI. Accordingly SEBI has framed the

CIS Regulations 1999 which came into force with effect from 31

15.10.1999. Under the CIS Regulations, the expression 'Collective

Investment Scheme' was defined under regulation 2(2). Regulation 3 of

CIS Regulations provides that no person other than a Collective

Investment Management Company which has obtained a certificate

under the CIS Regulations shall carry on or sponsor or launch a CIS.

Thus, reading section 12(1B) together with the CIS Regulations, it is

apparent that under the SEBI Act any CIS made or offered by any entity

could be carried on only till 14.10.1999 and on the CIS Regulations

coming into force from 15.10.1999 only a Collective Investment

Management Company which has obtained a certificate under the CIS

Regulations could carry on a CIS. In other words, prior to the CIS

Regulations were notified, any entity could carry on CIS and after CIS

Regulations came into force it is only a Collective Investment

Management Company which has obtained a certificate from SEBI

under the CIS Regulations is entitled to carry on or sponsor or launch a

CIS.

16. Object of inserting Section 11AA to SEBI Act with effect from

22.2.2000 was to define the expression 'Collective Investment Scheme'

under the SEBI Act, which was till then defined only under the CIS

Regulations. On insertion of Section 11AA by Securities Laws

(Amendment) Act, 1999, regulation 2(2) of the CIS Regulations has

been substituted by the SEBI (Collective Investment Schemes)

(Amendment) Regulations, 2000 with effect from 14.2.2000. As per the

substituted regulation 2(2), the expression 'Collective Investment 32

Scheme' under the CIS Regulations shall have the same meaning as

assigned to it under Section 11AA of the SEBI Act. Regulation 3 of CIS

Regulations stipulates that no person other than Collective Investment

Management Company shall carry on or sponsor or launch a CIS

continues to be in force. Thus reading Section 11AA(1) with Section

11(1), 11(2)(c) and Section 12(1B) of the SEBI Act along with the CIS

Regulations it becomes abundantly clear that SEBI is empowered to

regulate CIS made or offered by any entity and under the regulatory

mechanism, only the scheme or arrangement of a collective investment

management company which satisfy the conditions set out under Section

11AA(2) would be entitled to carry on CIS by obtaining registration

from SEBI. Therefore, after the CIS Regulations coming into force and

after insertion of Section 11AA, running CIS by any entity other than a

collective investment management company without obtaining

registration from SEBI would be in violation of SEBI Act.

Consequently, argument of the appellant that the scheme sponsored by

the appellant as AMC of the Trust which satisfies the conditions set out

under Section 11AA(2) falls outside the purview of SEBI cannot be

accepted.

17. It is relevant to note that section 11AA(3) inter alia provides that

notwithstanding anything contained in Section 11AA(2), any scheme or

arrangement made or offered by a cooperative society registered under

the Cooperative Societies Act, 1912 or under any law relating to

cooperative societies for the time being in force in any state and any 33

scheme or arrangement made by any of the entities specified therein

shall not be a Collective Investment Scheme. Thus, Section 11AA(3)

carves out exception and provides that notwithstanding the provisions

contained under Section 11AA(2), any scheme or arrangement made or

offered by the entities specified therein shall not be treated as CIS. Very

fact that Section 11AA(3) carves out exception, clearly shows that but

for the exception, the scheme or arrangement made or offered by those

entities being in contravention of CIS Regulations would be illegal. The

exception carved out under Section 11AA(3) is restricted to a scheme or

arrangement made or offered by any co-operative society and does not

extend to any scheme or arrangement made or offered on behalf of a

Trust. Therefore argument of the appellant that the scheme floated by

the appellant as AMC of the Trust falls outside the purview of SEBI

cannot be accepted.

18. Fact that the word 'company' appearing in Section 11AA(2) has

been substituted with the word 'person' with retrospective effect from

18.07.2013 does not in any way enhance the case of the appellant. That

amendment was necessitated in view of insertion of a proviso to Section

11AA(1) with retrospective effect from 18.07.2013. As per the said

proviso, any pooling of funds under any scheme or arrangement which

is not registered with the Board, or is not covered under Section

11AA(3) involving a corpus amount of one hundred crore rupees or

more is deemed to be CIS. The entity covered under the proviso to

Section 11AA(1) has to be an entity other than a company, because a

company pooling funds under any scheme or arrangement having corpus 34

of less than ` 100 crore or more than ` 100 crore would be covered

under Section 11AA even prior to insertion of the proviso to Section

11AA(1). Since the proviso to Section 11AA(1) by a deeming fiction

provided that pooling of funds under any scheme or arrangement

involving corpus amount of ` 100 crore or more by an entity other than

a company would be a CIS, it became necessary to substitute the word

'company' in Section 11AA(2) with the word 'person' so that there is no

inconsistency in the provisions under the SEBI Act.

19. Argument of the appellant that the Art Fund made and offered by

the appellant on behalf of the Trust do not fulfill the conditions set out

under Section 11AA(2) is also without any merit. Clauses 1, 2.1 & 5.1

of the Trust Deed specifically provide that the Trust property shall be

held by the Trustee Company for the benefit of the Unit Holders (other

than the settler) for the purpose of pooling of capital from the public for

collective investment by way of acquisition, holding, management,

trading or disposal of Indian as well as foreign art or any other property

including antiquities whatsoever, for the purpose of having the effect of

providing facilities for the participation by persons as beneficiaries in

such properties or investments and in the profits of income arising

therefrom. In the Confidential Information Memorandum ('CIM' for

short) under the head 'Summary' it is stated that the scheme, plans to

collect money from eligible investors and plans to invest the same in art

works. Admittedly ` 102.40 crores collected from the investors have

been pooled and utilized for the purpose of purchasing art works which 35

is the purpose of the scheme. The CIM speaks of the Fund having the

objective of generating significant medium and long term income and

capital growth from its portfolio. Paragraph A.2 of Chapter V of the

CIM speaks of the Fund striving to 'create significant wealth' and

intending to 'gauge financial return for its investors'. These facts on

record clearly establish that the first two conditions set out under Section

11AA(2) are satisfied in the present case.

20. Apart from the above, paragraph C-II of the CIM records that the

Trustee Company has exclusive ownership of the Trust property and the

Trustee Company holds the same in trust and for the benefit of the Unit

Holders. From the Trust Deed and the CIM it is evident that the Trust

Property is managed and administered by the appellant and the investors

never had any day to day control over the same. No case is made out by

the appellant to demonstrate that condition number (iii)&(iv) set out in

Section 11AA(2) are not satisfied in the present case. Thus, the facts on

record demonstrate beyond shadow of doubt that all the conditions set

out under Section 11AA(2) are satisfied in the present case and hence no

fault can be found with the decision of SEBI that the scheme floated by

the appellant constitutes CIS.

21. Argument of the appellant that in the year 2006 when Art Fund

was launched there was no legal regime existing to govern the

functioning of the Art Fund is without any merit, because, Section 11(1)

read with Section 11(2)(c) of SEBI Act which are in existence from

1992 confer power on SEBI to regulate CIS made or offered by any 36

entity. Section 11AA inserted with effect from 22.02.2000 read with the

CIS Regulations further provide that any scheme or arrangement made

or offered by any company which satisfy the conditions set out under

Section 11AA(2) would be a CIS and only to such a company

registration would be granted by SEBI under Section 12(1B) of SEBI

Act for running CIS. Therefore, the appellant is not justified in

contending that there was no legal regime existing when the scheme was

launched by the appellant in the year 2006.

22. Various decisions were relied upon by the appellant in support of

its contention that on a plain reading of Section 11AA(2) it must be held

that jurisdiction of SEBI to regulate CIS is restricted to any scheme or

arrangement made or offered by any company. There is no merit in the

above contention. As noted earlier, powers conferred on SEBI to

regulate CIS under extends to CIS made or offered by any entity. SEBI

as a regulatory measure has provided in the CIS Regulations that

registration for running CIS would be granted only to a collective

investment management company which satisfies the conditions set out

therein. Even Section 11AA inserted to SEBI Act with effect from

22.02.2000 reiterates the same position. Therefore, fact that Section

11AA(2) sets out the conditions applicable to a company, it cannot be

inferred that the powers of SEBI is restricted only to regulate CIS made

or offered by a company, especially when the provisions contained in

Section 11(1) & 11(2)(c) specially empower SEBI to regulate CIS run

by any entity. In these circumstances, accepting the contention of the 37

appellant that the powers conferred on SEBI is restricted to regulate CIS

made or offered by any company, would be contrary to the express

provisions contained in Section 11(1), 11(2)(c) & 11AA(1) of SEBI Act

and the CIS Regulations and hence, the argument of the appellant cannot

be accepted.

23. Fact that SEBI has framed separate regulations in relation to

Mutual Funds, Venture Capital Funds or Alternative Investment Funds

and the fact that no independent regulations have been framed in respect

of Art Fund, cannot be a ground to infer that the Art Fund falls outside

the purview of SEBI. In the absence of any independent regulations

framed in respect of Art Funds, it is obvious that the Art Funds which

satisfy the conditions set out under Section 11AA(2) would be governed

by the CIS Regulations.

24. Argument of the appellant that the Art Fund is launched by the

appellant for and on behalf of the Trust which is governed by the

provisions contained under the Indian Trusts Act, 1982 and therefore,

neither the SEBI Act nor the CIS Regulations authorize SEBI to regulate

the functioning of the private Trust is also without any merit. Section

11(1)/11(3)/11(4) and Section 32 of the SEBI Act unequivocally provide

that notwithstanding anything contained in any other law for the time

being in force, SEBI would have same powers as are vested in Civil

Court in relation to the matters set out therein and in the interests of

investors in securities market SEBI is empowered to take such measures

as it deems fit. In the present case, appellant has collected money from 38

the investors under a scheme floated on behalf of the Trust with a view

to invest the pooled amount in art works and thereafter on sale of the

said art works distribute the profits to the investors. In such a case,

decision of SEBI in holding that the appellant was running CIS without

obtaining registration from SEBI cannot be faulted.

25. Fact that CIS Regulations were framed by SEBI on the basis of

Dave Committee Report which related to plantation and agro schemes

cannot be a ground to assume that the CIS Regulations are applicable

only to plantation and agro industries. Neither the provisions contained

under the SEBI Act nor the provisions contained under the CIS

Regulations even remotely suggest that the provisions contained under

the SEBI Act and the CIS Regulations are intended to apply only to

plantation and agro schemes.

26. Argument of the appellant that as AMC of the Trust the appellant

was only entrusted with the duty to manage the funds of the Art Fund

and was not responsible for making payments is without any merit.

Admittedly, the Trust was created by the appellant. Mr. Neville Tuli

(Founder and Chairman of the appellant) holds about 34.66% shares of

the appellant company. The appellant has appointed Oseta Investments

Trustee Company Private Limited as Trustee of the Trust. Mrs. Swaraj

Tuli, Mother of Mr. Neville Tuli (Founder and Chairman of the

appellant) holds 99% shares of Oseta Investments Trustee Company

Private Limited. Moreover, Oseta (Trustee) has appointed the appellant

as AMC. Thus, the appellant is the sponsor and AMC of the Trust. In the 39

year 2006 as AMC of the Trust, appellant had launched the Art Fund by

inviting subscriptions from various privately placed investors to enable

the appellant to pool the funds received and invest the same in art works.

In view of the close proximity between the appellant and the Trustee of

the Trust and in view of the fact that Mr. Neville Tuli, Founder and

Chairman of the appellant is also the Chief Advisor of the Art Fund, it is

held in the impugned order that the Art Fund is sponsored by the

appellant as an arrangement to launch its scheme which involves

investment contracts in the nature of CIS, while de-facto management

and control of the scheme remains with the appellant. It is further held

that the appellant has sponsored and caused to sponsor/ caused to carry

on a CIS through arrangement of a private Trust without obtaining the

certification of registration from SEBI as contemplated under the CIS

Regulations. In view of the close proximity between the appellant and

the Trustee as also the AMC (appellant itself) no fault can be found with

the decision of SEBI in holding that the appellant had adopted a modus

operandi of operating CIS through the medium of a Trust. It appears that

the appellant was under the erroneous belief that if the CIS operated

through a Trust, it would be outside the purview of SEBI and under that

erroneous belief the appellant adopted the modus operandi of running

CIS through the arrangement of a private Trust. Therefore, in the facts

of present case, since the appellant has been running CIS through the

arrangement of a private Trust without obtaining registration from SEBI,

no fault can be found with the decision of SEBI that the appellant is 40

guilty of operating CIS in violating of SEBI Act and the CIS

Regulations.

27. Fact that the scheme was launched by the appellant only to select

set of investors (high net worth investors) by way of private placement,

does not in the facts of present case, absolve the appellant of its

obligation to comply with the provisions of SEBI Act and the

regulations made thereunder. As held by the Apex Court in case of

Sahara India Real Estate Corporation Limited (supra) if offer is made to

more than 49 persons, then it will automatically be deemed to be a

public offer and not a private placement. In the present case, investments

from more than 650 investors have been received in violation of SEBI

Act and CIS Regulations and therefore SEBI is justified in passing the

impugned order with a view to protect the interests of investors.

Similarly, decision of the Apex Court in case of PGF Limited would

also be squarely applicable to the facts of present case because amounts

have been collected from the investors for the purpose of pooling the

funds and investing the same in art works so that the profits arising

therefrom could be passed on to the investors. Under the CIS

Regulations it is not mandatory that there must be guaranteed return and

it would be enough even if the funds collected are pooled and invested

with a view to earn profit and distributing that profit to the investors.

28. Argument of the appellant that since the scheme sponsored by the

appellant does prescribe maximum subscription limit and since the CIS

Regulations do not necessitate calculation of NAV and there is no 41

underlying requirement to value investments or the units by calculating

NAV on ongoing basis, the scheme in question falls outside the purview

of CIS is also without any merit. Once the scheme or arrangement

satisfies the four conditions set out under Section 11AA(2) then, the

scheme or arrangement would be covered under CIS and the provisions

of SEBI Act and CIS Regulations would apply accordingly. Similarly,

fact that there are no Appraising Agencies or Credit Rating Agencies

approved by SEBI to appraise or rate the assets of the Art Funds would

have no relevance because, having operated CIS without following the

provisions contained in the SEBI Act and the regulations made

thereunder, appellant cannot escape liability by alleging that the CIS

Regulations are unworkable in case of Art Funds. Any scheme or

arrangement made or offered by any company which satisfy the

conditions set out under Section 11AA(2) must follow the procedure

prescribed under CIS Regulations. For all the aforesaid reasons, in the

facts of present case, decision of SEBI in holding that the scheme

floated by the appellant constitutes CIS and since the said scheme was

operated without obtaining registration from SEBI, appellant has

contravened the provisions of the SEBI Act and CIS Regulations cannot

be faulted.

29. Question then to be considered is, by the impugned order dated

April 15, 2013, apart from restraining the appellant from accessing the

capital market whether SEBI is justified in directing the appellant to

wind up its existing CIS and refund the monies collected by it under its

scheme but remaining unpaid, to all the investors and further directing 42

the appellant to pay the amount of profits/ income earned, if any, that is

due to the investors as per the terms of its offer or pay interest at the rate

of 10% per annum from the date of investment till the date of refund,

whichever is higher.

30. Admittedly, the scheme floated by the appellant in the year 2006

has come to an end in January 2010. SEBI had issued a show cause

notice to the appellant on October 12, 2007 calling upon the appellant to

show cause as to why the scheme in question should not be held to be

covered under CIS. During the pendency of the said show cause notice

SEBI, issued a press note on February 13, 2008 to the effect that the

investments made in Art Funds constitute CIS and are governed by the

CIS Regulations framed by SEBI. Inspite of above press release, the

show cause notice issued to the appellant on October 12, 2007 was not

adjudicated and in the meantime the scheme in question came to an end

in January 2010.

31. Thereafter, the Art Fund declared the final NAV of ` 111.72

(cum-income) per unit on 24.03.2010. Based on the said NAV of

` 111.72 (cum-income) per unit, the total amount payable to the

investors comes to ` 114,40,12,800/-. It is the case of the appellant that

on sale of art works the amount received is ` 53,26,00,000/-, whereas

the Art Fund has paid ` 70,76,91,971/- to the investors as of 30.06.2013

and the outstanding amount as of 30.06.2013 is ` 43,63,20,829/-. It is

the case of the appellant that 16.72% of the total investors have been

paid entire amount payable as per the final NAV, 36% of the total 43

investors have been repaid more than 50% of the total amount payable

and the balance 47% of the total investors have been repaid less than

50% of the total amount payable.

32. From the impugned order it is seen, that none of the above factors

have been considered and only on the basis of NAV communicated

09.05.2009 at ` 117.10 per unit, the appellant is directed to refund the

monies collected by it under its scheme but remaining unpaid, to all the

investors. In addition to the above appellant is also directed to pay

amount of profit/income earned, if any, that is due to the investors as per

the terms of offer or pay interest at the rate of 10% per annum from the

date of investment till the date of refund, whichever is higher.

33. Except finding fault with the appellant in not seeking registration

before operating the scheme, no fault is found in the scheme operated by

the appellant. In other words, SEBI does not find fault with the scheme

of the appellant which neither offered guaranteed return nor offered

interest on the amount invested. In such a case, on what basis appellant

is directed to refund the amount invested with interest at the rate of 10%

per annum is not set out in the impugned order.

34. It is relevant to note that even after issuing a press note on

February 13, 2008, SEBI itself was not sure till 2013 as to whether the

scheme in question is covered under CIS or not. In fact when respondent

no. 2 who had invested in the scheme had complained against the

appellant, SEBI by its communication dated 31.01.2011 informed the

respondent no. 2 that the scheme was not covered under CIS and 44

therefore the investors who have invested in the scheme of the appellant

cannot seek redressal of their grievances from SEBI. It is only when this

Tribunal on 29.11.2012 set aside the said communication dated

31.01.2011 and directed SEBI to reexamine the issue afresh in

accordance with law, SEBI has passed the impugned order on April 15,

2013 holding that the scheme floated by the appellant is covered under

CIS.

35. Thus, it is evident that even after issuing show cause notice in the

year 2007, SEBI did not adjudicate the same, because even according to

SEBI the scheme was not covered under CIS. Thus decision of SEBI

that the scheme in question does not fall within the purview of SEBI

held the field till SEBI changed its stand and passed the impugned order

on April 15, 2013. In such a case, for the error committed by SEBI in

misconstruing its own regulations and for the inordinate delay on part of

SEBI in arriving at correct conclusion whether the appellant can be

penalized by directing to refund the amount with interest at the rate of

10% from the date of investment needs consideration, especially when

the scheme has come to an end in the year 2010 and the terms of the said

scheme neither offered guaranteed return nor offered interest on the

amount invested. Although regulation 65 of CIS Regulations empower

SEBI to direct refund with interest in appropriate cases, how in the facts

of present case, directing refund of the amount invested with interest is

justified, is not set out in the impugned order. Explanation given by the

appellant that due to recession in the market the art works could not be

sold at a profit is not doubted in the impugned order. In such a case, it is 45

not known as to on what basis direction to pay amount of profits/income

to the investors is given. Even counsel for respondent no. 2 finds fault

with the impugned order, and submits that the WTM has not done the

work of ascertaining the profits if any, at the time when the scheme

ended and further submits that NAV (ex-income) ought to have been

taken into consideration by the WTM while passing the impugned order.

36. In these circumstances, while upholding the impugned order of

SEBI to the extent it holds that the scheme operated by the appellant

during the period from 2006 to 2010 constituted CIS, we set aside the

directions contained in the impugned order to the extent it directs the

appellant to refund the monies collected by it under the said scheme but

remaining unpaid to all the investors and also set aside the direction

given by SEBI to the appellant to pay profits/income due to the investors

or pay interest at the rate of 10% per annum from the date of investment

till the date of refund, whichever is higher and direct SEBI to decide

those issues afresh after affording an opportunity of hearing to the

appellant and the respondent no. 2.

37. Appeal is partly allowed in the aforesaid terms with no order as to

costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member 13.10.2015 Prepared & Compared By: PK