Shree Sai Space Creations Limited & Ors. vs Sebi

Order Reserved on: 21.06.2019

Date of Decision : 01.08.2019

Appeal No. 304 of 2018 [[

1.

Shree Sai Space Creations Limited Malu Trade Centre, CDC - 25, Spine Road, Chikhali, Chinchwad, Pune - 411 019.

2. Suresh L. Shrivastav Sai Villa Bungalow, CDC-50, Veer Sawarkar Road, Purna Nagara, Behind H.P. Petrol Pump, Chinchwad, Pune - 411 019.

3. Laxmi L. Shrivastav Sai Villa Bungalow, CDC-50, Veer Sawarkar Road, Purna Nagara, Behind H.P. Petrol Pump, Chinchwad, Pune - 411 019.

4. Ritesh L. Shrivastav Sai Villa Bungalow, CDC-50, Veer Sawarkar Road, Purna Nagara, Behind H.P. Petrol Pump, Chinchwad, Pune - 411 019.

5. Vivek L. Shrivastav Sai Villa Bungalow, CDC-50, Veer Sawarkar Road, Purna Nagara, Behind H.P. Petrol Pump, Chinchwad, Pune - 411 019. ...Appellants

Versus Securities and Exchange Board of India.

SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent 2

Mr. Saurabh Bachhawat, Advocate with Mr. Jitendra Sharda, Advocate i/b Mindspright Legal for Appellants.

Mr. Mustafa Doctor, Senior Advocate with Mr. Abhiraj Arora and Mr. Vivek Shah, Advocates i/b ELP for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair, Member

1. This appeal has been filed challenging the order of the

Adjudicating Officer ('AO' for short) of Securities and Exchange

Board of India ('SEBI' for short) dated April 5, 2018. By that

order appellants have been directed to jointly and severally pay a

penalty of Rs. 25 Lakh for running a Collective Investment

Scheme ('CIS' for short) without SEBI registration and thereby

violating Section 12(1B) of the SEBI Act, 1992 and Regulation 3

of the SEBI (Collective Investment Scheme) Regulations, 1999

('CIS Regulations, 1999' for short).

2. The background of the case is as follows. Appellants are the

Company in question as well as its Directors at the relevant time.

Sai Space Creations Limited, the Company, was incorporated on

August 7, 2010. They collected money from a large number of 3

investors for a solar power project at Village - Rubavali, Taluka -

Mahad, District - Raigad in an area measuring 20 acres of land,

during 2012-13 in the form of investment in a joint venture project

/ scheme. The scheme brochure provided different payment plans

for periods ranging from 4 to 6 years and for 4 to 7 years. A

perusal of the list of investors / contributors / JV participants show

that most of them belong to States of Utter Pradesh, Haryana,

Rajasthan, Madhya Pradesh and Gujarat and only a few belong to

the State of Maharashtra where the project site is located. This

would raise the question as to how such small investors would

become active participants in running a scheme / business of the

appellant Company as claimed by the appellants.

3. On October 8, 2013 SEBI wrote a letter seeking details and

documents since the appellants were involved in mobilizing funds

without obtaining SEBI registration under CIS Regulations, 1999.

Since the appellants denied running a CIS, on October 28, 2013

SEBI sought further documents regardless of the scheme being

CIS or not. On January 23, 2014 WTM of SEBI passed an ex-

parte ad-interim order under Section 11 and 11B of the SEBI Act

read with Regulation 65 of CIS Regulations, 1999. On November

24, 2014 the WTM passed the final order concluding that the

appellants were engaged in activities covered under CIS without 4

obtaining registration. This order was challenged before this

Appellate Tribunal. During the pendency of the appeal on

February 24, 2016 the Recovery Officer issued an order of

attachment which was also challenged by filing a Misc.

Application. Both the Misc. Application and the appeal were

disposed of by this Tribunal on April 20, 2016 directing appellants

to file a proposal for the refund of the entire amount before the

Recovery Officer without going into the question of whether the

appellants has been in fact covered under the CIS Regulations,

1999 as sought by the appellants. Thereafter the appellants have

been in the process of protracted correspondence and negotiations

with SEBI. Finally, on August 18, 2016 appellants submitted

original documents of land to SEBI and SEBI started the auction

process on July 20, 2017. On December 4, 2017 the AO issued a

show cause notice seeking why an enquiry should not be held and

penalty be not imposed under Section 15D(a) of the SEBI Act and

Regulation 3 of CIS Regulations, 1999. Following personal

hearing and written submissions etc. the impugned order has been

passed on April 5, 2018.

4. Shri Saurabh Bachhawat, learned counsel for the appellant

submits that the appellant Company is in the business of solar

energy generating panels and for expanding its business entered 5

into separate agreements with investors and the entire business

was managed together by the Company and the investors. He cited

a Memorandum of Understanding executed on May 29, 2013

between the Company as the first party and one Mr. / Mrs.

Santosh Kumbar of District Belgaum as the second party or JV

participant. He further contended that since such joint agreements

are in place the appellants and the other parties were collectively

managing the business, minutes of which are also on record.

Hence, the appellants are not running any CIS and hence SEBI has

no jurisdiction to pass the impugned order. It was further argued

by the learned counsel for the appellants that in the same matter

this Appellate Tribunal disposed of Appeal No. 180 of 2015 on

April 20, 2016. The appellants are in the process of making the

payment / refund and two properties have been already disposed

of by SEBI and Rs. 82 lakh has been recovered by SEBI.

Auctioning the rest of the properties for recovering the remaining

amount is under process and also the said properties are under

SEBI. The April 20, 2016 order of this Tribunal was passed

without treating the appellant Company as a CIS. In any case

when the process of refund as approved by this Tribunal was

under way no separate penalty should have been imposed on the

appellants through another adjudication process. In any case the 6

penalty of Rs. 25 lakh imposed on the appellants is too harsh,

particularly when refund of the money under SEBI's own

monitoring and auctioning of property etc. is under way.

5. Shri Mustafa Doctor, learned senior counsel for SEBI

submitted that the proceedings by the Whole Time Member

('WTM' for short) and the instant proceedings by the AO are

parallel process. The WTM by its order passed certain directions

including restraining the appellants from dealing in the securities

market and refunding the monies collected from the investors etc.

which is the matter dealt by this Tribunal in Appeal No. 180 of

2015. Irrespective of whether the position relating to the refund

etc; which in any case is still incomplete as the properties given by

the appellants are located in different parts of the country,

adjudicating process for collecting money as a CIS without

obtaining a SEBI registration for the same is as per the provisions

of the SEBI Act. The penalty imposed on the appellants Rs. 25

lakh is also reasonable as under Section 15D(a) the penalty

imposable at the relevant time was Rs. 1 lakh for each day subject

to a maximum of Rs. 1 crore. In the context of this matter, after

providing for a mitigating factor under Section 15J the AO has 7

imposed a penalty of Rs. 25 lakh jointly and severally which is

just and reasonable.

6. We do not agree with the contentions of the appellant. The

preliminary objection to the impugned order that the appellants

are complying with the order of the WTM on the direction of the

Tribunal and it is without accepting that the appellants were

running CIS and hence parallel adjudication process could not

have been initiated has no merit since it was on appellants' own

willingness that the Tribunal passed such an order without going

into the question of whether appellants were running CIS or not. It

does not prevent SEBI from initiating parallel proceedings as

provided under law. It is also a fact that appellants have not yet

completed the process of repayment to the investors despite lapse

of three years from the date of our order dated April 20, 2016.

7. The submission that the joint venture agreement is a proof of

joint management of the business has no merit since there is

nothing on record to show that the investors had any say in the

management of the business. This is further amplified by the fact

that investments have been done by people located in various parts

of the country. Further, a list of 370 such parties from various

parts of the country are also on record who invested in small units 8

of lands located in a remote area of Maharashtra. It is not clear

how such small investors could go to such faraway places to

manage such properties / business. The appellants' reliance on an

unsigned document stated to be minutes of the meeting held at the

office of Shree Sai Spaces Creation Ltd. at Pune regarding

formation of a committee for the management of solar power plant

is of no help, as this record has no veracity. In any case the

function of this committee as described below clearly states that

preference will be given to the Company's decision:-

"The function of the management committee is to manage and control the solar power project and take decision on behalf of the joint venture participants provided that if decisions are taken by the company for the interest of all the joint venture participants, then preference will be given to the company decision after due consideration of opinions of the management committee."

8. This description itself shows that the final decision will be

taken by the Company itself. Given the above facts there is no

doubt that appellants were in fact running CIS in terms of the

definition of a CIS under Section 11AA(2), 12(1B) of SEBI Act,

1992 and Regulation 3 of CIS Regulations, 1999, in terms of

pooling of funds, the schemes were with a view to receive profits,

income or property; it was managed by the Company and its 9

management on behalf of the investors and investors do not have

any role in the management of the scheme.

9. For facility, the relevant provisions are reproduced as

follows:-

Section 11AA of the SEBI Act "11AA(2)

(2) Any scheme or arrangement made or offered by any [person] under which,--

(i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;

(ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;

(iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

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

"Section 12(1B) of SEBI Act

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 schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations:

10 Provided that any person sponsoring or causing to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment schemes 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.

Explanation- For the removal of doubts, it is hereby declared that, for purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer.

Regulation 3 of CIS Regulations, 1999

No Person Other than Collective Investment Management Company to launch collective investment scheme

3. 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. Given the aforesaid facts and position of law, it is clear that

the appellants are in fact running a CIS. It is also an admitted fact

that the appellants did not obtain a certificate of registration for

running such a scheme under SEBI Act and CIS Regulations,

1999. Accordingly, the penalty imposed on the appellants cannot

be faulted. The penalty imposable under Section 15(D)(a) of SEBI

Act at the relevant time was Rs. 1 lakh for each day during which 11

an entity carries on any collective investment scheme or Rs. 1

crore whichever is less. In the instant case, the appellant Company

was set up in 2010 and the money collected in the form of

investment in joint venture project / scheme during 2012-13 and

for periods ranging from 4 to 7 years. Therefore, the Company

and the scheme came into existence many years after notification

of the CIS Regulations, 1999 and the schemes were flouted

despite the fact that Regulations notified in the year 1999 makes it

mandatory for obtaining registration from SEBI for hoisting any

such a scheme. Accordingly, we do not find any anomaly in the

direction to pay a penalty of Rs. 25 lakh jointly and severally by

the appellants which takes into account the mitigating factors

under Section 15J of SEBI Act.

11. In the result, the appeal is dismissed with no orders on costs.

Appellants are directed to pay the penalty within 30 days from the

date of this order.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

01.08.2019 Prepared and compared by:msb