Business organisations like PACL, PGF (Real Estate Companies), Sahara Group (SIRECL& SHICL), recently are in the news, as these firms alleged to have been collected huge amounts of money running into crores of rupees under the shadow of some Collective Investment Schemes and violated SEBI regulations. In return, these CIS entities are offering post-dated cheques and thus giving an impression to the investors that their money or return is assured, which may not be the case always.
PACL India Ltd, promises prospective customers high interest on the money they deposit through appreciation of land prices, or through direct allotment of land. Realty industry sources said the company owns a land bank of around 180,000 acres estimated to be worth around ` 70,000 crore and covers zones including small towns such as Visakhapatnam, Moradabad and Siwan and larger cities such as Mumbai and Delhi-NCR. It seems the company had also been buying up land in the barren desert in Barmer district in Rajasthan, close to the sensitive India-Pakistan border.The company is said to dole out commissions of up to 40% to its agents, spread across several layers. However, the Securities and Exchange Board of India (SEBI) deems these deals illegal, because SEBI considers it a ‘collective investment scheme’ in the garb of a real estate company.
When SEBI notified the CIS regulations in 1999, more than 1,000 companies in India were asked to wind down and refund investors. Both PACL and PGF found themselves in the list. Both petitioned high courts-PGF Ltd in Punjab and PACL Ltd in Rajasthan, where they are registered. The Punjab High Court ruled that PGF Ltd was clearly a collective investment scheme, and asked it to shut shop. But the Rajasthan High Court took the view that PACL could not be considered a collective investment scheme. SEBI appealed against this decision in the Supreme Court. This dispute has to be settled by the Supreme Court, where the case has been pending for eight long years.
Sahara Group of companies viz., SIRECL and SHICL had floated OFCDs schemes in 2008 and 2009 respectively, to raise money from public, which was detected by SEBI in 2010. The market Regulator alleged that these fund raisings violated several laws, including the Companies Act and the SEBI Act, 1992. Subsequently, SEBI barred the two Sahara group companies from raising any more investors through these instruments. Sahara group then challenged the SEBI order in the Allahabad high Court, which initially stayed the regulator’s order. SEBI then moved the Supreme Court and the apex court directed the HC to hear the matter on a day-to-day basis. After the HC vacated its earlier stay on the SEBI order, the Sahara Group moved the Supreme Court.
Existing Legal Framework
a) Meaning of Collective Investment Scheme
According to clause (ba), sub-section (1) of section 2 of Securities and Exchange Board of India Act, 1992, the “collective investment scheme” means any scheme or arrangement which satisfies the conditions specified in section 11AA. (SEBI Act).
"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;
(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 Funds 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 (of 1956);
(vii) falling within the meaning of chit business as defined in clause (e) of section 2 of the Chit Funds 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.”
Therefore, a Collective Investment Scheme means any scheme or arrangement, which satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act. In other words, any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS. Investors do not have day to day control over the management and operation of such scheme or arrangement.
b) Schemes do not constitute CIS
The following do not constitute a collective investment scheme:
1) any scheme or arrangement made or offered by a co-operative society 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;
2) any scheme or arrangement under which deposits are accepted by non-banking financial companies
3) any scheme or arrangement being a contract of insurance to which the Insurance Act, applies;
4) any scheme or arrangement providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952
5) any scheme or arrangement under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956);
6) any scheme or arrangement 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);
7) any scheme or arrangement falling within the meaning of Chit business as defined in clause (d) of section 2of the Chit Fund Act, 1982 (40 of 1982);
8) any scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund;
c) Meaning Collective Investment Management Company (CIMC)
A Collective Investment Management Company is a company incorporated under the provisions of the Companies Act, 1956 and registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999, whose object is to organise, operate and manage a Collective Investment Scheme.
d) Existing Collective Investment Scheme
Entities, which were operating a collective investment scheme at the time of commencement of CIS Regulations i.e. (October 15, 1999), are deemed to be an existing collective investment scheme. An existing Collective Investment Scheme cannot launch any new scheme or raise money from the investors even under the existing scheme, unless a certificate of registration is granted to it by SEBI. In other words, after notification of regulations an existing collective investment scheme, even after obtaining provisional registration as well as after obtaining credit rating cannot mobilise funds from the public unless a certificate of registration is granted to it.
e) Circumstances that a company registered as a Collective Investment Management Company (CIMC) can raise funds from the public
A registered Collective Investment Management Company is eligible to raise funds from the public by launching schemes. Such schemes have to be compulsorily credit rated as well as appraised by an appraising agency. The schemes also have to be approved by the Trustee and contain disclosures, as provided in the Regulations, which would enable the investors to make informed decision.
A copy of the offer document of the scheme has to be filed with SEBI and if no modifications are suggested by SEBI within 21 days from the date of filing then the Collective Investment Management Company is entitled to issue the offer document to the public for raising funds from them.
f) Investor’s rights to receive information about the schemes where they have invested
The investor are entitled to receive a copy of the Balance Sheet, Profit and Loss account and a copy of the summary of the yearly appraisal report from CIMC within two months from the closure of the financial year. Further, the scheme wise annual report or an abridged form thereof has published in a national daily as soon as possible but not later than two calendar months from the date of finalisation of accounts. Also, scheme wise un-audited quarterly financial results have to be published in a national daily by CIMC within one month from the close of each quarter. It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. SEBI does not take any responsibility either for the financial soundness of any scheme for which the offer document has been filed or for the correctness of the statements made or opinions expressed in the offer document. It is the responsibility of the Collective Investment Management Company to ensure that the disclosures made in the offer document are generally adequate and are in conformity with the Regulations.
g) Circumstances for Winding up of an existing Collective Investment Scheme
An existing collective investment scheme which failed to make an application for registration, or was not desirous of obtaining provisional registration, or has not been granted provisional registration, or having obtained provisional registration fails to comply with the provisions as laid down in the Regulations, was / is required to wind up the existing scheme.
h) Procedure for winding up of an existing Collective Investment Scheme
First of all an existing collective investment scheme has to send an information memorandum to the investors who have subscribed to the schemes, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined. The said information memorandum has to be dated and signed by all the Directors of the scheme. The information memorandum has to explicitly state that investors desirous of continuing with the scheme will have to give a positive consent, within one month from the date of the information memorandum, to continue with the scheme. If, positive consent to continue with the scheme is received from only 25% or less of the total number of existing investors, the scheme shall be wound up and payment be made to the investors within three months of the date of the information memorandum. Investors may note that many of the existing collective investment schemes had collected funds from the public prior to coming into force of the regulatory jurisdiction of SEBI and any action by SEBI against defaulting entities does not necessarily ensure the refund of money invested by the investors in such entities.
i) Authorities for Grievance Redressal
Investors should approach CIS in this regard. If investors do not get satisfactory response thereto, they may write to SEBI. Further, investors can approach district consumer redressal forums in case entities fail to honour their commitments or for any deficiency in service. For bouncing of cheques, investors can move the courts under section 138 of the Negotiable Instruments Act as the right to file criminal complaint exclusively vests with the beneficiary of the cheque.
Investors should further note that wherever they do not have a right to the land or to the produce arising out of the land such investment may be a deposit and where a company fails to repay the deposits, it attracts the provisions of section 58A of the Indian Companies Act, 1956.
j) Penal provisions if a registered collective investment management company violates certain provisions of the Regulations
If, a registered collective investment management company violates certain provisions of the regulations, then action in terms of suspension/ cancellation of certificate may be initiated against the entity. Further, SEBI may, in the interests of the securities market and the 'investors, initiate criminal prosecution under Section 24 of the SEBI Act, apart from passing of directions such as:
1) requiring the person concerned not to collect any money from investor or to launch any scheme;
2) prohibiting the person concerned from disposing of any of the properties of the scheme acquired in violation of the Regulations;
3) requiring the person concerned to dispose off the assets of the scheme in a manner as may be specified in the directions;
4) requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise, collected under the scheme;
5) prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period
k) Sahara - SEBI Case- Apex Court Ruling
The Supreme Court on 15/07/2011 sent the Sahara–Sebi case related to raising of funds by the Lucknow-based group through optionally fully convertible debentures (OFCDs) to the Securities Appellate Tribunal (SAT) in Mumbai and the Court said: “that the SEBI’s order dated June 23, asking two Sahara group companies to refund money raised from the public, shall be put on hold”.
The apex court also ordered that since the whole issue involved important questions of Law under the Companies Act, 1956, under which the OFCDs were issued by Sahara, the ministry of corporate affairs (MCA) should be made a party to the petition.
The SC has given SAT eight weeks to decide whether the two Sahara group entities-Sahara Commodity Services (earlier Sahara India Real Estate Corp or SIRECL) and Sahara Housing Investment Corp (SHICL)-can raise money through OFCDs. The Sahara group has been directed to file its petition in SAT within three weeks and the court also directed that SAT shall not be influenced by any prior orders related to the case. On its part, the Sahara group has said that it would not raise any money through OFCDs till the case is decided in SAT.
As per the direction of the apex court the Securities Appellate Tribunal (SAT) has to go into the matter in detail and pass its order, but said the effect of the order ‘will not be given’, which implies that the SC will have the final say on the order.
Question of Law
The contention of the Sahara is that
i) They are closely held and unlisted companies and SEBI is not having jurisdiction.
ii) OFCD (Optionally Fully Convertible Debenture) is neither a share nor a debenture and a sort of Hybrid instrument and will not come within the ambit of definition of ‘securities’ as defined under Section 2 of the SEBI Act.
Unless, Stringent Legal Framework is in place to penalize these culprits, these un-scrupulous businessmen will continue to do their activities by circumventing the provisions of the Law and continue to dupe the investing community. Therefore, to curb this menace and to safeguard the investors from falling prey to these dubious schemes, the Regulator, (SEBI) should come out with a separate set of guidelines/ Regulations to govern Alternative Investments, Portfolio Wealth Managers and cover all type of CIS Schemes. Globally, alternative investments are quite in vogue among the rich investors, who are estimated to allocate 5–10 percent of their investment portfolio on these products.