Dismissed

Phenomenal Plantations v. SEBI

SAT28 Mar 2002

Case brief

AI extract

What is this about?

The Tribunal upheld SEBI's order debarbing Phenomenal Plantations Ltd from capital markets for 5 years for failing to register its collective investment schemes under 1999 Regulations. It dismissed the claim that the scheme was exempt as an 'existing' scheme and rejected the contempt plea regarding a letter sent to an investor.

What did the court decide?

The appeal is dismissed; the impugned order debarring the appellant from operating in the capital market for 5 years is upheld. The application for contempt is dismissed.

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BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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APPEAL NO.45/2001

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APPLICATION NO. 18/2001

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In the matter of:

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Phenomenal Plantations Ltd Appellant Vs.

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Securities and Exchange Board of India Respondent APPEARANCE Mr. K.K.Jegdish Advocate Mrs. S.J.Nagasri Advocate for Appellant Mr. S.V.Krishnamohan Division Chief, SEBI Mr. Praveen Trivedi Asstt.Legal Advisor, SEBI for Respondent

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(Appeal arising out of the order dated July 2, 2001 made by the Securities and Exchange Board of India)

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ORDER

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The Appellant is a public limited company incorporated on December 14, 1993. The certificate of commencement of business was issued to the Appellant on January 5, 1994 by the Registrar of Companies. Its paid capital is Rs.13.3 lakhs comprising 1, 32, 990 equity shares of Rs.10/- each. Out of the said 1, 32, 990 shares Phenomenal Housing Finance (I) Ltd is holding 1, 29, 960 shares. The remaining 3, 030 shares are held by 7 others. The Appellant is engaged in plantation business and is operating collective investment schemes. The Appellant has mobilised funds from the public on 3 stages with different amounts of subscription and benefits for the same scheme of "PPL Teak Bond". It had floated three "schemes" – 1^st scheme was floated in 1994-95, 2^nd one in 1995-96 and the third one in 1996-97. While the 1^st scheme maturity period is for 15 years, the maturity period for the 2^nd scheme is 16 years. The 3^rd scheme has Plan A and Plan B. While Plan A extends upto 16 years Plan B extends upto 22 years. The schemes have a total number of about 38, 000 investors. As per the information available on record the total funds mobilised from public against issuing PPL Teak Bond (as per the audited accounts as on 31.3.1997) was to the tune of Rs.5, 10, 79, 640 (after deducting the amount pertaining to the discontinued Teak Bonds). Since neither party to the appeal has produced the audited balance sheet of the Appellant, the Appellant’s current financial position- assets and liabilities - is not known.

Phenomenal Plantations Vs. SEBI — Securities and Capital Markets | SAT (2002)

Dismissed

Phenomenal Plantations v. SEBI

SAT28 Mar 2002

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Case brief

AI extract

What is this about?

What did the court decide?

The appeal is dismissed; the impugned order debarring the appellant from operating in the capital market for 5 years is upheld. The application for contempt is dismissed.

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

¶2

APPEAL NO.45/2001

¶3

APPLICATION NO. 18/2001

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In the matter of:

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Phenomenal Plantations Ltd Appellant Vs.

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(Appeal arising out of the order dated July 2, 2001 made by the Securities and Exchange Board of India)

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ORDER

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Shri Jegdish submitted that in terms of regulation 68(1) any person who has been operating as collective investment scheme on the date of notification of the Regulation shall be deemed to be an existing collective investment scheme and that since the Appellant is carrying on collective investment schemes since 1994, is a deemed collective investment scheme and therefore no further registration is required. According to him regulation 68(2) requiring the existing collective investment scheme to make an application for registration is thus in conflict with the provisions of 68(1) which cannot be resolved. In this context he referred to the deeming provisions in the Maharashtra State Co-operative Societies Act 1960, enabling the societies registered under Maharashtra State Co-operative Societies Act, 1925 to operate without any fresh registration. According to him regulation 68(2) is meant only to raise money by way of fees to benefit the Respondent and with this in view the Respondent is asking the Appellant to seek registration. He further submitted that in terms of regulation 73(6) and 73(7) a collective investment scheme is allowed to continue its business provided 25% of its total number of investors support the same, that the Appellant has the support from 90% of the total number of investors. According to the learned Counsel as per the "preamble" to the Regulation, the prohibition is on the collective investment schemes launching any new schemes or raising money from the investors under the existing schemes, without obtaining a certificate of registration, that the Appellant has not launched any new scheme after the Regulation came into effect and it also did not raise funds thereafter. In this context he referred to the Chartered accountant’s certificate dated June 12, 1998 confirming the position, forming part of the appeal. He submitted that the Appellant is in existence since 1993 and carrying on its business smoothly, whereas the Regulation came into effect only from October 15, 1999, that the Regulation cannot operate retrospectively. In support he cited Gulabchand Vs Rukmini Devi AIR 1971 MP 40(FB). He submitted that as per the press release issued by the Respondent on 26.11.1999 the Respondent allowed the existing schemes to operate undisturbed.

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Shri Jegdish submitted that during the pendency of the appeal the first contemner has circulated a highly damaging and defamatory and libellous letter No.Ref: SEBI / CIS / LGL / 210901 / 1933 dated 18.10.2001, that by this letter the cause of action arose for the Appellant to take up sub-judicial contempt proceedings against the Contemners which legal redress is available to the Appellant under the Contempt of Courts Act, 1971. Shri Jegdish read out the letter and stated that the said letter has been sent by the Contemners to one man by name "K.K.Singh" with the address at CTS No.359, Opp. Suhash Terrace, Pannalal Gosh Marg, Linking Road, Near Ganapati Talab, Banderwada, Malad West, Mumbai 400 064, that the address stated therein belongs to the Appellant, whereas the addressee is a different person who has nothing to do with the Appellant. According to the learned Counsel error has been committed by the staff of Respondent by mixing up the name of K.K.Singh with the name of Shri N.K.Singh, that the latter is the founder director of the Appellant, that the said letter which has reached the hands of the Appellant and now is in custody of the Appellant and by this proves the "publication" has been completed thereby attracting the provisions of Contempt of Courts Act, 1971. According to the learned Counsel the said letter contains highly defamatory and libellous matter which has been indulged in during the pendency of the proceedings before the Tribunal, which has the effect of interference with administration of justice and also there is danger of undermining the dignity of the Tribunal, besides shaking up the public confidence in the judicial system itself. He submitted that against the order barring the Appellant, the appeal has been preferred and nothing should have been done by Respondent pending appeal as that would amount to sub-judice and contempt of court, that as this error has been committed by Respondent, it is liable for Contempt of Court and be dealt with accordingly. Shri Jegdish stated that the impugned letter has been penned by one person from the Legal Department of the Respondent who all are supposed to be in the know of legal appeal proceedings in progress, that the Legal Department does not and cannot take place of a layman. He stated that the contemner has further committed flagrant violation of dignity of judiciary by using the words "written to the State Government to register civil / criminal cases against the entity" little realising that decision of court may go either way. According to him contempt has been manifest when it is said "…… and to the Department of Company affairs to initiate winding up of the entity", with little regard or respect for the Appellant who is a juristic person and little did the Respondent care for the Appellant’s Directors who are respected persons in the society. Learned Counsel stated that the decision to initiate prosecution proceedings against the "entity" during the pendency of the appeal is nothing but interference in the appeal proceedings. He stated that from the observation in the letter that "you would appreciate that redressal of your grievance would depend upon the outcome of legal proceedings and other actions mentioned above" the authorised signatory and the contemners No.1 and 2 were aware of legal proceedings and therefore, they could not have ventured into indulging in contempt of Court.

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Learned representative submitted that as per regulation 73(1) an existing collective investment scheme, which fails to make an application for registration is required to wind up the scheme and repay the investors, that as per regulation 74 an existing collective investment scheme which is not desirous of obtaining provisional registration is permitted to formulate a scheme of repayment and make repayment to the existing investors in the manner specified in regulation 73, that in terms of regulation 73(2) the scheme to be wound up is required to send an information memorandum (IM) to all the investors in the scheme. Shri Krishna Mohan submitted that the Respondent vide its letter dated December 15 / 20, 1999 and also by way of a public notice dated December 10, 1999 had advised all the collective investment schemes including the Appellant of the need to comply with the requirements of regulation 73/74 in case they were not desirous of getting registered, that as per the press notification dated December 10, 1997 the Appellant was required to send the IM to the investors by February 28, 2000. The learned Representative submitted that as the Appellant neither applied for registration nor wound up the scheme and repaid the money to the investors, in terms of regulation 74 read with regulation 73, the Respondent vide notice dated May 12, 2000 asked the Appellant to show cause as to why action as mentioned in the said show cause notice should not be initiated against the Appellant and, that apart the Respondent vide press notification dated May 16, 2001 published in all leading newspapers all over India, informed the public in general and the erring entities including the Appellant about the non compliance of the statutory requirements and the action that may follow for such non-compliance. He further stated that the Respondent vide its letter dated July 31, 2000 even reminded the Appellant in the matter. Shri Krishna Mohan further submitted that as the Appellant and various entities did not comply with the requirements of the Regulation, the Respondent vide order dated December 7, 2000 directed them to refund the money collected under the schemes with returns, to the investors as per the terms of the offer within a period of one month from the date of the said order and it was also mentioned in the said order that in case they fail to comply with the aforesaid directions, the nature of consequences that would follow. He said that since the Appellant did not comply with the said directions the impugned order was passed. Shri Krishna Mohan submitted that from the sequence of events narrated, it cannot be said that the Appellant was not given proper opportunity to present its case. With reference to the Appellant’s reliance on sections 12(3), 15I, 15U and regulation 62(2) Shri Krishna Mohan submitted that those sections and regulation are specific to certain action and have no bearing on the contravention of regulation 73 and regulation 74. He submitted that procedure followed by the Respondent including issuance of notice and press notification was found to meet the requirement of the principles of natural justice, by the Tribunal in several cases and in particular he referred to the decision in Venus Greeneries Ltd v. SEBI (Supra). (2001) 34 SCL 801: (2002 46 CLA 1.

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It is in the light of the regulations extracted above one has to see the Appellant’s claim that since it was already operating schemes and as such "deemed to be an existing scheme", no further registration is required and that regulation 68(2) requiring to make an application by such an old scheme is in conflict with the provisions of regulation 68(1). In this context one should not forget the provisions of section 12 (1B) of the Act. According to the said section "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: 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." In this connection it has to be noted that by the Appellant’s own version it had started operating plantation schemes since 1994. The Appellant’s stand that being an "old scheme" it shall be deemed to be an existing collective investment scheme, is perfectly correct in terms of regulation 68(1). But the same regulation also requires the old scheme to comply with the provisions of the said Chapter. The provisions of the said chapter require the existing schemes to get registered. Sub regulation (2) of regulation 68 requires such old schemes to make an application to the Board in the manner specified in regulation 5. Regulation 5 requires the old schemes to make an application for the grant of certificate within a period of two months from the date of notification of the Regulation. There is not even a suggestion anywhere in the Regulation that an existing collective investment scheme is not required to get registered to carry on the activity of a collective investment scheme. From the text of section 12(1B) extracted above also it is clear that an existing scheme has to get registered under the regulations. The Appellant’s contention that the Registrar of Companies has already issued "commencement of business certificate" to it and the Appellant’s Memorandum of Association allows it to carry on the plantation business and as such no further approval from the Respondent is required is untenable. Issuance of the commencement of business certificate to a public limited company by the Registrar of Companies does not in any way obviate the requirement of registration under section 12(1B) of the Act. The purpose of Registrar of Companies issuing the commencement of business certificate and the objective of the Act requiring registration under the Regulation are not one and the same and one cannot be considered as a substitute for the other. The Appellant’s reliance on the provisions of the Maharashtra Co-operative Societies Act is of no help to it in this regard as the legal position providing continuity to the societies registered under the 1925 Act has been made clear in the 1960 Act. There is no such provision dispensing with the requirement of registration of the old schemes under the Regulation. On the contrary it is a clear requirement under the Act and the Regulation that even the existing schemes also should get registered in case they want to carry on with the business of operating the schemes. Therefore, the Appellant, in case it wants to carry on the business of operating the collective investment schemes, has to get registered under the Regulation.

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The interpretation of regulations 73(6) and 73(7) given by the learned Counsel for the Appellant that the Appellant is entitled to carry on the business provided 25% of the total number of investors support the scheme, is not correct. Text of these regulations has already been extracted in this order. It can be seen therefrom that in terms of regulation 73(1) an existing collective investment scheme, which has failed to make an application for registration to the Board is required to wind up the scheme. So is the Appellant’s case. In terms of regulation 73(2) information memorandum detailing the state of the affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined, is required to be sent to all the investors in the scheme, which is wound up. The information memorandum is also required to explicitly state that investors desirous of continuing with the scheme shall have to give a positive consent within one month from the date of the information memorandum to continue with the scheme, that those who give positive consent under sub regulation (6) shall continue with the scheme at their own risk and responsibility, that if the positive consent to continue with the scheme is received from only twenty five percent or less of the total number of the existing investors, the scheme has to be wound up. The payment to the investors, who have not given positive consent is required to be made within three months of the date of information memorandum. Therefore it is not that with the "support" of 25% of the total number of the investors, the Appellant can carry on the scheme and no payment is required to be made in that context to the investors who have not given their positive consent. As per the information furnished by the Appellant as on 15.2.2002 it had 34438 Teak Bondholders. Out of which 10199 Bondholders are stated to have given their positive consent. These statements are not supported by any affidavit. The affidavit filed by Shri N.K.Singh, on December 24, 2001 also does not disclose any material information in support of the Appellant’s contention. The learned Counsel vide his letter dated February 21, 2002 addressed to the Registrar of the Tribunal has forwarded a specimen copy of the "Information Memorandum" stated to have been sent to all the investors. The full text of the said Information Memorandum is extracted below:

Phenomenal Plantations v. SEBI

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Phenomenal Plantations v. SEBI

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

What the court decided

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Statutes considered