Date of judgement:
12 February 2020
Bench:
Justice R.F. Nariman
Justice S. Ravindra Bhat
Justice V. Ramasubramanian
Parties:
Appellant – Osians Connoisseurs of Art Pvt. Ltd.
Respondent – SEBI & Anr
Subject
Osian Art Fund, which was set up as a private trust, pooled money from the investors to acquire and manage artworks. The question was whether such a trust had the authority to mobilize money in the absence of a certificate of registration.
Overview
- In the year 2007, SEBI had issued a show-cause notice to Osian's Connoisseurs of Art Pvt. Ltd.(appellant) because they were trustees of Yatra Art Trust Fund 1 & 2, which was involved in a collective investment scheme, without applying for the Certificate of Registration and hence were in violation of Section 12 of SEBI Act, r.w. Regulation 3 of CIS Regulation.
- The appellants argued that they have not violated any of the aforementioned Sections because they were not registered in the form of a company, hence the Regulations did not apply to them. Secondly, they contended that their investment scheme does not fall under the definition of a collective investment scheme.
- However, in 2013, SEBI ordered the trust fund to return back the entire money collected by them along with the returns, at the rate of 10% per annum, within a period of three months. Thereafter, within 15 days, they were required to wind up and submit a repayment report to SEBI, acknowledging that the amount collected by them is returned back to the rightful investors.
- SEBI also restrained the appellants from accessing the securities market for 4 years. It directed the state police to initiate a criminal case against the appellants for fraud, cheating, and misappropriation of public funds and initiated attachment and recovery proceedings against them under the SEBI Act. However, this part of the order was set aside by the Securities Appellate Tribunal (SAT).
Issues
- Whether the appellant, who is a private trust, is under any obligation to adhere to the SEBI guidelines and regulations while engaging in such collective investment schemes?
Legal Provisions
- Section 12 of Securities and Exchange Board of India Act, 1992 (SEBI) – Mode of forming an incorporated company.
- Regulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999 (CIS) – Only a Collective Investment Management Company is entitled to launch or sponsor a collective investment scheme.
- Section 11AA of SEBI Act, 1992 – Definition for collective investment schemes.
Judgement Analysis
- The counsel for the appellant, Shri Vishwanathan, submitted that Section 11AA uses the word ‘company’ and not ‘person’, and that his client conducted his business in the form of trust. As a result, the provisions of the SEBI Act would not be attracted in any way.
- The legal officer for SEBI maintained that the appellant was engaged in a fund mobilising activity that falls under the definition of collective investment scheme under Section 11AA of the SEBI Act. Also, he had done so without obtaining a proper Certificate of Registration, thereby violating Section 12 (1B) of the SEBI Act and Regulation 3 of the (CIS) Regulations, 1999.
- After a careful perusal of Section 11AA, the Court held that the collective investment scheme can be floated only in the form of a collective investment management company as a result of which it uses the word ‘company’ and not ‘person’ in Sub Section (2).
- Once the interpretation of this statute becomes clear, the Court said it becomes evident that the collective investment scheme carried on by the appellants in the form of a private trust would be directly in violation of the statute, read with the CIS Regulations and would be thus illegal.
- Owing to the fact that the matter has been pending for an extremely long period of time, the Court instead of remanding the matter to SEBI, itself directed that the principal amount is required to be paid back to the investors, within a period of 6 months from the date of the judgement.
Conclusion
The Collective Investment Scheme Regulation was introduced to protect the interests of the investors and save them from fraud and cheating. Stringent procedural laws were put down by SEBI to avoid any sort of violations. Hence, the procedural aspect given under this scheme is indispensable.
The scheme is also required to work through a perceived legitimate and administrative framework. The interpretation taken by the court fairly indicates the wide scope of the CIS Regulations 1999, which serves as a caution to various entities that seek to establish collective investment schemes.
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