Supreme Court rules against Sebi in CIS cases

The Supreme Court has ruled against the capital markets regulator in a clutch of appeals in matters relating to collective investment schemes (CIS).In a judgment delivered last week, covering five similar cases that date back to the period between 1995 and 1999 when CIS regulations were in the process of being formulated, the court dismissed three appeals by the Securities and Exchange Board of India (Sebi) and allowed two by

appellants against Sebi. It dismissed appeals of Sebi against high court relief granted to three directors of Gaurav Agrigenetics, namely, Gaurav Varshney, Vinod Kumar Varshney and Parvesh Varshney. Sebi had filed criminal charges against these directors for collecting money from the public through the company without getting a registration. Another appeal by Sebi against Raj Chawla of Fairdeal Forests was dismissed on similar grounds. The apex court held the complaints by Sebi did not adequately press charges under Section 12(B) of the Sebi Act at the complaint stage.

“The complaint did not include any direct or indirect insinuation that the accused had unauthorisedly commenced operations of a collective investment scheme, after January 25, 1995. Even the date of commencement of the collective investment operations, by the accused, was not expressed in the complaint. It was imperative for ‘the Board’, to lay the above charge, through express assertions, for proceeding against the accused, for violation of the non-proviso mandate, under Section 12(1B),” reads the judgment by the bench of J S Khehar and C Nagappan.

The provisions of Section 12(1B) of the Sebi Act prohibit collective investment schemes, including mutual funds, from sponsoring any new scheme till the regulations are notified. While the regulations for MF schemes have been notified by Sebi, regulations for CIS, including plantation schemes, require to be notified in view of a press release issued by the central government. “These regulations are under preparation and will be issued in due course, first in draft form for public discussion and later in the final form. Till these regulations are notified, as a result of the provisions of 12(1B) of the Act, no person can sponsor or cause to be sponsored any new collective investment scheme and raise further funds,” the provision said.

KEY DATES

Jan 1995: Sebi Act amended to include Section 12 (1b) in Jan 1995

July 1995: Gaurav Agrigenetics incorporated  

Nov 1997: Govt, Sebi announce formulation of comprehensive rules for plantation firms according to the recommendation of a panel headed by S A Dave

July-Dec, 1998: Gaurav and Vinod Kumar Varshney resign from Gaurav Agrigenetics  

October 1999: Collective Investment Schemes Regulations takes effect

March 2000: Deadline for application for registration under CIS

The effect of this Section was that a new entrepreneur desirous of sponsoring or carrying on any activity in the nature of collective investment for the first time after January 25, 1995, could do so only after he/it had obtained a certificate of registration from ‘the Board’, in accordance with the Collective Investment Regulations. Therefore, till the latter were framed under Section 12(1B), and a certificate of registration had, no fresh entry could be made in the field of collective investment by a person/entity not already carrying on such activity.

The CIS regulations were notified only in 1999. All these directors had resigned from their respective companies by that time. The SC also upheld appeals by two directors, P C Thakur and Sunita Bhagat of Accord Plantation, another CIS. Sebi had held them guilty of not winding up the CIS nor repaying the investors. In 2010, a trial court had held them guilty and sentenced them to imprisonment of six months and a fine of Rs 10 lakh. Their appeals were dismissed by the high court in 2014.

The Bench of Khehar and Nagappan set aside the HC order and said the complaint filed against them stood dismissed. The fact that Thakur and Bhagat had resigned from Accord before the deadline for application registration under the new CIS regulations came to their rescue.