BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Order Reserved on : 24.11.2020

Date of Decision : 04.12.2020

Misc. Application No. 316 of 2020

(Delay Application)
And
Misc. Application No. 318 of 2020
(Exemption from filing duly affirmed affidavit)
And
Appeal No. 280 of 2020

1. Mr. Rakesh Kumar Gupta,

J-272, Sarita Vihar,
New Delhi – 110 076.

2. Mr. Sumit Bharana,

House No. C-146, 1st Floor,
Sarvodaya Enclave,
New Delhi – 110 017.

3. Ms. Rashmi Bharana,

House No. C-146, 1st Floor,
Sarvodaya Enclave,
New Delhi – 110 017.

4. Mr. Sanjay Chawla,

1303, Amber Court-1,
Essel Tower,
M.G. Road, Gurgaon,
Haryana-122 001.

5. Ms. Manisha Bharana,

House No. C-146, 1st Floor,
Sarvodaya Enclave,
New Delhi – 110 017. …Appellants
 2

Versus

1. Securities and Exchange Board of India,

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

2. Adel Landmarks Ltd.

Represented through
Mr. Udayraj Patwardhan,
Interim Resolution Professional,
C-703, Marathon Innova,
Off Ganpatrao Kadam Marg,
Lower Parel (West),
Mumbai – 400 013. …Respondents

Mr. Salman Khurshid, Senior Advocate with Mr. Apoorv

Agarwal, Advocate and Mr. Sumit Bharana, appellant no. 2 for
Appellants.

Mr. Mustafa Doctor, Senior Advocate Ms. Nidhi Singh,

Ms. Kinjal Bhatt and Mr. Hersh Choudhary, Advocates i/b
Vidhii Partners for Respondent No. 1.

Mr. Sumit Nagpal, Advocate for Respondent No. 2

CORAM: Justice Tarun Agarwala, Presiding Officer

Justice M.T. Joshi, Judicial Member

Per: Justice Tarun Agarwala, Presiding Officer

1. The appellants are the directors of Adel Landmarks Ltd.

(„Company‟ for short) and have filed the present appeal against

the order dated June 30, 2020 passed by the Adjudicating

Officer („AO‟ for short) of Securities and Exchange Board of

 3

India („SEBI‟ for short) imposing a penalty of Rs. 25 lakh upon

the directors as well as upon the Company to be paid by them

jointly and severally. The appellants have also challenged the

order of the Whole Time Member dated 7.10 2015

and19.08.2019. A prayer was also made for a direction to SEBI

to withdraw the proceedings in CC No. 24/17(new case

[Link]/5/2018) before Patiala House Court New Delhi and

further direct SEBI to file their claims before the Company as

the said Company is under CIRP.

2. The facts leading to the filing of the present appeal is, that

the Adel Landmarks Ltd. is a public limited company and is

engaged in the business of real estate and infrastructure

development. The appellants are its directors. On June 10, 2013

a complaint against the Company was received by SEBI stating

therein that the Company was mobilizing money from investors

under a Collective Investment Scheme („CIS‟ for short). This

triggered an investigation and ultimately on June 5, 2014 an

interim order under Section 11 and 11B of the SEBI Act, 1992

read with Regulation 63 of the SEBI (Collective Investment

Schemes) Regulations, 1999 („CIS Regulations‟ for short) was

issued restraining the Company and its directors from collecting

any money from the investors / buyers under the garb of CIS.
 4

Thereafter, the Whole Time Member („WTM‟ for short) passed

a final order dated October 7, 2015 holding that the scheme was

a CIS which was being run without registration under the SEBI

Act and therefore the said scheme was wholly illegal. The

WTM accordingly restrained the Company and its directors

from collecting any money under the CIS and further directed to

wind up the scheme and refund the money to its investors. The

WTM stated that the aforesaid directions are in addition to the

rights of the SEBI to initiate prosecution proceedings under

Section 24 and adjudication proceedings under Chapter VI A of

the SEBI Act.

3. The Company and its directors filed Appeal No. 520 of

2015 against the order of the WTM dated October 7, 2015

wherein the appellants made a statement that they would refund

the money collected from the buyers irrespective of the fact that

the scheme was a CIS or not and whether the same was required

to the registered or not. Based on the contention of the

appellants this Tribunal disposed of the appeal by an order dated

December 7, 2017 directing the appellant to make a

representation giving details of the money so paid and the

manner in which the balance money was required to be paid.

 5

For facility, the order of this Tribunal dated December 7, 2017

is extracted hereunder:-

“1. The affidavit (dated 06.12.2017) tendered in

the Court on behalf of appellants is taken on record
and the appeal is heard on the footing that the
contents of the said affidavit are denied by Securities
and Exchange Board of India („SEBI‟ for short).

2. This appeal is filed to challenge the order

passed by the Whole Time Member („WTM‟ for
short) of SEBI on October 7, 2015. By the said
order, the appellants are, inter alia, directed to
abstain from collecting any money from the investors
under the schemes which are identified by SEBI as
Collective Investment Schemes („CIS‟) and
restrained from accessing the securities market for
the period as more particularly set out therein.
Moreover, the appellants are also directed to wind
up the schemes identified as CIS and refund the
monies collected under those schemes.

3. Counsel for the appellants submit that without

prejudice to the contention of the appellants that the
schemes floated by the appellant no. 1 company do
not constitute CIS, the appellant no. 1 company has
partly paid the amount to the investors collected
under the scheme and the appellants are ready and
willing to pay the balance amount to the investors as
per the schemes floated by the appellants.

4. Counsel for SEBI states that the refunds

allegedly made by the appellants are yet to be
verified by SEBI.

5. Since appellants are willing to comply with the

impugned order by refunding the entire amount
collected, without going into the merits of the
argument as to whether the schemes floated by the
appellant no. 1 constituted CIS or not, we dispose of
the appeal by permitting the appellants to make a
representation to SEBI within a period of eight
weeks from today setting in detail the name and the
quantum of amount already refunded and the mode
 6

and the manner in which the balance amount would

be refunded.

6. If the appellants make a representation within

a period of 8 weeks from today, then, SEBI shall
consider the said representation and pass
appropriate order thereon. If the appellants fail to
make representation within a period of 8 weeks from
today, then SEBI is at liberty to implement the
impugned order.

7. Appellants shall furnish list of their assets to

SEBI within a period of 8 weeks from today.
Appellants shall also furnish any other information /
documents that may be demanded by SEBI.

8. Appeal is disposed of in the aforesaid terms

with no order as to costs.”

4. On the basis of the aforesaid order, the appellants and the

Company made a representation and through various orders

issued by WTM the amounts so refunded was verified.

Eventually, the WTM issued an order dated August 19, 2019

directing the appellant to make a publication in the newspapers

inviting claims from the buyers. It was also indicated in the

order that in the event no further complaints were received, the

directions of the WTM in its order of October 7, 2015 would

stand disposed of. It is stated that based on the aforesaid

directions, necessary publication were made on the basis of

which certain claim applications were received which was

disposed of by the Company and the amounts were paid to the

 7

buyers. It has been asserted that now the order of the WTM

dated October 7, 2015 has been fully complied with.

5. In the meanwhile, Edelweiss Asset Reconstruction

Company Limited filed an application under the Insolvency &

Bankruptcy Code, 2016 against the Company Adel Landmarks

Ltd. before the National Company Law Tribunal (NCLT) New

Delhi which petition was admitted and, by an order dated

October 5, 2018, an Interim Resolution Professional was

appointed and the management has been suspended and a

moratorium was declared under Section 14 of the said Code. It

has been asserted by the appellants that the resolution plan has

been submitted which is pending consideration before NCLT.

6. Notwithstanding the aforesaid, the AO issued a show

cause notice dated January 28, 2020 directing the Company and

the appellants to show cause as to why penalty proceedings

should not be initiated under Chapter VI A of the SEBI Act for

violating the provisions of the SEBI Act and CIS Regulations.

After considering the reply, the AO passed the impugned order

dated June 30, 2020 directing the Company and the appellants

to pay Rs. 25 lakh jointly and severally as the Company had

launched a CIS without obtaining registration and had

contravened Section 12(1B) of the SEBI Act and Regulation 3

 8

of the CIS Regulations. The appellants, being aggrieved by the

said order has filed the present appeal.

7. We have heard Shri Salman Khurshid, the learned senior

counsel along with Shri Apoorv Agarwal, the learned counsel

for the appellants, Shri Mustafa Doctor, the learned senior

counsel along with Ms. Nidhi Singh, Ms. Kinjal Bhatt and

Shri Hersh Choudhary, the learned counsel for respondent no. 1

and Shri Sumit Nagpal, the learned counsel for respondent no. 2

through video conference.

8. The learned senior counsel for appellants Shri Salman

Khurshid contended that the appellants Company is in the

business of real estate of buying and selling land and is not

involved in a CIS. It was contended that the appellants are not

required to register itself under Section 11AA of the SEBI Act

read with CIS Regulations. It was contended that the impugned

order imposing a penalty of Rs. 25 lakh and holding that the

appellants and the Company were carrying on a CIS without

registration was wholly illegal and was liable to be set aside.

9. It was contended that not only the order of the AO dated

June 30, 2020 but also the earlier order of the WTM dated

October 7, 2015 was also liable to be set aside. It was urged that
 9

the appellants had clearly indicated before this Tribunal that

without prejudice to their rights to question the veracity as to

whether it was a CIS or not and whether the appellants were

required to obtain registration under SEBI Act, the appellants

would refund the money. It was, thus, contended that since a

penalty order has been passed, the appellants are within their

rights to question the findings of the WTM in these proceedings

also.

10. The learned senior counsel Shri Salman Khurshid

contended that the appellant had acquired 76.72 acres of land on

its behalf by associates / subsidiaries / group companies of the

appellants at Dwarka Expressway, Gurgaon. Agreements were

executed with the buyers and that 108 buyers had paid Rs. 51

crore whereas the appellants had paid Rs. 220.43 crore for

purchase of land before taking booking from the buyers. It was

also contended that out of Rs. 220.43 crore, only Rs. 51 crore

was paid by the buyers and rest of the funds was paid by the

Company. In addition to the above, additional chunk of lands

was to be purchased and developed for which purpose the

appellants had applied for grant of license for a plotted colony

measuring 108 acres in sector 103 through its associate

company. The learned senior counsel contended that upon the

 10

grant of the license, the appellants would develop the plots and

thereafter would transfer it to the buyers. In this regard,

agreements were executed with the buyers and formal allotment

letters were only to be issued after the grant of the license. It

was also stated that a clear stipulation was made in the

agreement that in the event the license was not granted by the

appropriate authority for development of the plots, the amount

received from the buyers would be refunded along with

appropriate compensation which amount was stipulated in the

agreement itself. It was, thus, contended that a bare reading of

the agreement would indicate that the Company was only

engaged in sale and purchase of land and was not involved in

the CIS. It was thus contended that the ingredients of Section

11AA(2) of the Act was lacking in as much as there was no

pooling of funds nor the appellants or its Company had offered

any assured returns. The learned senior counsel thus contended

that the order of the AO was liable to be set aside.

11. On the other hand, the learned senior counsel Shri Mustafa

Doctor of SEBI contended that the scheme launched by the

appellants was nothing but a CIS and the ingredients of Section

11AA(2) of the Act have been carefully dealt with and

considered in detail by the AO in the impugned order. The

 11

learned senior counsel contended that the project launched by

the appellants was nothing but a CIS and since admittedly no

registration was taken, the appellants were penalized for

violating the provisions of the Act and the CIS Regulations. The

learned senior counsel contended that there is no error in the

impugned order and the quantum of penalty was justified in the

circumstances of the case.

12. The learned senior counsel for the parties cited certain

judgments in support of their case which will be appropriately

dealt with at the appropriate place. It may be stated here that no

arguments were made by the appellants on the veracity of the

order dated19.08.2019 passed by the WTM nor any arguments

were made on the issue of directing SEBI to withdraw the

proceedings pending before the Patiala Court New Delhi.

Further no submissions were made on behalf of respondent no.

2.

13. Having heard the learned senior counsel for the parties at

some length, we are of the opinion that, the relief claimed by the

appellants for the quashing of the order of the WTM dated

October 7, 2015 cannot be granted. In our view the order of the

WTM dated October 7, 2015 has become final and binding on

the parties. We are of the opinion that when the appeal of the
 12

appellants was disposed of by the Tribunal by an order dated

December 7, 2017 challenging the order of the WTM dated

October 7, 2015, the said appellants did not take leave of the

Tribunal or liberty to file a fresh appeal challenging the order of

the WTM. In the absence of any leave being granted it is no

longer open to the appellant to question the veracity or legality

of the order dated October 7, 2015 passed by the WTM. This

view of ours is supported by a decision of this Tribunal in

Karmbhoomi Real Estate Ltd. & Ors. vs SEBI in Appeal No.

11 of 2019 decided on January 21, 202 wherein the Tribunal

held:-

“9. Having heard the learned counsel for the

parties at some length, we are of the opinion that it
is no longer open to the appellant to challenge the
findings given by the WTM in its order dated 3rd
December, 2015 holding that the business activity of
the appellants falls within the ambit of a CIS. The
order of 3rd December, 2015 was no doubt
challenged by the appellant before this Tribunal but
contention was made by the appellant that without
going into the question as to whether the business
activities of the appellant comes within the ambit of
CIS or not, the appellants were willing to refund the
entire amount to the investors. Based on this
concession made by the appellant the appeal was
disposed of without going into the contention as to
whether the scheme of the appellant was a CIS under
the SEBI laws or not. We are of the view that since
no liberty was taken from the Tribunal reserving its
rights to question the veracity of the finding of the
WTM on the business activity of the appellant as a
CIS, it is no longer open to the appellant at this
stage to question the findings of the WTM in its
 13

order dated 3rd December, 2015. Even otherwise,

we find that in the present appeal only the impugned
order dated 22nd February, 2019 passed by the WTM
has been questioned. No prayer has been made by
the appellant for quashing of the order dated 3rd
December, 2015. Thus, it is no longer open to the
appellant to question the findings of the WTM which
held that the business activity of the appellant came
under the ambit of a CIS. The contention raised by
the appellant on this aspect is rejected.”

14. The AO has given a finding that the scheme was a CIS.

This finding can be challenged by the appellants in the instant

appeal even though the WTM order has become final. The AO

after considering the material evidence on record held that the

plots are tentative in nature and have not as yet been identified.

Even the allocation of the plots have not been given. The plots

have also not been demarcated nor has any specific plot been

given to a buyer. Further, the agreement executed between the

Company and the buyer stipulates that those “desirous to

contribute and invest fund for future purchase of land” indicates

that the motive was profit based. The AO also came to a

conclusion that the compensation given to the buyers in the

event the appellants failed to get a license from the appropriate

authority was a camouflage for payment of profits. The AO

after considering the material evidence held that the pre-booking

of the plot classifies as a CIS and since no registration was

 14

obtained under the SEBI Act and CIS Regulations, the scheme

floated by the appellants was totally illegal.

15. The findings of the AO are given in paragraph 27, 28, 29

and 30 which are extracted here under:-

“27. In the light of the above observations, it is to be

tested whether the alleged Scheme by the Company
of „pre-booking of plots‟ qualify as a CIS in terms of
Section 11AA(2) of the SEBI Act.

Condition 1 -The contributions, or payments made

by the investors, by whatever name called, are
pooled and utilized for the purposes of the
scheme or arrangement.

28. The customers of Adel are required to

execute an application registration form and an
agreement. It is noted that none of these initial
documents mention the exact plot no. or the location
where the plot would be allotted by Adel. These
documents only mention the area (in sq. yd.). In
view of the same, it can be concluded that Adel
does not identify the plot at the time of accepting
the money from the customers for the plots.
Further, the agreement executed by Adel with the
customer states that the money contributed by the
customers is to be used by Adel for
purchase/acquisition of land in its name or in
the name of its associates. The land so acquired
would be used by Adel for development of a
residential colony in which the developed plots
on/near Dwarka Expressway will be allotted
to the customers within a period of 12 months
with a grace period of 6 months. The Company
has produced a G.O. of the Haryana Govt. to
state that by payment of a penalty it could
regularize the alleged pre-booking of plots.
However, in the light of the fact that the
agreement contemplates a „compensation‟ which is
also shown in the list claimed to show the
 15

repayments made by the Company, it is Noted

that the contributions or payments made by the
investors in the Scheme of the Company has
been pooled and utilized for the purposes of
the scheme/ arrangement. Therefore, the first
condition stipulated under section 11AA(2)(i) of the
SEBI Act is satisfied.

Condition 2 –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.

29. In this scheme referred above, I note that

the Investors have the option to get a plot of
land which will be purchased and developed by
the Adel by pooling the amounts collected from the
investors. It is noted from Clause 13 of the
agreement dated December 18, 2011 (entered
into by one Mr. Sandeep Dhingra who had
invested Rs.85,36,000/-) that in case Adel fails to
allot the plot to him within 18 months the customer
shall be eligible to receive Rs.14,79, 240.00/-along
with the refund of existing investment. Further, the
Company has also stated that it in case it was not
able to get license for the proposed project, it
had to refund the amounts received along
with compensation. I also note from the list claimed
to be the details of repayment made by the
Company to its investors that for a customer
Arun Singh Khokhar, it is stated that
Rs.40,17,000/- is the „Received Amount‟. Along with
the compensation amount of Rs.12,65,355/-, the
Company claims to have paid Rs.51,55,819/(after
deducting TDS of Rs. 1,26,536/). Similar is the
case for all 108 customers mentioned in the said
list. Therefore, I note that the Company has
solicited investments with a promise of refund of
investment amount along with return in the nature of
compensation. Hence, the second condition, which
stipulates that the contributions or payments are
made to such scheme or arrangement by the
investors with a view to receive profits, income,
 16

produce or property as stipulated in Section 11AA

(2) (ii) of the SEBI Act is also satisfied.

Condition 3 -The property, contribution or

investment forming part of scheme or
arrangement, whether identifiable or not, is
managed on behalf of the investors.

Condition 4: The investors do not have day to

day control over the management and operation of
the scheme or arrangement.

30. As noted in the preceding paragraphs, Adel

agrees to allot a future plot to the investor upon
execution of the “Agreement”. However, at the time
of execution of agreement, the land or its location is
not identified. It is further noted that the said
execution of the agreement shall not be construed as
an agreement to sell. From this, it is clear
that the investor is making contribution or
investment in an unidentified land/unit. The
allotment of such plot/land to the investor is at Adel's
discretion. Till the time, the plot of land is actually
transferred in the name of investor, by executing
a sale deed; the land to be purchased and
developed will remain in the control of Adel on
behalf of such investor(s). As has been
observed in the preceding paragraph, I note that
Adel, collect monies from investors for the scheme of
"Purchase and development of plot” without
identifying the land/plot, indicating return in the
form of compensation. Further, the investors do
not have any say in choosing a particular property
or in the further development of the property. This
indicates that the investors do not, at any stage,
manage the property, contribution or investment
forming part of the 'Scheme' and the contribution or
investment is managed and utilized by Adel on behalf
of the investor. In view of the above, I note that
the third and fourth conditions stipulated in
Section 11AA(2)(iii) and (iv) of the SEBI Act
are satisfied.”
 17

16. Before dealing as to whether the scheme is a CIS or not, it

would be appropriate to consider a few provisions of the Act.

For facility, the Sections 2(ba), Section 11AA(2) of the SEBI

Act and Regulation 3, 73 and 74 of the CIS Regulations are

extracted hereunder:-

SEBI Act, 1992:-

Section 2(ba) ―collective investment scheme‖ means

any scheme or arrangement which satisfies the
conditions specified in section 11AA;

“11AA. (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.
 18

CIS Regulations :

“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.”

“73. (1) An existing collective investment scheme

which:

(a) has failed to make an application for

registration to the Board; or

(b) has not been granted provisional

registration by the Board; or

(c) having obtained provisional registration

fails to comply with the provisions of
regulation 71;

shall wind up the existing scheme.

(2) The existing Collective Investment Scheme to be

wound up under sub-regulation (1) shall send an
information memorandum to the investors who have
subscribed to the schemes, within two months from
the date of receipt of intimation from the Board,
detailing the state of affairs of the scheme, the
amount repayable to each investor and the manner
in which such amount if determined.

(3) The information memorandum referred to in sub-

regulation (2) shall be dated and signed by all the
directors of the scheme.

(4) The Board may specify such other disclosures to

be made in the information memorandum, as it
deems fit.

(5) The information memorandum shall be sent to

the investors within one week from the date of the
information memorandum.
 19

(6) The information memorandum shall 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.

(7) The investors who give positive consent under

sub-regulation (6), shall continue with the scheme at
their risk and responsibility :

Provided that if the positive consent to continue with

the scheme, is received from only twenty-five per
cent or less of the total number of existing investors,
the scheme shall be wound up.

(8) The payment to the investors, shall be made

within three months of the date of the information
memorandum.

(9) On completion of the winding up, the existing

collective investment scheme shall file with the
Board such reports, as may be specified by the
Board.”

“74. An existing collective investment scheme

which is not desirous of obtaining provisional
registration from the Board shall formulate a scheme
of repayment and make such repayment to the
existing investors in the manner specified in
regulation 73.”

17. The Supreme Court while considering the object for

introducing Section 11AA, held as under:-

“36. The correctness of the submission can also be

examined in a different angle, namely, what is the
paramount purpose for which the SEBI Act, 1992
came to be enacted? The object of the main Act itself
came to be considered by this Court in a recent
decision reported in Sahara India Real Estate
Corporation Ltd. (supra) wherein this Court has
stated as under:-
 20

"65. Parliament has also enacted the SEBI Act

to provide for the establishment of a Board to
protect the interests of investors in securities
and to promote the development of, and to
regulate the securities market. The SEBI was
established in the year 1988 to promote orderly
and healthy growth of the securities market
and for investors' protection. SEBI Act, Rules
and Regulations also oblige the public
companies to provide high degree of protection
to the investor's rights and interests through
adequate, accurate and authentic information
and disclosure of information on a continuous
basis."
(emphasis added)

The object for introducing Section 11AA which came

to be inserted by Act 31 of 1999 w.e.f 22.02.2000 is
to the following effect: "2. Recently many companies
especially plantation companies have been raising
capital from investors through schemes which are in
the form of collective investment schemes. However,
there is not an adequate regulatory framework to
allow an orderly development of this market. In
order that the interests of investors are protected, it
has been decided that the Securities and Exchange
Board of India would frame regulations with regard
to collective investment schemes. It is, therefore,
proposed to amend the definition of "securities" so
as to include within its ambit the derivatives and the
units or any other instrument issued by any
collective investment scheme to the investors in such
schemes."

18. While interpreting the provision of Section 11AA, the

Supreme Court held:

“35. A reading of the said provision discloses that it

talks of any scheme or arrangement, which would
fall within the definition of a collective investment
scheme. Section 2 (ba) under the definition clause
states that a collective investment scheme would
 21

mean any scheme or arrangement, which satisfies

the conditions specified in Section 11 AA.

Under sub-Section (2) of Section 11AA, it is

stipulated that any scheme or arrangement made or
offered by any company by which the contribution,
or payment made by the investors, by whatever name
called, are pooled and utilized for the purposes of
scheme or arrangement; contributions or payments
are made by the investors with a view to receive
profits, income, produce or property, whether
movable or immovable, based on the scheme or
arrangement, any property, contribution or
investment which forms part of the scheme or
arrangement is identifiable or not is managed by
someone on behalf of the investors shall be collective
investment scheme. Further the investors should not
have day to day control over the management and
operation of the scheme or arrangement. A detailed
analysis of sub-section (2) of Section 11AA, which
defines a collective investment scheme disclose that
it is not restricted to any particular commercial
activity such as in a shop or any other commercial
establishment or even agricultural operation or
transportation or shipping or entertainment industry
etc. The definition only seeks to ascertain and
identify any scheme or arrangement, irrespective of
the nature of business, which attracts investors to
invest their funds at the instance of someone else
who comes forward to promote such scheme or
arrangement in any field and such scheme or
arrangement provides for the various consequences
to result there from. As a matter of fact the provision
does not make any reference to agricultural or any
other specific activity and, therefore, at the very
outset it will have to be held that the submission
based on Entry 18 of List II, while challenging the
vires of Section 11AA, is wholly misconceived. The
fallacy in the submission of the PGF Limited is that
it proceeds on the footing as though the said
provision, namely, Section 11AA was also intended
to cover an activity relating to agriculture and its
development and, therefore, the provision conflicts
with Entry 18 of List II of the State List to be struck
 22

down on that score. Inasmuch as the said Section

11AA seeks to cover, in general, any scheme or
arrangement providing for certain consequences
specified therein vis-`-vis the investors and the
promoters, there is no question of testing the validity
of Section 11AA in the anvil of Entry 18 of List II.
The said submission made on behalf of the
appellants is, therefore, liable to be rejected on that
sole ground.”

19. In NGHI Developers India Ltd. & Ors. vs. SEBI (Appeal

No. 225 of 2012 decided on July 23, 2013) this Tribunal

explained the provisions of Section 11AA and the object of

introducing the said provisions is as under:-

“11. We have heard the counsel for both the parties

at length and perused a copy of the appeal alongwith
documents annexed thereto.

12. At the outset, we find it necessary to discuss the

evolution of the law regarding CISs. In the 1990s, it
came to the notice of the Government of India that a
large number of corporates engaged in plantation
activities were issuing bonds in the nature of agro
and plantation bonds, while offering exponentially
high rates of return which were considered
abnormal in such transactions. A large portion of the
funds collected were received from the public with
the promoters putting in small amounts of their own
money. In order to regulate such entities and their
businesses, the Government issued a press release
dated November 18, 1997 identifying schemes which
would be treated as Collective Investment Schemes
under the SEBI Act, 1992. SEBI was tasked with
formulating regulations to govern CISs which would
lead to furtherance of licit investment in the
securities market.

13. With this goal, a committee was formed under

the deft chairmanship of Dr. S. A. Dave by SEBI. The
preliminary report and regulations were released by
 23

SEBI to the public on December 31, 1998.

Subsequently, a number of suggestions were received
from investors and corporates alike, these were
sifted through by the Dave Committee and the ones
found to be appropriate for the transparent working
of CISs were incorporated in the Final Report dated
April 5, 1999. Thus, on the basis of the
recommendations of the Dave Committee, Section
11AA was added to the SEBI Act and the CIS
Regulations were framed. CIS Regulations were
framed primarily for the protection of investors in
the schemes launched by various entities seeking to
dupe bonafide investors into putting their life savings
at risk by promising high returns. CISs, although
initially conceived in the context of agro and
plantation industries, were not confined to the same
and given a wider definition by the legislature in all
its wisdom when the law was finally spelt out in
terms of the definition of CIS as provided for in
Section 11AA when introduced to the SEBI Act, 1992
on January 30, 1992. It is, therefore, safe to
conclude that Section 11AA of the SEBI Act was
brought into existence with the object of ensuring
that no chinks remained in the proverbial armour
worn by hapless investors who predominantly turn
out to be people belonging to low and middle level
income groups or retired senior citizens putting their
life savings at risk with the hope of reaping huge
profits.

15. We see from the provisions reproduced above

that Section 11AA lays down the conditions which
need to be satisfied before any scheme or
arrangement launched by a particular company can
be called a CIS, viz., the money collected from
investors should be pooled and then utilized for the
purposes of the scheme; the investors should have
contributed their money with the objective of
deriving profits in any form, whether “income,
produce or property”; the entire working and
operation of the scheme is managed by the
concerned company on behalf of the investors; and
the investors have no modicum of control over daily
activities with respect to the arrangement in
 24

question. Section 12(1B) succinctly provides that all

persons intending to float any scheme or
arrangement in the nature of a CIS, shall do so only
after obtaining a certificate of registration from
SEBI. Further, Regulation 3 of the CIS Regulations,
states that only a Collective Investment Management
Company shall sponsor CISs. Regulation 73
provides for the winding up of an existing scheme in
certain cases viz., failure to make an application for
registration to SEBI; refusal of SEBI to grant
provisional registration; or failure to comply with
the provisions of Regulation 71 once provisional
registration is obtained from SEBI. Finally,
Regulation 74 provides that in case a company
carrying on business in the nature of a CIS does not
wish to obtain provisional registration with the
SEBI, it may devise a scheme of repayment of money
collected from investors in accordance with the CIS
Regulations.”

20. The Supreme Court after analyzing the scheme held in

PGF Limited vs Union of India and Ors., (2013) SC 3702 as

under:-

“51. A conspectus consideration of the scheme of

development of the land purchased by the customers
at the instance of the PGF Limited and the promised
development under the agreement disclose that there
was wholesale uncertainty in the transactions to the
disadvantage of the investor‟ concerned. The above
factors and the factors, which weighed with the
Division Bench in this respect definitely disclose that
PGF Limited under the guise of sale and
development of agricultural land in units of 150 sq.
yrds. i.e. 1350 sq. ft. and its multiples offered to
develop the land by planting plant, trees etc., and
thereby the customers were assured of a high
amount of appreciation in the value of the land after
its development and attracted by such anticipated
appreciation in land value, which is nothing but a
return to be acquired by the customers after making
the purchase of the land based on the development
 25

assured by the PGF Limited, part with their monies

in the fond hope that such a promise would be
fulfilled after successful development of the bits of
land purchased by them.”

“52. The above conclusion of ours can be culled out

from the sample documents placed by the appellants
before the Court. The appellants, however, failed to
supply any material till date to demonstrate as to
how and in what manner any of the lands said to
have been sold to its customers were developed and
thereby any of the customer was or would be
benefited by such development. It is imperative that
the transaction of the PGF Limited vis-a-vis its
customers has necessarily to be examined as to its
genuineness by subjecting itself to the statutory
requirement of registration with the second
respondent followed by its monitoring under the
regulations framed by the second respondent. All the
above factors disclose that the activity of sale and
development of agricultural land propounded by the
PGF Limited based on the terms contained in the
application and the agreement signed by the
customers is nothing but a scheme/arrangement.
Apart from the sale consideration, which is hardly
1/3rd of the amount collected from the customers,
the remaining 2/3rd is pooled by the PGF Limited for
the so called development/improvement of the land
sold in multiples of units to different customers. Such
pooled funds and the units of lands are part of such
scheme/arrangement under the guise of development
of land. It is quite apparent that the customers who
were attracted by such schemes/arrangement
invested their monies by way of contribution with the
fond hope that the various promises of the PGF
Limited that the development of the land pooled
together would entail high amount of profits in the
sense that the value of developed land would get
appreciated to an enormous extent and thereby the
customer would be greatly benefited monetarily at
the time of its sale at a later point of time. It is
needless to state that as per the agreement between
the customer and the PGF Limited, it is the
responsibility of the PGF Limited to carry out the
 26

developmental activity in the land and thereby the

PGF Limited undertook to manage the
scheme/arrangement on behalf of the customers.
Having regard to the location of the lands sold in
units to the customers, which are located in different
states while the customers are stated to be from
different parts of the country it is well-neigh possible
for the customers to have day to day control over the
management and operation of the
scheme/arrangement. In these circumstances, the
conclusion of the Division Bench in holding that the
nature of activity of the PGF Limited under the guise
of sale and development of agricultural land did fall
under the definition of collective investment scheme
under Section 2(ba) read along with Section 11AA of
the SEBI Act was perfectly justified and hence, we do
not find any flaw in the said conclusion.”

21. In the light of the aforesaid decisions and the findings

given by the AO and after considering the documentary

evidence on record we find that there are two essential

ingredients under Section 12AA(2) of the Act which needs

consideration, namely, pooling of the resources and payments

being made with a view to get profits/income. In the instant

case, we find that buyers have pooled in the resources for

purchase of a prospective plot in future. In the absence of any

allotment orders being issued and in the absence of any

demarcation of the plot in question there is uncertainty in the

sale and purchase of land. This pooling of the resources thus

indicates that the money pooled in for purchase of land in future

and development is essentially for a speculative gain. The

 27

agreement indicates high amount of compensation in the event

of failure to obtain a license. We find that a buyer who has paid

Rs. 93 lakh for a plot would get a compensation of Rs.

17,57,700/- in 18 months. This amount of compensation

indicates a high rate of return. We are thus quite satisfied that

use of the word in the instant case, namely, „compensation‟ is

nothing else but profits and indicate assured returns on the

investment made by the buyer. Thus, this ingredient of pooling

in resources and profits/income are writ large. We, therefore,

approve the findings given by the AO indicating that all the

ingredients under Section 12AA(2) exists and are satisfied.

22. In the light of the aforesaid, we are of the opinion that the

appellants were not engaged in real estate project but were

running a CIS. In the absence of obtaining a registration the

collection of money through this scheme was wholly illegal.

The AO was justified in proceeding against the appellants for

violation of SEBI Act and CIS Regulations.

23. In the light of the aforesaid, the decisions cited by the

appellants in the case of Puravankara Projects dated

03.06.2014 decided by SEBI and PACL India Ltd. vs UOI

(2004) 49 SCL 250 are distinguishable on facts and are not

applicable in the instant case.

 28

24. A sum of Rs. 25 lakh has been imposed upon the

Company and the appellants as penalty to be paid jointly and

severally. We are of the opinion that the penalty imposed in the

instant case is arbitrary and excessive. No doubt, the appellants

have violated the provisions of the SEBI Act and CIS

Regulations but the violation does not appear to be intentional.

Further, before this Tribunal while challenging the order of the

WTM the appellants come forward that they would refund the

amount, based on which details were supplied to SEBI and over

a period of time the amount has been refunded along with

appropriate compensation / interest. As late as on August 2019.

The WTM directed the appellants to make a publication inviting

claims from the buyers, if any. In the order it was also indicated

that in the event there were no further complaints, the direction

of SEBI would stand disposed of. It has come on record that

certain claims were filed which was disposed of and SEBI was

duly informed about it. As on date, there is nothing to indicate

non-compliance of the directions of the WTM. In this light,

while considering the quantum of penalty this factor ought to

have been taken into consideration under Section 15J of the

SEBI Act which has been brushed aside by the AO. Admittedly,

Rs. 51 crore was collected from the buyers and more than Rs. 70
 29

crore have been refunded. Considering the aforesaid, we are of

the opinion that the quantum of penalty imposed is excessive.

We are of the opinion that a notional penalty of Rs. 2 lakh

should be paid by each of the directors.

25. In view of the aforesaid, the order of the AO with regard

to the finding on the issue of CIS is affirmed and only the

quantum of penalty is reduced from Rs. 25 lakh to Rs. 2 lakh

each to be paid by the appellants individually. By our interim

order dated September 22, 2020 we had directed the appellants

to deposit 50% of the penalty amount. We have been informed

that the amount has been deposited. In view of the aforesaid, the

excess amount alongwith accrued interest, if any, shall be

refunded by the respondent to appellants within two weeks from

the date of this order.

26. In view of the aforesaid, the appeal is partly allowed.

In the circumstances of the case, there shall be no order as to

costs. All the Misc. Applications are accordingly disposed of, if

not disposed.

27. The present matter was heard through video conference

due to Covid-19 pandemic. At this stage it is not possible to sign

a copy of this order nor a certified copy of this order could be

issued by the registry. In these circumstances, this order will be

 30

digitally signed by the Presiding Officer on behalf of the bench

and all concerned parties are directed to act on the digitally

signed copy of this order. Parties will act on production of a

digitally signed copy sent by fax and/or email.

Justice Tarun Agarwala

TARUN
Digitally signed by TARUN AGARWAL
DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR
PRADESH, postalCode=221505, st=Uttar Pradesh,
[Link]=30fcf68685192bbc53e6ff1608a83fb3881
Presiding Officer
de7ac2ab7954d509c85ed6e0f7c41,

AGARWAL
serialNumber=095f8b286bb0b1cd07ff676611f4f5
e7999727d404aa38ca422f9d3529bdb8a3,
cn=TARUN AGARWAL
Date: 2020.12.04 11:22:31 +05'30'

Justice M.T. Joshi

Judicial Member

04.12.2020
msb