SECURITIES AND EXCHANGE BOARD OF
INDIA
ORDER
UNDER SECTION 11B OF THE SEBI ACT, 1992 READ
WITH REGULATIONS 65 AND 73 OF THE SEBI (COLLECTIVE INVESTMENT SCHEMES)
REGULATIONS, 1999 IN THE MATTER OF M/S GURU TEAK INVESTMENTS
(MYSORE) P.
LTD.
1.0
BACKGROUND
1.1 M/s Guru Teak
Investments (Mysore) P. Ltd. (hereinafter
referred to as ‘Company’) having its head office at No.874, Raineo House, First Floor, Dr Modi Hospital Road, West of Chord Road, Bangalore 560
086 was granted provisional registration by Securities and Exchange Board
of India (hereinafter referred to as ‘SEBI’) under Regulation 71(1) of
SEBI (Collective Investment Schemes) Regulations, 1999 (hereinafter
referred to as Regulations) with effect from 1.7.2001.
In terms of Regulation 71(1), the said provisional registration was
subject to the fulfillment of the certain conditions within the time
specified therein and the same was also communicated to the Company by
SEBI vide letter dated 9.7.2001. The conditions under Regulation 71 (1) of
the Regulations for the grant of provisions registration are as under :
Regulation 71(1)
:
The
Board after being satisfied that the conditions specified in regulation 70
are fulfilled may grant provisional registration to the applicant subject
to the following conditions, namely:-
(a) the
applicant shall get the existing schemes rated by a credit rating agency
with {two years} from the date of grant of provisional
registration;
(b) the
applicant shall get the existing schemes audited by an auditor within a
period of {two years} from
the date of grant of provisional registration;
(c) the
applicant shall get existing schemes appraised by an appraising agency
within a period of {two years} from the date of grant of provisional
registration;
(d) the
applicant shall create a trust and appoint trustees in the manner
specified in Chapter IV of these regulations within a period of {two
years} from the date of grant of provisional
registration;
(e) the
applicant shall comply with accounting and valuation norms in respect of
schemes floated before the commencement of these regulations as specified
in Part II of the Ninth Schedule within a period of {two years} from the
date of provisional registration;
(f)
the
applicant shall meet the minimum net worth of Rupees one crore within one year from the date of grant of
provisional registration which shall be increased by Rupees one crore each within two years, three years, four years
and five years from the date of grant of provisional
registration.
(g) the
applicant shall not dispose of the scheme property except for meeting
obligations arising under the offer document of the
scheme
(h) the
applicant shall comply with the conditions specified in regulation
11;
(i)
such
other conditions which the Board may impose.
(2)
The
applicant shall give a written undertaking to the Board to comply with the
conditions specified in sub-regulation (1).
1.2
In terms
of the provisions of Regulation 71(2) of the said
Regulations, the company vide its letter dated 20.6.2004 gave a
written undertaking to comply
with the conditions specified in regulations 71(1)
of Regulations.
1.3 It
was, however, noted that the company had failed to comply with various
conditions for the grant of provisional registration within the timeframe
as stipulated in Regulation 71(1) of the Regulations and as such did not
get its schemes rated, appraised etc. within the period specified.
Further, it had failed to form the trust in the manner specified under the Regulations. It
was also noted that the company in utter violation of the Regulation 69
and also in violation of the condition prescribed in the Provisional
Registration duly communicated by SEBI vide letter dated 09.07.2001,
mobilized Rs.53.52 crores from the investors
during the period from 01.04.2000 to 31.03.04.
1.4
Therefore, SEBI vide its letter dated 27.11.2003, while informing
the company that it had failed to comply with the conditions of provisional
registration, advised it to wind up existing schemes and repay the
investors in the manner specified under Regulation 73 of the Regulations.
The format of winding up and repayment report was also furnished to the
company vide the aforesaid letter for compliance on the part of the
company.
1.5 The
company vide its letter dated 11.12.2003 while admitting the delay on its
part in complying with the statutory requirements, requested for the grant
of additional time for the said compliances. In response to the request of the
company , SEBI vide its letter dated 23.01.2004 while rejecting the said
request, advised the company
once again to submit its winding up and repayment report within the
specified time. The company
was forewarned that failing
to comply with the aforesaid, appropriate action in terms of Securities
and Exchange Board of India
Act, 1992
(hereinafter referred to as SEBI Act) read with Regulations will be
taken against the company and its promoters/directors. Vide another letter dated
27.4.2004, the company was again advised to submit the winding up
and repayment report on or before 12.05.2004 to avoid any adverse actions against the company
and its promoters/directors.
The company in
spite of reminders/specific notice, failed to submit the
winding up and repayment report in violation of Regulation
73(9). Regarding mobilization of Rs.53.52 crores in violation of Regulations,
the company vide its letter dated 02.06.2004 submitted that the
subsequent mobilization
was made from the investors who had paid part amount against the units
they had bought from the company.
This
submission however did not hold good in light of specific provision
of
Regulation 69 which bars the existing collective investment schemes
to
raise money from the investors even under the existing schemes
unless a certificate of registration is granted to it by the Board
under
Regulation 10 of the Regulations.
1.6
Though the violations on the part of the company were very clear
and evident, SEBI in compliance with the principles of natural justice,
gave the company an opportunity of personal hearing before the then
Chairman, SEBI on 5.11.004.
In the said hearing, the company was represented by its Managing
Director, General Manager and other Directors of the Company along with
their practicing company secretary.
After hearing as per the submissions made by the representatives of
the Company, the Company was given an additional time of 30 days to
satisfy SEBI that it had complied with the conditions of provisional
registration.
1.7 The company vide its
letter dated 03.12.2004 submitted a compilation of documents claiming to
have complied with Regulation 71(1) of Regulations and requested for the
grant permanent registration under Regulation 10 of the Regulations. After examining the said documents
filed by the company, as against the requirements of the Regulations and
the conditions of the grant of registration, as communicated by the
company vide SEBI letter dated 09.07.2001, the then Chairman SEBI found
and noted the following violations/non compliances on the part of the
company:
1)
The
company had mobilized Rs.53.52 crores from the
investors during the period 01-04-2000 to 31-03-2004 in violation of the Regulation 69 of the said
regulations and also the conditions prescribed in the Provisional
Registration.
2)
The
company did not submit Auditor's report within a period of one year from
the date of provisional registration. The company has submitted only the
company audit report with balance sheets and profit and loss accounts for
the year ended March 31, 2004. Further it did not submit the scheme-wise
audit report.
He further noted from the Audit report that
:
a) The Company does not fulfill the requirements
specified in The Companies (Auditor's) Report order, 2003 issued by the
Central Government of India.
b) The company has capitalized land to an extent
of Rs.6,52,40,764/- in respect of which the land costing
Rs.1,70,18,793/- has been held in the name of directors and agents.
c) Further, the company GTIL has accumulated
losses to an extent of Rs.13,02,34,215/-.
3) The company could not appraise its
existing schemes by an appraising agency within a period of one year from
the date of grant of provisional registration. The company had submitted
the appraisal report prepared by Agricultural Finance Corporation.
However, there was no authentication received from the said appraisal
agency about the appraisal report.
He further noted
some of the following observations made in the appraisal report ::
Technical
evaluation
a) Majority of the farms are under open area
without much natural vegetation cover, some of the plantation experience
occasional high wind velocity. As teak is shallow rooted, such high wind
velocities are detrimental.
b) In some of the farms, soils are shallow and
have poor fertility. The plants are showing mal-nutritional disorders in
their growth.
c)
With regard to water
management, the water is not uniformly distributed and erosion of top soil
is observed.
d) Some of the farms, spacing of 1m x 1m is
adopted and it appears to be too close.
Initial spacing of 1.5 x 1.5 m is ideal.
e) As majority of plantations are located in low
rainfall areas ranging from 435 to 900 mm as against optimum rainfall of
1250
to 1800 mm, adequate supply of soil moisture is more.
f) The company has so far acquired 1620 acres of
land, out of which, about 845 acres are registered, 500 acres is under
natural plantation of Neriya and the rest of 345
acres are used for cultivation of teak. All the land used for teak
cultivation is registered in the names of Managing Director, Directors and
Advisory Committee Members.
g) Financial Evaluation of
Plantation
scheme :
Among the crop
development expenses, the land development cost were found to be very high
as the company has spent considerable amount on land leveling and for
supply of soils in huge quantities from outside source. This cost could be
minimized. Similarly, the company is spending huge expenses on other costs
which include construction of huge water storage structures and water
harvesting structures like tanks / farm pumps. The cost on these
structures could be completely eliminated.
h) Over
administration cost constitute a considerable percentage (59%) of the
total expenditure of the company for the years 1996 – 2003. The revenue expenses of the
company were very high and the projected yields and income of the company
were highly ambitious and optimistic. It further states that at the
existing cost of cultivation, the company will have to bring in an
additional area of 1970 acres under plantations, to meet the commitment
made to the investors. In order to meet the interim
payment to the investors the company initiated steps for
development of modern dairy at two locations. It also proposed to engage
in trading activity in wood. However the company did not inform SEBI and
also did not obtain SEBI’s approval for such
diversification.
4)
As regards, creation of
Trust and appointment of Trustees, the company vide its letter
dated December 3, 2004 submitted a copy of Trust Deed executed by it.
It was however noted that it has not appointed the trustees who is
registered with SEBI as Debenture Trustee under SEBI (Debenture Trustee)
Regulations 1993 in violation of the CIS Regulations. It was further noted that the
trust so constituted was being administered by the Board of Trustees.
There were 7 trustees, out of which, 2 were shareholders of the company
which is a private limited company and was in violation of the provisions
of Chapter IV of the CIS Regulations.
5) The company
was not maintaining scheme-wise accounting and not complying with
accounting and valuation norms as specified in Part II of the Ninth
Schedule of CIS Regulations.
6) The company
failed to submit networth certificate as
required as per the Regulations. The purported networth certificate dated December 21,
2004 submitted by the
company showed the negative networth of Rs. 32,81,85,456/- as on
March 31, 2004.
7) Though the
company was required to inform SEBI forthwith any material change in the
information in particular previously furnished which could have any bearance on the provisional registration grated to it,
the company failed to bring to the notice of SEBI the material change in
its functioning in as much as that it had initiated steps for development
of Modern Dairy at two locations and also intending to be engaged in
trading activities in woods.
This diversification was noted from the appraisal report which
stated that in order to meet the interim payment to the investors, the company has initiated steps for
development of Modern Dairy at two locations and is also intending trading activities in woods.
8) In this
regard it was found that the company continued to collect money from the
investors in spite of clear instructions from SEBI and also in violation of the
provisions of Reg. 69 of the CIS Regulations.
9) The company
failed to maintain proper books of accounts, records, and documents for
each scheme separately in violation of Regulation 40 of the Regulations.
In view of the aforesaid findings the then Chairman, being
satisfied that the company had failed to comply with the conditions of the
provisional registration and that the company had violated the provisions
of Regulation 69 and 71 of the Regulations held that the company was not
eligible for the grant of permanent registration under Regulation 10 and
therefore vide his order dated 18.02.2005 directed the company to wind up
its schemes and repay the investors in the manner specified in Regulation
73 within a period of 5 ˝ months from the date of receipt of this order
and submit the winding up and repayment report to SEBI in the format
specified by SEBI.
APPEAL NO.
59/2005
Aggrieved by the
aforesaid order dated 18.02.2005, the company preferred an Appeal
No.59/2005 – M/s. Guru Teak Investment (Mysore)
Pvt. Ltd. Vs. SEBI before the Hon’ble Securities
Appellate Tribunal (SAT). The Hon’ble SAT vide
its interim order dated 11.03.2005 stayed the operation of SEBI Order
dated 18.02.2005 and further directed the Appellant as under :
(a)
The
appellant shall deposit with the respondent a sum of Rs.50 lacs within 8 weeks from the date of receipt of the
order.
(b)
The
appellant shall not alienate any immovable property standing in the name
of the company without leave of the Tribunal.
(c)
The
appellant shall not mobilize any further funds from the
public.
(d)
The
respondent shall keep the sum in a fixed deposit with accrued cumulative
interest for a period of three months with any nationalized bank at the
discretion of the Chairman.
(e)
It is the
desire of the Tribunal even those land which are not owned by the company
which are subject matter of the scheme be not allowed to be alienated
pending appeal.
The company filed an application dated
04.06.2005 in the SAT informing the depositing of Rs.50 lacs with SEBI and inter alia stated that in terms of the aforesaid directions
of SAT, the Appellant was forced to stop his business of accepting
deposits and is depending upon the borrowings to meet its day to day
commitments with great difficulty.
Therefore, the appellant requested SAT to
modify its interim order dated 11.03.2005 and withdraw the condition
restraining the appellant from accepting desposits under the schemes of the company.
DISPOSAL OF THE APPEAL BY
SAT
The Securities Appellate Tribunal after hearing
both the parties vide its order dated 28.06.2005 set aside SEBI’s order dated 18.02.2005 and remanded the matter
to SEBI for fresh disposal in accordance with law. So far as various
findings of SEBI regarding non compliance of the conditions of provisional
registration by the company, SAT observed that SEBI could consider giving
the company more time for the said compliances. SAT further observed as under :
“ The appellant has also deposited with
the respondent a sum of Rs.50 lakhs on
05.05.2005 pursuant to the interim order passed by this Court. This amount shall remain with SEBI
till the matter is finally disposed of in accordance with law. The appellant was also
directed by the interim order not to alienate any movable property
standing in the name of the company without the leave of the Tribunal and
the appellant was also not to mobilize any further funds. The learned senior counsel for the
appellant submitted that the appellant filed the above application praying
for certain conditions to be lifted and for the reasons stated in the
affidavit. It is for SEBI to
consider the application sympathetically in accordance with the law during
the pendency of the matter before SEBI in the
interest of both the investors and in public interest. SEBI may retain the
amount deposited by the company till the time it passes the final orders
or disburse it to any person who wants to the money back during the pendency of the mater before SEBI.. All contentions of the appellant are left open. The
respondent may issue fresh show cause notice and
dispose of the matter under remand as expeditiously as
possible.
a)The sum
of Rs. 50 lakhs
deposited by the company in pursuant to the interim order passed by this
court shall remain with SEBI till the matter is finally disposed of in
accordance with law. It appears that SAT has also added in hand written
that this amount to be used to repay the investors who want refund of the
money.
b) The appellant on 08.06.05 had filed an application before SAT
praying for certain conditions to be lifted for the reasons stated in the
affidavit.
SAT in its final order has held that “it is for SEBI to consider
the application sympathetically in accordance with law during the pendency of the matter before SEBI in the interest of
both the investors and in public interest.”
c) SAT has also held that “SEBI may retain the amount deposited by
the company till it passes the final orders or disburse it to any person
who wants the money back during the pendency of
the matter before SEBI. All contentions of the appellant are left open.
The respondent (SEBI) may issue fresh show cause
notice and dispose of the matter under remand as expeditiously as
possible.”
2.0
POST-SAT DECISION PROCEEDINGS:
2.1
Subsequent to the aforesaid order dated 28.06.2005, the company
vide its letter dated 04.08.2005 requested SEBI to grant 3 years’ time to
comply with the condition regarding making networth of the company positive in terms of
Regulation 71(1) (f). As this
extension of time was not possible in terms of the relevant Regulation,
SEBI vide its letter dated 25.10.05 informed the company that its request
for grant of additional time of 3 years to comply with the conditions of
provisional registration cannot be acceded to. SEBI also advised the
company to submit the status report on compliance with the conditions of
provisional registration immediately.
The company then requested SEBI for a meeting and accordingly a
meeting was held between the concerned officials of SEBI and the
representatives including the Managing Director of the company on
28.10.2005. In the said
meeting the company was advised to submit the status of their compliance
with the conditions of provisional registration to enable SEBI to examine
the progress and take a view in the matter in terms of the
observations/directions of SAT vide its order dated
28.06.2005.
2.2 Instead of submitting the compliance report
as advised by SEBI, the Company filed an application dated 16.12.2005
before the Hon’ble SAT whereby it sought
directions against SEBI to consider and dipose
off the matter and pass appropriate orders within 15 days. While disposing
off the aforesaid application, the Hon’ble SAT
on 05.01.06 directed SEBI to dispose off
the matter expeditiously on or before February 10,
2006.
3.0
PERSONAL HEARING AND WRITTEN SUBMISSIONS:
3.1 In compliance of the aforesaid directions dated
05.01.06 of SAT and in the absence of compliance report which the company
failed to submit to SEBI, it was decided to proceed in the matter on the
basis of the available record.
However, before taking a final view in the matter, in adherence to
the principles of natural justice, an opportunity of personal hearing was
granted to the Company before me on 28.01.2006. The said personal hearing was
attended by Shri Gangadhar, the Managing Director of the company along
with Shri S.S. Naganand, Senior Advocate.
In the course of personal hearing, the issues relating to
non-compliance vis-ŕ-vis the conditions as stipulated under Regulation
71(1) of the CIS Regulations were discussed in detail item wise with the
company representatives. The company representatives made their oral and
written submissions.
3.2
The
detailed submissions of the company regarding their compliance of the
conditions for the grant of provisional registration may be summarized as
under:
(a)
Creation of Trust and appointment of
Trustees
Regarding creation of trust etc. in compliance of Regulation
71(1)(d) it was stated by the company that it
had already formed the Trust
by a Registered Trust dated 31.03.2001 which is a public trust and the
author of the Trust being the company. Further, it was stated that in the
State of Karnataka, there is no provision for supervision of
public Trust. The provisions of the Karnataka Land Reforms Act, 1961
placed restrictions on the holding of agricultural land by certain
entities including the companies.
Further, the main assets of the scheme being Teak Trees are
attached to and form part of the earth. They cannot be conveyed or
transferred to a Trust.
However, there is substantial compliance as the Trust have been created. As regards appointment of trustees
it was stated that SEBI did not inform the names of eligible Trustees. It
was further submitted that after SEBI’s
communication that the names of the Trustees are available on the website
of SEBI, company wrote several letters to those trustees requesting them
to accept the position of Trustees but none of them agreed. As regards the accounts of the
Trust, it was submitted that since the Trust is not holding the assets of
the scheme directly in its name, the accounts of the Trust have not been
drawn up as they do not reflect any of these transactions. However, the transactions of
collective investments schemes are reflected in the audited accounts of
the company and in the individual audited accounts of each scheme which
have since been filed before SEBI.
b)
Schemewise
audited report
Regarding non maintenance of scheme wise
accounts, the company admitted that it did not maintain the same
initially. However, it was submitted that the scheme wise financial
statements have been prepared by apportioning the expenditure and
reflecting the corresponding assets and its auditors have expressed the
view that said apportionment has been done on a reasonable basis.
Therefore, it was contended that the applicant has complied with this
requirement also.
c)
Networth
Regarding networth,
it was submitted that the CIS Regulations define the expression networth in Regulation 2(1)(s). The
definition itself makes the position clear that it relates to the company
and not the scheme as obviously each scheme do not have any capital or
free reserves. The Applicant
is a company governed by the provisions of the Companies Act, its accounts have to be maintained in accordance
with the provisions of Sections 209 to 215 of the Companies Act,
1956. The Company’s statutory
auditors have audited the accounts. There is no provision in the Companies
Act or in any accounting standard issued by the Institute of Chartered
Accountants of India that the assets of a company ought not to be
revalued. On the contrary, it
is well settled principle of accounting that the Balance Sheet should
accurately and correctly reflect the value of the assets. In the case of
the Applicant, it owns a large extent of land of 1272 acres. Some of these
are plantation lands which are registered in the name of the company since
the prohibition on holding agricultural lands does not apply to plantation
lands. Some of the Lands are
registered in the name of the Directors who are holding it in trust for
the company. These lands have been acquired over a number of years, they
are reflected in the Balance Sheet at their historical cost and they have
not been revalued as on 31.03.2005.
The teak trees planted as per the CIS Regulations run by the
company are in a portion of the land which is to the extent of 400
acres. The Applicant company
got evaluated the standing timber in the rest of its lands (other than the
teak under cultivating as per schemes). This evaluation was done by an
independent qualified valuer approved by the
Government. The value was
found to be significantly higher than the Balance Sheet figure and
therefore after making a conservation assessment, the standing timber was
revalued and brought to books.
This revaluation now has resulted in the Balance Sheet of the
Company reflecting the true value of a portion of its assets. The object of CIS Regulations is
to ensure that the Balance Sheet ought to reflect the real worth of the
company. Regulation 9(c) of
the CIS Regulations prescribes a condition of eligibility, this condition
is applicable to the Applicant, which is a company it prescribes a minimum
networth of Rs.5,00,00,000/- (Rupees five crores only) which have to be achieved progressively.
The proviso provides for Rs.3,00,00,000/- (Rupees
three crores only) to be increased to
Rs.5,00,00,000/- (Rupees five crores only)
within 3 years from the date of grant of registration. In the case of the Applicant,
registration has not yet been granted. It is already achieved the networth of Rs.5,00,00,000/-
(Rupees five crores only). It is submitted that the
definition clause cannot be applied mechanically to the body of the
statute and will have to be suitably read down as warranted by the
language of the statue.
d) Alleged continuation of acceptance
of contributions even after 28.02.2005 the date of communication of the
SEBI’s orders:
In this regard, it was submitted that the order
of SEBI was received by the Company’s head office at
Bangalore on 28.02.05, the company has about 50,000
representatives all over the State and it immediately issued
instructions. By the time
those instructions were implemented, it took about 8 to 9 days. In the
meantime, the company filed an appeal before the Hon’ble SAT which was heard on 11.3.2005 and SAT
directed the company not to mobilize further funds from the public. Pursuant to this, the company
stopped mobilisation of
funds.
4.0
CONSIDERATION
OF ISSUES AND FINDINGS:
4.1
I have
carefully examined the documents filed by the company, the submissions
made by the company during the hearing and their written submissions vide letter dated
January 30, 2006.
4.2 After
examining all the relevant documents, it appears that although the
company has initiated certain measures of compliance in an
inordinately belated move, the same do not meet the basic
requirements of Chapter IV of the Regulations read with fourth
Schedule. To cap it all, the
company is seeking further time for what
is the bedrock of the entire process of
compliance.
4.3 In
this regard I may with convenience advert to paragraphs
26, 27 and 28 of the order of Hon’ble SAT of 28/6/2005. There is no gainsaying the fact with
reference to para 26 that appointment of trustee
is the very corner stone of the entire package of compliance expected of a
Collective Investment Management Company (CIMS) under Chapter IV of
Regulations read with Fourth Schedule. Section 11AA of SEBI Act defines
Collective Investment Scheme wherein management of the property,
contribution, or investment forming part of scheme or arrangement, whether
identifiable or not, are managed on behalf of the investors is of
paramount importance.
4.4
Appointment of trustee under Chapter IV of the Regulation has to be
read in the context of the mandate of the enactment. As per Regulation
16(2) of the Regulations in Chapter IV, the Collective Investment
Management Company shall appoint a trustee who shall hold the assets of
the scheme for the benefit of unit holders. This is further re-emphasised in Fourth Schedule wherein a recordal in the trust deed is provided for to ensure
that investors shall have beneficial
interest in the trust property to the extent of individual holding in
respective schemes.
4.5 Again
under Regulation 21(2) spelling out the rights and obligations of the
trustee, there is a re-emphasis of the whole scheme of the management of
the assets of the scheme. To cite, Regulation 21(2), interalia, specifies that the trustee shall ensure
that the Collective Investment Management Company has appointed auditors
to audit the accounts of the scheme from the list of auditors approved by
the Board, has appointed a compliance officer to comply with the
provisions of the Act and the Regulations and to redress investor
grievances, has prepared a compliance manual and designed internal control
mechanisms including internal audit systems, has not given any undue or
unfair advantage to any associates of the company in any manner,
detrimental to the interests of the unit holders/investors, has operated
the scheme in accordance with the provisions of the trust deed, these
Regulations and the offer documents of the schemes, has undertaken the
activity of managing schemes only and has minimum networth on a continuous basis and shall inform the
Board of any shortfall.
4.6
Regulation 21(3) provides that where the trustee has reason to
believe that the conduct of the business of scheme is not in accordance
with the regulations, trust deed and offer documents of the scheme, the
trustee has to take the remedial steps and shall immediately inform the
Board of the action taken.
4.7
Regulation
21(4) stipulates that the trustee shall be accountable for, and be the
custodian of the funds and property of the respective scheme and shall
hold the same in trust for the benefit of the unit holders in accordance
with the regulations and the provision of trust deed.
4.8
From the
foregoing, it would be evident that the entire regulations relating to CIS
envisages a clear separation of responsibilities from the management
company in the matter of discharging a fiduciary responsibility by the
trustee appointed under the trust deed wherein the assets of the various
schemes will vest. The creation of the trust coupled with the obligations
enjoined upon the trustee are necessary instruments to ensure that the
assets, funds and the property of the respective schemes are managed and
administered for the benefit of the investors in accordance with the
regulations, without being, in any way, misused by the promoters of the
scheme to the detriment of the investors. Various duties assigned to the
trustee including appointment of auditors for getting the accounts of the
schemes audited, for ascertaining the minimum networth on continuous basis and for ensuring
compliance of the Regulations through the Compliance Officer are necessary
adjuncts to further the said objectives as elaborately adumbrated above
and the entire scheme of control of management has been so designed under
the Regulations to ensure that there is an adequate and impartial control
over the various schemes, so that nothing is done by the promoters or the
management company, in their discretionary domain, to harm the interest of
the unit holders. This duty cast upon the trustee becomes doubly more
onerous and sacred, since under 11 AA (2) (iv),
the investors do not have day to day control over the management and
operation of the scheme or management. They are solely dependent on the
trustee for efficient management of the scheme. In the instant case the
fact remains that the management company has not appointed a trustee as
required under Regulation 18(1) of the Regulations. According to the said
Regulations, only persons registered with the Board as Debenture Trustees
under Securities and Exchange Board of India (Debenture Trustee)
Regulations, 1993 shall be eligible to be appointed as trustee of
Collective Investment Scheme. It transpires that the putative trustees
appointed by the company are not as per the requirements of Regulation
18(1).
4.9
Before the
Hon. SAT in the course of hearing earlier on 8th June 2005, the
company took shelter under the plea that SEBI did not inform them
regarding the approved panel of debenture trustees. When it was pointed
out at that time to them by SEBI that the names were available on the
website, the Counsel for the company conceded the same and wanted time to
comply. At the time of hearing before me, it was pointed out by the
learned Counsel of the company that the company is still scouting for
names from the approved panel, though there is a general unwillingness on
the part of the debenture trustees registered with SEBI under SEBI
(Debenture Trustee) Regulations, 1993.
4.10
It has to
be made clear at the outset that it is the duty of the management company
to appoint a trustee from SEBI registered debenture trustees and the same
cannot be skirted on a tenuous plea that the company is not able to enlist
the services of anyone from the SEBI registered debenture trustees,
despite the time that has elapsed since June 2005. In my view this delay
has to be reckoned in the overall context of the case wherein there is
rankling delay in compliance with some of the basic requirements that
alone can impart legitimacy to many of the compliance measures. For
instance, the scheme wise audited financial statement
were submitted on 7th November
2005 for the years
2001-02, 2002-03 and 2003-04. Similarly the company has furnished networth statement of the company for the financial
year ended 31st March
2005. The Networth certificate shows negative networth of Rs.48,16,43,720/-
(excluding revaluation reserves) and a positive networth of Rs.5,32,56,280/- after including
revaluation reserve.
4.11
It is also
further noticed that revaluation was not done periodically and was done
only as on 31/3/2005. The revaluation exercise appears to be
designed to convert the negative networth of the
company into positive networth and much store
cannot be set on that. In any event, the networth of the schemes has not been provided for and
what is of concern is the networth of the
schemes. In addition, the entire revaluation of assets of the company has
been done purportedly under the Companies Act, by including valuation of
standing crops/ timber not forming part of the scheme. The Regulator is
concerned with the networth of the assets under
the scheme valued in accordance with the regulations. Additionally it is
to be pointed out that the requirement under the SEBI Act read with
Regulations are in addition to the requirements under the Companies Act
and accordingly is of material importance for evaluating performance of
the various schemes.
4.12
As also
observed by me supra, none of the compliances in terms of auditing the
accounts, evaluating the minimum networth etc.,
qualify for acceptance, in as much as they were undertaken by the company
under the Companies Act and not by the trustees appointed under the
Regulation 18(1). It is a matter of record that the scheme wise audit
report, though not strictly in sync, for the purpose of this order,
highlights various equally glaring deficiencies and in that view does not
give a stamp of approval to whatever is reportedly being done by the
management company.
4.13
Some of
the points raised by the auditors are as under :
i.
the requirement of schemes being constituted in
the form of a trust and appointment of trustees as per CIS Regulations has
not been complied with.
ii.
In
deviation to the conditions stipulated at the time of grant of provisional
registration, the company has been accepting Unit Capital from investors
till March 2005.
iii.
The
regulations stipulate that none of the schemes shall be open ended and any
scheme shall be kept open for subscription for a maximum of ninety
days. Contrary to this
requirement, all the schemes are open ended.
iv.
Each
scheme shall be launched with trustees approval
along with credit rating obtained from credit agency and appraisal from
appraisal agency. Further,
credit rating and appraisal functions are required to be performed
continuously at the end of every financial year for all the schemes as per
the regulations. These
stipulations are not carried out with regard to all the schemes in
operation.
4.14
In the
attendant circumstances of the case bristling with festering delay,
egregious deficiencies as pointed out in the audit report, jugglery of
numbers through revaluation by including the value of assets outside the
purview of scheme, coupled with the signal failure to ensure the entire
compliance through the instrumentality of trustees under Regulation 18
(1), the modicum of compliance that has been attempted very belatedly is
not de-rigore juris. It is
unfortunate that the management company has taken the de-rigore requirement as an idle formality which can
be fulfilled in seeming compliance by fits and starts at their
convenience. The mandated requirements under the Regulations cannot be
allowed to be trifled with in a manner which will be in derogation of such
requirements under law and the same calls for a serious view.
4.15
None of
the compliance so far attempted can enjoy the stamp of approved
compliance, since the same was sought to be fulfilled in a facile manner
of personal expediency rather than in strict conformity with the
requirements of the Regulations. In so far as the modicum of compliance is
not in the manner prescribed and within the time prescribed under the
Regulations, the same cannot pass muster for the Regulator in relation to
a scheme where the investment of the unit holders/ investors needs to be
sedulously and meticulously monitored by SEBI registered Debenture
Trustees in the manner as prescribed under the Regulations, without being
shortchanged by the discretionary judgment of the promoters and management
of the scheme.
4.16
I also
note that in terms of SAT order dated 28.06.05 SEBI was required to keep
the amount of Rs. 50 lacs deposited by the company with it,pursuant to the SAT
direction dated 11.03.05, during the pendency of
the matter only. Therefore, the said amount with interest if any, needs to be refunded to the company so that the
same may be used by the company for making repayments to the investors of
its Collective Investment Schemes in terms of this order. The concerned
department of SEBI shall taken necessary steps in this regard as
expeditiously as possible.
5.0
ORDER:
5.1
Thus, on a
conspectus of the facts and material circumstances attendant thereto, I,
in exercise of powers conferred upon me under Section 19 and Section 11B
of the Securities and Exchange Board of India Act, 1992 read with
Regulation 65 and 73 of the SEBI (Collective Investment Schemes)
Regulations, 1999, direct M/s. Guru Teak Investments (Mysore) Pvt. Ltd. :
A) to
wind up the existing schemes and repay the investors in the manner
specified in Regulation 73 within a period of 5 ˝ months from the
date
of receipt of this order and submit the winding up and repayment
report
to SEBI in the format specified by SEBI.
B)
to utilize the amount so refunded by SEBI
for making repayment to the
investors in terms of this order.
DATE:08.02.2006
PLACE: MUMBAI
G. ANANTHARAMAN
WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF
INDIA