1. Investment funds created as trusts for art investment — SEBI classification as Collective Investment Schemes — Requirement for registration under SEBI Act. (Para 3 , 4 , 5 , 6 )
Back
Next 
2020 Supreme(SC) 794
SUPREME COURT OF INDIA
ROHINTON FALI NARIMAN, S. RAVINDRA BHAT, V. RAMASUBRAMANIAN, JJ.
Osians Connoisseurs of Art Pvt. Ltd. - Appellant
Versus
Securities and Exchange Board of India & Anr - Respondent
Civil Appeal No. 54 of 2016, 19936 OF 2017, 77 OF 2018
Decided On : 12-02-2020
Important Points
The Court held that a Collective Investment Scheme (CIS) must be operated by a registered Collective Investment Management Company. Operating a CIS through a private trust is illegal, as Section 12(1B) of the SEBI Act and CIS Regulations require such schemes to be registered in corporate form.
Subject
Financial Law - Securities Regulation
Act Referred
CHIT FUNDS ACT: S.2(e)
CIS REGULATIONS: Reg..3
COMPANIES ACT: S.58(a), S.620(a)
RESERVE BANK OF INDIA ACT: S.45(i)
SECURITIES AND EXCHANGE BOARD OF INDIA ACT: S.12(1)(b), S.19, S.11(a)(a)
SECURITIES AND EXCHANGE BOARD OF INDIA COLLECTIVE INVESTMENT SCHEMES REGULATION: Reg..3, Reg.65
CIS REGULATIONS: Reg..3
COMPANIES ACT: S.58(a), S.620(a)
RESERVE BANK OF INDIA ACT: S.45(i)
SECURITIES AND EXCHANGE BOARD OF INDIA ACT: S.12(1)(b), S.19, S.11(a)(a)
SECURITIES AND EXCHANGE BOARD OF INDIA COLLECTIVE INVESTMENT SCHEMES REGULATION: Reg..3, Reg.65
Headnote
Indian Trusts Act, 1882 – Securities and Exchange Board of India Act, 1992 – Sections 11, 12 – SEBI (Collective Investment Scheme) Regulations, 1999 – Regulation 3 – Collective Investment Scheme – Illegal Trust – Securities and Exchange Board of India first apprised appellants, who are trustees of these two Trusts Funds stating that, as these Funds were Collective Investment Schemes, they should apply for certificates of registration insofar as these Funds were concerned. – This was responded to by Fund I denying that activities would amount to activities of a Collective Investment Scheme. – As a result thereof, SEBI issued a Show Cause Notice to show cause as to why Yatra Art Fund should not register itself with SEBI in prescribed corporate form, as otherwise collective investment scheme carried out by Trust would be illegal. – Show cause notice also mentioned that all amounts collected should be refunded within a period of 30 days from said show cause notice. – Appellants responded to aforesaid show cause notice stating that there was no violation of Section 12 (1B) of Securities and Exchange Board of India Act, 1992 read with Regulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999 and as appellants were not registered in form of a company, Regulations themselves would not apply. – Secondly, detailed arguments were made as to why schemes involved could not be said to be collective investment schemes. – One year later, a joint representation to SEBI was made stating that aforesaid schemes floated by appellants were not collective investment schemes, reiterating that they were not made in corporate form – Held, Statutory scheme, therefore, is that, if a collective investment scheme, as defined, is to be floated by a person, it could only be done in form of a collective investment management company and in no other form. – This is the reason why Section 11AA uses expression “company” in sub-Section (2) and not word “person” – Once statutory scheme becomes clear, it is clear that collective investment scheme that was being carried on by appellants in the form of a private Trust would be in the teeth of Statute read with CIS Regulations and would thus be illegal – It is difficult to upset any part of SEBI’s order that remains after penultimate part of order was set aside by Appellate Tribunal. – Court find that this litigation has been going on for an extremely long period of time and instead of remanding matter to SEBI to decide refund issue afresh – Principal amount repayable to each investor of both Schemes shall be paid back – Appeal Disposed of.
Legal Category Hierarchy
Advocates:
Advocate Appeared:
For the Appellant : Mr. Nakul Dewan, Sr. Adv. Mr. Moazzam Khan, Adv. Ms. Shweta Sahu, Adv. Mr. Brijesh Ujjainwal, Adv. Mr. Akshat Goel, Adv. M/s Lex-peritia and Co., AOR Mr. A. N. S. Nadkarni, ASG. Ms. Shirin Khajuria, Adv. Mr. Shekhar Vyas, Adv. Mr. Kunal Chatterji, AOR
For the Respondent: Mr. Siddharth Dias, Adv. Mr. Devansh Gandhi, Adv. Mr. Puneet Sharma, AOR Mr. Chander Uday Singh, Sr. Adv. Mr. Pratap Venugopal, Adv. Ms. Surekha Raman, Adv. Ms. Viddusshi, Adv. Ms. Ayushi Gaur, Adv. Mr. Akhil Abraham Roy, Adv. Mr. Vijay Valsan, Adv. M/s. K J John and Co., AOR
Advocate Appeared:
For the Appellant : Mr. Nakul Dewan, Sr. Adv. Mr. Moazzam Khan, Adv. Ms. Shweta Sahu, Adv. Mr. Brijesh Ujjainwal, Adv. Mr. Akshat Goel, Adv. M/s Lex-peritia and Co., AOR Mr. A. N. S. Nadkarni, ASG. Ms. Shirin Khajuria, Adv. Mr. Shekhar Vyas, Adv. Mr. Kunal Chatterji, AOR
For the Respondent: Mr. Siddharth Dias, Adv. Mr. Devansh Gandhi, Adv. Mr. Puneet Sharma, AOR Mr. Chander Uday Singh, Sr. Adv. Mr. Pratap Venugopal, Adv. Ms. Surekha Raman, Adv. Ms. Viddusshi, Adv. Ms. Ayushi Gaur, Adv. Mr. Akhil Abraham Roy, Adv. Mr. Vijay Valsan, Adv. M/s. K J John and Co., AOR
Table of Contents
2. Whether a trust can be classified as a collective investment scheme given that Section 11AA of the SEBI Act refers to a company. (Para 11 )
3. Section 12(1B) applies to any person, but CIS Regulations mandate that such schemes be operated only through a registered Collective Investment Management Company. (Para 12 , 13 )
4. A collective investment scheme must be operated in the form of a collective investment management company; operating such a scheme as a private trust is illegal. (Para 13 , 14 )
5. Appeal disposed of with directions to refund principal and interest to investors within specified timelines. (Para 16 , 17 , 20 , 21 , 23 )
6. Can a collective investment scheme be operated by a private trust?
No. While Section 12(1B) of the SEBI Act refers to a person, the CIS Regulations mandate that only a Collective Investment Management Company, incorporated under the Companies Act, can sponsor or carry on a collective investment scheme. (Para 12 , 13 , 14 )
7. Does the use of the word company in Section 11AA of the SEBI Act exempt non-corporate entities from CIS regulations?
No. The statutory scheme requires that if a person floats a collective investment scheme, it must be done in the form of a collective investment management company. (Para 13 )
8. What is the legal consequence of operating a collective investment scheme in a form other than a registered company?
Such an arrangement is considered to be in the teeth of the statute and the CIS Regulations, rendering the scheme illegal. (Para 14 )
JUDGMENT :
R. F. NARIMAN, J.
CIVIL APPEAL NO. 54 OF 2016
1. Learned senior counsel appearing for the appellant seeks permission of the Court to withdraw the civil appeal.
2. The civil appeal is allowed to be withdrawn.
CIVIL APPEAL NO. 19936 OF 2017
3. The brief facts leading to the filing of the present civil appeal are as follows:
Two trusts named Yatra Art Fund Trust (Fund I) and Yatra Art Fund II (Fund II) were created under the Indian Trusts Act, 1882, through execution of Indentures of Trust dated 15.06.2005 and 01.12.2006.
4. A perusal of the trust deed shows that both these trust Funds were created for an initial period of 4-4½ years, the first Fund ending, after extension of one year, on 15.09.2011. Insofar as the second Trust Fund is concerned, this Trust Fund was also extended and ended on 31.01.2012. It may also be mentioned that these Trusts Funds were established so that investors could invest in works of art. In the Confidential Information Memorandum, it was made clear to the investors that these were investments which were fraught with grave risks and that the investors invest in these Trust Funds with open eyes knowing of the aforesaid risks.
5. So far as the first Fund was concerned, a total corpus amounting to Rs.10.95 crores was collected from the investors. We are informed that 50 such investors invested in this Fund. So far as the second Fund is concerned, the total corpus was Rs.21.92 crores, with 132 persons having so invested.
6. On 18.06.2007, the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) first apprised the appellants, who are the trustees of these two Trusts Funds stating that, as these Funds were Collective Investment Schemes, they should apply for certificates of registration insofar as these Funds were concerned. This was responded to by Fund I on 16.07.2007, denying that the activities would amount to the activities of a Collective Investment Scheme. As a result thereof, on 12.10.2007, SEBI issued a Show Cause Notice to show cause as to why the Yatra Art Fund should not register itself with SEBI in the prescribed corporate form, as otherwise the collective investment scheme carried out by the Trust would be illegal. The show cause notice also mentioned that all amounts collected should be refunded within a period of 30 days from the said show cause notice. On 05.11.2007, the appellants responded to the aforesaid show cause notice stating that there was no violation of Section 12 (1B) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) read with Regulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999 (hereinafter referred to as ‘ CIS REGULATIONS ’); and as the appellants were not registered in the form of a company, the Regulations themselves would not apply. Secondly, detailed arguments were made as to why the schemes involved could not be said to be collective investment schemes. One year later, on 03.11.2008, a joint representation to SEBI was made stating that the aforesaid schemes floated by the appellants were not collective investment schemes, reiterating that they were not made in the corporate form.
7. It appears that, at this point of time, SEBI itself was unsure as to whether such funds would amount to collective investment schemes. However, in 2013, the matter was resuscitated and after giving the appellants a hearing, inasmuch as as many as nine investors complained with regard to Trust Fund No.2, including an Investors’ Association, an order was delivered by the whole-time member of SEBI on 06.11.2015 as follows:
“29. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11 and 11B thereof and Regulation 65 of the SEBI (Collective Investment Scheme) Regulation, 1999, hereby issue the following directions:
a. Yatra Art fund shall abstain from collecting any money from the investors or launch or car
