Osians Connoisseurs ... v. Securities And Excha..., Supreme Court Of India, Judgment, Law, casemine.com

Citation Codes

Neutral Citations

2020 INSC 174

Equivalent Citations

citation codes

Case Number

Civil Appeal No. 54 of 2016, Civil Appeal No. 19936 of 2017, Civil Appeal No. 77 of 2018

Judges

Justice S. Ravindra Bhat
Justice R.F. Nariman
Justice V. Ramasubramanian

Acts

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
SECTION 19 SECURITIES AND EXCHANGE BOARD OF INDIA ACT 1992
SECTION 45 I RESERVE BANK OF INDIA ACT 1934
clause (e) of section 2 of the Chit Fund Act, 1982; (viii)
section 620A of the Companies Act, 1956; (vii)
section 58A of the Companies Act, 1956; (vi)
CO OPERATIVE SOCIETIES ACT 1912
sub- section (2) or sub-section (2A),
Section 11 (2)(c) of the SEBI Act
Indian Trusts Act, 1882,
Provisions Act, 1952; (v)
COMPANIES ACT 1956

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Smart Summary

Factual and Procedural Background

Two trusts—Yatra Art Fund Trust (Fund I) and Yatra Art Fund II (Fund II)—were constituted under the Indian Trusts Act, 1882 by indentures dated 15 June 2005 and 1 December 2006. Both funds were created to pool investments for purchasing works of art and were initially intended to run for four years, later extended to 15 September 2011 (Fund I) and 31 January 2012 (Fund II). Fund I collected a corpus of ₹10.95 crore from 50 investors while Fund II collected ₹21.92 crore from 132 investors.

On 18 June 2007 the Securities and Exchange Board of India (SEBI) informed the trustees that the activities constituted a Collective Investment Scheme (CIS) and required registration. The trustees denied SEBI’s jurisdiction, arguing that the schemes were not CIS and that the CIS Regulations applied only to “companies,” not to trusts. SEBI issued a show-cause notice on 12 October 2007 directing registration or refund of monies within 30 days. After exchanges of correspondence, SEBI passed an order dated 6 November 2015 directing, inter alia, refund of the entire corpus with 10 percent annual interest and restraining the Fund from accessing the securities market for four years.

The trustees appealed to the Securities Appellate Tribunal (SAT), which on 21 August 2017 affirmed SEBI’s finding that the schemes were CIS but set aside directions requiring initiation of criminal proceedings and attachment of assets, and remanded the refund mechanism to SEBI. The trustees then filed Civil Appeal No. 19936 of 2017 in the Supreme Court. A related Civil Appeal No. 54 of 2016 was withdrawn at the outset of the hearing.

Legal Issues Presented

Whether the investment schemes operated through Yatra Art Fund Trust and Yatra Art Fund II constitute “Collective Investment Schemes” under Section 11AA of the SEBI Act, 1992.
Whether SEBI’s regulatory power over CIS extends to schemes operated in the form of trusts rather than companies.
Whether SEBI’s directions to refund investors’ monies with interest and to restrain market access were valid and enforceable.

Arguments of the Parties

Appellants (Trustees of Yatra Art Fund)

The schemes are not “collective investment schemes” within the meaning of Section 11AA because that provision refers to schemes “made or offered by any company,” whereas the funds are organized as trusts.
Section 12(1B) and the CIS Regulations, 1999, which contemplate regulation of a “collective investment management company,” do not apply to non-corporate entities such as trusts.
Consequently, SEBI lacked jurisdiction to demand registration or order refunds.

Respondent (SEBI)

The four indicia in Section 11AA(2) are satisfied: investors pool contributions; they seek returns; the property is managed on their behalf; and investors lack day-to-day control.
The term “person” in Section 12(1B) and SEBI’s general regulatory mandate under Section 11(2)(c) encompass trusts as well as companies.
Therefore, the schemes were unregistered CIS, justifying SEBI’s directions to refund monies and restrain market access.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Osians Connoisseurs of Art Private Limited v. Securities and Exchange Board of India & Anr. (SAT, 13 Oct 2015)	Defines parameters for treating art-fund arrangements as Collective Investment Schemes and delineates appropriate remedial directions.	The SAT relied on this decision when partly modifying SEBI’s order; the Supreme Court noted that reliance but found no reason to disturb the concurrent findings.

Court's Reasoning and Analysis

The Supreme Court examined Sections 11, 11AA and 12(1B) of the SEBI Act along with the CIS Regulations, 1999. It emphasised that:

Section 11(2)(c) authorises SEBI to regulate “collective investment schemes” generally.
Section 12(1B) bars any “person” from operating a CIS without registration, demonstrating that the legislature intentionally used a broad term not confined to corporate entities.
The appellants’ reliance on the word “company” in Section 11AA was misplaced because Section 12(1B) and the CIS Regulations, read conjointly, extend the registration requirement to all persons, including trusts.
The factual matrix satisfied all four statutory criteria in Section 11AA(2)—pooling of funds, expectation of returns, management on behalf of investors, and lack of investor control—thereby classifying the schemes as CIS.

Consequently, the Court found no ground to disturb the concurrent findings of SEBI and the SAT. The appellants’ distinction between trusts and companies “does not commend itself” to the Court.

Holding and Implications

Civil Appeal No. 54 of 2016: ALLOWED TO BE WITHDRAWN.

With respect to Civil Appeal No. 19936 of 2017, the Court indicated that it was “difficult to interfere with the concurrent findings” that the schemes were CIS and rejected the appellants’ statutory interpretation argument. The precise final order is not reproduced in the excerpt, but the Court’s reasoning upholds SEBI’s jurisdiction and the SAT’s conclusions.

Implications: The decision affirms SEBI’s authority to regulate unregistered investment schemes irrespective of the legal form in which they are structured. Trust-based pooling arrangements that meet the Section 11AA criteria fall squarely within SEBI’s CIS regulatory framework, reinforcing investor-protection mandates without creating new precedent beyond application of existing statutory provisions.

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Osians Connoisseurs Of Art Pvt. Ltd . (S) v. Securities And Exchange Board Of India And Another (S).

R. F. NARIMAN, J. CIVIL APPEAL NO. 54 OF 2016 Learned senior counsel appearing for the appellant seeks permission of the Court to withdraw the civil appeal. The civil appeal is allowed to be withdrawn. CIVIL APPEAL NO. 19936 OF 2017 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 CIVIL APPEAL NO. 54 OF 2016 etc. dated 15.06.2005 and 01.12.2006. A perusal of the trust deed shows that both these trust Funds were created for an initial period of 4-4 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 Trusts Funds with open eyes knowing of the aforesaid risks. 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. 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 CIVIL APPEAL NO. 54 OF 2016 etc. 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. 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 CIVIL APPEAL NO. 54 OF 2016 etc. 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 carry out any Collective Investment Schemes including the scheme which have been identified as a Collective Investment Scheme in this Order. b. Yatra Art Fund is directed to refund the entire monies collected by it under its scheme to all the investors along with the returns at the rate of 10% per annum, within a period of three months from the date of this Order and thereafter, within a period of fifteen days, submit a winding up and repayment report to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, including the trail of funds claimed to be refunded, bank account statements indicating refund to the investors and receipt from the investors acknowledging such refunds. c. Yatra Art Fund is restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market for a period of four (4) years. d. Yatra Art Fund is also directed to immediately submit the complete and detailed inventory of the assets owned by Yatra Art Fund. e. In the event of failure by Yatra Art Fund to comply with the above directions, the following actions shall follow: - Yatra Art Fund shall remain restrained from accessing the securities market and would furhter be prohibited from buying, selling or otherwise dealing in securities, even after the period of four (4) years of restraint imposed in Paragraph 29(c) above, till all the monies mobilized through such schemes are refunded to its investors with interest, which CIVIL APPEAL NO. 54 OF 2016 etc. are due to them. - SEBI would make a reference to the State Government/Local Police to register a civil/criminal case against Yatra Art Fund, its promoters, directors and its managers/ persons in-charge of the business and its schemes, for offences of fraud, cheating, criminal breach of trust and misappropriation of public funds; and - SEBI shall also initiate attachment and recovery proceedings under the SEBI Act and rules and regulations framed thereunder. An appeal was carried to the Securities Appellate Tribunal, which was then disposed of on 21.08.2017, following the Appellate Tribunals judgment dated 13.10.2015 in Osians Connoisseurs of Art Private Limited v. Securities and Exchange Board of India & Anr. It may be pointed out that the Appellate Tribunal set aside the paragraphs of the SEBIs order which required the State Government to make a reference to register civil/criminal cases against the Fund and initiate attachment and recovery proceedings under the SEBI Act and Rules and Regulations. However, insofar as paragraph 29 (b) set out hereinabove of SEBIs order was concerned, the Appellate Tribunal remanded the matter to SEBI, adopting the reasoning contained in the earlier Tribunal judgment of 13.10.2015 as follows: For the reasons stated in our order in Appeal No. 62 of 2013 decided on October 13, 2015 the present appeals are disposed of in terms set out therein Having heard Shri K.V. Vishwanathan, learned senior CIVIL APPEAL NO. 54 OF 2016 etc. counsel appearing for the appellants and Shri C. U. Singh, learned senior counsel appearing for the respondent-SEBI, for some time, it would not be possible to state that the Schemes in the present case would not be Collective Investment Schemes. It is difficult, therefore, to interfere with the concurrent findings made in this behalf by both SEBI and the Appellate Tribunal. Further, the arguments made by Shri Vishwanathan, learned senior counsel, based upon the language of Section 11AA of the SEBI Act does not commend itself to us. It may be mentioned that Section 11 (2)(c) of the SEBI Act states as follows:

11 (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for- (c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds; In 1995, Section 12(1B) was introduced, by which it became clear that no person can sponsor or cause to be sponsored or carry on or cause to be carried on any collective investment scheme unless he obtains a certificate of registration from the Board in accordance with the regulations. What is of importance is to notice that the expression CIVIL APPEAL NO. 54 OF 2016 etc. person is used by Section 12(1B). However, in 1999, by amendment, Section 11AA was introduced in which it was stated as follows: 11AA. Collective investment scheme.- (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) or sub-section (2A) shall be a collective investment scheme: Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme. (2) Any scheme or arrangement made or offered by any company under which,-

(i) the contributions, or payment 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. (2A) Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act. (3) Notwithstanding anything contained in sub- section (2) or sub-section (2A), any scheme or arrangement

(i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State; CIVIL APPEAL NO. 54 OF 2016 etc.

(ii) under which deposits are accepted by non- banking financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934;

(iii) being a contract of insurance to which the Insurance Act, 1938, applies;

(iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952;

(v) under which deposits are accepted under section 58A of the Companies Act, 1956;

(vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956;

(vii) falling within the meaning of Chit business as defined in clause (e) of section 2 of the Chit Fund Act, 1982;

(viii) under which contributions made are in the nature of subscription to a mutual fund;

(ix) such other scheme or arrangement which the Central Government may, in consultation with the Board, notify, shall not be a collective investment scheme. Based on the aforesaid, Shri Vishwanathan argued that it would not be possible for him to fall foul of the law considering that Section 11AA uses the word company and not person, and as his client carried on this business in the form of a Trust, the provisions of SEBI Act would not be attracted at all. This argument would fly in the face of both Section 12(1B) and the CIS Regulations, in particular, Regulation 2(h), which defined a Collective Investment Management CIVIL APPEAL NO. 54 OF 2016 etc. Company as follows: (h) Collective Investment Management Company means a company incorporated under the Companies Act, 1956 and registered with the Board under these regulations, whose object is to organise, operate and manage a collective investment scheme; Regulation 3 of the CIS Regulations states:

Osians Connoisseurs ... v. Securities And Excha...