IN THE GAUHATI HIGH COURT (THE HIGH COURT OF ASSAM, NAGALAND, MIOZRAM AND ARUNACHAL

PRADESH)

WP(C) 4298/2013

1. Rose Valley Hotels and Entertainments Ltd, a company registered under the Companies Act, 1956 with the registered and head office at R.B./29, Raghunathpur, VIP Road, Kolkata 700 059 and the regional office at Peace Enclave, Ulubari, G.S. Road post office, Paltan Bazar police station, Guwahati 7 and branch offices at various corners of the state of Assam.

2. Sri Gautam Kundu, Chairman, Rose Valley Hotels and

Entertainments Ltd, a company registered under the Companies Act, 1956 with his office at R.B./29, Raghunathpur, VIP Road, Kolkata 700 059 as well as at Peace Enclave, Ulubari, G.S. Road post office, Paltan Bazar police station, Guwahati 7, Assam.

3. Shri Shibamoy Dutta, Managing Director, Rose Valley Hotels

and Entertainments Ltd, a company registered under the Companies Act, 1956 with his office at R.B./29, Raghunathpur, VIP Road, Kolkata 700 059 as well as at Peace Enclave, Ulubari, G.S. Road post office, Paltan Bazar police station, Guwahati 7, Assam.

4. Shri Ashoke Saha, Director, Rose Valley Hotels and

Entertainments Ltd, a company registered under the Companies Act, 1956 with his office at R.B./29, Raghunathpur, VIP Road, Kolkata 700 059 as well as at Peace Enclave, Ulubari, G.S. Road post office, Paltan Bazar police station, Guwahati 7, Assam.

5. Shri Salil Gupta, son of Late Ram Provat Gupta, resident of

Colony Bazar, Lokhra Road, Binova Nagar post office, Fatashil-Ambari police station, Kalapahar, Guwahati 18, holding the post of Senior Regional Manager, Rose Valley Hotels and Entertainments Ltd, a company registered under the Companies Act, 1956 with his office at Peace Enclave, Ulubari, G.S. Road post office, Paltan Bazar police station, Guwahati 7, Assam.

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6. Sri Ruhini Barthakur, son of late Sarbeshwar Barthakur, resident of Raghubari village, Dikhowmukh post office, Gourisagar police station, Shivasagar district, Assam, Pin 785 664, holding the post of branch manager, Jorhat branch office, Rose Valley Hotels and Entertainments Ltd.

Petitioner.

-versus-

1. State of Assam represented by the Chief Secretary to the

government of Assam in the Home department having his office at Dispur, Guwahati 781 006, Kamrup metro district, Assam.

2. The Secretary, Home department, government of Assam, with

his office at Dispur, Guwahati 781 006, Kamrup metro district, Assam.

3. The Director-General of Police, Bureau of Investigation(E.O.)

Assam with his office at Srimantapur, Guwahati 781 032, Kamrup metro district, Assam.

4. The Additional Director-General of Police, Bureau of

Investigation(E.O.) with his office at Srimantapur, Guwahati 781 032, Kamrup metro district, Assam.

5. Inspecting Officer, Bureau of Investigation(E.O.) Assam

with his office at Srimantapur, Guwahati 781 032, Kamrup metro district, Assam.

6. The Director-General of Police, Assam with his office at

Ulubari, Guwahati 781 007, Kamrup metro district, Assam.

7. Officer-in-charge, Jorhat police station with his office at Jorhat, Jorhat post office and police station, Assam 785 001.

8. Officer-in-charge, Barpeta police station having his office at

Barpeta, Assam.

9. Assistant Sub-inspector of Police, Barpeta police station with his office at Barpeta district, Assam.

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10. Officer-in-charge, Haflong police station with his office at Haflong, NC Hills district, Assam.

11. Assistant Sub-inspector of Police, Haflong police station

with his office at Haflong, NC Hills district, Assam. 12.The Union of India represented by the Secretary(Legislative

department), Ministry of Law, Justice and Company Affairs with his office at 4th floor, A wing, Shastri Bhawan, New Delhi 110 001.

13. Securities and Exchange Board of India, a statutory body

constituted under the Securities Exchange Board of India Act, 1992 with its office at SEBI Bhawan, plot C-4A, G block, Bandra Kurla complex, Mumbai 400 051 and also its branch office at L&T Chamber, 16 Camac Street, Kolkata 700 017 and NEDFI House, 4th floor, G.S. Road, Dispur, Guwahati 781 006.

14.Sri S. Raman, the whole time member, Securities Exchange

Board of India with his office at SEBI Bhawan, plot C-4A, G block, Bandra-Kurla complex, Mumbai – 400 051.

Respondent.

For the petitioner : Shri L. Nageswar Rao Sr Advocate, with Shri S. Deb Sri S. Lodh Sri S Chetia Sri JP More.

For the Union of India : Sri S.C. Keyal Assistant Solicitor-General

of India. For the State : Sri U Rajbongshi Additional Advocate-General

For the respondent 12 and 13 : Smt. M. Hazarika Sr Advocate.

Date of hearing and order : 25.6.2015

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BEFORE HON’BLE THE CHIEF JUSTICE(ACTING) MR. K. SREEDHAR RAO

HON’BLE MR JUSTICE P. K. SAIKIA

JUDGMENT-AND-ORDER

Sri K. Sreedhar Rao, Chief Justice(Acting)

The petitioner is a company registered under the Companies Act, 1956

with the head office in Kolkata and the regional office at Guwahati and

branch offices in various parts of the state of Assam. The company which

owns several hotels all over the country floated a scheme ~ Holiday

Membership Plan(HMP) ~ calling for monthly investments up to 3 to 5 years

under different categories styled as standard, silver, gold, platinum and

diamond from different categories of persons ~ middle to aristo ~ and on

completion of the subscription for the period of contract offered the facility of

free stay in its hotels for a period between 3 and 4 days with extra payment

for food and other entertainments. The terms of the scheme also declare that

after completion of the subscribed period if for any reason the subscriber is

unable to avail the benefit of stay in hotels the amounts subscribed would

be refunded with an agreed rate of interest as per the agreement.

2) In the writ petition the total number of subscription to the scheme is

not stated. However, it is stated that about 2,50,000 persons in the state of

Assam have subscribed to the HMP scheme. One of the subscribers lodged a

complaint against the petitioner company alleging fraud. The Bureau of

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Investigation(Economic Offences) of the state of Assam took up investigation,

conducted raids and searches and in course of the investigation has found

the petitioner company collected about Rs 1006.70 crore till February, 2012

from various subscribers. The documents seized in the search proceedings

were sent to the Security Exchange Board of India(SEBI) and on the basis of

which the SEBI passed the impugned order which is as follows.

“WTM/SR/ERO - CIS/11/ 07/2013

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI

CORAM: S. RAMAN, WHOLE TIME MEMBER

ORDER

Under sections 11(1), 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 read with Regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999 in the matter of Rose Valley Hotels and Entertainments Limited.

1. The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had

received a letter dated June 20, 2012, from the Additional Director General of Police,

Office of the Director, Bureau of Investigation (E. O.), Assam, Guwahati (hereinafter

referred to as “ADGP, Assam Police”), regarding the raising of funds by M/s Rose

Valley Hotels and Entertainments Limited (hereinafter referred to as “RVHEL”) and

M/s Rose Valley Real Estates Constructions Limited (hereinafter referred to as

“RVRECL”). As per the aforesaid letter, RVHEL and RVRECL were stated to have

collectively raised ₹1006.70 Crores from the public till February 2012. Further, RVHEL

was stated to have launched a scheme titled Rose Valley Holiday Membership Plan

(hereinafter referred to as “HMP”) in the year 2010. Under the HMP, an investor can

book a holiday package through payment of monthly installments and upon maturity

or completion of tenure for monthly installments, such investor can either avail of the

facilities i.e. room accommodation and services or opt for maturity payment i.e. a

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return on the investment with annualized interest. A brochure, application form

containing the terms and conditions of the HMP alongwith a confirmation Certificate

evidencing subscription to such HMP, were also annexed with the aforesaid letter.

2. As a matter of preliminary enquiry in order to ascertain whether or not RVHEL was

carrying on activities of a ‘collective investment scheme’, SEBI vide letter dated March

1, 2013, advised RVHEL to submit the following documents relating to the HMP, by

March 15, 2013, viz. –

i. Total number of individuals who have subscribed to the plan(s);

ii. Details (number of rooms available, etc.) about the accommodation

provided/projected to be provided;

iii. Total number of individuals who have actually availed the services (accommodation)

under the plan(s);

iv. Details of assets held by RVHEL;

v. Total amount refunded by RVHEL towards principal investment and towards interest.

3. RVHEL vide letter dated March 15, 2013, replied that it was in ‘Time Share’ business,

which does not come under the purview of SEBI. In this regard, RVHEL drew reference

to a meeting organised on February 11, 2013, at the instance of the Secretary,

Institutional Finance and Programme Implementation Department, Government of

Jharkhand at Ranchi (hereinafter referred to as “Joint Secretary, Govt. of

Jharkhand”) to discuss the business activities of RVHEL, which was attended by

representatives of SEBI and RVHEL. RVHEL submitted that since the SEBI

representative present at such meeting had mentioned that ‘Time Share’ Schemes do

not come under SEBI purview, it was at a loss to understand the reasons behind

SEBI's advice to furnish various information in connection with the ‘Time Share’

business.

4. Subsequent to receipt of the abovementioned letter dated March 15, 2013, SEBI vide

letter dated March 19, 2013, replied to RVHEL as under –

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i. It was incorrect to state that SEBI had already concluded that the scheme of RVHEL

did not come under its purview since the object of the meeting organised on

February 11, 2013, was to brief the Joint Secretary, Govt. of Jharkhand, on the Writ

Petition pending at Kolkata High Court between SEBI and RVRECL.

ii. Immediately after the aforesaid meeting, SEBI had addressed a letter dated February

13, 2013 to the Joint Secretary, Govt. of Jharkhand, to advise RVHEL to furnish the

documents mentioned at para 2 supra, for ascertaining whether it comes under the

purview of 'collective investment schemes' as specified in the SEBI Act, 1992

(hereinafter referred to as “SEBI Act”).

In addition to the above, RVHEL was once again advised vide the SEBI letter dated

March 19, 2013, to submit the documents mentioned at para 2 supra to SEBI by

March 31, 2013, failing which, RVHEL would be liable to be proceeded against under

the SEBI Act and the Regulations made thereunder.

5. RVHEL vide letter dated April 02, 2013, inter alia replied to the abovementioned SEBI

letter as under –

“Your letter under reference (SEBI letter dated March 19, 2013) is without Jurisdiction

and uncalled for.

It appears from your above letter that you are attempting to wrongfully proceed

against us in a pre-decided manner by giving reference as ‘Schemes of Rose Valley

Hotels and Entertainments Ltd. without registration of SEBI’.

From the correspondence exchanged between yourself and us it is clear that you have

not even considered the business of Rose Valley Hotels and Entertainments Ltd.

coming under the purview of SEBI Act in any manner whatsoever.

We deny that it is incorrect to say that the scheme of Rose Valley Hotels and

Entertainments Ltd. do not come under your purview as alleged. We deny that you

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have any jurisdiction to enquire into the affairs of the company which as per your

admission does not come under your purview. …”.

6. While the preliminary inquiry was in progress, SEBI received an ad interim Order dated

June 12, 2013 (hereinafter referred to as “Interim Order”), from the Government of

Tripura. Vide the aforesaid Order, which was passed by the Sub-Divisional Magistrate

Sadar, West Tripura (hereinafter referred to as “SDM, West Tripura”) in accordance

with the provisions of the Tripura Protection of Interests of Depositors (in Financial

Establishments) (Amendment) Act, 2011 (hereinafter referred to as "Financial

Establishments Act"), the following restrictions were imposed with immediate effect

against the Agartala Regional Office of RVHEL –

“1. The Rose Valley, Agartala, is henceforth restrained from collecting or mobilizing

any kind of monetary deposits from the public under any of the plan or schemes of the

Rose Valley Hotels and Entertainments Ltd., or of any other subsidiary comprised in

the Rose Valley Group, until requisite statutory registrations, licenses and permissions

are obtained, and produced to the satisfaction of the Competent Authority as defined

under the Financial Establishments Act and until such restriction is revoked by a

subsequent Order.

2. The Rose Valley, Agartala, shall make all due payment of entitlements of all its

existing depositors against the plans/schemes such depositors hold under any

nomenclature by the 31st July, 2013 and submit a compliance report accordingly to the

Competent Authority as defined under the Financial Establishments Act.

3. Rose Valley Hotels and Entertainments Ltd., the Rose Valley Group as a collective

entity, or any of the subsidiary companies of the Rose Valley Group, including the

Directors and Associates, are hereby restrained from executing sale, transfer or alter

the moveable and immoveable properties listed in the Statement annexed hereto and

marked as Annexure – A, and any other moveable or immoveable properties subsisting

or under construction anywhere in Tripura that is not mentioned in the Annexure – A,

but otherwise legitimately belongs to the Rose Valley Hotels and Entertainments Ltd.,

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the Rose Valley Group as a collective entity, or any of the subsidiary companies of the

Rose Valley Group.”

7.1 The material available on record i.e. letter forwarded by the ADGP, Assam Police

alongwith the annexures therein; the correspondences between SEBI and RVHEL; the

Interim Order passed by the SDM, West Tripura alongwith the annexures therein, etc.

have been perused. In this context, I note that RVHEL has not denied accepting funds

from the public under its HMP. In view of the aforesaid fact and on the basis of the

material available on record, I find it necessary to proceed with the instant matter, to

determine whether or not the HMP offered by RVHEL is a ‘collective investment

scheme’ in accordance with section 11AA of the SEBI Act.

7.2 Section 11AA of the SEBI Act reads as follows:

“(1) Any scheme or arrangement which satisfies the conditions referred to in subsection

(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 solely 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.”

7.3. RVHEL has submitted that it is in ‘Time Share’ business and therefore will not come

under SEBI's purview. On this ground, RVHEL has refused to submit documents in

respect of the HMP, to SEBI. On an examination of the material available on record, it

is prima facie observed that –

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i. RVHEL offers different membership plans under the HMP i.e. standard, silver, gold,

platinum and diamond, to intended investors.

ii. When an investor subscribes to a particular plan offered under the HMP, he is

required to make monthly payments on advance or installment basis towards

provisional allotment of facilities i.e. room accommodation and services, at resorts

or hotels owned and managed by RVHEL.

iii. The HMP plan once subscribed to, cannot be cancelled nor can the money paid in

lieu of the facilities offered be claimed, before the expiry of tenure for such plan.

iv. Upon maturity or completion of tenure for payment of monthly installments in

respect of the relevant HMP plan, the investor becomes entitled to the facilities

offered therein. However, such investor may also cancel the HMP booking upon

maturity or completion of tenure for monthly installments, in lieu of maturity

payment for non-utilization of the facilities i.e. the equivalent accumulated credit

value under the HMP inclusive of annualized interest. For example, when an

investor opts for maturity payment in the event of cancellation of the HMP

booking under a particular scheme (HA4-5-STD), after making the payment of 60

monthly installments of ₹500 each, he would get a refund of ₹ 48,000, which is a

return of 17.65% of annualized interest to the investor.

v. The rates of annualized interest offered under the various membership plans of

the HMP is reproduced below –

Type of Membership Plan Annualised Interest Standard 11.96% - 17.65%

Silver 11.21 % Gold 12.61%

Platinum 15.38% Combined Scheme – Diamond 11.2%

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vi. In his letter to SEBI, the ADGP, Assam Police stated that out of 21.90 Lakh investors

of RVHEL, 4.13 Lakh have opted for maturity payment instead of availing the

facilities offered under the HMP. As per the Interim Order passed by the SDM,

West Tripura, RVHEL is alleged to have taken "recourse to unilateral and

spontaneous cancellation of bookings of hotels in a routine manner so as to make

returns" to the investors under the HMP. Further, the Interim Order states that

complaints from the public have also been received by the Government of Tripura

inter alia alleging RVHEL failed to entertain claims from such investors for maturity

payment, on time.

7.4 From the abovementioned details in respect of the HMP offered by RVHEL, I note that

–

i. RVHEL operates investment plans through the HMP, which it offers to the public. The

contribution in the form of monthly installments made by investors in response to

plans offered under the HMP are pooled and utilized for the purpose of the HMP;

ii. Such contributions towards plans offered under the HMP are made by the investors

with a view to receive profits or income in the form of returns with annualized

interest i.e. maturity payment.

iii. The resorts and hotels, which are part of the HMP, are wholly owned and managed

by RVHEL Further, the contributions made by investors to the HMP are managed

on their behalf, by RVHEL.

iv. RVHEL has complete control on the plans offered by it under the HMP.

In view of the above, I find that the HMP has all the ingredients of a 'collective

investment scheme' as defined in section 11AA of the SEBI Act, as reproduced at para

7.2 supra, for ready reference.

7.5 RVHEL has submitted that SEBI does not have any jurisdiction to enquire into its

affairs since SEBI has admitted before the Joint Secretary, Govt. of Jharkhand that

'Time Share' business does not come under its purview. In this regard, I note that vide

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letter dated March 19, 2013, RVHEL was informed that it was incorrect to state that

SEBI had concluded that its scheme did not come under SEBI's purview since the

object of the meeting organised on February 11, 2013, was to brief the Joint

Secretary, Govt. of Jharkhand, on the Writ Petition pending at Kolkata High Court

between SEBI and RVRECL. RVHEL was also informed that pursuant to the aforesaid

meeting, SEBI had written to that authority vide letter dated February 13, 2013, to

advise RVHEL to furnish relevant documents in order for SEBI to ascertain whether it

comes under the purview of 'collective investment schemes' as specified in the SEBI

Act.

7.6 I note that although RVHEL has submitted that it is in 'Time Share' business and

therefore outside SEBI's purview, the main characteristics of a 'collective investment

scheme' are found in the HMP offered by it. In this context, it may be pertinent to

refer to the observations of the Hon'ble Supreme Court of India in P.G.F Limited & Ors.

vs. UOI & Anr. (MANU/SC/0247/2013), wherein it had observed: “...sub-section (2) of

Section 11 AA, 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.” In view of these

observations, I find that the SEBI Act is applicable to ‘collective investment schemes’

that engage in inviting investments or contributions from investors for investing in any

asset which will inter alia result in a return on such investment. In this regard, the

activity of fund mobilization under the HMP by RVHEL with a resultant promise of

returns when considered in light of the other features of the HMP, as discussed in the

preceding paragraphs, prima facie falls within the ambit of 'collective investment

scheme' as defined under section 11AA of the SEBI Act.

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7.7 I note that in terms of section 12(1B) of the SEBI Act, "no person shall sponsor or

cause to be sponsored or cause to be carried on a 'collective investment scheme'

unless he obtains a certificate of registration from the Board in accordance with the

regulations”. Regulation 3 of the SEBI (Collective Investment Schemes) Regulations,

1999 (hereinafter referred to as "CIS Regulations"), provides that no person other

than a Collective Investment Management Company which has obtained a certificate

under the CIS Regulations shall carry on or sponsor or launch a 'collective investment

scheme'. Therefore, a person can launch or sponsor or cause to sponsor a 'collective

investment scheme' only if it is registered with SEBI as a Collective Investment

Management Company. In my view, therefore, the launching/floating/sponsoring or

causing to sponsor any 'collective investment scheme' by any 'person' without

obtaining the certificate of registration in terms of the provisions of the CIS

Regulations is in contravention of section 12(1B) of the SEBI Act and regulation 3 of

the CIS Regulations. In this regard, I note that RVHEL has not obtained any certificate

of registration under the CIS Regulations for its fund mobilizing activity from the

public, under the HMP offered by it.

7.8 Upon a consideration of the aforementioned paragraphs, I am of the view that RVHEL

is prima facie engaged in fund mobilising activity from the public, by floating or

sponsoring or launching 'collective investment schemes' as defined in section 11AA of

the SEBI Act without obtaining a certificate of registration from SEBI as required under

section 12(1B) of the SEBI Act and the CIS Regulations. I, therefore, find that SEBI

has full jurisdiction to proceed against RVHEL in the instant matter.

8. I note that RVHEL was advised to respond to the preliminary enquiry conducted by

SEBI, on two occasions through SEBI letters dated March 1, 2013 and March 19, 2013.

However, on both occasions, RVHEL did not cooperate with SEBI as is evident from its

refusal to submit the documents sought vide the aforesaid letters. In these

circumstances, I find that reasonable opportunity has been afforded to RVHEL to

respond to SEBI and its refusal do so, when considered in the context of the

abovementioned prima facie finding, leads me to believe that such refusal to submit

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the information sought was only to conceal the true nature and operation of the fund

mobilising activity under the HMP.

9. Protecting the interests of investors is the first and foremost mandate for SEBI and

therefore, steps have to be taken in the instant matter to ensure only legitimate

investment activities are carried on by RVHEL and no investors are defrauded. In light

of the same, I find there is no other alternative left but to take recourse through an

interim action against RVHEL for preventing it from further carrying on with its fund

mobilising activity related to 'collective investment scheme', without registration from

SEBI.

10. In view of the foregoing, I, in exercise of the powers conferred upon me under

sections 11(1), 11B and 11(4) of the SEBI Act read with Regulation 65 of CIS

Regulations, hereby direct RVHEL and its Directors:

a. not to collect any more money from investors including under the existing schemes;

b. not to launch any new schemes;

c. not to dispose of any of the properties or alienate any of the assets of the schemes;

d. not to divert any funds raised from public at large which are kept in bank

account(s) and/or in the custody of the company.

11. The above directions shall take effect immediately and shall be in force until further

orders.

12. This Order shall also be treated as a show cause notice. RVHEL and its Directors may

show cause as to why appropriate directions under the SEBI Act and CIS Regulations

including directions in terms of Regulations 65 and 73 of the CIS Regulations, should

not be taken against them.

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13. RVHEL and its Directors shall, within 15 days from the date of receipt of this Order, file

their reply, if any, to this order. RVHEL and its Directors may also indicate, in such

reply, whether they wish to avail an opportunity of personal hearing in the matter.

Place: Mumbai. S. RAMAN

Date: July 10, 2013. WHOLE TIME MEMBER

SECURITIES AND EXCHANGE BOARD OF INDIA”

3) The petitioner aggrieved by the said order has filed this writ petition

praying the following reliefs.

“I) Issue Rule, calling upon the respondents and each one of them, to show cause as to why a Writ of Mandamus and/or in the nature thereof, shall not be issued, for mandating/directing them, to forthwith stop the illegal and unlawful atrocities and harassments, perpetrated upon the petitioners, and the officials of the petitioner-Company, by the Police, and other authorities of the State of Assam, and also for mandating/directing them, to forthwith revoke/rescind the impugned Order/Show Cause Notice dated 11.07.2013(Annexure-P6 supra). II) Issue Rule, calling upon the respondents and each one of them, to show cause as to why a Writ of Certiorari and/or in the nature thereof, shall not be issued, for directing them, to transmit the records, relevant to the subject matter of this writ petition, for rendering substantive and conscionable justice to the petitioners, and for quashing/setting aside the impugned Order/Show Cause Notice dated 11.07.2013(Annexure-P6 supra). III) Issue Rule, calling upon the respondents and each one of them, to show cause as to why a Writ of Prohibition and/or in the nature thereof, may be issued, for restraining/prohibiting them, from acting in any manner, in furtherance of the impugned Order/Show Cause Notice dated 11.07.2013(Annexure-P6 supra). IV) In the Ad-interim and thereafter, on hearing the parties, in the Interim, an Order in terms of i. ii. & iii above. V) After hearing the parties, be pleased to make the Rule absolute in terms of i. ii. and iii above.

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VI) Call for the records appertaining to this petition. VII) Costs of and incidental to this proceeding. VIII) Any other Relief(s) as to this Hon’ble High Court may

deem fit and proper”.

4) In course of hearing of the matter the petitioner has filed the contract

document(between the subscriber and the petitioner) in which the following

terms and conditions are stipulated.

“1. The intending member is to apply in Company’s prescribed Form for booking of a standard A C room accommodation with services thereto for staying(according to checkout times) with a payment, either in full or in part, out of total price for such accommodation and services availing installment facilities under the respective plan of the Company viz. ROSE VALLEY HOLIDAY MEMBERSHIP PLANS – STANDARD, SILVER, GOLD, PLATINUM & DIAMOND according to the capacity of the applicant. No changes shall be entertained towards the plan once selected by the applicant. 2. The intending Member is to apply in prescribed Form for preferred class or membership of the Company’s HOLIDAY PLAN. 3. The membership fees for various category of Membership will appear from the chart appended to the application for Membership. 4. The membership is offered on the basis of Advance booking of room of various hotels/resorts of the Company. 5. The intending members can pay the membership fees as prepaid booking or by way of monthly installments. In case of monthly installments the facilities of membership can be availed only upon payment of all installments. 6. In case of installment payment after receiving the Payment of 1st installment the Company will issue an acknowledgement Pay-in-slip for such Payment in respect of provisional membership and subsequently issue a “ROSE VALLEY HOLIDAY MEMBERSHIP PLAN CERTIFICATE and CARD”, in confirmation of facilities to be provided by the Company in favour of the applicant after 15 days but within 30 days. 7. ROSE VALLEY HOLIDAY PLAN MEMBER will be entitled to benefit as provided under the respective Membership plan for a couple legally related and for 2(two) children upto 12 yrs of age. For the proof of identification of spouse & children, 2 Nos. of Stamp size current photograph are to be furnished to the Company along with the duly completed application.

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8. ROSE VALLEY HOLIDAY MEMBERSHIP PLAN is transferable subject to information to the company and compliance of formalities of new membership and payment of Rs 150/- as charges towards administrative expenses. 9. ROSE VALLEY HOLIDAY MEMBERSHIP PLAN is in accordance with the terms and conditions and also as mentioned on the back of the main part of the application form subject to the payment of total price and entitlement of privileges thereto respectively and are binding upon the parties. 10. All bookings are subject to availability and payment of full membership fees. Subject to availability of rooms the Company shall issue itinerary mentioning the name of the hotel/resorts and room no. as per choice of member as well as schedule of arrival and departure(according to check-out time) respectively at least 7(seven) days before their arrival at such hotel/resorts. Applicant may enjoy such accommodation and service after 30 days of enrolment to the plan according to the Company norms as per the respective Plan. 11. Service includes one Breakfast and two bottles of packaged drinking water daily and non-alcoholic welcome drink on arrival. All meals shall be charged at a discount of 10% on Menu rate. 12. ROSE VALLEY HOLIDAY PLAN MEMBER may due to an emergency which needs to be informed to the management seven days prior to final confirmation date, cancel the booking of such accommodation & services with a letter of request to the Company mentioning about his/her reason and intention for the purpose and on such situation the concerned applicant may be entitled to the total equivalent sum under the plan for unutilization of such accommodation and services and other facilities provided for, less cancellation fees of Rs 50/-(Rupees Fifty) per accommodation, but the payment shall be made by the Company only after the expiry of the tenure of the respective plan. Defaulters are however not entitled to such benefits under any circumstances. 13. The applicant shall have to pay installments in time and strictly according to the respective membership plan of the Company and upon His/her failure the Company may charge permissible amount for delayed payment or rescind the contract. 14. The expression “booking” where used herein shall always be provisional and will remain in force till final confirmation for such accommodation & services etc. 15. Correspondence will be made with the applicants at the address given in the Application Form but in case of any change thereof should be intimated by the applicant to the Company for the convenience of the parties. 16. The concerned applicant in respect of the Plan is to inform to the Company on the prescribed Form about his/her final desire to avail room accommodation & services etc after the payment of last installments and the Company after getting such information, will issue a clearance certificate for

18

final confirmation within 7(seven) days(subject to availability of rooms) mentioning the name of Hotel/Resorts as well as schedule of arrival and departure. 17. Plan once issued cannot be cancelled and booking money paid shall not be claimed before the expiry of the tenure of such respective plan. 18. Applicants are requested to read carefully the Application Form, Plan of the Company and Terms & Conditions as contained therein and satisfy himself/herself before making the application for booking of a room accommodation & services etc. 19. Rose Valley Hotels & Entertainments Ltd will provide accidental Insurance Coverage for minimum of Rs 25,000/-(Rupees twenty five thousand) and a maximum of Rs 50,000/-(Rupees fifty thousand) to the member for a period of 2(two) years for booking under the STANDARD, SILVER, GOLD, PLATINUM & DIAMOND plans and as such, the applicant shall be entitled for free insurance coverage benefits from a recognize Insurance Company, as per their terms and conditions. Slab for Insurance Coverage are as follows: Entitlement of Privileges[Room(s) accommodation & Service] Insurance coverage Upto Rs 25,000/- Rs 25,000/- Above Rs 25,000/- Rs 50,000/-

20. However, for 1(one) year plan under “Standard – S4” the Insurance Coverage will be for a period of only one year. 21. Applicant(s) are requested to note that the discount, services and other facilities provided for shall be in force till utilization and without any interruption but subject to act of God or by other reasons beyond the reasonable control of the Company. 22. Applicant(s) is/are at liberty to gift his/her/their room accommodation to his/her/their friends or relatives or at option he/she/they may also opt to transfer or sell it to any one with the consent of the Company. In this event, third party should be considered and referred to as “Guest” but subject to consent of the applicant(s). 23. For the convenience of the applicant(s), for selling out their room accommodation, if required, he/she/they may contact Rose Valley Travels(P) Ltd. Perhaps, they may charge a nominal amount as against their services in respect of our Membership Plan.

19

24. On the event of death of the applicant, the nominee or in absence of the nominee, the legal heir(s)/successor(s) of the applicant is/are entitled to the benefits in respect of the Plan. 25. The tenure of the ROSE VALLEY HOLIDAY MEMBERSHIP PLAN is according to the respective plans, mentioned on the back of Applicant Form. 26. A non-refundable processing fees of Rs 100/- only shall be charged extra. 27. Disputes, if any, are to be referred to the Arbitrator to be appointed by the Company and the decision of the Arbitrator shall be final and binding upon the Parties hereto in accordance with the provisions of the Arbitration and Conciliation Act, 1996. 28. All disputes are subject to Kolkata Jurisdiction.”.

5) Shri L. Nageswar Rao, the learned senior counsel arguing for the

petitioner, urged the following contentions in support of the prayers made in

the writ petition.

(i) The subscriptions collected under the HMP would not come

within the purview of the collective investment scheme as envisaged in

section 11AA(2) of the Securities and Exchange Board of India Act, 1992.

(ii) The terms of the contract in the HMP scheme envisage coverage

of accident risk to the subscriber of a scheme for a period of 1 to 2 years by

a policy of insurance. The insurance component offered under the scheme

makes the entire scheme excluded from the purview of the collective

investment scheme in view of the provisions contained in Explanation to

Section 12(1)(1B) of the SEBI Act.

20

(iii) The SEBI under Section 11B of the Act could not have passed

the ad-interim ex-parte order. The power to issue directions under Section

11(B) will arise only after making or causing to be made an enquiry and

upon satisfaction of the requisites under Section 11(B) interim orders could

be passed.

(iv) When the notice is issued by the SEBI a single member of it

could not have passed the ad-interim ex-parte order without a specific

authorisation in writing to that effect in view of the provisions contained in

Section 19 of the Act.

6) The conditions stipulated in sub-Section (2) of Section 11AA of the

Securities and Exchange Board of India Act, 1992 is extracted here under

for convenient reference.

“(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;

21

(iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement.”.

It is argued that the conditions stipulated in sub-Section (2) of Section

11AA have to be cumulatively fulfilled to constitute a collective investment

scheme. The HMP scheme launched by the petitioner does not qualify to be

constituted as a collective investment scheme. The conditions mentioned in

sub-Section (2) do not apply to the HMP scheme, in particular with reference

to clause (ii) it is submitted that under the HMP scheme the investor does

not receive any profit ~ whether movable or immovable ~ from such scheme

or arrangement. The investor is only permitted to stay in a hotel for a

particular number of days and such a stay in the hotel amounts to a licence.

The consideration for the investment cannot be construed as profit, income,

produce or property.

7) The learned senior counsel referred to the provisions of sub-Section

(1B) of Section 12 of the Securities and Exchange Board of India Act, 1992

which reads as follows.

“[(1B) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations: Provided that any person sponsoring or cause to be sponsored, carrying or causing to be carried on any venture

22

capital funds or collective investment scheme operating in the securities market immediately before the commencement of the Securities Laws(Amendment) Act, 1995 for which no certificate or registration was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of sub-section (2) of section 30.]. [Explanation. – For the removal of doubts, it is hereby declared that, for the purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer]”.

The contract of HMP scheme imbibes coverage of accident insurance

to the investor. In view of the Explanation to sub-Section (1B) whenever a

contract provides a component of insurance such investments would be

excluded from the purview of the collective investment scheme. A document

is produced containing the terms of the contract which stipulates the benefit

of accident risk insurance coverage. Therefore the HMP scheme cannot be

termed as a collective investment scheme within the definition of sub-

Section (2) of Section 11AA of the Securities and Exchange Board of India

Act, 1992.

8) With reference to the interim order passed by the SEBI the learned

senior counsel referred to the provisions of Section 11B of the Securities and

Exchange Board of India Act, 1992, which reads as under.

“[11B. Power to issue directions. – Save as otherwise provided in section 11, if after making or causing to be

23

made an enquiry, the Board is satisfied that it is necessary – (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions,- (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.].

It is argued that the nature of interim order that the SEBI is

empowered to pass under Section 11B of the Securities and Exchange Board

of India Act, 1992 does not empower the SEBI to pass the ad interim order

in question. The provisions of Section 11B of the Act declare that an interim

order could be passed only after making or causing to be made an inquiry

and if the Board is satisfied the interim orders could be passed, however, in

this case the interim order passed is beyond the purview of the powers

invested under Section 11B and that ad interim order passed is made within

an enquiry coupled with the satisfaction of the Board.

9) The learned senior counsel further referred to the provisions of

Section 11(4) of the Securities and Exchange Board of India Act, 1992 which

are as follows.

24

“[11(4). - Without prejudice to the provisions in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:- (a) suspend the trading or any security in a recognized stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach after passing of an order on an application made for approval, by the Judicial Magistrate of first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached. (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company(not being intermediaries referred in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market: Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned.]”.

25

Clause (a) deals with suspending the trading of any security in a

recognised stock exchange. The investment in question made does not come

within the definition of “securities” in the Act. Clause (b) deals with

restraining persons from accessing the securities market and prohibiting

any person associated with securities market to buy, sell or deal in

securities. The investment in question is not a security within the definition

of “securities” in the Act. Clause (d) deals with impounding and retaining the

proceeds or securities in respect of any transaction which is under

investigation. In the instant case the directions issued also do not conform

to the requirement of clause (d). Besides, under Section 11B no ad interim

direction can be issued by SEBI without making any enquiry or causing to

be made any inquiry into the matter therefore the interim order passed is

dehors the powers conferred by the statute.

10) It is admitted in the submissions that the petitioner did refund to

some of the investors with interest because wild rumours were spread about

some Ponzi schemes the investors started demanding the refund of their

investments along with interest. The petitioner with sobriety to avoid

unnecessary legal tangle made refund of deposits to some of the investors

and such refunds should not be viewed to conclude that the investments are

basically for interest earning and not for HMP scheme.

26

11) The learned senior counsel for the petitioner referred to the amended

proviso to sub-Section (1) of Section 11AA and sub-Section (2A) of Section

11AA of the Securities and Exchange Board of India Act, 1992, which reads

as follows.

Proviso to sub-Section (1) of Section 11AA:- “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”.

Proviso to sub-Section (2A) of Section 11AA:- “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”.

It is argued that in the first place the amended provisions would not

apply to the case of the petitioner since the investments are all made prior to

the coming into force of the amended provisions, however, seriously

challenged the validity of the amended proviso to sub-Section(1) of Section

11AA on the ground that it militates against the provisions of sub-Section

(2) of Section 11AA which lays down the cumulative conditions to constitute

the collective investment scheme under the Act. The amendment which

incorporates proviso to sub-Section (1) of Section 11AA has overriding effect

and limits the effect and purport of the substantive provision in sub-Section

(2) of Section 11AA. In this regard it is argued that a proviso to a Section or

sub-Section should always be subordinate to the Section or sub-Section and

it cannot eclipse or override the contents of the Section or sub-Section.

27

Therefore the incorporation of proviso to sub-Section (1) of Section 11AA is

bad in law. In this regard the learned senior counsel relied on the decisions

of the Supreme Court in Dwarka Prasad v. Dwarka Prasad Saraf(1976) 1

SCC 128 para 16 to 21 ~ it is laid down that a proviso cannot expand or

limit the principal provision ~ Madhu Gopal v. VI Addl. Dist. Judge(1988) 4

SCC para 7 ~ it is laid down that a proviso cannot take away the substantive

rights conferred by the main provision ~ and J.K. Industries v. Chief

Inspector of Police(1996) 6 SCC 665 para 34 ~ it is laid down that a proviso

should not be read as providing something by an addition to the main

provision. Therefore the proviso which sweepingly encompasses any type of

investment in any scheme which is more than Rs 100 crore which is called

as collective investment scheme is illegal and bad in law.

12) The incorporated sub-Section 2A to Section 11A empowers the SEBI

to make regulations to lay down conditions in respect of any scheme or

arrangement. Such a power to make regulations suffers from vice of

excessive delegation. It is for the statute to lay down the conditions and

such a power cannot be delegated to levy. In this regard the learned senior

counsel relied on the decisions of the Supreme Court in Harishankar Bagka

and another v. State of Madhya Pradesh(1955) 1 SCR 380 para 9, and

Hamdard Dawakhana v. Union of India(1960) 2 SCR 671 para 28 to 34.

28

13) Sri Somik Deb, the instructing counsel, submitted that under Section

19 when the SEBI has initiated proceedings therefore a single member could

not have passed the impugned order without a specific authorisation. The

impugned order does not refer to the grant of authorisation to the member

who passed the impugned order. In that view the impugned order suffers

from lack of jurisdiction.

14) Per contra, Smt. M. Hazarika, the counsel for the SEBI, repelling the

contentions raised by the learned senior counsel for the petitioner submitted

the following grounds.

(i) In the first place the petitioner has not disclosed all relevant and

material facts; but belatedly filed the format of application for membership,

which contains the terms and conditions.

(ii) It is admitted by the petitioner that out of 21.90 lakh investors

4.13 lakh of them have been refunded the deposited money with interest.

(iii) The term “that the investor would avail the benefit of stay in a

hotel for a certain period on completion of the investment period” is nothing

but a camouflage and perfidious stipulation. The rate of interest offered on

29

the refund is very lucrative and attractive ~ 17.65 per cent per annum,

almost double the rate offered by banks on deposits!

(iv) The averments made in the petition regarding the bona fide and

genuineness of the terms of the scheme are only self-serving statements;

there is no credible material placed to show about how many members have

actually availed the HMP benefit.

(v) The stipulation which gives discretion to the petitioner to decide

the refund is only a make-believe stipulation to escape from the purview of

being called a collective investment scheme.

(vi) The petitioner has not furnished all the names and identities of

all the investors to prove the bona fide and genuineness of the scheme and

how many members have subscribed to different categories of the scheme.

(vii) The insurance component investment under the terms of the

scheme is only limited for 1 to 2 years whereas the scheme would be for 3 to

5 years. Copies of the insurance policy produced before the Court are vague;

it does not mention about who are the members covered by the policy. The

policy only mentions the number of persons covered under the insurance

but not the names and identities.

30

(viii) The policy in respect of the 24.90 lakh investors is not produced

before the Court; only as a token a few vague insurance policies are

produced which do not contain the names and identities of the persons for

whose benefit the insured has taken the insurance.

(ix) The terms regarding the coverage of accident insurance is only a

ploy devised by the petitioner to make-believe that the contract imbibes a

component of insurance only to escape from the clutches of law and avoid

the jurisdiction of the SEBI.

15) With regard to the directions issued in the impugned order the learned

counsel for the SEBI relied on Regulation 65 of the Securities and Exchange

Board of India(Collective Investment Schemes) Regulations, 1999, which

reads as follows.

“65. The Board may, in the interests of the securities market and the investors and without prejudice to its right to initiate action under this Chapter, including initiation of criminal prosecution under section 24 of the Act, give such directions as it deems fit in order to ensure effective observance of these regulations, including directions: (a) requiring the person concerned not to collect any money from investors or to launch any scheme; (b) prohibiting the person concerned from disposing of any of the properties of the scheme acquired in violation of these regulations; (c) requiring the person concerned to dispose of the assets of the scheme in a manner as may be specified in the directions; (d) requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise, collected under the scheme; (e) prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period.”.

31

16) The power given to the Board under the Regulations should be read in

conjunction with the powers given under Sections 11(4) and 11B of the Act.

The impugned order which puts restrictions on the petitioner is fully in

consonance with the provisions of Regulation 65.

17) The counsel for the SEBI produced a circular (no.SEBI/LAD/DRA-

II/242/2010 dated 3rd May, 2010) by which the powers under Sections 11(1)

and 11B are delegated to be exercised by the whole-time member, therefore

submitted that the contention that the whole-time member has no power to

pass the impugned order is an untenable argument. The prayer in the writ

petition against the police not to investigate into the matter is untenable,

when the transactions in question constitute a crime the police will have the

jurisdiction to investigate, more so when an FIR is registered. In fact

petitioner’s counsel did not focus this argument on this aspect.

Opinion

18) It is admitted fact that there are 21.90 lakh investors under the HMP

scheme. The petitioner’s company has produced only a format of an

application for subscriptions belatedly. The names and identities of all the

investors under the HMP scheme is not furnished. The terms of the scheme

give the benefit of holiday stay in the hotels to the members after they have

successfully paid the entire amount agreed under the scheme. In the

alternative the terms also enable the members to take refund of the amount

32

invested with interest at the rate of 17.6 per cent per annum. The terms of

the scheme disclose that the refund of deposited amount with interest will

be given if for any reason the member is not able to avail the benefit of stay

in the hotels and it is at the discretion of the petitioner. There is no material

before the court to show that all the investors who have become members

have invested only with a dominant intention of availing the benefit of the

stay or whether they were lured by an attractive rate of interest which is

almost double the banks’ rate given on the deposits. The petitioner of course

states that because of some Ponzi schemes were exposed and CBI

investigations have been directed, therefore to save the morale of the

petitioner’s company without hassles refunds have been made to four lakh

investors.

19) There is no credible material placed by the petitioner to convince the

court that all the members who have subscribed had the dominant intention

of enjoying the stay at the hotels. Only on the basis of the format of an

application for subscription of membership it cannot be conclusively held

that the scheme is only for enjoying the stay in the hotels. It could have

been held so if there was no alternative term of refund of deposit with a

lucrative rate of interest of 17.6 per cent per annum. This aspect of the

matter requires a detailed enquiry about the names and identities of all the

subscribers, their social status, their annual income, etc to find out how

33

many persons have genuinely subscribed for membership for availing the

benefit of stay in the hotel. On the basis of incoherent material produced by

the petitioner like format of the membership it is not possible to agree with

the contention that the scheme is only a holiday management scheme and

does not come under the purview of the collective investment scheme more

so because of the fact that there is a term in the contract of refund of money

with a lucrative rate of interest. If the interest on deposit was the alluring

factor on the part of the investors then the case would squarely fall under

sub-clause (ii) of sub-Section 2 of Section 11AA of the SEBI Act. These facts

constitute a mixed question of law and fact and has to be decided by SEBI.

20) We find that there was no difficulty for the petitioner to have

submitted to this jurisdiction of the SEBI and produced all the records to

convince the SEBI that the scheme is genuinely a holiday management

scheme and does not constitute a collective investment scheme and thus

could have excluded themselves from the jurisdiction of SEBI.

21) The second contention that the members under the scheme are

covered with accident insurance for a period of 1 to 2 years thus it is argued

that in view of the insurance component and in view of Explanation to sub-

Section (1B) of Section 12 of the Securities and Exchange Board of India Act,

1992 the scheme does not constitute collective investment scheme appears

34

to be untenable argument; the petitioner has not produce all the necessary

and credible material to show that the insurance coverage is genuine and it

covers all the investors. The holiday investment scheme ranges between 3 to

5 years, whereas the insurance coverage is only for 1 to 2 years. The entire

subscription period is not covered by the accident insurance. The petitioner

has not produced all the policies issued by the insurers in respect of all the

investors. Since the insurance certificates produced are vague and there is

no details of names and identities of the members whose risk is covered

under the said policies the plea of insurance accident coverage appears to be

a facade contrived by the petitioner to keep the scheme outside the

definition of the collective investment scheme so as to exempt itself from the

jurisdiction of SEBI and this aspect of dubious insurance coverage requires

an inquiry.

22) The authority of the Whole-time Member who passed the interim order

is challenged seriously on the ground that without having proper delegation

of powers the Whole-time Member alone could not have passed the interim

order when the SEBI has issued the notice. In reply to the said contention

the counsel for the SEBI has produced a notification issued by the SEBI

wherein the powers of the Board are delegated to the Whole-time Member

under Sections 11(1), 11(3), 11(4) and 11B of the SEBI Act, therefore the

third argument in this regard does not hold water.

35

23) With regard to the incorporation of proviso to sub-Section (1) of

Section 11AA of the Act, though it has prospective effect, despite lengthy

arguments were canvassed it is the contention that the proviso incorporated

to sub-Section (1) of Section 11AA curtails and limits the substantive

provisions of sub-Section (2) of Section 11AA of the Act. In this regard it is

argued that any proviso to a Section or sub-Section which has effect of

expanding or limiting the principal provision or which frustrates the main

provision would be bad in law. The decisions of the Supreme Court in

Dwarka, Madhu, and JK Industries(supra) are relied on.

24) On the contrary, in CIT v. Jagannath Mahadeo Prasad(AIR 1969 SC

209) the Supreme Court in para 3 has made the following observations.

“The argument was elaborated further by referring to the true nature

and function of a .proviso which was to except or take out a particular portion

from the field dealt with by the section. Chagla, C.J., who delivered the

judgment of the Bombay Bench, had no difficulty in coming to the conclusion

that on the language of the proviso itself and on the scheme of the Act the

Legislature in enacting the so called proviso was enacting a substantive

provision dealing with the mode of computing the profits and gains charge-

able under the head "profits and gains of business profession or vocation" and

that the Legislature had provided that when profits and gains were computed

the loss sustained in a speculative transaction must not be taken into account

except to the extent of the amount of profits and gains, if any, in any other

business consisting of speculative transactions. The learned Chief Justice

36

further referred to the mischief which was aimed at by the Legislature in

enacting the proviso. In recent times businessmen were known to buy

speculative losses in order to reduce their profits and the Legislature wanted

to put an end to that mischief which could only be done by preventing the

assessee from reducing his profits by speculative losses. The Bombay

decision was followed by the Madhya Pradesh High Court in Commissioner

Income Tax, Nagpur v. Ram Gopal Kanhaiya Lal as also by the Division Bench

of the Punjab High Court in Manohar Lal Munshi Lal v. Commissioner of

Income' Tax, New Delhi. The matter ultimately went to a Full Bench of the

Punjab High Court in Commissioner of Income Tax v. Ram Swarup in which

after reviewing the entire case law and examining the various aspects

relevant to the question the view expressed by Chagla, C.J. in the Bombay

case was accepted as correct. Similarly in Jummar Lal Surajkaran v.

Commissioner of Income Tax, Hanuman Investment Company v.

Commissioner of Income Tax, and Joseph' John v. Commissioner of Income

Tax, the considerations which prevailed in Keshavlal Pramchand's case were

accepted as correct”.

25) The Supreme Court in S. Sundaram Pillai and others v. V.R.

Pattabiraman and others[(1985) 1 SCC 591], after recording a catena of

decisions of the Supreme Court on the point, in para 43 summarises the

legal purport of the proviso for different purposes in the following manner.

“43. We need not multiply authorities after authorities on this point

because the legal position seems to be clearly and manifestly well

established. To sum up, a proviso may serve four different purposes:

(1) qualifying or excepting certain provisions from the main enactment;

37

(2) it may entirely change the very concept of the intendment of the enactment

by insisting on certain mandatory conditions to be fulfilled in order to make

the enactment workable;

(3) it may be so embedded in the Act itself as to become an integral part of the

enactment and thus acquire the tenor and colour of the substantive enactment

itself; and

(4) it may be used merely to act as an optional addenda to the enactment with

the sole object of explaining the real intendment of the statutory provision”.

26) The ratio laid down in Sundaram case(supra) is followed by the

Supreme Court in Swedish Match AB and another v. Securities & Exchange

Board of India and another[(2004) 11 SCC 641]. Similarly the Supreme

Court in Southern Petrochemical Industries Co Ltd v. Electricity Inspector

and E.T.I.O. and others(MANU/SC/2333/2007) has followed the ratio laid

down in Sundaram case(supra). In para 104 of the judgment the Supreme

Court has made the following observations.

“104. Once the aforementioned conclusion is arrived at, it would not be

necessary to construe the proviso appended to Sub-section (1) of Section 20 in

its own language. Proviso, as is well known, has four functions, as has been

noticed by this Court in S. Sundaram Pillai v. V.R. Pattabiraman

MANU/SC/0387/1985: [1985] 2 SCR 643.

27) The ratio laid down by the Supreme Court in the above said decisions

makes it clear that the effect of a proviso need not necessarily be truncated

when its plain meaning suggests that it is a substantive enactment although

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mis-called as a proviso. In that view of the matter we do not find any merit

in the argument that proviso to sub-Section (1) of Section 11AA of the SEBI

Act is repugnant to the Section and therefore held to be bad in law.

28) With regard to the delegation of powers to the Board incorporated

under sub-Section 2A of Section 11AA to frame regulations cannot be

considered as excessive delegation because in any statute or rule framed by

the legislature the framers cannot anticipate and foresee every kind of

situation that may arise in the operation of the provisions of the enactment.

Therefore it is always the legislative policy to give a delegated power in every

enactment to the authorities to operate the provisions of the Act. Such a

provision in itself cannot be considered illegal unless any regulation or rule

is made by the delegated authority is in conflict with the main provision

then such regulation can be held bad. The power to lay down the conditions

regarding the scheme or arrangement in the context of the provisions of the

Securities and Exchange Board of India Act, 1992 and the subjects it deals

with cannot be considered as uncanalised and excessive delegation. In that

view of the matter the writ petition is dismissed.

JUDGE CHIEFJUSTICE (ACTING)

na/

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