SECURITIES AND EXCHANGE BOARD OF INDIA Vs. GAURAV VARSHNEY & ANR.
LAWS(SC)-2016-7-37
SUPREME COURT OF INDIA
Decided on July 15,2016

SECURITIES AND EXCHANGE BOARD OF INDIA Appellant
VERSUS
Gaurav Varshney And Anr. Respondents

JUDGEMENT

JAGDISH SINGH KHEHAR,J. - (1.) Sub -Section (1B) was inserted into Section 12 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as, the SEBI Act), on 25.1.1995. Section 12(1B) is extracted hereunder: - "12. Registration of stock -brokers, sub -brokers, share transfer agents, etc. ­ (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 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 of 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 question that arises for consideration in the present criminal appeals is, whether respondent nos. 1 and 2 ­ Gaurav Varshney and Vinod Kumar Varshney, had violated Section 12(1B), by incorporating M/s. Gaurav Agrigenetics Ltd., under the provisions of the Companies Act, 1956, on 3.7.1995, in the capacity of its first directors and promoters. This position emerges, because it is not a matter of dispute, that M/s. Gaurav Agrigenetics Ltd. commenced a collective investment scheme, immediately on its incorporation.
(2.) In order to highlight the implications of the amendment, made on 25.1.1995, the Government of India issued a press release dated 18.11.1997. The text of the same is extracted hereunder: - "The matter relating to regulating entities which issue instruments such as agro bonds, plantation bonds etc. has been receiving Government's attention. While the instruments may be funding agro based investment activity, it is observed that they often offer very high rates of return not consistent with normal returns in such activities. There is, therefore, a high element of risk associated with such schemes. In order to ensure that investors make investment decisions with the full knowledge of the risks involved in such schemes, Government has felt it necessary to put in place an appropriate regulatory framework for such schemes. Government after detailed consultation with the regulatory authorities concerned has decided to treat such schemes as "Collective Investment Schemes" coming under the provisions of the Section 11(2)(c) of the SEBI Act. In order to regulate such Collective Investment Schemes, both from the aspect of investor protection as well as allowing legitimate investment activity to take place, SEBI would first formulate draft regulations for this purpose. These draft regulations would be made available for public discussion. The investors who have invested in such schemes as well as entities running such schemes will be requested to give their comments on pertinent matters to SEBI for enabling SEBI to formulate appropriate regulations for such Collective Investment Schemes. Once these regulations come into force, it is expected that they will promote legitimate investment activity on plantation and other agriculture based business, while at the same time give investors an adequate degree of protection for their investments." For the same purpose, as stated above, the Securities and Exchange Board of India (hereinafter referred to as, 'the Board') also issued a separate press release, dated 26.11.1997. The text of the above press release, is reproduced below: - "The Central Government has by a press release dated 18.11.1997 decided that an appropriate regulatory framework for regulating entities which issued instruments such as agro bonds, plantation bonds, etc. has to be put in place. The Government has decided that schemes through which such instruments are issued would be treated as collective investment schemes coming under the provisions of the SEBI Act. In terms of the press release, SEBI has initiated action for drafting regulations for such collective investment schemes. The provisions of section 12(1B) of the SEBI Act prohibit collective investment schemes including mutual funds from sponsoring any new scheme till the regulations are notified. While the regulations for mutual fund schemes have been notified by SEBI, regulations for collective investment schemes including plantations schemes require to be notified in view of the press release issued by the Central Government. These regulations are under preparation and will be issued in due course, first in draft form for the public discussion and later in the final form. Till these regulations are notified, as a result of the provisions of section 12(1B) of the SEBI Act, no person can sponsor or cause to be sponsored any new collective investment scheme and raise further funds. The provisions of section 12(1B) provides that till regulations are notified all collective investment schemes which are operating can continue with their activities till the regulations are notified. Any collective investment scheme which is desirous of taking benefit of the proviso to section 12(1B) of the SEBI Act is directed to send to SEBI information within 21 days from today containing details such as: - - Terms and conditions of the schemes launched - Funds raised through all the schemes - Promises or assurances or assured returns made in the scheme - Copies of offer document of the scheme - Names, details and background of promoters/sponsors All collective investment schemes which want to take benefit of the proviso of Section 12(1B) are also directed to make an advertisement only in accordance with the advertisement code already prescribed by SEBI under the Disclosure and investors protection guidelines." In addition to the above, 'the Board' also issued a public notice, on 18.12.1997. The instant public notice also related to, the implications of Section 12(1B). The contents of the public notice, are reproduced below: - "The Central Government has by a press release dated 18.11.1997 decided that an appropriate regulatory framework for regulating entities which issued instruments such as agro bonds, plantation bonds, etc. has to be put in place. The Government has decided that schemes through which such instruments are issued would be treated as collective investment schemes coming under the provisions of the SEBI Act. In terms of the press release, SEBI has initiated action for drafting regulations for such collective investment schemes. A committee under the chairmanship of Dr. S.A. Dave has already been constituted. The provisions of section 12(1B) of the SEBI Act prohibit collective investment schemes including mutual funds from sponsoring any new scheme till the regulations are notified. While the regulations for mutual fund schemes have been notified by SEBI, regulations for collective investment schemes including plantations schemes require to be notified in view of the press release issued by the Central Government. These regulations are under preparation and will be issued in due course, first in draft form for the public discussion and later in the final form. Till these regulations are notified, it is hereby brought to the notice of the public that as a result of the provisions of section 12(1B) of the SEBI Act, no person can sponsor or cause to be sponsored any new collective investment scheme and raise further funds. Further, the provisions of section 12(1B) provides that till regulations are notified all collective investment schemes which are in existence can continue with their operations till the regulations are notified. It is hereby brought to the notice of the public that existing collective investment schemes which are desirous of taking benefit of the proviso to section 12(1B) of the SEBI Act and continue their operations are directed to send to SEBI, by 15th January 1998 information containing details such as: Terms and conditions of the schemes launched, Funds raised through all the schemes, Promises or assurances or assured returns made in the scheme, Copies of offer document of the scheme and Names, details and background of promoters/sponsors. Note: The above information regarding existing collective investment schemes in northern, southern and eastern region maybe filed with the respective regional office of SEBI. In further exercise of the powers under section 11 read with section 11(B) all collective investment schemes which want to take benefit of the proviso of section 12(1B) are also directed to make an advertisement only in accordance with the advertisement code already prescribed by SEBI under the Disclosure and investors protection guidelines."
(3.) In order to appreciate the stance adopted on behalf of respondent nos. 1 and 2, it is essential to point out, that in consonance with Section 12(1B) of the SEBI Act, and in furtherance of the power vested with 'the Board', under Section 30 of the SEBI Act, 'the Board' framed regulations - the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as, the Collective Investment Regulations). The Collective Investment Regulations, were to come into force, on the date of their publication in the official gazette. It is not a matter of dispute, that the same were brought into force, on 15.10.1999.;


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