Case: P.G.F. Limited and Ors Vs. Union of India and Anr

The appellant, known as Pearls Green Forests Limited and called PGF Limited from 1997, is having its registered office at S.C.O. No.1042-43, Sector 22-B, Chandigarh and its Head Office at 2nd Floor, Vaishali Building, Community Centre, Paschim Vihar, New Delhi. Though the Memorandum and Articles of Association of the Company provide for carrying on very many activities by way of business operations, we are only concerned with three of the activities of the PGF Limited, namely, sale of agricultural land, sale and development of agricultural land and joint venture schemes. Of the above three operations, when the writ petition was heard by the Division Bench of the High Court it was reported on 28.05.2004 by the learned counsel for the appellants that the PGF Limited took a decision to disband all its schemes, other than its operations relating to the business connected with sale of agricultural land and/or sale and development of agricultural land. Based on the said representation, an interim order came to be passed by the Division Bench on 28.05.2004 with which we are also not seriously concerned.3. There was a public notice issued by the second respondent herein on 18.12.1997, apart from specific letter addressed by the second respondent to the PGF Limited dated 20.04.1998, by which the PGF Limited was called upon to furnish various details as regards to the Collective Investment Schemes, within 15 days of the issuance of its letter dated 20.04.1998. The second respondent also stated to have issued further communication based on the order of the Delhi High Court in CWP No.3352/1998 dated 7th and 13th October 1998, wherein all plantation companies, agro companies and companies running collective investment schemes, to get themselves credit rated from credit rating companies approved by the second respondent. The PGF Limited was directed to comply with the said directions also.In the above-stated background, the second respondent passed an order on 20.02.2002 in exercise of its powers under Section 11B of the SEBI Act, by issuing some stringent directions against the PGF Limited. The PGF Limited challenged the said order before the Punjab and Haryana High Court in CWP No.4620/2002 wherein the second respondent came forward to keep its order dated 20.02.2002 in abeyance, provided the PGF Limited agreed to furnish the information sought for within two weeks. Based on the said stand of the second respondent by order of the High Court dated 29.04.2002, the PGF Limited was directed to submit its reply to the show cause notice and furnish all requisite information to the second respondent. The second respondent was also directed to provide an opportunity of personal hearing to the PGF Limited. The order dated 20.02.2002 was also directed to be kept in abeyance, till the final order was passed. Subsequent to the said order of the High Court dated 29.04.2002, after following the directions contained in the said order, the second respondent passed its order on 06.12.2002, by which it was held that the business activity of the PGF Limited, namely, the sale and development of agricultural land, as well as its joint venture schemes, were all collective investment schemes and since the PGF Limited failed to comply with the statutory requirement as provided under the SEBI (Collective Investment Schemes) Regulation, 1999, directed the PGF Limited not to collect any money from investors nor to launch any new scheme with a further direction to refund the money collected under the schemes, which were due to the investors as per the terms of the offer within a period of one month from the date of its order and failing which threatened to initiate actions as available under the SEBI Act and SEBI (Collective Investment Schemes) Regulation, 1999.5. Aggrieved by the said order of the second respondent dated 06.12.2002, the appellants preferred the writ petition before the High Court of Punjab and Haryana in CWP No.188 of 2003 wherein the order impugned dated 26.07.2004 came to be passed. Before the Division Bench of the High Court, on behalf of the appellants herein, two contentions were raised, namely, that apart from its joint venture business, its other business activities, namely, sale of agricultural land and sale and development of agricultural land, would not fall within the category of collective investment schemes as specified under Section 2(ba) read with Section 11AA of the SEBI Act and consequently the order impugned dated 06.12.2002 cannot be sustained.6. Apart from challenging the order dated 06.12.2002, the appellants also challenged the vires of Section 11AA of the SEBI Act. At the instance of the second respondent the question about the territorial jurisdiction of the High Court was raised, which was turned down by the Division Bench in the order impugned and the same has become final and conclusive, as there was no challenge to the said part of the judgment of the Division Bench. As far as the stand of the PGF Limited that its business activity of sale and development of agricultural land would not fall within the category of collective investment schemes, the Division Bench, after a detailed consideration, held that having regard to the nature of offer made by the PGF Limited, the prescribed filled in application forms, collected from the investors before entering into the transaction of transfer of any land by way of sale and the various terms contained in the agreement for development, held that the nature of development of the land assured to the customer by the PGF Limited would bring the whole scheme of sale and development of agricultural land under the concept of collective investment schemes falling under Section 11AA(2)(ii) and (iv) of the SEBI Act and, therefore, the second respondent had every authority to proceed against the PGF Limited.7. The Division Bench, thereafter, proceeded to examine the correctness of the order of the second respondent dated 06.12.2002 and held that there was every justification for the second respondent to pass the said order and for passing the ultimate direction contained therein. As far as the challenge as to the vires of Section 11AA of the SEBI Act, the Division Bench examined the said submission threadbare and found no substance in the said submission inasmuch as the object of adding Section 11AA of the SEBI Act pointed at investors protection, not agriculture and consequently the first respondent-Union of India had every competence to introduce the said provision in the SEBI Act.

Court's reasoning:
25. With the above prelude to the nature of litigation launched by the appellants in the High Court and pursuing the same in this Court, when we consider the submission of the appellants, we find that the submission was fivefold. According to the appellants while the appellants as a company provided in the Memorandum and Articles of Association, various objects and business ventures, it was actually involved in the business of joint venture schemes, sale of agricultural lands and sale and development of agricultural lands. While the sale of agricultural land and sale and development of agricultural land was continued to be operated upon, according to the PGF Limited, its business of joint venture schemes were brought to an end on and from 01.02.2000. In fact, the said stand was made at the time when the second respondent extended its opportunity prior to the passing of the impugned order dated 06.12.2002. Certain details were also furnished before the second respondent as to what were the extent of monitory transactions carried on in respect of the joint venture schemes and also the action taken by the PGF Limited after stopping its joint venture activities on and after 01.02.2000. Before this Court also certain details were furnished as to what extent monies were refunded to those who were part of the joint venture schemes and certain funds, which were deposited with the second respondent and were to be refunded to those whose availability and identity could not be traced after the stopping of the operation of joint venture schemes. We shall, however, examine the scope and extent of acceptability of such a stand made on behalf of the PGF Limited in order to examine whether the stand of the PGF Limited that its joint venture schemes were stopped from 01.02.2000 while the provisions of Section 11AA of the SEBI Act was brought into the statute book from 22.02.2000 by Act 31 of 1999. We, however, hasten to add that admittedly even after 01.02.2000, according to the PGF Limited it continued to receive funds from various participants of the joint venture schemes on the pretext that such receipt of funds related to the involvement of those investors in the schemes, which were in operation prior to 01.02.2000. The contention of the PGF Limited was that since the operation of joint venture schemes were brought to an end as from 01.02.2000 and Section 11AA of the SEBI Act was inserted into statute book and became operational only from 22.02.2000, there was no scope for the second respondent to have called upon the PGF Limited to subject itself to the jurisdiction of the second respondent in purported exercise of its power under Section 11AA of the SEBI Act as well as in pursuance of its public notice issued in the yearsecond submission of the learned senior counsel for the appellants was that sale of agricultural land, which is one of the business activities of the PGF Limited being an activity of mere sale and purchase of agricultural land and there being no connected scheme relating to such sale transaction, there was no scope for any collective investment scheme in order to invoke Section 11AA of the SEBI Act.27. The third contention was that the other activities of sale and development of agricultural land of the PGF Limited was governed by Entry 18 of List II of the Seventh Schedule and, therefore, the connected developmental activity of the PGF Limited in regard to those agricultural land sold to its investors cannot form the subject matter of legislation by the Parliament and consequently even if the validity of Section 11AA of the SEBI Act can be upheld, the PGF Limiteds activity of the development of agricultural land should stand excluded from its coverage. In other words, according to learned counsel, even if the activities of the PGF Limited based with land sold and its further development, if at all any legislation could be passed, the same could have been done only by the State Legislature and not under Section 11AA of the SEBItherefore, hold that Section 11AA of the SEBI Act is constitutionally valid. We also hold that the activity of the PGF Limited, namely, the sale and development of agricultural land squarely falls within the definition of collective investment scheme under Section 2(ba) read along with Section 11AA (ii) of the SEBI Act and consequently the order of the second respondent dated 06.12.2002 is perfectly justified and there is no scope to interfere with the same. In the light of our above conclusions, the PGF Limited has to comply with the directions contained in last paragraph of the order of the second respondent dated 06.12.2002. We also hold that while ensuring compliance of the order dated 06.12.2002, the second respondent shall also examine the claim of the PGF Limited that it had stopped its joint venture scheme as from 01.02.2000 is correct or not by holding necessary inspection, enquiry and investigation of the premises of the PGF Limited in its registered office or any of its other offices wherever located and also examine the account books other records and based on such inspection, enquiry and investigation issue any further directions in accordance with law. Whatever amount deposited by the PGF Limited pursuant to the interim orders of this Court relating to joint venture scheme shall be kept in deposit by the second respondent in an Interest Bearing Escrow Account of a Nationalized Bank. The second respondent shall also verify the records of the PGF Limited relating to the refund of deposits of the customers who invested in the joint venture schemes and ascertain the correctness of such claim and based on such verification in the event of any default noted, appropriate further action shall be taken against the PGF Limited for settlement of the monies payable to such of those investors who participated in any such joint venture schemes operated by the PGF Limited. It will also be open to the second respondent while carrying out the above said exercise to claim for any further payment to be made by the PGF Limited towards settlement of such claims of the participants of the joint venture schemes and charge interest for any delayed/defaulted payments. As far as the deposit made by the PGF Limited with the second respondent on the ground that the such amount could not be disbursed to any of the investors for any reason whatsoever the second respondent, based on the verification of the records of the PGF Limited, arrange for refund/disbursement of such amount back to the participants of the joint venture schemes with proportionate interest payable on that amount. The above directions are in addition to the directions made by the Division Bench of the High Court.54. Having noted the conduct of the PGF Limited in having perpetrated this litigation which we have found to be frivolous and vexatious in every respect, right from its initiation in the High Court by challenging the vires of Section 11AA of the SEBI Act without any substantive grounds and in that process prolonged this litigation for more than a decade and thereby provided scope for defrauding its customers who invested their hard earned money in the scheme of sale of land and its development and since we have found that the appellants had not approached the Court with clean hands and there being very many incongruities in its documents placed before the Court as well as suppression of various factors in respect of the so called development of agricultural land, we are of the view that even while dismissing the Civil Appeal, the PGF Limited should be mulcted with the exemplary costs