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Any company indulge in CIS activity ,normally known as CHIT FUND activity now should comply SEBI notice asap.In our view they should stop those activity and be a law abiding citizen of India.Contact us we will help for the same.

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SEBI VS COMPANIES Unending Stories Of Fraud
Sebi-Sahara case : A saga of big numbers and innocuous names

It was an innocuous-looking complaint by one 'Roshan Lal' four years and four months ago that sent watchdog Sebi on trail of "various illegalities" committed by Sahara group in raising over Rs 24,000 crore from more than three crore investors.

NEW DELHI: It was an innocuous-looking complaint by one 'Roshan Lal' four years and four months ago that sent watchdog Sebi on trail of "various illegalities" committed by Sahara group in raising over Rs 24,000 crore from more than three crore investors.

The high-profile saga — which today saw the arrest of flamboyant Sahara group chief Subrata Roy, who calls himself "Managing Worker" of his business empire — has seen many dramatic events along the way.

There has been many emotional pitches by Sahara group, which claims to have a networth of over Rs 68,000 crore and assets worth over Rs 1.5 lakh crore.

The Sebi-Sahara case itself comprises staggering numbers like collection of over Rs 24,000 crore from three crore individuals, while once Sahara sent 127 trucks containing 31,669 cartons full of over three crore application forms and two crore redemption vouchers to Sebi office. This apparently resulted into a huge traffic jam on outskirts of Mumbai, where the regulator is headquartered.

The case also has brought to headlines numerous financial jargons like OFCDs, DRHP and RHP, as also numerous innocuous sounding names like Kalawati, Hardwar and the famous 'Roshan Lal.'

It all started with Sahara Prime City, a real estate venture of the group, filing a Draft Red Herring Prospectus (DRHP) with Sebi on September 30, 2009. This is an initial document that a company needs to file with Sebi to bring out an IPO or initial public offer of shares to public investors.

While going through this DRHP, Sebi sensed certain large-scale fund raising exercises by two Sahara firms — Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment Corp Ltd (SHICL).

Soon, Sebi received two complaints — one on December 25, 2009 and the second on January 4, 2010 — alleging illegal means used by these two firms in issuance of certain bonds, called OFCDs (Optionally Fully Convertible Debentures), to the public throughout the country for many months.

The second complaint was from Roshan Lal, which was received by Sebi through National Housing Bank. Based on these complaints, Sebi began seeking clarifications from the group, initially through their investment bankers Enam Securities and later directly.

-- Further investigations found that the funds were raised through OFCDs after filing RHPs (Red Herring Prospectus) with the Registrar of Companies, although the rules required permission from Sebi for any issuance of securities to 50 or more investors. In these cases, the number of investors ran into crores.

Eventually, Sebi passed an interim order against the two companies on November 24, 2010, asking them to refund the money collected from investors.

A final order was passed by the regulator on June 23, 2011, while the group challenged these directions before the Securities Appellate Tribunal. However, the Tribunal upheld the Sebi orders on October 18, 2011, and asked the companies to refund Rs 25,781 crore to over three crore investors.

The group then moved the Supreme Court, which also passed a historic order on August 31, 2012, asking the two companies to deposit outstanding amount of over Rs 24,000 crore with Sebi for refund to the investors.

Saharas were also asked to deposit details of all investors to Sebi, which was mandated to refund the money after verifying their genuineness.

Sebi again moved the Supreme Court alleging non- compliance by the group to the earlier orders, pursuant to which the apex court passed another order on December 5, 2012, and asked the two firms to deposit the money in three instalments beginning with an immediate payment of Rs 5,120 crore.

While the group paid the first instalment, it failed to meet the deadline for other two payments and rather claimed to have already paid more than Rs 20,000 crore directly to the investors.

Unconvinced with Saharas' claims, Sebi passed orders on February 13, 2013, to attach bank accounts and other properties of the group and later issued summons for personal appearance of Subrata Roy and other three directors before it.

Roy and others appeared before Sebi on April 10, 2013, after which he famously told reporters that he was not even offered tea by Sebi officials.

During the same month, April 2013, Sebi finally closed its file on Sahara Prime City, whose planned IPO had kick-started this long-running battle.

In the meantime, Sahara group continued to issue full-page and multi-page advertisements in newspapers wherein it claimed to have cleared bulk of its outstanding liabilities to bondholders.

In these advertisements, the group also claimed to have raised total funds to the tune of Rs 2,25,000 crore since inception in 1978 across various businesses and pegged its total networth at an astonishing figure of Rs 68,174 crore and the size of its assets at Rs 152,518 crore.

Sahara also charged that Sebi was making "baseless allegations" against it and accused it of not accepting "60 truckloads of documents", while the regulator countered these charges by saying that the documents given by them were "hopelessly mixed up".

Sebi also issued public notices in newspapers, cautioning investors and general public against dealing with Saharas.

The regulator also asked various financial institutions including banks to freeze all accounts of the group, besides writing to district collectors and other authorities for attachment of land, real estate and other properties.

Similar letters were sent also to the tax department and other agencies like Enforcement Directorate too.

Later, Sebi began an exercise for refund to genuine investors from Rs 5,120 crore deposited by Saharas. However, not much headway appears to have been made in the process as Sebi has detected instances of multiple accounts, on which it has sought a clarity from the Supreme Court.

Following are the key developments :-

  1. September 2009: Sahara Prime City files Draft Red Herring Prospectus (DRHP)
  2. October 2009: Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara Housing Investment Corporation Ltd (SHICL) file Red Herring Prospectus with Registrar of Companies.
  3. December 2009: Complaint received from Professional Group for Investor Protection against Sahara group for illegalities in fund raising SIRECL and SHICL
  4. January 2010: Similar complaint received against Sahara group from one Roshan Lal through National Housing Bank
  5. November 2010: Sebi passes interim order against the two firms
  6. June 2011: Sebi passes final order
  7. October 2011: Securities Appellate Tribunal upholds Sebi order
  8. August 2012: Supreme Court passes order asking the two companies to deposit over Rs 24,000 crore to Sebi for refund
  9. December 2012: Supreme Court allows Sahara to deposit money in 3 installments. It deposits first installment of Rs 5,120crore
  10. February 2013: Sebi issues attachment orders against the group after companies failed to pay remaining two installments
  11. March 2013: Sebi seeks arrest of Subrata Roy
  12. April 2013: Roy appears before Sebi after summons
  13. July 2013: Sebi moves Supreme Court against Sahara group for non-compliance with the court's direction
  14. November 2013: Subrata Roy barred from leaving the country
  15. February 20, 2014: Supreme Court asks Roy to appear personally
  16. February 26, 2014: Supreme Court issues non-bailable warrant after Roy's fails to make personal appearance; Sahara chief cites mother's illness for non-appearance
  17. February 28, 2014: Roy arrested by Lucknow police.
SEBI PAN Card Club : SEBI asks Pancard Clubs to stop collecting money from investors

Pancard Clubs and its directors are barred from carrying on with theirexisting fund mobilizing activity through under holiday packages

The Securities and Exchanges Board of India (SEBI) ordered Pancard Clubs Ltd (PCL) and its directors to immediately stop collecting any fresh money from investors under itsexisting schemes; to not launch any new schemes or plans or float any new companies to raise fresh money; to submit a full inventory of assets obtained through money raised by PCL; to not dispose of any properties or assets obtained through money raised by PCL; to not divert any funds from PCL; and to furnish details sought by SEBI.

Whole Time Member S Raman, in his order said that, “I find no other alternative but to take recourse to an interim order against PCL and its Directors for preventing them from further carrying on with its existing fund mobilizing activity by launching 'collective investment scheme', without obtaining registration from SEBI in accordance with law.”

This order comes in response to complaints received against PCL, alleging fraudulent fund mobilisation across the country. In response to queries and details sought by the SEBI for the preliminary inquiry, PCL had responded that, “PCL is in the business of marketing time share products- room's nights of its hotels, affiliates and other hotels outside its group - to its prospective applicants at a fixed tariff, during the contracted tenure of the holiday options.” It added that, "PCL's business model does not fall under the purview of collective investment scheme."

An example of their scheme: The tenure of Pancard Clubs-dezire holiday option scheme is 37 months. The applicant has to confirm to acquire a minimum of 9 room nights and thereafter multiple of 9 room nights at the offer price Rs900 for one room nights. The applicant can choose the option of monthly or quarterly payment of the room night instalment at the time of obtaining the room nights. The applicant shall have to complete the payment towards the committed number of room nights in a maximum period of 27 months from the date of first payment. Persons completing all the 27 payments for the committed number of room nights shall be considered as a valid applicant and shall be formalised for and eligible for the benefits of the scheme. In the event of non-payment of instalment consistently, the applicant shall be levied a late fee of Rs25 per month formonthly option and Rs75 per quarter for quarterly option for each such delayed payment.

For all of PCL's eight schemes on offer, upon maturity, the applicant may surrender his unutilised room nights and opt for following:

  1. The applicant may opt for surrender value. The actual surrender value shall be determined by the company at the time of surrender of room nights and shall be paid after the expiry of tenure under the scheme.
  2. The applicant may opt to exchange or barter or utilise the products and services of the company or group companies.
  3. The applicant may opt to convert his unutilised room nights to the extent of surrender value entitlement into life membership of various clubs of the company/group.
  4. The company in its discretion may give an option to its applicant to convert his unutilised room nights, to the extent of surrender value, into shares, debentures

Based on the financial statements provided by PCL, SEBI found that there were inconsistencies in PCL's offerings. The order by SEBI noted, “It is noted from the analysis that only 0.34% of the investors/customers utilised the purchased room nights. From the details provided by PCL, it is observed that PCL has a total of 1,420 rooms (723 domestic and 697 foreign) of its own. As per the scheme details provided by PCL vide letter dated 11 April 2014, it is noted that the available room night for a year owned by PCL is only 5,18,300. However, it has sold around 1.35 crore room nights. In other words, PCL possesses less than 4% rooms.”

The order, while directing PCL and directors to abstain from further fund mobilisation and related activities as mentioned above, noted that, “The features of the Holiday Plans offered by PCL, as discussed in the preceding paragraphs, shows that the activity of fund mobilization by PCL under its 'scheme(s)/ plan(s)' Page 13of 15 with a resultant promise of returns, prima facie falls within the ambit of 'collective investment scheme' as defined under section 11AA of the SEBI Act. Therefore, I am of the view that PCL is engaged in the mobilisation of funds from public under its holiday plans, which is in the nature of 'collective investment scheme' as defined under Section 11AA of the SEBI Act.”

SEBI and KBCL : Is UP-based Kalpataru group again collecting money from investors, illegally?

Mathura-based Kalpataru group's two companies were barred by SEBI for raising money illegally from investors. Yet, the group has floated another similarly named company and is collecting money under its real estate scheme

Uttar Pradesh-based Kalptaru group is again collecting money from investors through its real estate schemes using a new company. Last year, market regulator Securities and Exchange Board of India (SEBI), barred KBCL India Ltd, a unit of Kalpataru group, and its directors from raising money and directed them not to launch any new scheme. However, according to sources, the group is collecting money using its another unit, Kalptaru Buildtech Corp Ltd (KBCL) in Uttar Pradesh and Rajasthan by promising huge returns upon investing in a plot of land.

“The protection of the interest of the investors is the first and foremost mandate and therefore steps have been taken to ensure that the Kalptaru group does not collect further funds under its scheme. However, the mastermind of Kalptaru Group is intentionally switching its illegal collective investment scheme (CIS) business under KBCL India to Kalptaru Buildtech Corp (CIN: U45400UP2009PLC038016) or KBCL. They are using the similarity between the names of KBCL India (which is barred by SEBI) and KBCL and collecting money by creating confusion,” the sources pointed out.

The sources said, “Kalptaru Buildtech Corp is inviting contributions to invest in equated monthly instalments (EMIs) in land. The investors are being given an option to withdraw from the delivery of land and take their money with promised returns. In other words, this company is conducting CIS activities under the garb of real estate operations. This company raises deposits in the disguise of advances for unknown real estate projects. The weirdest fact in this case is, the investors are not even aware of the location of the plot and are not sure whether the land has been purchased or not by the company. As land is a physical asset, there should always be clear holding to prove ownership. A person can only own the land once physical possession is taken. Promoters of KBCL are allegedly siphoning the monies collected and are using a sales network comprising local persons who are offered hefty commissions. The agents of these companies recruit more agents and they in turn recruit more agents.”

Kalptaru group, however, had denied running a CIS without taking permission from SEBI. It states that KBCL India is a public limited, listed company and the group is engaged in construction, development and management of agricultural land, townships, shopping malls and group housing society in various states in India and did not run any collective investment scheme.

Last year, SEBI in its order barring KBCL India and the company directors, Rakesh Kumar, Vishvnath Pratap Singh and Shashi Kant Mishra, had said, “KBCL is prima facie engaged in fund mobilizing activity from the public, by floating/ sponsoring/ launching 'collective investment scheme' 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 find that the instant 'Scheme' offered by KBCL under the guise of 'business of real estate/ sale-purchase' is nothing but a smokescreen for its fund mobilizing activity. I find that such fund mobilizing activity falls within the ambit of 'collective investment scheme' as defined under Section 11AA of the SEBI Act and the same has been carried on by KBCL without due registration from SEBI. In this context, I note that 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 KBCL and no investors are defrauded,” S Raman, Whole Time Member of SEBI said in his order issued on 12 September 2013.

SEBI had also asked KBCL India and its directors not to dispose of properties and assets acquired through its CIS and also not to divert the funds raised from such schemes. The company has also been restrained from launching any new schemes.

However, this was not the first time, the Mathura-based Kalpataru group faced the wrath of the market regulator. Earlier in 2003, SEBI debarred Kalptaru Agro India Ltd (KAIL) and its concerned officials from operating in the capital market for five years for failing to return money to investors as per regulators orders.

Few months ago, the Bombay High Court restrained Kalptaru Buildtech Corporation from directly or indirectly using the name or mark 'Kalptaru' or any other deceptively similar mark as part of its corporate or trading name. Mumbai-based real estate company, Kalpataru Properties Pvt Ltd had dragged Kalptaru Buildtech Corp to court for violating its intellectual property rights over its trademark and name. “Kalpataru Properties came across the other company using the name Kalptaru Buildtech Cor Ltd in 2013 and asked it to cease using the name. But since the defendant continued with the use of the same name, the matter landed in court and the court is satisfied that ...the mark is solely and exclusively associated with the Plaintiff (Kalpataru Properties),'' the HC had said in its order.

SEBI and PACL : Sebi to caution investors against PACL

The Securities and Exchange Board of India (Sebi) has received complaints that PACL (Pearl Agrotech Corporation Limited) continues to collect money from investors, defying the market regulator’s ban.

The market regulator, also entrusted with the responsibility of cracking down on illicit money collection schemes, plans to issue an advisory, cautioning investors against investing in schemes offered by the Delhi-based company.

In August, Sebi had passed an order against PACL, asking the firm to refund around Rs 50,000 crore raised from 58.5 million customers.

A Sebi official said the regulator plans to caution investors by issuing advertisements against PACL. “After the investigation, we will come out with an advisory notice warning investors against the company and not to invest in the schemes launched by it,” said a senior Sebi official.

Two emails sent to PACL did not elicit a response.

Sources indicate that PACL is accepting investments in cities, including Mumbai, Delhi and Ahmedabad.

Sebi, while issuing the order against PACL, had also referred the matter to the state government and local police, asking them to register a civil or criminal case against PACL “for offences of fraud, cheating, and criminal breach of trust and misappropriation of public funds”. The Economic Offenses Wing (EOW), Mumbai, had earlier initiated an inquiry against the company, which it has now transferred to the Central Bureau of Investigation (CBI) considering the quantum of money involved. The regulator has also referred the matter to the Ministry of Corporate Affairs (MCA) to initiate the process of winding up of PACL.

In Sebi’s 92-page order, the total amount mobilised by the company, “by its own admission “comes to a whopping Rs 49,100 crore and “this figure could have been even more if PACL would have provided the details of the funds mobilised during the period of April 1, 2012 to February 25, 2013.”

Sebi order states that PACL operated a land investment scheme, which qualified as a collective investment scheme, without proper registration.

The order also mentions that investors failed to receive any land even after years of investments into schemes offered by PACL.

SEBI and Royal Twinkle Club : Sebi acts against Royal Twinkle Star Club for illegal scheme

Continuing its clamp down on illegal investment schemes, Sebi today barred Royal Twinkle Star Club, which has admitted to mopping up nearly Rs 670 crore through holiday plans, from raising more money from the investors.

Continuing its clamp down on illegal investment schemes, Sebi today barred Royal Twinkle Star Club, which has admitted to mopping up nearly Rs 670 crore through holiday plans, from raising more money from the investors.

Royal Twinkle Star Club Ltd (RTSCL) is part of diversified Mirah group which has interests in real estate and hospitality, among other areas.

Sebi has directed RTSCL and its directors -- Omprakash Basantlal Goenka, Prakash Ganpat Utekar, Venkatraman Natrajan and Narayan Shivram Kotnis -- not to collect "any more money from investors including under the existing schemes".

They have been barred from launching any new schemes as well as from disposing any of the properties or alienate any of the assets of the schemes.

Further, the market watchdog has asked these entities "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." As per the order, they have to furnish the list of investors with full particulars, including permanent account number (PAN), within 15 days from the date of receipt of this order.

RTSCL issues holiday plan certificates of confirmation to individual investors who purchase the holiday plans.

"RTSCL has admitted to raising a sum of Rs. 669.33 crore from a total of 3,68,833 investors under its Comfort Holiday Plan, Economic Holiday Plan and Luxury Holiday Plan," the order said.

Under the plans, holiday points are awarded to investors in any case the investor desires, the same can be rented out or sold in the open market through RTSCL.

"... The contribution made by investors in response to the Holiday Plans offered by RTSCL are pooled and utilised for providing various holiday facilities, and in case the said facilities are not availed, then providing compensation," the order noted.

In January 2012, the Securities and Exchange Board of India (Sebi) had received a complaint that RTSCL was collecting thousands of crores from gullible investors under the garb of 'Comfort Holiday Plan'.

It was also alleged that RTSCL was indulging in illegal deposit mobilisation involving guaranteed returns of 1.5 times in 4 years, 1.7 times the investment in 5 years, double in 6.5 years and 3 times in 9 years.

Sebi's Whole Time Member S Raman, in the order, said that steps have to be taken in the instant matter to ensure only legitimate investment activities are carried on by RTSCL and no investors are defrauded.

"In light of the same, I find there is no alternative but to take recourse through interim action against RTSCL for preventing it from further carrying on with its fund mobilising activity related to 'collective investment scheme', without registration from Sebi," it noted.

SEBI and Citrus : Citrus Check Inns mis-selling holiday package as investment plan?

Citrus Check Inns, the new avatar of Royal Twinkle Star Club, is selling its holiday membership as an investment plan to gullible investors. Is SEBI aware about it?

Citrus Check Inns Ltd is the new avatar of Royal Twinkle Star Club (RTSC) that was infamous for selling holiday packages to gullible people on monthly instalment basis and promising high returns on their investment. Several agents of both these entities are found hard selling these as investment plans just to earn more commission and also recruiting new agents for marketing it.

One investor, Sampath P told Moneylife that, his parents invested in RTSC investment plan. Not being very financially literate they misunderstood the holiday package membership as a recurring deposit plan. They paid Rs500 every month to RTSC in the hope of getting good returns on their investment! On maturity when Sampath and his parents went to collect the amount, after standing in long queue with other investors waiting for their money, RTSC simply refused to pay up. This happened on several occasion, finally the company agreed to pay the money he invested along with some interest. He said there are many other investors who are still asking for their money.

Few agents of these companies operate through their own website and sell membership plans. Their sites include presentations and membership plans of both the companies as well as how one can earn income through its plans. Mrs Harapriya, an agent, in her blog titled: Big-Dad’s-Money, posted about how one can become millionaire by being part of its network and investing in its ‘investment plans’ and she typically pitches it in the money-circulation scheme way.

“In this world with high rate of inflation everybody wants to become rich overnight. Sometimes question comes in mind, is this possible? I know for getting prosperity in life, hard work is a must, without hard work life becomes a bed of thorns.

It is in your hand to make the dream comes true and to walk on the red carpet with roses under your feet. You will earn crores of rupees, dollar, pound sterling even euro. It is all in your hand. Join citrus check-inns in April by depositing an amount of Rs15,000 or more amount in different holiday plans of the company.”

There are many complaints on forums like regarding ‘investment plans’ offered by Royal Twinkle Star Club. One such victim, Sajid Memon, warns people about the company. He wrote; “Royal Twinkle Star Club is misleading the common public by false selling. The company is really a fake. These people take common people hard earn money, promise 13%, 14% or more interest, and then come up with many excuses and finally disappear. It happened with me. They convinced me, though my family said a no and made me invest.”

Both RTSC and Citrus Check Inns are owned by Mumbai-based Mirah group, which runs hotels under the name Citrus and retail food chain restaurants such as Rajdhani, Mad Over Donuts and Falafels. Citrus Check Inns website claims that it gives freedom to its members to travel over 30 Indian and 3,000 overseas destinations.

Earlier in February 2012, the MCA has directed a probe into books and records of Royal Twinkle Star Club, following allegations of illegal deposit collection from several investors. “RTSC offered customers a variety of Investment plans for holidays, Investors have raised concerns as the holiday plans have an option for redemption of the subscription amount. Registrar of Companies, (Roc)Mumbai received complaints from several investors saying that they were approached by agents of RTSC, who guaranteed returns of 1.5 times in 4 years, 1.7 times the investment in 5 years, double in 6.5 years and 3 times in 9 years,” says a report from Business Standard.

Omprakash Gupta, chairman and managing director of Mirah group, told the newspaper that there was no probe by MCA into the company books and accounts. Goenka said, “RTSC was marketing holiday plans by subscription to the membership offers, but not collecting deposits. The points mentioned in offer documents are reward points as offered by any credit card company or airline company as bonus reward points.”

RTSC in its new avatar as Citrus Check Inns also offers membership plans with different names and features, which are based on the points system. On paying certain amount, the company provide points to investors, which they can redeem at various Citrus hotels. Each point is equivalent of Rs100 and people who do not want to avail holiday plan can ‘rent out’ their holidays to someone else after fulfilling all terms and conditions.

The company displays the holiday membership plan in equated monthly instalment (EMI) options for future holidays along with reward point scheme. However, majority of the company agents mis-sell this membership as investment and also promote it as part time and full time earning opportunity. This includes selling of membership plans and adding more people into their network like multi-level marketing (MLM) schemes and earning commissions.

One reader told Moneylife, “Citrus Check Inns is selling investment schemes and collecting money from people with promise of returns more than bank and post office, in the garb of timeshare. They are targeting low and middle income people, who do not have much knowledge of an investment product.”

One agent of the company wrote on It says, "Citrus Check Inns Ltd Refundable membership plan as well as Money Investment plan, because money is collected and pay back after different period. All plans are suitable for every customer plan period is; 5/6/7/8 and 9. It means we called Recurring Deposit / Fixed Deposit/ pension plan and money back term."

This comment clearly is intended on selling ‘investment plan’ and not any membership plan of holiday package.

What both Royal Twinkle Star Club and Citrus Check Inns are doing, under the pretext of selling membership plan, is nothing but pure collective investment scheme (CIS), as per Securities and Exchange Board of India (SEBI) definition.

The SEBI Act, 1992 gives the market regulator power to regulate the working of schemes which are in effect CIS and have the following characteristics :

  1. Pooling of money;
  2. Entrustment of money to someone such that the investors are not the ones who are managing their own money; and
  3. Sharing of returns from a specified investment

Money collecting activities of both RTSC and Citrus Check Inns, carry the features of a CIS, specified under Section 11AA of the SEBI Act read with Regulation 3 of the SEBI (CIS) Regulations.

Earlier, market regulator SEBI had barred several companies like Osian’s-Connoisseurs of Art Pvt Ltd , Sun-Plant Agro , Kolkata-based Rose Valley group , and Maitreya Plotters and Structures Pvt Ltd from collecting money from public under the pretext of offering ‘investment plan’ and ‘huge returns’.

The Rose Valley group was found running a holiday membership plan similar to what is being offered by RTSC and Citrus Check Inn.

Our email sent to SEBI, about the money collection scheme of RTSC and Citrus Check Inn, remained unanswered till writing the story.

SEBI and Ponzi : Is the Modi govt helping Ponzi, MLMs become legal?

Ordinary people are the biggest losers in the Ponzi, MLMs, chit fund and money circulation schemes like Saradha, Speak Asia and QNet. Yet, under 'pressure' from powerful MNCs operating as direct selling companies..

Ordinary people are the biggest losers in the Ponzi, MLMs, chit fund and money circulation schemes like Saradha, Speak Asia and QNet. Yet, under 'pressure' from powerful MNCs operating as direct selling companies, the Modi government is reportedly proposing to dilute the PCMCS Act. Will it impose stringent conditions on them or merely help them to escape scrutiny?

It is reliably learnt that Department of Banking and Financial Services under the Ministry of Finance is moving a Cabinet Note on 7 October 2014 to bring exceptions to Prize Chits & Money Circulations Schemes (Banning) (PCMCS) Act, 1978.

By using this amendment, several multi-level marketing (MLM) companies, like Amway, QNet may get a free run in this country and become completely legal, when they were operating in a grey area so far. The lobbyists of these companies in Delhi have been extremely active in New Delhi to get the Narendra Modi government support by diluting the Act. The irony is that while the Finance Ministry is quietly working at diluting the Prize Chits Act, the very same government and its capital market regulator has been going after the Saradha scamsters with renewed vigour and the chairman of MPS Greenery has been arrested following action by the capital market regulator. Ponzi schemes have been bursting on the national scene with great regularity and in most cases, there is political collusion. A major scam is also being investigated in Orissa after tens of thousands of people were duped of their life savings.

So why is the dilution of the PCMCS act such a priority for the new government? Why is it being discussed so quietly, without a public engagement and seeking of feedback from stakeholders? Those who have persistently fought to protect people or highlighted activities of these MLM companies are surprised that the government has time to discuss dilution of this act, when at least six nationalised banks are headless for months and many do not even have executive directors.

EAS Sarma, former secretary to the Government of India (GoI) has written to Cabinet Secretary Ajit Seth and the Banking Secretary Mr Sandhu in response to reports that the Ministry of Finance has circulated a Cabinet note with respect to proposed amendments to the PCMCS Act, 1978.

He says, “There are issues that impinge on several court cases and any dilution of the Act will prejudice the Centre's and States' cases before the Courts. Such a dilution will allow the delinquent MLM companies and their promoters to escape scot-free to the detriment of the public interest”.

The Cabinet note cited by Mr Sarma comes in the wake of regular chit fund scams, like Saradha, breaking all over the country and the government's as yet ineffective efforts to bring these chit funds under control.

By aping the model of MNCs, many indigenous companies are promoting illegal money circulation schemes in every nook and corner, thus ruining the fiscal system of this country. Rough estimates till now has revealed that financial consumers have lost a whopping Rs3 lakh crore by ‘investing’ or ‘buying products’ from these MNCs and local indigenous companies.

Even, the Intelligence Bureau (IB) in October 2012, written to the government about the illegal financial activities of chit fund companies. The IB reported "fresh" illegal financial activities of chit fund companies and multi-level marketing schemes that were cheating lower middle class and poor people, especially from rural and semi urban areas. Of the four firms named, two companies - Rose Valley Estate Construction Ltd, Kolkata and MPS Greenery Developers Ltd, Jhargram are in West Bengal, says a report from Hindustan Times.

The provisions of the PCMCS (Banning) Act, 1978 deals with such activities. Section 2(c) of the Act defines ‘Money Circulation Scheme’ as a scheme by whatever name called for making of quick or easy money on any event or contingency relative or applicable to enrolment of new members into the scheme; for receipt of any money or valuable thing as consideration for a promise to pay money on any event or contingency relative or applicable to enrolment of new members into the scheme. This section further clarifies that it is immaterial whether the commission derived from entrance fee of new members, renewal of periodical subscriptions, conducting of seminars and sale of products or not.

Section 3 of the Act bans (i) Promotion or conduct of these schemes, (ii) enrol of members into such scheme, (iii) Participate or otherwise involvement in these schemes and (iv) remit or receive of the money relating to these schemes.

Mr Sarma, says, “I wish to underline the fact that ‘economic liberalisation’ should not mean welcoming firms that add no value to the economy. Most MLMs, the world over, belong to that category. Many of them are high and mighty, as they are MNCs supported by their parent countries. Their parent governments lobby on their behalf as they profiteer at the cost of the public in the developing world. These companies have, time and again, tried to sneak into the country, through the questionable FIPB route. The smaller MLMs and Chit Funds, hand-in-glove with the regulatory authorities, function merrily without registering under the Companies Act and swindle people. Several of these companies have financial links with terrorist groups, drug traffickers and so on. There is no place in India today where some family or the other is not shedding tears for having got robbed by one of these Ponzi companies! Do you want this unfortunate situation to continue and become worse?”

“If this report is true and if the Act is diluted in anyway, it will not only prejudice the ongoing court cases against MLM companies like Amway but also help more and more unethical Ponzi companies to derive strength and rob millions of unwary households of their meagre savings. There will be a mushrooming of Saradha-like companies having their sway over unsuspecting public and destroying their lives. Instead of curbing the MLMs, then the Central Government will have the unenviable distinction of being an abettor of the MLMs' anti-social activity,” the former Secretary said in his letter.

What is urgently needed today is not any dilution of the PCMCS Act but making it more stringent so that any company that tries to carry on activities that add no value to the economy but syphon off the savings of the small households are brought under rigorous regulatory oversight. The need of the hour is to secure coordination among regulators like SEBI, Registrar of Companies, Enforcement Directorate, Serious Fraud Investigation Office (SFIO), the State police and so on. Similarly, there is need for coordination among Central Ministries such as Finance, Corporate Affairs, Consumer Affairs and the State governments.

Moneylife has been writing and exposing thousands of MLMs, including Speak Asia, QNet (earlier version Gold Quest and Quest Net), StockGuru India, NMart, Minerals for All, and so on. Even Moneylife Foundation, the voice of over 31,000 financial consumers across the country, sent a Memorandum to the then Prime Minister Manmohan Singh urging him to either to ban out rightly or put in place a regulator in-charge to monitor such MLM companies and their schemes.

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SEBI Consultancy - FAQ - Collective Investment Schemes

1. What is meant by Collective Investment Schemes?

A Collective investment scheme is any scheme or arrangement, which satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act.

Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS. Investors do not have day to day control over the management and operation of such scheme or arrangement.

2. Which are the schemes not treated as CIS?

The following do not constitute a collective investment scheme :

  1. any scheme or arrangement made or offered by a co-operative society 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;
  2. any scheme or arrangement under which deposits are accepted by non-banking financial companies
  3. any scheme or arrangement being a contract of insurance to which the Insurance Act, applies;
  4. any scheme or arrangement providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952
  5. any scheme or arrangement under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956);
  6. any scheme or arrangement 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 (1 of 1956)
  7. any scheme or arrangement falling within the meaning of Chit business as defined in clause (d) of section 2of the Chit Fund Act, 1982 (40 of 1982);
  8. any scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund;

3. What is a Collective Investment Management Company?

A Collective Investment Management Company is a company incorporated under the provisions of the Companies Act, 1956 and registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999, whose object is to organise, operate and manage a Collective Investment Scheme.

4. What is an existing Collective Investment Scheme?

Entities, which were operating a collective investment scheme at the time of commencement of CIS Regulations i.e. (October 15, 1999), are deemed to be an existing collective investment scheme.

5. Can an existing Collective Investment Scheme raise further funds?

An existing Collective Investment Scheme cannot launch any new scheme or raise money from the investors even under the existing scheme, unless a certificate of registration is granted to it by SEBI. In other words, after notification of regulations an existing collective investment scheme, even after obtaining provisional registration as well as after obtaining credit rating cannot mobilise funds from the public unless a certificate of registration is granted to it.

6. Under what circumstances a company registered as a Collective Investment Management Company can raise funds from the public?

A registered Collective Investment Management Company is eligible to raise funds from the public by launching schemes. Such schemes have to be compulsorily credit rated as well as appraised by an appraising agency. The schemes also have to be approved by the Trustee and contain disclosures, as provided in the Regulations, which would enable the investors to make informed decision.

A copy of the offer document of the scheme has to be filed with SEBI and if no modifications are suggested by SEBI within 21 days from the date of filing then the Collective Investment Management Company is entitled to issue the offer document to the public for raising funds from them.

7. Will the unit certificates be listed on Stock Exchanges?

Yes, they have to be compulsorily listed on the Stock Exchanges as mentioned in the Offer document.

8. Are the investors entitled to receive information about the schemes where they have invested and at what interval?

The investor are entitled to receive a copy of the Balance Sheet, Profit and Loss account and a copy of the summary of the yearly appraisal report from CIMC within two months from the closure of the financial year.
Further, the scheme wise annual report or an abridged form thereof has published in a national daily as soon as possible but not later than two calendar months from the date of finalisation of accounts.
Also, scheme wise un-audited quarterly financial results have to be published in a national daily by CIMC within one month from the close of each quarter.

9. Does filing of offer document of a scheme by a CIMC with SEBI mean that investment in that scheme is safe and sound?

It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. SEBI does not take any responsibility either for the financial soundness of any scheme for which the offer document has been filed or for the correctness of the statements made or opinions expressed in the offer document.
It is the responsibility of the Collective Investment Management Company to ensure that the disclosures made in the offer document are generally adequate and are in conformity with the Regulations.

10. Under what circumstances can an existing Collective Investment Scheme be wound up?

An existing collective investment scheme which failed to make an application for registration, or was not desirous of obtaining provisional registration, or has not been granted provisional registration, or having obtained provisional registration fails to comply with the provisions as laid down in the Regulations, was / is required to wind up the existing scheme.

11. What is the procedure for winding up of an existing Collective Investment Scheme?

First of all an existing collective investment scheme has to send an information memorandum to the investors who have subscribed to the schemes, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined.
The said information memorandum has to be dated and signed by all the Directors of the scheme. The information memorandum has to explicitly state that investors desirous of continuing with the scheme will have to give a positive consent, within one month from the date of the information memorandum, to continue with the scheme.
If, positive consent to continue with the scheme is received from only 25% or less of the total number of existing investors, the scheme shall be wound up and payment be made to the investors within three months of the date of the information memorandum.

12. What are the redressal mechanisms available to an investor in Collective Investment Schemes who invested before the date of notification of the Regulations (i.e. before October 15, 1999)?

Investors may note that many of the existing collective investment schemes had collected funds from the public prior to coming into force of the regulatory jurisdiction of SEBI and any action by SEBI against defaulting entities does not necessarily ensure the refund of money invested by the investors in such entities.

13. Is there some institution, which guarantees repayment of money now ?

As a regulatory body SEBI can not guarantee or undertake the repayment of money to the investors.

14. Whom to approach for Grievance Redressal ?

Investors should approach CIS in this regard. If investors do not get satisfactory response thereto, they may write to SEBI. Further, investors can approach district consumer redressal forums in case entities fail to honour their commitments or for any deficiency in service. For bouncing of cheques, investors can move the courts under section 138 of the Negotiable Instruments Act as the right to file criminal complaint exclusively vests with the beneficiary of the cheque.
Investors should further note that wherever they do not have a right to the land or to the produce arising out of the land such investment may be a deposit and where a company fails to repay the deposits, it attracts the provisions of section 58A of the Indian Companies Act, 1956. It is clarified that SEBI has no jurisdiction over such deposits.

15. What are the mechanisms available to an investor to know about the registration status of various entities either existing or new?

On grant of registration as a collective investment management company, SEBI shall issue a Press Release giving the name and address of the entities which have been granted registration. Further, the same shall be posted on the SEBI website:

16. What are the penal provisions if a registered collective investment management company violates certain provisions of the Regulations?

If, a registered collective investment management company violates certain provisions of the regulations, then action in terms of suspension/ cancellation of certificate may be initiated against the entity.
Further, SEBI may, in the interests of the securities market and the ' investors, initiate criminal prosecution under Section 24 of the SEBI Act, apart from passing of directions such as

  1. requiring the person concerned not to collect any money from investor or to launch any scheme;
  2. prohibiting the person concerned from disposing of any of the properties of the scheme acquired in violation of the Regulations;
  3. requiring the person concerned to dispose off the assets of the scheme in a manner as may be specified in the directions;
  4. 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;
  5. prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period

Note : The answers given here are general in nature. The questions and the answers have been structured to enable the readers to gain a broad understanding of SEBI(Collective Investment Schemes) Regulations, 1999. For exact details the reader is advised to refer to the SEBI (Collective Investment Schemes) Regulations, 1999 which are available on our website. Readers may also note that these answers do not aim to explain the Regulations in force, since answers to questions involving particular case / fact pattern may depend upon administrative decisions and Court orders, if any, in respect of the same.