From not being sure about the applicability of its own regulation to issuing bizarre order of refunding money with 10% interest, SEBI’s repeated bungling under three different chairmen is shocking
The Securities Appellate Tribunal (SAT) on Tuesday set aside part of an order of Securities and Exchange Board of India (SEBI) that directed Osian’s Connoisseurs of Art to refund the unpaid amount of Rs102 crore raised from investors along with interest at 10% per annum. The Osian’s Art Fund was a CIS (Collective Investment Scheme) promoted by Neville Tuli, an art dealer. CIS is any scheme made by any company under which the contributions by investors are pooled, to receive profits.
The tribunal held that art funds came under the regulator’s (SEBI) jurisdiction and that Osian’s Art Fund was indeed a CIS. But the tribunal asked the regulator to re-examine its order to refund money. It said the regulator had not explained why Osian’s Connoisseurs of Art needed to return money to investors since the scheme neither offered guaranteed returns nor offered interest on invested amount. While passing this order, SAT has exposed how SEBI has repeatedly bungled in handling this case. Here is the sequence of events that shows how pathetic has been SEBI’s record in the Osian’s case.
Before the Scheme was launched: Osian’s Art Fund was launched in 2006. Osian claims in an affidavit that: “Prior to the launching of the scheme the appellant had formal meeting with SEBI’s Executive Director Pradeep Kar on February 15, 2006 and also had informal discussions and correspondence with SEBI on the question as to whether the scheme would attract registration under any of the regulations framed by SEBI. However, no response was received by the appellant from SEBI in that behalf. The SEBI chairman at that time was M Damodaran.
After the Scheme was launched: SEBI had begun its investigation of Osian in 2007, issuing a show cause notice to Osian on 12 October 2007. However, shockingly, SEBI officials went to sleep after issuing this show cause notice. Even as the show cause notice was pending, on 13 February 2008 SEBI had issued a press release, stating that Art Funds/Schemes were CIS and that floating such schemes without obtaining registration from SEBI would be in violation of Section 12 of SEBI Act read with Section 11 and Section AA of SEBI Act. In spite of the press release the appellant, Osian, has failed to apply for and obtain registration under CIS Regulations. Once again SEBI kept quiet. Osian was allowed to operate as it is. M Damodaran was the SEBI chairman till 18th February 2008.
After the Scheme ended: The scheme closed in 2010 and Osian was paying back only a part of the money and only selectively. One of them was A. K. Muthuswamy, of Chennai. He complained about Osian to SEBI. In shocking reply, SEBI told him on 31 January 2011 that the scheme was not covered under CIS and therefore, the investors, who have invested in the scheme of the appellant, cannot seek redressal of their grievances from SEBI. Remember, a few years ago SEBI had issued a show cause notice and also issued a press release about Osian being an art fund! At this time, the SEBI chairman was CB Bhave who left office in February 2011.
The matter went to the SAT. On 29 November 2012 SAT said that SEBI’s 31 January 2011 communication to Muthuswamy was wrong and directed SEBI to re-examine the issue in accordance with law. By an order passed on 15 April 2013, SEBI held Osian guilty of sponsoring and managing a CIS without obtaining certificate of registration from SEBI, in contravention of Section 12(1B) of SEBI act and Regulation 3 of the SEBI’s (Collective Investment Schemes) Regulations, 1999. By that order, Osian was directed to wind up the CIS and refund the monies collected but not paid to the investors. In addition, Osian was also directed to pay the amount of profits/income earned that is due to the investors as per the terms of its offer or pay interest at the rate of 10% per annum on the amount invested from the date of investment till the date of refund, whichever is higher. The SEBI chairman this time was UK Sinha, who is expected to end his term a little later from now.
Osian went to the SAT against this order arguing that it was not a CIS. SAT has now rejected this contention. “The scheme floated by Osian fulfils all the conditions set out Section 11AA(2) of SEBI Act and therefore, the decision of SEBI in holding that the scheme floated by SEBI falls within the scope of CIS cannot be faulted”, said the SAT Order.
However, the SAT Order also points out, “SEBI does not find fault with the scheme of Osian which neither offered guaranteed return nor offered interest on the amount invested. In such a case, on what basis Osian is directed to refund the amount invested with interest at the rate of 10% per annum is not set out in the impugned SEBI order.”
SAT goes on to say “…for the error committed by SEBI in misconstruing its own regulations and for the inordinate delay on part of SEBI in arriving at correct conclusion, whether Osian can be penalised by directing to refund the amount with interest at the rate of 10% from the date of investment needs consideration, especially when the scheme has come to an end in the year 2010 and the terms of the said scheme neither offered guaranteed return nor offered interest on the amount invested.”
SAT has said that although regulation 65 of CIS Regulations empower SEBI to direct refund with interest in appropriate cases, how in the facts of present case, directing refund of the amount invested with interest is justified, is not set out in the SEBI order of 2013.
Hence, the SAT ruled that it is setting aside the directions contained in the SEBI order, to the extent that it directs Osian to refund the monies at 10% interest per annum. Instead, the SAT Order has directed SEBI to decide those issues afresh after affording an opportunity of hearing to Osian and AK Muthuswamy.
You may also read the earlier articles on Osian:
In a manner of critical viewing, the point of concern / bone of contention of a reader in his comment herein, as read and understood, rightly so, may be noted to be in -line /on the same wave length as of the posted comment @ http://feedproxy.google.com/~r/IndianCor... (SEBI’s order levying record penalty – some concerns) – also shared on Facebook.
A repeat instance of lack of proper vision. blatantly wanting wisdom in the proverbial "bark(ing) up the wrong tree", so to say the least.
The Final NAV was thus declared by the Osians Art Fund without any involvement or input or pressure from or consultation with the unitholders. It was solely decided by the Trustees & Unitholders had no say in it. If they had declared a negative Final NAV, unitholders would have been very disappointed no doubt, but would have had no alternative but to accept the same, as returns were not assured.
But after the fund declared the Final NAV entirely at their discretion, to not then pay it out to the unitholders is quite unforgivable.
I have heard some talk about buyers of the Art reneging on their commitments. To this I can only say that it is for these experts who were running the fund to have known that it was conceivable that buyers of the Art might renege on their agreements, and if so, they could have withheld the declaration of the Final NAV till all payments were received. They , in all their wisdom & expertise declared the Final NAV, it is their responsibility therefore to see that the NAV is paid to the unitholders (with some interest for the delay).