wtm/rka/efd-dra-iii/ 1 - 2/2016 before the securities and

Order in the matter of Godavari Biorefineries Limited of 31

WTM/RKA/EFD-DRA-III/ 1 - 2/2016

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

UNDER SECTIONS 11 AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF

INDIA ACT, 1992.

______________________________________________________________________________ IN THE MATTER OF GODAVARI BIOREFINERIES LIMITED- IN RESPECT OF

Noticees:-

Sl. No. Name of the Noticees PAN Order Number

1. Sameerwadi Sugarcane Farmer’s Welfare Trust AAITS7115G

1/2016

2. Narsang V. Padhiyar, Chairman and Trustee ADNPP7282P

3. Pandappa R. Channal, Trustee AOTPC5084M

4. Balachandra R. Bakshi, Trustee AFMPB6323E

5. Veerbhadrappa R. Terdal, Trustee ABCPT1496J

6. Prahlad N. Desai, Trustee ABOPD7235M

7. Godavari Biorefineries Limited AABCG2543C 2/2016

8. Mr. Samir S. Somaiya, Managing Director AMUPS9442C

9. Mr. Vinay V. Joshi, Director AAHPJ2213M

10. Mr. V. Sivaprakasam ABHPV3418P

Appearances:

Sl. No. Noticee Authorised Representative

1 Sameerwadi Sugarcane Farmer’s Welfare Trust

Narsang V. Padhiyar, Chairman and Trustee

Pandappa R. Channal, Trustee

Balachandra R. Bakshi, Trustee

Veerbhadrappa R. Terdal, Trustee

Prahlad N. Desai, Trustee

Mr. Kumar Desai, Advocate

Mr. Vinay Chauhan, Advocate

Mr. Prashant Ingle, Advocate

Mr. Narsang V. Padhiyar

Mr. Pandappa R. Channal

2 Godavari Biorefineries Limited

Mr. Samir S. Somaiya, Managing Director

Mr. Vinay V. Joshi, Director

Mr. V. Sivaprakasam, Director

Mr. Janak Dwarkadas, Senior Advocate

Mr. R. J. Gagrats, Advocate

Mr. Ankit Lohia, Advocate

Ms. Sheetal Sabnis, Advocate

Ms. H. V. Tamanna, Advocate

Ms. Ipsita Sen, Advocate

Mr. Naresh Khetan, Chief Finance Officer

Ms. Rutika Pawar, Company Secretary

1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) received a complaint

dated November 22, 2009 against Godavari Biorefineries Limited (hereinafter referred to as “GBL”

or “the Company”), alleging, inter alia, that:-


(i) GBL has formed a trust namely Sameerwadi Sugarcane Farmers’ Welfare Trust (hereinafter

referred to as the “Trust”);

(ii) The Trust was collecting contributions from sugarcane farmers in North Karnataka aiming at

a total of ₹100 crore;

(iii) As against investments received from the Trust, GBL privately placed its 50 lakh shares of

₹10/- each at a premium of ₹190/- per share to the Trust; and

(iv) The share certificates were to be subsequently transferred by the Trust to the

contributors/beneficiaries on pro rata to their contributions.

2. In view of the above, SEBI initiated investigations into the matter. The investigation revealed inter

alia the following:-

(a). GBL was incorporated in the year 1956 as a subsidiary of Godavari Sugar Mills Ltd. Pursuant

to a scheme of demerger sanctioned by the Hon’ble Bombay High Court vide order dated

March 20, 2009, all the core businesses of Godavari Sugar Mills Ltd. were demerged in GBL

with effect from April 01, 2008 and its issued, subscribed and paid up capital increased by

₹45.48 crores.

(b). Mr. Sameer S. Somaiyya, Mr. Vinay V. Joshi and Mr. V. Sivaprakasam were the directors of

GBL at the relevant time (hereinafter collectively referred as “directors” or individually by

their respective names).

(c). On June 19, 2009, the board of directors of GBL passed a resolution to raise further capital

to the tune of ₹100 crores by allotment of equity shares to the identified 'eligible investors'. Mr.

Narsang V. Padhiyar (General Manager – Public Relations, GBL), one of the key

management personnel (KMP) of GBL, among others, was authorized to do the needful

with respect to allotment of shares of GBL.

(d). On August 12, 2009, in the Annual General Meeting (AGM) of GBL a special resolution was

passed for allotment of shares to identified 'eligible investors' at a premium.

(e). On September 19, 2009, the Trust was formed by executing a Trust Deed. Mr. Baburao A.

Amalajeri and Mr. Bhalachandra R. Bakshi were the settlors of the Trust. Mr. Narsang V.

Padhiyar (General Manager – Public Relations, GBL), Mr. Pandappa R. Channal, Mr.

Bhalachandra R. Bakshi, Mr. Veerbhadrappa R. Terdal and Mr. Pralahad N. Desai were made

the Trustees of the Trust (all these trustees are hereinafter collectively referred as “Trustees”

or individually by their respective name). The object of the Trust was to undertake welfare

schemes, to provide beneficial support to all the activities meant for the welfare and benefit

of the beneficiaries/contributories.

(f). As stipulated in the Trust Deed, the settlors, who are farmers producing sugarcane in the

districts of Bagalkot, Bijapur and Belagaum in the state of Karnataka, had set up the Trust

for the benefit of beneficiaries by pooling resources and funds, to organize schemes and

initiatives for educating the beneficiaries about the economies of growing sugarcane as

compared to other crops, development of irrigation sources, coordinating and managing

harvests and transport of sugarcane and such other similar initiatives.

(g). The beneficiaries of the Trust were sugarcane farmers from the districts of Belgaum,


Bagalkot and Bijapur who have been supplying or will supply sugarcane to GBL.

(h). The Trust Deed contemplated contribution by the beneficiaries for the purpose of

investment in securities. In order to become a beneficiary, the farmer had to contribute

money to the trust. Some of the salient features of the Trust Deed, were observed as under:

Clause 1.1 – “Contribution” means the money to be contributed by a farmer to the Trust

to become a beneficiary.

Clause 7.4 - “the Trustees shall utilize the corpus to acquire Securities, with potential to generate

returns, and shall fund the objectives of the Trust from the dividends accruing such Securities”.

Clause 4.2 - The Trust Fund shall vest in the Trustees and the Trustees shall hold the

Trust Fund and the accumulation, additions, accretions thereto in trust for the benefit of

the beneficiaries.

Clause 5.2.3 - The beneficiaries could inter alia opt for distribution of their beneficial

interest in the Trust as per the procedure laid down in Clauses 5.3 and 5.4 of the Trust

Deed.

Clause 8 - General Powers of the Trustees: All the affairs of the Trust shall be managed

and administered by the Trustees in accordance with the Trust Deed- viz; carrying out

welfare schemes, borrowing money, investment in the securities, to hold and administer

the Trust Fund, to open accounts with any scheduled banks and depository, to appoint

from time to time mangers, secretaries, clerks, consultants and other farmers, etc.

(i). The Trust collected contributions from its 32,376 contributories/beneficiaries amounting to

total ₹45,39,20,000/.The Trustees issued receipts to the contributories/beneficiaries in respect

of their contributions to the Trust assuring issuance of shares of GBL to them on pro rata

basis.

(j). On November 05, 2009, GBL invited the Trust to invest in its shares at a price of ₹200/ per

equity share of face value of ₹10/ each.

(k). On November 18, 2009, the Trustees passed a resolution accepting the offer of GBL to invest

in its shares at a price of ₹200/ per equity share of face value of ₹10/ each. The Trustees also

authorized Mr. Narsang V. Padhiyar (the General manager of GBL and one of the Trustees)

to open and operate the savings bank accounts in the name of the Trust and to “singly”

operate and honour cheques, bills of exchange and promissory notes, etc. on behalf of the

Trust. The Minutes of the said meeting were signed only by Mr. Narsang V. Padhiyar, even

though the minutes stated that the meeting was attended by all the Trustees.

(l). On November 20, 2009, GBL allotted its 18,41,850 shares to the Trust.

(m). On March 30, 2010, GBL passed another resolution to further allot 4,27,750 shares to the

Trust. On the same date, the Trustees also passed a resolution accepting the offer of GBL and

thereafter, subscribed to 4,27,750 equity shares of GBL at a price of ₹200/ per equity share

of face value of ₹10/ each.

(n). In this manner, GBL allotted a total of 22,69,600 equity shares to the Trust in two tranches

on November 20, 2009 and on March 30, 2010 – together constituting 7.42% of the issued

share capital of GBL. GBL issued 83 share certificates of different denominations (ranging


from 50 to 50,000 shares each certificate) representing these 22,69,600 shares as described in

the following Table:

Sl. No. No. of share

certificates Denomination per certificate

Total no. of equity shares

1. 42 50,000 21,00,000 2. 16 10,000 1,60,000 3. 8 1,000 8,000 4. 15 100 1,500 5. 2 50 100

Total 83 22,69,600

(o). The statement of accounts issued by the Trust to its contributories/beneficiaries reads inter

alia as “….the Trust has invested the contributions received from the beneficiaries, in the equity of GBL at

Rs. 200/- per Equity Share (Face value of Rs. 10- per equity share). Your corresponding share in the Trust

Fund, calculated in accordance with the Trust Deed is …………equity shares”.

(p). Mr. Narsang V. Padhiyar, General Manager of GBL was associated with the allotment of

shares of GBL and he was also one of the Trustees of the Trust having substantial

responsibilities and authority in managing the affairs of the Trust including signing of all the

important documents of the Trust such as its resolutions, the minutes of the various

meetings and the receipts issued to the contributories/beneficiaries.

(q). Though the Trust was created on September 19, 2009, i.e., just two months before the first

allotment of shares by GBL to it, it had claimed in its resolution dated November 18, 2009

that it had ".... long standing relationship with Godavari Biorefineries Limited”.

(r). Though the Trust Deed stipulated that the corpus of the Trust be used for investing in any

securities, the Trust had invested its corpus only in the shares of GBL.

(s). The list of top 100 such contributories to the Trust showed that the contributions were

received from some farmers who were from districts other than Belgaum, Bagalkot and

Bijapur, as well (e.g., Dharwad, Bangalore, etc.)

(t). When a contributory/beneficiary named Mr. Sankar T. Tigadi approached the Trust seeking

distribution of his beneficial interest in the Trust, the Trustees informed him that his

contribution had already been transferred to GBL for allotment of shares and GBL had in

turn issued shares in the name of the Trust which will be transferred to the

contributories/beneficiaries at the time of the proposed IPO of GBL.

3. In view of the above, SEBI issued a common show cause notice (SCN) dated January 25, 2012 and

two corrigenda thereto, dated December 10, 2012 and February 25, 2013, to the Trust, its Trustees,

and GBL and its directors (hereinafter collectively referred to as the "noticees"). The charges leveled

against the noticees are reproduced as under:

(a). ".. it is alleged that the Trustees of the Trust, are engaging in offering the shares of GBL for sale to the

investors by issuing receipts to them. It is further alleged that GBL is controlling and using the Trust through

Shri Padhiyar who is a senior management person, not only for carrying out an unregistered CIS but also

circumventing the provisions of ICDR Regulations with regard to the public issue. Further, GBL alongwith


the Trust is committing fraud on the market mechanism by not offering its shares directly to the investors. The

arrangement between the Trust and GBL is just a sham to circumvent the legal requirements of the ICDR

Regulations, which would have attracted had GBL offered its shares directly to the investors. It is alleged that

GBL is using the Trust as a conduit for this purpose. The allotment of the shares of GBL to the Trust at

₹200/- indicates the intention of GBL to manipulate the offer price of shares during its proposed public

offer."

(b). "......it is alleged that GBL is running a CIS through the Trust without obtaining the certificate of

registration from SEBI."

4. Thus, the SCN charged GBL and its directors and the Trust and its Trustees for the alleged violation

of the provisions of:

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

with regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 (the CIS

Regulations);

(b). Regulations 4(2), 5(1), 5(7), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 47 of the SEBI (Issue of

Capital and Disclosure Requirements) Regulations, 2009 (the ICDR Regulations).

5. SEBI issued a corrigendum dated December 10, 2012 (Corrigendum - 1) to the said SCN and

modified some of the charges/violations against the noticees. The allegations/violations leveled

against the noticees, as modified by the said corrigendum, are reproduced as under:

(a). “Thus, it is alleged that the acts of omissions and commissions by GBL and its directors and the Trust and

its Trustees are in violation of the provisions of Section 12(1B) of the SEBI Act read with Sections 56 and

73 of the Companies Act, 1956, Regulation 3 of the SEBI (CIS) Regulations, 1999 and Regulations 4(2),

5(1), 5(7), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 47 of the SEBI (ICDR) Regulations, 2009.

(b). Therefore, the noticees are hereby called upon to show cause as to why -

(i) Suitable directions under section 11 and 11B of the SEBI Act, 1992 read with Regulation 65 of the

CIS Regulations, 1999 should not be passed against Noticee Nos. 1-6;

(ii) Suitable directions under section 11 and 11B of the SEBI Act, 1992 read with Regulation 107 of the

ICDR Regulations, 2009 should not be passed against Noticee Nos. 7-10.”

6. Thus, the SCN, as modified by Corrigendum -1:

(a). advised the Trust and its Trustees as to why suitable directions under sections 11 and 11B of

the SEBI Act, 1992 read with Regulation 65 of the CIS Regulations, 1999 should not be

passed against them;

(b). advised GBL and its directors as to why suitable directions under section 11 and 11B of the

SEBI Act, 1992 read with Regulation 107 of the ICDR Regulations, 2009 should not be

passed against them.

7. The said SCN was again modified vide another corrigendum dated February 25, 2013 (Corrigendum

- 2) and GBL and its directors and the Trust and its Trustees were also alleged to have violated section


67 of the Companies Act, 1956 in addition to the provisions of section 12(1B) of the SEBI Act read

with Sections 56 and 73 of the Companies Act, 1956, regulation 3 of the CIS Regulations, 1999 and

regulations 4(2), 5(1), 5(7), 6, 7, 16(1), 20(1), 25, 26, 36, 37, 46 and 47 of the ICDR) Regulations.

8. Therefore, in the SCN, as modified by the two corrigenda thereto, GBL and its directors were

advised to show cause as to why suitable directions under sections 11 and 11B of the SEBI Act, 1992

read with regulation 107 of the ICDR Regulations should not be passed against them. Further, the

Trust and its Trustees were advised to show cause as to why suitable directions under sections 11 and

11B of the SEBI Act, 1992 read with regulation 65 of the CIS Regulations should not be passed

against them for the above mentioned alleged contraventions.

9. Vide separate applications dated July 21, 2012 and July 24, 2012, the Trust, the Trustees, GBL and its

two directors, viz; Mr. Sameer S. Somaiyya and Mr. Vinay V. Joshi applied for settlement of the

proceedings against them through consent order. After their consent applications were rejected by

SEBI, these noticees also sought copies of certain documents including the complaint dated

November 22, 2009 and inspection thereof and the same was provided to them on January 14, 2013

February 11, 2013. The Trust and its Trustees submitted their replies vide letters dated March 13,

2012, January 23, 2013, March 15, 2013 and April 01, 2013 and GBL and its directors submitted

their replies vide letters dated March 07, 2012, December 10, 2012, February 26, 2013 and March 26,

2013.

10. Opportunity of personal hearing was granted to the noticees on March 14, 2013, April 02, 2013,

April 23, 2013, June 18, 2013. Mr. Janak Dwarkadas, Senior Advocate, appeared and made

submissions on behalf of GBL and its directors on April 02, 2013 and Mr. Kumar Desai, Advocate

appeared and made submissions on behalf of Trust and its Trustees on several dates, i.e., on April 02,

2013, April 23, 2013 and June 18, 2013. Mr. Kumar Desai, also submitted a list of all the

beneficiaries of the Trust, various case laws, a compilation of documents referred to and relied upon

by the Trust and an affidavit of Mr. Narsang V. Padhiyar stating, inter alia, on behalf of the Trust that

SEBI may direct GBL to sub-divide the shares into lots of fifty each to enable the Trustees to make

an in specie distribution of shares to each of the beneficiaries which would meet with the request of

the beneficiaries and spirit of directions contemplated in regulation 65 of the CIS Regulations and

the SCN. He also submitted a list of 9,826 contributories alongwith their applications consenting to

in specie distribution of shares of GBL. GBL and its directors also submitted their written

submissions vide letters dated April 12, 2013 and July 03, 2013 and the Trust and its Trustees

submitted their written submissions vide letter dated July 03, 2013.

11. While the matter was pending consideration, vide letters dated July 24, 2013 and July 25, 2013,

respectively, GBL and its directors, and the Trust and its Trustees sought a second opportunity of

personal hearing referring to the proposition of the Trustees. Considering the facts and circumstances,

particularly the common proposition of the noticees in view of the demand and consent of the

beneficiaries, it was felt necessary to provide opportunity of hearing to GBL, its directors, Trust and

the Trustee together. Accordingly, one more opportunity of personal hearing was granted to the


noticees on August 22, 2013. The noticees appeared on January 21, 2014 and on January 24, 2014

GBL and its directors submitted their written submissions. The Trust and its Trustees submitted their

additional written submissions vide letter dated April 10, 2014 and vide letter their dated October

16,2015 made further request to make in specie distribution of shares.

12. The replies to SCNs and various submissions of GBL and its directors are summarized below:

(1) Mr. Baburao A. Amalajeri and Mr. Bhalachandra R. Bakshi, who are farmers producing

sugarcane in the districts of Bagalkot, Bijapur and Belgaum, are the Settlors of a private trust,

namely, Sameerwadi Sugarcane Farmers Welfare Trust by a Deed of Trust declared and executed

on September 19, 2009 for the benefit of all sugarcane farmers (as beneficiaries of the Trust) by

pooling resources and funds to organize schemes and initiatives for educating the said farmers

about the economies of growing sugarcane as compared to other crops, development of

irrigation sources, coordinating and managing harvests, transport of sugarcane and such other

similar initiatives. GBL does not have any control over the decisions and/or activities of the said

Trust. The said Trust is independent of GBL and is controlled and managed by the Trustees.

(2) The manner in which the discretion for setting up the Trust has been exercised by the Settlors of

the Trust is a matter within the individual knowledge and discretion and/or between the

contributories/beneficiaries and the Settlors. GBL has had no role and/or connection with the

Settlors apart from the Settlors themselves being suppliers of sugarcane to GBL.

(3) The fact that Mr. Narsang V. Padhiyar is a Trustee of the Trust is a matter between the

contributories/beneficiaries of the Trust and the Trustees. Further, Mr. Narsang V. Padhiyar,

though an employee of GBL, is also a sugarcane supplier.

(4) The Trust is wholly independent from GBL and cannot be said to have a "connection" with the

Company as alleged. Further, the role and function of Mr. Narsang V. Padhiyar clearly does not

make him the “Key Managerial Personnel" (KMP) in GBL. The allegation that Mr. Narsang V.

Padhiyar is a senior management person, is not only unfounded but is also contradicted in the

SCN itself. On the one hand SEBI has alleged that Mr. Narsang V. Padhiyar is a KMP and/or

senior management person, on the other hand, it is alleged that the day-to-day activity of the

Trust are carried out by Mr. Narsang V. Padhiyar. The terms KMP and/or 'senior management

person' cannot be construed to be a person who signs documents such as routine receipts,

resolutions, etc. 'Merely because Mr. Narsang V. Padhiyar is an employee of GBL and is also acting

independently in his capacity as a Trustee cannot be a basis to allege any "connection" between GBL and the

Trust. In fact, Mr. Narsang V. Padhiyar is also a contributory/beneficiary under the Trust'. The mere fact

that an employee of GBL is associated with the Trust in his capacity as a Trustee cannot be a

factor establishing connection between GBL and the Trust.

(5) Hence, the Trust which has been established for the welfare of farmers who supply and/or

propose to supply sugarcane to GBL cannot be said to be a facade created by it to collect

contribution from investors.

(6) The allegation that the Trust is controlled by GBL is contrary to the Trust Deed which clearly

provides that the Trustees are obliged to act in their independent capacity without being

influenced either by the directions of the Settlors or any other person including GBL.


(7) In law neither the contributories/beneficiaries of any private/public trust nor any person other

than the trustees can have any control in respect of trust property. Further, the discretion

exercisable by the trustees or the voting rights in respect of shares standing in the name of the

trustees are exercisable by the trustees only.

(8) The fact that there may be several contributories/beneficiaries of the Trust or that they may be

entitled to receive a benefit of the welfare scheme floated by the Trust does not make the issue

of shares of GBL illegal qua the Company.

(9) The issuance of its equity shares by GBL in favour of the Trustees (who are holding the same on

behalf of the Trust), is not violative or in breach of the provisions of section 67 of the

Companies Act, 1956 as the said issuance and allotment was made on a private placement basis

to the five Trustees (who would hold the same on behalf of the Trust). Hence, it would not

amount to a ‘public issue’.

(10) GBL has never issued or allotted shares on a pro rata basis to the contributories/beneficiaries of

the Trust.

(11) The receipts, issued by the Trust, do not contain any assurance of issue of shares to the

contributories/beneficiaries by GBL.

(12) GBL was desirous of making a preferential issue of shares to the Trust as it was impressed by the

initiative adopted by the Trustees to undertake the welfare initiatives for the sugarcane farmers.

GBL also appreciated the intent of the Trustees in investing in the equity shares of GBL as the

beneficiaries of the Trust, i.e. the sugarcane farmers would stand to gain and share in the

prosperity of GBL to which they were supplying sugarcane for crushing.

(13) Apart from the Trust, GBL had also allotted shares to some other entities like Mr. Ankit Raj

Organo Chemicals Limited (AROC Limited), Mr. Upendra V. Mithani and Mr. Vijay V. Mithani

(promoters of AROC Limited) aggregating to 2,50,000 equity shares. Further, the promoters of

GBL converted the preference shares held by them into equity shares by way of a resolution

dated December 14, 2009 and all the aforesaid shares were allotted at the same price of ₹200/-

per equity share. there was no mala fide on the part of GBL and its management and the

promoters have not made any gain out of the allotment of shares to the Trustees for the benefit

of the beneficiaries.

(14) The ICDR Regulations will apply only when an issuer is offering specified securities through

"Public Issue" or 'Rights Issue". The shares in question which have been acquired by the Trustees

and vest in the Trustees for the welfare of the beneficiaries cannot in any manner be taken to be

an offering of the specified securities by public issue/rights issue of securities.

(15) As per section 153 of the Companies Act, 1956, it is the Trustees alone whose names appear in

the Register of Members of GBL and it is the Trustees alone who can exercise control over the

shares. Therefore, the shareholders of GBL including the Trustees continue to remain less than 50

in number.

(16) On learning that GBL was in the process of raising its equity capital by the issuance of equity

shares on a private placement basis, the Trustees had approached GBL with a proposal to invest

in its equity shares.

(17) In view of the fact that the issuance of shares was by way of a private placement to the Trust and


not a public issue, the question of issuing a prospectus does not arise and in view thereof, the

alleged breach of section 56 of the Companies Act, 1956 regarding “matters to be stated and

reports to be set out in prospectus” is inapplicable. The fact that there may be several

beneficiaries of the Trust or that they may be entitled to receive the benefit of the welfare

schemes initiated by the Trust does not make the issue of shares by GBL to the Trust illegal in

any manner whatsoever.

(18) The alleged breach of section 73 of the Companies Act, 1956 regarding allotment of shares and

debentures to be dealt in on stock exchange also does not and cannot arise since GBL is not a

publicly listed company and the issuance of the shares was by way of private placement to the

Trust. Further, by the said allotment of the said equity shares to the Trust, GBL has not made

any profits or gains or gained any unfair advantage whatsoever.

(19) GBL has not made any offer or given any invitation to the 32,376 beneficiaries of the Trust but

has issued and allotted shares to and in the name of the Trustees. The issue of shares by a

company to the Trust which has been validly created (as provided under the Indian Trusts Act,

1882) and which shares are required by law to be held in the names of the Trustees, cannot be said

to be in violation of the provisions of the SEBI Act, merely on account of the fact that the

beneficiaries of the Trust are more than 50 in number. Hence, there cannot be any question of

violation of the provisions of section 67 of the Companies Act, 1956.

(20) The private placement of equity shares by GBL was made with a bona fide intention and utmost

good faith and de hors any sinister intent or design and were based on the advice of its merchant

bankers.

(21) As per the Trust Deed and the Indian Trusts Act, 1882, the Trustee are bound to fulfill the

objectives of the Trust which is an obligation annexed to the ownership of a property. The

beneficiaries have right against the Trustees who are the owners of the trust property i.e. the

share certificates in this case.

(22) The Companies Act does not recognise a Trust. If it is held that no Trust can be created to hold

shares for 50 beneficiaries unless the Trust complies with the SEBI Act and ICDR Regulations,

no such Trust can be created and that position would be in derogation of the provisions of the

Indian Trusts Act, 1882. In terms of section 32 of the SEBI Act, the provisions of SEBI Act and

Regulations made by SEBI are in addition to the provisions of the Indian Trusts Act, 1882 and

they cannot be in derogation thereof.

(23) The allegation in the SCN relating to violation of section 12(1B) of the SEBI Act ought to be

looked at in light of the term 'collective investment scheme' as defined in section 2(ba) read with

section 11AA of the SEBI Act and regulations 2(1)(i) and (ii) of the CIS Regulations. In terms of

section 2(ba) of the SEBI Act 'collective investment scheme' means any scheme or arrangement which

satisfies the conditions specified in section 11AA. Under section 12(1B) a scheme cannot be a

'collective investment scheme' unless it satisfies all the conditions of section 11AA(2). Section 11AA(2)

applies only to a scheme or arrangement “made or offered by any company”.

(24) The provisions of sections 12(1B), 2(ba) and 11AA of the SEBI Act are not intended to apply to

a trust which is private, formed and incorporated in accordance with the provisions of the Indian

Trusts Act, 1882.


(25) Assuming whilst denying that the allegations of CIS can be said to be made against GBL, in the

SCN, none of the requirements of section 11AA (2) of the SEBI Act, which are cumulative in

nature, are satisfied in the present case.

(26) Therefore, the provisions of sections 12(1B), 2(ba) read with section 11AA of the SEBI Act,

cannot be said to have been violated in any manner whatsoever and since the test of a CIS under

section 11AA is not satisfied, the question of violation of regulation 3 of the CIS Regulations

cannot arise.

(27) Out of the 31 sugar mills in the area, in 11 sugar mills the sugarcane farmers have formed co-

operatives for the overall welfare of each other. The intention of the legislature appears to

encourage co-operative movement which is apparent from the provision of section 11AA (3)(i)

of the SEBI Act. The Trust to which the shares have been allotted by GBL has been set up with

the very same objective. Since the intent of the Trust was similar to these co-operatives, in as

much as the Trustees intended to invest in the equity shares of GBL, so that the beneficiaries of

the Trust would stand to gain and share in the prosperity of GBL to which they have been

supplying sugarcane for crushing.

(28) The application money received from the Trust, aggregating ₹45.39 crores, has been utilized

towards capital expenditure for modernization and expansion of the refining plant and towards

the establishment of the co-generation plant and any direction requiring to cancel the allotment

of shares to the Trustees and refund the money paid by them would not be in the interest of

GBL, its shareholders, employees and sugarcane farmers.

(29) Any direction requiring GBL to refund the monies paid for allotment of shares held by the

Trustees, would be highly prejudicial to GBL, its shareholders and other stakeholders. In order

to repay amounts to the contributories/beneficiaries, GBL would be compelled to either divert

the working capital or raise finance through outside sources which is bound to have an adverse

effect on the financial position of GBL.

(30) Neither the Trustees nor the beneficiaries have sought the refund of the monies. The interests of

justice would be better served pursuant to an in specie distribution of the shares to the

beneficiaries and dissolution of the Trust in accordance with the provision of the Trust Deed

and the Indian Trusts Act, 1882 as proposed by the Trustees, instead of ordering a refund of the

monies received by GBL. Therefore, SEBI may direct GBL to make an in specie distribution of

the shares to the beneficiaries as requested for by the Trust.

(31) An in specie distribution of shares would not be in violation of the provisions of section 67 of the

Companies Act, 1956. Section 67 draws a distinction between private placement of shares and a

“public issue”. The exercise of in specie distribution does not envisage any fresh offer invitation or

allotment of shares. The in specie distribution would result in the splitting/sub-division of the

existing share certificate for the shares allotted to the Trust into multiple share certificates

representing a smaller number of shares and thereafter “transferring” such shares in the name of

the transferees of the shares. Such split and transfer of shares would also be in accordance with

the discretion of the Trustees under the Trust Deed and would be governed, inter alia, by the

provisions of sections 108 to 112 of the Companies Act, 1956.


13. The replies to SCNs and various submissions of the Trust and its Trustees are summarized below:

(1) Pursuant to the settlement of the Trust and for the purposes of carrying out the objectives of

the Trust, the Trustees accepted contributions from the contributories/beneficiaries and took

steps towards their welfare. There are five Trustees of the Trust, who are also

contributories/beneficiaries are and supplying sugarcanes to GBL. Mr. Narsang V. Padhiyar is

the Chairman Trustee. The powers of the Trust, particularly with regard to investing the funds

of the Trust, have not been delegated to Mr. Narsang V. Padhiyar. The resolution for

investing has been passed at the meeting of the Trust. The authentication of

resolution/signing of receipts by Mr. Narsang V. Padhiyar was merely an administrative act.

Further, resolutions were not required to be signed by all the Trustees.

(2) In his capacity as the chairman of the Trust, Mr. Narsang V. Padhiyar has signed the

resolutions dated November 18, 2009 and March 30, 2009. Even though the resolutions were

signed by Mr. Narsang V. Padhiyar, the minutes of the said meetings have been signed by all

the Trustees. Therefore, the conclusions drawn on the basis of the alleged association of Mr.

Narsang V. Padhiyar with GBL are unfounded in as much as all the decisions in relation to

the management and administration of the Trust were to be and have been taken by the five

Trustees or a majority of them and not by Mr. Narsang V. Padhiyar alone as insinuated or

alleged.

(3) In view of his personal relationship with the farmers and in recognition of his work, Mr.

Narsang V. Padhiyar was promoted as a General Manager (Public Relations) of GBL. The

allegation that the minutes of the meeting of the Trust held on November 18, 2009 indicate

that the Trustees authorised Mr. Narsang V. Padhiyar to singly operate and honour cheques,

bills of exchange and promissory notes on behalf of the Trust, is incorrect as he was one of

the many persons, including Mr. Pandappa R. Channal, Mr. Bhalachandra R. Bakshi, Mr.

Veerabhadrappa R. Terdal and Mr. Prahalad N. Desai to give effect to the resolution. As

regards, the board resolution dated June 19, 2009, it may be noted that the Trust was not in

existence on that date and as such Mr. Narsang V. Padhiyar was not a Trustee.

(4) The Trustees alone exercise control over the shares, and in terms of the Trust Deed, the

Trustees alone exercise discretion as to the manner and quantum of investment. Further, any

acquisition of shares by subscription or otherwise by the Trustees (in GBL or any other

listed/unlisted company) in the fulfillment/discharge of their duties would be regarded only

as an investment made by the Trustees in the interest of the contributories/beneficiaries.

(5) The allegations that it was unusual for the Trust to have a long standing relation with GBL

barely after two months of its creation, and that the said long standing relation as recorded in

the resolution dated March 30, 2010 is due to Mr. Narsang V. Padhiyar who is allegedly a

KMP of GBL are denied.

(6) Out of the 31 sugar mills operating in the Northern Karnataka region, at least 11 are co-

operative sugar mills wherein the sugarcane suppliers are shareholders and have a sense of

ownership and belonging in the sugar mills to which they supply sugarcane. The other farmers

who are not members of the co-operative but were sugarcane growing suppliers in the three

districts, wanted the same feeling of ownership in GBL as they were supplying sugarcane to it


for the last several years. It is in light of the aforesaid, the Trust was established by the Settlors

and the Trustees to bring about a feeling of collective ownership between the farmers and

there was no intent for the distribution of the income or profits earned by the Trust on this

investment. The income and the profits were to be used for the activities of the Trust which

were for the benefit of the contributories/beneficiaries.

(7) There is a symbiotic relationship between the sugar mills and the farmers who supply

sugarcane to the sugar mills for crushing. The Settlors and the Trustees have been working

with sugarcane farmers to give them greater bargaining power with sugar mills. Therefore, the

Trustees thought it fit to make investment in the shares of GBL.

(8) The allegations in the SCN and the corrigenda thereto are contrary and inconsistent. On the

one hand, the SCN alleges that the Trust is operating as a CIS and on the other it alleges that

the Trust is acting as an entity created and controlled by GBL to facilitate the public issue

proposed to be undertaken by them. Further, in the first corrigendum to SCN, SEBI added

that the Trust and the Trustees had also violated sections 56 and 73 of the Companies Act,

1956 and that the Trustees were required to show cause as to why the directions under

regulation 65 of the CIS Regulations should not be passed against the Trust and the Trustees.

The charge of violation of the ICDR Regulations was made against GBL and its directors by

the said corrigendum and not against the Trust and the Trustees.

(9) The allegations in the SCN that the Trust was acting as an entity created and controlled by

GBL to facilitate the public issue proposed to be undertaken and the Trustees were engaged

in offering shares of GBL for sale to the investors by issuing receipts to them and that GBL is

controlling and using the Trust for carrying out the operations of an unregistered CIS, is

wholly devoid of any merit as it is the Trustees who are the legal owners of the shares issued

to the Trust and the Trustees hold the same for the benefit of the contributories/beneficiaries

of the Trust.

(10) Being a private Trust, it envisages a separate legal ownership and beneficial ownership as

defined in the Indian Trusts Act, 1882. By its very nature, the investments made by a trust can

only be held in the name of the trustees in accordance with the provisions of the Companies

Act, 1956 and the Indian Trusts Act, 1882. Therefore, the shares issued by GBL in pursuance

of the offer made to the Trust and accepted by the Trustees, could only be held in the names

of the Trustees in accordance with law.

(11) The allegation made by SEBI that the Trust is an entity created and controlled by GBL is

totally false and incorrect and contrary to factual position on record. The Trust and GBL are

distinct and separate and as such the Trust is not a façade of GBL.

(12) The allegation that the Trustees of the Trust are engaged in offering shares of GBL for sale to

the contributories/beneficiaries by issuing receipts to them and that GBL is controlling and

using the Trust for carrying out the operations of an unregistered CIS is devoid of any merits

since the contributories/beneficiaries contributed monies and the Trustees invested the

monies as per the Trust Deed. The dividends received by the Trust were to be used for the

welfare of the contributories/beneficiaries.

(13) As regards the letter of Mr. Shankar S. Tigadi dated April 09, 2011, requesting the Trust to


refund the amount of ₹10,000/-, the Trustees approached GBL for clarification as regards the

valuation and transfer of the shares since the shares were not listed. GBL, however, advised

the Trust that as and when GBL comes out with an IPO, the contributories/beneficiaries of

the Trust would be able to avail a better price for the shares and would be able to sell the

same at the market price. In light of such advice of GBL, the Trust, vide its letter dated May

05, 2011, informed Mr. Shankar S. Tigadi about the proposed IPO of GBL. In the said letter,

Mr. Narsang V. Padhiyar inadvertently mentioned that GBL has been advised by M/s Motilal

Oswal and M/s Khetan and Co. that the shares may be transferred in the name of Mr. Sankar

S. Tigadi after the process of IPO is completed.

(14) Sections 56 and 73 of the Companies Act, 1956 are not attracted in the present case since the

Trust is not governed by the Companies Act, 1956, and all the allegations in that regard as

regards the breach of the said Sections are denied.

(15) Provisions of section 56 of the Companies Act, 1956 relate to matters to be stated and reports

to be put in prospectus. Neither the Trust nor the Trustees have issued any prospectus or any

other information memorandum in the nature of prospectus. SEBI has also not made any

such allegation that the Trust or Trustees have issued any prospectus or any other

Information Memorandum in the nature of a prospectus. Therefore, the provisions of section

56 of the Companies Act, 1956 do not apply.

(16) Provisions of section 67 of the Companies Act, 1956 deal with issuance of shares or

debentures to the public. Neither the Trust nor the Trustees have issued any shares to

anybody. The receipts issued by the Trust/ Trustees to the contributories acknowledge receipt

of money and, do not mention anything about any shares of GBL. Therefore, the provisions

of section 67 do not apply.

(17) Provisions of section 73 of the Companies Act, 1956 deal with allotment of shares, to be dealt

with on a stock exchange. The Trust and the Trustees have not allotted any shares. They have,

however, been allotted shares on private placement basis by GBL whose shares are not dealt

with on any of the stock exchanges as GBL is an unlisted company. The said shares so

allotted are held in the names of Trustees under the provisions of section 153 of Companies

Act, 1956. Therefore, the provisions of section 73 of the Companies Act, 1956 do not apply.

(18) The Corrigendum - 1 dated December 12, 2012 of the SCN modified the contemplated the

directions against the Trust and the Trustees and proposed to issue appropriate direction

against them under SEBI Act and CIS Regulations. Thus, SEBI itself had accepted that the

Trust and Trustees have not violated ICDR Regulations and has discharged them with regard

to that charge alleged in the SCN. Therefore, the modified allegation against them in the

Corrigendum -1 and the Corrigendum - 2 dated February 25, 2013 that the Trust and Trustees

violated provisions of section 56 and 73 read with section 67 of the Companies Act was

irrelevant and uncalled for.

(19) As per the Trust Deed, the beneficiary of the Trust should be a farmer from the districts of

Belgaum, Bagalkot and Bijapur and supplying sugarcane to GBL is not a pre-condition as

alleged since the Trust Deed contemplates receipt of contributions from sugarcane farmers

from the aforesaid districts who have supplied or who “will supply” sugarcane to GBL.


(20) Out of the top 100 contributories that SEBI has identified only three farmers, namely, Mr.

Shankar M. Bidari, Mr. Shivakumar V. Talloli and Mr. Govindappa B. Nyamagoudar, who

reside at Bangalore and Dharwad respectively, in view of their occupation. However, all three

aforesaid individuals are farm owners in Belgaum and Bagalkot districts. Therefore, allegations

that the Trust has beneficiaries from outside the areas designated in the Trust Deed are

unfounded and without any merit.

(21) The allegations in the SCN as regards the contributories/beneficiaries are unfounded as all the

32,376 contributories/beneficiaries are identifiable persons and the statement of accounts has

been issued by the Trust to the contributories/beneficiaries in accordance with the Trust

Deed. Of the said 32,376 contributories, about 28,000 of the contributories/beneficiaries are

farmers from the districts of Belgaum, Bagalkot and Bijapur who have supplied sugarcane to

GBL and the remaining are farmers who will supply sugarcane to GBL in the future.

(22) Under section 11(2)(c) of the SEBI Act, 1992 SEBI is empowered to register and regulate the

working of CIS as defined in section 11AA of the SEBI Act read with the relevant provisions

of the CIS Regulations, which require that CIS could only be sponsored and carried on by a

Company registered under the Companies Act, 1956 and whose main object clause was to

organize, operate and manage a CIS.

(23) The CIS Regulations apply only to a scheme or arrangement which is “made or offered by any

company” and 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 a scheme or arrangement”.

(24) The conditions of a CIS do not in any manner apply to the Trust as the Trust is not a

company registered under the Companies Act, 1956 nor is the Trust controlled by any

Collective Investment Management Company as required by the CIS Regulations. The object

and purpose of the trust was not to generate any profit or income for its

contributories/beneficiaries. Various clauses of the Trust Deed do not permit the Trust to

distribute profits or income to the contributories/beneficiaries. The purpose of contribution

to the Trust by the contributories/beneficiaries is not “with a view to receive profits, income, produce

or property. A scheme under which a welfare association and/or welfare trust undertakes welfare

initiatives for its members and/or beneficiaries cannot be construed to be a 'collective investment

scheme' since the principal requirement of the contribution or payment being made by the

investors with a view to receive profits, income produce or property from the scheme or

arrangement is wholly absent.” Therefore, one of the conditions for a scheme or arrangement

to be a CIS, as specified in section 11AA(2)(ii) of the SEBI Act, 1992 is also not satisfied.

(25) One of the essential requirements for a scheme to be CIS, as provided under section 11AA of

the SEBI Act, is that the contributions or payments made by the investors must be utilized

for the purpose of the CIS and the amount would necessarily have to be invested in an entity

which is different and distinct from the Trust itself. Since the Trust is not a CIS, there is no

requirement to apply for registration, as alleged.

(26) The Trust has issued individual receipts to each one of the contributories/beneficiaries

acknowledging receipt of their contribution in accordance to clause 7.4 of the Trust Deed so


that the contributories/beneficiaries are aware of their representation in the corpus of the

Trust. All the contributions received from the beneficiaries have been properly accounted for

by the Trust. The accounts of the Trust have been audited and the returns are filed with the

authorities. None of the contributories/beneficiaries were issued shares on a pro rata basis.

The receipts issued by the Trust cannot be equated with shares of a company.

(27) The contribution was to be invested by the identifiable farmers and the Trust Deed was not

open for contribution to the general public.

(28) Provisions of section 11AA(2) of the SEBI Act before their amendment by the Securities

Laws (Amendment) Ordinance, 2014 apply to schemes launched by a company. In this case,

the allegedly scheme was launched by the Trust which is not a company. Section 11AA(2) of

the SEBI Act as amended by the Securities Laws (Amendment) Ordinance, 2014 (whereby the

word “person” has been substituted for “company”) shall not apply retrospectively. Further,

the provisions of section 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations

which apply to a “person” cannot apply to a trust, which is not a legal person. The position of

SEBI in its order dated April 15, 2013, in the matter of Osian Connoisseurs of Art Pvt. Ltd.

(Osian case) is not correct. In addition, the facts of the instant case and those of the Osian case

are distinct as summarised hereunder:

Distinction between Osian Case and the Instant case

Osian Case Noticees’ Comments

Noticee is a Company which has sponsored

private Trust. Directors of the Company and the

Trustees are all closely related to each other.

Trust and GBL are separate and independent.

GBL has neither sponsored nor does it run the

Trust.

Object to generate income and capital growth

from portfolio of investment and art works.

Trust does not permit distribution of income.

However if a contributory/beneficiary wants

refund of his contribution, the same may be

returned in specie and on such return the

concerned person ceases to be a beneficiary.

SEBI had issues advisory on Art Funds vide

Press Release dated February 13, 2008.

No such advisory issued by SEBI or any other

authority.

Osian had issued Confidential Information

Memorandum

No such Confidential Information

Memorandum issued by the Trust or the

Trustees.

Trust voluntarily followed obligations cast on

CIS under chapter VI of the CIS Regulations.

In other words the trust treated itself as a CIS.

The Trust or the Trustees have never done

anything of this kind, because they have never

treated the Trust as a CIS.

ABN Amro Bank has been appointed as

marketing agent

No marketing agents appointed.

The directors who were sponsors of the Trust

and the Trustees are closely related persons and

if corporate veil is lifted they are of the same

family.

Trust is sponsored by two persons who are

sugarcane farmers and who have been working

for the benefit of sugarcane farmers in the said 3

districts. There are five Trustees, only one of the


Trustees happen to be an employee of the

Company (GBL) and is also a beneficiary, and

he is also one of 285 such employees of GBL

who are beneficiaries of the Trust.

Object is to use the contributions made by

investors to buy and market artworks for the

benefit of the investors.

The object of the Trust is to carry out various

welfare activities for the betterment of the

Beneficiary farmers, as listed in the Trust Deed,

none of which involves payment of profits.

Scheme was for 36 months. Trust has no fixed term.

They had offered shares to more than 50

persons. Totally 656 investors.

In the present case investment in the shares has

been made in the names of the five Trustees

only and the total number of persons to whom

the Company offered the shares on private

placement basis does not exceed 50.

14. During the personal hearing on January 21, 2014, the learned advocates appearing for the noticees

reiterated the earlier submissions and further submitted that no guaranteed returns were promised to

the beneficiaries who were selected group of persons. Relying upon a certificate of a Chartered

Accountant they submitted that all the monies contributed by beneficiaries have been invested in

GBL for the purposes of improving its performance and, in fact, shareholders' value has increased.

Further, the shares allotted to the Trustees vest in them and beneficiaries will get benefited on pro rata

transfer of shares to them from the Trust.

15. According to the learned advocates, any direction to refund will not be in the interest of GBL or the

investors or the securities market. It will bring down the value of GBL and in turn the interest of the

beneficiaries/investors who are farmers. They emphasized that the proposal of the noticees to

permit GBL to split/sub-divide the existing share certificate (issued in respect of its shares allotted to

the Trust) into multiple share certificates representing a smaller number of shares and thereafter

“transferring” such shares in the name of the transferees of the shares would be in the interest of the

company and the beneficiaries. Such in specie distribution of shares would not be in violation of the

provisions of section 67 of the Companies Act, 1956 since such distribution would be pursuant to

the Trust Deed and would be governed, inter alia, by the provisions of sections 108 to 112 of the

Companies Act, 1956.

16. The learned advocates also submitted that GBL and its directors have not derived any personal

benefit from the alleged scheme. Further, direction as contemplated in the SCN in terms of

regulation 65 of the CIS Regulations requires passing of directions in the interest of the securities

market and the investors. One such direction as contemplated in regulation 65 is requiring the

person to return the assets to the concerned investors. They further submitted that if two ways are

possible, the route which is in the interest of person who invested in the scheme should be followed.

The return of in specie distribution of shares as proposed by them would be beneficial for the

beneficiaries. Therefore, if the beneficiaries are satisfied to take the shares , SEBI should allow the

same. The Trust and the Trustees have also submitted the written request of some of its


contributories/beneficiaries, numbering around 9826, consenting to the aforesaid proposal of the

noticees.

17. It was noted that the valuation of shares submitted by the noticees was an old one. In order to

examine the proposition of noticees taking into account the interest of investors and the allegations

against the noticees it was deemed necessary to provide them another opportunity to submit updated

valuation with rationale thereof. Accordingly, they were asked to submit the updated valuation with

its rationale. The GBL vide its advocates letter dated April 27, 2015 submitted the valuation of its

shares. The notiocees were given another opportunity of personal hearing which the Trust and its

Trustees availed on February 03, 2015 when Mr. Kumar Desai, Advocate appeared on their behalf

and reiterated the submissions and proposals made by them. On June 30, 2015 Mr. Janak

Dwarkadas, Sr. Advocate appeared for GBL and its directors and while reiterating their submissions

he submitted that they never had any mala fide intention to collect money from public against

issuance of shares. The scheme in question was a bona fide scheme for the benefit of the framers i.e.

beneficiaries of the Trust. Even, as on date, 92% of shareholding of GBL is held by its promoters

and only 8% shares are held in Trust. Agreeing with the proposition of the Trustees to dissolve the

Trust and distribute the shares of GBL in specie to the beneficiaries, it was submitted on behalf of

GBL that it is willing to split/sub-divide the existing share certificate (issued in respect of its shares

allotted to the Trustees) into multiple share certificates representing a smaller number of shares and

thereafter transferring such shares in the name of the beneficiaries.

18. It was further submitted that as per the valuation report of March 2015 given by M/s. Chaturvedi

and Shah, Chartered Accountant the value of share of GBL (which were initially allotted at ` 200 per

share ) was `184 per share. Learned Senior Advocate further submitted that a private equity investor

has made investment in GBL to acquire its additional shares at the rate of `189 per share which is

close to the valuation of `184 per share as given by the Chartered Accountant. Thus, the valuation

of shares at `184 per share is justifiable. In view of the reduction in the value of shares from `200 to

`184 per share, it was proposed on behalf of GBL and its directors that GBL will pay interest to the

beneficiaries at the rate of 10% from the date of allotment till the date of in specie distribution.

Further, since the beneficiaries have been paid dividend during the said period, the same shall be

adjusted against the amount payable to them at the time of in specie distribution. Vide letter dated July

10, 2015 the advocates and solicitors of GBL and its directors submitted the particulars of

differential amount to be paid to the beneficiaries for in specie distribution (as on June 30, 2015) as

described in the following Table:-

Particulars of the differential amount to be paid between initial investment of `200 plus

interest at 10% and current fair market value of `184

Sr. No. Particulars Shares allotted on 20th

November, 2009 (A)

Shares allotted on 30th March, 2010

(B)


(in `) (in `)

1 Investment per share (a) 200.00 200.00

2 Interest at 10% upto 30th June, 2015 112.27 105.10

3 Total (c)=(a+b) 312.27 305.10

4 Fair Market value as at 31st December, 2014 184.00 184.00

5 Difference (e)=(c-d) 128.27 121.10

6 (Less) Sugar Benefit and Dividend (f) (13.51) (13.16)

7 Net Difference (g)=(e-f) 114.76 107.94

8 Number of Shares (h) 1,841,850 427,750

9 Amount (i)=(gxh) 211,370,706 46,171,335

10 Total Amount (A) + (B) 257,542,041

19. I have carefully considered the SCN, corrigenda thereto, the replies and submissions of the noticees,

consent and demand of the contributories/beneficiaries of the Trust and other relevant material

available on record. I note that the issues for determination in these proceedings are two-fold, i.e.:

(a). whether in the garb of private of placement to the Trustees, GBL has issued shares to public

without complying with the requirements of the Companies Act, 1956 and the ICDR

Regulations and as such the arrangement between the Trust and GBL is just a sham to

circumvent the legal requirements of the ICDR Regulations where GBL is using the Trust as a

conduit.

(b). whether the arrangement or scheme sponsored by the Trust and its Trustees are in the nature of

'collective investment scheme' and GBL is running a 'collective investment scheme' through the Trust and as

such there is contravention of the provisions of section 12(1B) of SEBI Act read with regulation

3 of the CIS Regulations.

20. A common thread for both the issues as alleged in the SCN and corrigendum is that GBL is

controlling the Trust through Mr. Narsang V. Padhiyar and there existed an arrangement between

the Trust and GBL to circumvent the requirements of the SEBI Act and the Regulations. Before

dealing with the above issues, I deem it necessary to determine the allegation of control of GBL over

the Trust and the alleged arrangement/connection between them. In this regard, following relevant

facts and circumstances described in the SCN and not disputed by the noticees are worth

mentioning-

(a). By the resolution dated June 19, 2009, the board of directors of GBL inter alia decided to allot

equity shares to identified 'eligible investors' (whether incorporated bodies and/or individuals

and/or trustee and/or institutions /banks or otherwise). Further, for the purpose of giving effect

to this decision, Dr. S. K. Somaiya, Chairman and Managing Director, Mr. Samir S. Somaiya,

Joint Managing Director, Mr. V. Sivaprakasam, Director (Works), Mr. Kailash Pershad, Prof.

Rooshikumar Pandya, Directors of the company, Mr. V. V. Joshi, General Manager (Corporate

Planning), Mr. N. S. Khetan, General Manager (Finance and Accounts), Mr. Narsang V.


Padhiyar, General Manager and Mr. S. P. Gupta, Company Secretary were authorised 'severally' to

take all steps and perform all acts, deeds, etc. with regard to allotment of shares of GBL and

utilisation of the proceeds of the issue.

(b). On August 12, 2009, the necessary resolution of the shareholders was passed in the AGM of

GBL.

(c). The board resolution as well as the shareholders resolution both contemplated allotment of

shares to identified 'eligible investors'.

(d). Just about one month later the Trust was settled on September 19, 2009 wherein Mr. Narsang V.

Padhiyar was one of the five Trustees and he was the Chairman Trustee. He was having

substantial responsibilities and authority in managing the affairs of the Trust including signing of

all the important documents of the Trust such as its resolutions, the minutes of the various

meetings and the receipts issued to the contributories/beneficiaries.

(e). By a resolution dated November 18, 2009, the Trustees authorized Mr. Narsang V. Padhiyar, inter

alia, to open and operate the savings bank accounts of the Trust and to “singly” operate and

honour cheques, bills of exchange and promissory notes, etc. on behalf of the Trust. The

Minutes of the said meeting were signed only by Mr. Narsang V. Padhiyar.

(f). On November 20, 2009, i.e., just after two days of the passing of resolution of the Trust wherein

Mr. Narsang V. Padhiyar, was actively involved as the Chairman Trustee having substantial roles

and responsibilities in its affairs, GBL allotted its 18,41,850 shares to the Trust alongwith

allotment of shares to another investor, viz; Mr.Ankit Raj Organo Chemicals Ltd. Having

authority to take all steps for the allotment of shares in terms of the board resolution dated June

19, 2009, Mr. Narsang V. Padhiyar, was also actively involved in allotment of shares by GBL to

the Trust.

(g). Again on March 30, 2010, GBL and the Trust passed their respective resolutions for further

allotment of 4,27,750 shares to the Trust. On the same date, GBL allotted 4,27,750 shares to the

Trust alongwith allotment of shares to two other investors Mr. Upendra V. Mithani and Mr.

Vijay V. Mithani.

(h). All the documents of Trust including the receipts issued to the beneficiaries, the minutes and

resolutions empowering the Trust to invest in shares of GBL were signed by only Mr. Narsang

V. Padhiyar.

(i). The Trust was created on September 19, 2009, i.e., just two months before the first allotment of

shares to it by GBL. Further, though as per the Trust Deed the corpus of the Trust was to be

used for investing in any securities, the Trustees had invested the contribution received from the

beneficiaries/contributories only in the shares of GBL.

21. Considering the above sequence of events, the involvement of Mr. Narsang V. Padhiyar in the

allotment of shares by GBL and also in managing and controlling the affairs of the Trust for

allotment of shares to it, cannot be just a coincidence. The facts and circumstances of the case as

discussed hereinabove indicate strong probability that the Trust was caused to be settled by GBL and

its directors under an arrangement with active involvement of Mr. Narsang V. Padhiyar to facilitate

allotment of shares to the Trust against contribution received from the beneficiaries who were


farmers of sugarcane who regularly supply or will supply sugarcane to GBL. Thus, it can reasonably

be inferred that there was cooperation among GBL and the Trust in the arrangement with regard to

allotment of shares by GBL to the Trust.

22. With regard to the aforesaid first issue, I note that it is undisputed fact that GBL issued and allotted

its equity shares to the Trust on two occasions as discussed hereinabove in para 2. Admittedly, the

Trust in question is a legally settled private Trust under the Indian Trusts Act, 1882 for the

welfare/benefit of the contributories/beneficiaries who are sugarcane farmers from the districts of

Belgaum, Bagalkot and Bijapur who supply or will supply sugarcane to GBL. The Settlors of the

Trust as well as contributories/beneficiaries are such farmers. Accordingly, it is administered and

controlled by the Trustees in terms of the Trust Deed dated September 19, 2009 and the Indian Trusts

Act, 1882. As per section 153 of the Companies Act, 1956 shares of a company allotted to a trust are

held in the name of its trustees. Accordingly, in the instant case, the shares of GBL allotted to the

Trust are held in the name of its five Trustees who act for the welfare/benefit of

contributories/beneficiaries of the Trust. Further, the share certificates issued by GBL to the Trust

are in the nature of jumbo share certificates (i.e., 22,69,600 shares in 83 share certificates of different

denominations ranging from 50 to 50,000 shares each certificate). The allotment of shares was made

to the Trust on one to one basis and no notice, brochure, advertisement, etc. were issued nor any

negotiation were engaged inviting subscription from public and there was no intention manifested to

circulate the shares to public at large through the Trust. Under these facts and circumstances of the

case, I find that the invitation/offer by GBL to the Trust and its Trustees was not calculated to

result, directly or indirectly, in the shares becoming available for subscription or purchase by persons

other than those receiving the invitation. Thus, in terms of section 67(3) of the Companies Act,

1956, the invitation/offer to subscribe to the shares of GBL to the five Trustees of the Trust, acting

for the benefit of the contributories/beneficiaries, is not an offer or invitation to the public to

subscribe to its shares. In view of these facts, I find that GBL did not make an offer or invitation to

public to subscribe to its shares and it did not intend to issue/allot its shares to public.

23. I further note that the five Trustees of the Trust held the shares of GBL in the form of jumbo shares

certificates on behalf of the contributories/beneficiaries. Further, pursuant to the allotment of

shares, there was no attempt by the Trust or its Trustees to circulate the shares of GBL amongst the

non-beneficiaries or other members of public by way of sale transactions. The Trust appears to be

bona fide trust in this case as it has no other no purpose than the holding shares allotted to the

Trustees for the benefit of farmers. Further, Trustees have proposed to dissolve the Trust so as to

distribute the benefits of Trust to beneficiaries and in this regard they have also furnished the written

request of around 9,826 of the contributories/beneficiaries. These facts indicate that that there was a

bona fide intent of the Trust and its Trustees to hold and utilize the Trust assets, property and funds for

the beneficial interest of its contributories/beneficiaries. In view of these facts and circumstances of

the case, no mala fide intention could be attributed to:

(a) GBL and its directors in so far as allotment of shares of GBL to the Trust and its five Trustees is

concerned; or


(b) the Trust and its five Trustees in so far as subscribing to and holding the shares of GBL on behalf

of the contributories/beneficiaries is concerned; or

(c) the arrangement between GBL and the Trust in so far as placement of shares of GBL to the

Trust and its Trustees is concerned.

24. In view of the above, I find that the allotment of shares by GBL to the Trust was not an allotment to

the public in the garb of private of placement to the Trust. I note that the facts and circumstances

described in the SCN neither lead to the inference that the Trust in this case was just a facade

created by GBL to collect subscriptions from public nor do they indicate that the Trust was created

for camouflaging the acts of GBL in perpetrating a scheme of making a public issue of its shares in

the garb of private placement.

25. It is further noted that as per the terms of the Trust Deed, the corpus of the Fund built from the

contributions of the contributories/beneficiaries was to be utilized for investment in securities and

to fund the objectives of the Trust, i.e., the benefit of the beneficiaries from the dividends accruing

such securities. Further, only the identified contributories/beneficiaries were to get the benefits as

per the Trust Deed. In the facts and circumstances brought on record by the noticees and above

discussions, I am of the view that the arrangement between GBL and Trust was not a conduit or

sham to circumvent the requirements of the ICDR Regulations and the Companies Act, 1956 as

alleged in the SCN. I, therefore, find merit in submissions that the noticees have not violated the

provisions of sections 56 and 73 of the Companies Act, 1956 and regulations 4(2), 5(1), 5(7), 6, 7,

16(1), 20(1), 25, 26, 36, 37, 46 and 47 of the ICDR Regulations. In this regard, I also find merit in the

submissions on behalf of the Trust and the Trustees that having dropped the directions against them

for alleged violation of the ICDR Regulations, the allegation of violations of provisions of section 56

and 73 read with section 67 of the Companies Act, 1956 by them in the Corrigendum -1 and

Corrigendum -2 was irrelevant. Further, section 67 of the Companies Act, 1956 lays down the rule of

construction of the reference to expression “offering shares or debentures to the public” in the Act

or in the Articles of a company. Section 67 is not a charging section (which can be violated) but is

merely a rule of interpretation for determining as to whether the offer for sale of shares or

debentures, as the case may be, was made to the public or not. Therefore, modification of

charges/violations as alleged in the SCN by the Corrigendum -2 was not required.

26. With regard to the second issue, it is noted that the Trust contemplated contribution of monies by a

farmer in order to become a beneficiary and the corpus of the Trust was to be utilised by the Trustees

to acquire securities with potential to generate returns. It is also admitted position that the fund so

contributed and pooled was to vest in the Trustees and to be utilised to meet the objectives of the

Trust from the dividends accruing the securities. Admittedly, the Trust had collected/mobilized

₹45,39,20,000/by way of contribution from 32,376 contributories/ beneficiaries and pooled and

utilized the same for acquiring equity shares of GBL. I note that though the CIS Regulations and for

that matter the SEBI Act do not prescribe any specific number of investors in a scheme for it to be

called a 'collective investment scheme’, applying the principles as applicable under the Companies Act,

1956 for determination a public offer, it can be said that a scheme or arrangement falling under


section 11AA of the SEBI Act and offered to a section of public is also a scheme made or offered

to 'public'. In this case, the scheme in question was open for contribution by any sugarcane farmers

from the three districts of Belgaum, Bagalkot and Bijapur. Such farmer could be an existing supplier

of sugarcane to GBL or a prospective supplier coming forward to contribute/invest in the scheme.

27. The Trustees have contended that the Trust is not a legal person and cannot be charged for the

contravention of the CIS Regulations and section 12(1B) of the SEBI Act as alleged in this case. In

this regard, I note that in terms of section 3(42) of the General Clauses Act, 1897 the word "Person"

shall include any company or association or body of individuals, whether incorporated or not,". A trust is a juristic

person for the purpose of various legal/statutory compliances. For example, a mutual fund is

required to be registered with SEBI in the form of a trust. Thus, in my view, a trust is covered in the

prohibition of section 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations. In this

regard, the following observations of the Hon'ble Supreme Court in Shiromani Gurdwara Prabandhak

Committee Vs. Som Nath Dass (2000) 4 SCC 146 is worth mentioning:

"19. Thus, it is well settled and confirmed by the authorities on jurisprudence and courts of various countries that

for a bigger thrust of socio-political-scientific development evolution of a fictional personality to be a juristic person

became inevitable. This may be any entity, living, inanimate, objects or things. It may be a religious institution or

any such useful unit which may impel the courts to recognise it. This recognition is for subserving the needs and

faith of the society. A juristic person, like any other natural person is in law also conferred with rights and

obligations and is dealt with in accordance with law. In other words, the entity acts like a natural person but only

through a designated person, whose acts are processed within the ambit of law.”

28. The Hon’ble Madras High court has also relied upon the above judgment and has observed in the

matter of M/s. Abraham Memorial & Ors. vs C. Suresh Babu on 7 August, 2012 as:

“From the foregoing discussions, it is manifestly clear that the moment a Trust (organisation) is formed with an

obligation attached to the same, an artificial person is born and because such artificial person is recognised by law,

conferring upon such artificial person right to own property, to enjoy certain other rights and also to discharge

certain obligations, it attains the status of a ‘juristic person’. Thus, a Trust, whether private or public, is a juristic

person who can sue/be sued or prosecute/be prosecuted.”

29. The noticees have further contended that for any scheme or arrangement to be termed as 'collective

investment scheme' under section 11AA of the SEBI Act, the scheme ought to be made or offered by a

company, a factor which according to them is wholly absent in the present case. In this regard, it is

necessary to refer to the scheme of the SEBI Act and the CIS Regulations. It is trite to say that the

SEBI Act casts upon SEBI a statutory duty to protect the interests of investors in securities market

and to protect the development of, and to regulate, the securities market and for matters connected

therewith or incidental thereto. Section 11 of the SEBI Act has empowered it to take such 'measures'

as it thinks fit for carrying out those objectives and duties. In terms of section 11(2)(c) of the SEBI

Act, the 'measures' referred to in section 11(1) may provide for registering and regulating the working

of 'collective investment schemes'. In furtherance of such duty, SEBI has taken one such measure by laying


down the CIS Regulations. Regulation 3 of the CIS Regulations stipulates that 'no person' other than

a Collective Investment Management Company which has obtained a certificate under the said

regulations shall carry on or sponsor or launch a 'collective investment scheme'.

30. Further, in terms of section 12(1B) of the SEBI Act, no “person” shall sponsor or cause to be

sponsored or carry on or caused to be carried on a 'collective investment scheme' unless he obtains a

certificate of registration from the Board in accordance with the Regulations. I note that section

12(1B) of the SEBI Act and regulation 3 of the CIS Regulations both start with negative words "No

person………" which clearly indicate that their provisions are mandatory. They have clothed their

command in negative form which insists on compliance with their provisions as they are enacted. In

this regard, the following observations of the Hon'ble Supreme Court in the matter of Mannalal

Khetan and Ors. Vs. Kedar Nath Khetan and Ors AIR1977 SC 536 are relevant to mention:-

"…The mandatory character is strengthened by the negative form of the language. The prohibition against transfer

without complying with the provisions of the Act is emphasised by the negative language. Negative language is worded

to emphasise the insistence of compliance with the provisions of the Act. (See State of Bihar v. Mahawjadhiraja Sir

Kahemshwar Singh of Darbbhanga and Ors.(1) MANU/SC/0019/1952: [1952]1SCR889 K. Pentiah and

Ors. v. Mtiddala Veeramatlappa avd Ors. (2) MANU/SC/0263/1960 : [1961]2SCR295 and unreported

decision dated 18 April, 1976 in Criminal Appeal No. 279 of 11975 etc. Additional District Magistrate,

Jabalpu v. Shivakant Shukla (3). Negative words are clearly prohibitory and are ordinarily used as a legislative

device to make a statutory provision imperative.

17. In Raza Buland Sugar Co. Ltd. v. Municipal Board (4) Rampur. (1965) 1 Section C.R. 970 this Court

referred to various tests for finding out when a provision is mandatory or directory. The purpose for which the

provision has been made, its nature, the intention of the legislature in making the provision, the general inconvenience

or injustice which may result to the person from reading the provision one way or the other, the relation of the

particular provision to other provisions dealing with the same subject and the language of the provision are all to be

considered. Prohibition and negative words can rarely be directory. It has been aptly stated that there is one way to

obey the command and that is completely to refrain from doing the forbidden act. Therefore, negative, prohibitory and

exclusive words are indicative of the legislative intent when the statute is mandatory. (See Maxwell on Interpretation

of Statutes 11th Ed. p. 362 seq; Crawford Statutory Construction, Interpretation of Laws p. 523 and Seth

Bikharaj Jaipuria v. Union of India (5 MANU/SC/0045/1961 : [1962]2SCR880."

31. In view of the above, it is very clear that provisions of section 12(1B) of the SEBI Act and regulation

3 of the CIS Regulations are mandatory and both contain substantive provisions of law. On careful

examination of these provisions it is clear that they intend to cover the whole gamut of entities or

persons, natural, juristic or otherwise [except those exempted under section 11AA(3)], who sponsor

or cause to sponsor a 'collective investment scheme' so as to bring them into the regulatory framework of

the SEBI Act and the CIS Regulations through registration. Therefore, no person, other than a

Collective Investment Management Company that has obtained certificate of registration from the Board,

can sponsor or cause to sponsor or carry on or caused to be carried on a 'collective investment scheme'.

The expression ‘Collective Investment Management Company’ is defined in regulation 2(h) of the CIS


Regulations as under:

2(h)”Collective Investment Management Company” means a company incorporated under the Companies Act,

1956 (1 of 1956) and registered with the Board under these regulations, whose object is to organize, operate and

manage a collective investment scheme;”

32. Therefore, 'a person' can launch or sponsor or cause to sponsor a 'collective investment scheme' only if it is

registered as a Collective Investment Management Company in accordance with the CIS Regulations. Any

other structure for sponsoring or causing to sponsor a 'collective investment scheme' is, thus, prohibited by

law. Accordingly, neither a trust can sponsor or carry on a 'collective investment scheme' nor any such

scheme can be caused to be sponsored or carried on through a trust.

33. In terms of section 2(ba) of SEBI Act " 'collective investment scheme' means any scheme or arrangement which

satisfies the conditions specified in section 11AA;" The provisions of section 11AA read as following-

"Collective Investment Scheme

11AA. (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."

34. From the above provisions it is noted that the definition of 'collective investment scheme' is provided in

section 11AA(1) by making reference of conditions stipulated in sub-section 11AA (2). On careful

reading of the provisions of section 11AA(2), it is seen that the opening sentence of sub-section (2)

that refers to word "company" does not intend to stipulate any condition that in order to treat a

scheme or arrangement as a 'collective investment scheme', the scheme or arrangement should be launched

by a company. The four essential conditions to hold a scheme or arrangement as 'collective investment

scheme' in section 11AA(1) are provided in clauses (i) to (iv) of sub-section (2). In my view, if these

four conditions laid down in clauses (i) to (iv) of sub-section(2) are satisfied and the scheme or

arrangement in question does not fall under any exempted category provided in sub-section (3), the

scheme or arrangement would be a 'collective investment scheme'.

35. I am of the view that the provisions of sub-section 11AA(2) have to be interpreted in furtherance of

the intent and object of the SEBI Act including section 11AA thereof. The whole purpose of the

SEBI Act, particularly the provisions of sections 11(2)(c), 11AA and 12(1B) thereof, would be

defeated if section 11AA is interpreted narrowly as sought to be done in this case by the noticees


inasmuch as any person would float/sponsor or cause to sponsor 'collective investment scheme', directly

or indirectly through an entity that is not a company so as to keep itself out of the purview of the

regulatory mechanism. In my view, section 11AA being a definition should be read alongwith other

sections like section 11(2)(c), 11AA(1) and section 12(1B) of the SEBI Act and be applied in

furtherance of the objects of the SEBI Act and the CIS Regulations that have been framed to carry

out the purposes of the SEBI Act. In this regard, I note that the Hon’ble Supreme Court in

Bhavnagar University v Palitana Sugar Mills Pvt. Ltd. (2003) 2 SCC 111, has held that: “It is the basic

principle of construction of statute that the same should be read as a whole, then chapter by chapter, section by section

and words by words. Recourse to construction or interpretation of statute is necessary when there is ambiguity, obscurity,

or inconsistency therein and not otherwise. An effort must be made to give effect to all parts of statute and unless

absolutely necessary, no part thereof shall be rendered surplusage or redundant.” The Hon'ble Supreme Court has

further held in Reserve Bank of India, etc. v. Peerless General Finance and Investment Co. Ltd. & Ors.[1987] 1

SCC 424, that "No part of a statute and no word of a statute can be construed in isolation. Statutes have to be

construed so that every word has a place and everything is in its place".

36. The SEBI Act is welfare legislation and while interpreting its provisions its larger objective should be

kept in mind. Therefore, the provisions of sections 11(2)(c), 11AA and 12(1(B) have to be read

harmoniously and opening sentence of section 11AA (2) should be read down so as to give a

purposeful meaning to the definition. I note that reading down of statute is permissible, since it is

well settled that all efforts should be made to sustain the purposeful meaning of the provision. In

this regard, I note that the Hon’ble Supreme Court in SEBI vs Ajay Agarwal, AIR 2010 SC 3466, has

laid down the principle to be adopted while interpreting the SEBI Act as following:

“It is a well known canon of construction that when Court is called upon to interpret provisions of a social welfare

legislation the paramount duty of the Court is to adopt such an interpretation as to further the purposes of law and

if possible eschew the one which frustrates it.”

37. In my view the provisions of section 11AA of the SEBI Act are clarificatory and directory in nature.

They provide for the definition of 'collective investment scheme' and cannot dilute the substantive

provision of section 11(2)(c) and 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations. I

am also of the view that the intent of these provisions, as stated above, is to cover all schemes and

arrangements that satisfy conditions provided in clauses (i) to (iv) of section 11AA(2), except those

excluded in sub-section (3) of section 11AA. It is clear that the emphasis under section 11AA is on

the scheme and consequences and not on the legal status and structure of the person who sponsored

or offered the scheme or arrangement. In this regard, I note that the Hon’ble Supreme Court in

P.G.F Limited & Ors. vs UOI & Anr. MANU/SC/0247/2013, (hereinafter referred to as the 'PGFL

Case') held as under:

“A reading of sub-Section (3) of Section 11AA also throws some light on this aspect, wherein it is provided that

those institutions and schemes governed by sub-clause (i) to (viii) of sub-Section (3) of Section 11AA will not fall

under the definition of collective investment scheme. ……….. Therefore, by specifically stipulating the various

ingredients for bringing any scheme or arrangement under the definition of collective investment scheme as stipulated


under sub- Section (2) of Section 11AA, when the Parliament specifically carved out such of those schemes or

arrangements governed by other statutes to be excluded from the operation of Section 11AA, one can easily

visualize that the purport of the enactment was to ensure that no one who seeks to collect and deal with the monies

of any other individual under the guise of providing a fantastic return or profit or any other benefit does not indulge

in such transactions with any ulterior motive of defrauding such innocent investors and that having regard to the

mode and manner of operation of such business activities announced, those who seek to promote such schemes are

brought within the control of an effective State machinery in order to ensure proper working of such schemes.”

38. In the above case, the Hon’ble Supreme Court has further clarified the purpose of section 11AA as

follows:"…..the Parliament thought it fit to introduce Section 11AA in the Act in order to ensure that any such

scheme put to public notice is not intended to defraud such gullible investors and also to monitor the operation of such

schemes and arrangements based on the regulations framed under Section 11AA of the Act." The Hon'ble

Supreme Court further held that: "Inasmuch as the said Section 11AA seeks to cover, in general, any scheme or

arrangement providing for certain consequences specified therein vis-a-vis the investors and the promoters,…….”

39. Accordingly, a scheme or arrangement, sponsored or caused to be sponsored by 'any person' and

satisfying the conditions stipulated in clauses (i) to (iv) of section 11AA(2) but not falling under the

exceptions of section 11AA(3) would be a 'collective investment scheme'. I find that the prohibition under

section 12(1B) of the SEBI Act and regulation 3 of the CIS Regulations, is against every person, be it

an individual, trust, association of persons, partnership, limited liability partnership, company, etc.,

except with respect to activities which are specifically exempted under sub-section (3) of section

11AA of the SEBI Act. Further, as mentioned hereinabove, the requirements of section 12(1B) of

the SEBI Act and regulation 3 of the CIS Regulations not only prohibit a person from sponsoring a

'collective investment scheme' but also from causing to sponsor a collective investment scheme without

obtaining a certificate of registration of SEBI in accordance with the CIS Regulations. Further, as

discussed hereinabove, such person can sponsor or cause to sponsor a 'collective investment scheme' only

through a Collective Investment Management Company. It is an established principle that what cannot be

done directly cannot be done indirectly. Accordingly, if 'a person' cannot sponsor a 'collective investment

scheme ' without obtaining registration from SEBI in accordance with CIS Regulations he cannot do

so through a Trust.

40. Considering the above settled position, I am also of the view that the amendment brought in section

11AA(2) of the SEBI Act by replacing the word 'company' by the word 'person' is a clarificatory

amendment and it has not changed the position as regards the legal status of an entity sponsoring,

launching or causing to sponsor or launch a 'collective investment scheme'.

41. I now proceed to examine as to whether the scheme or arrangement in question satisfies the

conditions specified in section 11AA (2) (i) to (iv) of the SEBI Act. The characteristics of the instant

scheme or arrangement vis-a-vis the conditions specified in clauses (i) to (iv) of section 11AA(2) of

the SEBI Act are enumerated in the following table:


CIS as per the SEBI Act

read with CIS Regulations

Scheme as per the Trust Deed

2(i) The contributions or payments

made by the investors, by whatever

name called, are pooled and

utilized for the purpose of the

scheme or arrangement;

Clause B:

The Settlors have decided to set up a trust for the benefit of the

beneficiaries by pooling resources and funds, to organize schemes and

initiatives for educating the Beneficiaries about the economies of growing

sugarcane as compared to other crops, development of irrigation sources,

coordinating and managing harvests and transport of sugarcane and such

other similar initiatives.

Clause 1.1 “Contribution” means the money to be contributed by a farmer to the

Trust to become a beneficiary;

2(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;

Clause 7.4

The Trustees shall utilize the Corpus to acquire Securities, with potential

to generate returns, and shall fund the objectives of the Trust from the

dividends accruing such Securities.

2(iii) The property, contribution or

investment forming part of scheme

or arrangement, whether

identifiable or not, is managed on

behalf of the investors;

Clause 4.2

The Fund shall vest in the Trustees and the Trustees shall hold the Trust

Fund and the accumulation, additions, accretions thereto in trust for the

benefit of the Beneficiaries, subject to the provisions of this Deed of

Trust.

2(iv) The investors do not have

day-to-day control over the

management and operation of the

scheme or arrangement.

Clause 8

General Powers of the Trustees: All the affairs of the Trust shall be

managed and administered by the Trustees in accordance with the Deed

of Trust namely carrying out welfare schemes, borrowing money,

investment in the securities, to hold and administer the Trust Fund, to

open accounts with any scheduled banks and depository, to appoint from

time to time mangers, secretaries, clerks, consultants and other farmers

etc.

42. From the above stipulations in the Trust Deed, I note that :-

(i) The scheme or arrangement in question envisaged contributions or payments made by the

investors i.e. farmers in this case. The contributions/investments were, pooled and utilized for

the purpose of the Trust. Thus, the first condition specified in section 11AA(2) (i) is satisfied in

this case.

(ii) The contributions so pooled formed corpus of the Trust which was to be utilized for the

benefit of the contributories/beneficiaries. The contributions or payments were made by the

contributories/beneficiaries with a view to receive the securities or any other benefit arising out

of such investment. Thus, the condition specified in section 11AA(2)(ii) is satisfied in the

instant case.


(iii) The contributions of the contributories/beneficiaries, the property under the scheme i.e., the

Trust Fund and the jumbo share certificates were being managed/held on their behalf by the

Trustees. Thus, the condition stipulated in section 11AA(2) (iii) is satisfied in this case.

(iv) Though the contributories/beneficiaries could inter alia opt for distribution of their beneficial

interest in the Trust, they do not have any control, leave alone day to day control, in respect of

the investment decisions regarding the Trust fund or corpus. Thus, the condition stipulated in

section 11AA(2) (iv) is also satisfied in this case.

43. In view of the above, I find that the scheme or arrangement, in this case, satisfies all the four

conditions stipulated in clauses (i) to (iv) of section 11AA (2) of the SEBI Act and hence is a 'collective

investment scheme'.

44. During hearing, Mr. Kumar Desai, Advocate sought to contest the order dated April 15, 2013 passed

in the Osian case and also sought to draw distinction between the scheme in the Osian case and that in

the present one. I have already dealt with the facts of the Osian case in the order dated April 15, 2013.

In view of the above findings, I do not agree with contentions of learned advocate with regard to

applicability of section 11AA of the SEBI Act on a trust and obligation of 'any person' under section

12(1B) of the SEBI Act and regulation 3 of the CIS Regulations. I have also perused the points of

distinction between the facts of Osian case and those of the instant case as forwarded by the Trust and

Trustees. In my view, those points of distinction are not material and are irrelevant so as to change

the position of law as applicable on the facts and circumstances of the instant case. Those

distinctions are mainly with regard to procedure and modus operandi adopted in the said two cases. As

in Osian case, in this case also the 'collective investment scheme' was offered to indefinite number of

beneficiaries. Further, the advisory issued by SEBI with regard to the Art Funds does not declare

that schemes, other than those sponsored by art funds, are not 'collective investment schemes'. As already

discussed hereinabove, any scheme or arrangement falling under the ambit of section 11AA of the

SEBI Act is 'collective investment scheme' be it Art Fund or any other scheme as in this case. I, therefore,

do not find any merit in these contentions.

45. Another contention of the Trustees is that the Trust has issued individual receipts that can not be

equated with shares. From the mandatory provisions of section 12(1B) of the SEBI Act and

regulation 3 of the CIS Regulations, I note that issuance of 'securities' or 'units' is not a condition

precedent for a scheme to fall under the ambit of those provisions. Even the definition under section

2(1) (ba) read with section 11AA does not require issuance of units as a condition to get a scheme

covered under the definition of 'collective investment scheme.' In my view, the provisions are very clear in

that any scheme or arrangement which is a 'collective investment scheme' must first obtain the certificate

of registration from the Board in accordance with the CIS Regulations then only it can sponsor the

schemes and issue units which are securities as defined in section 2(h) of the Securities Contracts

(Regulation) Act, 1956 (the SCRA). Therefore, the contention in this regard does not hold good and

the noticees cannot be absolved of the mandatory obligation under section 12(1B) of the SEBI Act,


1992 and regulation 3 of the CIS Regulations. In this regard, I note that in the PGFL case, the

Hon'ble Supreme Court has not accepted such argument and has emphasized that essential elements

for determining the nature of a scheme or arrangement under section 11AA of the SEBI Act are the

investment and 'rights and entitlement' of the investors, rather than the unit or instrument or

document involved in the scheme. The following observations of the Hon’ble Supreme Court in this

regard in the PGFL case is worth mentioning:

"It has to be borne in mind that by seeking to cover any scheme or arrangement by way of collective investment

scheme either in the field of agricultural or any other commercial activity, the purport is only to ensure that the

scheme providing for investment in the form of rupee, anna or paise gets registered with the authority concerned

and the provision would further seek to regulate such schemes in order to ensure that any such investment based

on any promise under the scheme or arrangement is truly operated upon in a lawful manner and that by

operating such scheme or arrangement the person who makes the investment is able to really reap the benefit

and that he is not defrauded."

46. I therefore, find that in this case a 'collective investment scheme' was carried out without obtaining

certificate of registration from the Board in accordance with the provisions of section 12(1B)of the

SEBI Act and regulation 3 of the CIS Regulations. In this regard, it is noted that the SCN as

modified by Corrigendum -1 contemplates suitable directions under section 11 and 11B of the SEBI

Act read with regulation 65 of the CIS Regulations only against Noticee Nos. 1-6 i.e. Trust and its

Trustees and not against other noticees. While directions for winding up of trust/scheme or

restraint/debarment, if any, for violation in this regard can be issued to Trust and/or Trustees as

contemplated in the SCN as modified by Corrigendum -1, GBL and its directors can not be

absolved from their obligations to ensure compliance of directions that are issued in order to protect

the interests of investors in the scheme in question. In this case, several mitigating facts and

circumstances as noted above are relevant. The Trust was bona fide created for the benefit of

sugarcane farmers and material available on record do not suggest any fraudulent scheme in this

case. There is no allegation that promoters/directors of GBL or the Trustees have derived any

personal benefit out of the scheme in this case and the material on record also do not suggest the

same. The scheme/ arrangement in question has been closed and no further contributions have been

collected and pooled other than those stated in the SCN and the contributions received from the

contributories/beneficiaries have been invested in GBL. It is noted that the Trustees are still holding

shares of GBL represented by jumbo share certificates on behalf of the contributories/beneficiaries

who are investors in the scheme and noticees.

47. In this regard, I have also considered the common proposal made by GBL and its directors on one

hand and Trust and Trustees on the other hand for in specie distribution of shares to the

contributories/beneficiaries of the Trust pro rata to their contributions. It has been proposed to sub-

divide 83 share certificates (issued in respect of its 22,69,600 equity shares) into 45,392 share

certificates consisting of 50 shares each and to make an in specie distribution to each of the

beneficiaries on a pro rata basis. In this regard, it has been submitted on behalf of GBL that such

proposal will be within the scope of regulation 65(d) of the CIS Regulations which provides for


direction to return the 'assets' to the concerned investors. In this case, the shares in question were

not issued and allotted to public and the proposal is also not intended to transfer those shares to

public or persons other than beneficiaries who agree to take pro rata shares. It has been submitted

that substantial number (9,826) of beneficiaries have consented for in specie distribution of shares.

48. I, therefore, in exercise of powers conferred upon me by virtue of provisions of section 19 of the

Securities and Exchange Board of India Act, 1992 issue following directions under section 11 and

11B of the said Act read with regulations 65 and 73 of the Securities and Exchange Board of India

(Collective Investment Schemes) Regulations, 1999:

(a). The noticees no. 1 to 6 are directed to wind up the existing 'collective investment scheme' and dissolve

the Trust.

(b). The noticees shall, jointly and severally, refund to the contributories/beneficiaries the money

equivalent to the value of their investment with regard to pro rata shares in the jumbo share

certificates alongwith interest at the rate of 10% per annum from the date of investment till the

date of refund and after adjusting amount of dividend paid, if any. However, considering the

desire of large number of contributories/beneficiaries for pro rata distribution of shares, as

mentioned hereinabove, in the interest of such investors, I allow the noticees to make pro rata

distribution of GBL shares to contributories/beneficiaries who give positive consent for such pro

rata distribution of shares and also make payment in addition to these shares in the following

manner as proposed by noticees:

Sr. No. Particulars Shares allotted on

20th November, 2009

(In `)

Shares allotted on 30th March, 2010

(In `)

1 Investment per share (a) 200 200

2 Interest at 10% till the date of refund (b) x y

4 (Less) Fair value of shares (c) (184) (184)

6 (Less) Sugar Benefit and Dividend (d) (13.51) (13.16)

7 Net amount payable (a+b-c-d) ( 200+x-184-13.51) ( 200+y-184-13.16)

(c). The noticees shall, within fifteen days of this order, issue a public notice, in one vernacular daily

having wide circulation in each of the areas from where the contributions have been received

providing therein the modalities for refund of investments with interest/distribution of shares,

details of contact persons such as names, addresses and contact details .

(d). The Trust and its Trustees are directed to refund the unutilised contributions remaining in the

corpus of the Trust, if any, and any profit earned thereon, to all the contributories/beneficiaries

in proportion to their contribution to the corpus of the Trust.

(e). The noticees are directed to ensure compliance with directions in clause (a) to (d) above within a

period of twelve months from the date of this order and submit a winding up and compliance

report to SEBI in accordance with regulation 73 of the CIS Regulations within fifteen days of

such compliance or within such period as SEBI may allow on written request in this regard,

failing which the following actions shall follow:-


(i) appropriate civil/criminal proceedings under the SEBI Act, 1992 including recovery process

under section 28A, thereof, shall be initiated against the noticees; and

(ii) a reference shall be made to the Ministry of Corporate Affairs, to initiate the process of

winding up of GBL.

(f). The Trustees, namely, Mr. Narsang V. Padhiyar, Mr. Pandappa R. Channal, Mr. Balchandra R.

Bhakshi, Mr. Veerbhadra R. Terdal and Mr. Prahlad N. Desai are restrained from buying selling

and dealing in securities and from accessing the securities market, directly or indirectly, in any

manner till the collective investment scheme in this case is completely wound up and investors are

given refund of their investments or pro rata shares, as the case may be, in terms of the above

directions.

49. The show cause notice dated January 25, 2012 and the corrigenda thereto are accordingly disposed

of.

50. This Order shall come into force with immediate effect.

Sd/-

DATE: JANUARY 1ST, 2016 RAJEEV KUMAR AGARWAL

PLACE: MUMBAI WHOLE TIME MEMBER

SECURITIES AND EXCHANGE BOARD OF INDIA

wtm/rka/efd-dra-iii/ 1 - 2/2016 before the securities and

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