WTM/RKA/IMD-CIS/16/2013. Case: In Re: Osian's-Connoisseurs of Art Private Limited Vs. Securities and Exchange Board of India

Case NumberWTM/RKA/IMD-CIS/16/2013
CounselFor Appellant: Mr. Zal Adhyarjuna, Shri Vyapak Desai, Ms. Payal Chatterjee, Shri K. Mahadevan, Advocates and Shri Anujit Gangoli, Director and For Respondents: Shri Santosh Kumar Shukla, Joint Legal Adviser, Shri Mridul Rastogi, Asst. General Manager and Shri Durgesh Kumar Thakur, Asst. Legal Adviser
JudgesRajeev Kumar Agarwal, Whole Time Member
IssueCompanies Act, 1956 - Sections 67, 67(3); Securities And Exchange Board Of India Act, 1992 - Sections 11, 11(1), 11(2) (c), 11(2)(c), 11AA, 11AA (2), 11AA(1), 11AA(2), 11AA(2)(i), 11B, 12, 12(1(B), 12(1B), 19, 24; Securities Contracts Regulation Act, 1956 (42 of 1956) - Section 2(h)
Judgement DateApril 15, 2013
CourtSecurities and Exchange Board of India


Rajeev Kumar Agarwal, Whole Time Member

  1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") noticed that Osian's-Connoisseurs of Art Private Limited (hereinafter referred to as "Noticee") was soliciting contribution in the nature of investments from the investors under the scheme of 'Art Fund' with an objective to invest in the art works. In order to understand the nature of activities of the Noticee and to examine whether they would fall within the ambit of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and SEBI (Collective Investment Scheme) Regulations, 1999 ('CIS Regulations') SEBI undertook an inquiry and vide it's letter dated June 18, 2007 sought clarification from the Noticee. The Noticee submitted its reply to SEBI vide its letter dated July 3, 2007. From the reply of the Noticee, it was noted that the Noticee is a company incorporated under the Companies Act, 1956 and has sponsored a fund by the name Osian Art Fund (hereinafter referred to as the 'Osian' or the 'Art Fund') as a private trust formed under the Indian Trust Act, 1882. Oseta Investments Trustee Company Private Limited (hereinafter referred to as the 'Oseta' or the 'Trustee') is the trustee and the Noticee acts as Asset Management Company (AMC) for the Osian. Osian had launched a 'Scheme - Contemporary -1' which involves pooling of investments from investors with the objective to generate income and capital growth from portfolio of investment and management in the art works. The investments/contributions received from the investors are managed by the Noticee.

  2. From the characteristics of the arrangement and scheme sponsored /floated by the Noticee as stated in its above reply, it was prima facie observed that the activities of the Noticee are in the nature of 'collective investment schemes' as defined under section 11AA of the SEBI Act. Since the Noticee was undertaking such activities without obtaining certificate of registration as required under section 12(1B) read with section 11(2) (c) of the SEBI Act and regulation 3 of the CIS Regulations, SEBI issued a show cause notice (SCN) dated October 12, 2007. Oseta, vide its letter dated December 21, 2007, assumed the responsibility to respond to the SCN and filed the reply for itself and on behalf of the Noticee. An opportunity of hearing was granted to the Noticee on September 5, 2008 before the then Whole Time Member when Mr. Darius Khambata, Senior Advocate had appeared and made submissions on behalf of the Noticee. The Noticee had also submitted its written submissions vide its letter dated September 15, 2008.

  3. In may be mentioned in this context that SEBI had also issued an "advisory on Art Funds" vide its Press Release No. PR No. 44/2008 dated February 13, 2008 and also issued message to the investors advising them that 'Art Funds" are 'collective investment schemes' as defined under the SEBI Act. Investors were also advised with regard to their investment in Art Funds, funds/schemes launched by companies or any entity formed for the purpose. It was informed to them that launching/floating of the 'Art Funds' or schemes without obtaining a certificate of registration from the SEBI in terms of provisions of the CIS Regulations amounts to violation of the provisions of section 12 read with section 11 and 11AA of the SEBI Act and the CIS Regulations.

  4. Another opportunity of hearing was granted to the noticee before me on April 17, 2012 when Shri Vyapak Desai, Advocate appeared and submitted that SEBI had, vide its letter dated January 31, 2011 advised Shri A. K. Muthuswamy (hereinafter referred to as 'the Complainant') that his complaint with regard to his investment of ` 25 lakhs in the scheme of the Noticee did not come within purview of SEBI. He further submitted that the Complainant had filed a writ petition before the Hon'ble High Court of Madras challenging the SEBI's letter dated January 31, 2011 which has been finally heard on April 16, 2012 when the Hon'ble High Court has dismissed the writ petition. He sought adjournment of the hearing in order to study the decision of the Hon'ble High Court before making final submissions, which was granted to him.

  5. Vide order dated April 16, 2012, while dismissing the writ petition filed by the Complainant praying for direction to SEBI to dispose of his complaint dated January 18, 2011 read with his email dated February 18, 2011 in accordance with provisions of sections 11AA and 12(1B) of the SEBI Act read with the CIS Regulations and SEBIs advisory / message dated February 13, 2008, Hon'ble High Court of Madras observed that SEBI while exercising quasi judicial function cannot entertain the second complaint on same cause of action after rejecting it. The second complaint 'cannot be treated to be review, as there is no power of review with Board under the Act". Therefore, the Hon'ble High Court held that it could not issue direction to deal with the complaint which was not maintainable in law. However, the Hon'ble High Court gave liberty to the Complainant to challenge SEBIs letters dated January 31, 2011 by filing an appeal, if so permissible in law. Pursuant to the same, the Complainant filed an appeal before Hon'ble Securities Appellate Tribunal (SAT).

  6. It may be mentioned that the proceedings commenced by the SCN against the Noticee were not in challenge either in the writ petition before the Hon'ble High Court of Madras or in the appeal before Hon'ble SAT. Hon'ble SAT while deciding the appeal filed by the Complainant, vide its order dated November 29, 2012, set aside SEBI's letter dated January 31, 2011 and directed SEBI to reexamine the matter after hearing both the parties. Consequently, another opportunity of personal hearing was granted to the Noticee on December 26, 2012 which was, on request of the Noticee, rescheduled to January 4, 2013. Mr. Zal Adhyarjuna, Advocate appeared on the scheduled date and made submissions on the lines of reply dated December 21, 2007 and September 15, 2008. Another opportunity of personal hearing was granted to the Noticee and the Complainant, both on March 14, 2013 before me when Mr. Vyapak Desai, Advocate of the Noticee appeared and made submissions on behalf of the Noticee. Mr. K. Mahadevan, Advocate of the Complainant argued on his behalf on the lines of his written submission dated March 14, 2013. As requested by him, the copies of replies of the Noticee were furnished to him and he was granted seven days time to file his rejoinder, if any, and to furnish a copy thereof to the Noticee. The Noticee was allowed to file its response to the rejoinder of the Complainant within one week thereafter. The Complainant vide letter dated March 18, 2013 submitted his rejoinder with a copy endorsed to the Noticee. SEBI also vide its letter dated March 28, 2013 forwarded a copy of the same to the Noticee. However, the Noticee has chosen to not to file his response to the rejoinder of the Complainant. I, therefore, infer that the Noticee does not have anything to add to its submissions already made in these proceedings.

  7. The submissions of the Noticee are summarized as below:

    (a) The Osian is set up as a private trust, with the Oseta appointed as its Trustee. Therefore, the SCN should have been directed to the Oseta instead of the Noticee who is the Sponsor and AMC of the Fund. Since the law does not recognise a private trust as possessing characteristics of a separate juristic entity, Osian Art Fund is not a legal entity. In this structure, the legal title vests in the Trustee (Oseta) and the beneficial title with the beneficiaries (investors).

    (b) In the present context, the legal representative of the Osian Art Fund is the Trustee and not the Noticee, which is only its sponsor and AMC. The Noticee, is strictly segregated from Osian Art Fund and this arrangement functions more in the nature of a mutual fund. Oseta is fully committed to complying with all applicable laws and regulations.

    (c) A 'collective investment scheme' under the CIS Regulations has necessarily to be a scheme or arrangement offered by a 'company' but in the present case the scheme has been floated by the Osian, which is structured as a private trust. Prior to the amendment in 2000, any person who floated a scheme which satisfied the requirements mentioned in regulation 2(2)(a) to (d) would have qualified as 'collective investment scheme'. However, post amendment of 2000, it is evident from section 11AA of the SEBI Act and regulation 2(2) of the CIS Regulations that SEBI has consciously introduced the qualification that a 'collective investment scheme' is one which is offered by any 'company' and the same must be given meaning accordingly. Hence, the scheme of trust cannot be construed as a 'collective investment scheme' under the CIS Regulations.

    (d) S. A. Dave Committee on Collective Investment Schemes, 1998 (Dave Committee Report) indicates that the introduction of CIS Regulations was necessitated to ensure legitimate investment activity in plantation and other agriculture based business. The CIS Regulations have been framed on the basis of the Dave Committee Report. A reading of the CIS Regulations would show that it is intended for regulating plantation activities and live stock activities wherein there is always underlying assets. They also aim at protecting the small investors who are fragmented rather than the sophisticated and high networth investors. By its very nature, the CIS Regulations were never intended to, and cannot, in its present form, cover specialized fund such as Art Funds.

    (e) SEBI Act/CIS Regulations are not umbrella regulations to cover all sort of pooling of funds. As recommended by Dave Committee, the CIS Regulations deal with open ended schemes of plantation / agro companies. If SEBI desired to regulate other pooling of funds it could have amended the CIS Regulations or made separate regulations since CIS Regulations never contemplated...

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