Criminal Liability On Officers And Directors For Running An Illegal Collective Investment Scheme

In this short article, Atipriya Gautam who is currently seeking M.A. IN BUSINESS LAWS, from NUJS, Kolkata discusses Criminal Liability on Officers and Directors for running an unlawful Collective Investment Scheme. To direct such conduct and clamp down elements running illicit schemes, the marketplace regulator introduced the Securities and Exchange Board of India (Collective Investment Schemes), Regulations, 1999 (“Regulations”).

These Regulations, in addition to other activities, control the enlistment and commitments of the Collective Investment Management Company. In the first place, it is helpful to check out the meaning of “Collective Investment Scheme” and “Collective Investment Management Company”. The expression “Collective Investment Scheme” (CIS) is defined under section 11AA of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). 1. The payments or contributions made by the traders are pooled and used solely for the purpose of such set up or scheme. 2. The payments or contribution are made by the investors with a view to get income or profits from such system or set up.

3. The obligations, property, or contributions forming part of such plan or arrangement is maintained with respect to the traders. 4. Traders don’t have control over the day-to-day management of such arrangement or structure. SEBI has managed to get mandatory for each entity that is running the CIS to join up itself under section 12(1B) of the Act and Regulation 3 of the Regulations.

Section 24 of the Act offers the abuse for the contravention of the provisions of this Act. On a bare perusal of Section 27, it is clear that for an offense committed by an organization its directors/officials aren’t automatically punished combined with the company. The Section provides for safeguards giving a chance to the directors/officials to prove their non-involvement in the commission payment of the offense, to flee the penal implications.

As per the procedures of sections 27 only those people who were in charge and responsible at the relevant point of your time for the carry out of the company’s business will be deemed to be liable for such contravention. Thus, only on establishment of facts, the legal fiction shall come into procedure against the individuals.

Such people can effectively oppose the prosecution by creating want of understanding of the contravention or activities of homework to avoid the same. Such an onus on anybody is not a heavy one and can be discharged ordinarily. Maitreya Services Pvt. Ltd. SEBI began the probe against Maitreya Services Pvt. Ltd. (“Maitreya”) after a guide from the TAX office in September 2010 affirming infringement of SEBI directions by Maitreya. Amid the inquiry, Maitreya has shown that it bears out the business enterprise of real estate and its business includes purchasing and offering of land, development of the land, structure, and other land related activities.

SEBI discovered that Maitreya experienced propelled different plans under which cash was collected from the general population. These techniques varied based on the installment to be made by the buyer, and the time period for which such investments were to be produced. During the course of its inquiry, SEBI found that the business had launched and operated Collective Investment Schemes without getting registered under Section 12(1B) of the Act and Regulation 3 of the Regulations and an amount of Rs. 804 crores was exceptional with it was to be reimbursed to the traders.

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While responding to the show-cause by SEBI, Maitreya refused to be in CIS operations and invalidated all charges leveled against it and requested the techniques are terminated and released from the show-cause notice. In 2012, Maitreya searched for to stay the proceedings through a consent process, however, that was dismissed by SEBI.

SEBI’s probe discovered that Maitreya got mobilized Rs. 1,332 comes from general public as “advances” as on March 31, 2011 and got reimbursed Rs. 538 crores as “reimbursement” to investors, resulting in some Rs. 794 crores as exceptional to be reimbursed as on that day. SEBI likewise discovered that the assets were deficient to meet the liabilities and its repayment responsibilities were almost twice the worthiness of its total movable and immovable resources.

Therefore, SEBI purchased for winding up of the CIS being run under the disguise of real estate industry, asking the worried power to refund the amount of money to the traders within an interval of three months. SEBI additionally banished Maitreya, and its directors from being able to access the securities market till all its collective investment schemes are wound up and decided to initiate prosecution proceedings against them. During the initial inquiry, the business refused to provide details that have been wanted by SEBI, proclaiming that the regulator didn’t have jurisdiction and the company was not working any collective investment system.