Whether Land is a “Security” Under Collective Investment Schemes

following guest post is contributed by Prachi Pandya, who is the founding
member of Corporate Attorneys and can be contacted at
[email protected]]
It is a matter of interest that the
trigger point of framing the SEBI (Collective Investment Schemes) Regulations,
1999 (the “CIS Regulations”) was owing to initiatives by private entrepreneurs
undertaking plantation or agricultural activities on a commercial scale. Since the
Income Tax Act exempts income from agricultural activities from taxable income,
such schemes were becoming attractive and indeed popular.
However, during the mid-1990s, such
entities began defaulting in making payments to their investors. This not only
caused huge losses to the investors, but also eroded the confidence of the general public.
Thereafter, several press releases
and newspaper advertisements/ notices were issued by the Securities &
Exchange Board of India (“SEBI”) from time to time, bringing to the notice of
the general investors and the public, on the functioning of collective
investment schemes (“CIS”). The press releases further stated and clarified
that instruments such as agro bonds and plantation bonds should be treated as
CIS, and are subject to the jurisdiction of the Securities and Exchange Board
of India Act, 1992 (“SEBI Act”).
The CIS Regulations were
implemented on the basis of recommendations of the Dave’s Committee. The
primary objective of the CIS Regulations was to shield the interest of gullible
investors expecting to earn profits by putting their life savings into schemes
floated by various entities assuring them of exponentially high returns.
Since the introduction of section
11AA in the SEBI Act in February 2000 and formulation of the CIS Regulations, a
wide range of schemes have been brought under its ambit (and scanner). Of course
the most famous case relates to Sahara.
In two such cases, an interesting question
of law arose as to whether ‘land’ can be termed and considered as an instrument
or an unit or a security to fall within the ambit of the definition of
“securities” as defined in section 2(h) of the Securities Contract (Regulation)
Act, 1956 (“SCRA”). These two cases were that of Alchemist Infra Realty Limited
(Order of the Securities Appellate Tribunal dated July
23, 2013
) and PACL Limited (Wholetime Member’s Order dated August 22, 2014)
The term ‘securities’ in Section 2(h)
of the SCRA was amended vide the Securities Laws (Amendment) Act, 1999 to
include units or any other instrument issued by any CIS to the investors in
such schemes
The facts of both the aforementioned
cases were more or less similar. Below in brief are facts of the more recent
case of PACL:
Limited (“PACL”) was running a CIS and had failed to submit the information /
details to SEBI in terms of the press release dated November 26, 1997 and
the public notice dated December 18, 1997.
2. In
view of such default, SEBI by its letter dated March 04, 1998 informed PACL
that it was not eligible to take the benefit under the proviso to Section
12(1B) of the SEBI Act and therefore could neither launch any new schemes nor
continue raising funds under its existing schemes.
PACL by its letter dated March 23, 1998, replied to the SEBI and challenged the
jurisdiction of SEBI, by stating that its transactions are in the nature of
sale and purchase of agricultural land and thus outside the purview of the
securities market.
4. A public
interest litigation (“PIL”) was filed before the Delhi High Court by Mr. S.D.
Bhattacharya against SEBI and others in the year 1998, bringing to light, the
activities of various agro-plantation companies who had duped the hard earned
money of several investors. PACL was also impleaded in the said PIL.
The Delhi High Court by another order dated May 26, 1999, directed SEBI to
appoint auditors for ascertaining the genuineness of the transactions executed
by PACL. Pursuant to the audit, several discrepancies were pointed out.
6. Thereafter,
between November 1999 and December 1999 SEBI sent several letters to PACL to
comply with the CIS regulations.
would reply stating that SEBI did not have jurisdiction as, it was mainly
dealing in the sale and purchase of agricultural land and development of the
8. Pursuant
to an investigation, SEBI issued a show cause notice dated June 14, 2013 to
PACL Limited and its director.
PACL’s primary defence was that
since it was dealing in agricultural land which did not fall within the
definition of ‘securities’, the CIS Regulations and the SEBI Act were not
applicable to them. On this ground PACL challenged SEBI’s jurisdiction.
PACL further contended that its
business relates to buying and selling of agricultural land, including
development of such land into cultivable land and providing other
infrastructure on it. PACL further submitted that the transactions were similar
to that of a builder or a developer of property and that it does not promise
any ‘assured return’ or ‘profit’ to the customer.
However, SEBI took the view that ‘land’
falls within the definition of ‘securities’ and PACL’s business of dealing in
agricultural land falls within the framework of the CIS Regulations. The
following were SEBI’s reasoning and findings:
1. Schemes floated by
PACL fall squarely within the definition of CIS as defined under Section 11AA
of the SEBI Act and are thus required to comply with the provisions of the CIS
2. PACL was mobilizing money
from the public or from the investors under their existing schemes.
3. SEBI relied on the
Punjab High Court’s Judgement in the matter of P.G.F.
Limited vs. Union of India & Another
where it was held  that Section 11AA and the CIS Regulations
were intended for ‘investor protection’ and the same fall within the residuary
clause i.e., Entry 97 of the Union List under the 7th Schedule of the
Constitution of India.
In the said judgment, the Hon’ble Punjab High Court observed, on which
SEBI placed reliance:
The pith and substance rule is relatable to the
objects and reasons of a legislation, and not to the activities of a party.
…… Stated in other words, while examining the issue of legislative
jurisdiction, it is the pith and substance of the legislation, and not the pith
and substance of the activities of a party, which are relevant. In drawing our
conclusion, therefore the relevant question to be examined would be, whether
the pith and substance of the legislation under challenge is “investor
protection”, and sale and purchase of agricultural land is an activity
ancillary thereto; or whether, the pith and substance of the legislation under
challenge, is sale and purchase of agricultural land and ‘investor protection’
is ancillary thereto. In answering the aforesaid quarry, the conclusion
undoubtedly is in favour of the former i.e., the pith and substance of the
legislation in question is “investor protection”, whereas sale and
purchase of agricultural land and/or development of agricultural land is
incidental thereto.
This finding was upheld by the Apex Court in the same matter
in appeal
[(2013) AIR SCW 2420].
4. It was further observed by SEBI:
Out of the sample of 500 customers selected randomly
from the list of customers provided by PACL, who according to it were allotted
land in the year 2005-2006, not a single customer had finally received the land
even after the passage of more than eight (8) years. This shows clearly that
the real estate business is only a facade for running a CIS.
5. PACL was soliciting and inviting investments from
prospective customers by way of written materials, under which one of the aims
of PACL is to offer maximum return on investment and benefits to the customers.
6. PACL pools the money received from the customers
for the purchase of the land.
7. The agreement entered into between PACL and its
customers along with the application form is not a registered document and
hence any restrictions on alienation or transfer of the immovable property are
not a valid restriction under law.
Securities Appellate Tribunal in the matter of Alchemist Infra Realty Limited
has held:
We further note that
the said certificate falls completely within the scope of the definition of the
terms “securities” as provided in Section 2(h) of SCRA which as amended by the
Securities Laws (Amendment) Act, 2004, w.e.f. October 12, 2004, now includes
units or any other instrument issued by any Collective Investment Scheme to the
investors in such schemes. Therefore, the certificate issued to the investors
readily falls within the meaning of the expression “securities”.
Supreme Court in the case of M/s. P.G.L. Ltd. has held:
A detailed analysis of
sub-section(2) of Section 11A, which defines a collective investment
scheme  discloses that it is not
restricted to any particular commercial activity such as a shop or any other
commercial establishment or even agricultural operation or transportation or
shipping or entertainment industry, etc…..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,
there is no question of testing the validity of Section 11AA in the anvil of
Entry 18 of List II (of the Constitution of India).”
To summarise, over the years and
with the changing dynamic of business, SEBI too has evolved itself and its
regulations to cover and encompass within its ambit all kinds of activities
which directly or incidentally affect the rights of investors. It has made efforts
to address the loopholes by expanding and modifying its regulations such that
no activities go unnoticed which in any manner prejudices the interest of
gullible investors.
– Prachi Pandya

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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