The Hindu Business Line : Money doesn't grow on trees

IN THE Gospel, according to St. Matthew, is the verse `the tree is know by its fruit.' Promoters of teak and other plantation companies seem to have forgotten this while offering double-digit returns to investors for investing in their orchards at hitherto unheard of places some years back. When the Government stepped in to regulate the industry, one company objected and the matter went to the Allahabad High Court in the Paramount Bio-tech Industries Ltd (PBIL) vs Union of India (2004 49 (I) CC 726) case.

Rating

PBIL was engaged in the business of collective hi-tech and hybrid agro-plantations and sale and development of orchards on behalf of the owners. The project sites were at Bareilly and Garh Mukteshwar. It had managed to garner Rs 2.36 crore under its various schemes. In 1997, the Government, consequent to a study, brought the industry under the control of the Securities and Exchange Board of India (SEBI), which promptly formulated the SEBI (Collective Investment Schemes) Regulations 1999. A glance at the scheme forced PBIL to approach credit-rating agencies, since credit rating was made mandatory for such companies, and PBIL got a "get-rated or stop-business" letter from SEBI. However, the credit-rating agencies feigned ignorance of any such mandate from SEBI. PBIL then decided to take up the issue legally.

The objections

Having decided to go legal, PBIL had a variety of objections. SEBI could not make regulations only for grant of a certificate of registration and not for collective investment schemes, as the business was in trees and plantations that would not form `securities' which alone SEBI had the power to regulate, the provision that 50 per cent of the directors should be independent was restricting the rights of shareholders, the accounting norms were too stiff to be followed and that the covenant that no scheme should be launched unless the certificate from SEBI has been obtained would force these companies out of business for that time.

PBIL contended that the entire industry had been crippled because of the intervention of SEBI. Hitting SEBI where it hurt the most, it said that the expression `collective investment scheme' had not been defined in the SEBI Act prior to the amendment to the Security Laws (Amendment) Act 1999 which obtained legality on February 22, 2000. Hence, the regulations regarding collective investment schemes made in 1999 were invalid. PBIL stated that it had paid back almost Rs 1.40 crore to various investors and that it had decided to close down the business.

SEBI defence

SEBI, in reply, gave a brief summary of the growth of the plantation company in India. The bouncing of cheques issued by the companies in the industry en masse instigated SEBI to get a special audit done of a sample 35 companies by a firm of chartered accountants.

The report was revealing. One company did not bother to get its accounts audited at all, diverted a lot of the funds collected to sister companies, lease rent of Rs 2 crore was paid for land valued at about Rs 15 lakh, plantation land was purchased in the individual names of the directors and their cronies and that depositors were being paid out of fresh deposits received.

The Dave Committee that was formed made suggestions and recommendations after consulting the industry and SEBI. It finished off its defence by stating that it had received more than 55 complaints regarding PBIL.

Ruling

The Allahabad High Court, following Howeys Test as postulated by the US Supreme Court, ruled that the definition of `collective investment scheme' as given by the Dave Committee has to be interpreted to be the official definition.

The bonds issued would certainly fall within the definition of securities The court, having ruled that the definition of the Dave Committee regarding collective investment schemes would be taken as the final word, went to state that the actual dates when the definition was enacted would be immaterial.

For a similar reason, the court ruled that the regulations formulated by SEBI were not retrospective in nature. The factual statement that the business had been closed down would have to be looked into by SEBI.

Rejecting the allegation of PBIL that the provisions of the SEBI regulations are contradictory to the Companies Act and other Acts, the court ruled that the regulations are special laws and would prevail over the provisions of the Companies Act and other regulations.

The Allahabad High Court observed that in Srinivasa Enterprises vs Union of India (1980 4 SCC 507), the Supreme Court ruled that the ban on price chit enterprises which were fleecing the public was reasonable and in Peerless General Finance and Investment Co Ltd vs Reserve Bank of India (AIR 1992 SC 1033), the Supreme Court upheld the directives issued by RBI on financial investment companies.

End-game

The legal battle by PBIL to defend the plantation scheme operators failed in the courts. However, what it not clear about the case is whether the balance of Rs 1 crore has been paid back to the investors. If it has not, there are no prizes for guessing where the money went.

(The author is a Hyderabad-based chartered accountant.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Incentivise crop diversification

No dream Budget, just a credible one please

May we see peer reviews of our CAs on the Net?

A performing value for NPLs

Money doesn't grow on trees

IT industry — Indian firm clicks as well as MNC

The lure of London

Presentation kills if you don't know how to do one

Tax actions