SEBI | Directors liable along with Company to refund the money of investors collected under ‘Collective Investment Scheme’ without obtaining a certificate of registration

Securities and Exchange Board of India (SEBI): Ananta Barua, Whole Time Member, issued directions holding the Directors of Zeestar liable for accepting money under the Collective Investment Scheme when they weren’t possessing the registrations for the same.

It was brought to the attention of SEBI that Zeestar Limousines Ltd. was collecting money from the public under a Collective Investment Scheme. On examination of the matter, SEBI prima facie found that the scheme of Zeestar was in the nature of collective investment scheme (“CIS”), as defined under Section 11-AA of the Securities and Exchange Board of India Act, 1992. Accordingly, SEBI initiated proceedings under Sections 11 and 11-B of the SEBI Act against the Company.

On December 11, 2015 an order was passed by SEBI which said that the launching/ floating/ sponsoring/ causing to sponsor of any ‘collective investment scheme’ by any ‘person’ without obtaining the certificate of registration in terms of the provisions of the CIS Regulations is in contravention of Section 12(1-B) of the SEBI Act and Regulation 3 of the CIS Regulations and Zeestar had launched a CIS without obtaining certificate of registration from SEBI, which contravened the provisions of the said section and regulation. SEBI pronounced such order as all the four conditions specified under Section 11-AA(2) of the SEBI Act were satisfied in the instant case, the schemes/plans promoted, launched, carried on and operated by the Company were in the nature of CIS in terms of Section 11-AA(1) and they  were carried on without any formal registration.

After passing certain directions against the Company, SEBI had advised that proceedings may be initiated against the Directors of Zeestar as well.

Accordingly, SEBI issued show-cause notice to the Directors of the Company, as to why appropriate directions under Sections 11(1) and 11-B of SEBI Act, 1992 may not be issued against them for contravention of Section 12(B) of SEBI Act, 1992 and Regulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999 by Zeestar.

The opportunity of personal hearing was granted to all the directors and the service of the hearing notice was directly done through paper publication.  None of the directors turned up for the scheduled hearing nor did any of them file a reply to the show-cause notice. The findings of the order passed against Zeestar were not challenged within the time specified under Section 15-T of the SEBI Act, 1992 for filing appeal in the appellate forum. Further, time to file such appeal also lapsed.

The Tribunal held that all the Directors (except one who joined in the year 2010) were the Directors of Zeestar since 2008. The Board of Directors is primarily responsible for the management of the affairs of a company and raising and utilisation of the funds. The Directors held these positions while Zeestar was running the unregistered CIS and were still holding the position of ‘Director’ to date and as such, they were found guilty as alleged.

Hence, the Directors are liable, jointly and severally with the Company, to make a refund of the money collected by Zeestar to investors.  [Zeestar Limousines Ltd., In Re; 2019 SCC OnLine SEBI 147; decided on 25-09-2019]

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