In an order dated August 22, 2014, a whole time member of SEBI found the business activities of PACL Limited to be in the nature of a Collective Investment Scheme and ordered the refund of all the money it had received and the ‘returns’ it had promised to its customers.

Under the SEBI Act, a CIS is any scheme that involves the pooling of money from investors for the purposes of the scheme and which attracts investments through assured profits or returns. The scheme involves management of the funds collected on behalf of its investors who do not have day to day control in the scheme. In order to run a CIS, entities need to be registered under the SEBI (CIS) Regulations, 1999.

PACL offered customers the opportunity to purchase small parcels of barren land and provided the service of developing the said parcel into fertile agricultural land. Customers paid for the land and the development services either at the outset or in instalments. At the time of purchase, while PACL provided an estimated value that could be realised post the development activity, it did not promise any fixed return to its customers. It merely offered to provide marketing services to those customers who intended to sell the land at the end of the development period.

By concluding that the aforesaid activities of PACL amounted to be in the nature of a CIS, SEBI has substantially expanded the scope of its jurisdiction to include land sale-purchase transactions. For instance, it is unreasonable to consider that SEBI is empowered to regulate any builder who may collect money while constructing a commercial or residential building in a city, thereby engaging in an activity which is not too different from the activities of PACL.
Disclosure: Finsec Law Advisors appeared for PACL Limited in the aforementioned proceedings.

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Date:September 28, 2015