The Securities Appellate Tribunal, in the matter of Citrus Check inns Limited v. SEBI, recently considered the validity of SEBI's order finding Citrus to be running an unregistered Collective Investment Scheme. Citrus is in the holiday timeshare business and its schemes are largely similar to those of other unregulated timeshare companies. SAT observed that Citrus may be distinguished from other timeshare companies as some of its schemes allow customers to obtain a refund along with promised returns. Thereby, SAT was convinced that certain schemes of Citrus satisfied the ingredients of a CIS.

While deciding the course of action to be resorted to, SAT observed that the fundamental legislative purpose in entrusting SEBI with the affairs of CIS companies is to register and regulate them under the CIS regulations so that the interests of gullible investors are duly protected. It noted that only one entity is registered as a CIS and other entities that are found to be acting as unregistered CISs are directed to wind up. In this light, SAT observed that it is high time for SEBI to take corrective measures and permit a company operating a CIS to register. Thereby, SAT directed SEBI to grant Citrus an opportunity to register as a CIS.

The final directions issued by SAT makes this case a landmark judgement. Ordinarily, when SEBI determines that a company is running an unregistered CIS, it directs the company to wind up, refund all monies collected along with promised returns, and imposes several restrictions on its promoters and directors. These directions are issued by SEBI irrespective of submissions made by these companies seeking permission to register under the CIS Regulations. However, this is unfair to certain businesses which may not clearly fall within the definition of a CIS and this may be ascertained only after SEBI finds them to be a CIS. It is imperative that such businesses are provided an opportunity to register and become compliant with the CIS Regulations when SEBI finds them to be a CIS. Apart from allowing a CIS to continue operations, this will allow SEBI to keep a watchful eye on these entities and ensure investor protection.