SURESH CHAND AND ANR. versus SURESH CHANDER (D) THR LRS. AND ORS. on 19 February 2020

SURESH CHAND AND ANR.

v.

SURESH CHANDER (D) THR LRS. AND ORS.

(Civil Appeal No. 482 of 2020)

FEBRUARY 19, 2020

[DR. DHANANJAYA Y. CHANDRACHUD ANDAJAY RASTOGI, JJ. ]

Rajasthan Pre-emption Act 1966: ss. 6, 5 – Right of pre-emption – When accrues – Held: Right of pre-emption is apreferential right to acquire the property by substituting the originalvendee – Transfer or sale of an immovable property is a conditionprecedent to the enforceability of the right – Right of pre-emption isattached to the property and only on that footing it can be enforcedagainst the vendee – Though the right is recognised by law, yet itcan be rendered imperfect by the vendor when he transfers theproperty to another person who also has a superior right topre-emptor – On facts, plaintiff and second defendant were brothersin joint possession of courtyard having half share each and seconddefendant sold house alongwith courtyard to first defendant – Asregards plaintiff’s claim for right of pre-emption, plaintiff had asuperior right of pre-emption by virtue of s. 6(3) since he was thebrother of the second defendant and first defendant has an inferiorright of pre-emption as compared to plaintiff, hence his claim cannotprevail over the superior right of pre-emption of plaintiff – Courtsbelow rightly proceeded on a correct interpretation of the provisions.

Dismissing the appeal, the Court

HELD: 1.1 Section 5 of the Rajasthan Pre-emption Act,1966 provides for cases in which the right of pre-emption doesnot accrue. As a result of Section 5(1)(c), the right of pre-emptiondoes not accrue on a transfer of the property to any of the personsmentioned in Section 6, to any person who has an equal or inferiorright of pre-emption. In a case, where a transfer is to a personmentioned in Section 6, the right of pre-emption does not accrueto any person who has an equal or inferior right of pre-emption.In other words, in a case where the vendee also has a right of A

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Apre-emption u/s. 6, the right of pre-emption will accrue only to aperson with a superior right of pre-emption. [Para 11][898 A-C]

1.2 Section 6(1) specifies the persons to whom the right ofpre-emption accrues. Under Section 6(1)(ii), a right ofpre-emption accrues in respect of an immovable property toBowners of other immovable property with a stair-case, entranceor other right or amenity common to such property and theproperty that is transferred. Where a right of pre-emption enuresto the benefit of a person under the provisions of s. 6(1)(ii), aconsequence emanates in terms of s. 5(1)(c). The effect of s. 5(1)(c)is that a right of pre-emption does not accrue, on a transfer toCany person mentioned in s. 6, to any person who has an equal orinferior right of pre-emption. Where a transfer is to any of thepersons mentioned u/s. 6, the right of pre-emption to the claimantaccrues only if the claimant has a superior right. The right ofpre-emption, as Section 4 indicates, is subject to the provisions Dof Section 5. Consequently, where any of the provisions of Section5 come into operation, the right of pre-emption would not beavailable. [Paras 12, 13][898-C, G-H; 899 A-C]

1.3 The right of pre-emption is a preferential right to acquirethe property by substituting the original vendee. The transfer orEsale of an immovable property is a condition precedent to theenforceability of the right. The right of pre-emption is attachedto the property and only on that footing can it be enforced againstthe vendee. Though the right is recognised by law, yet it can berendered imperfect by the vendor when he transfers the propertyto another person who also has a superior right to the pre-emptor.F[Para 15]

1.4 In the instant case, it has come on the record beforethe trial court that DC, the predecessor of the appellants, had apre-existing right in respect of the amenity of the commoncourtyard or sahan. This was admitted in the written statementGfiled by BP in the Suit. PW 1 during his cross-examination wasconfronted with the above written statement. What emerges fromthe above admission is that DC had a right in common in respectof the amenity of the courtyard. During the course of proceedingsbefore this Court, it was admitted that the courtyard was sharedHbetween BP and DC. Therefore, both their rights would fall within the ambit of the provisions of Section 6(1)(ii). In terms of theprovisions of s. 5(1)(c), the right of pre-emption would not accrueto any person with an equal or inferior right of pre-emption. KLexecuted a sale deed in favour of DC who within the meaning ofs. 6(1)(ii) had a right of pre-emption. But the right of pre-emptionof DC was inferior to the right which was claimed by BP as thebrother of KL, DC right u/s. 6(ii) was subject to a superior rightof BP by virtue of s. 6(3). Section 6(3) states that even amongpersons of the same class, the nearer in relationship to the personwhose property is transferred excludes the more remote. [Para16][900 D-H; 901 A-C]

1.5 It was submitted that the comma appearing in s. 5(1)(c)should be read as “or” and the Section must be interpreteddisjunctive; that s. 5(1)(c) should be read as “the right of pre-emption shall not accrue... on a transfer to any of the personsmentioned in s. 6” or “the right of pre-emption shall not accrue...to any person who has an equal or inferior right of pre-emption”;that the plaintiff-BP would not be covered by the first part as thefirst defendant-DC would be covered by s. 6(1)(ii) and the secondpart would not apply to the plaintiff as he only has an inferiorright of pre-emption against the defendant; that the plaintiff cannotclaim any right of pre-emption where a transfer is affected by aperson who is covered by any of the clauses of Section 6. However,the disjunctive interpretation of Section 5(1)(c) as suggestedcannot be countenanced in view of the plain text of the provision.Reading the provision in a manner as suggested would amountto an exercise of legislative re-drafting. This is impermissible.[Para 17][901 B-F]

1.6 The two segments of s.5(1)(c) are that the first segmentcontains the words “on a transfer to any of the persons mentionedin s. 6; and the second segment comprises of the words “to anyperson who has an equal or inferior right of pre-emption”. Bothsegments are separated by a comma and refer to two separatesets of persons. In the first segment the expression “any of thepersons” refers to the vendee. In the second segment, theexpression “any person” refers to the claimant. In the instantcase, the plaintiff-BP had a superior right of pre-emption by virtueof the provisions of Section 6(3) since he was the brother of the AB

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Asecond defendant. DC has an inferior right of pre-emption ascompared to BP. Hence his claim cannot prevail over the superiorright of pre-emption of BP. The concurrent findings of the trialjudge, first appellate court and in second appeal, have proceededon a correct interpretation of the provisions. [Paras 18, 19][901 F-H; 902 A-C]B

Bishan Singh v. Khazan Singh AIR 1958 SC 838;Radhakisan Laxminarayan Toshniwal v. ShridharRamchandra Alshi AIR 1960 SC 1368 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 482 of2020.

DFrom the Judgment and Order dated 26.11.2010 of the High Courtof Judicature for Rajasthan, Jaipur Bench in S.B. Civil Second AppealNo. 395 of 2008.

Puneet Jain, Ms. Christi Jain, Abhinav Deshwal, Harshit Khanduja,Harsh Jain, Ms. Pratibha Jain, Advs. for the Appellants.

ES.K. Sinha, Ms. Seema Kashyap, Advs. for the Respondents.

The Judgment of the Court was delivered by DR. DHANANJAYA Y CHANDRACHUD, J.

1. Leave granted.F

2. This appeal arises from a judgment and order of the High Courtof Judicature of Rajasthan at Jaipur in a second appeal under Section100 of the Code of Civil Procedure 1908.

3. The issue in the present appeal is whether a right of pre-emptionwas available to Beni Prasad who is alleged to be a joint owner inGpossession of the disputed courtyard. This has arisen in the context ofthe Rajasthan Pre-emption Act 1966[1]. Briefly stated, the facts whichhave given rise to the present appeal are thus: A suit[2] for pre-emptionwas instituted by Beni Prasad in the Court of the Civil Judge, SeniorDivision, Badi, District Dholpur in Rajasthan. Beni Prasad died duringH1 “the Act”

2 Civil Suit Case No 71 of 1993

the pendency of the proceedings and is represented by respondents 1 to13. Beni Prasad and Kirorilal were brothers. Beni Prasad filed the suitfor pre-emption, against Devicharan who was impleaded as the firstdefendant and Kirorilal who was impleaded as the second defendant.Theappellants in the present appeal are the sons of Devicharan. A sale deedwas executed on 6 January 1990 by Kirorilal in favour of Devicharan bywhich Kirorilal sold his house along with the disputed courtyard toDevicharan. The basis of the suit was that Beni Prasad and Kirorilal, asbrothers were joint owners in possession of the disputed courtyard havinga half share each. It was argued that the plaintiff in his capacity as thebrother of the second defendant, had a right of pre-emption which wouldprevail against the first defendant, in regard to the purchase of the houseand the courtyardfrom the second defendant. The suit was contested bythe defendants who filed their written statements. The defence was thatthe original owners of the property Pyare Lal and Baboo Lal had soldthe disputed house to Prabhu Lal, who was the father of the originalplaintiff and the second defendant. In the written statement, a plea wastaken that on 17 January 1956, a partition had been effected betweenthe members of the family as a consequence of which, the seconddefendant was allotted the disputed house and the courtyard and theoriginal plaintiff was allotted another property.

4. The Trial Court framed several issues of which specificallyissues (iii), (iv) and (vi) have a bearing on the subject matter of thepresent appeal. Issues (iii), (iv) and (vi) read as follows:

“iii) Whether, the plaintiff has the right of pre-emption in the saledeed dated 6[th] of January, 1990.

iv) Whether, there is common entrance to the ancestral house ofthe defendant no.1 and house purchased by the defendant no.1from the defendant no. 2. If yes, then what is its effect on thesuit.

vi) Whether, the defendant no.1 is also a sharer in the disputedcourtyard and he was vested with the right of pre-emption/priorpurchase right in respect of the disputed house.”

5. Before the Trial Court, the submission which was urged onbehalf of the defendants was that the first defendant, Devicharan himselfhad a share in the disputed property and was vested with a right ofpre-emption. In support of the claim of Devicharan to the use of the AB

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Acommon amenity as a courtyard, reliance was placed on a writtenstatement (Exhibit A2) filed on 15 February 1982 and 17 February 1982by Beni Prasad in another suit instituted against him by his brotherKirorilal. In the course of his written statement, Beni Prasad stated thatDevicharan was also the owner of the disputed courtyard. During thecourse of the cross-examination in the suit out of which these proceedingsBarise, PW 1, who deposed in evidence, was confronted with the above-mentioned written statement. The Trial Judge, in the course of thejudgment, recorded that PW 1 had stated that whatever had been setout in the written statement filed by his father would have been correct.On the basis of the admission contained in the written statement in theCsuit of 1980, it was urged on behalf of the appellants that Devicharanhad an interest in the courtyard which was a common amenity. Thelegal consequence of this would be that Devicharan also had a right ofpre-emption. Hence, the submission was that a right of pre-emption wouldnot be available to Beni Prasad against another holder of the right ofpre-emption, equal or inferior. This submission was rejected by the learnedDTrial Judge as below:

“If by way of an argument it may be assumed that Devicharanwas vested with the right of transmigration through the saidcourtyard, even then as compared to the plaintiff, his right of pre-emption is at lesser level. In this way both of these issues areEdecided in favour of the plaintiffs and against the defendants.”

6. The suit was decreed by the Trial Court. The above findingwas affirmed in first appeal. The first appellate court adverted to thewritten statement (Exhibit A2), which was filed by Beni Prasad in theearlier suit of 1980.However, the appellate court held that notwithstandingFthe fact that Devicharan had a right of passage through the disputedcourtyard, the plaintiff, who was the brother of Kirorilal, had a better ora higher right as compared to Devicharan since Kirorilal and Beni Prasadwere brothers. The first appeal was dismissed.

7. The High Court has dismissed the second appeal in limineGholding that no substantial question of law arose for its consideration.8. Assailing the judgment of the High Court, Mr Puneet Jain,learned counsel appearing on behalf of the appellants, submitted that:

(i) The provisions of Sections 4, 5(1)(c) and 6(1)(ii) of the Actindicate that a right of pre-emption is not available when theH

SURESH CHAND AND ANR. v. SURESH CHANDER (D) THR.LRS. AND ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

person to whom the property has been sold by the vendor isan individual who has a right of pre-emption whether equalor inferior; and

(ii) Pre-emption is a weak form of a right and the legislature, inthe present case, has indicated that the right would not beavailable where the property is sold to a person who is seizedof such a right. In other words, it was urged that whether theright of pre-emption available to Devicharan is equal or inferiorwould be a matter of no relevance having regard to theprovisions of Section 5(1)(c).

9. On the other hand, it was urged on behalf of the respondentsby Mr S K Sinha, learned counsel, that both the Trial Court and theappellate court came to the conclusion that Beni Prasad and Kirorilalwere brothers. Consequently, the assertion by Beni Prasad of a right ofpre-emption, when Kirorilal purported to sell the property on 6 January1990 to Devicharan, has to be valid. Learned counsel submitted that inthe event that the claim of the appellants is accepted in terms of the saledeed, a situation may occur by which the respondents are deprived ofthe use of the common amenity of the disputed courtyard.

10. In assessing the rival submissions, it is necessary to analysethe provisions of the Act. Section 4 is in the following terms:

“4 Cases in which right of pre-emption accrues. Subject tothe provisions contained in section 5, the right of pre-emptionshall, upon the transfer of any immovable property, accrueto the persons mentioned in section 6.”

The right of pre-emption accrues on the transfer of any immovableproperty to the classes of persons mentioned in Section 6. But the openingwords of Section 4 indicate that the right of pre-emption which accruesunder Section 6 is subject to Section 5.

11. Section 5 provides for cases in which the right of pre-emptiondoes not accrue. For the purposes of the present appeal, clause (c) ofsub-section (1) of Section 5, which is relevant, provides as follows:

“5. Case in which right of pre-emption does not accrue – (1) Theright of pre-emption shall not accrue - (a) ***

(b) ***

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A(c) on a transfer to any of the persons mentioned in section 6, toany person who has an equal or inferior right of pre-emption;”

As a result of Section 5(1)(c), the right of pre-emption does notaccrue on a transfer of the property to any of the persons mentioned inSection 6, to any person who has an equal or inferior right of pre-emption.BIn a case, where a transfer is to a person mentioned in Section 6, theright of pre-emption does not accrue to any person who has an equal orinferior right of pre-emption. In other words, in a case where the vendeealso has a right of pre-emption under Section 6, the right of pre-emptionwill accrue only to a person with a superior right of pre-emption.

C12. Section 6(1) specifies the persons to whom the right of pre-emption accrues. Section 6(1)(ii) is in the following terms:

“6. Persons to whom right of pre-emption accrues – (1) Subjectto the other provisions of this Act, the right of pre-emption inrespect of any immovable property transferred shall accrue to,Dand vest in, the following classes of persons, namely:

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(ii) owners of other immovable property with a stair-case or anentrance or other right or amenity common to such other propertyand the property transferred,”

ESub-sections (2) and (3) of Section 6 are as follows:

“(2) Among the different classes of persons mentioned insub-section (1), persons of the first class will exclude those of theother classes, persons of the second class will exclude those ofthe third class.F

(3) Among persons of the same class claiming the right ofpre-emption, he person nearer in relationship to the person whoseproperty is transferred will exclude the more remote.”

13. Under Section 6(1)(ii), a right of pre-emption accrues in respectGof an immovable property to owners of other immovable property with astair-case, entrance or other right or amenity common to such propertyand the property that is transferred. Where a right of pre-emption enuresto the benefit of a person under the provisions of Section 6(1)(ii), aconsequence emanates in terms of Section 5(1)(c).The effect of Section5(1)(c) is that a right of pre-emption does not accrue, on a transfer toH

SURESH CHAND AND ANR. v. SURESH CHANDER (D) THR.LRS. AND ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

any person mentioned in Section 6, to any person who has an equal orinferior right of pre-emption. In other words, where a transfer is to anyof the persons mentioned under Section 6, the right of pre-emption to theclaimant accrues only if the claimant has a superior right. The right ofpre-emption, as Section 4 indicates, is subject to the provisions of Section5. Consequently, where any of the provisions of Section 5 come intooperation, the right of pre-emption would not be available.

14. In a fourjudge Bench decision of this Court in BishanSingh v Khazan Singh[3], Justice Subba Rao (as the learned Chief Justicethen was), while dealing with the provisions of the Punjab Pre-EmptionAct 1913, summarised the law on pre-emption as follows:

“11. The plaintiff is bound to show not only that his right is asgood as that of the vendee but that it is superior to that of thevendee. Decided cases have recognized that this superiorright must subsist at the time the pre-emptor exerciseshis right and that that right is lost if by that time anotherperson with equal or superior right has been substituted inplace of the original vendee. Courts have not looked uponthis right with great favour, presumably, for the reason thatit operates as a clog on the right of the owner to alienatehis property. The vendor and the vendee are, therefore,permitted to avoid accrual of the right of pre-emption by alllawful means.The vendee may defeat the right by sellingthe property to a rival pre-emptor with preferential or equalright. To summarize: (1) The right of pre-emption is not a right tothe thing sold but a right to the offer of a thing about to be sold.This right is called the primary or inherent right. (2) Thepre-emptor has a secondary right or a remedial right to follow thething sold. (3) It is a right of substitution but not of re-purchasei.e., the pre-emptor takes the entire bargain and steps into theshoes of the original vendee. (4) It is a right to acquire the wholeof the property sold and not a share of the property sold. (5)Preference being the essence of the right, the plaintiff musthave a superior right to that of the vendee or the personsubstituted in his place. (6) The right being a very weakright, it can be defeated by all legitimate methods, such as AB

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Athe vendee allowing the claimant of a superior or equal rightbeing substituted in his place.”

(Emphasis supplied)

In a Constitution Bench decision of this Court in RadhakisanLaxminarayan Toshniwal v Shridhar Ramchandra Alshi[4], this CourtBdealt with the question whether a suit for pre-emption could be filedprior to execution of the sale deed. Justice J L Kapur, speaking for thisCourt held thus:

“13. ...The right to pre-empt the sale is not exercisable till a pre-emptible transfer has been effected and the right of pre-emptionCis not one which is looked upon with great favour by thecourts presumably for the reason that it is in derogation ofthe right of the owner to alienate his property. It is neitherillegal nor fraudulent for parties to a transfer to avoid anddefeat a claim for pre-emption by all legitimate means...”

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(Emphasis supplied)

15. The right of pre-emption is a preferential right to acquire theproperty by substituting the original vendee. The transfer or sale of animmovable property is a condition precedent to the enforceability of theright. The right of pre-emption is attached to the property and only onEthat footing can it be enforced against the vendee. Though the right isrecognised by law, yet it can be rendered imperfect by the vendor whenhe transfers the property to another person who also has a superior rightto the plaintiff pre-emptor.

16. In the present case, it has come on the record before the TrialFCourt that Devicharan, the predecessor of the appellants, had apre-existing right in respect of the amenity of the common courtyard orsahan. This was admitted in the written statement filed by Beni Prasadin Suit 43 of 1980. PW 1 during his cross-examination was confrontedwith the above written statement.What emerges from the aboveadmission is that Devicharan had a right in common in respect of theGamenity of the courtyard. During the course of proceedings before thisCourt, it was admitted that the courtyard was shared between BeniPrasad and Devicharan. Therefore, both their rights would fall withinthe ambit of the provisions of Section 6(1)(ii). In terms of the provisions H4 AIR 1960 SC 1368

of Section 5(1)(c), the right of pre-emption would not accrue to anyperson with an equal or inferior right of pre-emption. Kirorilal executeda sale deed on 6 January 1990 in favour of Devicharan who within themeaning of Section 6(1)(ii) had a right of pre-emption. But the right ofpre-emption of Devicharan was inferior to the right which was claimedby Beni Prasad as the brother of Kirorilal. Devicharan’s right underSection 6(ii) was subject to a superior right of Beni Prasad by virtue ofSection 6(3). Section 6(3) states that even among persons of the sameclass,the nearer in relationship to the person whose property is transferredexcludes the more remote.

17. During the course of the arguments, Mr Puneet Jain, learnedcounsel for the appellants has raised an argument that the commaappearing in Section 5(1)(c) should be read as “or” and the Section mustbe interpreted disjunctively. It is argued that Section 5(1)(c) should beread as “the right of pre-emption shall not accrue... on a transfer to anyof the persons mentioned in Section 6” or “the right of pre-emption shallnot accrue... to any person who has an equal or inferior right ofpre-emption”. It is urged that the plaintiff (Beni Prasad) would not becovered by the first part as the first defendant (Devicharan) would becovered by Section 6(1)(ii) and the second part would not apply to theplaintiff as he only has an inferior right of pre-emption against thedefendant. It is submitted that the plaintiff cannot claim any right of pre-emption where a transfer is affected by a person who is covered by anyof the clauses of Section 6. However, the disjunctive interpretation ofSection 5(1)(c) as suggested by the counsel of the appellants cannot becountenanced in view of the plain text of the provision. Reading theprovision in a manner as suggested would amount to an exercise oflegislative re-drafting. This is impermissible.

18. The two segments of Section 5(1)(c) are as follows:

(i) The first segment contains the words “on a transfer to any ofthe persons mentioned in Section 6; and

(ii) The second segment comprises of the words “to any personwho has an equal or inferior right of pre-emption”.

Both segments are separated by a comma and refer to twoseparate sets of persons. In the first segment the expression “any of thepersons” refers to the vendee. In the second segment, the expression“any person” refers to the claimant. In the present case, the plaintiff AB

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A(Beni Prasad) had a superior right of pre-emption by virtue of theprovisions of Section 6(3) since he was the brother of the seconddefendant. Devicharan has an inferior right of pre-emption as comparedto Beni Prasad. Hence his claim cannot prevail over the superior right ofpre-emption of Beni Prasad.

B19. For the above reasons, we are of the view that the concurrentfindings of the Trial Judge, the first appellate court and in second appeal,have proceeded on a correct interpretation of the provisions noticedabove.

20. We accordingly dismiss the appeal. However, there shall beCno order as to costs.

Nidhi Jain

Appeal dismissed.

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OSIANS CONNOISSEURS OF ART PVT. LTD.

v.

SECURITIES AND EXCHANGE BOARD OF INDIA & ANR.

(Civil Appeal No. 54 of 2016)

FEBRUARY 12, 2020

[R. F. NARIMAN, S. RAVINDRA BHAT ANDV. RAMASUBRAMANIAN, JJ ]

Securities and Exchange Board of India Act, 1992: ss. 11AA,12(1B) – SEBI (Collective Investment Scheme) Regulations, 1999 –Regn 3, Regn 2(h) – Collective Investment Scheme (CIS) – Creationof trust fund by the appellant-trustees – Appellants told by SEBIthat these Funds being CIS, they should apply for certificates ofregistration for these Funds, to which the appellants denied sincethey were not registered in the form of a company – Thereafter,issuance of notice by SEBI – Order by SEBI that the trust fundsshall abstain from collecting any money from the investors or carryout any CIS and refund the entire monies collected by it under itsscheme to all the investors – Matter disposed of by the AppellateTribunal – On appeal held: Statutory scheme under the CISRegulations is that, if a CIS, as defined u/Regn 2(h), is to be floatedby a person, it could only be done in the form of a collectiveinvestment management company and in no other form – Collectiveinvestment scheme being carried on by the appellants in the form ofa private Trust would be in the teeth of the Statute read with CISRegulations and thus, illegal – In view of the long pendency,issuance of direction to appellant to pay back the principal amountwith interest to each investor within the stipulated period.

Disposing of the appeals, the Court

HELD: 1. It would not be possible to state that the Schemesin the instant case would not be Collective Investment Schemes.It is difficult, therefore, to interfere with the concurrent findingsmade in this behalf by both SEBI and the Appellate Tribunal. In1995, Section 12(1B) of the SEBI Act was introduced, by which itbecame clear that no person can sponsor or cause to besponsored or carry on or cause to be carried on any collectiveinvestment scheme unless he obtains a certificate of registration

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Afrom the Board in accordance with the regulations. It is importantto notice that the expression “person” is used by Section 12(1B).However, in 1999, by amendment, Section 11AA was introducedwhich defines Collective Investment Scheme. [Para 13][900 D-H]B2. The statutory scheme under the CIS Regulations is that,if a Collective Investment Scheme, as defined under Regulation2(h), is to be floated by a person, it could only be done in the formof a collective investment management company and in no otherform. This is the reason why Section 11AA uses the expression“company” in sub-Section (2) and not the word “person” (as theCCIS Regulations of 1999 had come into force on 15.10.1999;Section 11AA came into force on 22.02.2000). Once the statutoryscheme becomes clear, it is clear that the Collective InvestmentScheme that was being carried on by the appellants in the form ofa private Trust would be in the teeth of the Statute read with theDCIS Regulations and would thus be illegal. Thus, it is difficult toupset any part of SEBI’s order that remains after the penultimatepart of the order was set aside by the Appellate Tribunal. However,this litigation is going on for a long period of time and instead ofremanding the matter to SEBI to decide the refund issue afresh,the principal amount repayable to each investor of both theESchemes shall be paid back with 10 per cent interest within thestipulated period. [Paras 15, 16, 17, 18][911 A-E]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 54 of2016.

FFrom the Judgment and Order dated 13.10.2015 of the SecuritiesAppellate Tribunal, Mumbai in Appeal No. 62 of 2013.

With

C. A. No. 19936/2017 and 77/2018.

A.N.S. Nadkarni, ASG, Nakul Dewan, Sr. Adv., Moazzam Khan,GMs. Shweta Sahu, Brijesh Ujjainwal, Akshat Goel, M/s. Lex-peritia andCo., Ms. Shirin Khajuria, Shekhar Vyas and Kunal Chatterji, Advs. forthe Appellant.Chander Uday Singh, Sr. Adv., Siddharth Dias, Devansh Gandhi,Puneet Sharma, Pratap Venugopal, Ms. Surekha Raman, Ms. Viddusshi,H

Ms. Ayushi Gaur, Akhil Abraham Roy, Vijay Valsan and M/s. K J Johnand Co., Advs. for the Respondents.

The Judgment of the Court was delivered by

R. F. NARIMAN, J.

1. Learned senior counsel appearing for the appellant seekspermission of the Court to withdraw the civil appeal.

2. The civil appeal is allowed to be withdrawn.

CIVIL APPEAL NO. 19936 OF 2017

3. The brief facts leading to the filing of the present civilappeal are as follows:

4. Two trusts named Yatra Art Fund Trust (Fund I) and Yatra ArtFund II (Fund II) were created under the Indian Trusts Act, 1882, throughexecution of Indentures of Trust dated 15.06.2005 and 01.12.2006.

5. A perusal of the trust deed shows that both these trust Fundswere created for an initial period of 4-4½ years, the first Fund ending,after extension of one year, on 15.09.2011. Insofar as the second TrustFund is concerned, this Trust Fund was also extended and ended on31.01.2012. It may also be mentioned that these Trusts Funds wereestablished so that investors could invest in works of art. In theConfidential Information Memorandum, it was made clear to the investorsthat these were investments which were fraught with grave risks andthat the investors invest in these Trust Funds with open eyes knowing ofthe aforesaid risks.

6. So far as the first Fund was concerned, a total corpus amountingto Rs.10.95 crores was collected from the investors. We are informedthat 50 such investors invested in this Fund. So far as the second Fund isconcerned, the total corpus was Rs.21.92 crores, with 132 persons havingso invested.

7. On 18.06.2007, the Securities and Exchange Board of India(hereinafter referred to as ‘SEBI’) first apprised the appellants, whoare the trustees of these two Trusts Funds stating that, as these Fundswere Collective Investment Schemes, they should apply for certificatesof registration insofar as these Funds were concerned. This was A

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Aresponded to by Fund I on 16.07.2007, denying that the activities wouldamount to the activities of a Collective Investment Scheme. As a resultthereof, on 12.10.2007, SEBI issued a Show Cause Notice to show causeas to why the Yatra Art Fund should not register itself with SEBI in theprescribed corporate form, as otherwise the collective investment schemecarried out by the Trust would be illegal. The show cause notice alsoBmentioned that all amounts collected should be refunded within a periodof 30 days from the said show cause notice. On 05.11.2007, the appellantsresponded to the aforesaid show cause notice stating that there was noviolation of Section 12 (1B) of the Securities and Exchange Board ofIndia Act, 1992 (hereinafter referred to as ‘SEBI Act’) read withCRegulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999(hereinafter referred to as ‘CIS Regulations’); and as the appellantswere not registered in the form of a company, the Regulations themselveswould not apply. Secondly, detailed arguments were made as to why theschemes involved could not be said to be collective investment schemes.One year later, on 03.11.2008, a joint representation to SEBI was madeDstating that the aforesaid schemes floated by the appellants were notcollective investment schemes, reiterating that they were not made inthe corporate form.8. It appears that, at this point of time, SEBI itself was unsure asto whether such funds would amount to collective investment schemes.EHowever, in 2013, the matter was resuscitated and after giving theappellants a hearing, inasmuch as as many as nine investors complainedwith regard to Trust Fund No.2, including an Investors’ Association, anorder was delivered by the whole-time member of SEBI on 06.11.2015as follows:F“29. In view of the foregoing, I, in exercise of the powers conferredupon me under Section 19 of the Securities and Exchange Boardof India Act, 1992 read with Sections 11 and 11B thereof andRegulation 65 of the SEBI (Collective Investment Scheme)Regulation, 1999, hereby issue the following directions:

Ga. Yatra Art fund shall abstain from collecting any money fromthe investors or launch or carry out any Collective InvestmentSchemes including the scheme which have been identified as aCollective Investment Scheme in this Order.

b. Yatra Art Fund is directed to refund the entire monies collectedHby it under its scheme to all the investors along with the returns at OSIANS CONNOISSEURS OF ART PVT. LTD. v .SECURITIES ANDEXCHANGE BOARD OF INDIA & ANR. [R. F. NARIMAN, J.]

the rate of 10% per annum, within a period of three months fromthe date of this Order and thereafter, within a period of fifteendays, submit a winding up and repayment report to SEBI inaccordance with the SEBI (Collective Investment Schemes)Regulations, 1999, including the trail of funds claimed to berefunded, bank account statements indicating refund to theinvestors and receipt from the investors acknowledging suchrefunds.

c. Yatra Art Fund is restrained from accessing the securities marketand are prohibited from buying, selling or otherwise dealing insecurities market for a period of four (4) years.

d. Yatra Art Fund is also directed to immediately submit thecomplete and detailed inventory of the assets owned by Yatra ArtFund.

e. In the event of failure by Yatra Art Fund to comply with theabove directions, the following actions shall follow:

- Yatra Art Fund shall remain restrained from accessing thesecurities market and would furhter be prohibited from buying,selling or otherwise dealing in securities, even after the period offour (4) years of restraint imposed in Paragraph 29(c) above, tillall the monies mobilized through such schemes are refunded to itsinvestors with interest, which are due to them.

- SEBI would make a reference to the State Government/LocalPolice to register a civil/criminal case against Yatra Art Fund, itspromoters, directors and its managers/ persons in-charge of thebusiness and its schemes, for offences of fraud, cheating, criminalbreach of trust and misappropriation of public funds; and

- SEBI shall also initiate attachment and recovery proceedingsunder the SEBI Act and rules and regulations framed thereunder.”

9. An appeal was carried to the Securities Appellate Tribunal,which was then disposed of on 21.08.2017, following the AppellateTribunal’s judgment dated 13.10.2015 in Osian’s – Connoisseurs ofArt Private Limited v. Securities and Exchange Board of India &Anr. It may be pointed out that the Appellate Tribunal set aside theparagraphs of the SEBI’s order which required the State Governmentto make a reference to register civil/criminal cases against the Fund and AB

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Ainitiate attachment and recovery proceedings under the SEBI Actand Rules and Regulations. However, insofar as paragraph 29 (b) setout hereinabove of SEBI’s order was concerned, the Appellate Tribunalremanded the matter to SEBI, adopting the reasoning contained in theearlier Tribunal judgment of 13.10.2015 as follows:

B“……………………………………………………………………………

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For the reasons stated in our order in Appeal No. 62 of 2013decided on October 13, 2015 the present appeals are disposed ofin terms set out therein”C

Having heard Shri K.V. Vishwanathan, learned senior counselappearing for the appellants and Shri C. U. Singh, learned senior counselappearing for the respondent-SEBI, for some time, it would not be possibleto state that the Schemes in the present case would not be CollectiveInvestment Schemes. It is difficult, therefore, to interfere with theDconcurrent findings made in this behalf by both SEBI and the AppellateTribunal.

10. Further, the arguments made by Shri Vishwanathan, learnedsenior counsel, based upon the language of Section 11AA of the SEBIAct does not commend itself to us. It may be mentioned that Section 11E(2)(c) of the SEBI Act states as follows:

“11 (2) Without prejudice to the generality of the foregoingprovisions, the measures referred to therein may provide for-

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(c) registering and regulating the working of venture capital fundsand collective investment schemes, including mutual funds;”

11. In 1995, Section 12(1B) was introduced, by which it becameclear that no person can sponsor or cause to be sponsored or carry on orGcause to be carried on any collective investment scheme unless he obtainsa certificate of registration from the Board in accordance with theregulations.

12. What is of importance is to notice that the expression “person”is used by Section 12(1B). However, in 1999, by amendment, SectionH11AA was introduced in which it was stated as follows:

OSIANS CONNOISSEURS OF ART PVT. LTD. v .SECURITIES ANDEXCHANGE BOARD OF INDIA & ANR. [R. F. NARIMAN, J.]

“11AA. Collective investment scheme.- (1) Any scheme orarrangement which satisfies the conditions referred to in sub-section (2) or sub-section (2A) shall be a collective investmentscheme:

Provided that any pooling of funds under any schemeor arrangement, which is not registered with the Board or is notcovered under sub-section (3), involving a corpus amount of onehundred crore rupees or more shall be deemed to be a collectiveinvestment scheme.

(2) Any scheme or arrangement made or offered by any companyunder which,-

(i) the contributions, or payment made by the investors, bywhatever name called, are pooled and utilized for the purposesof the scheme or arrangement;

(ii) the contributions or payments are made to such scheme orarrangement by the investors with a view to receive profits,income, produce or property, whether movable or immovable,from such scheme or arrangement;

(iii) the property, contribution or investment forming part ofscheme or arrangement, whether identifiable or not, is managedon behalf of the investors;

(iv) the investors do not have day-to-day control over themanagement and operation of the scheme or arrangement.

(2A) Any scheme or arrangement made or offered by anyperson satisfying the conditions as may be specified inaccordance with the regulations made under this Act.

(3) Notwithstanding anything contained in sub-section (2) orsub-section (2A), any scheme or arrangement—

(i) made or offered by a co-operative society registered underthe Co-operative Societies Act, 1912 (2 of 1912) or a societybeing a society registered or deemed to be registered underany law relating to co-operative societies for the time being inforce in any State;

(ii) under which deposits are accepted by non-banking financialcompanies as defined in clause (f) of section 45-I of the ReserveBank of India Act, 1934; A

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(iii) being a contract of insurance to which the Insurance Act,1938, applies;

(iv) providing for any Scheme, Pension Scheme or the InsuranceScheme framed under the Employees Provident Fund andMiscellaneous Provisions Act, 1952; B

(v) under which deposits are accepted under section 58A ofthe Companies Act, 1956;

(vi) under which deposits are accepted by a company declaredas a Nidhi or a mutual benefit society under section 620A ofthe Companies Act, 1956; C

(vii) falling within the meaning of Chit business as defined inclause (e) of section 2 of the Chit Fund Act, 1982;

(viii) under which contributions made are in the nature ofsubscription to a mutual fund; D

(ix) such other scheme or arrangement which the CentralGovernment may, in consultation with the Board, notify, shallnot be a collective investment scheme.”

13. Based on the aforesaid, Shri Vishwanathan argued that itwould not be possible for him to fall foul of the law consideringEthat Section 11AA uses the word “company” and not “person”, andas his client carried on this business in the form of a Trust, the provisionsof SEBI Act would not be attracted at all.

14. This argument would fly in the face of both Section 12(1B)and the CIS Regulations, in particular, Regulation 2(h), which defined aF“Collective Investment Management Company” as follows:

“(h) “Collective Investment Management Company” means acompany incorporated under the Companies Act, 1956 andregistered with the Board under these regulations, whose objectis to organise, operate and manage a collective investmentscheme;”

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Regulation 3 of the CIS Regulations states:

“3. No person other than a Collective Investment ManagementCompany which has obtained a certificate under these regulations H

shall carry on or sponsor or launch a collective investmentscheme.”

15. The statutory scheme, therefore, is that, if a collectiveinvestment scheme, as defined, is to be floated by a person, it could onlybe done in the form of a collective investment management companyand in no other form. This is the reason why Section 11AA uses theexpression “company” in sub-Section (2) and not the word “person” (asthe CIS Regulations of 1999 had come into force on 15.10.1999; Section11AA being enacted and coming into force on 22.02.2000).

16. Once the statutory scheme becomes clear, it is clear that thecollective investment scheme that was being carried on by the appellantsin the form of a private Trust would be in the teeth of the Statute readwith the CIS Regulations and would thus be illegal.

17. This being the case, it is difficult to upset any part of SEBI’sorder that remains after the penultimate part of the order was set asideby the Appellate Tribunal.

18. However, we find that this litigation has been going on for anextremely long period of time and instead of remanding the matter toSEBI to decide the refund issue afresh, we order as follows:

19. The principal amount repayable to each investor of both theSchemes shall be paid back within a period of six months from today inthe following manner:

20. We are informed that so far as the first Fund is concerned,81.32 per cent of the total principal sum of Rs. 10.95 crores has beenrepaid.

21. Insofar as Fund No. 2 is concerned, we have been informedthat 50 per cent of the principal amount of Rs. 21.92 crores has beenrepaid.

22. The balance owing to the 50 investors of Fund No. 1 and tothe 132 investors of Fund No. 2 be therefore, repaid within six monthsfrom the date of this judgment.

23. So far as the interest at the rate of 10 per cent is concerned,this amount will be paid on the principal outstanding amount from thedate on which it becomes due to each such member, till the date onwhich each Fund came to an end, i.e., insofar as Fund No. 1 is concerned A

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Atill 15.09.2011 and so far as Fund No. 2 is concerned till 31.01.2012. Theaforesaid interest shall be paid within nine months from the date of thisjudgment.

24. Once the amounts are actually paid within the time periodspecified, compliance report be filed with SEBI in this behalf.

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25. The appeal stands disposed of.

26. In terms of our judgment in Civil Appeal No. 19936 of 2017,this appeal stands disposed of.

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Nidhi Jain

Appeals disposed of.

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