In this article, Atipriya Gautam who’s currently seeking M.A. IN BUSINESS LAWS, from NUJS, Kolkata discusses Criminal Liability on Officers and Directors for running an unlawful Collective Investment Scheme. To direct such conduct and clamp down elements running illicit schemes, the marketplace regulator introduced the Securities and Exchange Board of India (Collective Investment Schemes), Regulations, 1999 (“Regulations”).

These Regulations, in addition to other activities, deal with the enlistment and commitments of the Collective Investment Management Company. In the first place, it is effective to check out the meaning of “Collective Investment Scheme” and “Collective Investment Management Company”. The expression “Collective Investment Scheme” (CIS) is defined under section 11AA of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). 1. The obligations or contributions made by the traders are pooled and utilized solely for the purpose of such agreement or system. 2. The payments or contribution are made by the traders with a view to receive income or revenue from such scheme or set up.

3. The payments, property, or efforts developing part of such plan or arrangement is maintained on behalf of the investors. 4. Investors do not have control over the day-to-day management of such agreement or structure. SEBI has made it mandatory for each entity that is running the CIS to join up itself under section 12(1B) of the Act and Regulation 3 of the Regulations.

Section 24 of the Act offers the consequence for the contravention of the procedures of this Act. On a bare perusal of Section 27, it is clear that for an offense dedicated by an organization its directors/officials are not automatically punished combined with the company. The Section offers safeguards by giving a chance to the directors/officials to show their non-involvement in the percentage of the offense, to escape the penal effects.

As per the provisions of section 27 only those persons who were in charge and responsible at the relevant point of time for the conduct of company’s business will be deemed to be liable for such contravention. Thus, only on establishment of facts, the legal fiction shall enter into operation against the people.

Such people can effectively oppose the prosecution by creating want of knowledge about the contravention or activities of due diligence to avoid the same. Such an onus on anybody is not a heavy one and can be discharged normally. Maitreya Services Pvt. Ltd. SEBI began the probe against Maitreya Services Pvt. Ltd. (“Maitreya”) after a reference point from the Income Tax office in September 2010 affirming infringement of SEBI directions by Maitreya. Amid the inquiry, Maitreya presented that it carries out the business of real property and its own business incorporates purchasing and offering of land, development of the land, construction, and other land related activities.

SEBI found that Maitreya had propelled different plans under which cash was gathered from the overall population. These techniques varied based on the installment to be produced by the investor, and the time period that such investments were to be produced. During the course of its inquiry, SEBI found that the Company had launched and operated Collective Investment Schemes without getting registered under Section 12(1B) of the Act and Regulation 3 of the Regulations and some Rs. 804 crores were excellent with it was to be reimbursed to the investors.

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While answering the show-cause by SEBI, Maitreya denied being in CIS functions and invalidated all charges leveled against it and requested the procedures are terminated and released from the show-cause notice. In 2012, Maitreya wanted to settle the proceedings through a consent procedure, however, that was dismissed by SEBI.

SEBI’s probe discovered that Maitreya got mobilized Rs. 1,332 crores from general public as “advances” as on March 31, 2011 and experienced reimbursed Rs. 538 crores as “reimbursement” to investors, resulting in some Rs. 794 crores as exceptional to be reimbursed as on that time. SEBI likewise discovered that the assets were deficient to meet the liabilities and its repayment responsibilities were almost twice the value of its total movable and immovable assets.

Therefore, SEBI purchased for winding up of the CIS being run under the disguise of real estate industry, asking the worried expert refund the amount of money to the investors within a period of three months. SEBI banished Maitreya, and its directors from being able to access the securities market to all its collective investment plans are finished up and made a decision to initiate prosecution proceedings against them. During the initial inquiry, the ongoing company refused to provide details which were wanted by SEBI, proclaiming that the regulator didn’t have jurisdiction and the company had not been operating any collective investment scheme.