Anil Harish vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

Four separate appeals have been filed against a common order dated March 28, 2019 passed by the Adjudicating Officer (hereinafter referred to as

‘AO’) of Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) imposing a penalty. Since the issue is common, all

the appeals are being decided together. For facility, the facts stated in the lead Appeal No. 370 of 2019 Anil Harish vs. SEBI is being taken into

consideration.

CIG Realty Fund (CIG) is a venture capital funds registered under the Securities and Exchange Board of India (Venture Capital Funds)

Regulations, 1996 (hereinafter referred to as ‘Venture Capital Funds Regulations’). The appellant is a trustee of this fund. The other appellants

are also trustees except the appellant Unitech Advisors who is the Investment Advisor.

The following schemes were launched :

a. CIG Realty Fund - I â€" launched on October 6, 2006 which had a term of seven years i.e. up to October 5, 2013.

b. CIG Realty Fund - II - launched on September 28, 2007 and which also had a tenure of seven years.

Under the Private Placement Memorandum and Contribution Agreement, there was a provision to extend the term twice for one year each on the

recommendation of the investment advisor.

When the term of CIG Realty Fund scheme was coming to an end in October 2013, certain discussions were held between the trustees and the

officials of SEBI with regard to the possibility of giving a third extension to the scheme. It is alleged that no objections were placed by SEBI officials

with regard to the proposal of the third extension. Accordingly, letters were sent to all the contributors vide letter dated July 20, 2015, by e-mail as well

as by courier requiring them to give their consent or otherwise with regard to the third extension within a period of one month. It is alleged that 75% of

the contributors’ gave their consent and, accordingly, as per the conditions contained in Private Placement Memorandum and Contribution

Agreement, an amendment was made and the term of the scheme was extended for a period of three years up to October 5, 2015. Similarly, CIG

Realty Fund â€" II was also extended for a period of three years.

SEBI issued a show cause notice dated November 30, 2018 alleging that the appellants illegally extended the term of the scheme for the third time

which was violative of the Venture Capital Funds Regulations in as much as after the term of the scheme, it was compulsorily liable to be wound up

under Regulation 23(1)(a) read with Regulation 16 of the Venture Capital Funds Regulations. It was also alleged that the appellants have failed to

wind up the scheme after the third extension. The appellants filed their respective replies and after considering the matter, the AO passed the

impugned order dated March 28, 2019 imposing respective penalties on each of the appellants.

The stand of the appellant in the appeal of Anil Harish is, that before the expiry of the second extension, there were several discussions with the

officials of SEBI with regard to the third extension. At no stage, the officials of SEBI objected to the proposed third extension else they could have

taken steps immediately thereafter under Regulations 23(d) and 25(1) directing the appellants to wind up the scheme. It was, thus, contended that

since no objection was raised nor did SEBI invoke the powers under Regulations 23(d) and 25(1), the issuance of show cause notice on November 30,

2018 after three years was grossly belated and the proceedings were liable to be quashed on the ground of laches.

It was also contended that prior to the third extension, the appellant had tendered his resignation on May 25, 2015, but the same was accepted on

June 2, 2016 and, therefore, the appellant on this basis should be discharged.

It was also contended that under the Private Placement Memorandum / Contribution Agreement, there is an inherent power to extend the term of

the scheme. The Private Placement Memorandum and the Contribution Agreement provides for making such amendments, which provision was

utilized and that 75% of the members had given their consent to extend the term of the scheme. It was contended that the AO committed a manifest

error in holding that the life of the term of the scheme cannot be extended under the Private Placement Memorandum or Contribution Agreement in

as much as the Regulation 23(1)(a) stipulates that the scheme has to be wound up after the expiry of the term meaning thereby that no extension was

permissible after the expiry of the initial period of the scheme.

The other appellants have also adopted the same arguments.

On the other hand, the learned counsel for the respondent contended that the appellants had no power to extend the term of the scheme and that

the regulation is very clear which provides that under no circumstances the term could be extended under Regulation 23(1)(a) read with Regulation 16

of the Venture Capital Funds Regulations. The learned counsel however contended that even assuming without admitting that the appellants had

power to amend the term of the scheme, it was not done as per the conditions provided under the Private Placement Memorandum and the

Contribution Agreement. The learned counsel contended that the amendment is required to be carried out by 75% of the capital contribution and not

by 75% of the contributors which is totally different and distinct. In this regard, the learned senior counsel placed reliance upon a document of the

appellant dated September 14, 2015.

Having heard the learned counsel for the parties and in order to proceed further, it would be appropriate if we perused certain provisions of the

Regulations and the Private Placement Memorandum and the Contribution Agreement. For facility, Regulation 16 and Regulation 23(1)(a) is extracted

hereunder :-

“16. (1) The venture capital fund shallâ€

(a) issue a placement memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be

raised from investors; or

(b) enter into contribution or subscription agreement with the investors which shall specify the terms and conditions subject to which monies

are proposed to be raised.

(2) The Venture Capital Fund shall file with the Board for information, the copy of the placement memorandum or the copy of the

contribution or subscription agreement entered with the investors along with a report of money actually collected from the investor.â€​

“23. (1) A scheme of a venture capital fund set up as a trust shall be wound up,

(a) when the period of the scheme, if any, mentioned in the placement memorandum is over;

(b) if it is the opinion of the trustees or the trustee company, as the case may be, that the scheme shall be wound up in the interests of

investors in the units;

(c) if seventy-five per cent of the investors in the scheme pass a resolution at a meeting of unit holders that the scheme be wound up; or

(d) if the Board so directs in the interests of investors.

(2) A venture capital fund set up as a company shall be wound up in accordance with the provisions of the Companies Act, 1956 (1 of

1956).

[(2A) A venture capital fund set up as a body corporate shall be wound up in accordance with the provisions of the statute under which it is

constituted.]

(3) The trustees or trustee company of the venture capital fund set up as a trust or the Board of Directors in the case of the venture capital

fund is set up as a company (including body corporate) shall intimate the Board and investors of the circumstances leading to the winding

up of the Fund or Scheme under sub regulation (1).â€​

A perusal of Regulation 16 indicates that the Venture Capital Funds will issue a Placement Memorandum which shall contain details of the terms

and conditions subject to which monies are proposed to be raised from investors. Regulation 23 provides that the scheme of the Venture Capital Funds

set up as a trust shall be wound up when the period of the scheme mentioned in the Placement Memorandum comes to an end.

The Placement Memorandum as specified in Regulation 16 is the Private Placement Memorandum which has been executed by the appellant. In

this memorandum, there is a provision for an amendment to the fund agreement which is extracted hereunder :-

“The Fund Agreements can be amended as per the terms of amendment contained in the respective Fund Agreement.

The Contribution Agreement to which each Contributor will be a party may be amended (other than the Investment Philosophy) only by the

written consent of the Trustees (in consultation with the Investment Advisor) and of the Contributors representing 75% of the Capital

Contributions of CIG Realty Fund-I. However, no such amendment which increases any Contributor's Capital Commitment, reduces a

Contributor’s share of the Fund's distribution, income and gains, increases a Contributor's share of the Fund's losses, increases the

Advisory Fees or a Contributor’s share of the Advisory Fees, otherwise materially and adversely affect the rights or obligations of a

Contributor or amends the amendment provisions of the Contribution Agreement will be made without the consent of such Contributor. The

Trustees are permitted to unilaterally make amendments to the Contribution Agreement in the following circumstances:

(i) admitting Additional Contributors in accordance with the terms of the Contribution Agreement;

(ii) to reflect the transfer of an interest of a Contributor in accordance with the terms of the Contribution Agreement;

(ii) correct typographical errors or eliminate ambiguities;

(iv) relating to administrative matters and which do not have a material effect on the Scheme and/or Investment Advisor; or

(v) providing for alternative investment structures in accordance with the provisions of the Contribution Agreement.â€​

A perusal of the aforesaid provision in the Private Placement Memorandum indicates that the Contribution Agreement to which each contributor is

a party can be amended only by the written consent of the Trustee in consultation with the investment advisory and all the contributors representing

75% of the capital contributions of the CIG Realty Fund â€" I, i.e. the scheme.

Clause 16.3 of the Contribution Agreement provides as under :-

 “16.3. Amendments

No modification or amendment to this Agreement and no waiver of any of the terms or conditions hereof shall be valid or binding unless

made in writing and duly executed by the Parties.â€​

The aforesaid provision indicates that any amendment to the agreement with regard to term of the condition shall be valid and binding only if it is

made in writing and executed by the parties, namely, the contributors, investment advisor and the trustees.

The words “capital contributionâ€​ is defined under Section 8 of the Private Placement Memorandum which extracted hereunder :-

Capital Contribution"" means such portion of the Capital Commitment actually paid from time to time by a Contributor to the Trust in

respect of a given Scheme, pursuant to Drawdown Notice(s) issued in that behalf.â€​

Having heard the learned counsel for the parties at length, we are of the opinion that it is not necessary to dwell on the subject as to whether the

appellants had the power to amend the contribution agreement and extend the life of the term of the scheme as in our view, the controversy can be

decided on another issue.

Assuming for a moment that the appellants had the power to amend the Contribution Agreement and extend the period of the term of the scheme,

the same was required to be done in accordance with the provision relating to the amendment to the funds agreement as provided under the Private

Placement Memorandum. The said provision relating to amendments to the fund agreement clearly provides that there has to be written consent from

the contributors representing 75% of the capital contribution of the CIG Realty Fund. We find from the letter dated September 14, 2015 written by the

investment advisor to SEBI that 75% of the contributors had consented to the extension of the scheme for three years. This fact as depicted in the

letter dated September 14, 2015 is patently erroneous and against the terms contained in the amendments to the fund agreement under the Private

Placement Memorandum. This letter of September 14, 2015 indicates that total number of contributors are 208 and only 74 contributors gave the

response which is less than 50% and cannot be 75%. However, the percentage of the contributors is not the required norm under the Private

Placement Memorandum for amending the fund agreement. What is essential is that the resolution is required to be passed by 75% of the capital

contributors. The total capital contribution in the instant case was Rs. 350 crore. 75% of the total contribution would be Rs. 262.50 crore. The letter of

September 14, 2015 indicates that 74 contributors who had given their consent had a total capital contribution of Rs.120.515 crore which far less than

the prescribed Rs. 262.50 crore

Thus, in our view, even if the appellants had the power to extend the term of the scheme by amending the Contribution Agreement, the same was

not done in accordance with the conditions contained in the Private Placement Memorandum which required that the amendment could be passed only

by 75% of the capital contribution and not by 75% of the contributors. Since the appellants did not pass the amendment in accordance with the

provisions stipulated in the Private Placement Memorandum, the term of the scheme was illegally extended.

The AO held the appellants to have violated the provision of the regulations from another angle. Nonetheless, in view of our finding as given

aforesaid, we are of the opinion, the order of the AO does not require any interference.

The appeals accordingly fails and are dismissed with no order as to costs.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage, it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Private Secretary on

behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally

signed copy sent by fax and/or email.