In relation to an ongoing proceeding against Pearls Agrotech Corporation Limited (PACL) and its four directors, for illegal and fraudulent mobilisation of funds from the public, the SEBI Adjudicating Officer (AO) has passed a stupefying 7000 crore order, dated September 22, 2015, against the company and the directors; holding the company liable for registration as a CIS under Section 11AA of the SEBI Act, 1992.
As per the order, PACL was mobilizing money without obtaining the requisite registration under the SEBI Act and the CIS Regulations, 1999, and therefore, PACL and its directors had contravened Regulation 4(2)(t) of the SEBI (PFUTP) Regulations, 2003. It is important to note that, pursuant to an amendment in 2013, under Regulation 4(2)(t), the law presumes that illegal mobilization of money under a CIS is a fraudulent and unfair trade practice. Further, the maximum penalty for such practices under Section 15HA of the SEBI Act is Rs. 25 crore or three times the profit made out of such practices. It was alleged that PACL had illegally mobilized funds to the tune of approximately Rs. 2,423 crore after Regulation 4(2)(t) came into force i.e. on September 06, 2013. While determining the quantum of penalty, the AO considered October 01, 2013 as the cut-off date. However, the AO observed that the entire amount which had been illegally raised during the period under consideration can be treated as the amount of disproportionate gain or unfair advantage to PACL and its directors, as the company was not registered with SEBI as a CIS. Finding the instant case to be one fit for the maximum penalty, the AO imposed a fine of approximately Rs. 7,269 crore which is thrice the amount of illegal money mobilized by the company.
The AO ought to have ascertained and considered the “profit” or illicit gains made out of the mobilization of money, and not computed the penalty based on the whole amount that was collected. It is noteworthy that SEBI, by its order dated August 22, 2014, had already asked PACL to refund Rs. 49,100 crore that it had mobilized through 15 years. Therefore, PACL has not only been asked to refund the entire money collected, but also to pay a penalty of three times the amount of money collected, post October, 2013. On a lighter side, if the amendment of September 2013 had always been a part of the SEBI FUTP Regulations, or had it been made applicable retrospectively, the AO could have ordered a whopping penalty of Rs. 150,000 crore.