Supreme Court of India
M/S. P.G.F. LIMITED & ORS.versusUNION OF INDIA & ANOTHER
- Citation
- 2013 INSC 155
- Decided
- 12 March 2013
- Disposal
- Dismissed
- Bench
- B S CHAUHAN
Holding
Section 11AA of the SEBI Act is constitutionally valid and the activities of PGF Limited constitute a collective investment scheme, making SEBI’s order lawful.
Summary
PGF Limited, which sold and developed agricultural land and ran joint‑venture schemes, was directed by SEBI to cease collecting money and to refund investors, on the ground that its activities constituted a collective investment scheme (CIS) under Section 11AA of the SEBI Act. PGF challenged the SEBI order and the constitutional validity of Section 11AA, arguing that the provision intruded on State legislative competence (Entry 18, List II) and that its land‑sale activities were not CIS. The High Court upheld SEBI’s order; PGF appealed to the Supreme Court. The Court held that Section 11AA is a valid parliamentary enactment under the power to protect investors (Entry 97, List I) and that PGF’s scheme satisfied all the criteria of a CIS – pooling of contributions, promise of profit, management by the company and lack of day‑to‑day investor control. Consequently, the SEBI order was lawful, the appeal was dismissed, PGF was ordered to comply with the SEBI directions, pay exemplary costs of Rs 50 lakh and cooperate with CBI and Income‑Tax investigations.
Issues considered
- Whether Section 11AA of the Securities and Exchange Board of India Act, 1992 is constitutionally valid.
- Whether Section 11AA infringes the legislative competence of the State under Entry 18 of List II of the Seventh Schedule.
- Whether the sale and development of agricultural land and joint‑venture schemes by PGF Limited fall within the definition of a collective investment scheme under s.2(ba) read with s.11AA.
- Whether Parliament can enact Section 11AA under its power to protect investors (Entry 97, List I) and the residuary power under Article 248.
- Whether the writ petition challenging SEBI’s order is bona‑fide and whether exemplary costs should be imposed.
Legislation cited
- Chit Funds Act, 1982s. 2(e)
- Companies Act, 1956s. 620A
- Constitution of Indias. Article 248, s. Schedule VII List I Entry 97, s. Schedule VII List II Entry 18
- Employees' Provident Funds and Miscellaneous Provisions Act, 1952
- Insurance Act, 1938
- Reserve Bank of India Act, 1934s. 45-1(f)
- Securities and Exchange Board of India Act, 1992s. 11AA, s. 2(ba)
- Securities Contracts (Regulation) Act, 1956s. 2(h)(i)
Subjects
Collective Investment SchemeSEBI ActConstitutional validityLegislative competenceInvestor protectionAgricultural landWrit petitionExemplary costsCBI investigationSection 11AA
Judgment
[2013] 6 S.C.R. 32
A M/S. P.G.F. LIMITED & ORS.
v.
UNION OF INDIA & ANOTHER
(Civil Appeal No.6572 of 2004)
MARCH 12, 2013
B
[DR. B.S. CHAUHAN AND FAKKIR MOHAMED
IBRAHIM KALIFULLA, JJ.]
Securities and Exchange Board of India Act, 1992.
c
ss. 11 AA - Constitutional validity of - Held: The provision
is constitutionally valid - It does not intrude into the specific
activities of sale of agricultural land and development - The
provision cannot be struck down on the ground of legislative
o competence, being in conflict with Entry 18 of List /I of Seventh
Schedule of the Constitution - Constitution of India, 1950 -
Schedule V/I, List /I, Entry 18.
s.2(ba) and 11AA(2) - Collective Investment Scheme -
Whether covers appellant-Company's business activity of
E sale and development of agricultural land - Held: The activity
of the company is nothing but a scheme/arrangement in the
guise of sale and development of agricultural land - The
agreement between the investors and the company shows that
it was one-sided and arbitrary and there was uncertainty in the
F transactions to the disadvantage of the investors - Therefore
the business activity squarely fell within the definition of
Collective Investment Scheme uls. 2(ba) rlw. s. 11 AA(2) - In
view of the fact that the whole attempt of the Company was
vexatious, and it perpetuated the present litigation with evil
G intention, exemplary cost of Rs. 50 lakhs imposed -
Appropriate inquiry and investigation directed to be
conducted by CBI and Income Tax Department apart from the
inquiry by the second respondent.
H 32
P.G.F. LIMITED & ORS. v. UNION OF INDIA 33
Practice and Procedure - Writ petition - Challenging A
validity of provision of law - Held: In such cases, it is
imperative to examine at the threshold, by applyng the
principle of lifting of veil as to whether such challenge is bona
fide or there is any hidden agenda in perpetrating such
litigation - Writ court should also keep in mind certain criteria B
for the purpose of entertaining such challenge and also while
granting interim relief in such cases.
Words and Phrases - 'Collective Investment Scheme' -
Meaning of, in the context of s. 11 AA of Securities and C
Exchange Board of India Act.
The appellant-Company was involved in business
activity of sale of agricultural land, sale and development
of agricultural land and joint ventures scheme. The
second respondent by a public notice as well as by D
specific letter called upon the appellant-company to
furnish certain details regarding its Collective Investment
Schemes. It also asked the company to get itself credit
rated from credit rating companies approved by the
second respondent. Thereafter the second respondent E
passed an order dated 20.2.2002 in exercise of its powers
u/s. 11 B of SEBI Act, issuing stringent directions against
the appellant-company. The order was challenged. The
High Court directed the Company to furnish the details
required by the second respondent and also directed the F
respondent to give personal hearing to the company. In
compliance with the Court direction, second respondent
passed its order dated 6.12.2002 l)olding that the
business activity of the company i.e. sale and
development of. agricultural land and its joint venture G
schemes were Collective Investment Schemes and
directed the Company neither to collect money from
investors nor to launch any new Scheme as it had failed
to comply with the statutory requirement as provided
under SEBI (Collective Investment Schemes) Regulation,
H
34 SUPREME COURT REPORTS [2013) 6 S.C.R.
A 1999. It also directed the Company to refund the money
collected under the schemes, to the investors as per
terms of the offers.
The company challenged the order dated 6.12.2002
8 contending that its business activities in sale of
agricultural land and sale and development of
agricultural land would not fall within the category of
Collective Investment Scheme specified u/s. 2(ba) r.w.
s.11AA of SEBI Act. The Company also challenged the
C vires of s.11AA of SEBI Act. The High Court dismissed
the petition holding that the business activities of the
Company were Collective Investment Schemes falling uf
s. 11AA (2)(ii) and (iv) of SEBI Act and therefore the
second respondent was authorized to proceed against
the Company. The Court also held that s.11AA was valid
D as Union of India was competent to introduce the said
provision. Hence the present appeal.
Dismissing the appeal, the Court
E HELD: 1.1. On very many occasions a challenge to
a provision of law, as to its constitutionality is raised with
a view to thwart the applicability and rigour of those
provisions and as an escape route from the applicability
of those provisions of law and thereby create an
impediment for the concerned authorities and the
F institutions who are to monitor those persons who seek
such challenges by abusing the process of the Court.
Such frivolous c~llenges always result in prolongation
of the litigation, which enables such unscrupulous
elements who always thrive on other peoples money to
G take advantage of the pendency of such litigation
preferred by them and thereby gain, on the one side,
unlawful advantage on the monitory aspect and to the
disadvantage of innocent victims, and ultimately, gain
unlawful enrichment of such ill-gotten money by
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 35
defrauding others. In effect, such attempts made by A
invoking the extraordinary jurisdiction of the writ Courts
of many such challenges, mostly result in rejection of
such challenges. However, at the same time, while taking
advantage of the long time gap involved in the pending
proceedings, such unscrupulous litigants even while B
suffering the rejection of their stand at the end as to the
vires of the provisions, always try to wriggle out of their
liabilities by stating that the time lag had created a
situation wherein those persons who were lured to part
with huge sums of money are either not available to get C
back their money or such unscrupulous petitioners
themselves are not in a position to refund whatever
money collected from those customers or investors. It is,
therefore, imperative and worthwhile to examine at the
threshold as to whether such challenges made are
0
bonafide and do require a consideration at all by the writ
courts by applying the principle of 'lifting the veil' and as
to whether there is any hidden agenda in perpetrating
such litigation. [Para 31] (65-A-G]
1.2. Therefore, certain criteria to be kept in mind E
whenever a challenge to a provision of law is made before
the Court. The Court can, in the first instance, examine
whether there is a prima facie strong ground made out
in order to examine the vires of the provisions raised in
the writ petition. The Court can also note whether such F
challenge is made at the earliest point of time when the
statute came to be introduced or any provision was
brought into the statute book or any long time gap exist
as between the date of the enactment and the date when
the challenge is made. It should also be noted as to G
whether the grounds of challenge based on the facts
pleaded and the implication of provision really has any
nexus apart from the grounds of challenge made. With
reference to those relevant provisions, the Court should
be conscious of the position as to the extent of public
H
36 SUPREME COURT REPORTS [2013] 6 S.C.R.
A interest involved when the provision operates the field as
against the prevention of such operation. The Court
should also examine the extent of financial implications
by virtue of the operation of the provision vis-a-vis the
State and alleged extent of sufferance by the person who
B seeks to challenge, based on the alleged invalidity of the
provision with particular reference to the vires made.
Even if the writ Court is of the view that the challenge
raised requires to be considered, then again it will have
to be examined, while entertaining the challenge raised
C for consideration, whether it calls for prevention of the
operation of the provision in the larger interest of the
public. The Writ Court should also examine such other
grounds on the above lines for consideration while
considering a challenge on the ground of vires to a
Statute or provision of law made before it for the purpose
0
of entertaining the same as well as for granting any
interim relief during the pendency of such writ petitions.
It is also imperative that when such writ petitions are
entertained, the same shoul,d be disposed of as
expeditiously as possible and on a time bound basis, so
E that the legal position is settled one way or the other.
[Paras 31 and 32] [65-H; 66-A-G]
2.1. The paramount object of the Parliament in
enacting the Securities and Exchange Board of India Act
F itself and in particular the addition of Section 11AA was
with a view to protect the gullible investors most of whom
are poor and uneducated or retired personnel or those
who belong to middle income group and who seek to
invest their hard earned retirement benefits or savings in
G such schemes with a view to earn some sustained
benefits or with the fond hope that such investment will
get appreciated in course of time. Certain other Section
of the people who are worstly affected are those who
belong to the middle income group who again make such
H investments in order to earn some extra financial benefits
P.G.F. LIMITED & ORS. v. UNION OF INDIA 37
and thereby improve their standard of living and on very A
many occasions to cater to the need of the educational
career of their children. [Para 37] [71-E-G]
2.2. A reading of s.11AA of SEBI Act discloses that it
talks of any scheme or arrangement, which would fall
8
within the definition of a collective investment scheme.
Section 2 (ba) under the definition clause states that a
collective investment scheme would mean any scheme
or arrangement, which satisfies the conditions specified
in Section 11AA. Under sub-Section (2) of Section 11AA,
. it is stipulated that any scheme or arrangement made or C
offered by any company by which the contribution, or
payment made by the investors, by whatever name
called, are pooled and utilized for the purposes of
scheme or arrangement; contributions or payments are
made by the investors with a view to receive profits, D
income, produce or property, whether movable or
immovable, based on the scheme or arrangement, any
property, contribution or investment which forms part of
the scheme or arrangement is identifiable or not, is
managed by someone on behalf of the investors shall be E
collective investment scheme. Further the investors
should not have day to day control over the management
and operation of the scheme or arrangement. A detailed
analysis of sub-section (2) of Section 11AA, which defines
a collective investment scheme disclose that it is not F
restricted to any particular commercial activity such as
in a shop or any other commercial establishment or even
agricultural operation or transportation or shipping or
entertainment industry etc. The definition only seeks to
ascertain and identify any scheme or arrangement, G
irrespective of the nature of business, which attracts
investors to invest their funds at the instance of someone
else who comes forward to promote such scheme or
arrangement in any field and such scheme or
arrangement provides for the various consequences to H
38 SUPREME COURT REPORTS [2013) 6 S.C.R.
A result there from. [Para 35] (69-H; 70-A]
Sahara India Real Estate Corporation Limited and Ors.
vs. Securities and Exchange Board of India and Anr. (2013)
1 sec 1 - relied on.
8 2.3. Sub-Section (3) of Section 11AA of SEBI Act
provides that those institutions and schemes governed
by sub-clause (i) to (viii) of sub-Section (3) of Section
11AA will not fall under the definition of collective
investment scheme. Sub-clauses (i) to (viii) shows that
c those are all the schemes, which are operated upon
either by a co-operative society or those institutions,
which are controlled by the Reserve Bank of India Act,
1934 or the Insurance Act of 1938 or the Employees
Provident Fund and Miscellaneous Provisions Act, 1952
D or the Companies Act, 1956 or the Chit Fund Act of 1982
and contributions, which are made in the nature of
subscription to a mutual fund, which again is governed
by a SEBI (Mutual Fund) Regulations 1996. Therefore, by
specifically stipulating the various ingredients for
E bringing any scheme or arrangement under the definition
of collective investment scheme as stipulated under sub-
Sectio n (2) of Section 11 AA, when the Parliament
specifically carved out such of those schemes or
arrangements governed by other statutes to be excluded
from the operation of Section 11AA, one can easily
F
visualize that the purport of the enactment was to ensure
that no one who seeks to collect and deal with the
monies of any other individual under the guise of
providing a fantastic return or profit or any other benefit
does not indulge in such transactions with any ulterior
G motive of defrauding such innocent investors and that
having regard to the mode and manner of operation of
such business activities announced, those who seek to
promote such schemes are brought within the control of
an effective State machinery in order to ensure proper
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 39
working of such schemes. [Para 39) [72-D-H; 73-A-BJ A
2.4. The implication of Section 11AA was not intended
to affect the development of agricultural land or any other
operation connected therewith or put any spokes in such
sale-cum-development of such agricultural land. By B
seeking to cover any scheme or arrangement by way of
collective investment scheme either in the field of
agricultural or any other commercial activity, the purport
is only to ensure that the scheme providing for
investment in the form of rupee, anna or paise gets
registered.with the authority concerned and the provision C
would further seek to regulate such schemes in order to
ensure that any such investment based on any promise
under the scheme or arrangement is truly operated upon
in a lawful manner and that by operating such scheme
or arrangement, the person who makes the investment D
Is able to really reap the benefit and that he is not
defrauded. Sub- clauses (i) to (viii) of sub-Section (3),
which excludes those schemes and arrangements from
the operation of Section 11AA in as much as those
schemes are already governed under various statutes E
and are operated upon by a co-operative society or State
machinery and there would be no scope for the
concerned persons or the institutions who operate such
schemes within the required parameters and thereby the
common man or the contributory's rights or benefits will F
not be in any way jeopardized. It is, therefore, apparent
that all other schemes/arrangements operated by all
others, namely, other than those who are governed by
sub-section 3 of Section 11AA are to be controlled in
order to ensure proper working of the scheme primarily G
in the interest of the investors. [Para 40) [73-C-H; 74-A]
2.5. What sub-section (2) of Section 11AA intends to
achieve is only to safeguard the interest of the investors
whenever any scheme or arrangement is announced by
H
40 SUPREME COURT REPORTS [2013] 6 S.C.R.
A such promoters by making a thorough study of such
schemes and arrangements before registering such
schemes with the SEBI and also later on monitor such
schemes and arrangements in order to ensure proper
statutory control over such promoters and whatever
B investment made by any individual is provided necessary
protection for their investments in the event of such
schemes or arrangements either being successfully
operated upon or by any mis-fortune happen to be
abandoned, where again there would be sufficient
c safeguards made for an assured refund of investments
made, if not in full, at least a part of it. [Para 42] [74-F-H;
75-A]
2.6. The factors, which weighed with the Parliament
to introduce Section 11AA cannot be held to be done
D with a view to affect any particular category of business
activity much less the activity of agriculture. Therefore,
the stand of the appellant-Company that what it sought
to carry out under its scheme was merely sale and
development simplicitor of agricultural land and not a
E collective investment scheme cannot be accepted [Para
43] [75-B-C]
2.7. Section 11AA of the SEBI Act is constitutionally
valid. The provision is not suffering from any infirmity, as
F it does not intrude into the specific activities of sale of
agricultural land and its development. Thus, there is no
scope to apply Entry 18 of List II of Seventh Schedule of
the Constitution, in order to strike down the said
provision on the ground of legislative competence. [Paras
G 43 and 53] [75-D; 81-F]
3.1. The activity of the appellant-Company, namely,
the sale and development of agricultural land squarely
falls within the definition of collective investment scheme
under Section 2(ba) read along with Section 11AA (ii) of
H the SEBI Act and consequently the order of the second
P.G.F. LIMITED & ORS. v. UNION OF INDIA 41
respondent dated 06.12.2002 is perfectly justified and A
there is no scope to interfere with the same. [Para 53} [81-
F-GJ
3.2. In the present case, once the customer signs the
application form and the agreement, virtually he would be 8
left high and dry with no remedy, in the event of any
breach being committed by the appellant-Company,
while on the other hand he will have everything to loose
if such breach happened to occur at the instance of the
customer. The agreement, thus, demonstrates to be C
wholly one sided· and arbitrary in all respects. [Para 49]
[78-D-F]
3.3. A conspectus consideration of the scheme of
development of the land purchased by the customers at
the instance of the appellant-Company and the promised D
development under the agreement disclose that there
was wholesale uncertainty in the transactions to the
disadvantage of the investors' concerned. The above
factors disclose that appellant-Company under the guise
of sale and development of agricultural land in units of E
150 sq. yrds. i.e. 1350 sq. ft. and its multiples offered to
develop the land by planting plant, trees etc., and thereby
the customers were assured of a high amount of
appreciation in the value of the land after its development
and attracted by such anticipated appreciation in land F
value, which is nothing but a return to be acquired by the
customers after making the purchase of the land based
on the development assured by the appellant-Company,
part with their monies in the fond hope that such a
promise would be fulfilled after successful development G
of the bits of land purchased by them. [Para 51] [79-G-H;
80-A-C]
3.4. The appellants, however, failed to supply any
material to demonstrate as to how and in what manner
any of the lands said to have been sold to its customers H
42 SUPREME COURT REPORTS [2013] 6 S.C.R.
A were developed and thereby any of the customer was or
would be benefited by such development. It is imperative
that the transaction of the appellant-Company vis-a-vis
its customers has necessarily to be examined as to its
genuineness by subjecting itself to the statutory
B requirement of registration with the second respondent
followed by its monitoring under the regulations framed
by the second respondent. All the above factors disclose
that the activity of sale and development of agricultural
land propounded by the appellant-Company based on
c the terms contained in the application and the agreement
signed by the customers is nothing but a scheme/
arrangement. Apart from the sale consideration, which is
hardly 1/3rd of the amount collected from the customers,
the remaining 2/3rd is pooled by the appellant-Company
for the so called development/improvement of the land
D
sold in multiples of units to different customers. Such
pooled funds and the units of lands are part of s_uch
scheme/arrangement under the guise of development of
land. It is quite apparent that the customers who were
attracted by such schemes/arrangement invested their
E monies by way of contribution with the fond hope that
the various promises of the appellant-Company that the
development of the land pooled together would entail
high amount of profits in the sense that the value of
developed land would get appreciated to an enormous
F extent and thereby the customer would be greatly
benefited monetarily at the time of its sale at a later point
of time. As per the agreement between the customer and
the appellant-Company, it was the responsibility of the
appellant-Company to carry out the developmental
G activity in the land and thereby the appellant-Company
undertook to manage the scheme/arrangement on behalf
of the customers. Having regard to the location of the
lands sold in units to the customers, which were located
in different states while the customers were stated to be
H from different parts of the country it is well-neigh possible
P.G.F. LIMITED & ORS. v. UNION OF INDIA 43
for the customers to have day to day control over the A
management and operation of the scheme/arrangement.
In these circumstances, the conclusion of the Division
Bench in holding that the nature of activity of the
appellant-Company under the guise of sale and
development of agricultural land did fall under the B
definition of collective investment scheme under Section
2(ba) read along with Section 11AA of the SEBI Act was
justified. [Para 52] [80-D-H; 81-A-E]
4.1. The appellant-Company is bound to comply with c
the direction of the second respondent dated 6.12.2002.
While ensuring compliance of the order dated 06.12.2002,
the second respondent shall also examine the claim of
the appellant-Company that it had stopped its joint
venture scheme as from 01.02.2000 is correct or not by
0
holding necessary inspection, enquiry and investigation
of the premises of the appellant-Company in its registered
office or any of its other offices wherever located and also
examine the account books other records and based on
such inspection, enquiry and investigation issue any
further directions in accordance with law. Whatever E
amount deposited by the appellant-Company, pursuant
to the interim orders of this Court relating to joint venture
scheme shall be kept in deposit by the second
respondent in an Interest Bearing Escrow Account of a
Nationalized Bank. The second respondent shall also F
verify the records of the appellant-Company relating to
the refund of deposits of the customers who invested in
the joint venture schemes and ascertain the correctness
of such claim and based on such verification in the event
of any default noted, appropriate further action shall be G
taken against the appellant-Company for settlement of the
monies payable to such of those investors who
participated in any such joint venture schemes operated
by the appellant-Company. It will also be open to the
second respondent while carrying out the above said H
44 SUPREME COURT REPORTS [2013] 6 S.C.R.
A exercise to claim for any further payment to be made by
the appellant-Company towards settlement of such claims
of the participants of the joint venture ·schemes and
charge interest for any delayed/defaulted payments. As
far as the deposit made by the appellant-Company with
B the second respondent on the ground that the such
amount could not be disbursed to any of the investors
for any reason whatsoever the second respondent,
based on the verification of the records of the appellant-
Com pa ny, arrange for refund/disbursement of such
c amount back to the participants of the joint venture
schemes with proportionate interest payable on that
amount. The above directions are in addition to the
directions made by the Division Bench of the High Court.
[Para 53] [81-G-H; 82-A-G]
D 4.2. The whole attempt of the appellant-Company
was thoroughly vexatious and calls for severe indictment.
In view of the evil intention of the appellant-company in
having perpetrated this litigation, apart from mulcting the
appellant-Company with exemplary costs of
E Rs.50,00,000/- (fifty lakhs) it also calls for appropriate
enquiry and investigation to be made not only by the
second respondent but also by the prime criminal
investigating agencies, namely, the Central Bureau of
Investigation and also by the Department of Income Tax,
F in order to find out the extent of fraud indulged in by the
appellant-Company under the garb of development of
agricultural lands that too at the cost of gullible investors, .
who were offered fragmented pieces of so called
agricultural lands in multiple units of 150 sq. yds. per unit.
G In the event of any malpractice indulged in by the
appellant-Company, to launch appropriate proceedings,
both Civil, Criminal and other actions against the
appellant-Company, as well as, all those who were
responsible for having indulged in such malpractice.
H [Paras 24 and 56] [59-G-H; 60-A-C; 84-H; 85-A-F]
P.G.F. LIMITED & ORS. v. UNION OF INDIA 45
4.3. The appellant-Company is directed to appoint a A
nodal officer, not below the rank of a Director, of its
company who shall be responsible for furnishing
whatever information, documents, account books or
other materials that may be required by the second
respondent, the Central Bureau of Investigation as well B
·as the Income Tax Authorities. [Para 56] [85-C]
K.K. Baskaran vs. State represented by its Secretary,
Tamil Nadu and Ors. (2011) 3 SCC 793: 2011 (3)
SCR 527; Sona/ Hemant Joshi and Ors. vs. State of C
Maharashtra and Ors. (2012) 10 SCC 601; State of
Maharashtra vs. Vijay C. Puljal and Ors. (2012) 10 SCC 599;
New Horizon Sugar Mills Ltd. vs. Government of Pondicherry
and Anr. (2012) 10 SCC 575: 2012 (8) SCR 874; Naga
People's Movement of Human Rights vs. Union of India (1998)
2 SCC 109: 1997 (5) Suppl. SCR 469; Union of India vs. 0
Shri Harbhajan Singh Dhillon (1971) 2 SCC 779: 1972 (2)
SCR 33; S.P. Mittal vs. Union of India and Ors. (1983) 1 SCC
51: 1983 (1) SCR 729; Kartar Singh vs. State of Punjab
(1994) 3 SCC 569: 1994 (2) SCR 375; Mohinder Singh Gill
and Anr. vs. The Chief Election Commissioner, New Delhi and E
Ors. (1978) 1 SCC 405: 1978 (2) SCR 272; Commissioner
of Police vs. Gordhandas Bhanji- 1952 SCR 135; Delhi Cloth
and General Mills Co. Ltd. vs. Union of India and Ors. (1983)
4 SCC 166: 1983 (3) SCR 438; Reserve Bank of India vs.
Peerless General Finance and Investment Co. Ltd. and Ors. F
(1987) 1 SCC 424: 1987 (2) SCR 1; Narendra Kumar
Maheshwari VS. Union of India 1990 (Suppl.) sec 440: 1989
(3) SCR 43; E. V. Cinnaiah vs. State of A.P. and Ors. (2005)
1 SCC 394: 2004 (5) Suppl. SCR 972 - cited.
G
Case Law Reference:
2011 (3) SCR 527 cited Para 15
(2012) 10 sec 601 cited Para 15
c2012) 10 sec 599 cited Para 15 H
46 SUPREME COURT REPORTS [2013] 6 S.C.R.
A 2012 (8) SCR874 cited Para 15
1997 (5) Suppl. SCR 469 cited Para 15
1972 (2) SCR33 cited Para 15
B 1983 (1) SCR 729 cited Para 15
1994 (2) SCR 375 cited Para 15
1978 (2) SCR 272 cited Para 15
1952 SCR 135 cited Para 15
c
(2013) 1 sec 1 relied on Para 36
1983 (3) SCR 438 cited Para 16
1989 (3) SCR 43 cited Para 16
D 2004 (5) Suppl. SCR 972 cited Para 16
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
6572 of 2004.
E From the Judgment & Order dated 26.07.2004 of the High
Court of Punjab & Haryana in C.W.P. No. 188 of 2003. ·
A.K. Ganguli, Parag P. Tripathi, Debesh Panda, Barnali
Basak, Chhitanya Safaya, Roh it Tandon, Subramonium Prasad,
P.N. Puri, Suruchii Aggarwal, Manish Kumar, Siddharth
F Jaiprakash, Monisha Handa, Sidharth Luthra, Sushma Suri, J.K.
Mohopatra, Supriya Juneja, Aakansha Tandon, B.V. Balaram
Das, Shovan Mishra, Milind Kumar for the Appearing Parties.
The Judgment of the Court was delivered by
G FAKKIR MOHAMED IBRAHIM KALIFULLA, J. 1. This
appeal is directed against the Division Bench Judgment of the
High Court of Punjab & Haryana at Chandigarh in Civil Writ
Petition (CWP) No.188/2003 dated 26.07.2004. Since the
Division Bench has dealt with elaborately the back.ground of the
H case for filing the writ petition at the instance of the appellant,
P.G.F. LIMITED & ORS. v. UNION OF INDIA 47
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.)
we do not wish to state the same in detail in our judgment. A
However, we only wish to refer such of those bare facts required
to support our decision and conclusion. At the very outset, we
wish to note that though this appeal has been preferred by PGF
Limited, its Chairman-cum-Managing Director and two other
individuals who are stated to be residents of village Khabra and B
Samaspur of Punjab but the same has been really contested
by the appellant No.1 whom we will hereinafter refer to as 'PGF
Limited'.
2. The appellant, known as Pearls Green Forests Limited
·and called PGF Limited from 1997, is having its registered C
office at S.C.O. No.1042-43, Sector 22-B, Chandigarh and its
Head Office at 2nd Floor, Vaishali Building, Community Centre,
Paschim Vihar, New Delhi. Though the Memorandum and
Articles of Association of the Company provide for carrying on
very many activities by way of business operations, we are only D
concerned with three of the activities of the PGF Limited,
namely, sale of agricultural land, sale and development of
agricultural land and joint venture schemes. Of the above three
operations, when the writ petition was heard by the Division
Bench of the High Court it was reported on 28.05.2004 by the E
learned counsel for the appellants that the PGF Limited took a
decision to disband all its schemes, other than its operations
relating to the business connected with sale of agricultural land
and/or sale and development of agricultural land. Based on the
said representation, an interim order came to be passed by F
the Division Bench on 28.05.2004 with which we are also not
seriously concerned.
3. There was a public notice issued by the second
respondent herein on 18.12.1997, apart from specific letter G
addressed by the second respondent to the PGF Limited dated
20.04.1998, by which the PGF Limited was called upon to
furnish various details as regards to the Collective Investment
Schemes, within 15 days of the issuance of its letter dated
20.04.1998. The second respondent also stated to have issued
further communication based on the order of the Delhi High H
48 SUPREME COURT REPORTS (2013] 6 S.C.R.
A Court in CWP No.3352/1998 dated 7th and 13th October 1998,
wherein all plantation companies, agro companies and
companies running collective investment schemes, to get
themselves credit rated from credit rating companies approved
by the second respondent. The PGF Limited was directed to
B comply with the said directions also. ·
4. In the above-stated background, the second respondent
passed an order on 20.02.2002 in exercise of its powers under
Section 11 B of the SEBI Act, by issuing some stringent
directions against the PGF Limited. The PGF Limited
C challenged the said order before the Punjab and Haryana High
Court in CWP No.4620/2002 wherein the second respondent
came forward to keep its order dated 20.02.2002 in abeyance,
provided the PGF Limited agreed to furnish the information
sought for within two weeks. Based on the said stand of the
D second respondent by order of the High Court: dated
29.04.2002, the PGF Limited was directed to submit its reply
to the show cause notice and furnish all requisite information
to the second respondent. The second respondent was also
directed to provide an opportunity of personal hearing to the
E PGF Limited. The order dated 20.02.2002 was also directed
to be kept in abeyance, till the final order was passed.
Subsequent to the said order of the High Court dated
29.04.2002, after following the directions contained in the said
order, the second respondent passed its order on 06.12.2002,
F by which it was held that the business activity of the PGF
Limited, namely, the sale and development of agricultural land,
as well as its joint venture schemes, were all collective
investment schemes and since the PGF Limited failed to
comply with the statutory requirement as provided under the
G SEBI (Collective Investment Schemes) Regulation, 1999,
directed the PGF Limited not to collect any money from
investors nor to launch any new scheme with a further direction
to refund the money collected under the schemes, which were
due to the investors as per the terms of the offer within a period
H of one month from the date of its order and failing which
P.G.F. LIMITED & ORS. v. UNION OF INDIA 49
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
threatened to initiate actions as available under the SEBI Act A
and SEBI (Collective Investment Schemes) Regulation, 1999.
5. Aggrieved by the said order of the second respondent
dated 06.12.2002, the appellants preferred the writ petition
before the High Court of Punjab and Haryana in CWP No.188 B
of 2003 wherein the order impugned dated 26.07.2004 came
to be passed. Before the Division Bench of the High Court, on
behalf of the appellants herein, two contentions were raised,
namely, that apart from its joint venture business, its other
business activities, namely, sale of agricultural land and sale C
and development of agricultural land, would not fall within the
category of collective investment schemes as specified under
Section 2(ba) read with Section 11AA of the SEBI Act and
consequently the order impugned dated 06.12.2002 cannot be
sustained.
D
6. Apart from challenging the order dated 06.12.2002, the
appellants also challenged the vires of Section 11 AA of the
SEBI Act. At the instance of the second respondent the
question about the territorial jurisdiction of the High Court was
raised, which was turned down by the Division Bench in the E
order impugned and the same has become final and
conclusive, as there was no challenge to the said part of the
judgment of the Division Bench. As far as the stand of the PGF
Limited that its business activity of sale and development of
agricultural land would not fall within the category of collective F
investment schemes, the Division Bench, after a detailed
consideration, held that having regard to the nature of offer
made by the PGF Limited, the prescribed filled in application
forms, collected from the investors before entering into the
transaction of transfer of any land by way of sale and the various G
terms contained in the agreement for development, held that
the nature of development of the land assured to the customer
by the PGF Limited would bring the whole scheme of sale and
development of agricultural land under the concept of collective
investment schemes falling under Section 11AA(2)(ii) and (iv)
H
50 SUPREME COURT REPORTS [2013] 6 S.C.R.
A of the SEBI Act and, therefore, the second respondent had
every authority to proceed against the PGF Limited.
7. The Division Bench, thereafter, proceeded to examine
the correctness of the order of the second respondent dated
B 06.12.2002 and held that there was every justification for the
second respondent to pass the said order and for passing the
ultimate direction contained therein. As far as the challenge as
to the vires of Section 11AA of the SEBI Act, the Division Bench
examined the said submission threadbare and found no
substance in the said submission inasmuch as the object of
C adding Section 11AA of the SEBI Act pointed at investors'
protection, not agriculture and consequently the first respondent-
Union of India had every competence to introduc~ the said
provision in the SEBI Act.
D 8. We heard Mr. A.K. Ganguli, learned senior counsel for
the appellants, Mr. Sidharth Luthra, learned Additional Solicitor
General for respondent No.1 & Mr. Parag P. Tripathi, learned
senior counsel for respondent No.2. Mr. Ganguli while assailing
the order of the Division Bench after taking us through the
E material documents, in particular, the specimen application
form submitted by the investors along with its annexures,
copies of certain sale deeds between the vendor and the
investors, submitted that once the joint venture operattons
carried on by the PGF Limited, were stopped by them on and
F from 01.02.2000, its other activity of sale of agricultural land nor
the sale and development of agricultural land can be brought
within the category of collective investment schemes. The
learned senior counsel by referring to the definition of 'security'
under the Securities Contracts (Regulation) Act, 1956, which
G definition was adopted for the purpose of application of SEBI
Act as mentioned in Section 2(1 )(i), contended that the
application form or the development agreement cannot be
construed as an 'instrument' in order to state that the sale and
development activity of the PGF Limited can be brought within
the category of collective investment schemes.
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 51
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
9. The learned senior counsel contended that none of the A
terms and conditions of the agreement contemplated any return
while operating the activity of development of the agricultural
land of the investors that since return is sine qua non for any
collective investment scheme, the activity of sale and
development of agricultural land cannot be construed as a B
collective investment scheme. According to learned senior
counsel, the role of the PGF Limited was merely facilitating the
investors for purchasing agricultural lands in multiple units and
beyond that no other obligation was to be performed by the
PGF Limited, which can be construed as providing for any C
return in the process of sale and development of agricultural
land to the investors by the PGF Limited. The learned senior
counsel, therefore, contended that the conclusion of the Division
Bench in holding that the sale and development of agricultural
land would fall within the definition of collective investment
scheme under Section 2(ba) read along with 11AA of the SEBI D
Act, was erroneous and consequently the· judgment of the
Division Bench as well as the order of the second respondent
dated 06.12.2002 are liable to be set aside.
10. As far as the vires of Section 11AA of the SEBI Act E
is concerned, learned senior counsel primarily contended that
the business of the PGF Limited being sale of agricultural land
and sale and development of agricultural land to its customers,
the said activity would only fall under Entry 18 of List II of the
Seventh Schedule and, therefore, the State Legislature alone F
was competent to bring about any legislation for the purpose
of regulating its activities. The learned senior counsel contented
that none of the transactions carried on by the PGF Limited
with its customers whether directly or indirectly nor any of the
documents available on record in relation to the transaction of G
sale of agricultural land and sale and development of
agricultural land can be construed as an 'instrument' falling
under the definition of 'securities' as defined under Section
2(h)(ib) of the Securities Contracts (Regulation) Act, 1956,
which expression was 'mutatis mutandis' applied for the H
52 SUPREME COURT REPORTS [2013] 6 S.C.R.
A definition of 'securities' under the provisions of the SEBI Act.
According to learned senior counsel since those documents
would not fall within the definition of 'securities' as defined under
the SEBI Act read along with Securities Contracts (Regulation)
Act, 1956 there is absolutely no scope to invoke the definition
B of Section 2(ba) read along with Section 11AA of the SEBI Act.
11. The learned senior counsel strenuously contended that
the stand of the respondents as accepted by the Division
Bench, namely, that the collective investment scheme would fall
within the expression 'investor protection' and thereby governed
C by Entry 97 of List I of the Seventh Schedule read along with
Article 248 of the Constitution was wholly misconceived and,
therefore, on the ground of legislative competence, Section
11AA of the SEBI Act is liable to be struck down. In support of
the said submission learned senior counsel also made detailed
D reference to various State enactments dealing with the
protection of rights of depositors in financial establishments and
contended that having regard to such initiatives taken by various
State Governments, if at all, any protection were to be extended
to the investors, namely, the customers of the PGF Limited
E whose rights qua the agricultural lands transferred in their
favour, could have been validly enacted only in exercise of the
powers vested with the respective State Governments under
Entry 18 of List II of the Seventh Schedule and such exercise
of power of legislation could have never been carried out by
F the first respondent.
12. Learned senior counsel further contended that the
judgment of the Division Bench of the High Court in upholding
the validity of Section 11AA of the SEBI Act resulted in various
G incongruities in that the impugned provision brought into the
SEBI Act created under a law referable to Entries 43, 44 and
48 of List I of the Seventh Schedule directly encroaching upon
the leg_islative power of the State under Entry 18 of List II of the
Seventh Schedule. According to learned senior counsel, the
subject matter of 'investors protection' pleaded on behalf of the
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 53
[FAK~IR' MOHAMED IBRAHIM KALIFULLA, J.]
respondents and accepted by the Division Bench of the High A
Court, which was referable only to Entries 43 and 44 of List I
of the Seventh Schedule, can have no reference to the
transactions dealing with sale and purchase of agricultural lands
and their development and consequently the introduction of
Section 11AA into the SEBI Act by way of a parliamentary B
legislation was wholly incompetent.
13. According to learned senior counsel, the SEBI Act and
the Securities Contracts (Regulation) Act, 1956 deal only with
instruments, which can be openly traded in the Stock Market C
as compared to the title deeds with respect to immovable
properties, which cannot by any stretch of imagination brought
within the meaning of the term 'instrument' in order to invoke
Section 11AA of the SEBI Act to rope in the PGF Limited's
activities as falling under the expression 'collective investment
scheme' and proceed against them. It was, therefore, D
contended that even if Section 11AA can be held to be valid,
it should be declared that the said provision will have no
application to sale and development of agricultural land.
14. The learned senior counsel further contended that even E
the second respondent never contended that the transactions
of the PGF Limited in the sale and development of the
agricultural lands to its investors as sham transactions as could
be seen from the impugned order of the second respondent
dated 06.12.2002 and in the said circumstances the F
conclusions drawn by the Division Bench to the contrary cannot
be accepted and the same cannot form the basis for upholding
the order of the second respondent dated 06.12.2002.
15. In support of his submissions learned senior counsel
relied upon the decisions in K.K. Baskaran Vs. State G
represented by its Secretary, Tamil Nadu and others - (2011)
3 SCC 793, Sona/ Hemant Joshi and others Vs. State of
Maharashtra and others - (2012) 10 SCC 601, State of
Maharashtra Vs. Vijay C. Puljal and others - (2012) 10 SCC
599, New Horizon Sugar Mills Ltd. Vs. Government of H
54 SUPREME COURT REPORTS [2013] 6 S.C.R.
A Pondicherry and another - (2012) 10 SCC 575, Naga People's
Movement of Human Rights Vs. Union of India - (1998) 2
SCC 109, Union of India Vs. Shri Harbhajan Singh Dhillon -
(1971) 2 SCC 779, S.P. Mittal Vs. Union of India and others
- (1983) 1 SCC 51, Kartar Singh Vs. State of Punjab - (1994)
B 3 SCC 569, Mohinder Singh Gill and another Vs. The Chief
Election Commissioner, New Delhi and others - (1978) 1 SCC
405 and Commissioner of Police Vs. Gordhandas Bhanji -
1952 SCR 135.
16. Mr. Luthra, learned Additional Solicitor General
C appearing for the Union of India after referring to the judgment
of the Division Bench and the directions ultimately issued to the
PGF Limited to refund all the monies collected from the
investors, contented that the source of power to the Parliament
to introduce Section 11AA of the SEBI Act was Entry 97 of List
D I read along with Article 248 of the Constitution and not Entry
48 of List I or Entry 18 of List II. By relying upon the recent
decision of this Court in Sahara India Real Estate Corporation
Limited and others Vs. Securities and Exchange Board of
India and another - (2013) 1 SCC 1, learned Additional
E Solicitor General contended that the object of SEBI Act itself
was mainly for the protection of investors and that the decision
of this Court has also reinforced the said position. The learned
Additional Solicitor General relied upon Delhi Cloth & General
Mills Co. Ltd. Vs. Union of India and others - (1983) 4 SCC
F 166, Reserve Bank of India Vs. Peerless General Finance
and Investment Co. Ltd. and others - (1987) 1 SCC 424 and
Narendra Kumar Maheshwari Vs. Union of India - 1990
(Suppl.) SCC 440 to emphasis·the need for investors
protection in the present day context. The learned Additional
G Solicitor General contended that since the protection of
investors is the main objective of the legislation, namely, SEBI
Act and the said concept is not specifically enumerated in any
of the Entries of Seventh Schedule, the same would be
governed only by Entry 97 of List I and by virtue of the residual
H power is vested with the Parliament under Article 248 of the
P.G.F. LIMITED & ORS. v. UNION OF INDIA 55
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
Constitution, the introduction of Section 11AA of the SEBI Act A
was valid in law and the judgment of the Division Bench does
not call for interference. By relying upon the decision of this
Court in E. V. Chinnaiah Vs. State of A.P. and Others - (2005)
1 SCC 394, the learned Additional Solicitor General also
contended that the pith and substance theory applied by the B
Division Bench of the High Court to conclude that the business
activity of the PGF Limited, namely, sale and development of
agricultural land is nothing but a collective investment scheme
and consequently governed by the concept of investors
protection as governed by Section 11AA of the SEBI Act, was c
perfectly justified and the same does not call for interference.
17. Mr. Tripathi, learned senior counsel for the second
respondent in his submissions contended that the sale and
development of agricultural land of the PGF Limited was in pith
and substance a collective investment scheme and that the D
contention of the PGF Limited that its business related to
transaction concerning agricultural land simplicitor cannot be
accepted. The learned counsel, therefore, contended that the
submission that there was no competence for the Parliament
to enact Section 11AA of the SEBI Act and based on the said E
provision SEBI cannot control the business of the PGF Limited,
cannot be countenanced. According to learned senior counsel
the salient features of the business of the PGF Limited, namely,
sale and development of agricultural land in reality was an
investment simplicitor by the gullible public under the guise of F
sale and development of agricultural land and, therefore,
Section 11AA of the SEBI Act was valid in law and the PGF
Limited is bound to comply with the requirements of the SEBI
Act in order to protect the interests of the investors.
G
18. While highlighting the salient features, the learned
senior counsel referred to the application to be submitted by
the investors and the various stipulations contained in the
agreement of the PGF Limited, which disclose that while the
sale of agricultural land in units of 150 sq. yrds. (1350 sq. ft.) H
56 SUPREME COURT REPORTS [2013] 6 S.C.R.
A was not immediately made, the same was dependent on certain
other time bound contingencies. The learned senior counsel
then pointed out that various terms contained in the application
and the agreement disclose that the PGF Limited continued to
retain absolute control over the land in question, which is sold
B in fragmentation to different parties and created a bondage with
the PGF Limited, which virtually deprived of those investors to
have absolute control over the land purchased by them.
According to him, the so called development of the land by
various investors was collectively retained by the PGF Limited.
c 19. To highlight such a dominant control of the PGF Limited
over the various units sold to the customers, the learned senior
counsel pointed out that from the date of signing of the
agreement for development, the PGF Limited retained absolute
control in the matter of consultation with agro-consultants and
D experts for soil test, climate etc., apart from the development
of the land by way of survey, demarcation, clearing cultivation,
planting and raising of crops, trees, plants, saplings etc., use
of fertilizers and pesticides, irrigation, harvesting and all other
activities allied or incidental thereto, to be decided by the PGF
E Limited. Even as regards to the payment plans, the learned
senior counsel pointed out that the sample agreement
produced does not disclose as to how much from out of the
composite amount collected from the customer would be the
cost of the land for the purpose of development. By referring
F to the rejoinder filed before the High Court, the learned senior.
counsel pointed out that for the first time PGF Limited stated
that 1/3rd of the consideration was towards the cost of land for
which the sale deed is executed and the remaining ,amount
spent towards development of land and there was no separate
G document to cover the amount spent for development. Based
on the said stand of the PGF Limited, the learned senior
counsel pointed out that out of Rs.5000/- by way of
consideration only Rs.1750/- was relatable to cost of land and
the rest was towards development, maintenance etc.
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 57
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
20. The learned senior counsel also submitted that the A
Notes of Accounts disclose that it was the policy of the
company to acquire land and allot land units to its joint ventures
by way of earmarking land units after three years in case of
deferred schemes and after one year in case of a lump sum
scheme. It was also pointed out that when a specific question B
was- put by the High Court to the PGF Limited as to how many
investors had in fact proceeded to cultivate the land and put it
for agricultural use or developed it by themselves, nothing was
placed before the High Court to substantiate the claim of the
PGF Limited. It was pointed out that the investors mostly c
belonged to the rural areas and were uneducated, who were
lured with a return of 12.3%, as against the comparative
investment option of 8.9%, while in reality there was no
development of the land and the alleged promise of distribution
of return was from out of the investment, from new investors. In D
the light of the above features contained in the application and
the agreement placed before the Court, it was contended that
the activity of the PGF Limited was not a mere sale and
purchase of land, but in actuality was an investment scheme
wherein land was being used only as a resource, which was
promised to be worked on and developed by the PGF Limited E
and the exploitation of the land would result in return to the
investors. It was, therefore, submitted that in reality the business
of the PGF Limited was purely an investment scheme and
consequently governed by the definition of collective investment
scheme as defined under Section 2(ba) read along with F
Section 11 AA of the SEBI Act.
21. With regard to the legislative competence, the learned
senior counsel submitted that having regard to the nature of
business transaction of the PGF Limited, in pith and substance, G
it was a collective investment scheme of the PGF Limited along
with the investors and, therefore, as rightly claimed by the
respondent the introduction of Section 11AA of the SEBI Act
by the Parliament was governed by the concept of 'investor$
protection' falling within residuary Entry 97 of List I read along H
58 SUPREME COURT REPORTS [2013] 6 S.C.R.
A with Article 248 of the Constitution and not governed by Entry
18 of List II. The learned senior counsel, therefore, contended
that the challenge to the said Section on the ground of legislative
competence was rightly rejected by the Division Bench of the
High Court.
B
22. As far as the contention that the PGF Limited's scheme
did not fall under the category of security, the learned senior
counsel contended that even applying Section 2(h) of the
Securities Contracts (Regulation) Act, 1956 read along with the
provisions of the SEBI Act, the sale-cum-development
C agreement of the PGF Limited would fall within the definition
of 'instrumenf, which only means "a written legal document that
defines rights, duties, entitlements or liabilities" and
consequently governed by the provisions of the SEBI Act. In this
context, learned senior counsel placed reliance upon a decision
D of the Bombay High Court in the case of Ashok Organic
Industries Ltd. Vs. Asset Reconstruction Company (India)
Limited - (2008) 3 Comp. L.J. 61, wherein it was held that
instrument is a formal legal document which may even in
appropriate case wide enough to cover the decrees. The
E learned senior counsel, therefore, contended that even a
Certificate, Receipt, Registration Letter or a Unit Certificate or
any such similar document would fulfill the criteria of "by
whatever name called" in the definition of the term 'Unit' under
Regulation 2(z)(dd) and it can be treated as an instrument and,
F therefore, subject to the rigours of SEBI (Collective Investment
Schemes) Regulations, 1999.
23. Learned senior counsel also drew our attention to the
fact that in the case on hand, the sale of land in multiple units
G could always be sold or disposed of after getting a No
Objection Certificate from the PGF Limited and, therefore, from
that angle as well the contention of the PGF Limited was liable
to be rejected. The learned senior counsel also referred to the
'Blue Sky Laws' in the United States of America, which sought
to regulate and control frauds in securities, largely at the
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 59
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
initiative of the agrarian population and its small bankers A ·
against the fraudulent transactions of financiers in agricultural/
plantation lands and submitted that the SEBI (Collective
Investment Schemes), Regulations are more or less parallel to
such 'Blue Sky Laws', which was carried out in the interest of
the investors, who were lured to part with their hard earned B
savings under the disguised promise of the PGF Limited to
provide a higher value for the investment, by way of
development and, therefore, the second respondent as a
statutory authority had every duty to ensure that such schemes
were controlled and regulated by the Regulation of 1999. The c
learned senior counsel, therefore, contended that the PGF
Limited cannot be allowed to wriggle out of the control of SEBI
Act by contending that it was dealing only with agricultural lands
governed by Entry 18 of List II and hence its activities cannot
be called as collective investment scheme falling under the D
provision of the SEBI Act.
24. Having heard Mr. AK. Ganguli, learned senior counsel
for the appellants, Mr. Sidharth Luthra, learned Additional
Solicitor General for respondent No.1 & Mr. Parag P. Tripathi,
_ learned senior counsel for respondent No.2, having perused the E
numerous paper books and compilations placed before us and
having bestowed our serious consideration to the various
submissions before us, at the very outset, we state that the
present litigation by way of writ petition before the High Court
in challenging the vires of Section 11AA of the SEBI Act and F
after having lost before the Division Bench of the High Court in
its elaborate judgment, in its frantic attempt to pursue the
litigation still further by filing this civil appeal before the Supreme
Court, which in turn necessitated devotion of the precious time
of this Court, force us to state that the whole attempt of the PGF G
Limited was thoroughly vexatious and calls for severe
indictment. We also wish to note here and now that apart from
rejecting the contentions of the PGF Limited for various reasons
to be adduced in this judgment and having noted the evil
intention of the PGF Limited in having perpetrated this litigation, H
60 SUPREME COURT REPORTS [2013] 6 S.C.R.
A apart from mulcting the PGF Limited with exemplary costs, it
also calls for appropriate enquiry and investigation to be made
not only by the second respondent but also by the prime criminal
investigating agencies, namely, the Central Bureau of
Investigation and also by the Department of Income Tax, in order
B to find out the extent of fraud indulged in by the PGF Limited
under the garb of development of agricultural lands that too at
the cost of gullible investors, who were offered fragmented
pieces of so called agricultural lands in multiple units of 150
sq. yds. per unit. At this juncture, it will be appropriate to note
C that in spite of our repeated asking of the learned senior counsel
for the appellants, as to what materials were placed before the
High Court or before this Court, as to the extent of
developments made to the various so called agricultural lands
procured and stated to have been transferred in favour of
D thousands of investors, to our utter dismay, the learned senior
counsel appearing for the appellants fairly submitted that no
material was either placed before the Division Bench of the
High Court or before this Court till the conclusion of the hearing.
The learned senior counsel, however, made a feeble contention
that there was no occasion for the appellants to produce those
E materials though he was not able to satisfactorily explain to us.
as to why no such material could be placed before us when we
repeatedly called upon the appellants to place such materials.
25. With the above prelude to the nature of litigation,
F launched by the appellants in the High Court and pursuing the
same in this Court, when we consider the submission of the
appellants, we find that the submission was fivefold. According
to the appellants while the appellants as a.company provided
in the Memorandum and Articles of Association, various
G objects and business ventures, it was actually involved in the
business of joint venture schemes, sale of agricultural lands and
sale and development of agricultural lands. While the sale of
agricultural land and sale and development of agricultural land
was continued to be operated upon, according to the PGF
Limited, its business of joint venture schemes we~ brought to
H . '
~
i
P.G.F. LIMITED & ORS. v. UNION OF INDIA 61
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
an end on and from 01.02.2000. In fact, the said stand was made A
at the time when the second respondent extended its
opportunity prior to the passing of the impugned order dated
06.12.2002. Certain details were also furnished before the
second respondent as to what were the extent of monitory
transactions carried on in respect of the joint venture schemes B
and also the action taken by the PGF Limited after stopping
its joint venture activities on and after 01.02.2000. Before this
Court also certain details were furnished as to what extent
monies were refunded to those who were part of the joint venture
schemes and certain funds, which were deposited with the c
second respondent and were to be refunded to those whose
availability and identity could not be traced after the stopping
of the operation of joint venture schemes. We shall, however,
examine the scope and extent of acceptability of such a stand
made on behalf of the PGF Limited in order to examine whether D
- the stand of the PGF Limited that its joint venture schemes were
stopped from 01.02.2000 while the provisions of Section 11AA
of the SEBI Act was brought into the statute book from
22.02.2000 by Act 31 of 1999. We, however, hasten to add that
admittedly even after 01.02.2000, according to the PGF Limited E
it continued to receive f1,mds from various participants of the joint
venture schemes on the pretext that such receipt of funds
related to the involvement of those investors in the schemes,
which were in operation prior to 01.02.2000. The contention of
the PGF Limited was that since the operation of joint venture
schemes were brought to an end as from 01.02.2000 and F
Section 11 AA of the SEBI Act was inserted into statute book
and became operational only from 22.02.2000, there was no
scope for the second respondent to have called upon the PGF
Limited to subject itself to the jurisdiction of the second
respondent in purported exercise of its power under Section G
11AA of the SEBI Act as well as in pursuance of its public notice
issued in the year 1997-98.
26. The second submission of the learned senior counsel
for the appellants was that sale of agricultural land, which is one H
62 SUPREME COURT REPORTS [2013) 6 S.C.R.
A of the business activities of the PGF Limited being an activity
of mere sale and purchase of agricultural land and there being
no connected scheme relating to such sale transaction, there
was no scope for any collective investment scheme in order to
invoke Section 11AA of the SEBI Act.
B
27. The third contention was that the other activities of sale
and development of agricultural land of the PGF Limited was
governed by Entry 18 of List II of the Seventh Schedule and,
therefore, the connected developmental activity of the PGF
Limited in regard to those agricultural land sold to its investors
C cannot form the subject matter of legislation by the Parliament
and consequently even if the validity of Section 11AA of the
SEBI Act can be upheld, the PGF Limited's activity of the
development of agricultural land should stand excluded from its
coverage. In other words, according to learned counsel, even
D if the activities of the PGF Limited based with land sold and
its further development, if at all any legislation could be passed,
the same could have been done only by the State Legislature
and not under Section 11AA of the SEBI Act.
E 28. It was then contended that having regard to the fact that
agricultural land, which was the subject matter of development
of PGF Limited's business activity along with the incidence of
sale, the same being governed by Entry 18 of List II of the
Seventh Schedule, the very promulgation of Section 11AA of
F the SEBI Act by the Parliament was invalid and ultra vires of
the Constitution on the ground of lack of competence and
consequently the second respondent could not have proceeded
against the PGF Limited for non-compliance of the provisions
contained in the said Section.
G 29. It was lastly contented that the approach of the Division
Bench of the High Court in having gone into the nature of
transactions entered into by the PGF Limited with the investors,
was incorrect as the sale deeds executed in favour of the
investors were all not the subject matter of investigation, even
H by the second respondent, while passing its orde~ dated
P.G.F. LIMITED & ORS. v. UNION OF INDIA 63
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
06.12.2002. Therefore, the order of the Division Bench in A
having extensively gone into the genuineness of those
documents, was by way of extra pleadings of the Division
Bench, which ought not to have been made and hence on that
score the PGF Limited should not have been non suited.
B
30. Having noted the various submissions of the learned
senior counsel for the appellants, we wish to deal with the
constitutional validity of Section 11AA of the SEBI Act in the
forefront befor~ dealing with other contentions. In this context,
in the foremost, we wish to deal with the contention of the PGF C
Limited by making reference to various State enactments
dealing with the rights of depositors. The contention proceeds
on the basis that if at all the activities of the PGF Limited in
dealing with agricultural lands vis-a-vis its customers, in respect
of the so called development agreements, were to be controlled,
monitored or regulated, the State Legislature alone could be D
competent to bring about a legislation on par with various State
enactments referred to by the PGF Limited. In fact, even after
the elaborate submissions of learned senior counsel, we were
at a loss to understand as to how far the operation of those
State enactments relating to the depositors, can have any E
impact, while examining the constitutional validity of Section
11AA of the SEBI Act. For the purpose of analysis, when we
examine the Madhya Pradesh Nikshepakon Ke Hiton Ka
Sanrakshan Adhiniyam, 2000 (M.P. Act No.16 of 2001) the
preamble of the Act states that the said Act was to protect the F
deposits made by the public in the financial establishments and
matters connected therewith or incidental thereto. Admittedly,
the PGF Limited is not a financial institution at all and even
according to PGF Limited it has not collected any deposits from
the public at large. The PGF Limited though a company G
incorporated under the Companies Act, was not receiving
deposits under any scheme or arrangement or in any other
manner and hence, it will not fall under the definition of 'financial
establishment' of the said Act. The purported intent of almost
all the other State enactments were identical. It is a common H
64 SUPREME COURT REPORTS [2013] 6 S.C.R.
A ground that many of the statutes brought out by the respective
States were upheld, except in some States where the Act was
struck down, which is stated to be a subject matter of
consideration pending before this Court. These State
enactments in order to protect the depositors being duped
B under the garb of granting extraordinary returns, were sought
to be protected by providing certain machineries, including
certain prosecuting machinery and appropriate judicial forum
for redressing their grievances. According to the PGF Limited
it is not a financial institution and was not collecting any
c deposits and that its sole activity apart from sale of agricultural
land was development of such lands sold to its customers. The
extreme contention of the PGF Limited was that if Section
11AA of the SEBI Act was to be upheld, it would virtually set at
naught those various State enactments, which in our
considered opinion can only be stated as an argument of
D desperation and has absolutely no nexus whatsoever to the
question raised with regard to the validity of Section 11AA of
the SEBI Act and hence, does not in any way impinge upon
the said Section. Moreover, the said submission was never
raised or focused before the Division Bench and is now sought
E to be raised before this Court for the first time and we find no
substance in the submission while examining the validity of
Section 11AA of the SEBI Act. In the light of our above
conclusion, we do not find any necessity to refer to any of the
decisions relied upon in connection with the said submission,
F namely, the decisions in K.K. Baskaran (supra), Sona/ Hemani
Joshi (supra), Vijay Puljal (supra), New Horizon Sugar Mills
Ltd. (supra), Naga People's Movement of Human Rights
(supra), Harbhajan Singh (supra), S.P. Mittal (supra), Kartar
Singh (supra), Mohinder Singh Gill (supra) and Gordhandas
G Bhanji (supra).
31. Before adverting to the various contentions raised in
challenging the vires of Section 11AA of the SEBI Act, we feel
that it is worthwhile to state and note certain precautions to be
H observed whenever a vires of any provision of law is raised
P.G.F. LIMITED & ORS. v. UNION OF INDIA 65
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
before the Court by way of a writ petition. It will be worthwhile A
to lay down certain guidelines in that respect, since we have
noticed that on very many occasions a challenge to a provision
of law, as to its constitutionality is raised with a view to thwart
the applicability and rigour of those provisions and as an
escape route from the applicability of those provisions of law B
and thereby create an impediment for the concerned authorities
and the institutions who are to monitor those persons who seek
such challenges by abusing the process of the Court. Such
frivolous challenges always result in prolongation of the
litigation, which enables such unscrupulous elements who c
always thrive on other peoples money to take advantage of the
pendency of such litigation preferred by them and thereby gain,
on the one side, unlawful advantage on the monitory aspect and
to the disadvantage of innocent victims, and ultimately, gain
unlawful enrichment of such ill-gotten money by defrauding D
others. In effect, such attempts made by invoking the
extraordinary jurisdiction of the writ Courts of many such
challenges, mostly result in rejection of such challenges.
However, at the same time, while taking advantage of the long
time gap involved in the pending proceedings, such
E
unscrupulous litigants even while suffering the rejection of their
stand at the end as to the vires of the provisions, always try to
wriggle out of their liabilities by stating that the time lag had
created a situation wherein those persons who were lured to
part with huge sums of money are either not available to get
back their money or such unscrupulous petitioners themselves F
·are not in a position to refund whatever money collected from
those customers or investors. It is, therefore, imperative and
worthwhile to examine at the threshold as to whether such
challenges made are bonafide and do require a consideration
at all by the writ courts by applying the principle of 'lifting the G
veil' and as to whether there is any hidden agenda in
perpetrating such litigation. With that view, we lay down some
of the criteria to be kept in mind whenever a challenge to a
provision of law is made before the Court.
H
66 SUPREME COURT REPORTS [2013] 6 S.C.R.
A 32. The Court can, in the first instance, examine whether
there is a prima facie strong ground made out in order to
examine the vires of the provisions raised in the writ petition.
The Court can also note whether such challenge is made at the
· earliest point of time when the statute came to be introduced
B or any provision was brought into the statute book or any long
time gap exist as between the date of the enactment and the
date when the challenge is made. It should also be noted as to
whether the grounds of challenge based on the facts pleaded
and the implication of provision really has any nexus apart from
c the grounds of challenge made. With reference to those relevant
provisions, the Court should be conscious of the position as to
the extent of public interest involved when the provision operates
the field as against the prevention of such operation. The Court
should also examine the extent of financial implications by virtue
of the operation of the provision vis-a-vis the State and alleged
0
extent of sufferance by the person who seeks to challenge
based on the alleged invalidity of the provision with particular
reference to the vires made. Even if the writ Court is of the view
that the challenge raised requires to be considered, then again
it will have to be examined, while entertaining the challenge
E raised for consideration, whether it calls for prevention of the
operation of the provision in the larger interest of the public. We
have only attempted to set out some of the basic considerations
to be borne in mind by the writ Court and the same is not
exhaustive. In other words, the Writ Court should examine such
F other grounds on the above lines for consideration while ~
considering a challenge on the ground of vires to a Statute or
provision of law made before it for the purpose of entertaining
the same as well as for granting any interim relief during the
pendency of such writ petitions. For the above stated reasons
G it is also imperative that when such writ petitions are
entertained, the same should be disposed of as expeditiously
as possible and on a time bound basis, so that the legal
position is settled one way or the other.
H 33. Keeping the above factors relating to the constitutional
P.GF. LIMITED & ORS. v. UNION OF INDIA 67
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
challenge to a provision of law made in mind, we proceed to A
examine the challenge made by the PGF Limited to Section
11 AA of the SEBI. Act. In fact, the chalienge to the provision
was two-fold. The main contention of the PGF Limited was that
since indisputably the business of the PGF Limited was sale
and development of agricultural land, the same would be B
governed by Entry 18 of List II, namely the State subject and,
therefore, the Central Legislation brought about by the
Parliament in introducing Section 11 AA of the SEBI Act cannot
_be sustained. It was alternatively contended that even assuming
that the Section can be held to be valid, inasmuch as the c
business is solely sale and development of agricultural land
again falling under Entry 18 of List II section 11AA it can be
read down to the effect that the said provision will have no
application to the business activity of the PGF Limited.
34. As far as the main contention is concerned, when we D
test the said submission, we find that the said submission is
wholly misconceived. In order to appreciate the first contention,
it will be worthwhile to extract Section 11 AA which reads as
under:
E
"11AA. Collective investment scheme- (1) Any scheme or
arrangement which satisfies the conditions referred to in
sub-section (2) shall be a collective investment scheme.
(2) Any scheme or arrangement made or offered by any
company under which- F
(i) the contributions, or payment made by the investors,
by whatever name called, are pooled and utilized
for the purposes of the scheme or arrangement;
G
(ii) the contributions or payments are made to such
scheme or arrangement by the investors with a view
to receive profits, income, produce or property,
whether movable or immovable from such scheme
or arrangement;
H
68 SUPREME COURT REPORTS (2013] 6 S.C.R.
A (iii) the property, contribution or investment forming part
of scheme or arrangement, whether identifiable or
not, is managed on behalf of the investors;
(iv) the investors do not have day-to-day control over the
management and operation of the scheme or
B
arrangement.
(3) Notwithstanding anything contained in sub-section (2),
any scheme or arrangement-
c (i) made or offered by a co-operative society
registered under the Co-operative Societies Act,
1912 (2 of 1912) or a society being a society
registered or deemed to be registered under any
law relating to co-operative societies for the time
D being in force in any State;
(ii) under which deposits are accepted by non-banking
financial companies as defined in clause (f) of
section 45-1 of the Reserve Bank of India Act, 1934
(2 of 1934);
E
(iii) being a contract of insurance to which the Insurance
Act, 1938 (4 of 1938) applies;
(iv) providing for any scheme, pension scheme or the
insurance scheme framed under the Employees'
F
Provident Funds and Miscellaneous Provisions Act,
1952 (19 of 1952);
(v) under which deposits are accepted under Section
58A of the Companies Act, 1956 (1 of 1956);
G
(vi) under which deposits are accepted by a company
declared as a Nidhi or a Mutual Benefit Society
under Section 620A of the Companies Act, 1956
(1 of 1956)
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 69
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
(vii) falling within the meaning of chit business as A
defined in clause (e) of Section 2 of the Chit Funds
Act, 1982 (40 of 1982);
(viii) under which contributions made are in the nature
of subscription to a mutual fund, Shall not be 8
collective investment scheme."
35. A reading of the said provision discloses that it talks
of any scheme or arrangement, which would fall within the
definition of a collective investment scheme. Section 2 (ba)
under the definition clause states that a collective investment C
scheme would mean any scheme or arrangement, which
satisfies the conditions specified in Section 11 AA. Under sub-
section (2) of Section 11AA, it is stipulated that any scheme
or arrangement made or offered by any company by which the
contribution, or payment made by the investors, by whatever D
name called, are pooled and utilized for the purposes of
scheme or arrangement; contributions or payments are made
by the investors with a view to receive profits, income, produce
or property, whether movable or immovable, based on the
scheme or arrangement, any property, contribution or E
investment which forms part of the scheme or arrangement is
identifiable or not is managed by someone on behalf of the
investors shall be collective investment scheme. Further the
investors should not have day to day control over the
management and operation of the scheme or arrangement. A
F
detailed analysis· of sub-section (2) of Section 11 AA, which
defines a collective investment scheme disclose that it is not
restricted to any particular commercial activity such as in a shop
or any other commercial establishment or even agricultural
operation or transportation or shipping or entertainment
industry etc. The definition only seeks to ascertain and identify G
any scheme or arrangement, irrespective of the nature of
business, which attracts investors to invest their funds at the
instance of someone else who comes forward to promote such
scheme or arrangement in any field and such scheme or
arrangement provides for the various consequences to result H
70 SUPREME COURT REPORTS [2013] 6 S.C.R.
A there from. As a matter of fact the provision does not make any
reference to agricultural or any other specific activity and,
therefore, at the very outset it will have to be held that the
submission based on Entry 18 of List II, while challenging the
\ires of Section 11AA, is wholly misconceived. The fallacy in
B the submission of the PGF Limited is that it proceeds on the
footing as though the said provision, namely, Section 11AA
was also intended to cover an activity relating to agriculture and
ii!> development and, therefore, the provision conflicts with Entry
1J8 of List II of the State List to be struck down on that score.
c Inasmuch as the said Section 11AA seeks to cover, in general,
~y scheme or arrangement providing for certain consequences
specified therein vis-a-vis the investors and the promoters,
there is no question of testing the validity of Section 11AA in
the anvil of Entry 18 of List II. The said submission made on
behalf of the appellants is, therefore, liable to be rejected on
0
that sole ground.
36. The correctness of the submission can also be
examined in a different angle, namely, what is the paramount
purpose for which the SEBI Act, 1992 came to be enacted?
E The object of the main Act itself came to be considered by this
Court in a recent decision reported in Sahara India Real Estate
Corporation Ltd. (supra) wherein this Court has stated as
llnder:-
"65. Parliament has also enacted the SEBI Act to provide
F for the establishment of a Board to protect the interests of
investors in securities and to promote the development of.
and to regulate the securities market. The SEBI was
established in the year 1988 to promote orderly and healthy
growth of the securities market and for investors'
G protection. SEBI Act, Rules and Regulations also oblige
the public companies to provide high degree of protection
to the investor's rights and interests through adequate,
accurate and authentic information and disclosure of
information on a continuous basis."
H (emphasis added)
P.GF. LIMITED & ORS. v. UNION OF INDIA 71
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
The object for introducing Section 11AA which came to be A
inserted by Act 31 of 1999 w.e.f 22.02.2000 is to the following
effect:
"2. Recently many companies especially plantation
companies have been raising capital from investors
8
through schemes which are in the form of collective
investment schemes. However, there is not an adequate
regulatory framework to allow an orderly development of
this market. In order that the interests of investors are
protected, it has been decided that the Securities and C
Exchange Board of India would frame regulations with
regard to collective investment schemes. It is, therefore,
proposed to amend the definition of "securities" so as to
include within its ambit the derivatives and the units or any
other instrument issued by any collective investment
scheme to the investors in such schemes.· D
37. Therefore, the paramount object of the Parliament in
enacting the SEBI Act itself and in particular the addition of
Section 11AA was with a view to protect the gullible investors
most of whom are poor and uneducated or retired personnel E
or those who belong to middle income group and who seek to
invest their hard earned retirement benefits or savings in such
schemes with a view to earn some sustained benefits or with
the fond hope that such investment will get appreciated in course
of time. Certain other Section of the people who are worstly F
affected are those·who belong to the middle income group who
again make such investments in order to earn some extra
financial benefits and thereby improve their standard of living
and on very many occasions to cater to the need of the
educational career of their children.
G
38. Since it was noticed in the early 90s that there was
mushroom growth of attractive schemes or arrangements, which
persuaded the above vulnerable group getting attracted
towards such schemes and arrangements, which weakness
H
72 SUPREME COURT REPORTS [2013] 6 S.C.R.
A was encashed by the promoters of such schemes and
arrangements who lure them to part with their savings by falling
as a prey to the sweet coated words of such frauds, the
Parliament thought it fit to introduce Section 11AA in the Act
in order to ensure that any such scheme put to public notice is
B not intended to defraud such gullible investors and also to
monitor the operation of such schemes and arrangements
based on the regulations framed under Section 11AA of the
Act. When such was the laudable object with which the main
Act was enacted and Section 11AA was introduced as from
c 22.02.2000, the challenge made to the said Section will have
to be examined by keeping in mind the above said background
and test the grounds of challenge as to whether there is any
good ground made out to defeat the purport of the enactment.
39. A reading of sub-Section (3) of Section 11AA also
D throws some light on this aspect, wherein it is provided that
those institutions and schemes governed by sub-clause (i) to
(viii) of sub-Section (3) of Section 11AA will not fall under the
definition of collective investment scheme. A cursory glance of
sub-clauses (i) to (viii) shows that those are all the schemes,
E which are operated upon either by a cooperative society or
those institutions, which are controlled by the Reserve Bank of
India Act, 1934 or the Insurance Act of 1938 or the Employees
Provident Fund and Miscellaneous Provisions Act, 1952 or the
Companies Act, 1956 or the Chit Fund Act of 1982 and
F contributions, which are made in the nature of subscription to
a mutual fund, which again is governed by a SEBI (Mutual Fund)
Regulations 1996. Therefore, by specifically stipulating the
various ingredients for bringing any scheme or arrangement
under the definition of collective investment scheme as
G stipulated under sub-Section (2) of Section 11AA, when the
Parliament specifically carved out such of those schemes or
arrangements governed by other statutes to be excluded from
the operation of Section 11 AA, one can easily visualize that the
purport of the enactment was to ensure that no one who seeks
H
P.G.F. LIMITED & ORS. v. UNION OF INDIA 73
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
to collect and deal with the monies of any other individual under A
the guise of providing a fantastic return or profit or any other
benefit does not indulge in such transactions with any ulterior
motive of defrauding such innocent investors and that having
regard to the mode and manner of operation of such business
activities announced, those who seek to promote such B
schemes are brought within the control of an effective State
machinery in order to ensure proper working of such schemes.
40. It will have to be stated with particular reference to the
activity of the PGF Limited, namely, sale and development of
agricultural land as a collective investment scheme, the C
implication of Section 11AA was not intended to affect the
development of agricultural land or any other operation
connected therewith or put any spokes in such sale-cum-
development of such agricultural land. It has to be borne in mind
that by seeking to cover any scheme or arrangement by way D
of collective investment scheme either in the field of agricultural
or any other commercial activity, the purport is only to ensure
that the scheme providing for investment in the form of rupee,
anna or paise gets registered with the authority concerned and
the provision would further seek to regulate such schemes in E
order to ensure that any such investment based on any promise
under the scheme or arrangement is truly operated upon in a
lawful manner and that by operating such scheme or
arrangement the person who makes the investment is able to
really reap the benefit and that he is not defrauded. Sub- F
clauses (i) to (viii) of sub-Section (3), which excludes those
schemes and arrangements from the operation of Section 11
AA in as much as those schemes are already governed under
various statutes and are operated upon by a cooperative
society or State machinery and there would be no scope for G
the concerned persons or the institutions who operate such
schemes within the required parameters and thereby the
common man or the contributory's rights or benefits will not be
in any way jeopardized. It is, therefore, apparent that all other
schemes/arrangements operated by all others, namely, other
H
74 SUPREME COURT REPORTS [2013] 6 S.C.R.
A than those who are governed by sub-section 3 of Section 11AA
are to be controlled in order to ensure proper working of the
scheme primarily in the interest of the investors.
41. In this context, we can also take judicial notice of the
B fact that those schemes, which would fall under sub-Section (2)
of Section 11 AA would consist of a marketing strategy adopted
by those promoters, by reason of which, the common man who
is eager to make an investment falls an easy prey by the sweet
coated words and attractive persuasions of such marketing
experts who ensure that those who succumb to such
C persuasions never care to examine the hidden pitfalls under the
scheme, which are totally against the interests of the investors,
apart from various other stipulations, which would ultimately
deprive the investors of their entire entitlement, including their
investments. The investors virtually by signing on the dotted
D lines of those stereotyped blank documents would never be
aware of the nature of constraints created in the documents,
which would virtually wipe out whatever investment made by
them in course of time and ultimately having regard to the legal
entangles in which such investors would have to undergo by
E spending further monies on litigations, ultimately prefer to ignore
their investments cursing themselves of their fate. More than 90
per cent of such investors would rather prefer to forget such
investments than making any attempt to secure their money
back. Thereby, the promoters put to unlawful gain who always
F thrive on other peoples money.
42. Therefore, in reality what sub-section (2) of Section
11AA intends to achieve is only to safeguard the interest of the
investors whenever any scheme or arrangement is announced
by such promoters by making a thorough study of such
G schemes and arrangements before registering such schemes
with the SEBI and also later on monitor such schemes and
arrangements in order to ensure proper statutory control over
such promoters and whatever investment made by any
individual is provided necessary protection for their investments
H in the event of such schemes or arrangements either being
P.G.F. LIMITED & ORS. v. UNION OF INDIA 75
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
successfully operated upon or by any mis-fortune happen to be A
abandoned, where again there would be sufficient safeguards
made for an assured refund of investments made, if not in full,
at least a part of it.
43. By no stretch of imagination the above factors, which 8
weighed with the Parliament to introduce Section 11AA can be
held to be done with a view to affect any particular category of
business activity much less the activity of agriculture. We are
not, therefore, in a position to countenance the stand of the PGF
Limited that what it sought to carry out under its scheme was C
merely sale and development simplicitor of agricultural land and
not a collective investment scheme. In the light of our above
conclusions on this ground it will have to be held that Section
11AA is a valid provision, not suffering from any infirmity, as it
does not intrude into the specific activities of sale of agricultural
land and its development. In other words, there is no scope to D
apply Entry 18 of List II of Seventh Schedule in order to strike
down the said provision on the ground of legislative
competence.
44. When we examine the nature of the activity of the PGF E
Limited by way of sale and development of agricultural land, it
will be necessary to mention the salient features pointed out
by Mr. Tripathi, learned senior counsel for the second
respondent and find out as to how far Section 11AA of the SEBI
Act, would apply and thereby, the validity of Section 11AA has F
to be upheld amt the various grounds raised on behalf of the
PGF Limited do not in any way impinge upon the said Section.
45. Some of the releva(lt documents, which are required
to be noted for this purpose are the Application form, which is
to be filled in and furnished by an investor with the PGF Limited G
based on which an agreement is to be first signed by the
investor and thereafter, the sale deed is executed in units of
150 sq. yrds. per unit. A perusal of the Application form would
show that when the investor applies for purchase of agricultural
units/plots for getting the same developed and maintained by 11
76 SUPREME COURT REPORTS [2013) 6 S.C.R.
A PGF Limited under the PGF Limited's cash down payment
plan/installment payment plan, based on the number of units/
plots a period plan number, the area of liJnd, the period of plan,
the consideration etc., are all noted. An agreement is also
entered into based on the application on the same date
B depending upon the nature of payment either cash down or
installment payment and the investor is referred as customer
and the appellant No.1 is referred to as PGF, a public limited
company who is stated to be engaged in the business of sale,
purchase or development of agricultural land. After noting down
c the desire of the investor for purchase of the number of units/
plots based on the payment plan, the agreement in the forefront
states that the PGF Limited would arrange for the allotment of
the land within a reasonable period and not exceeding 270 days
in respect of cash down payment plan and not exceeding 90
days after the receipt of 50 per cent of consideration in respect
0
of installment payment plans. It is worthwhile to note that while
money is received either by way of cash down or 50 per cent
through installment facility only an allotment will be intimated by
way of a letter without any assurance as to when the sale deed
in favour of such applicant customer would be executed. After
E the allotment letter without prescribing any specific time
stipulation, the agreement mentions that sale deed would be
executed in favour of the customer and will be duly registered.
Such execution was, however, to the condition that if transfer
of such small plot of land as prescribed by law is not otherwise
F possible, practicable or feasible, even such transfer of title
would be in favour of a customer by way of joint holding with
other customers, by way of a joint sale deed and the original
sale deed will be entrusted with a custodial service company,
whose name and addresses would be communicated to the
G customer respectively. Thereafter, if the customer wants to
verify the document he will have to approach the said custodial
service company and that too after making a request 15 days
before such intended verification,
H 46. When it comes to the question of development, it is
P.G.F. LIMITED & ORS. v. UNION OF INDIA 77
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
stipulated that such development would be in consultation with A
agro consultants and experts after taking into account several
factors such as soil condition, climate etc., apart from matters
pertaining to development including survey, demarcation,
clearing, cultivation, planting/raising of crops, trees, plants,
saplings etc., as well as use of fertilizers and pesticides, B
irrigation and all other activities allied or incidental thereto would
be decided by the PGF Limited. Insofar as the joint sale deed
is concerned only certified copies of the sale deed would be
furnished to the customer and if this is not possible/ feasible/
practical, PGF shall provide a copy of the sale deed duly c
attested by a Notary Public to the customer.
47. Under the heading 'Common Services & Facilities' it
is stipulated in the agreement that in respect of certain common
facilities such as irrigation and drainage systems, pipelines,
electrical lines (which may be passing through, whether D
underground or overground, the customer's plot), motors, pump
sets, temporary sheds and structures etc., the customer wilt
have no ownership rights and cannot interfere in any manner
with the same and that such common services and facilities
would be the properties of the PGF. As far as consequences E
of any breach by the PGF Limited, under Clause 13 some
skeleton provision is made that the customer will be entitled to
terminate the agreement, in which event PGF Limited would
refund the amounts along with simple interest @ 12.5% per
annum from the date of the contract, (i.e.) if such breach related F
to the development of plot(s), then again the customer will be
entitled to terminate the agreement, in which event the PGF
Limited would refund the amounts paid by the customer after
deducting the cost of land, registration expenses, development
charges and other incidental expenses and the balance G
amount, if any, would be refunded together with simple interest
@ 12.5% per annum from the date of contract and the PGF
Limited shall not be liable to pay any cost/expense/damage
whatsoever in any case other than what has been provided
under Clause 13(a) & (b). H
78 SUPREME COURT REPORTS [2013) 6 S.C.R.
A 48. But when it comes to the question of breach by the
·customer under Clause 14(A) as many as sub-clauses (a) to
(f) are stipulated and if it related to any default before allotment
of land under Clauses 14(B) sub-clauses (a) to (e) providing
for stringent conditions have been laid down. Under Clause 18
B all possible situations are mentioned in order to ensure that
under no circumstance PGF Limited will be liable for any
consequence for non-performance of its part of the contract.
Under Clause 20 it is stipulated that any dispute pertaining to
the agreement would be referred for arbitration to a retired
c judicial officer appointed by the PGF Limited as sole arbitrator
and settled in accordance with the Arbitration and Conciliation
Act, 1996 and the jurisdiction for any further agitation of legal
rights would be only in the Civil Courts at Delhi, to the exclusion
of all other Courts.
D 49. Thus, as rightly pointed out by Shri Tripathi, learned
senior counsel for the second respondent, once the customer
signs the application form and the agreement, virtually he would
be left high and dry with no remedy, in the event of any breach
being committed by the PGF Limited, while on the other hand
E he will have everything to loose if such breach happened to
occur at the instance of the customer. The agreement, thus,
demonstrates to be wholly one sided and arbitrary in all
respects.
50. When we refer to such incongruities existing in the
F predrafted/standard format agreement to be signed by the
customers, it will also be worthwhile to the so called sale deeds,
which were placed before the Division Bench as sample
documents. A perusal of those sale deeds are much more
revealing. One of the sample documents was executed by one
G Mr. Malkiat Singh s/o Sh. Sadhu Singh resident of Village
Vhoje Majra, Punjab through his authorized attorney Mr. Rajesh
Agarwal s/o Sh. Ram Agarwal in favour of one Mr. Pankaj
Karnatak s/o Sh. V.D. Karnatak R/o Delhi. The said vendor
Malkiat Singh stated to have purchased an extent of 9.37 acres
H of dry land in Survey No.113 in '.fi!!_age Velugudari for .total
P.GF. LIMITED & ORS. v. UNION OF INDIA 79
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
consideration of Rs.1, 19, 100/- from one Ganga Reddy s/o Raja A
Reddy. The said Malkiat Singh is stated to be a resident of
Punjab. Out of the said extent of 9.37 acres an extent of 150
sq. yrds. was sold to the said Pankaj Karnatak of Delhi by sale
deed dated 23.10.2001. The sale consideration was shown as
Rs.1515/- while the value of the document is shown as Rs. B
4000/-. The revealing fact was that the photocopy of the said
document disclose the signature of Malkiat Singh at the bottom
of each page of the document. But the signature of the Power
of Attorney is not found in the said document though in the
opening paragraph it is claimed that the sale deed was c
executed only by the Power Agent. The sai~ Rajesh Agarwal
has only signed on the back side of the first page of the
document before the Registrar. Of the two Witnesses to the
document, one of the witnesses stated to be the resident of
New Delhi, while the other witness was stated to be the resident D
of Nirmal. The addresses of the witnesses are not mentioned
and the document
I
was registered in the office of Sub-Registrar
of Nirmal. In the schedule, the boundaries have been simply
.mentioned as surrounded on the East by 5 ft. ·wide road, West
bY. 5 ft. wide road, North by Plot No.140 and South by Plot E
No.142. Along with the document a site plan is annexed and
the authenticity of the said plan is not disclosed, while the name
of the person who drew the sketch alone is mentioned. Thus,
in very many respects the genuineness of the document
appears to be doubtful. In fact, the Division B!:mch has dealt
with this aspect of the nature of document" in extenso in F
paragraph 56 of the judgment impugned With which observation
we fully concern.
51. A conspectus consideration of the scheme of
development of the land purchased by the ~tomers at the G
instance of the PGF Limited and the prom~ development
under the agreement disclose that there. Yr.ts wholesale
uncertainty in the transactions to thf! disait{antage of the
investors' concerned. The above factors and~· factors, which
weighed with the Division Bench in this respect definitely H
. ... '
80 SUPREME COURT REPORTS [2013] 6 S.C.R.
A disclose that PGF Limited under the guise of sale and
development of agricultural land in units of 150 sq. yrds. i.e.
1350 sq. ft. and its multiples offered to develop the land by
planting plant, trees etc., and thereby the customers were
assured of a high amount of appreciation in the value of the
B land after its development and attracted by such anticipated
appreciation in land value, which is nothing but a return to be
acquired by the customers after making the purchase of the land
based on the development assured by the PGF Limited, part
. with their monies in the fond hope that such a promise would
c be fulfilled after successful development of the bits of land
purchased by them.
52. The above conclusion of ours can be culled out from
the sample documents placed by the appellants before the
Court. The appellants, however, failed to supply any material
D till date to demonstrate as to how and in what manner any of
the lands said to have been sold to its customers were
developed and thereby any of the customer was or would be
benefited by such development. It is imperative that the
transaction of the PGF Limited vis-a-vis its customers has
E necessarily to be examined as to its genuineness by subjecting
itself to the statutory requirement of registration with the second
respondent followed by its monitoring under the regulations
framed by the second respondent. All the above factors
disclose that the activity of sale and development of agricultural
F land propounded by the PGF Limited based on the terms
contained in the application and the agreement signed by the
customers is nothing but a scheme/arrangement. Apart from
the sale consideration, which is hardly 1/3rd of the amount
collected from the customers, the remaining 2/3rd is pooled by
G the PGF Limited for the so called development/improvement
of the land sold in multiples of units to different customers. Such
pooled funds and the units of lands are part of such scheme/
arrangement under the guise of development of land. It is quite
apparent that the customers who were attracted by such
H schemes/arrangement invested their monies by way of
P.G.F. LIMITED & ORS. v. UNION OF INDIA 81
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
contribution with the fond hope that the various promises of the A
PGF Limited that the development of the land pooled together
would entail high amount of profits in the sense that the value
of developed land would get appreciated to an enormous
extent and thereby the customer would be greatly benefited
monetarily at the time of its sale at a later point of time. It is B
needless to state that as per the agreement between the
customer and the PGF Limited, it is the responsibility of the
PGF Limited to carry out the developmental activity in the land
and thereby the PGF Limited undertook to manage the
scheme/arrangement on behalf of the customers. Having regard c
to the location of the lands sold in units to the customers, which
are located in different states while the customers are stated
to be from different parts of the country it is well-neigh possible
for the customers to have day to day control over the
management and operation of the scheme/arrangement. In D
these circumstances, the conclusion of the Division Bench in
holding that the nature of activity of the PGF Limited under the
guise of sale and development of agricultural land did fall under
the definition of collective investment scheme under Section
2(ba) read along with Section 11 AA of the SEBI Act was
perfectly justified and hence, we do not find any flaw in the said E
conclusion.
53. We, therefore, hold that Section 11AA of the SEBI Act
is constitutionally valid. We also hold that the activity of the PGF .
Limited, namely, the sale and development of agricultural land F
squarely falls within the definition of collective investment
scheme under Section 2(ba) read along with Section 11AA (ii)
of the SEBI Act and consequently the order of the second
respondent dated 06.12.2002 is perfectly justified and there is
no scope to interfere with the same. In the light of our above G
conclusions, the PGF Limited has to comply with the directions
contained in last paragraph of the order of the second
respondent dated 06.12.2002. We also hold that while ensuring
compliance of the order dated 06.12.2002, the second
respondent shall also examine the claim of the PGF Limited H
82 SUPREME COURT REPORTS [2013] 6 S.C.R.
A that it had stopped its joint venture scheme as from 01.02.2000
is correct or not by holding necessary inspection, enquiry and
investigation of the premises of the PGF Limited in its
registered office or any of its other offices wherever located
and also examine the account books other records and based
B on such inspection, enquiry and investigation issue any further
directions in accordance with law. Whatever amount deposited
by the PGF Limited pursuant to the interim orders of this Court
relating to joint venture scheme shall be kept in deposit by the
second respondent in an Interest Bearing Escrow Account of
c a Nationalized Bank. The second respondent shall also verify
the records of the PGF Limited relating to the refund of deposits
of the customers who invested in the joint venture schemes and
ascertain the correctness of such claim and based on such
verification in the event of any default noted, appropriate further
action shall be taken against the PGF Limited for settlement
0
of the monies payable to such of those investors who
participated in any such joint venture schemes operated by the
PGF Limited. It will also be open to the second respondent while
carrying out the above said exercise to claim for any further
payment to be made by the PGF Limited towards settlement
E of such claims of the participants of the joint venture schemes
and charge int(!rest for any delayed/defaulted payments. As far
as the deposit made by the PGF Limited with the second
respondent on the ground that the such amount could not be
disbursed to any of the investors for any reason whatsoever the
F second respondent, based on the verification of the records of
the PGF Limited, arrange for refund/disbursement of such
amount back to the participants of the joint venture schemes
with proportioriate interest payable on that amount. The above
directions are in addition to the directions made by the Division
G Bench of the High Court.
54. Having noted the conduct of the PGF Limited in having
perpetrated this litigation which we have found to be frivolous
and vexatious in every respect, right from its initiation in the
, H High Court by challenging the vires of Section 11AA of the SEBI
P.G.F. LIMITED & ORS. v. UNION OF INDIA 83
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
Act without any substantive grounds and in that process A
prolonged this litigation for more than a decade and thereby
provided scope for defrauding its customers who invested their
hard earned money in the scheme of sale of land and its
development and since we have found that the appellants had
not approached the Court with clean hands and there being very B
many incongruities in its documents placed before the Court
as well as suppression of various factors in respect of the so
called development of agricultural land, we are of the view that
even while dismissing the Civil Appeal, the PGF Limited should
be mulcted with the exemplary costs. We also feel it c
appropriate to quote what Mahatma Gandhi and the great poet
Rabindranath Tagore mentioned about the greediness of
human being which are as under:
"Earth provides enough to satisfy every man's need, but
not every man's greed. D
-Mahatma Gandhi-
The greed of gain has no time or limit to its
capaciousness. Its one object is to produce and E
consume. It has pity neither for beautiful nature nor for
living human beings. It is ruthlessly ready..without a
moment's hesitation to crush beauty and life olit of them,
molding them into money."
-Rabindranath Tagore- · F
55. In this respect, it will be worthwhile to note what thel'GF
Limited disclosed before the second respondent in its letter
dated 15.01.1998 alongwith the covering letter dated
20.05.2002. The details mentioned therein disclose that the total G
amount received by the PGF Limited under different schemes
,from 01.01.1997 to 31.12.1997 was approximately Rs.186.84
crores. Its paid up capital was stated to be Rs.94,90,000/- and
it mobilized Rs.815.23 crores under joint venture schemes from
01.04.1996 to 30.06.2002. The future liabilities towards joint H
84 SUPREME COURT REPORTS [2013] 6 S.C.R.
A venture schemes was projected in ii sum of Rs.655.41 crores.
Total outstanding liabilities payable to investors under the old
closed schemes as on 30.06.2002 was stated to be Rs.497
crores. As against the above, till 31.10.2002, the PGF Limited
stated to have made a net payment of Rs.115.93 crores leaving
B the balance due in a sum of Rs.393.69 crores approximately.
The above details have been noted by the second respondent
while mentioning the submission of the PGF Limited in its order
dated 06.12.2002. Thus, we are convinced that the PGF
Limited deliberately did not furnish the amounts till this date what
C Was collected from the customers who made their investments
in the so-called venture of sale and development of agricultural
lands. Therefore, it is explicit that the PGF Limited was playing
a hide and seek not only before the second respondent, but
was also taking the Courts for a ride. We have noted in more
than one place in our order that inspite of our repeated asking
0
the appellants did not come forward to disclose the details of
any development it made in respect of the lands alleged to have
been sold to its customers. There is also no valid reason for
not disclosing the details before the court. As in one of its
activities, namely, joint venture scheme alone, it had mobilized
E Rs.815.23 crores, it can be easily visualized that in its activities
of sale and development of land such mobilization would have
far exceeded several thousand crores. In such circumstances,
the appeal is liable to be dismissed which may have costs.
F 56. Apart from imposing cost for having wasted the
precious time of the High Court as well as of this Court, in order
to ensure that none of the investors/customers of the PGF
Limited, who have parted with their valuable savings and
earnings by falling a prey to the promise extended to them are
G deprived of their investments, we feel it just and necessary to
direct for proper investigation both by the Central Bureau of
Investigation as well as the Department ,of Income Tax and in
the event of any malpractice indulged in by the PGF Limited,
to launch appropriate proceedings, both Civil, Criminal and
H other actions against the PGF Limited, as well as, all those who
· P,G.F. LIMITED & ORS. v. UNION OF INDIA 85
[FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
were responsible for having indulged in such malpractice. We A
also direct the second respondent to proceed with its
investigation/enquiry and inspection of the PGF Limited as well
as all its other officers and other premises and after due enquiry
to be carried out in accordance with law, take necessary steps
for ensuring the refund of the monies collected by the PGF B
Limited In connection with the sale and development of land to
its various customers. In order to enable the second respondent
to carry out the various directions contained in this judgment,
we direct the PGF Limited to appoint a nodal officer, not below
the rank of a Director, of its company who shall be responsible C
for furnishing whatever information, documents, account books
or other materials that may be required by the second
respondent, the Central Bureau of Investigation as well as the
Income Tax Authorities. While intimating appointment of such
nodal officer, the PGF Limited shall also furnish the contact
number i.e., landline/mobile numbers, e-mail address and other D
details of its nodal officer, its registered office, administrative
office and other offices. It is made clear that if the PGF Limited
failed to comply with any of the directions contained in this
judgment, the second respondent shall be at liberty to bring it
to .the notice of this Court by filing appropriate application for E
initiating necessary proceedings against the PGF Limited-
appellant No.1, its Chairman-cum-Managing Director-appellant
No.2 and other Directors and other responsible officers. With
the above directions, the appeal stands dismissed with cost
of Rs.50,00,000/-(Rupees fifty lacs only) to be deposited by the F
PGF Limited with the Registry of the Supreme Court within
eight weeks from the date of receipt of copy of this judgment.
On such deposit being made, the Registry shall arrange to
deposit the said sum with the Supreme Court Legal Services
Committee. In the event of PGF Limited failing to comply with G
the direction for payment of costs within the stipulated time limit,
the Registry shall bring the same to the notice of the Court for
initiating appropriate proceedings against the PGF Limited for
non-compliance.
K.K.T. Appeal dismissed. H
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