Market regulator Securities and Exchange Board of India (SEBI) has imposed a total penalty of ₹1.10 crore on four former directors, Oprakash Basantlal Goenka, Prakash Ganpat Utekar, Venkatraman Natarajan and Narayan Shivram Kotnis of Citrus Check Inns Ltd, for fraudulently mobilising investor funds through unregistered collective investment schemes (CIS).
The
adjudication order follows SEBI's long-running investigation into Citrus Check Inns which was accused of raising thousands of crores from investors by marketing holiday membership plans that, in substance, functioned as investment schemes. The regulator concluded that the company had mobilised about ₹2,722 crore from more than 1.28mn (million) investors under seven holiday plans without obtaining the mandatory registration required under the SEBI (Collective Investment Schemes) Regulations.
According to SEBI, the company offered 25 holiday plans, of which seven promised investors’ returns if they chose not to utilise the holiday benefits. Investors accumulated ‘holiday points’ based on their investments and could either redeem these points for holidays or convert them into cash, effectively earning assured returns. Depending on the scheme, promised returns ranged from around 16.7% to as high as 191.2% over the plan tenure.
The regulator observed that despite the schemes being marketed as holiday packages, very few investors actually availed the holiday facilities. As of December 2016, only 5.72% of investors had used the holiday benefits, while just 0.41% of the money mobilised was spent on providing such facilities. Instead, thousands of investors opted to redeem or sell their accumulated points, reinforcing SEBI's finding that the schemes were essentially investment products rather than genuine holiday memberships.
SEBI held that the arrangements satisfied all four conditions prescribed under Section 11AA of the SEBI Act for a collective investment scheme. The funds contributed by investors were pooled, managed entirely by the company and invested with the expectation of earning returns, while investors had no day-to-day control over the management of the schemes. The company, nevertheless, operated these schemes without obtaining SEBI registration, violating the SEBI Act and CIS Regulations.
The adjudicating officer (AO), N Murugan of SEBI, also rejected the directors' contention that the proceedings had become redundant because the Supreme Court is overseeing the liquidation of the company's assets and refund to investors.
SEBI noted that the apex court had expressly permitted the regulator to continue enforcement proceedings and that the liability to pay penalties was personal to the directors and independent of the ongoing investor refund exercise.
While deciding the quantum of penalty, SEBI noted that the show-cause notice (SCN) did not quantify any disproportionate gains made by the directors. However, it observed that the scale of investor exposure was enormous, with over ₹2,722 crore mobilised through an illegal scheme. The regulator also noted that the directors had earlier been associated with Royal Twinkle Star Club Ltd, another company found to have operated an unregistered collective investment scheme, thereby making the violations repetitive.
SEBI imposed a higher penalty on Mr Goenka because he held an overwhelming ownership stake and exercised effective control over Citrus Check Inns during the relevant period. Accordingly, Mr Goenka has been fined ₹35 lakh, while Mr Utekar, Mr Natarajan and Mr Kotnis have each been directed to pay ₹25 lakh, taking the total penalty to ₹1.10 crore.
The company itself was spared a monetary penalty because the show-cause notice against it was disposed of without penalty in view of the ongoing Supreme Court-monitored insolvency and investor refund process. Earlier this year, SEBI also restrained Citrus Check Inns and its four directors from accessing the securities market until all eligible investors are refunded. (Read:
Citrus Check Inns and 4 Directors Barred Until Rs3,036 Crore Is Refunded to Investors)
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