SEBI VS PACL: Trouble in Paradise

In its biggest-ever crackdown on a large-scale money pooling scheme estimated at nearly Rs. 50,000 crore (twice the amount to be recover from SAHARA group), regulator SEBI has ordered  Pearls Agrotech Corporation Limited (“PACL”) to refund investors within three months and wind up operations.

SEBI had found PACL violating Collective Investment Scheme Regulations by mobilizing the money without being registered with the regulator, SEBI.

Besides, closure of PACL operations, SEBI  is initiating further proceedings against PACL and its nine promoters and directors for fraudulent and unfair trade practices, as also for violation of SEBI's CIS Regulations, among others, as per a direction from the Supreme Court.

At present, it is being estimated that PACL has more than  58.5 million customers, more than twice the 22 million demat accounts in the entire country and has paid commission of
Rs 7,893.8 crore up to March 2012  to more than its 8 lakh agents who works as network of chain system for collection of public deposit in return for attractive commissions on deposits brought in by them and other agents linked to them in chain. PACL is yet to allot land to 46.3 million investors where as PACL claimed it was in the business of purchasing and developing land, adding the developed land was transferred to investors, who could sell it for gains.

SEBI will make a reference to the state governments and local police to register civil or criminal cases against PACL, its promoters, directors and managers for fraud, cheating, criminal breach of trust and misappropriation of public funds if the money is not refunded. SEBI will also initiate attachment and recovery proceedings if the money is not refunded to the public within the deadline set by it.

PACL Business Activities

PACL offered two kinds of plans to its customers—a cash-down payment plan and an instalment payment plan. Under the former, it offered to allot land to customers within 270 days of payment and under the latter within 90 days. In fact, business model of PACL isn’t very complicated. It collects money from investors and invests in cheap land which is likely to see changes in end use. Once that happens, the cheap land becomes a goldmine that PACL monetizes to pay investors 12.5% interest.

SEBI clamps down the business activities of PACL   categorizing the collection of public deposits under the garb of allotment of farm land to depositors without any maintenance of proper records/data and without registration of its scheme with SEBI under Collective Investment Scheme Regulations is a clear indication the activities of PACL are in the nature of a Ponzi scheme.

Before moving further let us understand- What is a PONZI Scheme??

Now, the most basic questions which arises, has PACL been involved in Ponzi Scheme or it was failure on part of PACL to get its scheme registered with SEBI under Collective Investment Scheme Regulations? Has PACL cheated any of its investor till date?

Though at this moment we may not have all answers, however few things are very clear:

1.     The Collective Investment Scheme operated by PACL was not registered with SEBI;

2.     There are more than 46.31 million customers to whom PACL is yet to allot land

Today, many companies especially in semi-urban and rural areas are accepting deposits in their firm’s name and also promising two to three times returns in two to four years without taking any legal permissions and there was cardinal mistakes by PACL group that often operated in the regulatory twilight zone. A shadowy empire giving up closely monitored financial services to slowly venture into real estate would not have necessarily drawn the attention of unfriendly politicians and a no-nonsense SEBI.

The timelines of battle between PACL and SEBI is provided as below:

After the first round of battle, where SEBI has ordered PACL to refund Rs. 49,100 crore to its investors, PACL is getting ready for second round and to knock on Securities Appellate Tribunal (“SAT”) against SEBIs order. The whole battle between SEBI and PACL is on the issue that whether the business activities of PACL comes within the ambit of CIS or not? However, in middle of this battle, there are millions of small investors who had been exposed to high degree of risk, who may lose everything if PACL shrinks.

Collective Investment Scheme (CIS)

w  An investment scheme wherein several individuals come together to pool their money for investing in a particular asset(s) and for sharing the returns arising from that investment as per the agreement reached between them prior to pooling in the money and as per Collective Investment Scheme Regulations, any company involved in CIS has to register with SEBI .

Though on prima facie it seems  that the business activities of PACL is similar to CIS and we can expect further crackdown on other companies engaged in similar activities like PACL.

If  you are interested in further details and inclined to know the procedure of CIS registration, click on the link below:

http://www.equicorplegal.com/Pdfs/ECA-%20Collective%20Investment%20Scheme.pdf

or contact us at admin@equicorplegal.com/+91 9958709189