Pancard clubs limited v.SEBI-A Bird’s eye view, by Swatilekha Chakraborty

The article delves into the recent Security Appellate Tribunal (“Tribunal”) judgment[1] which has upheld the Security Exchanges Board of India (“SEBI”)- the (“Respondent”) order classifying the holiday schemes floated by Pancard Clubs Limited (“Appellants”) as a Collective Investment Scheme (“CIS”) and thereby directing the Appellants to inter-alia, refund the sum of money amounting to Rupees  7,035 crore, collected from the investors

within three months from the passing of the impugned order, and further directing the Appellants to wind up the CIS operated by them under the guise of a time sharing business.The Tribunal has gone into the intricate provisions pertaining to CIS under the SEBI Act, 1992 (“Act”) and the regulations made there-under to examine the scheme/plan in details and has relied on a plethora of judgements to come to the conclusion that it was infact a CIS being operated without adequate registration under the Act.


The Respondent had passed an ex-parte interim order dated July 31, 2014contesting that the schemes launched and operated by the Appellants were a CIS as per Section 11AA[2] of the Act and that the Appellants were operating such CIS without proper registration as required under Section 12 (1B) of the Act [3]and Regulation 3 of the CIS Regulations (“Regulations”)[4].The scheme of the Appellants consisted of marketing time share products- room for a fixed duration of nights of its hotels, affiliates and other hotels outside its group, to its prospective applicants at a fixed tariff, during the contracted tenure of the holiday options.For all of Appellant’s eight schemes on offer, upon maturity, the applicant may surrender his unutilised room nights and opt for following:[5]

  • The applicant may opt for surrender value.[6] The actual surrender value shall be determined by the company at the time of surrender of room nights and shall be paid after the expiry of tenure under the scheme.
  • The applicant may opt to exchange or barter or utilise the products and services of the company or group companies.
  • The applicant may opt to convert his unutilised room nights to the extent of surrender value entitlement into life membership of various clubs of the company/group.
  • The company in its discretion may give an option to its applicant to convert his unutilised room nights, to the extent of surrender value, into shares, debentures.

The Appellants challenged the impugned order alleging that the holiday plans/schemes offered to its clients did not fall within the ambit of a CIS, on the grounds that such plans/schemes did not satisfy the criteria required to be classified as a CIS.


Appellants made the following submissions in front of the Hon’ble Tribunal, having the main contention that they did not satisfy the conditions as laid down in the Act to be identified as a CIS.

Firstly, the holiday plans offered to its customers entitle them to the utilization of room nights and/or other services. Therefore the contract between the company and the customers wasjustifiably a “contract for services”. As a result, selling holiday plans/schemes for consideration cannot be termed as “pooling of funds” within the meaning of s 11AA of the SEBI Act and, therefore, such holiday plans/schemes cannot be termed as “schemes or arrangements”.

Secondly, the sum of money received from its customers was not treated as forming part of a fund intended for investments. Further, the right conferred upon the customer to utilize the hospitality and leisure activities offered by the company at its hotels should be seen as a promise of performance of a service andnot as a return on the investment. Additionally, the “surrender value” i.e. the amount received by the customer in case he redeems the room nights credited to his name at the end of the maturity period of his plan, although higher than the initial price of the plan, does not represent sharing of income/profits/produce or property arising out of the holiday plan/schemes within the meaning s 11AA of Act.

Thirdly, the customers had complete freedom with respect to the time, mode or manner of utilizing the holiday plans/schemes. Further, the title to the properties associated with these plans/schemes was bestowed in the Appellant and its associate companies, implying that the properties are managed for the company’s business and not on behalf of its customers.

Fourthly, the Appellants submit that the customer has the liberty to interchange the room nights made available to him by virtue of the holiday plans/schemes offered by the company, across various other associated properties and with other services offered by the company such as picnics, restaurants, adventure trips, conferences, short excursions, banquets, tour packages including travel ticketing, etc. The customer may exercise the option of gifting such services to friends or family too.

Lastly, the Appellant concludes that assuming but not admitting the fact that SEBI classifies that the company’s holiday schemes as CIS, the company should be permitted, under regulation 73 of the Regulations[7], to submit a draft information memorandum for approval of SEBI and to seek the consent/approval of its members.


Firstly, Respondents, relying on the financial statements of the Appellants, established pooling of funds.

Secondly, the Respondent contends that the contributions received from customers of the holiday plans/schemes floated by the company, the Appellants have stated that such money received is treated as ‘advance against room nights’ and is used for the company’s business including purchasing of hotels, resorts and clubs and general business. Therefore, contribution once paid is solely managed by the company and not by its customers.

Thirdly, the ability to control the time, mode and manner of utilizing the holiday plans/schemes by the customer is merely an entitlement available to the customer and does not give him any right to control his contribution. The Appellants have complete control over the contributions and the scheme i.e. the management and operation of the scheme is in the hands of the Appellants and not the customer/investor.

Fourthly, as far as the jurisdiction of SEBI with respect to the Explanation to Section 12 (1B) of the SEBI Act is concerned, Appellants obtained the insurance cover by payment of premium to the respective insurance companies and then offered it to its customers. Further, if the construction offered by the Appellants were to be considered, a bank could start offering accident insurance along with a deposit and claim that RBI could not regulate it.

Lastly, with respect to the applicability of Regulation 73 of the CIS Regulations in favour of the Appellant, the Respondent submits that only existing CISs can resort to the provisions of the aforesaid Regulation.


Relying on the conditions laid down by s 11AA of the Act (reproduced above), the Court upheld the SEBI order and concluded that the holiday schemes of the Appellants did classify as a CIS.

The only question of law that came before the Tribunal in this case was whether the scheme of the Appellants could be successfully brought within the ambit of a CIS under the Act. The Tribunal began the examination with the following observation:

“It is pertinent to note that these conditions, when looked at individually, might seem to be fulfilled by a number of entities. However, in order to classify a scheme as a CIS, the aforementioned conditions need to be fulfilled collectively by a particular scheme. Therefore, any scheme that satisfies all four conditions under Section 11AA (2) (ii) comes under the definition of a CIS.”

The Tribunal, relying on a plethora of judgements of the Apex Court, went to prove that all such four conditions were in fact satisfied the scheme floated by the Appellants, which can be briefly summarized as follows.

Pooling of funds

With regards to the contributions made by investors being pooled and used for the scheme the Tribunal draws our attention to the fact that the argument put forth by the Appellants “fails to take away from the fact that the share capital of the company stands at a meagre INR 50 lakh, while the money mobilized under their holiday scheme is over INR 7,000 crore. Further, investments to the tune of over INR 1000 crore have been made towards acquiring hotels and resorts, thereby expanding their inventory of properties on offer in the holiday scheme by utilizing the proceeds of the impugned scheme. Needless to say that the corpus of money accumulated by the Appellants by way of contributions to the holiday scheme is well above the limit of INR 100 crore set under the proviso of clause 1 of subsection 2 of Section 11AA of the SEBI Act, crossing which, a scheme is deemed to be a CIS.” To come to this view, the Tribunal relied on the judgements of the Apex Court in the matters of PGF Ltd. vs. Union of India and Ors.[8]decided on March 12, 2013 and the judgment of this very Tribunal in NGHI Developers India Limited[9]decided on July 23, 2013.The Court has gone ahead to quote the relevant paragraphs of the aforementioned judgements(reproduced below).

Contributions made with a view to receive profits, income, produce or property

The Tribunal observed that in the instant matter schemes launched by the Appellants contained a feature viz. ‘surrender value’, which basically conferred upon the investor the right to surrender unutilized ‘room nights’ credited to his name on the expiry of the tenure of the scheme in exchange for an amount which would be higher in value than his initial investment. Relying on the observation made by Gauhati High Court in the case of Rose Valley Hotels & Entertainments Ltd and Ors.[10]the Tribunal went ahead to hold that “ the surrender value offered to investors harbours the terms of refund of deposit along with an interest component. Additionally, based on the statistics provided by the Appellants on the schemes floated by them, we see that a whopping 97% of investors availed the benefits of the surrender value as opposed to the services offered under the scheme. In our considered opinion, we find that a large chunk of investors established a pecuniary interest in the holiday scheme with the intention of exercising the option of ‘surrender value’ and receiving a profit on their investment, however small. Therefore, we hold that the condition mentioned under Section 11AA (2) (ii) of the SEBI Act is fulfilled by the scheme in question viz. the customers/investors in the CIS invested their money in the scheme with the intention to draw profits from the scheme.”

Property managed on behalf of the investors

Observing a similarity with the case of Alchemist v. SEBI[11], the Tribunal held on this point that“Coming to the present matter, it is evident from the facts before us that the investors’ contributions are managed by the Appellants on behalf of the customers and not by the customers themselves because no instance has been brought before us of customers managing their investments on their own without the company’s supervision. Further, as pointed out above, the money collected from investors is used by the Appellant Company to maintain accommodation and holiday facilities in various locations. Therefore, the investors do not use their investments for their purposes of their own supposed property, but the Appellant actually applies and manages the investors money in manner it deems fit.”

Day-to-day control over the management and operation of the scheme

The Tribunal to conclude the judgement, and determine this point, relied on the brochure[12] made available to investors. Further, it observed that the underlying philosophy of the fourth ingredient is that the day to day management of the money pooled under the scheme and the scheme’s working in general is at the company’s discretion, and not the investors. In the matter in front of the Tribunal, the investors had no say in the day to day control of the scheme or over their investments. In view of the Tribunal, it is beyond any doubt that complete control is conferred over the day to day management and operation of the scheme on the Appellant-Company and not the investors.


Thus the Tribunal upheld the SEBI order, completely in sync with the thought of SEBI that it was felt that the defaulters may dispose of or transfer or alienate the assets with a view to obstruct or delay the recovery proceedings, which needed to be prevented immediately. The key take away from this judgement is that each component of a CIS Scheme was analyzed by the Tribunal, thereby bringing within SEBI’s jurisdiction and power to control any such holiday schemes. In my humble opinion,the features of the schemes offered by the Appellants, as discussed in the preceding paragraphs, shows that the activity of fund mobilization by them under its scheme(s)/ plan(s) with a resultant promise of returns, prima facie falls within the ambit of ‘collective investment scheme’ as defined under section 11AA Act. Therefore, agreeing with the Hon’ble Tribunal’s view, I conclude that the resultant activities of the Appellant did fall within the ambit of a CIS as defined under the Act.


[2]11AA. Collective investment scheme(1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) 2[or sub-section (2A)] shall be a collective investment scheme.

Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme.]

(2) Any scheme or arrangement made or offered by any 3[person] under which,-

(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;

(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;

(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 arrangement.

(2A) Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act.]

(3) Notwithstanding anything contained in sub-section (2) 2[or sub-section (2A)], any scheme or arrangement-

(i) made or offered by a co-operative society registered under the Cooperative 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 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-I of the Reserve Bank of India Act, 1934 (2 of 1934);

(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’ 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);

(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);

(vii) falling within the meaning of chit business as 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,

(ix) such other scheme or arrangement which the Central Government may, in consultation with the Board, notify, shall not be collective investment scheme.

[3]Section 12 1(B)“No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations: 

Provided that any person sponsoring or causing to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment schemes operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of sub-section (2) of section 30.]  

[Explanation- For the removal of doubts, it is hereby declared that, for purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer.]”

[4]Regulation 3 of the CIS Regulations “No person other than a Collective Investment Management Company which has obtained a certificate under these regulations shall carry on or sponsor or launch a collective investment scheme.”

[5],last accessed 14th June, 2017

[6]The definition of the term ‘surrender value’ as given in the Appellant company’s terms and conditions is as under: “Surrender Value: shall mean the estimated value of a room night as computed by the Company at various intervals of time as the company may in its absolute discretion, decide on with reference to the prevailing demand/supply conditions in the market price as well as the competition in the hotel industry. Surrender value payment is net off all the administration charges that shall be applicable from time to time. The decision of the company with respect to the surrender value shall be final.” 

[7]Regulation 73 of the CIS Regulations“(1) An existing collective investment scheme which: (a) has failed to make an application for registration to the Board; or  (b) has not been granted provisional registration by the Board; or (c) having obtained provisional registration fails to comply with the provisions of regulation 71; shall wind up the existing collective investment scheme. 

 (2) The existing Collective Investment Scheme to be wound up under sub-regulation (1) shall send an information memorandum to the investors who have subscribed to the collective investment schemes, within two months from the date of receipt of intimation from the Board, detailing the state of affairs of the collective investment scheme, the amount repayable to each investor and the manner in which such amount is determined. 

 (3) The information memorandum referred to in subregulation (2) shall be dated and signed by all the directors of the collective investment scheme. 

 (4) The Board may specify such other disclosures to be made in the information memorandum, as it deems fit. 

 (5) The information memorandum shall be sent to the investors within one week from the date of the information memorandum. 

 (6) The information memorandum shall explicitly state that investors desirous of continuing with the collective investment scheme shall have to give a positive consent within one month from the date of the information memorandum to continue with the collective investment scheme.   (7) The investors who give positive consent under subregulation (6), shall continue with the collective investment scheme at their risk and responsibility :

 Provided that if the positive consent to continue with the collective investment scheme, is received from only twentyfive per cent or less of the total number of existing investors, the collective investment scheme shall be wound up. 

 (8) The payment to the investors, shall be made within three months of the date of the information memorandum. 

 (9) On completion of the winding up, the existing collective investment scheme shall file with the Board such reports, as may be specified by the Board.”


[8], last accessed 11th June, 2017

“52……. 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 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…. …. In 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 11AA of the SEBI Act was perfectly justified and hence, we do not find any flaw in the said conclusion. ”

[9], last accessed 11th June, 2017

“19……………The Appellants submit that in the present case the land is first purchased by the Appellants with its own funds. With respect to this submission, we state that the concept of CIS as envisaged by the legislature does not take into account any such variable. The fact stands that the money collected from the customers of the Appellants ostensibly for the purpose of purchase of land is pooled together and then utilized for the purposes of the scheme, whether to buy more land or to develop the land already in possession of the Appellants. In this regard, it is noteworthy that the Appellants first seek contributions from members of the public based on the standard agreement and the application form. On receiving contributions, they issue certificates confirming the receipt of the amount of money paid by the customers to the Appellants. This money, in turn, is utilized by the Appellants to further buy land after pooling the investments of all customers. This leads to the conclusion that there is in fact a scheme in place which involves pooling of the investments of the Appellants”. 

[10], last accessed 11th June, 2017

“19)    There is no credible material placed by the petitioner to convince the court that all the members who have subscribed had the dominant intention of enjoying the stay at the hotels. Only on the basis of the format of an application for subscription of membership it cannot be conclusively held that the scheme is only for enjoying the stay in the hotels. It could have been held so if there was no alternative term of refund of deposit with a lucrative rate of 17.6 percent per annum. This aspect of the matter requires a detailed enquiry about the names and identities of all the subscribers, their social status, their annual income, etc to find out how many persons have genuinely subscribed for membership for availing the benefit of stay in the hotel. On the basis of incoherent material produced by the petitioner like format of membership it is not possible to agree with the contention that the scheme is only a holiday management scheme and does not come under the purview of the collective investment scheme more so because of the fact that there is a term in the contract of refund of money with a lucrative rates of interest. If the interest on deposit was the alluring factor on the part of the investors then the case would squarely fall under subclause (ii) of sub-section 11AA of the SEBI Act….”.

[11], last accessed 11th June, 2017

[12] Clause 16 of the said Brochure

by – Swatilekha Chakraborty (

1 reply
  1. Manjunatha
    Manjunatha says:


    I invested more than 2 lakhs in PCL. Agents are not helping us. Is there any other approach? Please let us know.



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