Sunday, 28 December 2014

A bullet point analysis of SEBI's MVL decision under SEBI CIS regulations

Following is a bullet point analysis of the recent SEBI decision in the matter of MVL Limited under the SEBI CIS Regulations, holding that MVL was guilty of operating a collective investment scheme without adequate registrations as per the applicable regulations and Section 11AA of the SEBI Act. This decision is of high importance for real estate developers, investors in real estate sector and also for public at large.
Specific issues identified with the documentation

1.   Application form

a.    Plans are tentative and subject to change;
b.   No specific unit identified;
c.    No option for buyback/lease by the allottee.

2.   Assured return agreement

a.    No specific unit identified either by unit number, floor or otherwise.

3.   Other issues

a.    Layout, plans, maps and charts not part of the agreements;
b.   MVL shall manage the maintenance and upkeep;
c.    Search for competent tenant for first lease by MVL only;
d.   Buy back was found to be not an option but was applicable for all allottees;
e.    High returns promised of up to 96%;

Condition-wise analysis

1.   Condition 1:

The contributions, or payments made by the investors, by whatever name called, are pooled and utilized solely for the purposes of the scheme or arrangement

                                         i.    No unit identified, location not identified;
                                       ii.    Floor not specified;
                                      iii.    Manner of possession, sale etc. by allottee not specified;
                                      iv.    Total project cost was Rs. 216 crores and loan taken was 128 crores.
                         Therefore, the balance was funded by the monies collected from allottees .

Therefore, first condition satisfied, since money taken was used for the scheme.

2.   Condition 2:

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

                                         i.    MVL offers assured return;
                                       ii.    No unit identified;
                                      iii.    Allottees invested for profit only.

Therefore, second condition satisfied

3.   Condition 3:

The property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

                                         i.    MVL manages and carries out construction;
                                       ii.    MVL shall manage maintenance;
                                      iii.    The possession will be handed over only after sale deed.

Therefore, third condition satisfied

4.   Condition 4:

The investors do not have day to day control over the management and operation of the scheme or arrangement

                                         i.    Construction managed by MVL;
                                       ii.    Allottee cannot lease etc. Without consent of MVL.

Therefore, fourth condition satisfied

Other Important Factors

1.      The projects were uniformly priced at different locations and floors which is not possible in a real estate transaction;

2.      MVL continuously defaulted in making assured return payments to allottees and even suggested them to cancel the allotment. SEBI received a number of complaints.

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