SEBI Tightening Noose on REAL ESTATE Companies

OVERVIEW: Raising Unregulated Funds from Public

Recently, SEBI vide its interim order(s), has directed the companies engaged in mobilizing funds from public in unregulated manner, namely Garima Real Estate & Allied Limited (“GREAL”), Raghav Capital & Infrastructures Limited (“RCIL”), M/s Vee Realties India Limited (“VRIL”) & Arise Bhoomi Developers Limited (“ABDL”) (collectively called as “The Companies”) to, not to collect any fresh money from investors, not to launch any new schemes and has injuncted the companies from alienating or disposing any properties and assets and funds raised from public.

The Real Estate Industry plays significant role in growth of any economy. In India, this sector despite being of key importance has always faced financial crunches. To cover up finance needs, various new methodologies are adapted and tested by the Real Estate sector to meet the business requirements. Of late this sector has evidenced a large number of investment schemes floated by real estate companies for accessing public money and offering returns to the investors either in cash or kind (i.e. by paying an adjustable amount or offering share in the land/ project). Now this pooling of public money- Collective Investment Schemes (“CIS”) by real estate entities and not so real estate entities is being under scrutiny of Regulators like SEBI and few of these recent orders signifies that the regulators are determined to:-

SEBI ORDERS: Brief about Companies and their business model

Enquiry made by SEBI revealed that the companies were engaged in business of buying /selling and developing of real estate and offered various unregulated & unstructured schemes/plans soliciting funds from general public offering land /plots/development rights/units in the projects/incentives. It is found that the companies launched various investment schemes providing payment schedules and further categorized them into “One time / Daily /Monthly instalments scheme” for time periods ranging from 48 months to 15 years, these plans differ on the basis of monetary payment as per the plan option. The said companies offered return of 15-20% on such investments. Brief example of fund raising mechanism adopted by these companies is as following: 

For example, if the "applicant"/investor is investing in "One time Installment plan" for an amount of Rs 12,500/- for a plot size 25 yards, he/she will get the Income/return in the form of "adjusted amount" amounting to Rs 25,000/- after 5years and 11 months. The "adjusted amount" will further increase with the passage of time and RS 87,500/- will be given to the investor at the completion of 15 years. 

Through these instalment plans the companies offered investments options to public at as less as Rs. 110 Further, the companies appointed agents and who brought investors and received very lucrative commission of as high as 48% on the infused amount. While enquiring SEBI found that neither the application form issued by the Companies for raising funds, nor the agreement entered between the investor and the said companies contained any description(s) of the property/projects/avenue where the funds will be deployed. Hence, it is not clear that where the funds were exactly deployed.

Activities in nature of - Unregistered COLLECTIVE INVESTMENT SCHEMES (“CIS”)

The activity of mobilizing funds by these companies under the said schemes/plans when considered in light of peculiar characteristics and features of such schemes/plans as discussed in the preceding paragraphs, prima facie satisfied all conditions specified in section 11AA(2) of the SEBI Act i.e. Collective Investment Schemes.
  • The companies collected funds from public under various plans and schemes – Investment from the general public was invited by way of floating schemes for availing lands/plots/projects; and
  • The contributions/funds so collected are pooled and utilized for the purpose of the offered schemes – The brochure(s) and application form(s) of the companies stated that investment will be made in the lands/plots/projects, but nowhere contained any information of the land/plot/project where the funds will be deployed, so it is inferred that the funds initially collected from the applicants/investors, were pooled and utilized for the purpose of scheme.
  • The investors made contributions towards such schemes with a view to receive income /return thereon - The companies launched schemes offering adjusted amount on the investment(s) and it was also observed by the SEBI that the adjusted amount offered to investors was profits/income from such scheme ;and
  • None of the documents circulated by these companies contained any description or demarcation of property/projects/avenues where collected money is required to be deployed - Neither the agreement nor the application form for subscription to the scheme contained any details or specification of the land/plots/projects to be allotted to the applicants; and 
  • It is concluded that the property, contribution or investment forming part of the schemes/plans are managed by the companies and the investors do not have any day to day control over the management of the schemes/plans –Covenants of the agreement and application form states that the investors do not had a say in the management of the scheme, also the commercials of the agreement provided right to the companies to make alterations in the land/plots/projects, so the abovesaid portrays that the decision making power and management of scheme was vested in promoters and they were the persons managing the scheme on behalf of the investors.


In the present cases under discussion, SEBI prima-facie found that the Companies are acting as an entity mobilizing the funds in the nature of unregistered-CIS and falling under Ponzi-schemes. To curb the growth of ponzi schemes Government agencies are dedicatedly probing against the unregulated and unstructured fund raising schemes having effect of duping investors.

These steps of regulator shall not be taken as deterrent to the development of businesses because the intention of SEBI is to immune the investors from the unsystematic risks created by ponzi schemes which inflicts severe damages to the confidence of investors, thereby in-turn obstructing the flow of capital in industry and ultimately hampering the development of economy on whole.

Options made available by SEBI for structured Fund raising and meeting Financial Needs:

SEBI over the period of time has brought various regulations for facilitating structured channelization of money in the economy in structured manner and opened new avenues for corporates and investors.

Alternative Investment Fund: SEBI notified Alternative Investment Fund (AIF) in May, 2012, an all-in regulation that covers private collective investment devices, with a view to monitor unregulated funds, encourage the formation of new capital and investor protection thus increasing the market efficiency. The Funds covering not only Venture Funds but also allows other private equity players to pool funds and utilize it as per their independent Investment Objectives. The Regulations enables to collect money from HNIs on private placement and relatively have lesser regulatory hassles and compliances.


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