New Delhi, Oct. 10 -- The Securities and Exchange Board of India has barred four directors of Citrus Check Inns Ltd, a hospitality company part of the Mirah Group, from the capital markets for running a ponzi scheme that defrauded thousands of investors.
SEBI's October 9 order comes a decade after it passed interim and confirmatory orders in 2015, which barred the company and its directors from collecting new funds, onboarding new investors and disposing off any assets or properties obtained through funds raised through its schemes.
Over the past decade, the case has travelled through the Securities Appellate Tribunal (SAT), the National Company Law Tribunal (NCLT) and even the Supreme Court (see The Citrus Timeline).
Essentially, Citrus was running an illegal collective investment scheme masquerading as a holiday-plan service and managed to raise more than Rs 3,000 crore between 2011-12 and 2014-15.
How the saga unfolded
In 2014, SEBI received a complaint that Citrus was running a ponzi scheme and that it was refusing to refund money.
On the face of it, Citrus was running a holiday-planning service. People were invited to subscribe to various plans, which would earn them points. These points could then be either exchanged for a stay in one of the 19 hotels or resorts owned or managed by the company or could be redeemed for money. Each point translated to Rs 100.
All this seemed above board. The tricky bit was that the company offered holiday bonus points to the subscribers based on the plan they were under and their investment holding period. For instance, a person who paid Rs 36,000 and didn't take a holiday for three years would earn 360 points and get an additional 180 points as bonus. This would result in 540 points, which could then be redeemed for Rs 54,000.
"These holiday bonus points accrued over the plan period represent the returns generated over the plan period," according to the order signed by SEBI whole-time member Ananth Narayan, whose term ended on Thursday.
The returns promised for subscribing to various plans ranged between 16.7% and 191.2% based on the plan period, which translated to 5.55% to 21.24% per annum. The company raised as much as Rs 3,036.99 crore over FY12-FY15 from 25 plans. Of this, it raised Rs 2,722 crore from just seven plans.
The SEBI order noted that Citrus had nearly as many commission agents (12,55,548) as customers (12,81,542). The agents were paid up to 24.8% of the amount they mobilised. Moreover, the company's promotional expenses ranged between 17.57% and 36.72% of the total expenses over the four years.
The regulator decided that Citrus was running an illegal collective investment scheme, since it met the four criteria that defines such a scheme: pooling funds from people for a common scheme/arrangement; management of investment and assets on behalf of the contributors; investors not having control over the management or operation of the scheme/arrangement; and contributions made by investors with a view to receive profits, income, produce or property.
As the regulator noted, the average utilisation of holiday facilities under the seven plans (which accounted for most of the funds mobilised) was just 5.72% and that less than 0.5% of the total amount collected was used under these plans. "This clearly shows that the contributions were made with a view to receive the profits/ returns rather than availing the holiday facilities," the order noted.
Meanwhile, Citrus was taking the money into its accounts and the 2015 SEBI order noted that more than Rs 557 crores were routed to related parties from the company.
Through the latest order, SEBI restrained the company and its directors-Omprakash Basantlal Goenka, Prakash Ganpat Utekar, Venkatraman Natrajan and Narayan Shivram Kotnis-from accessing the securities market and alienating assets till all refunds to investors are made.
The four people were also directors of Royal Twinkle, another Mirah Group company that was also running an illegal investment scheme under the guise of holiday-membership products. In 2015, SEBI had barred the directors from the market until the refund for that scheme was completed. But the restraint had been shortened by SAT and the Supreme Court had dismissed SEBI's appeal against SAT's ruling. Therefore, the directors could still access the market till this final order on Citrus.
Published by HT Digital Content Services with permission from VC Circle.