Friday, November 29, 2013

Whether Gold purchase schemes illegal? Bombay HC rejects petition to direct SEBI to take action

Recently, Bombay High Court rejected a PIL seeking action by SEBI in respect of gold purchase schemes (Sandeep Agrawal vs. SEBI [2013] 39 139 (Bom.)). In a brief decision of less than half a page, the Court essentially held that contracts are private commercial contracts and do not require interference by SEBI. The Court observed, “If any shop owner is running such a scheme and the consumers are voluntarily taking part in such a scheme, it is purely a commercial transaction between a businessman and a consumer”.

It is submitted that this decision requires reconsideration. It also appears that the case was not argued well, since the Court had observed, “If the petitioner so desires to bring it in the nature of public ambit the least that is expected is to point out as to under what statutory provisions or the rules framed thereunder the said scheme is prohibited. Nothing is placed on record in that regard.”.

Many of the gold purchase schemes do prima facie appear to be collective investment schemes (CIS). While some recent newspaper reports explain what they are (see here and here), the essentials of some common schemes can be described as under.

The entity that sets up such scheme is often a gold-jewellery shop. Customers are invited to pay a certain sum in equal instalments for a period of time. At the end of the period, a sum, often called “bonus” is added to the amount accumulated. The customer is then given gold ornaments at the ruling market price for such total amount.

The terms may vary. The period may be longer or shorter. The entity may give some flexibility regarding gold price, either in terms of a fixed selling price or an assured appreciation or even some concession in the making charges of the jewellery.

It is difficult to see how most of such schemes are not CISs. Section 11AA of the SEBI Act, which defines CISs widely, seems to be clearly applicable and the conditions specified therein are attracted.

While there are many reputed names involved in such schemes, clearly there is no regulation as of now and SEBI seems to be taking no action against them. Such schemes are ripe for misuse, assuming SEBI takes a view that the provisions relating to CIS do not apply.

An entity other than a gold-jewellery shop may set up such a scheme. The Scheme may be for a long period of, say, three to five years. There is no control over where the amounts raised would be applied – even existing schemes do not provide for assurance that the amounts raised would be used to buy gold which would be earmarked for the customer. The entity may offer a higher “bonus” (which really seems to be disguised interest) to attract customers. It is easy to provide a cash alternative at time of maturity in form of ruling price of gold, which in any case can be assured, apart from “bonus”.

It is arguable that each case would have to be decided on facts and perhaps some of such schemes may not attract the provisions. But regardless of that, the risks of such schemes are too many to be ignored. In the backdrop of recent scams in West Bengal and elsewhere, it is surprising that these schemes have not received closer attention. Ideally, and at the very least, SEBI should have assured the Court that it is looking into the schemes, more so since it was made a party to the petition.


Anonymous said...

Sorry, you said that "the entity which sets up this is usually a gold jewelery shop" while later going on to state that "An entity other than a gold-jewellery shop may set up such a scheme". What is the exact position?

CA Jayant Thakur said...


The point is that usually it is seen that such gold-savings scheme are set up by gold-jewellery shops (as the news reports cited suggest). But this does not mean there is a law that requires only gold-jewellery shops to set up such a scheme. Any other entity may too set up such a scheme. The facts of each case would finally determine whether it is a deposit-raising scheme in disguise, whether it requires registration as CIS or otherwise.

The Court rejected the petition outright and has not gone into detailed specifics of law or facts.

CA Jayant Thakur said...
This comment has been removed by the author.
Anonymous said...

These schemes are not CIS because it is not necessary that, they pool the funds received from the customers.

CA Jayant Thakur said...


The facts of each scheme would of course have to be examined to determine whether it is CIS or not.

However, generally, it appears that the monies would be pooled and most likely invested/used somewhere, considering that a "bonus" is added at end of the period of deposits.