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How PACL found itself grounded

Sebi has asked the Jaipur-based company to return Rs 49,100 crore to investors. The author looks at the twists and turns of the market regulator's investigation

N Sundaresha Subramanian 

Nirmal Singh Bhangoo

Marriet Pinto is a resident of Mangalore in coastal Karnataka. She joined one of the schemes of PACL, formerly Pearl Agrotech Corporation, in 2005. In December 2007, she bought 1,001 square yards of land in an undisclosed location in Rajasthan for Rs 15,000 from Chailbihari, a resident of Allahabad, Uttar Pradesh. Both Pinto and Chailbihari were not present in Delhi where the sale deed was executed. Suresh Sinha, a Noida-based senior assistant of PACL, held Pinto's power of attorney, while one Manoj Kumar signed the deal on behalf of Chailbihari. Kumar also helped Rajina Begam of Perambalur, Tamil Nadu, buy 0.084 hectare of land in Madhya Pradesh for Rs 15,000.

Pinto and Begam are among the 19,284 customers who got a piece of land registered under their name. Apart from these, has over 12 million customers to whom land was allotted but no sale deed was executed. According to its statement to the Securities and Exchange Board of India (Sebi) on August 11, it had another 46.3 million customers to whom land was yet to be allotted. Eleven days later, whole-time Member Prashant Saran asked to wind up operations and repay investors in full within a period of three months. The amount to be repaid is Rs 49,100 crore - more than double the Rs 24,000-crore that the Sahara group has to give back to its investors.

The company did not respond to the questionnaires emailed to it by Business Standard. However, after news had broken out about the investigation, the group CEO, Jyoti Narayan, had told the media in July that the firm was a real estate developer and had never indulged in any collective investment scheme to double or triple the money deposited by investors. And, soon after the group was asked to refund the money to investors, PACL officials, speaking to television channels, said the company planned to move the against the order. They added that the interests of investors would not be jeopardised.

PACL offered customers two major plans to purchase a piece of land: a cash-down payment plan and an installment payment plan. PACL says it gets the customers to invest in land in undeveloped areas. The company then 'develops' this land. As the value of the developed land goes up, PACL helps the customer to own it. What if the customer does not want possession but wants to exit with gains? For them, PACL offers the 'opt-out' option. This option, which is exercised by a majority of PACL customers, has long convinced regulators that this is nothing but a money circulation scheme.

On perusal of the case of Agrahari Kusumlata (out of a sample of 500 customers), noted that the customer was not made aware of the location of the plot till the stage of issuing of the allotment letter. In Kusumlata's case, it was allotted after four years. That is not all. It was also seen that even after the allotment of land, PACL reserved the right to change the location of the land. The "letter of allotment of plot" also stated that the original title deeds would be retained by the custodial services company of PACL and that the customer would only get a certified copy of the sale deed.

Another important clause in the letter said that PACL reserved the right to change the location of the land and allot another land at a location different from what was given in the first instance. "This kind of right is never seen in a pure real estate transaction. The change of location unilaterally by PACL without referring such proposal to the customer could be seen as a means to force a customer to 'opt out' and move away with the returns promised by it, rather than allowing a customer to hold on to the site for which he makes the payment," Saran observed in his order.

One complicated aspect of the case is the land holdings it claims to have. It has purchased over 303,000 acres of land between 2005-06 and 2011-12. However, only 17 per cent, or about 53,890 acres, was bought in its own name. An overwhelming 70 per cent, or 214,000 acres, is held through general power of attorney, and the remaining through associate and subsidiaries. PACL in its reply to Sebi has disclosed these associate are controlled by its friends and those of its management.

In many cases, the associate are floated by PACL agents who have grown big enough to handle the business on their own. According to people familiar with the operations, PACL's 3.3 million agents are arranged in a hierarchy of 12 ranks based on their customer base. A Rank-12 agent, the highest level, can have anywhere between 60,000 and 70,000 agents under him. These big agents are allowed to own the land, corresponding to the money they collect. PACL pays its agents handsomely, Sebi found: out of the money collected, nearly 20 per cent goes to paying agents. Agents have received over Rs 8,500 crore in commissions from PACL over the years, according to the market regulator. This loose-federation model of operation has led to much litigation as some rogue agents have sold off the land and pocketed the money. Disputes running into several thousand crores have been recorded in the balance sheet of PACL.

Is the land bank of PACL enough to pay off the customers? Though PACL has developed commercial and residential properties in cities like Delhi, Chandigarh and Ludhiana, a large portion of its land bank seems to be in undeveloped stretches such as the desert lands along the India-Pakistan border in Rajasthan. In a proposal submitted to Sebi on a five-year refund plan, the company said it had land worth Rs 11,706.96 crore (agricultural land of Rs 7,322.11 crore and commercial land of Rs 4,384.84 crore). Of this, it has not only to meet the claims of the 46.3 million customers who have deposited Rs 29,420 crore with it but also to satisfy the 12.2 million customers to whom land has been allotted but sale deeds have not been executed. "PACL has not given the complete details of the land it claims to hold. In view of this, the proposal does not appear to be serious and reasonable," the Sebi order noted.

For people like Pinto who actually got land allotted, albeit in places they have never been to, Sebi found various gaps in the claims. The regulator pointed out that the date of purchase of land by sellers and the date of sale deed were too close for PACL to have undertaken any serious development. "For example, in the case of Pinto, the land was purchased on June 18, 2007, and was transferred in the name of the customer on December 08, 2007 - just after six months. This shows that PACL pools the money for the purchase of land and does not do any development of the land," Saran said in his August 22 order.

PACL’S 15-YEAR JOURNEY
  • 1996: PACL registered as Gurwant Agrotech
  • October 1999: Sebi notifies Collective Investment Schemes (CIS) regulations
  • November, December 1999: Sebi issues letters directing PACL to close unregistered CIS
  • 2003: Rajasthan High Court holds that PACL's schemes do not possess CIS characteristics, hence cannot be called CIS
  • February 26, 2013: Supreme Court sets aside Rajasthan High Court order
  • March- May, 2013: Sebi seeks and acquires all details of PACL’s operations, people and details since inception
  • June 14, 2013: Sebi issues show cause notice to PACL and 10 directors, past and present, including Nirmal Singh Bhangoo
  • June 21, 2013: PACL seeks details of 34 complainants mentioned in the show cause notice
  • July 17, 2013: PACL Customer Association (PCA) seeks permission to participate in the proceedings, asks for copies of show cause notices
  • September 17, 2013: Sebi allows inspection of documents by PACL
  • September 27, 2013: Sebi offers PACL a personal hearing, but Bhangoo seeks adjournment by a month on medical grounds. Others say documents inspected are voluminous and required more time. Sebi agrees for personal hearing on October 18
  • October 1 & 3, 2013: PACL’s law firm, Parekh & Co, requests adjournment citing non-availability of senior advocate. Hearing shifted to November 6.
  • October 23, 2013: PCA informs Sebi that it has moved SC seeking directions to Sebi to include it as a party to the proceedings
  • November 6, 2013: PACL’s directors Tarlochan Singh, Sukhdev Singh, Gurmeet Singh, Subrata Bhattacharya and Bhangoo appear before Sebi through their representatives. Matter adjourned to December 20, 23 and 24
  • November 20, 2013: Personal hearing fixed on February 4 to 6
  • February 4, 2014: Sebi asks PACL to submit a sample of complete case files of 500 customers, randomly selected from the list of customers submitted by PACL. PACL seeks two months for submission
  • April 4, 2014: PACL submits the details. Next hearing fixed for May 15
  • May 15, 2014: Representatives of PACL, Tarlochan Singh, Sukhdev Singh, Bhangoo, Gurmeet Singh, Bhattacharya and PCA make submissions. Matter posted for June 23
  • June 23, 2014: PACL seeks more time to submit a proposal for refund
  • July 12, 2014: PACL submits draft proposal seeking five years to refund customers’ advances
  • August 11, 2014: Final proposal for repayment submitted
  • August 22, 2014: Sebi orders PACL to stop raising funds and refund advances in three months

Also, Pinto's 1,001 square-yard plot is part of a larger piece of land measuring 140 bighas, while Begam's 0.084 hectare was part of a 5.016 hectare land parcel. PACL thus sold only a portion of land to its customers out of one huge piece of land which bears a common khasra/ survey number. "In the schedule of the property, only boundary details with serial number of the adjoining plots have been given. The schedule does not specifically identify the plot given to the customers. The sale deeds do not have the diagram depicting the demarcation of the plots sold/map for the ease of identification of the plot. The above findings are in contrast with the submission of PACL that the plots are adequately described in the sale deeds," Saran noted.

Though Sebi has analysed the case threadbare, the details took a while coming: by any standard, 15 years is a long time. In 1998, Sebi first cracked down on collective investment schemes including PACL and its sister concern, PGF, both promoted by PGF, the older and bigger of the two, succumbed as the Punjab & Haryana High Court upheld the Sebi order. However, PACL, which was based in Jaipur, survived as it got a reprieve from the Rajasthan High Court which ruled against the Sebi order. PACL was able to convince the Rajasthan High Court that it was not running a collective investment scheme. Since then it has been a long haul for Sebi, which had been trying to pin it down.

Ironically, PACL grew in leaps and bounds after the Sebi crackdown, which is said to have handed it a monopoly as most other such schemes did not survive. Sebi's campaign got an unexpected help from public-interest litigation initiated by some citizens of Gwalior led by Dharmvir Singh in 2011. They complained about numerous schemes that had been floated with dubious promises and were collecting money from people. In March 2011, the court ordered the government to submit an action taken report. This triggered a series of orders and raids ordered by the collector of Gwalior in May-June 2011. Several offices, including those of PACL and its associates, were raided and sealed. This brought PACL in the media's focus.

The real size and scale of the company's operations came to light when some reports suggested that its land bank was bigger than the city of Bangalore. These developments gave fresh ammunition for Sebi to knock the doors of the Supreme Court. In February 2013, Sebi finally won an appeal which gave it a go ahead to try PACL under the collective investment schemes regulations. This triggered an 18-month long tug-of-war between the company and the regulator which included repeated delays to requests of personal hearings, inspection of Sebi records, change of dates, non-availability of lawyers and some witnesses falling ill. Sebi allowed the company and its directors all these opportunities before passing its August 22 order.

By the looks of it, another long fight awaits the regulator and investors like Pinto as PACL is determined to explore at legal options first at the and then the Supreme Court.

First Published: Sat, September 06 2014. 20:37 IST
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