SEBI prohibits using LLP structures to make collective investments

SEBI has recently issued an interim order in respect of a platform which was offering various investment plans to the public claiming to invest the funds in agricultural projects to generate tax-free assured returns for its investors in the agricultural sector.

The modus operandi of the platform involved an investor who was desirous to invest through the platform was first made a partner in a Limited Liability Partnership (LLP) and the amount invested was treated as capital contribution to the LLP which would in turn make the investments. Further, the platform had created several such entities for the purpose of undertaking such investments.

SEBI concluded that such an arrangement was an unregistered Collective Investment Scheme (CIS) since it met the four conditions for a CIS provided in Section 11AA(2) of the SEBI Act. The four conditions are as under:

Condition 1: The contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement.

The SEBI Order held that the act of attracting investors to join the LLP as Partners and thereafter the contribution being made by such partners being invested in agricultural projects to generate profit for the partners satisfied the condition of pooling of contributions.

Condition 2: The contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits from such scheme or arrangement.

Based on the profit / loss sharing terms of the LLP Agreements and the platform / social media pages assuring guaranteed profits, SEBI concluded that second condition was also fulfilled.

Condition 3: The property, contribution or investment forming part of scheme, is managed on behalf of the investors; and

Condition 4: The investors do not have day-to-day control over the management and operation of the scheme.

The SEBI Order noted that the LLPs conferred several rights on the Designated Partners (different from the investors being inducted as partners) who were in charge of the business and management of the LLPs. The DPs could appoint partners and also operate bank accounts of the LLP. Further, the partners were not informed of the locations of the farms. Hence, SEBI concludes that the platform satisfied condition 3 and condition 4 to be a CIS.

The SEBI Order further held that such illegal mobilization of funds to was also a fraudulent practice under the PFUTP Regulations.

SEBI further concluded that the platform had mobilized close to INR 184 crore and such a magnitude justified issuance of interim directions.

A copy of the SEBI Order is enclosed herewith.

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