Retrospective application of segregated portfolio circulars rejected for a pre-circular credit event in a mutual fund scheme.

SEBI circulars on segregated portfolios in mutual fund schemes were held not to operate retrospectively on a credit event that occurred before their issuance. The creation of a segregated portfolio was treated as an optional mechanism for the asset management company, not a mandatory direction enforceable for past events. The reopening of the scheme and distribution of recoveries to existing investors were supported by approvals, disclosures, and prevailing market practice, so no interference was warranted with the complaint disposal.

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Issues: Whether the SEBI circulars on creation of segregated portfolio in mutual fund schemes could be applied retrospectively to a credit event that occurred before their issuance, and whether the reopening of the scheme and distribution of recoveries to current investors called for interference.

Analysis: The complaint and review were examined by SEBI on the basis of the asset management company's action taken report and the relevant regulatory framework. The credit event involving IL & FS had occurred before the circulars dated 28.12.2018 and 07.11.2019. The circulars were held not to have retrospective operation in the facts of the case. The creation of a segregated portfolio was treated as an optional and discretionary mechanism for the asset management company, not a mandatory direction capable of being enforced for past events. The reopening of the scheme had also been supported by necessary approvals and disclosures, and the distribution practice followed by the fund was consistent with prevailing market practice.

Conclusion: The challenge based on retrospective application of the circulars failed, and no interference was warranted with the disposal of the complaint.

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