2025 (5) TMI 1622 - AT - SEBI

Mutual fund scheme reopening after IL&FS defaults upheld, recoveries distributed to existing investors only

Rajeshkumar Champaklal Gandhi Versus Securities and Exchange Board of India and Motilal Oswal Asset Management Company Limited, Mumbai

The Securities Appellate Tribunal at Mumbai dismissed an appeal challenging the reopening of a mutual fund scheme following defaults by IL&FS group. ... Reopening of the mutual fund scheme - default by IL & FS group as mala fide or prejudicial to the interests of the existing investors who had suffered losses - HELD THAT:- We note that in reply to the review application the impugned order has been issued after due consideration by the Respondent No. 1. We take note of paragraph 21 of the affidavit in reply filed by the Respondent No. 1 wherein it has been stated that the impugned order has been issued after following the due procedure and that “The reopening of the said scheme was at the direction of the trustees of the AMC and does not amount to contravention of any provisions of the SEBI Act, the Mutual Fund Regulations or the circular”. Prayer made by the Appellant to review the act of reopening of scheme by Respondent No. 2 and to issue instructions to Respondent No. 2 to distribute the recoveries made from IL & FS to old and existing investors - As we note that Respondent No. 1, SEBI, as the Regulator for Mutual Fund Industry has already examined the issue. SEBI has concluded that the reopening of the scheme was supported by necessary approvals and disclosures ensuring investor protection within the ambit of applicable laws and circulars. In this instance, the default by IL & FS occurred before the issue of SEBI circulars dated December 18, 2018 and November 7, 2019 on creation of a segregated portfolio in Mutual Fund scheme in the event of a credit event. Therefore, the circulars cannot be made applicable in the present matter. The creation of a segregated portfolio is purely optional and discretionary for the AMC. Thus, any proceeds realized are to be distributed proportionately amongst all existing investors at the time of realization. The Appellant has not produced any regulatory instruction / circular to the contrary. We note that the scheme was reopened in January 2021 and new investors have since invested in the scheme leading to increase in the NAV and that the reopening of the scheme and allowing new investors to come in, is as per the market practices. Accordingly, we see no grounds to set aside the impugned order Issues Presented and Considered:The core legal questions considered by the Tribunal include:Whether the reopening of the mutual fund scheme by the Asset Management Company (AMC) after suspension due to default by IL & FS group was mala fide or prejudicial to the interests of the existing investors who had suffered losses.The applicability and retrospective effect of SEBI Circulars dated December 28, 2018 and November 7, 2019 concerning the creation of segregated portfolios in mutual fund schemes following credit events.The correctness of the regulatory authority's (SEBI's) disposal of the complaint filed by the appellant on the SCORES platform, including the adequacy of the Action Taken Report (ATR) filed by the AMC and the subsequent review order.Whether the recoveries made from IL & FS group should be distributed exclusively to the old investors existing at the time of suspension or proportionately to all investors existing at the time of realization of proceeds, including new investors admitted after reopening.The extent of SEBI's regulatory powers and the interpretation of its circulars in the context of credit events predating such circulars.Issue-wise Detailed Analysis:1. Mala fide Reopening of the Scheme and Protection of Existing Investors' InterestsLegal Framework and Precedents: The mutual fund regulations and SEBI's supervisory role mandate protection of investors' interests, particularly in credit events affecting scheme NAV and investor returns. The AMC's fiduciary duty includes safeguarding existing investors from prejudice arising from scheme management decisions.Court's Interpretation and Reasoning: The Tribunal examined whether the reopening of the scheme in January 2021 was executed with mala fide intent or was prejudicial to existing investors. The AMC had suspended the scheme to protect existing investors after IL & FS's default and reopened it only after a resolution plan was sanctioned and recoveries were expected.Key Evidence and Findings: The reopening was supported by board approvals, public disclosures, and was consistent with market practices. The appellant's contention that reopening benefitted new investors at the cost of old investors was considered but not substantiated by regulatory provisions or evidence of bad faith.Application of Law to Facts: The Tribunal found that the reopening was not mala fide but aligned with regulatory norms and investor protection principles. The AMC's actions were within the scope of its discretion and regulatory compliance.Treatment of Competing Arguments: The appellant argued that reopening was inequitable and that the AMC acted in bad faith. The respondents countered that reopening was necessary to revive the scheme and benefit all investors. The Tribunal accepted the latter, noting the absence of evidence of mala fide intent.Conclusion: The reopening of the scheme was not mala fide and did not violate investor protection norms.2. Applicability and Retrospective Effect of SEBI Circulars on Segregated PortfoliosLegal Framework and Precedents: SEBI Circulars dated December 28, 2018 and November 7, 2019 provide guidelines for creation of segregated portfolios in mutual fund schemes in the event of credit events. These circulars are administrative instructions issued under SEBI's regulatory powers.Court's Interpretation and Reasoning: The Tribunal analyzed whether these circulars apply retrospectively to credit events (IL & FS default) that occurred prior to their issuance. The circulars explicitly allow creation of segregated portfolios at the AMC's discretion but do not mandate retrospective application.Key Evidence and Findings: The IL & FS default occurred before the circulars came into effect. The AMC did not create a segregated portfolio at that time, consistent with market practice and regulatory norms then prevailing.Application of Law to Facts: The Tribunal held that retrospective application of the circulars is not permissible, as administrative circulars lack legislative competence for retrospective effect unless expressly stated. The discretionary nature of segregated portfolio creation further supports non-retrospective application.Treatment of Competing Arguments: The appellant sought retrospective application to protect old investors exclusively, while respondents argued for prospective application consistent with regulatory intent and industry practice. The Tribunal sided with the respondents.Conclusion: SEBI Circulars on segregated portfolios apply prospectively and cannot be applied retrospectively to the IL & FS default.3. Distribution of Recoveries from IL & FS GroupLegal Framework and Precedents: Mutual fund regulations and SEBI guidelines require equitable distribution of scheme proceeds among investors. The creation of segregated portfolios affects distribution but is discretionary and governed by circulars effective post-default.Court's Interpretation and Reasoning: The Tribunal considered whether recoveries should be distributed only to old investors or proportionately to all investors existing at the time of realization, including new investors admitted after reopening.Key Evidence and Findings: The AMC's practice and market norms distribute proceeds to all investors on the date of realization. The reopening increased the NAV benefiting all investors, including the appellant. No regulatory instruction mandated exclusive distribution to old investors.Application of Law to Facts: The Tribunal found that distribution to all existing investors at the time of realization is lawful and consistent with SEBI regulations and circulars. The appellant's claim for exclusive benefit was unsupported.Treatment of Competing Arguments: The appellant argued for exclusive distribution to protect old investors. Respondents emphasized equitable treatment of all investors and adherence to regulatory norms. The Tribunal favored the latter.Conclusion: Recoveries are to be distributed proportionately among all investors existing at the time of realization, not exclusively to old investors.4. Adequacy of SEBI's Disposal of the Complaint and Review ApplicationLegal Framework and Precedents: SEBI's complaint redressal mechanism through SCORES platform requires examination of complaints and issuance of reasoned orders. Review applications are to be disposed of after due consideration.Court's Interpretation and Reasoning: The Tribunal reviewed the complaint disposal and subsequent review order by SEBI. Both orders were found to be reasoned, based on detailed ATR from the AMC, and compliant with regulatory procedures.Key Evidence and Findings: SEBI's orders acknowledged the regulatory framework, AMC's approvals, and disclosures. The impugned orders addressed the appellant's concerns and explained the non-applicability of retrospective circulars.Application of Law to Facts: The Tribunal held that SEBI acted within its regulatory mandate and followed due process in disposing of the complaint and review application.Treatment of Competing Arguments: The appellant contended the orders were non-reasoned and mechanical. SEBI and AMC argued the orders were thorough and justified. The Tribunal agreed with SEBI and AMC.Conclusion: SEBI's disposal of the complaint and review application was proper and justified.Significant Holdings:The Tribunal held that 'The reopening of the said scheme was at the direction of the trustees of the AMC and does not amount to contravention of any provisions of the SEBI Act, the Mutual Fund Regulations or the circular.'It was established that the SEBI Circulars on creation of segregated portfolios 'shall be applicable only to the credit events which occurred post the circulars coming into effect and thus retrospective treatment for disbursal of recovery proceeds was not feasible.'The Tribunal affirmed that 'the creation of a segregated portfolio is purely optional and discretionary for the AMC' and that 'any proceeds realized are to be distributed proportionately amongst all existing investors at the time of realization.'Finally, the Tribunal concluded that 'the reopening of the scheme and allowing new investors to come in, is as per the market practices' and found no grounds to set aside the impugned order disposing of the appellant's complaint.