2025 (11) TMI 82 - AT - SEBI

Ruling upholds trustees' primary duty under Section 15 Indian Trust Act to wind up VCF schemes, reduces penalties

Mr. Rakesh Dhingra, Mr. Mahesh Kumar Sharma and Mr. Vijay Tulshyan, Gautam Budh Nagar,

AT upheld SEBI's finding that the trustees bore primary responsibility to wind up the VCF schemes under Section 15 of the Indian Trust Act and affirmed ... SEBI-registered Venture Capital Fund - Trust - CIG Realty Fund - non-winding up of the schemes - Imposition of a monetary penalties on each of the appellants u/s 15HB of the SEBI Act, 1992 for violation of SEBI (VCF) Regulations, 1996 - HELD THAT:- Appellant’s contention is that it is the duty of the investment advisor to wind up the scheme. We are unable to persuade ourselves to accept the said contention because, as per Section 15 of the Indian Trust Act, the primary responsibility to achieve the purpose of the trust is upon the trustees. Admittedly, the Schemes I, II and IV have not been wound up. The penalty imposed by SEBI for not winding up schemes I and II has been upheld by this Tribunal. The only additional contention which requires consideration whether the appellants, as trustees are also responsible for the winding up. The answer must be in the affirmative in view of Section 15 of the Indian Trust Act. Quantum of penalty - While considering non-winding of Schemes I and II, SEBI has imposed a penalty of Rs.1 Lakh on the appellants. This appeal is in respect of Scheme No. IV. Appellants are senior citizens and Fund’s assets are under attachment by the Enforcement Directorate. Therefore, it would be just and appropriate to reduce the penalty to Rs.2 Lakhs each on all three appellants. Appeal is allowed in part. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether trustees of a SEBI-registered Venture Capital Fund, constituted as a trust under the Indian Trust Act, 1882, are legally obliged to wind up schemes and return monies to investors upon expiry of the tenure specified in the private placement memorandum notwithstanding delegation to an Investment Advisor. 2. Whether trustees' alleged failures - including non-winding up of schemes, failure to redress investor grievances, failure to cooperate with inspection, improper investments, non-reporting and KYC lapses - attract directions under Sections 11(1)/11B(1) and penalties under Sections 11(4A)/11B(2) read with Sections 15A, 15C and 15HB of the SEBI Act, and relevant VCF/AIF Regulations. 3. Whether attachment of fund assets by an enforcement agency absolves trustees of the duty to wind up or comply with SEBI directions. 4. Whether the imposition of monetary penalty under Section 15HB is procedurally invalid for being issued beyond 120 days from last hearing under Regulation 30 of the VCF Regulations. 5. Whether trustees qualify as 'concerned persons' for inspection and directions under Regulation 25-29 of the VCF Regulations. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Trustees' duty to wind up schemes despite delegation to Investment Advisor Legal framework: Trusteeship obligations derive from the Indian Trust Act, 1882 (Section 15), VCF Regulations (Regulation 23(1)(d), 23(3)), and SEBI's power to issue directions (Sections 11 and 11B of the SEBI Act). Precedent treatment: Tribunal has previously upheld liability of trustees in similar non-winding up matters; Tribunal relied on analogous authority on trustees' obligations under trust law and VCF Regulations. Interpretation and reasoning: Section 15 of the Indian Trust Act imposes primary responsibility on trustees to deal prudently with trust property and to achieve the purpose of the trust. Regulation 23 expressly empowers trustees to wind up schemes and requires intimation to SEBI upon winding up. Delegation to an Investment Advisor does not relieve trustees of statutory duties; entrustment of day-to-day functions does not displace trustees' ultimate obligation to protect beneficiaries' interests and to effect realization and distribution when tenure expires. Ratio vs. Obiter: Ratio - trustees retain primary legal responsibility to wind up schemes and cannot evade that obligation by reference to delegation to the Investment Advisor. Obiter - observations on operational interaction between trustees and investment managers were contextual. Conclusion: Trustees are legally obliged to ensure winding up of schemes on expiry and cannot disclaim responsibility by asserting that the Investment Advisor alone manages fund affairs. Issue 2 - Applicability of directions and penalties for enumerated violations (non-winding up, grievance redressal, non-cooperation, improper investments, reporting and KYC lapses) Legal framework: SEBI's powers under Sections 11, 11B, 11(4A), 11B(2), and penalty provisions (Sections 15A, 15C, 15HB) read with VCF Regulation 23(1)(d) and Regulation 29; AIF Regulation 39 cited for consequential procedural context. Precedent treatment: Tribunal relied on prior decision upholding penalties for non-winding up in analogous proceedings; Regulation 29 provides for issuance of directions against trustees and concerned persons. Interpretation and reasoning: Inspection revealed multiple contraventions, including failure to wind up expired schemes, failure to redress investor complaints, failure to cooperate with inspection, investments in associate entities, failure of periodic reporting, and KYC deficiencies. These facts squarely fall within the scope of SEBI's regulatory and adjudicatory powers. Trustees' status as custodians of trust property and as persons mandated under VCF Regulations to take steps for winding up and reporting renders them liable for directions and penalties under the statutory and regulatory scheme. Ratio vs. Obiter: Ratio - material failures to carry out trustees' duties and statutory/regulatory obligations justify directions under Sections 11/11B and penal consequences under the cited provisions. Obiter - discussion of specific operational impediments (e.g., lack of staff) as explanatory, not exculpatory, factors. Conclusion: The record supports issuance of directions and imposition of monetary liability on trustees for the enumerated violations, subject to consideration of proportionality in quantum. Issue 3 - Impact of enforcement agency attachment on trustees' ability/obligation to comply Legal framework: Interaction between SEBI directions and attachments by enforcement agencies is situational; trustees' statutory obligations under trust law and SEBI regulations remain unless legally stayed or rendered impossible by operation of law. Precedent treatment: Earlier SEBI order (2018) and Tribunal's dismissal of appeal established liability prior to later attachment; attachment by enforcement agency occurred after Tribunal's prior decision. Interpretation and reasoning: Attachment of assets by an enforcement agency occurred after SEBI's earlier order and after this Tribunal's decision upholding SEBI's order in respect of prior schemes. Therefore, subsequent attachment does not retroactively absolve trustees of the duty to take steps earlier or explain inaction preceding attachment. Mere invocation of attachment by enforcement agency, without evidence of communication seeking directions or showing impossibility of compliance, does not extinguish trustees' statutory responsibilities. Ratio vs. Obiter: Ratio - post-hoc asset attachment does not automatically absolve trustees of pre-existing statutory duties or prior non-compliance; evidence of contemporaneous steps or impossibility is required for exculpation. Obiter - procedural suggestions for trustees to document communications with enforcement agencies. Conclusion: Attachment by an enforcement agency, in the circumstances, does not absolve trustees of liability for non-winding up or non-compliance with SEBI directions. Issue 4 - Timeliness of adjudicatory order: alleged breach of Regulation 30's 120-day timeline Legal framework: Regulation 30 of VCF Regulations prescribes timelines for issuance of order after last hearing; Regulation 29 (directions) and broader adjudicatory provisions do not uniformly contain identical timelines. Precedent treatment: SEBI asserted that the communication of findings under Regulation 29 is not bound by a 120-day timeline; Tribunal accepted that timeline argument as untenable where the invoked provision lacks such a limitation. Interpretation and reasoning: The appellants contended the order was non est for being passed after 128 days from last hearing; however, SEBI's action followed communication under Regulation 29 which does not prescribe the 120-day limitation contained in Regulation 30. Where the specific regulatory provision applicable to issuance of the impugned order does not prescribe the 120-day limit, delay alone, without statutory foundation or demonstrable prejudice, does not vitiate the order. Ratio vs. Obiter: Ratio - absence of statutory time limit under the particular regulation governing issuance of the impugned directions means the delay does not nullify SEBI's order. Obiter - advisories on administrative promptness. Conclusion: The procedural challenge based on expiration of 120 days under Regulation 30 is unsustainable in the facts where Regulation 29 governs the issuance and contains no analogous timeline. Issue 5 - Whether trustees are 'concerned persons' under inspection provisions Legal framework: VCF Regulations (Regulations 25-29) contemplate inspection and power to issue directions to 'concerned persons,' including trustees. Precedent treatment: Tribunal and SEBI jurisprudence treat trustees as concerned persons for purposes of inspection and directions where trustees bear statutory duties. Interpretation and reasoning: Trustees, by virtue of statutory duties and express regulatory references empowering SEBI to issue directions against trustees, qualify as 'concerned persons' during inspection and for issuance of directions. Appellants' contention to the contrary is inconsistent with trust law and the governance framework of VCFs. Ratio vs. Obiter: Ratio - trustees are covered by inspection/direction provisions as 'concerned persons' where their statutory or regulatory responsibilities are implicated. Obiter - none material. Conclusion: Trustees are properly characterized as 'concerned persons' and liable to inspection and directions under the VCF Regulations. Relief and quantum of penalty - mitigation on account of circumstances Legal framework: Tribunal's remedial powers permit modification of quantum of penalty taking into account mitigating factors and equities. Interpretation and reasoning: While liability was established on the legal and factual matrix, mitigating circumstances - advanced age of trustees and post-inspection attachment of fund assets by an enforcement agency - warranted exercise of discretion to reduce monetary penalty. The Tribunal balanced the need for regulatory sanction with proportionality and fairness. Conclusion: Penalty sustained in principle but reduced in quantum to a lesser sum per trustee; directions otherwise remain undisturbed. Intervention application by investors rendered unnecessary given limited scope of appellate modification.