2025 (11) TMI 82 - AT - SEBI

Appellants as VCF trustees held liable under Section 15 Indian Trust Act and Section 15HB SEBI Act; penalties varied

Mr. Rakesh Dhingra, Mr. Mahesh Kumar Sharma and Mr. Vijay Tulshyan, Gautam Budh Nagar Versus Securities and Exchange Board of India, Mumbai

AT upheld SEBI's finding that the appellants, as trustees of a SEBI-registered venture capital fund, were responsible for non-winding up of the schemes ... 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. ISSUES PRESENTED AND CONSIDERED 1. Whether trustees of a SEBI-registered Venture Capital Fund, constituted as a trust under the Indian Trust Act, are legally responsible for winding up schemes and returning monies to investors upon expiry of tenure, notwithstanding delegation to an Investment Advisor. 2. Whether extensions of scheme tenure granted contrary to the terms of the Private Placement Memorandum (PPM) and VCF Regulations are valid. 3. Whether trustees can escape liability for non-winding up or non-redressal of investor grievances on the ground of attachment of fund assets by a law enforcement agency or on asserted lack of control/records. 4. Whether failure to cooperate with SEBI inspection, to make statutory/ regulatory filings (quarterly reports, principal officer/designated director intimation to FIU), to maintain/obtain KYC from KRA, and investing scheme proceeds in associate companies amount to contraventions attracting directions and penalty under the SEBI Act and VCF/AIF Regulations. 5. Whether the impugned adjudication was time-barred for being passed beyond 120 days from the last date of hearing as per Regulation 30 of VCF Regulations, 1996. 6. Appropriate quantum of monetary penalty on trustees found liable for non-winding up and related contraventions, having regard to mitigating factors (advanced age of trustees; attachment of assets). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Trustees' duty to wind up schemes despite delegation to Investment Advisor Legal framework: Section 15 of the Indian Trust Act (duty of care and primary responsibility of trustees to achieve trust purpose); Regulation 23(1)(d) and Regulation 23(3) of SEBI (VCF) Regulations (trustees empowered/required to wind up schemes and intimate SEBI on winding up); Regulation 29 (power to issue directions). Precedent Treatment: Tribunal had previously upheld SEBI's order imposing penalty for non-winding up of earlier schemes against the same trustees; Cinema Capital Advisory Pvt. Ltd. v. SEBI (cited) supports trustees' responsibility and SEBI's power to direct trustees. Interpretation and reasoning: The Court reasons that delegation to an Investment Advisor does not absolve trustees of primary responsibility under the Indian Trust Act to realize and protect trust property and to achieve the trust's purpose. VCF Regulations expressly empower and oblige trustees to wind up schemes and communicate with SEBI. Admission that the Investment Advisor alone was empowered and the trustees' failure to take independent steps or to document requests to the Investment Advisor are evidentiary against trustees. The trustees' role includes taking necessary acts for winding up; contractual delegation does not displace statutory duties. Ratio vs. Obiter: Ratio - Trustees remain primarily responsible to wind up schemes and cannot evade statutory obligations by pointing to delegation. Obiter - Observations on the operational relationship between trustees and investment advisors where factual variances may alter outcomes. Conclusion: Trustees are liable for non-winding up and related failures despite the existence of an Investment Advisor; they cannot evade SEBI directions or penalties on delegation grounds. Issue 2 - Validity of extensions of scheme tenure Legal framework: Regulation 23(1)(a) read with Regulation 16 of VCF Regulations (scheme to be wound up when period in PPM is over; tenure not extendable contrary to VCF Regulations); PPM clause regarding amendment of contribution agreement (requires trustees' written consent in consultation with Investment Advisor and investors representing 75% of capital contribution). Precedent Treatment: Prior SEBI adjudication and Tribunal's upholding of penalty for non-winding up of earlier schemes supports strict adherence to PPM/regulatory tenure rules. Interpretation and reasoning: The Court notes that the VCF Regulations do not permit change of term already mentioned in PPM/contribution agreement. Even where consent was claimed from investors, the proper test is consent of investors representing 75% of capital contribution, not 75% of number of investors; consents obtained did not meet the PPM standard. Consequently, extensions granted are contrary to law and cannot validate continued non-winding up. Ratio vs. Obiter: Ratio - Extensions contrary to VCF Regulations and PPM requirements are invalid; validity requires compliance with the specified capital-contribution threshold. Obiter - Practical aspects of effectuating winding up are complex, but do not override regulatory proscriptions on tenure extension. Conclusion: The extensions of scheme tenure were not valid under VCF Regulations and PPM terms; trustees remained under obligation to wind up on expiry of valid tenure. Issue 3 - Effect of enforcement agency attachment and lack of records/staff as defense Legal framework: Duties under Indian Trust Act and SEBI/VCF Regulations require trustees to take steps for winding up and investor redress; regulatory directives are enforceable subject to factual impossibility. Precedent Treatment: Tribunal's prior upholding of SEBI's order (re: earlier schemes) and chronology of enforcement attachment considered; reliance on prior orders where attachment occurred after Tribunal's order. Interpretation and reasoning: The Court finds that attachment by a law enforcement agency, pleaded by trustees, post-dates the Tribunal's upholding of earlier SEBI directions and, in any event, does not relieve trustees of prior inaction. The trustees failed to demonstrate contemporaneous, diligent attempts to effect winding up or to secure SEBI/authority cooperation when assets were or became unavailable. Absence of records/staff and assertion of inability to act were not substantiated sufficiently to extinguish statutory duties. Ratio vs. Obiter: Ratio - Attachment or defects in records do not automatically absolve trustees who have statutory winding-up duties; actionable impossibility must be demonstrated contemporaneously. Obiter - The Court's compassion for practical difficulties (noted in mitigation for penalty quantum) does not alter liability. Conclusion: Attachment by enforcement authorities and invocation of lack of control do not exonerate trustees from liability absent convincing evidence of impossibility or timely steps taken to mitigate; trustees held liable. Issue 4 - Regulatory non-compliances during inspection (cooperation, reporting, KYC, investing in associate companies) and scope of SEBI's powers Legal framework: VCF Regulations (inspection provisions; reporting obligations); AIF Regulations (Regulation 39 referenced regarding directions/penalty); SEBI Act Sections 11(1), 11B(1), 11(4A), 11B(2) and penalty provisions (15A, 15C, 15HB) invoked for directions and monetary penalty. Precedent Treatment: Tribunal relied on prior findings and regulatory scheme that grants SEBI authority to inspect, issue directions and impose penalties for non-compliance. Interpretation and reasoning: The Court accepts SEBI's inspection findings that trustees and other noticees failed to cooperate with inspection, did not submit required reports, failed to provide KYC/compliance with KRA requirements, and invested proceeds in associate companies. These acts constitute contraventions under VCF/AIF Regulations and attract SEBI's power to issue directions and levy penalties. Trustees, as concerned persons during inspection, cannot contest their status; failure to furnish information is incriminating. Ratio vs. Obiter: Ratio - Non-cooperation, failure to report, KYC lapses and impermissible related-party investments constitute regulatory contraventions attracting SEBI directions and penalties. Obiter - Specific assessment of each contravention's mens rea is case-specific and not required to sustain liability here. Conclusion: The documented inspection deficiencies constitute valid grounds for SEBI directions and monetary penalty against trustees. Issue 5 - Timeliness of adjudication beyond 120 days Legal framework: Regulation 30 of VCF Regulations prescribes timelines for passing order from last date of hearing; Regulation 29 (SEBI's communication of findings and power to issue directions) does not contain a specified timeline. Precedent Treatment: SEBI and Tribunal have treated timelines in different regulatory provisions as applicable according to the nature of the action. Interpretation and reasoning: The Court rejects the contention that the impugned order was invalid because issued after 120 days, holding that SEBI's communication under Regulation 29 (used to issue directions/findings) does not prescribe the 120-day limit of Regulation 30; therefore, the adjudication was not automatically time-barred on that basis. Ratio vs. Obiter: Ratio - Absence of an express timeline in Regulation 29 means the 120-day limitation in Regulation 30 is not applicable to SEBI's directions under Regulation 29. Obiter - Parties should seek statutory clarity where procedural timelines are concerned. Conclusion: The delay beyond 120 days did not invalidate the impugned order given the regulatory provisions engaged. Issue 6 - Quantum of penalty and mitigation Legal framework: Penalty powers under Section 15HB read with Sections 11/11B and other penalty provisions; equitable considerations in fixing penalty quantum (age, asset attachment, prior orders). Precedent Treatment: Prior SEBI penalty of lesser amount (Rs.1 Lakh) in respect of earlier schemes and Tribunal's upholding inform assessment of proportionality. Interpretation and reasoning: While affirming trustees' liability, the Court exercises discretion to moderate monetary sanction in light of mitigating factors - advanced age of trustees and attachment of fund assets by the Enforcement Directorate - and to achieve a just result. The Court notes the need to maintain deterrence and regulatory compliance while being proportionate to circumstances. Ratio vs. Obiter: Ratio - Trustees held liable; however, penalty reduced as a matter of discretion considering mitigating facts. Obiter - Reduction should not be read as diminishing the statutory responsibility of trustees in future cases. Conclusion: Liability sustained but monetary penalty reduced to an equitable amount (recalibrated downward) per Court's discretion; other directions remain intact.