TaxTMI 
TaxTMI 
2017 (8) TMI 49
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....s not a fit and proper person and hence the Sahara MF and Sahara Asset Management Company P. Ltd. ('Sahara AMC' for short) are no longer fit and proper to carry on the business of mutual fund. The legal question that, therefore, arises is if the Promoter-Director of the Sponsor of a mutual fund is found to be not a fit and proper person whether the sponsor itself becomes not fit and proper and if so whether it would impact the fit and proper status of the mutual fund and the AMC under the Mutual Fund Regulations. 2. Before coming to the relevant facts in the present appeal, it is useful to explain the mutual fund framework under the SEBI (Mutual Funds) Regulations, 1996. The structure of a mutual fund stands on three pillars (i) An Asset Management Company, (ii) A Trust and (iii) A Sponsor. In the present matter the structure of the Sahara mutual fund comprises the Sahara AMC (Appellant No. 1), Sahara MF (Appellant No. 2), Sahara Sponsor (Appellant No. 3) and Trustees (Appellant Nos. 4 and 5). According to this framework a sponsor applies for a mutual fund license and SEBI grants a certificate of registration if the eligibility criteria provided under the Mutual Fund Reg....
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....oard may take into account the criteria specified in schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. Terms and conditions of registration 10. The registration granted to a mutual fund under regulation 9, shall be subject to the following terms and conditions- (a) the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations; (b) the mutual fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect; (c) the mutual fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it; (d) payment of fees as specified in the regulations and the Second Schedule. Eligibility criteria for appointment of asset Management Company 21. (1), (a)** &nbs....
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....p; ** (b) the asset management company shall forthwith inform the Board of any material change in the information or particulars previously furnished, which have a bearing on the approval granted by it; (c) no appointment of a director of an asset management company shall be made without prior approval of the trustees; (d) the asset management company undertakes to comply with these regulations; (e) no change in the controlling interest of the asset management company shall be made unless,- (i) prior approval of the trustees and the Board is obtained; (ii) a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the Head Office of the mutual fund is situated; and (iii) the unitholders are given an option to exit on the prevailing Net Asset Value without any exit load; (f) the asset management company shall furnish such information and documents to the trustees as and when required by the trustees. INTERMEDIARIES REGULATIONS SC....
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....r 18, 2011. The Hon'ble Supreme Court in its order dated August 31, 2012, inter alia, directed these companies and Mr. Subrata Roy Sahara to refund the monies. Subsequently the Apex Court passed several orders/directions in the matter against Mr. Sahara on account of delay in refunding the money. (c) Following these orders against the two Sahara group companies and their Directors SEBI initiated proceedings by appointing a Designated Authority under the Intermediaries Regulations on June 9, 2014. This Designated Authority was to enquire into whether there was any violation of the provisions of Regulation 21 read with Regulation 22 of the Mutual Fund Regulations, 1996 as well as related SEBI Circulars by the Sahara Mutual Fund, Sahara Sponsor, Sahara AMC and its Trustees. The Designated Authority submitted the report on October 14, 2014 holding that these entities are no longer fit and proper persons to carry on the business of mutual fund and recommended cancellation of certificate of registration of Sahara MF. Along with a copy of this report by the Designated Authority SEBI issued a common Show Cause Notice to these entities on November 11, 2014 asking why the certif....
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....tinct from its shareholders and therefore just because one of the shareholders is allegedly not a fit and proper person it cannot result in the sponsor being declared as not a fit and proper person. The relevant regulations make a distinction between the Company (Sponsor/AMC), its Whole Time Directors, Key Managerial Personnel and other Directors by providing different and independent requirements for each of them under the Regulations. (e) Mr. Subrata Roy Sahara who is alleged to be not a fit and proper person by SEBI consequent to the order by SEBI dated June 23, 2011 (supra) is a Non-Executive Director of Sahara Sponsor and did not involve in the day-to-day management of either Sahara Sponsor or in any matter relating to Sahara AMC or Sahara Mutual Fund. He was never a Trustee nor a Director of Sahara Mutual Fund. He resigned from the Sahara Sponsor on September 2, 2014 though subsequently he was reappointed as an Additional Director on November 3, 2014. He was not a KMP or an Officer on default or played any significant role in the management of Sahara Sponsor even while being on the Board of the Sahara Sponsor. (f) The information submitted to SEBI in March 2....
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....ability once the mutual fund framework in terms of the Asset Management Company and the Trustees are put in place. There is no case that the Trustees are not fit and proper. In any case Mr. Sahara who is allegedly not a fit and proper person has resigned from the Board of the Sahara AMC as well as from the Board of Sahara Sponsor though he was subsequently reappointed as the Non-Executive Director in the latter. He was neither a KMP nor has any day-to-day management functions in Sahara Sponsor. Thus while the Applicant Company for sponsorship of a Mutual Fund is to be fit and proper the same is not extended to its Non-Executive Directors who are not included amongst the officials/entities to be fit and proper as per Regulation 7 of the Mutual Fund Regulations. Thus, the charge levelled against the appellants herein just because one of the Promoters/Directors of Appellant No. 3 was found to be involved in the matter of two group companies who are not related to the appellant companies in any way cannot be justified and the impugned order needs to be quashed and set aside. (i) In order to substantiate their submissions the Learned Senior Counsel for the appellants, apart fro....
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....order sets out that the refund has to be made jointly and severally by these Companies and Mr. Sahara. (g) Citing various provisions in the Mutual Fund Regulations it was argued that the sponsor's liability and responsibility for operations and activities of the mutual fund is continuous. (h) According to Regulation 7(aa) of the Mutual Fund Regulations, the applicant (sponsor) is required to be a fit and proper person. Both the applicant company as well as its Directors are to be fit and proper because of the fact that the Directors have to file certain proforma giving their full details and they are under obligation to file any change in their status as and when it happens. While filing such proforma in 2003 and 2004 Mr. Subrata Roy Sahara had stated that he was the Managing Worker and Chairman of the Sahara Sponsor, with substantive powers over the management of the Company. (i) Fit and proper criteria is to be taken from Schedule II of SEBI (Intermediaries) Regulations, 2008 which provides that the applicant or intermediary, the principal officer and key management persons by whatever name called should have: (i) Integrity, reputation and ....
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....ough subsequent to the impugned order, the Reserve Bank of India (RBI) vide its order dated September 3, 2015 cancelled the certificate of registration of Sahara Sponsor to function as an NBFC and has also initiated action to wind up this company. Accordingly, the Lucknow Bench of the Allahabad High Court vide its order dated September 16, 2015 restrained the Sahara Sponsor from alienating its assets. (o) The Learned Senior Counsel for SEBI also opposed the Misc. Applications No. 188 of 2017 moved by the appellants seeking time to fulfill the requirement of raising its net worth from Rs. 10 crore to 50 crore pending the outcome of this appeal stating that when appellants are not a fit and proper person this issue does not even deserve any consideration. (p) Learned Senior Counsel for the SEBI also relied on a number of judgments in support of his contentions. 7. We have considered the submissions of both the parties, various judgments and other records placed before us. 8. We do not agree with the contentions of the Learned Senior Counsel for the appellants. The argument that the requirement of being fit and proper for the sponsor of a mutual fund is limited....
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....not holding any equity in the Sahara AMC. It is also on record that Mr. Sahara was a Director in all the Group Companies which hold the shares of Sahara AMC. Such high shareholding in the sponsor by one promoter and in the AMC by the same promoter group companies clearly establish the capability of that one Promoter/Director to control the affairs of the Sahara Sponsor and thereby that in the Sahara AMC and Sahara Mutual Fund. Therefore, even if Mr. Sahara ceases to be a Director in the Sahara Sponsor, given the facts of the present matter, his ability to control the activities of the Sahara Mutual Fund cannot be doubted. This is made abundantly clear by the order of the Hon'ble Supreme Court dated May 6, 2014 wherein it is stated that:- "The list of properties furnished to this Court, could not be have been so furnished, without the petitioner's express approval. There can be no doubt about the aforesaid inference, because the stance now adopted by the petitioner shows, that the petitioner is in absolute charge of all the affairs of the companies. And nothing can move without his active involvement. During the course of hearing of the present petitioner, learned c....
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....able to independent directors only and hence there was no requirement for filing fresh bio-data in respect of Mr. Sahara. We do not agree with this argument since the details of the circular clearly indicate that the circulars were applicable to all directors, not only to independent directors though the title of the circular mentioned independent directors. 14. The appellants have cited several orders such as (i) Heavy Engineering Mazdoor Union v. State of Bihar and Ors. [(2004) 9 SCC 407], (ii) Bacha F. Guzdar v. Commissioner of Income Tax, Bombay [AIR 1955 S.C. 74 (vol. 42. CN.18)], (iii) Electronics Corporation of India Ltd. and Others v. Secretary, Revenue Department, Govt. of Andhra Pradesh and Others [(1999) 4 Supreme Court Cases 458], (iv) [Court of Appeal] Adams and Others v. Cape Industries Plc. And Another (1984 A. No. 2597), (v) Balwant Rai Saluja and Anr. v. Air India Ltd. and Ors. [(2014) 9 SCC 407] (vi) Western Coalfields Ltd. v. Special Area Development Authority, Korba & Ors. [(1982 1 SCC 125], (vii) Delhi Development Authority v. Skipper Constructions Co. Pvt. Ltd. and Anr. [(1996) 4 SCC 125] and (viii) Digital Radio (Mumbai) Broadcasting Ltd. and Ors. v. Union....