TaxTMI 
TaxTMI 
TaxTMI 
2017 (8) TMI 49
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Regulations are satisfied. Among other condition....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ard 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)**  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g 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 SCHEDULE II Criteria for determining a 'fit and proper person' For the purpose of determining as to whether an applicant or the intermediary is a 'fit and proper person' the Board may take account of any conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y 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 certificate of registration of Sahara MF should not be cancelled. (d) The impugned order was passed by the WTM of SEBI on July 28, 2015 after considering the report of the Designated Authority, the reply to the Show Cause Notice, submissions made during personal hearing and other materi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ersonnel 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 2003 at the time of application for mutual fund registration or in March 2004 as bio-data of Mr. Subrata Roy Sahara could not have been relied on by SEBI in the impugned order without any reference to that in the show cause notice. Even otherwise though in 2003 and 2004 Mr. Subrata Roy Sahara claimed management responsibility as Mana....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsequently 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 from distinguishing the judgments relied on by SEBI in the impugned order, cited a number of judgments, details of which will be dealt with in a subsequent section of this order. 6. Shri Kevic Setalvad, Learned Senior Counsel for SEBI, defending the impugned order, submitted as follows:- (a) The impugned order draws its mandate from Section 12(3) of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 character; (ii) Absence of convictions and restrain orders; (iii) Competence including solvency and net worth and under Regulation 11 of Mutual Fund Regulations if the sponsor does not satisfy the stated eligibility criteria the application is liable to be rejected. (j) The orders passed by Hon'ble Supreme Court (cited earlier) clearly indicates that Mr. Subrata Roy Sahara's integrity, reputation and character....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ations 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 to the stage of application for registration is devoid of any merit. Various provisions of the Mutual Fund Regulations, 1996 clearly spell out the continuing obligation of the sponsor. This is emphasized by Regulations 25(20), 28(4), 18(24), 38(a), 52, 58(1) etc. whereby the continued liability of compensating the affected investors, stake-holding in new fund offers, guaranteeing guaranteed return schemes, liability on expenses exceeding certain limits and periodic disclosures to be made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 counsel have repeatedly emphasized that further deposits will be possible, only after the petitioner is released from judicial custody. This stance shows, that in the affairs of the Sahara Group, Mr. Subrata Roy Sahara, is the only person that matter. And therefore, the other individual directors, may have hardly any say in the matter." Therefore, the findings in the impugned order that Mr. Subrata Roy Sahara exercises full and complete control of the Sahara Sponsor and Sahara AMC cannot be disputed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 of India [222 (2015) DLT 243]. Citing these orders it was argued that a company is a separate juristic person distinct from the promoters/directors; corporate veil cannot be lifted except in matters of fraud etc. The impugned order does not state that the company is not a distinct juristic person nor corporate veil can be lifted arbitrarily. The facts relating to the cited judgments and the facts in the present appeal are distinguishable. The order in Heavy Engineering Mazdoor Union (supra) is in the context....