TaxTMI 
TaxTMI 
2023 (9) TMI 1718
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....9 was issued alleging the following. Investment in IDOF Scheme not being a permitted security for investment by FPIs 3. SEBI vide letter dated September 20, 2004 granted in-principle approval under Regulation 24(2) of the SEBI (Mutual Funds) Regulations, 1996 [currently read as Regulation 24(b) of SEBI (Mutual Funds) Regulations, 1996] to UTI AMC for management and advisory services in respect of IDOF / Noticee as Offshore Fund (hereinafter referred to as "OSF"). In the said approval letter, the following conditions were, inter-alia, stated: (i) UTI Mutual Fund shall launch scheme for investment in India and units issued by said scheme shall be subscribed by IDOF only. (ii) The activities of the AMC in respect of the offshore funds are segregated with the activities of UTI Mutual Fund. (iii) Any financial obligation arising out of the operations of the offshore fund / scheme shall be met separately without affecting the interests of the unit holders in other domestic mutual fund schemes managed by the AMC or the capital adequacy requirement of the AMC. (iv) The offshore funds shall be broad based on an ongoing basis, as per the provis....
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....Details of Noticee's transactions in IDOF Scheme are as under: Table 2 Date of transactions Value (Rs. in Crores) April 17, 2018 -3,144.00 May 11, 2018 -985.19 May 21, 2018 9.41 June 11, 2018 -594.00 July 02, 2018 0.38 July 06, 2018 -1,187.50 July 13, 2018 3.75 August 03, 2018 -397.50 August 07, 2018 -1.90 September 26, 2018 -2.08 Total -6,298.63 9. As already mentioned above, UTI AMC, vide letter dated March 01, 2005 had, inter-alia, intimated SEBI that the Noticee (an OSF) would invest substantially all its assets in an underlying domestic mutual fund scheme i.e. IDOF Scheme to be launched by UTI AMC Pvt. Ltd. with the approval of UTI Trustee Company Pvt. Ltd. 10. Regulation 15 of the then FII Regulations, 1995 specified that FIIs may, inter- alia, invest in the units of schemes floated by domestic mutual funds, including Unit Trust of India, whether listed in the recognized stock exchange or not. The notification No. FEMA 20/2000-RB dated 03/05/2000 contained similar provision relating to portfolio investment by FIIs whereby FIIs were allowed, inter-alia, to purchase units of domestic mutual fun....
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.... "The principal investment objective of the fund is to generate returns from investments in a portfolio of INR denominated fixed-income securities, units of Mutual Funds, and money market instruments such as Corporate Debentures, Bonds issued by Financial Institutions, Fixed deposits of Banks Commercial paper and Certificate of Deposits all issued in India (the Investments). The fund would invest in India via open ended dedicated scheme launched in India by UTI AMC." 15. The various restrictions imposed on investments by FPIs in debt securities and debt oriented mutual funds schemes are as follows: (i) SEBI circular dated April 01, 2013, had, inter-alia, specified that FIIs can invest in corporate debt without purchasing debt limits till the overall investment reaches 90% after which the auction mechanism shall be initiated for allocation of the remaining limits. (ii) SEBI circular dated September 13, 2013, had, inter-alia, specified that FIIs/QFIs can invest in Government debt without purchasing debt limits till the overall investment reaches 90% after which the auction mechanism shall be initiated for allocation of the remaining limits. (iii) SEB....
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.... per the provisions of FII Regulations, 1995 (now FPI Regulations, 2014) and guidelines issued thereunder. 20. Explanation 2 to regulation 5 of FPI Regulations, 2014, states that "broad based fund" shall mean a fund, established or incorporated outside India, which has at least twenty investors, with no investor holding more than forty-nine per cent of the shares or units of the fund. Further, in explanation to FAQ 23, it is stated that in case an FPI applicant has a bank as an investor, then such FPI shall be deemed to be broad based for the purpose of Regulation 5(b) of the FPI Regulations, 2014. This position was the same as was in the FII regime. 21. It was observed that UTI International Ltd. vide letter dated July 07, 2015 had mentioned that fund investment by Deutsche Bank (hereinafter referred to as "DB"), Singapore, in IDOF was proprietary money and thus the Noticee met broad based criteria. However, from the documents provided by UTI AMC vide e-mail dated October 25, 2018, it was observed that DB, Singapore was holder of notes issued by IDOF. Further, from the due diligence report of AZB & Partners, provided by DB, it was observed that DB, Singapore, was sole holder....
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....e email dated April 28, 2023 and submitted that it did not wish to make further written submissions. 25. The submissions of the Noticee are discussed later in this Order while dealing with the issues at hand. Consideration of Issues and Findings: 26. I have examined the facts of the case and the allegations against the Noticee mentioned in the SCN, the replies of the Noticee filed from time to time and other material available on record. 27. I note that UTI Asset Management Company Pvt. Ltd. (UTI AMC), vide letter dated May 05, 2004 to SEBI, proposed to launch a new Off-Shore Fund (IDOF), with a principal objective to generate income and capital appreciation from investments in Public Sector Debt securities in India. In response to the same, SEBI vide letter dated September 20, 2004 granted in-principle approval to UTI AMC for management and advisory services in respect of IDOF, for investment in India, subject to the condition inter alia that UTI Mutual Fund shall launch a scheme for investment in India and the units issued by the scheme shall be subscribed by the Off-Shore Fund (i.e. IDOF) only. It was further mentioned in the said letter that the Off-Shore Fund shall....
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....oticee has admitted that the Domestic Scheme was not launched as per the provisions of the Mutual Funds Regulations, 1996. However, it has vehemently contended that the Domestic Scheme still qualified to be a domestic mutual fund scheme, which satisfied the conditions mentioned in SEBI approval letter dated September 20, 2004. The Noticee has submitted that from the provisions of Regulation 21 of the FPI Regulations, 2014, it is abundantly clear that FPIs are permitted to invest in schemes floated by domestic mutual funds. However, at no place did the said provision mention that the "scheme floated by domestic mutual funds" are required to be launched in terms of the Mutual Funds Regulations, 1996. 34. The Noticee has further contended that various communications between UTI AMC and SEBI at different point of time show that SEBI had not, until the issuance of the SCN, objected to the Noticee's investment in the Domestic Scheme (i.e. IDOF Scheme). In fact, SEBI allowed the launch of the Domestic Scheme with no requirement to comply with the MF Regulations, 1996. Noticee has further contended that SEBI had been aware of this arrangement since issuance of the In-principle approval ....
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....1996, as existing at the time of launch of the Domestic Scheme, "mutual fund" means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of public under one or more schemes for investing in securities, including money market instruments or gold or gold related instruments;". (emphasis supplied). From the definition of "mutual fund", it is clear that the activities of a mutual fund involve raising funds from public or a section of public. However, as per the SEBI Approval Letter dated September 20, 2004, the Domestic Scheme was to be launched by UTI AMC exclusively for the Noticee and accordingly, had only one investor, which was the Noticee. Since there was only one investor, which was already pre-decided, the requirement of filing an offer document under the provisions of MF Regulations, 1996 was thus, non-existent. (c) Further, one of the purposes of regulating mutual fund schemes under MF Regulations, 1996 is ensuring the protection of investors. However, in the instant case, since there was only one investor in the Domestic Scheme, the need for protecting investor's interest through regulation under the provisio....
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....rovisions of SEBI Circular dated September 13, 2013 read with Regulation 23(1)(a) and 21(5) of the FPI Regulations, 2014. The details of the abovementioned allegation are provided in paras 15 to 17 above. 41. I note that Regulations 21(5) and 23((1)(a) of the FPI Regulations, 2014 provide that an FPI has to comply with the provisions of the FPI Regulations, 2014 and other terms and conditions, as specified by SEBI or RBI from time to time. In this regard, I note that vide SEBI Circular No. CIR/IMD/FIIC/15/2013 dated September 13, 2013, SEBI had inter alia extended the allocation mechanism, as applicable for corporate debt securities, to FII/QFI investment in Government Securities also, whereby FIIs/QFIs could now invest in Government Debt without purchasing debt limits till the overall investment reached 90%, after which the auction mechanism was to be initiated for allocation of the remaining limits. 42. In this regard, the Noticee has submitted that SEBI vide Circular dated November 29, 2004 had clarified that investment in securities, other than Government Securities (G-Secs) and Treasury Bills, constituted corporate debt. Furthermore, vide SEBI Circular dated January 31, ....
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....orporate debt investment. Accordingly, I find that such investment only had to comply with the limits prescribed for corporate debt investments. I also note from the copy of Debt Utilization Status Report (as on April 27, 2015) of NSDL, submitted by the Noticee, that only 77.45% of the limit for corporate debt was exhausted as on the said date. In view of the above, I find that the Noticee did not breach any limit for investment in Government Debt, as alleged in the SCN. 46. Apart from the above, I note from the details of FII Debt Limits Auction Results held on April 27, 2015, which is enclosed as Annexure 5 to the SCN, that on the said date, the total available limit of Government Debt was Rs.507 Crore whereas the total bid received was for Rs.1303 Crore and the total amount finally allocated was Rs.507 Crore. From the same, it is observed that the available quota of the Government Debt on the said date was over-subscribed, which means that the Government had fully realized the maximum possible bidding fees. 47. Accordingly, the allegation of violation of the provisions of SEBI Circular dated September 13, 2013 read with Regulation 23(1)(a) and 21(5) of the FPI Regulations,....
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....r the MF Regulations. The said position has been reiterated in Schedule 2 of the Constitution of the Domestic Scheme. 52. I note that vide SEBI Circular dated February 03, 2015, what is sought to be prohibited is investment in liquid and money market mutual fund scheme and not liquid and money market instruments per se. I note from the statements / reports of the Domestic Scheme as at December 31, 2015 and December 31, 2016 that the list of securities mentioned therein included securities having maturity period of more than 182/91 days, which means that the Domestic Scheme was not investing exclusively in money market instruments. Accordingly, the Domestic Scheme cannot be categorized as a liquid and money market mutual fund scheme, in terms of Regulation 2(p) of the MF Regulations, 1996. I therefore find that the allegation of violation of provisions of SEBI Circular dated February 03, 2015 read with Regulation 23(1) of the FPI Regulations, 2014 against the Noticee is not established. 53. The next allegation against the Noticee is that it had failed to comply with the condition of being a broad-based fund on an ongoing basis, as per the provisions of FII Regulations, 1995 (n....
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.... the abovementioned allegations, the Noticee has submitted that when DB was inducted as an investor in the Noticee in April 2015, the Original Issue Memorandum along with Second Addendum to the Constitution of the Domestic Scheme was submitted to SEBI. The terms and conditions were explicitly provided in relation to the issuance of debenture notes by the Noticee to DB. In fact, SEBI issued administrative warning in 2016 for non-compliance with the braod-based criteria in the context of the Noticee not having any investors during the period 2013 to April 2015. According to the Noticee, SEBI did not object to the arrangement DB had with the Noticee. 57. The Noticee has further contended that SEBI was apprised of the Noticee's intention to extend the maturity of the debenture notes which were issued in April 2015. Moreover, the final copy of the Supplementary Issue Memorandum explaining extension of the maturity of the debenture notes was also submitted to SEBI on March 06, 2017. SEBI had not objected to DB holding debenture notes of the Noticee. 58. Apart from the above, the Noticee has also contended that in any event, the nature of the debenture notes issued to DB was fundame....