TaxTMI 
TaxTMI 
2025 (11) TMI 686
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....ons, 1996 and relevant SEBI Circular SEBI Circular No. MFD/CIR/6/73/2000 dated 27th July, 2000. The respective violations and the penalty imposed vide the Impugned Order are as below: Applicant Alleged Violation Penalty Section Amount of Penalty (in Rs.) PGIM Asset Management company (Applicant No. 1) • Regulation 25(1), 25(2), 25(16) of the MF Regulations; • Clause (4), (6), (8) and (9) of the Code of Conduct as specified in the Fifth Schedule to the MF Regulations; and • Circular No. MFD/CIR/6/73/2000 dated July 27, 2000 Section 15(D)(b), 15(D)(f) and 15HB of the SEBI Act, 1992 INR 25,00,000/- (Rs. Twenty Five Lakh only) Ajit Menon (Applicant No. 2) • Regulation 25(6A) of the MF Regulations; • Clause (4), (6), (8) and (9) of the Code of Conduct as specified in the Fifth Schedule to the MF Regulations; and • Circular No. MFD/CIR/6/73/2000 dated July 27, 2000 Section 15(D)(f) and 15HB of the SEBI Act, 1992 INR 5.00,000/- (Rs. Five Lakh only) Kumaresh Ramakrishnan (Applicant No. 3) • Regulation 25(6B) of the MF Regulations; • Clause (4), (....
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....n failure to exercise due diligence. The CEO and the 3 Fund Managers were charged for alleged failure to discharge their duty in carrying out adequate research, record-keeping and conflict management in respect of such ISTs from open-ended schemes qua the investors of close-ended schemes. 2.6 Appellants and Mr. Iyer filed a common reply dated May 31, 2022 to the SCN and an opportunity of personal hearing was granted to the appellants on June 1, 2022 by the AO. Later, Mr. Iyer sought for without prejudice settlement on June 10, 2022 and he is not a party to the present appeal. On June 30, 2022, AO passed the IO against the appellants. 3. We have heard Mr. Pesi Modi, learned senior advocate with Mr. Rushin Kapadia, Ms. Yugandhara Khanwilkar, Mr. Rohan Vasa, Mr. Shreyas Lavekar, learned advocates for the appellants and Mr. Pradeep Sancheti, learned senior advocate with Mr. Mihir Mody, Mr. Yash Sutaria, Mr. Tushar Bansode, Mr. Aavish Shetty, Mr. Karthik K. P., Mr. Vijay Chockalingam, the learned advocates for the Respondent. 4. Mr. Pesi Modi, learned senior advocate for the applicants submitted that the IO is based on a fundamental misconception that the Appellants favoured op....
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....hich adjusted for downgrades, if any. Furthermore, all securities were secured NCDs Non-convertible Debentures with no claims of inadequate security. He further submitted that all such stressed securities fully recovered the amount of principal and interest thereon, with only one security sold at a minor loss. He is aggrieved that despite this, the impugned order dismisses this as irrelevant. Learned senior advocate submitted that relying on hindsight to label a security as "stressed" without evidence of contemporaneous adverse information, render its findings untenable. 4.5 Mr. Modi referred to the twin Conditions entailed in Paragraph-3 of Seventh Schedule of MF Regulations, 1996 with regard to transfer of investment from one scheme to another; which stipulate (a) transfer to be done at prevailing market price and; (b) to be in conformity with the investment objective of the scheme to which such transfer has been made. He submitted that all 25 ISTs complied with these conditions as evidently, the transfers were at market price and no allegations of ISTs not being in conformity of investment objective are made and hence no adverse view of such ISTs can be taken. Learned seni....
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.... 2018 was due to significant sales by DSP Mutual Fund, (DSP-MF). DSP-MF had clarified that the stock price drop was unrelated to DHFL's credit profile. • 95% of DHFL NCDs still remained in open-ended schemes post-ISTs, negating favoritism claims. B. Jorabat Shillong Expressway Ltd. (3 ISTs from Open to Close ended schemes on 8.10.2018) • Jorabat was incorporated as a special purpose vehicle (SPV) to construct a highway from Jorabat to Shillong. It was a ring-fenced SPV which was insulated from any financial risks of its parent companies. For this project, National Highway Authority of India ("NHAI") had given a guarantee of annuity payments. Pertinently, the project became operational for over 2 years, and annuity payments were received in a timely manner. • Jorabat NCD was rated as AAA(SO) security i.e. with "highest safety" and "lowest risk" with "Structured Obligation" - i.e. - the additional security of the NHAI guarantee apart from presence of a structured payment mechanism. • A Debt-Service Reserve Account (DSRA) was also created by Jorabat which was monitored by trustees to ensure timely debt servicing and repaymen....
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.... June, 4. 2021. (ii) Regarding Jorbat, he submitted that that the maturity date of the scheme i.e., April 26, 2021, aligns closer to Jorabat's maturity on March 1, 2021, comparatively UP Power Corporation NCD had a complex staggered maturity while Power Finance Corporation NCDs (maturing June 26, 2020) were less suited for the close-ended scheme's maturity date of April 26, 2021. (iii) Regarding Sunny and SD, he submitted that The ISTs aligned with scheme's maturity (April-September 2021) and maturity of NCDs (April 12-17, 2021), and hence were logical for cash deployment. These were supported by SPCL's irrevocable DSRA, which ensured timely repayment, and offered high interest rates which benefitted close-ended scheme investors. (iv) Regarding Business Broadcast Network, he submitted that the ISTs, aligned with the maturity of close-ended scheme (May-July 2020) with the NCDs' maturity on February 7, 2020 and hence were logical, SEBI-compliant decisions to ensure fund availability. Hence, IST was a routine rebalancing to meet internal policy limits and a standard practice. 5. In response, Mr. Pradeep Sancheti, learned senior advocate for the re....
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....ancial entities, which was acknowledged by the Minutes of Investment Committee of the AMC dated October 11, 2018. The Minutes noted significant redemption pressures, widening yield in DHFL bonds, and lack of market demand even at elevated yields of 125-150 bps, which shows that Appellant was aware of adverse conditions. The Investment Committee decided against further exposure to sponsor or group company securities, yet transfers of DHFL NCDs to open ended schemes continued which indicates a failure to exercise due diligence for protecting the interest of investors of close-ended schemes. • Mr. Sancheti also submitted that the Appellants' submissions denying knowledge of adverse information contradicts the Minutes of Investment Committee, which acknowledged market panic and liquidity crunch in NBFCs/HFCs, including DHFL. This is in violation of Regulation 25 and Regulation 18(8), which mandates ensuring the interest of investors across the schemes. B. Jorbat Shillong Expressway Limited (Jorbat): • Ld. Senior advocate submitted that Appellant's submissions are contradicted by the Minutes of Investment Committee dated October 8, 2018, which confirms....
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....es to maintain exposure limits for securities, in order to encourage portfolio monitoring. However, similar restrictions are not applicable in respect of close-ended schemes. This disparity prompted ISTs of low-quality securities from open-ended scheme to close-ended schemes, while high-quality securities were transferred from close-ended schemes to open-ended schemes. This indicates a deliberate strategy to enhance the NAV of open-ended schemes, while putting at risk the close-ended schemes. 5.5 Ld. Senior advocate also submitted that such ISTs executed during the Inspection Period, were prejudicial, unfair and not aligned with interests of all unit-holders, which violates Regulations 25(1) and (2) read with Code of Conduct laid down in Schedule-V, of the MF Regulations. Learned senior advocate submitted that subsequently SEBI issued a Circular dated October 8, 2020, which introduced safeguards to regulate ISTs and prohibit transfer from/to close-ended schemes after three business days post-New Fund Offer allotment and to ban ISTs of securities with negative news, rumors, or alerts in the mainstream media in four months. 5.6 Learned senior advocate also submitted that the....
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....5(2) of the MF Regulations, 1996 and Clauses (4), (6), (8) and (9) of the Code of Conduct specified in Schedule-V of the MF Regulations read with Regulation 25(6), circular No. MFD/ CIR/ 6/73/ 2000 dated July 27, 2000. 6.3 The appellant AMCs has pleaded that they did carry out due diligence and exercised due care in respect of all ISTs (including the impugned 18 ISTs). Such transfers are regulated by Para-3 of Schedule-VII of the MF Regulations, which read as follows: "3. Transfers of investments from one scheme to another scheme in the same mutual fund shall be allowed only if, - (a) such transfers are done at the prevailing market price for quoted instruments on spot basis. [Explanation. - "Spot basis" shall have same meaning as specified by stock exchange for spot transactions;] (b) the securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made." 6.3.1 During the relevant Inspection period, there existed no other provision which restricted the transfer of investment from one scheme to another. It was informed by Mr. Sancheti that the SEBI Circular, which introduced sa....
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....any force in the respondent's arguments that the AMC and its KMPs failed in exercising due diligence in taking investment decisions. The appellant has recorded rationale, which were placed before the investment committee of the AMC on different dates for taking decision of such ISTs. The said investment committee was constituted in pursuance of the circular dated July 27, 2000. 6.4.3 With regard to the merit of the allegation that AMC failed in exercising due diligence for such 18 ISTs (in respect of 5 debt securities), we find that the appellant fund had originally made investment in these 5 debt securities in 2014, in its open-ended schemes that time, which was not contrary to the provisions of the Regulations and the trust deed and it is in compliance with the due procedure laid down vide the SEBI circular dated July 27, 2000. The said circular provides for a detailed investment report for each investment, which is made for the first time. It requires only reasons to be recorded for subsequent purchase and sale in the same scrip. The process of due diligence emanates from this circular, which requires AMCs to develop mechanism to verify that due diligence is exercised whil....
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....s stated in the offer documents and take investment decision solely in the interest of unitholders. 7. .... 8. Trustees and the asset management company shall maintain high standards of integrity and fairness in all their dealings and in the conduct of their business. 9. Trustees and the asset management company shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment." 6.6 Earlier, while examining violation of Sub-regulation (1) and (2) of Regulation 25, we have held that the provisions of Schedule VII are the only specific applicable provisions to assess legality of violation of ISTs, which over-ride the general allegations of lack of due diligence, etc. The same principle applies to the alleged violations of Code of conduct. 6.6.1 In our considered view, there is no case for holding violation of Para-4 of the Code of Conduct, which requires the AMC and trustees to 'avoid conflicts of interest in managing the affairs of the schemes and to keep the interest of all the unit-holders paramount in all matters.' This finding of the AO is based on the allegation that....
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....sidering the best interests of the investors. In the absence of any allegation of private gains or having positions in the open-ended schemes, their business decisions cannot be questioned on the whims and fancy of the AO after a considerable gap of time. The regulator is expected to ensure that due process is followed in such rebalancing. Under the circumstances, even violation of Para-6 is not proved. 6.8 The Para-8 of the Code of Conduct expects that trustees' names should be kept in high standard of integrity and fairness in all their dealings and in the conduct of their business. In our considered view, decision of the AMC to transfer certain securities from one scheme to another is purely a professional business decision taken by the fund manager in accordance with due process, following the decision of the investment committee and on recording reasons in terms of circular of July 2000. No finding has been brought before us as to whether the trustees and AMC lacked in their integrity. Hence, there is no case for violation of Para-8 either. 6.9 Para-9 of the Code of Conduct requires the AMC to render at all times high standards of service, exercise due diligence, ensure ....