TaxTMI 
TaxTMI 
2026 (7) TMI 769
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....STMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY." 1. An average Indian is more than familiar with this unmistakable phrase. Brandished at most noticeable places, it cautions potential investors of the likely risks of investment in mutual funds. The present appeals deal with one such risky scenario ostensibly created by the appellants. THE APPEAL 2. The appeals, under Section 15Z of the Securities and Exchange Board of India Act, 1992 [SEBI Act], are directed against a common judgment and order [impugned order] of the Securities Appellate Tribunal [TRIBUNAL] dated 6th March, 2026, disposing of two appeals [Appeal No. 654 of 2021 and Appeal No. 527 of 2021]. Appeal No. 654 of 2021 was the instance of Kotak Mahindra Asset Management Company Limited [KOTAK AMC], assailing an order dated 27th August 2021 of the Whole Time Member [WTM or Member, used interchangeably] of the Securities and Exchange Board of India [SEBI] whereas, the appellants in Appeal No. 527 of 2022 were Kotak Mahindra Trustee Company Limited [KOTAK TRUSTEE] and its employees/officers/senior executives/fund managers [Nilesh Shah; Lakshmi Iyer; Deepak Agarwal; Jolly Bhatt; Abhis....
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....NCDs were to mature on 8th April, 2019, which was on the maturity date of one of the 6 Schemes and prior to maturity of the remaining 5. e. On 13th November, 2018, ZEEL made a public disclosure expressing its intent to divest 50% of its shareholding. This, along with invocation of pledge by other lenders of ZEEL, caused a drop in the share value of ZEEL, resulting in the security cover to drop below 1.5 times the exposure. In view of this drop, notices were issued by the debenture trustee (IDBI Trustee) to KONTI, EDISON and CYQUATOR on 25th January, 2019, to create a security over more shares, so that the cover can be increased back to 1.5 times or to deposit additional money. This, admittedly, was not done. f. On 26th January, 2019, a meeting was held by the promoters of ZEEL and its lenders, of which representatives of KOTAK MF were also a part. In this meeting, promoters of ZEEL expressed unwillingness to provide further shares or deposit additional money and requested for a moratorium. g. At this juncture, KOTAK AMC claims to have had 2 options: first, to sell the shares of ZEEL pledged against the ZCNCDs, or second, to agree with other lenders ....
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.... n. Pursuant to the SCNs being issued to KOTAK AMC, KOTAK TRUSTEE and its Senior Executives, replies, submissions, and personal hearing followed. An order was passed by the WTM on 27th August, 2021 levying penalties on KOTAK AMC in the following terms: 127.1. The Noticee shall refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes, equivalent to the percentage of exposure to the ZCNCDs of the Issuers in the respective schemes as on the date of maturity of the six FMP schemes, along with a simple interest at the rate of 15% per annum from the date of maturity of such schemes till the date of actual payment to the respective unitholders of the said schemes. The Noticee is also directed to submit a compliance report to The Division Chief, Investment Management Department-1, Division of Funds-2, Securities and Exchange Board of India, mentioning therein the details of such payments made to the unitholders of the six FMP schemes. The Noticee is directed to complete the exercise of payment of funds to the respective unitholders and submission of compliance report to the abovementioned authority within a period o....
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....nsel appearing for KOTAK AMC, Mr. Shyam Diwan, learned senior counsel appearing for KOTAK TRUSTEE and its Senior Executives, and Mr. N. Venkatraman, learned Additional Solicitor General appearing for SEBI. We have also perused the submissions filed on behalf of the parties. 6. We begin by examining the substantial question(s) of law proposed by the appellants in the appeal as well as during the hearing before us. Amongst others, the appellants would beseech us to examine whether the actions of KOTAK AMC taken in good faith could be held as violation of statutory duties or liable to regulatory action/penalty, when such action did not cause loss to the unitholders. All other question(s) flow therefrom. The primary question so framed, reads as follows: Whether, in the facts and circumstances, there could be any breach or violation of SEBI (Mutual Funds) Regulations, 1996 where: (i) The actions complained about did not result in any loss or harm to the investing public; (ii) The actions of the Appellants resulted in gain to the investors; (iii) All three sets of Appellants acted bona fide in the interest of investors and did not make any monetary ....
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.... ascertain whether such a violation was intentional or not. On a careful perusal of Section 15-D(b) and Section 15-E of the Act, there is nothing which requires that mens rea must be proved before penalty can be imposed under these provisions. Hence once the contravention is established then the penalty is to follow. 9. Ergo, once a breach of the SEBI Act and the regulations framed thereunder is established followed by regulatory action/imposition of penalty, as in these appeals, the only defence available to the appellants would be to demonstrate that no breach occurred at all and the decision/order of the TRIBUNAL holding to the contrary is manifestly perverse. Nothing else will suffice. 10. Turning to the crux of the appeals, we find that the primary allegations of SEBI against KOTAK AMC, KOTAK TRUSTEE and its Senior Executives were: A. Lack of due diligence while investing in ESSEL Group Companies; B. Extension of maturity dates of the ZCNCDs; and C. Inadequate disclosures to the investors and to SEBI. A. LACK OF DUE DILIGENCE WHILE INVESTING IN ESSEL GROUP OF COMPANIES 11. SEBI alleged that the investment made by KOTAK AMC in the ZCNCDs i....
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.... evaluating the proposal to invest in the ZCNCDs of certain insignificant and financially handicapped entities of Essel Group such as Konti and Edison". 16. There has been no challenge, far less serious challenge, to these findings. 17. It is trite that in cases of financial and technical matters, the line of thinking adopted by the expert regulator, if found reasonable, cogent, and in consonance with the established principles of law, may not be lightly departed from. Given that the WTM has duly considered all the relevant factors, its reasoning deserves deference. 18. Additionally, regulation 25(16) read with the Fifth Schedule of the 1996 Regulations demands due diligence. The focus should, therefore, have been on diligence, not dividends. Having faltered, the appellants have to bear the consequences. We, therefore, see no reason to agree with the contention that there was no lack of due diligence. 19. The WTM's order, since affirmed by the TRIBUNAL, is cogent and commends itself for acceptance. The contentions of KOTAK AMC, thus, stand rejected. B. EXTENSION OF MATURITY DATES OF THE ZCNCDS 20. This forms the core issue of the dispute-the trigger which caused S....
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....which is wholly arbitrary and incorrect. 28. This contention must be and is rejected in its entirety, as has been rightly done by the WTM and the TRIBUNAL. Apart from the established principle that negative equality cannot be claimed, there is ex facie violation of the 1996 Regulations. KOTAK AMC can neither seek shelter under the alleged violations of others to justify its own breach nor would existence of other violations, if at all, absolve KOTAK AMC of its own liability. Illegality is not cured by numbers; a collective wrong remains illegal, regardless of majority. 29. Secondly, the contention advanced on behalf of KOTAK AMC is that its act of extending the maturity dates of ZCNCDS beyond the maturity dates of the Schemes and consequential partial redemption of the Schemes by winding them up much after the maturity dates did neither cause any loss to the unitholders nor did anyone complain. On the contrary, goes the contention further, it only resulted in profits to the unitholders. 30. We have no hesitation to reject this contention as well. 31. The approach proceeds on a fundamentally flawed premise. Instead of claiming that there had been no breach of the SEBI Ac....
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....tors is no justification for deviation from the regulatory mandate and does not absolve liability. The course adopted by KOTAK AMC was wholly unknown to, and irreconcilable with, the legislative scheme enacted under the SEBI Act. It departed from the carefully calibrated framework established under the SEBI Act by not winding up the Schemes on the respective dates of maturity, thereby inviting penalty. Any breach committed to avert loss in the given circumstances does not find favour in law. Compliance with the regulatory mechanism being mandatory and non-negotiable, it is no valid defence that compliance with law would have resulted in loss. 35. In any event, in an appeal under Section 15Z, this Court is not to sit in judgment over the expediency of the breach, the pecuniary consequence of the breach and the absence of complaints. Commission of breach having practically stood admitted and established, any justification by referring to investor satisfaction and/or absence of complaint would not provide any immunity to the appellants. 36. Thirdly, in the submissions filed before us, KOTAK AMC contended that a circular issued by SEBI dated 28th December, 2018 [SEBI/HO/IMD/DF2/C....
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....few days after the maturity dates of FMP Series 127 and 183. Thus, after the entire operation, right from the decision to extend the ZCNCDs to the execution of agreements inter alia with KONTI and EDISON, the decision not to invoke pledge, and several others, - none of this was ever intimated to SEBI till SEBI knocked on KOTAK AMC's doors. It was imperative for KOTAK AMC, at the very least, to apprise SEBI being the regulator, of the proposed action when the action itself was not in consonance with the regulations. 41. Insofar as the investors are concerned, we pity them. Did they have a choice not to accept the course of action adopted by KOTAK AMC? The conscious decision to extend the maturity dates of ZCNCDs beyond the maturity dates of the Schemes was not a choice left for the unitholders to elect. That was not a contingency, which they could foresee. In an ideal scenario, the unitholders were assured that, even in the event of a default on the debentures, their investments would be protected through the realization of the pledged shares serving as collateral - the very rationale underlying the creation of security in the first place. KOTAK AMC departed completely from the p....
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....ion, at times, could be viewed with suspicion by the Court. We caution the appellants to be more vigilant in future and thereby avert reoccurrence of such mistake. 47. Even otherwise, the manner in which the appellants have conducted themselves throughout, while keeping the unitholders, SEBI and us in the dark, meets our stern disapproval. 48. Thus, on merits, there is no scope for grant of any relief. 49. Penalty, imposed on KOTAK AMC and KOTAK TRUSTEE, also calls for no interference. 50. However, what remains for consideration is the quantum of penalty imposed upon the Senior Executives. Learned senior counsel on their behalf made a fervent appeal to waive the penalty. According to him, while a beneficial outcome cannot justify a regulatory infraction, the absence of investor prejudice may be considered a mitigating factor for waiving penalty. 51. To consider this aspect, the conduct of the Senior Executives becomes material. They are supposed to be individuals who are domain experts, being well-versed in the field of securities law. It is unimaginable that they were not aware of the consequences of infraction of the regulatory framework. Future of the unitholders ....