TaxTMI 
TaxTMI 
2021 (8) TMI 1458
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....ctively, both of which have matured on April 8, 2019 and April 10, 2019, respectively. As per the Scheme Information Documents (hereinafter referred to as 'SIDs') of the aforesaid schemes, the investment objective of the said schemes was to generate returns through investments in debt and money market instruments with a view to significantly reduce the interest rate risk. As per the SIDs, the schemes were to invest in debt and money market securities, maturing on or before maturity of the said schemes. 3. In furtherance of the said investment objective, it was observed that the FMP series no. 127 and 183 of the Fund had invested in Zero Coupon Non- Convertible Debentures (hereinafter referred to as 'ZCNCDs') of Konti Infrapower & Multiventures Pvt. Ltd. (hereinafter referred to as 'Konti) and Edison Utility Works Pvt. Ltd. (hereinafter referred to as 'Edison' and hereinafter collectively referred to as 'Issuers'). The maturity dates of those ZCNCDs were April 08 & 10, 2019 i.e. before the maturity dates of the FMP Series no. 127 & 183 of the Noticee. It is noted that both the Issuers belonged to the 'Essel Group', which was the promote....
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.... the payment on certain units in the said FMPs in the interest of the Investors, beyond the maturity dates of those FMPs. 7. Upon observing that the aforesaid actions taken by the Noticee were prima facie in violation of certain provisions of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act, 1992'), read with the SEBI (Mutual Funds) Regulations, 1996 (hereinafter referred to as 'MF Regulations, 1996') as well as various circulars issued by SEBI in this regard from time to time, Show Cause Notices (SCNs) dated May 10, 2019 and June 12, 2019 were issued to the Noticee in response to which a written reply was filed by it vide letter dated August 29, 2019. Thereafter, in conformity with the principles of Natural Justice, an opportunity of personal hearing was granted to the Noticee which was successfully availed of by it on October 16, 2019. During the course of the said hearing, the Noticee was asked to submit as to whether the deferment of payment of proceeds to the investors on maturity of the FMPs was confined only to the above noted two FMP schemes or the same deferment was extended to some other schemes as well, due to the ....
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.... by the Issuers. Also, the IC of the Noticee has not examined any documents/reports so as to assess the adequacy of the collateral (shares of ZEEL) offered by the Issuers so as to secure the safety of the investment. 9.3. In view of the aforesaid apparent omissions on the part of the Noticee, it is alleged that the Noticee has not rendered high standards of service, has not exercised basic minimum due diligence and has not taken proper care of its investors' money before taking an investment decision in the ZCNCDs of the Issuers. The above acts of the Noticee have allegedly violated the provisions of Regulations 10(a), 25(1), 25(16) and clauses 6 and 9 of the fifth schedule of MF Regulations, 1996. 9.4. The Noticee has also failed to furnish any research report or any other research inputs so as to demonstrate the factors based on which, the aforesaid investment decision was taken for the first time by the Noticee to invest in the ZCNCDs issued by the Issuers. Also, no records were maintained by the Noticee to substantiate its investment decision in such ZCNCDs of Konti and Edison which would have reflected the data, facts and expert opinion etc. that were con....
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....ty of the said schemes. 9.8. It is further noted from the replies of the Noticee dated April 22, 2019 and April 30, 2019 that KMMF had entered into multilateral agreements dated April 06, 2019 with the Issuers, Cyquator and Dr. Subhash Chandra in terms of which, KMMF extended the maturities of the ZCNCDs of the Issuers till September 30, 2019. In view of the above, it is alleged that the said extension of maturity of the debt securities is an investment decision vis-a-vis the aforesaid ZCNCDs of the Issuers, which was in violation of the provisions of Regulations 10(a), 25(1), 25(2), 25(16), clauses 6 and 9 of the fifth schedule of MF Regulations, 1996 read with Circular No. SEBI/IMD/CIR No.12/147132/08 dated December 11, 2008. 9.9. In response to SEBI queries, it is noticed from the email dated April 22, 2019 of the Noticee that the units of the six FMPs were not fully redeemed and full payment was not made to the investors at the end of their respective maturity dates. 9.10. It is also noted that KMMF agreed with the Issuers for not redeeming the securities at the end of their original maturity period. Thus, it is alleged that the securities of the Issu....
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....ceding 60 days of from the original date of maturity of those securities. 9.14. In view of its aforesaid action(s), the Noticee is alleged to have violated provisions of Regulations 10(a), 25(16), 25(19), 47, clause 9 of the Fifth Schedule of the MF Regulations, 1996 read with Principles of Fair Valuation as mentioned in Eighth Schedule of the MF Regulations, 1996 and SEBI circulars SEBI/IMD/CIR No. 16/193388/2010 dated February 2, 2010 read with SEBI Cir/IMD/DF/6/2012 dated February 28, 2012. 10. In response to the said three SCNs dated May 10, 2019, June 12, 2019 and August 13, 2020, the Noticee has submitted its written responses by way of letters dated August 29, 2019, November 06, 2019, December 17, 2020 and May 28, 2021 wherein, the Noticee has broadly made the following contentions: 10.1. The Noticee has submitted that in early September 2019, part payment of investment proceeds was made to all unitholders of the respective schemes and the balance payment along with accrued interest was made on September 25, 2019. 10.2. The Noticee has sought copies of records and files inspected by it. 10.3. The Noticee has contended that Section 15D(b....
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.... if and when required. 9. To approve valuations on certain events and exceptions, and to review general valuation principles as it deems fit. Function specific to Debt Investment Committee: To review 1. Counterparties and debt issuers with regard to credit risk; 2. The ratings of all debt issuers the Schemes have invested in; 3. Credit information on all counterparties and establishing counterparty lists and limits to avoid default on settlements: 4. To approve credit limits for investments by all the Schemes of the Fund, present or to be launched in future, in all kinds of debt and money market instruments, including any kind of derivative instrument, within the limits laid down by the Board'_(emphasis supplied) The Noticee has submitted that all the above procedures were followed by the IC in accordance with the scope approved by its Board of Directors. 10.7. The Noticee has further submitted that the investment in the ZCNCDs of the Issuers, which belonged to the Essel Group, was structured with a collateral in the form of pledge of listed shares of ZEEL which was a part of large cap Nifty 50 Com....
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.... the exposure to the ZCNCDs of the Issuers was maintained till January 25, 2019 with top-up done by Issuers/Pledger on various occasions as per underlying terms. In fact, there were 34 instances of top-up of collaterals by the Issuers/pledger during the period of March- June 2016 to January 24, 2019. During this period, there were eight instances of share release also as per terms of transaction while at all points of time prior to January 25, 2019, the share price of ZEEL were above the base price from the time of investment. The Investment Note also clearly mentions the number of days to liquidate the shares of ZEEL pledged with the Noticee in case such requirement arises. 10.12. The Noticee contended that the investment in NCDs of the Issuers structured in the form of pledge of shares, was compliant with and not violative of the provisions of the MF Regulations, 1996. In fact, the Mutual Fund Advisory Committee in its meeting dated July 02, 2019 discussed such instruments and one of the proposals for discussion included a minimum cover of 3 to 4 times the investment and listing of the same. 10.13. The Noticee has contended that the allegation of non-considerati....
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....IMD/DE2/CIR/P/2019/104 dated October 1, 2019, laid down guidelines relating to investment in structured obligations and credit enhancement stipulating a minimum cover of four times considering the market value of such shares. Prior to the aforesaid circular was issued, the decisions of mutual funds can be said to be a matter of their best professional judgement, which cannot be quarrelled with. 10.21. The Noticee has submitted that there was no external research report available on the Issuers. Therefore, the research conducted was internal research. The investment by the referred schemes was in the NCDs of Issuers, which were structured in the form of pledge of shares. In this structure, the Issuers are generally not operating companies and hence the Investment Notes submitted to the IC concentrated on structure and collateral. In the process, main comfort was premised on the underlying collateral of equity shares of ZEEL with minimum cover of 1.50 times the exposure along with 'A' rating by an approved rating agency. 10.22. With respect to the allegation of delay in making disclosure of adverse information to the investors, the Noticee has submitted that....
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....ents in the scheme i.e. barring the portion of investments in ZCNCDs of the Issuers was paid off immediately. However, in order to pay the investors of respective schemes out of the funds to be realized from the ZCNCDs of the Issuers, the Noticee extended the time for repayment of the said ZCNCDs from respective maturity dates of the schemes vide the agreement dated April 6, 2019. However, after the maturity dates of the respective schemes, there has been no active fund management decision to invest beyond the maturity of the scheme. Further, with the benefit of hindsight, this decision of extension turned out to be far more favourable to the unitholders. 10.27. The Noticee has further attempted to justify the extension by stating that all the investments made were well within the maturity dates of the schemes and the Noticee didn't make any fresh investment after maturity of the scheme and it has only given time to the Issuers to repay by way of extension of the due dates and the same cannot be construed as a fresh investment decision. It is merely a rescheduling of the date of the maturity wherein the due dates of the cash flows are realigned. 10.28. In resp....
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....terest was finally paid off to the unitholders of the respective schemes by invoking the pledge and selling the shares held as security cover. 10.31. As regards Regulation 53 of the MF Regulations, 1996, the same applies only in the event of redemption or repurchase. Redemption and/or repurchase as can be seen from the MF Regulations, 1996, apply to any open ended fund when an investor applies to the fund house to redeem or repurchase as per the applicable cut off timing at an applicable NAV. In a close ended scheme, an investor does not have to make any application within a cut off time for repurchase or redemption. The provisions of close ended fund, do not envision any time line for repayment nor does it envisage any action of repurchase/redemption by investors. The concept of cut off timing and applicable NAV accordingly does not exist. The Noticee is bound to realize the investments and make payment to investors proportionately after payments of approved costs. Thus, the provisions of Section 53(b) are not applicable to the said matter and the Noticee denies any violation on that count. 10.32. It is submitted that when the provisions of Regulation 10(a), Regu....
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....hemes were close ended and could only have been redeemed upon maturity. 11. Before proceeding to deal with the allegations against the Noticee, as recorded above, and consider the explanations offered and arguments advanced by the Noticee on the said allegations, as have been highlighted above, I find it appropriate that for the purposes of easy reference, relevant provisions of the applicable Sections, Regulations, Guidelines, etc. as alleged in the SCN are reproduced hereunder: The MF Regulations, 1996 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; Asset management company and its obligations 25.(1) The asset management company shall take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of these regulations and the trust deed. (2) The asset management company shall exercise due d....
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....ted in a simple language about the investment policies, investment objectives, financial position and general affairs of the scheme. 6. Trustees and asset management companies shall carry out the business and invest in accordance with the investment objectives stated in the offer documents and take investment decision solely in the interest of unitholders. 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. Consideration and findings: 12. I have carefully considered the allegations against the Noticee, its written replies in response to the SCNs and oral submissions made in the course of two separate hearings and the materials available on record. Before dealing with the replies of the Noticee on merit on specific charges levelled against it in the three SCNs, I deem it necessary to first deal with the preliminary objections raised by the Noticee. To start with, the Noticee has challenged the authority and jurisdiction of SEBI in issuance of the Supplementary SCNs. It is contended that the Supplementary SCNs were issued wit....
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....to issue a Supplementary SCN. 15. I note from the SCN dated May 10, 2019 that the Noticee was called upon to show cause as to why suitable directions including the direction to claw back the management fee charged by it on FMP series 127 & 183 and to put operational constraints including not allowing launch of new FMPs for a specific period of time should not be issued against it and vide Supplementary SCN dated June 12, 2019, the Noticee was called upon to show cause as to why a penalty under the provisions of Sections 15D and 15HB not be imposed upon it for the violations of law, alleged in the SCN dated May 10, 2019. As noted above, during the course of personal hearing of the Noticee held on October 16, 2019, the Noticee was specifically asked to state as to whether the alleged acts were limited to FMP series 127 & 183 or the same acts were also followed and the payment on the ZCNCDs was similarly deferred in respect of any other schemes managed by the Noticee during the relevant period. In this respect, after the Noticee furnished the relevant details pertaining to similar FMP series, and based on the examination of the same, a separate SCN dated August 13, 2020 was issued ....
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....olations as observed in the case of FMP series 127 & 183 were noticed during the course of personal hearing as well as from the examination of materials submitted post the hearing held on October 16, 2019 in the matter. It is relevant to note here that the violations, as were noticed by SEBI in respect of any single scheme constituted a single separate violation. In the present matter, as the violations were noticed at a later stage with respect to four more FMP series viz: 187, 189, 193 & 194, the said violations generated similar but a separate cause of action thereby warranting issuance of fresh consolidated SCN in respect of those four FMP series as noted above. I further find it relevant to record that in the course of first personal hearing, when specifically asked about other FMP series, the Noticee affirmatively indicated that it had also followed the same practice which it had followed in the case of FMP series 127 & 183, in respect of other FMP schemes as well. Under the circumstances, it was thought proper that all the SCNs issued to Noticee on the basis of identical facts including almost similar transactions during the same period involving identical nature of violatio....
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.... would not ipso facto result in breach of Principle of Nature Justice. 20. In this regard, the Noticee has submitted that it was not provided with the copies of the materials inspected by it in the instant proceedings. However, I note that all the materials that have been relied upon while issuing the above stated three SCNs have been actually provided by the Noticee itself through various communications referred to in the respective SCNs. I find there is no material, (other than those communications referred to in the respective SCNs), which have been relied upon in the SCN but not provided to the Noticee. Further, it is not the case of the Noticee that it is not having the copies of the communications referred to in the SCNs and which have been exchanged by the Noticee itself with SEBI. Therefore, any copy of material that the Noticee demands is already in its possession by virtue of the fact that the said materials were provided by the Noticee itself. In view of the foregoing decision of the Hon'ble SAT, I am of the considered view that the Principles of Natural Justice have been adequately complied with in the present matter, as the all documents which have been relied u....
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.... in the SCNs dated May 10, 2019 and August 13, 2020. Thus the SCNs make sufficient suggestions with regard to the directions likely to be issued, once the violations of provisions are established, and therefore, I see the contention of the Noticee is not valid. In this regard, I note that the SCNs contains detailed enumeration of the allegations, the basis of each of those allegations, the documents relied upon for making such allegations as well as the relevant provisions of the Securities Laws supporting those allegations. I reiterate that in the instant case the SCNs contain detailed charges made against the Noticee and the basis of each allegation duly supported by the documentary evidence supplied by the Noticee itself. Hence, the above noted contention raised by the Noticee in this regard does not have any iota of truth. Therefore, I do not find any merit in the submissions of the Noticee that SEBI has not mentioned the measures it proposes to take in the present matter. Additionally, I also find that reliance by the Noticee on Gorkha Security (Supra) is not appropriate as said case is factually distinguishable, where the observations have been made by the Hon'ble Supreme....
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....plead himself innocent or his trades as lawful." In the instant case as well, the Board after examining and considering the acts and the role of the Noticee herein, have initiated proceedings against the Noticee. Be that as it may, the Board has set its criteria and exercised intelligible differentia while selecting cases for action more so for the instant proceedings, and the Noticee cannot plead innocence by basing its arguments on such extraneous reasons. The records before me do not indicate that like the Noticee, there were also some other entities who have followed identically exact procedure while investing the money raised from their investors, in the ZCNCDs issued by the said Issuers so as to demonstrate that the Noticee was placed exactly similar and identical to other such market participants, who also did not make payment to their investors on maturity of the schemes and the maturity of such instruments (ZCNCDs) were extended in similar manner to avoid default on the part of the Issuers while deferring the payment (from the proceeds of those investments) to the investors following the same procedure as has been followed by the Noticee in the instant proceedings. It i....
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....harge of obligations bestowed upon it under the MF Regulations, 1996, the AMC is required to exercise due diligence and care in all its investment decisions. 28. Apart from the sponsors, the Trustees and AMC, there is a fourth player involved in the management of a Mutual Fund, which is the custodian appointed by the mutual fund to carry out the custodial services. The custodian is defined in clause (h) of Regulation 2 of MF Regulations, 1996 to be a person who has been granted a certificate of registration to carry on the business of custodian of securities under the provisions of the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996. 29. Thus, to summarize, a mutual fund is registered at the instance of the sponsor. The sponsor is required to execute a trust deed in favour of the Trustees. It can be a Board of Trustee or a Trustee company. The appointment of Trustees is to be made with the prior approval of SEBI. The Trustees have to appoint AMC by entering into an investment management agreement with them. Perusal of the Fourth schedule of the MF Regulations, 1996 which narrates the contents of the investment management agreement shows that....
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....such NCDs. As opposed to that, a 'Zero Coupon Non- Convertible Debenture' (ZCNCD) is a unique type of debenture which is purchased at a discount to face value and at the maturity, the issuer pays the face value of such ZCNCD. There is no coupon rate defined in the such instrument and no periodical interest payment is made in such instruments. 33. In this regard, I note that the Noticee had launched FMP Series no. 127 in 2013 which was rolled over in 2015. Rest of the FMPs viz. series no. 183, 187, 189, 193 and 194 were launched during 2015 and 2016. All the aforementioned FMP schemes launched by the Noticee had matured during April-May 2019 wherein the Noticee was required to repay the investors immediately thereafter. However, due to extension of maturity of ZCNCDs of the Issuers, the total AUMs of the six FMP schemes could not be realized by the Noticee and a part of the said amount was paid at a later stage in two instalments in the month of September 2019. The complete details of the schemes along with the payment schedule are as below: Table 1: Details of FMP Schemes and the redemption to the investors (amount in Crores) FMP Series Launch Date (L)/ Rollo....
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....quator with KMMF to the extent of mandated 1.50 times the liability of the Issuers at any point of time. All these ZCNCDs, mentioned in the table above, were going to mature on April 08 & 10, 2019. At the same time, the six FMP schemes floated by the Noticee were going to mature on different dates during April and May 2019, as mentioned in Tables 1 & 2 above. 34. It is observed that the price of the scrip of ZEEL witnessed a sharp fall by more than 26% on January 25, 2019, reducing the share cover (of ZEEL shares) as a collateral below the mandated 1.50 times of the exposure to the ZCNCDs of the Issuers. At this point, the promoters of ZEEL expressed their inability to pledge additional shares as collateral in favour of the Noticee so as to maintain the collateral cover at the pre-decided level of 1.50 times of the exposure to ZCNCDs of the Issuers. Eventually, letters of intent dated February 07, 2019 were exchanged amongst the Issuers, pledgers of ZEEL shares and committee of lenders of which the Noticee was also a part. However, the said arrangement failed to bear any constructive results and the Noticee subsequently entered into two separate agreements dated April 06, 2019 w....
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....e allegations made in SCN dated August 13, 2020, issued in respect to FMP series No. 187, 189, 193 and 194, are identical in contents and the submissions made by the Noticee in its replies dated August 29, 2019, November 06, 2019, December 17, 2020 and May 28, 2021 with respect to each of these FMP schemes have also been made on similar lines. Accordingly, I deem it appropriate to deal with the aforesaid SCNs by way of passing one common order. 37. The allegations with respect to the violations of MF Regulations, 1996 read with consequent circulars issued in this regard, can be categorised under the following headings: 37.1. Lack of due diligence and proper care leading to not rendering high standards of service. 37.2. Failure to consider research report and analyse various factors. 37.3. Non-disclosure of adverse information to the unit holders. 37.4. Extension of maturity date of NCDs beyond the maturity date of the scheme. 37.5. Partial redemption and FMPs not wound up at the end of maturity. 37.6. Creation of segregated portfolio. 37.7. Wrong method of valuation of securities. I now deal with these allegations....
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....er to know the name of the issuers of debt securities, there arises no question of any reference to the financials and business operations of such issuers by the IC. Furthermore, in the said note, the IC has observed the following: "We believe that repayment of our exposures will, in all probability, be funded through a refinance. We take comfort from the reputation and track record of Essel Group in general and fundamentals, liquidity and performance of Zee shares" Thus, the investment note itself makes it very clear that throughout the entire due diligence exercise, the Issuer Companies, their financial status, antecedents etc. never existed in the horizon of the IC who had set out their only target of advancing loans out of the funds of their FMP series no. 127, 183, 187, 189, 193 and 194 to the Essel Group against shares of ZEEL, hence the IC was consciously oblivious about the identities of the Issuers or their debt instruments. 41. In this regard, the Noticee has stated that the financials of Konti and Edison were placed before the IC at the time of making investment decision. However, the financials were not included in the approval notes as the same were not ....
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....g and fishing enquiry but should be looked as due diligence expected from a reasonable person in the similar position. In fact, Regulation 25(2) explicitly enshrines this concept of due diligence wherein the phrase 'as would be exercised by other persons engaged in the same business' has been inserted with this objective only. 43. In the light of the afore cited observations made by the Hon'ble Supreme Court of India and the Hon'ble SAT, it is necessary to examine if the investment decisions of the Noticee were taken after due diligence and care and if the Noticee was able to render high standards of service to its unitholders at all times. 44. An AMC is a professional entity meant to float schemes on behalf of the Mutual fund, professionally manage the funds so collected under the said scheme and invest those funds on behalf of unitholders of that particular scheme. For the said purpose, the AMC is required to enter into an Investment Management Agreement with the trustees of a Mutual Fund as prescribed under Regulation 18(1) of MF Regulations, 1996, the clauses of which are required to be adhered to, along with compliance with the provisions prescribed under....
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....erest of either of the parties to use collateral for repayment of such loans since, on the one side, the issuer loses the collateral, which is often sold in a hurry and under distress, thereby reducing the fair market realisable price which can be received by selling such collateral in normal market conditions thereby making the issuer to bear a notional loss on such sale; and on the other side, the subscriber also suffers additional expenses and other operational hassles and sometimes the subscriber also is not in a position to recover the full amount of outstanding dues defaulted by the issuer even after liquidating all the collateral in the market. Therefore, a prudent investment practice demands that the subscriber, while subscribing to or investing in a structured product that eventually culminate in lending, must be assured by the issuer that the said debt shall be repaid on time using the future cash flow of such issuer and that the subscriber doesn't have to resort to a distress sale of the collateral. At the same time, the collateral cover should be so much that the subscriber to such debt instrument can assure itself to recover the whole amount of outstanding dues des....
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.... these companies as it was very much evident to the Noticee, even at the very initial stage of investment, that the repayment would never be made from the sources or future cash flows of the Issuers. However, as admitted by the Noticee, the same fact was available before the IC from the Annual Reports of the two Issuers but the IC did not take this critical factor into consideration. 48. Extending the aforesaid observations to the factual context of the present case, in my view, any prudent subscriber to such ZCNCDs of Konti and Edison would first conduct its own due-diligence to ascertain as to how the Issuer companies receiving the funds raised through the ZCNCDs would deploy those funds and find out if such deployment is likely to increase their profit and cash flow in the future allowing the Issuers to repay the said subscriptions with the returns thereon, in a hassle-free manner to the investors. However, I note from the submissions of the Noticee that the monies raised from the ZCNCDs were to be used by the Issuers for 'general corporate purposes'. Therefore, it is not the case of the Noticee that the Issuers invested in a project which went bad. It is also not the....
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....nt or to the security so kept by it as collateral, any alternative back-up means has been assured by the Issuers to secure the investment so made by it. 50. The Noticee has also fairly stated that it had subscribed to the ZCNCDs of the Issuers knowing that the loan repayment would take place by way of refinance. Refinance is nothing but a loan created for the purpose of payment of earlier loan. In general, borrowers opt for refinance for various reasons inter-alia to change the tenure of loans (both for increasing and decreasing the tenure), reduction in interest rates, lower monthly payments or to consolidate their debts. Refinance merely for the purpose of repayment of another loan has a very thin line of difference from evergreening of loans, a practice long back flagged by Reserve Bank of India as one of the reasons behind increasing Non-Performing Assets(NPAs) in the financial systems. In any case, from the financials and balance sheet of the Issuers, certain portions of which were reproduced above, it was clearly written on the walls that any prudent financial institution would avoid providing any loan to the Issuers or their promoters to refinance the redemption of the....
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....ateral has another drawback viz. their ever fluctuating price due to various market as well as extraneous factors, some of which are not in the control of the company concerned viz. ZEEL in the present matter. Thus, many a times the market price of a scrip of a listed company is driven by factors beyond the control and financial strength of such company and is dictated by the interplay of various extraneous economic, political and even geo-political factors. Further, equity is generally a volatile class of security requiring extra care, vigil and due diligence while accepting the same as a collateral. 55. In this case, I find that the Noticee decided to take the shares of ZEEL as collateral against its subscription to the ZCNCDs of the two Issuers to the extent of 1.50 times the outstanding investment amount and these shares were taken as the only means to ensure repayment of its investment in those debentures issued by the Issuers. While the Noticee has contended that the value of the collateral cover was always more than the investment amount at any point of time till it received complete repayment, it has also accepted that the said collateral cover fell below the mandated 1.....
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.... Noticee has indicated if such scenarios were taken into consideration while deciding on the ratio of collateral at 1.50 times the exposures to ZCNCDs of the Issuers. 56. Even if for a moment, presuming that the investment logic of the Noticee to invest in the ZCNCDs of the Issuers on the strength of the collaterals to the extent of 1.50 times the amount of exposure to be a prudent one, I find from the facts that the said collateral cover actually turned out to be inadequate to recover the outstanding investment in the eventuality of a drastic fall in the price of ZEEL on January 25, 2019. The submission of the Noticee that the value of the collateral cover was always more than the liability of the Issuers towards it, doesn't sound convincing in light of the fact that, on the day of January 25, 2019, more collateral was actually required to cover the shortfall in collaterals due to sudden fall in the price of ZEEL, as the said existing collateral fell below the stipulated 1.50 times cover. By the submission of the Noticee itself, the sale of the shares of ZEEL held by it as collaterals would have led to sub-optimal returns to the unitholders as it would have taken around 18 ....
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....y 1.50 times even knowing very well that the two Issuer companies of the Essel Group had no financial worth to repay the debt raised through those ZCNCDs. The reliance placed by the Noticee in the above noted SEBI circular to justify its acts is therefore misplaced on facts. Further, the Noticee should not forget that the circular referred to above was issued for compliance in addition to the primary requirements for compliances with high standards of due diligence and care as laid down in the MF Regulations, 1996 which demands that no AMC can afford to overlook its 'due diligence' and care before investing the unit-holders' money in any company or in any debt instrument. As already discussed above, the Noticee has grossly failed to take cognisance of the balance sheets of both the Issuers thereby failing to exercise basic due diligence prior to investing the funds of different FMP schemes in the ZCNCDs issued by these two Issuers. Further, the collateral cover of 1.50 times the outstanding investment accepted by the Noticee was glaringly far short of the threshold requirement of collateral equity cover as mandated in the abovementioned circular. While it is not the cas....
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....ra onerous duty to be more vigil while making investment from the funds raised from the common investors, as the funds so raised are held in fiduciary capacity on their behalf and not as an equity participation. 60. An investor, while investing in a mutual fund scheme, leaves his money in the hands of the AMC and the fund manager appointed by it, trusting them to act in the best interest of such investors in lieu of certain amount of management fees charged by them by way of an expense ratio as per the provisions of MF Regulations, 1996. While discharging their duties in managing the unit-holders invested money, it is not only mandated by the clause 9 of Code of Conduct under the MF Regulations, 1996, but otherwise also has been a regulatory expectation that the duty of the AMC is to provide high standards of service at the time of taking investment decisions which are supposed to be in the best interest of unit-holders/investors. In this situation, any decision to make investment in the securities offered by unlisted companies has to be taken with extreme care, cautions, robust due diligence and with a conservative approach since these securities are inherently riskier assets d....
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....rce of repayment from the Issuers, but also failed to carefully assess the adequacy of collateral submitted by the pledger Cyquator against the subscription so made by the Noticee into the ZCNCDs of the two Issuers, out of the funds of the FMP series 127, 183, 187, 189, 193 and 194. The Noticee even did not bother to collect the actual figures of pledged shares of ZEEL from the promoters of Essel Group and based only on its guess work, it expected to get back the money invested by it by way of refinance without obtaining a detailed plan about such future refinance. The Noticee expected to obtain more collateral cover from the promoters' overseas ownership of shares of ZEEL without ascertaining how and within what time frame such shares can be received by them if such eventuality arose. The Noticee has evidently invested in the ZCNCDs on the basis of guesswork, expectations, theorising various possibilities, past track records and reputation of Essel Group rather than on the basis of any serious exercise of due diligence based on hard facts of financials of the Issuers, future cash flow, actual status of pledged shares and other financial parameters, as expected from a professio....
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.... debt securities should be recorded. While there should be a detailed research report analysing various factors for each investment decision taken for the first time, the reasons for subsequent purchase and sales in the same scrip should be recorded. The contents of the research reports may be decided by the asset management companies and the trustees. AMC boards may develop a mechanism to verify that due diligence is being exercised while making investment decisions. They may pay specific attention in case of investment in unlisted and privately placed securities, unrated debt securities, NPAs, transactions where associates are involved and the instances where there is poor performance of the schemes." (emphasis supplied) 64. I have already held above that the Noticee, for the reasons recorded in details in the preceding paragraphs, has failed to exercise due diligence and proper care in examining the financials of Konti and Edison before subscribing to the ZCNCDs of these two Issuers. By its failure to do so, the Noticee has inter-alia acted in violation of the provisions of Regulation 25(2) of MF Regulations, 1996. 65. As may be observed, the above cited ....
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....substitute the research reports required to be prepared on the Issuer companies. Therefore, evidently, the Noticee has failed to carry out proper research and prepare a research report, therein examining those necessary factors pertaining to the two Issuer companies which deserved to be considered for making an investment decision. Under the circumstances, I hold that the Noticee has failed to exercise due diligence and care while making its investment decisions to invest in the ZCNCDs of the two Issuer companies thereby violating the provisions of Regulation 25(2) of MF Regulations, 1996 read with SEBI Circular dated July 27, 2000. C. Non-disclosure of adverse information to the unitholders: 69. It is alleged in the SCNs that certain events, which had an immediate adverse bearing on the investments of the investors in FMP series 127, 183, 187, 189, 193 and 194 thereby gravely affecting their commercial interests, were not communicated to the investors in a timely manner. The communication dated April 05, 2019 was made by the Noticee to the investors just before the dates of maturity of the respective scheme(s) and not at the actual time of occurrence of those events. Further....
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....t along with accrued interest on September 25, 2019. 73. It can be observed from the chronology of events that the first major material event happened when there was a sudden fall in the price of the scrip of ZEEL on January 25, 2019 which brought down the collateral cover below the 1.50 times of the total outstanding investment amount which was agreed to between the Noticee and the Issuers. From the materials submitted by the Noticee, I note that IDBI Trusteeship Services Ltd., the debenture trustee to the ZCNCDs of the Issuers, vide its letter dated January 25, 2019 had informed the about the fall in collateral cover to Konti and advised it to pledge additional shares within two business days. The said time limit of two business days got over on January 28, 2019 (January 27 being a Sunday) but the Issuers showed their inability to pledge more shares so as to increase the cover to the mandated 1.50 times the outstanding investment. 74. Subsequently, the second important event unfolded when the Board of the Noticee and Trustees of KMMF deliberated on the matter and decided to go with the decision of majority of the lenders for restructuring the debt of the Issuers while takin....
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....ample, cash deposit, FD receipts, bank guarantee etc., could have been insisted upon the Issuers or the Guarantor so as to fulfil the mandated collateral cover. However, from the fact that the promoters of ZEEL failed to meet margin calls from other lenders, failed to provide more securities of ZEEL to the Noticee to honour their commitment of providing collateral cover of at least 1.50 times of the outstanding investment amount and also from the subsequent efforts made by the Noticee to negotiate with the Issuers or the promoters to provide further securities or any other marketable assets other than the shares of ZEEL so as to prevent the Noticee from suffering from any further adverse price fluctuations in the market, I am constrained to assume that the Noticee was very well aware of the acute financial difficulties that the Issuers as well as the promoters of ZEEL were going through at a time, when the ZCNCDs of the Issuers were maturing for redemption. In such a situation, the probability of default in payment of the ZCNCDs upon maturity by the Issuers and Essel group was extremely high, which could be eventually avoided by the Noticee only by allowing the defaulting Issuers t....
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...., as has happened in the present matter, not only the investors of the affected schemes but also other investors of the Mutual Fund would have to live through uncertain times since the sporadic information available on the public forums as was seen in this case, would mostly speak about the financial hardships of the affected companies viz. the Issuers and the promoters of the Essel group or about the listed company (ZEEL herein) but these information available in the media or other public forums would not clearly explain the actual impact of those information or news on a particular mutual fund schemes which only the asset management company can assess and inform to the unitholders as soon as such adverse information about the issuers or its promoters start circulating in public forums. Therefore, it is incumbent for an AMC to immediately come out with a formal communication explaining in detail the event(s), the schemes affected by it, its possible impact on each of the said schemes and the efforts being undertaken by such AMC to mitigate those possible adverse impact on the investors' money. However, I find that the Noticee, as against what is expected from a responsible AMC....
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.... failure of the Noticee to provide proof of communication. D. Extension of maturity date of NCDs beyond the maturity date of the scheme 80. It is alleged in the SCNs that the decision to allow the Issuers to extend the maturity of the ZCNCDs was taken by the Noticee during the period January 25, 2019 to February 7, 2019. In this respect, from the information furnished by the Noticee, it is observed that KMMF had entered into two separate multilateral agreements dated April 06, 2019, each agreement signed with one of the Issuers, Cyquator and Dr. Subhash Chandra wherein, KMMF voluntarily extended the maturities of ZCNCDs of the Issuers from April 08 & 10, 2019 to September 30, 2019. The said extension of maturity of the debt securities is alleged to be an active investment decision, which could have been taken only by the Noticee, the AMC which was managing the funds of FMP series 127, 183, 187, 189, 193 and 194. By extending the maturity of ZCNCDs of the Issuers beyond the maturity date of the FMP schemes, the Noticee is alleged to have violated the provisions of Regulations 10(a), 25(1), 25(2), 25(16), clauses 6 and 9 of the Fifth Schedule of MF Regulations, 1996 read with C....
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....owing the extension of the due dates of those ZCNCDs of the Issuers and this act of the Noticee cannot be construed as a fresh investment decision. The Noticee has contended that it has only allowed rescheduling of the date of the maturity of those NCDs wherein the due dates of the cash flows are realigned and the same is recognized by SEBI in chapter 9.7 of Master Circular on Mutual Funds. The Noticee has also contended that it had complied with the investment restrictions provided under SEBI Circular dated January 05, 2000 read with Seventh Schedule to the MF Regulations, 1996. 84. From the aforesaid contentions I find that the Noticee has mainly tried to derive support from SEBI Circular dated January 05, 2000 and Master Circular on Mutual Funds. However, a close scrutiny and perusal of both these circulars show that they do not help the case of the Noticee. I note that the Circular dated January 05, 2000 speaks about certain changes in MF Regulations, 1996 including the Seventh Schedule which deals with general investment restrictions placed on mutual funds. There is no allegation that the Noticee has violated any of the provisions of the said circular. However, SEBI Circula....
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....ithout even providing any option to its investors/unit holders to give their consent or dissent to the proposed extension allowed by the Noticee. The above observation is further reinforced from the fact that the Issuers were ultimately not able to fully repay the outstanding dues to the Noticee despite getting an extended period of almost six months for redemption of the ZCNCDs as a result of which, a part of the dues had to be recovered by the Noticee by way of invocation of pledge of the shares of ZEEL on September 25, 2019. Since the six FMP schemes were close ended schemes, the investors were entitled to redeem their investment upon the maturity of such schemes, however, before the maturity of those schemes, the Noticee had already taken a decision to extend the maturity period of the ZCNCDs of the Issuers. 87. The Noticee has submitted that the investment made by it in the ZCNCDs of the Issuers in the initial stage was only for a period less than the maturity dates of the said six FMP schemes which it was later on required to extend so as to recover the whole invested amount and the said decision proved to be a prudent decision in the hindsight. However, it is to be unders....
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.... of dues to the unit-holders beyond the maturity dates of the schemes. In any case, the Noticee has itself submitted that it had paid rest of the consideration on September 25, 2019 by selling the shares of ZEEL pledged with it, hence, the rationale for not selling the pledged shares of ZEEL to pay off the unit holders at the time of maturity of the FMP schemes as contended by the Noticee does not survive any more. 88. Keeping the aforesaid deliberations and my observations in view, there is no doubt in my mind that the Noticee has failed to comply with the restriction imposed by SEBI Circular no. SEBI/IMD/CIR No. 12/147132/08 dated December 11, 2008 read with Regulations 10(a), 25(1), 25(2) and 25(16) of MF Regulations, 1996. E. Partial redemption and FMPs not wound up at the end of maturity: 89. As observed earlier, it is alleged in the SCNs that the units of FMP series 127, 183, 187, 189, 193 and 194 were not fully redeemed and full payment was not made to the investors at the end of their respective maturity dates. It is also alleged that the FMPs were not wound up upon the maturity of such schemes. By such acts and omissions on the part of the Noticee, it is alleged t....
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....alt with by me while discussing the previous issue wherein it has been held that the provisions of SEBI Circular dated December 11, 2008 are applicable during the whole term of a close ended scheme (and not only in the initial investment) and the decision to extend maturity of ZCNCDs of the Issuers was an active investment decision suo motu taken by the Noticee which was evidently taken in violation of the provisions of such circular. 94. Secondly, I note that SEBI Circular dated June 20, 2002 indeed deals with treatment and disposal of illiquid securities/NPAs at the time of maturity/ closure of the mutual fund scheme. The said provision clearly applies in case some of the securities either become NPA or due to their illiquidity, the AMC is unable to dispose them off in the market. As mentioned earlier in this order, the Noticee, at no point of time, declared and valued those ZCNCDs of the Issuers as NPA. Further, the scenario of delay/ failure in disposal of those securities (in the secondary market) due to their illiquidity doesn't apply in the present matter as the Noticee had subscribed to them and held them till maturity presuming that those ZCNCDs would be redeemed by....
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.... of the ZCNCDs of the Issuers based on its own volition and discretion, the Noticee has failed to complete the said process laid down by law whereby the unitholders were not provided with the monies payable to them within 10 days of maturity of FMP series 127, 183, 187, 189, 193 and 194. 97. Therefore, in terms of the above discussions, the Noticee is found to have violated the provisions of Regulations 39(1) and 53(b) read with clause 9 of Code of Conduct for AMCs prescribed at Fifth Schedule further read with Regulations 10(a) and 25(16) of MF Regulations, 1996. F. Creation of segregated portfolio 98. As observed from the aforesaid discussion, the Noticee has not paid the full NAV to the investors at the time of maturity of the FMP schemes in the months of April & May 2019 and the pay-out in respect of the portion of exposure in Essel Group entities (ZCNCDs of Konti and Edison) in the FMPs was made only during September, 2019 i.e. more than five months after the maturity dates of the respective FMP schemes. It is alleged that such act(s) of Noticee (of making final pay-outs to the investors much after the maturity dates of the schemes) amounts to creation of a segregated....
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....ent such as an issuer committing default in making payment on its debt instrument to the MF scheme, directly leads to a negative impact on the NAV of the said scheme. In the event of that, the risk averse investors can panic and attempt to leave the scheme, thus converting their notional loss into actual loss. Later on, in the aftermath of a resolution of such credit event leading to sudden rise in the NAV, the investors who have not redeemed their units or those who entered in such scheme subsequent to such credit event, get unduly benefitted from such resolution. To avoid such circumstances, SEBI, vide Circular dated December 28, 2018, enabled a provision for creation of segregated portfolio in a mutual fund scheme for the first time. Broadly speaking, the segregated portfolio is created by the fund manager as soon as a credit event has happened and those assets/securities, which are affected by such credit event, are put in the segregated portfolio subsequent to which, the unitholders are not allowed to redeem their units from such segregated portfolio created out of the main portfolio of the Mutual Fund scheme and funds collected subsequently if any, from the disposal of assets....
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.... provisions of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018 read with the provisions of Regulations 10(a), 25 (16), clause 9 of the Fifth Schedule of the MF Regulations, 1996. 104. However, in all fairness, I am of the view that the creation of segregated portfolio in the said six FMP schemes had no impact on the investors of the said schemes, since being close ended schemes, there was no standalone impact of segregation of such portfolio on the investors. Therefore, I am inclined to treat the aforesaid violation as a technical violation, which may not be required to be proceeded further. G. Wrong method of valuation of securities 105. The last allegation against the Noticee in the SCNs is that, despite extending the maturity date of the ZCNCDs of the Issuers from April 08 & 10, 2019 to September 30, 2019, the Noticee continued valuing the portfolios of FMP series 127, 183, 187, 189, 193 and 194 on amortisation basis rather than on fair value basis. By doing so, the Noticee has allegedly violated the provisions of Regulations 10(a), 25 (16), 25 (19), 47, clause 9 of the Fifth Schedule read with Principles of Fair Valuation as laid down in the Ei....
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....basis. 108. It is alleged in the SCNs that the decision by the Noticee regarding extending the maturity period of ZCNCDs of the Issuers was taken during the period between January 25, 2019 and February 07, 2019. Due to the said decision, the residual maturity period of such securities suo motu got exceeded beyond 60 days thereby requiring those ZCNCDs of the Issuers to be valued on the principles of fair valuation in terms of the afore-mentioned circulars issued by SEBI. However, the Noticee has allegedly continued showing valuation of such securities on amortization basis due to which the said valuation was not reflecting real market value of those securities. The said act of the Noticee was allegedly in violation of principles enshrined in Eighth Schedule of MF Regulations, 1996 as well as the abovementioned circulars. 109. In this regard, the Noticee has contended that the valuation of the securities in question, i.e. ZCNCDs of the Issuers was done on fair valuation basis till February 06, 2019 and thereafter the same was done on amortization basis from February 07, 2019 till their respective maturity periods viz. April 08, 2019. In support of its contention, the Noticee h....
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....utstanding investment made by the Noticee, the valuation sheet supplied by the Noticee along with its replies depicts no adverse impact whatsoever, of the event dated January 25, 2019 and of the developments thereafter, on the valuation of those ZCNCDs in the books of the six schemes managed by the Noticee. This clearly shows that, irrespective of the method adopted by the Noticee, the valuation of ZCNCDs of the Issuers was certainly far away from adverse market reality prevailing at that point in time pertaining to those ZCNCDs throwing those six FMP schemes to huge amount of credit risks. 111. The Noticee has attempted to defend itself on three counts viz. firstly, it was taking valuation from a third party independent agency; secondly, there was uncertainty in respect of the ZCNCDs of the Issuers due to which, it continued valuing those securities as per the established valuation policy; and thirdly, the FMPs being close ended schemes, the valuation method has little to no impact on the investors as they can redeem their units only at the end of the respective maturity periods. 112. It has to be noted that the responsibility to undertake fair valuation of the assets/securi....
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....e value of these securities and rather the values of those securities was shown to be rising incrementally either prior to or after the events of January 25-28, 2019 in a straight line as may be observed below: Name of the Security Valuation Date Valuation price 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 15-Jan-19 134.6746 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 16-Jan-19 134.1557 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/20.19 (UL) 17-Jan-19 134.2827 0.00% EDISONS UTIl ITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 18-Jan-19 134.3304 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2.019 (UL) 19-Jan-19 134.3738 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 20-Jan-19 134.4172 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 21-Jan-19 134.4606 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 22-Jan-19 134.5068 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 23-Jan-19 134.5476 0.00% EDISONS UTILITY WORKS P LTD. (XIRR 11.10) 08/04/2019 (UL) 24-Jan-19 134.5951 0.....
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....at the subsequent events of failure of committee of lenders (COL), which the Noticee was a part of, constituted in terms of the letter of intent dated February 07, 2019, were not reflected or factored into the said valuation sheet furnished by the Noticee. It clearly establishes that the valuation done by the Noticee in respect of the ZCNCDs of the Issuers was far away from the market realizable value of these securities and the Noticee was disclosing artificially inflated valuation of these securities so as to maintain an overstated NAV on a continuous basis and to avoid raising any kind of alarm amongst unitholders as well as to safeguard the Fund and its trustees from the questioning & complaints of the unit holders. 114. Finally, the Noticee has attempted to justify its actions by stating that the alleged wrong valuation would have no impact on the six FMP schemes as all of them were close-ended schemes; hence, there was no option available to the unitholders to redeem their units before the maturity of those schemes. However, it is to be noted that in terms of Regulation 32 of MF Regulations, 1996, every close ended scheme is required to be listed on a recognized stock exch....
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....ing in the ZCNCDs of the two Issuers which barely had any tangible source of cash flows to meet their debt obligations at the time of maturity of the said ZCNCDs issued by them. While the reputation of the promoters of Essel Group was relevant in the process of due diligence so as to get a limited assurance against any possibility of fraud or misappropriation of the money raised by the Issuers, the repayment of the ZCNCDs could have been done only by having cash in hand with the Issuers, a critical component of their respective balance sheets which was conspicuously missing in the financial statements of Konti and Edison. The Noticee tried to insulate itself from the credit risk by accepting collateral in the form of pledged shares of ZEEL; however, when required, such collateral fell short of the stipulated collateral cover of 1.50 times its total outstanding investment. Admittedly, it also proved to be infeasible on the part of Noticee to dispose of those shares in the market in the fear of accentuating further fall in the price of the shares of ZEEL due to which the Noticee went on to extend the maturity of those ZCNCDs of the Issuers beyond the maturity dates of the FMP schemes....
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....le in the market. Similarly, it cannot be lost sight of the fact that the Issuers could make a part payment of the redemption value of the ZCNCDs to the Noticee only because the promoters of Essel Group decided to make distress sale of their stake in ZEEL and also could find an investor for such a large chunk of shares in time. Had the promoters not been able to dispose of their shares of ZEEL, even the part repayment of those ZCNCDs would not have been possible, thereby throwing the fate of those ZCNCDs to more uncertainties. The investors of the six FMP schemes ultimately might not have suffered any financial loss as claimed by the Noticee, however it cannot be denied that due to lack of due diligence, proper care and foresight as well as poor professional judgment on the part of the Noticee, the investors suffered mental agony as no communication was forthcoming from the side of the Noticee for around 2.5 months subsequent to the credit event pursuant to sudden fall in the share price of ZEEL, and when the Noticee unilaterally took the decision to allow extension of maturity of the ZCNCDs to the Issuers in which, the unitholders had no say. Moreover, no one including the Noticee....
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....ticular security in the best interest of their investors. In fact, as a regulator, SEBI has been encouraging and promoting awareness amongst the retail investors for investment in securities markets through the mutual funds so that their funds are invested and managed in the hands of professionals who can render high standard of services to such teeming retail investors. In such a scenario, the events that have unfolded in this case as have been discussed aforesaid at length, have completely undermined the efforts of SEBI wherein, due to gross high handedness and poor due diligence on the part of the AMC, the interest of the investors has been affected negatively, be it financially or in any other way. As a regulator entrusted with the statutory mandate of investor protection, it is the duty of SEBI to at least curb and minimize such kind of events and conduct, as and when they come to notice, if it is not possible to completely eliminate such events and acts of negligence on the part of the Fund Managers like the Noticee in this case. 121. From the lapses in due diligence and the laid back approach adopted in risk assessment as displayed by the Noticee while taking investment d....
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....igence or risk assessment, can deter years of efforts being made by SEBI to promote participation by more and more investors in the securities market and can discourage the potential investors from investing even in the debt market which is otherwise perceived to be less risky and a safe market. 122. For a mutual fund house which has been in this industry in India for over two decades, the least that can be expected of the AMC of this Fund house is to have in place a robust system for research, risk assessment and due diligence; however, the insensitive manner in which the Noticee AMC is seen to have actuated its system of risk evaluation and due diligence in dealing with the investment in the said ZCNCDs of the Issuers, it seems the effectiveness of its systems stood compromised in the process of the Noticee's pursuit of reaping high yield out of those risky ZCNCDs which was clearly avoidable. The Noticee has brought out the reasons of 'business judgment' to defend its questionable decisions; however, it cannot be overlooked that those investment decisions which involve deployment of public funds require more and deeper scrutiny and cannot be left merely to the '....
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....rate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees. 124. Keeping in view the foregoing factual exposition about various acts of indiscipline, utter neglect of due diligence, inordinate delay in communicating with the investors, violation of the statutory sanctity of the maturity dates of the FMP schemes, permitting extension of the maturity of the ZCNCDs of the Issuers in contravention of extant regulations etc., there remains no doubt in mind that the Noticee has acted in gross violation of provisions of the SEBI Act, 1992, MF Regulations, 1996 as well as various circulars issued by SEBI from time to time hence, the Noticee is inter-alia liable to be held guilty of failure to exercise due diligence, care and render high quality of service as well as for failure to disclose information having negative impact on the six FMP schemes to its investors on time. 125. Thus, keeping in view the deliberations as well as my observations as recorded in the foregoing paragraphs of this order with regard to the blatant and deliberate violation of various provisions of law, I hold that the SCNs ....
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....EBI Act, hereby issue following directions and impose following penalty: 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 of 45 days from the date of this order. 127.2. Further, I impose a Monetary penalties of INR 50,00,000 (Rupees Fifty Lakhs only/-) on the Noticee under the provisions of Sections 1....