TaxTMI 
TaxTMI 
2026 (3) TMI 1733
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....y were heard together and are disposed of by this common order. 2. Kotak Mahindra Asset Management Company Limited ('Kotak AMC' for short) has filed Appeal No.654 of 2021 challenging the order dated August 27, 2021 passed by the WTM, SEBI [Whole Time Member, Securities and Exchange Board of India] directing the appellant to refund a part of investment management and advisory fees collected from the unit holders of 6 Fixed Maturity Plans ('FMP' for short) along with simple interest at 15% per annum from the date of maturity of such schemes and not to launch any new FMP scheme for a period of 6 months from the date of the impugned order and imposing a penalty of Rs.50 Lakhs on the appellant for violating the provisions of Regulation 10(a), 25(1), 25(2), 25 (16), 25(19), 33 (4), 39 (1), 47, 53(b) and clauses 2,6 and 9 of the fifth schedule of MF Regulations [SEBI (Mutual Fund) Regulations, 1996] read with Regulation 33(4) of MF Regulations and SEBI circulars. 3. Kotak Mahindra Trustee Company Limited ('Trustee Company' for short) and its employees have filed Appeal No. 527 of 2022 challenging the order dated June 30, 2022 passed by the AO, SEBI [Adjudicat....
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....ebentures (ZCNCD) of two Companies (Issuers), namely: ● 'Konti Infrapower & Multiventures Pvt. Ltd' ('Konti' for short) and ● 'Edison Utility Works Pvt. Ltd' (`Edison' for short). (v) Konti and Edison belonged to 'Essel Group'. Essel Group is the promoter of Zee Entertainment Enterprises Limited (ZEEL) and some other companies. (vi) Cyquator Media Services Pvt. Ltd (`Cyquator' for short), is also an entity of 'Essel group' and one of the promoters of ZEEL. (vii) Cyquator agreed to secure investment made by Kotak AMC with Konti and Edison by pledging its equity shares in ZEEL equivalent to 150% and to top up in case of drop in share price of ZEEL. The collateral security cover was monitored on daily basis by independent debenture Trustee (IDBI Trustee). (viii) On January 25, 2019, share price of ZEEL had sharp fall. Consequently, the collateral also fell below the mandated 150%. However, Cyquator did not top it up as agreed. Thereafter, letters of intent were executed amongst the issuers (Konti and Edison) and pledger (Cyquator). A separate agreement was also entered bet....
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.... no action was taken against other mutual funds which had made similar investments. 10. Amplifying his submissions, Mr. Modi submitted that the SEBI has incorrectly held that there was lack of due diligence, considering the fact that the investments were made with India's one of the largest media industries. Appellant had made monthly disclosure to the SEBI and SEBI was aware of the investment portfolio. The investments were fully secured by the pledge of ZEEL shares. ZEEL was a well-known company and also formed part of the BSE's Sensex and the NSE's NIFTY enjoying A+(SO) rating by Credit Rating Agency and thus, justified the investments made with Konti and Edison. 11. He submitted that the investment proposal had come from ZEEL and Essel group and the same was secured by pledge of promoter's shares. Therefore, the identity of Konti and Edison was irrelevant. 12. Mr. Modi contended that the word 'timely' is not defined and has to be distinguished from `immediately'. Communicating information in a 'timely' manner would have much wider discretion as the regulations stipulate no specific time for the same. On April 5, 2019, appellants info....
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....lity of the opportunity cost attached with such delay in redemption, which cannot be calculated in the present matter." 16. In addition to the above common submissions Mr. Modi made following additional submissions in Appeal No.654 of 2021. 17. With regard to the SEBI's allegation that the appellant violated Regulation 25(2) of MF Regulations, 1996 read with SEBI Circular dated July 27, 2000, he submitted that the investments were "structured investments". They were considered essentially as an investment in Essel Group. Therefore, research was done on ZEEL shares, which were pledged to secure the investment. 18. That, appellant's Investment Committee Notes considered various factors including the pledged shares of ZEEL. Appellants were tracking the scrip of ZEEL for about 10 years. Thus, there was proper due diligence. 19. With regard to Appeal No. 527 of 2022, Mr. Modi made an additional submission that the impugned order records that there was no additional or disproportionate gain to the appellants. Therefore, the penalty imposed upon the appellants is untenable. 20. Opposing the appeals, Mr. Rustomjee, learned Senior Advocate for the respondent submitted....
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....ers of Essel Group and based it solely on guess work, expecting to get back the money invested by it through refinance without obtaining a detailed plan about future refinance. v. When the share price of the scrip fell below 1.50 times, the issuers expressed their inability to pledge more shares to increase the cover to 1.50 times. However, appellants failed to inform these adverse developments to the unit holders till April 5, 2019, which was close to the closing date of the scheme. vi. The extension of maturity date of Zero-Coupon NCDs beyond the maturity date of scheme is not permissible in view of restrictions on investments in close ended schemes. Such debt funds should be invested only in schemes maturing on or before the date of maturity of the scheme, thus by entering into agreements unilaterally without taking unitholder's consent and extending the maturity dates of the Zero Coupon NCDs by around 6 months is in violation of SEBI Circular [Circular No. SEBI/IMD/CIR No.12/147132/08] dated December 11, 2008. Further there was no such provision for roll over scheme in the Scheme Information Document as required under the MF Regulations, 1996. vii....
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....sed on the reputation, standing and future prospects of the ZEEL / Essel Group and the reputation and standing of their promoters. (vii) The price of ZEEL scrip suffered sharp fall on January 24 and 25, 2019 leading to fall in security cover for these investments. The issuers, pledger Cyquator and the promoters of ZEEL group failed to top-up the collateral security. (viii) The unit holders of the FMPs were informed about developments with regard to the investments in Konti and Edison, between April 5 and April 12, 2019. (ix) On the respective maturity dates of the FMPs, partial redemptions were made, excluding the investments in the Zero Coupon NCDs of Konti and Edison. (x) The balance amounts were paid to the unit holders between September 9 and September 25, 2019 when proceeds were received by sale of shares by Essel Group Promoters and sale of remaining shares by the appellants by invoking pledge. 23. There are primarily three issues before us - (i) Whether the appellants exercised due care and diligence; and provided high standards of service while taking the decision to invest in Essel Group Companies? (ii) Whether the a....
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....39; contention that they had exercised due care and diligence while investing in the Zero Coupon NCDs of Konti and Edison. Firstly because, it is admitted by the appellants that no assessment of the Konti and Edison was ever made, instead the investments were based on the pledge of ZEEL shares as security. Investment in any Company must be made primarily based on the intrinsic strength of that company, whereas, in this case, focus was on the underlying shares of ZEEL pledged as security with the emphasis on reputation, track record and performance of ZEEL shares and Essel Group. 24.4 Secondly, we note that the Scheme Information Documents (SIDs) for the Fixed Maturity Plans clearly state: ● that appellants' Investment Committee would carry out `credit research' including qualitative and quantitative assessment of the Issuers (Konti and Edison); ● that business and financial profile of the Issuer shall be assessed on various parameters including balance sheets, cash flow adequacy, debt servicing capability, funding flexibility etc .; ● to determine the exposure limits on the Issuer, the total outstanding for the Issuer entity s....
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.... the share value. 24.10 In view of the above, in our considered view, appellants failed to exercise adequate care and due diligence expected from a professional Mutual Fund Asset management company, the Mutual Fund Trustee Company and its professional employees who were part of the decision-making process to invest in Konti and Edison. Accordingly, we answer this point in the negative. 25. Re: Issue No. (ii) - Whether the appellants violated the MF Regulation while extending the maturity dates of the investments made in Konti & Edison and made partial redemption of the FMPs at the time of their maturity? 25.1 Appellants' contention with regard to this issue is that, appellants did not make any fresh investments and only agreed to extend the time for repayment to avoid any crash in the share market. Further that, there was no roll over of the entire Fixed Maturity Plans, but liquidation of investments in Konti and Edison were delayed to get full recovery and additional profits. As a result of this extension, the investors have not suffered any loss and the extension was in the best interest of the unit holders. 25.2 The above argument is legally faulty because, the d....
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....8, 2019, hence, the unit holders were aware about the adverse situation. 26.4 We are not convinced by the above arguments. Even though 'timely' is not defined, the delay in informing the unit holders after three months cannot be considered as 'timely'. The appellants were in constant negotiations with the ZEEL Group and its promoters, from January, 2019 onwards, therefore, they were under obligation to keep the unit holders informed of the various developments. The disclosure by ZEEL on January 28, 2019 cannot be a substitute for appellants' duty to inform the investors. We, therefore, hold that the appellants failed to make adequate and timely disclosures to the unit holders with respect to the adverse developments in the investments made in Konti and Edison. Accordingly, we answer this point in the negative. 27. The appellants also argued that the direction to pay the investors the proportionate investment management fee with interest at 15% per annum is unjust and disproportionate because, the investors did not suffer any loss but got full amount with profit and interest. It was also argued that imposition of any penalty on the appellant is unjust espec....
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....nagement fee that it had unjustifiably charged from the unitholders of the six FMP schemes. As a logical consequence to the aforesaid findings, I also hold that the Noticee is liable for imposition of appropriate penalty under Section 11B(2) read with Section 15D(b) and 15HB of SEBI Act, 1992." [Emphasis supplied] 30. Thus, the reasoning for directions for disgorgement of part of the management fees are that the Appellant provided abysmal standard of service while handling the monies of the investors of the FMP schemes and therefore violated various provisions of law. In our view, such a reasoning cannot be used for directing disgorgement of management fees. In this regard, it would be appropriate to quote the relevant provisions of SEBI Act, 1992 which reads as follows :- "Section 11-B [Explanation .- For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount eq....