Kotak Mahindra Asset Management Company Limited vs SEBI
- Court
- Securities Appellate Tribunal
- Case type
- SEBI
- Decided on
- 06-03-2026
IN THE SECURITIES APPELLATE TRIBUNAL
AT MUMBAI
th
Dated this the 6 day of March , 2026
CORAM: Justice P.S. Dinesh Kumar, Presiding Officer
Ms. Meera Swarup, Technical Member
Dr. Dheeraj Bhatnagar, Technical Member
Appeal No. 654 of 2021
[Along with Misc. Application No. 711 of 2022 & 181 of 2025]
BETWEEN:
Kotak Mahindra Asset Management Company Limited
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051. …. Appellant
(By Mr. Pesi Modi, Senior Advocate with Mr. Neville
Lashkari, Mr. Joby Mathew, Mr. Aditya Joby and
Ms. Sanskrity Purohit, Advocates i/b Joby Mathew &
Associates for the Appellant)
AND:
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051.
…Respondent
(By Mr. Shiraz Rustomjee, Senior Advocate with Mr. Suraj
Choudhary and Mr. Abhishek Khare, Advocates i/b Khare
Legal Chambers for the Respondent-SEBI.)
2
AND
Appeal No. 527 of 2022
BETWEEN:
1. Kotak Mahindra Trustee Company Limited
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
2. Mr. Nilesh Shah
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
3. Ms. Lakshmi Iyer
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
4. Mr. Deepak Agrawal
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
5. Ms. Jolly Bhatt
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
6. Mr. Abhishek Bisen
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
7. Mr. Gaurang Shah
27 BKC, C-27, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…. Appellants
(By Mr. Pesi Modi, Senior Advocate with Mr. Neville
Lashkari, Mr. Joby Mathew, Mr. Aditya Joby and Ms.
Sanskrity Purohit, Advocates i/b Joby Mathew & Associates
for the Appellants)
AND:
3
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051.
….Respondent
(By Mr. Shiraz Rustomjee, Senior Advocate with Mr. Suraj
Choudhary and Mr. Abhishek Khare, Advocates i/b Khare
Legal Chambers for the Respondent-SEBI)
THESE APPEALS ARE FILED UNDER SECTION 15T OF THE
SEBI ACT, 1992 TO SET ASIDE THE IMPUGNED ORDER
DATED AUGUST 27, 2021 PASSED BY THE WHOLE TIME
MEMBER AND ORDER DATED JUNE 30, 2022 PASSED BY
THE ADJUDICATING OFFICER, SEBI RESPECTIVELY.
THESE APPEALS HAVING BEEN HEARD AND RESERVED FOR
ORDERS ON MARCH 19, 2025, COMING ON FOR
PRONOUNCEMENT OF ORDER, THE TRIBUNAL MADE THE
FOLLOWING:
O R D E R
Per: Ms. Meera Swarup, Technical Member
These two appeals are filed by Kotak Mahindra Asset
Management Company, its trustee company and its
employees. They 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
1
WTM, SEBI 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
1
Whole Time Member, Securities and Exchange Board of India
4
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
2
Regulations 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
3
passed by the AO, SEBI imposing a penalty on the
appellants totalling to Rs.1.60 Crores under Section 15-I of
4
the SEBI Act read with Rule 5 of SEBI (Procedure for
Holding Inquiry and Imposing Penalties) Rules, 1995 for
violations of provisions of MF Regulations and various
circulars under section 15 D (b) and 15 HB of the SEBI Act.
4. Brief facts of the case are:
(i) Kotak Asset Management Company (‘Kotak AMC’ for
short) is a wholly owned subsidiary of Kotak
Mahindra Bank Ltd., and provides management &
administrative services. It was appointed as the
Asset Management Company of Kotak Mahindra
Mutual Fund by the Kotak Trustee Company as per
Investment Management Agreement (‘IMA’ for
short) dated May 20, 1996 to provide management
and administrative services to the Trust and to
deploy the funds raised by the Mutual Fund under
the Scheme by authorizing them to do all such acts
2
SEBI (Mutual Fund) Regulations, 1996
3
Adjudicating Officer, Securities and Exchange Board of India
4
Securities and Exchange Board of India Act,1992
5
and things on behalf of the Trust as are necessary
for the discharge of the responsibilities of the AMC.
(ii) Kotak Mahindra Trustee Company Limited
(appellant No.1 in Appeal No. 527 of 2022) holds
the property of Kotak Mahindra Mutual Funds in
trust for the benefit of unit holders. Appellant No.2,
Mr. Nilesh Shah is the Managing Director of Kotak
AMC. Appellant No.3, Ms. Lakshmi Iyer is the Chief
Investment Officer (Debt) and Head Products of
Kotak AMC. Appellant No.4, Mr. Deepak Agarwal is
the Vice President & Fund Manager of Kotak AMC.
Appellant No.5, Ms. Jolly Bhatt, is the Compliance
Officer of Kotak AMC; Appellant No.6, Mr. Abhishek
Bisen is the Fund Manager of the Fixed Maturity
Plans ("FMP") series 127 and 183; Appellant No. 7,
Mr. Gaurang Shah, is a Director of Kotak AMC who
was also one of the members of the Investment
Committee that approved the investment decisions
of the FMP Schemes 127, 183, 187, 189, 193 and
194 along with Appellants 2 and 3.
5
(iii) Kotak Mutual Fund launched six ‘Fixed Maturity
Plans’ as ‘close ended’ debt schemes. They were to
mature between April 8, 2019 and May 15, 2019.
Kotak FMP Series 127 was listed on the BSE. Kotak
FMP Series 183, 187, 189, 193 and 194 were listed
on the NSE.
(iv) Kotak AMC constituted an Investment Committee to
take decisions on investments in debt instruments.
Based on its decisions investments were made in
5
series bearing nos. 127, 183, 187,189, 193 and 194
6
Zero Coupon Non-Convertible Debentures (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 between the issuers and the Kotak
AMC to extend the date of maturity of the Zero-
Coupon Debentures till September 30, 2019.
7
(ix) The schemes were wound up on their respective
maturity dates and payment was made to the
investors except for the portion invested in Zero
Coupon Debentures, which was ultimately paid in
September 2019 by invoking the pledge and selling
the ZEEL shares.
5. Following allegations were made in the show cause
notices issued to the appellants in both the appeals:
Lack of due diligence while investing in Essel Group
Companies;
Investment decisions made without research reports
and analyzing various factors;
Maturity Date of the security exceeded the maturity
date of schemes;
Partial redemption of FMPs at the end of their
maturity periods and the FMPs not being wound up at
the end of their maturity dates;
Creation of Segregated Portfolio;
Non- Compliance with principles of valuation of
securities;
Inadequate disclosures to investors of FMP 127, 183,
187, 189, 193 and 194;
6. Noticees submitted their replies. SEBI issued some
additional show cause notices. They were also replied. After
adjudication, the impugned orders have been passed.
7. We have heard Mr. Pesi Modi, learned Senior Advocate
for the appellants and Mr. Shiraz Rustomjee, learned Senior
Advocate for the respondents in both the Appeals.
8
8. Mr. Modi for the appellants made following common
submissions:
8.1 There is no allegation of any ‘fraud’ against the
appellants. The primary allegation is ‘lack of due diligence’
while making investment choice and not following the
mandated procedure. Appellants had disclosed their
investment portfolio in public domain from 2016 to 2019 as
mandated by the SEBI circulars. No objections were raised by
any investor nor any complaints were filed.
8.2 The impugned order records that the investment portfolio
in question benefitted the investors since they got the full
investment with profit and interest. The actual payment made
to the investors after selling the pledged ZEEL shares was with
an additional profit of Rs.24.16 crores, more than what they
would have got if the scheme was closed as per the original
schedule.
9. Mr. Modi next submitted that SEBI had cherry picked the
appellants and 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.
9
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 informed the
investors about the steep fall in price of ZEEL shares. On April
12, 2019, appellants informed the investors the decision to
provide additional time to the promoters of Essel group to
complete strategic sales process. Appellants also
communicated that they would withhold certain parts of units
of the FMPs for the benefit of the unit holders.
13. Mr. Modi submitted that none of the investors objected
or demanded immediate liquidation. He contended that since
the share price of ZEEL had fallen, if the pledged shares were
sold by the Kotak AMC, the market could have crashed.
Therefore, the pledged shares were not sold. However, they
were sold on a later date to get full recovery and additional
profit. He submitted that rescheduling is recoginsed by SEBI in
its circular dated June 20, 2002. Further, Regulation 41(2)(a)
of MF Regulations expressly mandates winding up of the
scheme in the best interests of the unit holders.
14. He submitted that the allegation that the appellants did
not reflect the realizable values of securities and valued the
portfolio on amortization basis is factually incorrect as the
appellants’ valuation was on fair valuation basis till February 6,
2019, thereafter, it was on amortization basis only from
10
February 7, 2019 till the respective maturity dates of the
schemes. Thereafter, in view of the peculiar situation, the
appellants relied on the valuation done by external valuers
(CRlSIL and ICRA) who valued the securities on the basis of
similarly placed securities in the market, i.e. on fair valuation
basis. Therefore, the allegation that after the maturity dates,
the appellant continued to value the portfolio on amortization
basis, is factually incorrect.
15. Mr. Modi further submitted that while considering the
mitigating factors, the learned WTM has noted that though
there was delay, the investors have been fully paid. He
referred to the following in the impugned order:
“126. …….. I note from the submissions of the Noticee
that the investors have been fully repaid the amounts due
to them, albeit with a delay but interest to the extent of
delay has also been paid to the investors. Therefore, in
monetary terms, the unitholders of six FMP schemes
ultimately did not suffer any loss. While the same is a
mitigating factor to be considered at the time of imposing
penalties, I also cannot rule out the possibility 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.
11
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 that:
i. The appellants’ contention that they have been
targeted is factually incorrect. He produced an
order of settlement of proceedings in the case HDFC
Mutual Fund and contended that SEBI has taken
action against mutual funds which violated the
Regulations. Appellants have not given the specific
names of any mutual fund but made vague
allegations. In absence of relevant facts, it is not
possible for SEBI to place its version on record. He
also submitted that it is settled that there can be no
claim based on negative equality.
ii. The main allegation is lack of due diligence. While
investing in the Zero Coupon NCDs, appellants
failed to exercise proper due diligence in
examination of repayment capacity of the two
issuers as well as in assessment of adequacy of
collateral/security cover. According to the
appellants’ note dated March 07, 2016 seeking
approval of Investment Committee, the Issuers
12
were Arm Infra & Utilities Pvt. Ltd. and Continental
Drug Company Pvt. Ltd. (now Konti). However, it is
the admitted position that investment was made in
Konti and Edison which shows that the appellants’
investment committee did not even bother to
ascertain the name of the actual issuer entity even
after approving the proposal to invest. The
financials examined were not of Issuer Entities but
of Zee & Dish TV. The investment committee had
st
approved the 1 investments on March 7, 2016
whereas the offer documents were issued by the
issuers on March 11, 2016 and March 28, 2016. The
nd
2 investment decision was taken on May 18, 2016
whereas offer documents was issued in June 2016.
Thus, even before the offer documents were issued
by the issuers approvals were given by the
investment committee which indicates gross lack of
due diligence.
iii. Further, the financial losses of the issuers were also
not taken into account. As per investment notes,
the repayment was to be done through refinancing,
however, the ability to get such refinance in case of
insufficient security was not recorded. Thus, the
credit risk of the issuers was not assessed.
iv. Appellants appear to have been influenced only by
the reputation of Essel Group, the repayment
history of promoters of Essel Group and the
strength of collateral provided by Cyquator.
Appellants did not bother to collect the actual
figures of the pledged shares of ZEEL from the
promoters of Essel Group and based it solely on
guess work, expecting to get back the money
13
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
6
months is in violation of SEBI Circular 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.
7
vii. Appellants contend that SEBI circular dated June
26, 2002 contemplates rescheduling of date of
maturity. This contention is incorrect because the
said circular deals with treatment and disposal of
illiquid securities and NPAs.
viii. The extension of maturity of the Zero Coupon NCDs
by the appellants lead to failure to wind up FMPs at
6
Circular No. SEBI/IMD/CIR No.12/147132/08
7
SEBI Circular MFD/CIR/05/432/2002 dated 20.6.2002
14
the end of maturity period which violates Regulation
33(4) of MF Regulations. Permissible exception to
the mandate of making a full redemption on
maturity date of a scheme is contained in the
proviso to the Regulation 33(4) of the MF
Regulations, which provides for roll over to close
ended schemes subject to disclosures to the
investors and a copy thereof being filed with SEBI,
whereas, no such roll over was sought in the
present case.
ix. Though the default and extension of maturity date
had occurred, the appellants continued valuing the
portfolios on amortization basis rather than fair
value basis. They were well aware that the maturity
date would be extended beyond 60 days making
the Circular inapplicable.
21. We have carefully considered the rival contentions and
perused the records.
22. The admitted facts are as follows: -
(i) Six closed ended debt schemes (FMPs 127, 183,
187, 189, 193 & 194) were launched by Kotak
Mahindra Mutual Fund during the period
November 2013 to July 2017 with maturity dates
falling between April 8, 2019 to May 15, 2019.
(ii) Investments with Konti and Edison had an
exposure ranging from 3.06% to 11.34% in the
Asset under management (‘AUM’).
15
(iii) The maturity dates of the Zero Coupon NCDs were
on or before the maturity dates of the Fixed
Maturity Plans.
(iv) Both the issuers namely, Konti and Edison,
belonged to the ‘Essel Group’ which was a
promoter of Zee Entertainment Enterprises Ltd.
(ZEEL).
(v) The investments in the Zero Coupon NCDs were
secured by Cyquator Media Services Private
Limited, also an entity of Essel Group and one of
the promoters of ZEEL, by pledging shares of
ZEEL. The cover for these investments was
decided to be a minimum of 1.50 times of the
exposure amount. In case of any drop in the share
cover below 1.50 times of the investment
exposure, it was mandated to be topped up
immediately.
(vi) The investment in issuer companies was based 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.
16
(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 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?
(iii) Whether the disclosures to the unit holders were
made timely and adequately?
24. Re: Issue No. (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?
24.1 Appellants have fairly admitted that the investment
decision in Zero Coupon NCDs of Konti and Edison were made
17
on the basis of investment proposal received from the
promoters of the ZEEL / Essel Group. Konti and Edison were
merely the investment vehicles of ZEEL / Essel Group and
their identity was not relevant. The investments were based
on the reputations, standing and future prospects of the
Group and their promoters. It was argued that, the
investments were secured by pledge of equity shares of ZEEL
equivalent to 150% of the exposure amount, with an
assurance to top up, in case, the value dropped below 150%.
But, the fact remains that when the collateral value dropped
below 150%, it was not topped up.
24.2 It was argued that SEBI was always aware of the said
investments as all the Mutual Funds have to disclose their
investment portfolio every month. SEBI had conducted
numerous inspections between 2014 and 2017 but no adverse
observation was made. The NCDs were rated as A+ (SO)
Rating by SEBI registered Credit Rating Agency. The pledge of
shares of ZEEL provided high upfront security, ZEEL’s shares
formed part of BSE’s Sensex and NSE’s NIFTY. The appellants
had previously invested in similar NCDs of the ZEEL promoter
entities and the same were also secured by pledge of
promoters shares and all such investments were duly paid
without any delay or default. The NCDs were “structured
obligations” and the debt was secured by collateral. The
investment rationale in such cases is based on the underlying
security. This concept is recognized by SEBI and there is no
restriction in Mutual Fund Regulations or any Circular for such
investments. Appellants were constantly monitoring the scrip,
but ZEEL shares witnessed a sharp fall due to sale of huge
quantity of shares by some investor.
24.3 While the above arguments are persuasive, we are
unable to persuade ourselves to accept appellants’ contention
18
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 shall be
considered; and
that “Securities carry a credit risk of repayment of
principal or interest by the Borrower”.
24.5 The investors in the Fixed Maturity Plans were made to
believe that the appellants would follow all that is stated in the
Scheme Information Documents. But it is admitted by the
appellants that it was not done. Therefore, we conclude that
the appellants did not carry out due diligence on the issuers
19
(Konti and Edison) as assured to the investors in the Scheme
Information Documents.
24.6 Having failed to carry due diligence, appellants have
sought to allege discriminatory treatment by the SEBI,
contending that no action was taken against similarly situated
Mutual Funds. As rightly pointed out by Mr. Rustomjee,
appellants have not placed on record the names of any other
defaulting Mutual Fund and thus the allegation is vague.
Further, we were informed that investments by other Mutual
Funds were in open-ended schemes. Therefore, this
contention is devoid of merit.
24.7 We also note that in the ‘Notes to the Investment
Committee’ dated March 7, 2016 and May 18, 2016 no
reasons were forthcoming as to why pledge of 1.5 times was
sufficient for the investments. Significantly, the approval notes
record that there was no clarity on the promoter’s share
pledge-based borrowings and the promoters could run out of
shares if prices in ZEEL and Dish TV shares fell by 20% (Note
dated March 7, 2016 states it to be 30%).
24.8 Appellant’s next contention is that the investment
details were within SEBI’s knowledge and that it had carried
out numerous inspections but made no adverse observations.
This argument does not absolve appellants of their duties and
obligations. SEBI’s explanation is that inspections are
generally on sample basis and they cannot cover each and
every aspect. Further, what was disclosed to the SEBI is the
investment pattern and not the reasons for the investment.
This is a plausible explanation and we accept it.
24.9 Further, when the shares of ZEEL witnessed a sharp fall,
the promoters failed to top-up the security to maintain it at
required 1.5 times. Though, appellants have pleaded that such
20
an event could not have been foreseen at the time of making
investment, the fact remains that the issuers were unable to
repay and the promoters failed to make good their pledge of
1.5 times 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
decision taken by the appellants to extend the maturity dates
of schemes goes against the basic tenet of closed ended
schemes which mandates investment only in securities which
mature on or before the date of maturity of the scheme. We
are unable to appreciate the stand taken by the appellants
21
that they had no option but to extend the maturity dates of
the securities to avoid crashing the price of ZEEL’s share. The
appellant have admitted that investments in Konti and Edison
were made only on the strength of the ZEEL shares, however,
the appellants did not take necessary action required under
the terms of the agreement with the issuer and the pledger
when the security cover fell below 1.5 times. In fact,
appellants negotiated time and again with the promoters of
the ZEEL / Essel Group thereby changing the terms of Zero
Coupon NCDs without informing the investors.
25.3 It is also an admitted fact that the extension of the
maturity dates led to partial redemption of the Fixed Maturity
Plans. Thus, the unit holders were deprived of full redemption.
Their consent was not taken for making the partial
redemption.
25.4 Therefore, we are of the view that the appellants
violated Regulation 33(4) of Mutual Fund Regulations by
extending the maturity dates of the investments and by
making partial redemption of the FMPs at the time of their
maturity. Accordingly, we answer this point in the
affirmative .
26. Re: Issue No (iii) – whether the disclosures were
made to the unit holders timely and adequately?
26.1 Under the Regulation 60 of the Mutual Fund
Regulations, the trustees are bound to make such
disclosures to the unitholders as are essential in order to
keep them informed about any information which may have
an adverse bearing on their investments.
26.2 It is an admitted fact that price of ZEEL shares fell
sharply in January 2019. On January 24 and 25, 2019, the
debenture trustee (IDBI Trustee) issued top up notices to
22
Cyquator, Konti and Edison. Thus, the appellants were aware
of adverse developments affecting the investments in Konti
and Edison right from January 2019, however, the first
communication was addressed to the unit holders only on
April 5, 2019.
26.3 The appellants have pleaded that ‘timely’ is not defined
in the MF Regulations and that the ZEEL Group had made
disclosures with respect to fall in the share prices on January
28, 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 especially
when there is no finding with regard to ‘fraud or mischief’. It
was urged that appellant which has been in the mutual fund
23
business for over about 30 years and the impugned order has
caused severe harm to appellant’s reputation and market
standing.
28. Similar arguments were made by the appellants in
Appeal No. 527 of 2022 with regard to the penalties imposed
by the learned AO. During oral arguments, the appellants had
pleaded that the decision in this appeal would have to follow
the decision in Appeal No. 654 of 2021. We have already held
that adequate care was not exercised while making
investments in ZCNCDs; extension of maturity dates was in
violation of MF Regulations; and disclosure to unitholders was
not made timely. Therefore, in our view Appellant No. 1, the
Trustee Company, failed to ensure that the transactions of
ZCNCDs entered into by the Kotak AMC were in accordance
with MF Regulations and the scheme documents. The Trust
further failed to ensure timely and adequate dissemination of
information to all unitholders. The Appellant Nos. 2 to 7 failed
to ensure that the Mutual Fund comply with the Regulations
and the funds of schemes are invested as per the information
given in SIDs and the unitholders are kept informed of all
developments regarding the investments. In view of this, we
see no ground to interfere with the penalties imposed by the
AO as per the impugned order dated June 30, 2022.
29. With regard to disgorgement of a part of the
management fee, paragraph 125 of the impugned order states
as follows:-
“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 have rightfully levelled
various allegations against Noticee for committing
those transgressions with open eyes unmindful of
the regulatory & legal implications of such
contraventions, thereby prejudicing the interest of
24
the innocent investors and unit holders of those
six FMP schemes. Hence in all fitness of things,
taking into account the abysmal standard of
service rendered by the Noticee while
handling the monies of the investors of those
FMP schemes, it is a deserving case for holding the
Noticee liable for issuance of appropriate
directions for disgorgement of a part of the
management 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
equivalent to the wrongful gain made or loss
averted by such contravention. ]”
[Emphasis supplied]
31. “Wrongful gain” as described under Section 447 of the
Companies Act, 2013 is extracted below:-
“wrongful gain means the gain by unlawful means of
property to which the person gaining is not legally
entitled.”
25
32. This Tribunal in Karvy Stock Broking Ltd. vs SEBI,
Appeal No. 6 of 2007 has held that disgorgement is an
equitable restitutive remedy designed to prevent unjust
enrichment and is not punitive in nature. We note that in
paragraph 126 of the impugned order, the WTM has given a
clear finding – “ Therefore, in monetary terms, the unitholders
of six FMP schemes ultimately did not suffer any loss .” The
respondents have failed to establish that the appellant made
any ‘wrongful gain’ or wrongfully averted loss. Management
fees is charged by the Appellant for the services rendered for
management and administration of the schemes. The services
rendered by the Appellant were not held as unlawful or in
contravention of law but were found to be deficient in the
impugned order for which penalty has been imposed.
Therefore, in the facts of this case, we are unable to
appreciate the reasoning given by WTM for issuing directions
for disgorgement for rendering deficient standards of services
by the Appellant. We have already held there were
deficiencies in the services rendered by the Appellant,
therefore, in our opinion, ends of justice could be met by
imposition of penalty.
33. We have held that the findings in both the impugned
orders against the appellants are substantiated. Investors
repose trust in the Mutual Funds Companies and invest their
hard-earned money. In our considered view, making
investment in Konti and Edison based on a pledge, without
assessing the financial strength of the Companies is a serious
lapse. This is compounded by not informing the investors
timely about the events leading to the partial redemption. In
view of these serious lapses, we do not find any merit in the
submissions with regard to penalty. Accordingly, the
following:-
26
O R D E R
i. Appeal No. 654 of 2021 is allowed in part .
Direction with regard to disgorgement of
investment management and advisory fee in
paragraph 127.1 of the impugned order is set
aside.
ii. Appeal No. 527 of 2022 is dismissed .
iii. Pending interlocutory application(s), if any, stands
disposed of. No costs.
Justice P.S. Dinesh Kumar
Presiding Officer
Ms. Meera Swarup
Technical Member
Dr. Dheeraj Bhatnagar
Technical Member
06.03.2026
msb
After pronouncement of the order, Mr. Pesi Modi,
learned Senior Advocate for the appellants prayed that the
stay order on penalties may be continued for a period of 8
weeks to enable the appellants to challenge the order in the
Supreme Court. Heard Mr. Abhishek Khare, learned
Advocate for the SEBI. Ordered accordingly.
Justice P.S. Dinesh Kumar
Presiding Officer
Ms. Meera Swarup
Technical Member
Dr. Dheeraj Bhatnagar
Technical Member
06.03.2026
msb
MADHUKAR
BHALBAR
Digitally signed by MADHUKAR
BHALBAR
Date: 2026.03.06 17:26:04 +05'30'