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“MANDATE FIRST, GAINS LATER; SEBI COMPLIANCE, NEVER FALTER”
The Supreme Court has held that under the SEBI (Mutual Funds) Regulations, 1996, a close-ended mutual fund scheme must be fully redeemed and wound up on its maturity date unless it is validly rolled over in the manner prescribed under Regulation 33(4), including necessary disclosures and written consent of unitholders. An AMC/ Fund houses cannot, on grounds of commercial expediency or investor benefit, unilaterally extend the maturity of underlying securities and delay redemption of scheme proceeds. The Court held that securities regulation is compliance-driven and consequence-neutral, so absence of investor loss, presence of investor gain, bona fide intention, or absence of complaints does not excuse a proven regulatory breach.
The Court further held that where contravention of the SEBI Act and the mutual fund regulations is established, penalty follows and mens rea is irrelevant unless the statute expressly requires otherwise. It reaffirmed that due diligence obligations under Regulation 25(16) and the Fifth Schedule must be strictly observed, and that trustees and senior executives are equally accountable where they fail to ensure regulatory compliance and act in breach of their fiduciary and statutory responsibilities.
The Supreme Court specifically held that the penalties imposed on Kotak AMC and Kotak Trustee did not warrant interference, and refused to reduce or waive the penalties imposed on the senior executives, observing that they were domain experts who knowingly exposed unitholders to serious regulatory risk. In addition, the Court imposed costs of Rs. 30 lakhs on Kotak AMC and Rs. 20 lakhs on Kotak Trustee, to be deposited with the Secretary General of the Supreme Court within two months. The Secretary General was directed to identify ten accredited organisations across the country working for destitute children, children battling cancer, orphans, women in distress, victims of crime, mental patients, elderly persons without family support, persons requiring prosthetics, and similar vulnerable groups, and to distribute the amounts equally among them.
A Two-Judge Bench comprising Justice Dipankar Datta and Justice Satish Chandra Sharma made it clear at the outset that in an appeal under Section 15Z of the SEBI Act, its role is confined to substantial questions of law and not to judging the commercial wisdom of the decision taken by market participants. The Bench stressed that the statutory and regulatory framework under securities law is consequence-neutral: compliance is mandatory regardless of whether the impugned conduct ultimately caused gain or loss to investors. Once breach of the SEBI Act or the regulations is established, the only real defence is to show that no breach occurred at all or that the findings are manifestly perverse.
On the question of due diligence, the Bench accepted SEBI’s finding that Kotak AMC’s investment in the debt instruments of Konti and Edison lacked proper diligence and care. The Bench noted that the investment rationale was not based on the financial health of the issuer entities but on the share-backed security, even though the financial statements of the issuer companies showed alarming and consistent losses. It also recorded that the internal approval note itself suggested that the Investment Committee was not even properly aware of the issuer entities while approving the investment, and that no meaningful analysis of credit risk, liquidity risk or interest-rate risk had been undertaken.
The Bench held that the core violation lay in the extension of the maturity dates of the debentures beyond the maturity dates of the close-ended schemes and the resulting delayed redemption of scheme proceeds. Referring to Regulation 33(4) and Regulation 39 of the SEBI (Mutual Funds) Regulations, 1996, the Bench said the legal position was plain: a close-ended scheme must be fully redeemed at the end of its maturity period and wound up on expiry of its duration, unless it is rolled over in accordance with the prescribed process and with written consent of unitholders. Since no rollover had been undertaken, the delayed and partial redemption was directly contrary to the regulations.
The Bench firmly rejected the defence that the course adopted by Kotak AMC caused no investor loss and in fact resulted in gains to unitholders. It said this was no defence at all because the regulations do not distinguish between a breach that leads to profit and a breach that leads to loss. Allowing a violator to escape liability merely because the breach turned out beneficial would undermine market integrity and incentivise future violations. The Bench therefore held that investor benefit, absence of complaints, or a claim of bona fide conduct cannot wash away a regulatory infraction.
The Bench also rejected Kotak AMC’s attempt to rely on the 28 December 2018 circular permitting creation of segregated portfolios. It noted that Kotak AMC had itself taken the stand before the Whole Time Member that partial winding up did not amount to segregation, and in any event the detailed procedural requirements of the circular, including provision in the scheme information document, trustee approval, press release, intimation to unitholders, and allotment of segregated units, had not been followed. Therefore, the action could not be saved by invoking the segregated portfolio framework after the event.
On disclosures, the Bench held that SEBI and the unitholders had been kept in the dark. SEBI was informed of the course actually adopted only on 12 April 2019, after the first maturity dates had already passed and after SEBI itself sought information. The Bench found this unacceptable, particularly because the action taken was not in consonance with the regulations and should have been disclosed to the regulator beforehand. It also observed that unitholders were not given any real choice, because the decision to extend the debenture maturity and withhold redemption amounts was imposed on them without the legally required rollover process.
The Bench was equally critical of Kotak Trustee and the senior executives. It observed that the trustee, despite holding scheme funds in a fiduciary capacity, failed to independently assess whether the proposed course complied with the regulations and served the interests of unitholders. The Bench held that Kotak AMC, Kotak Trustee and the senior executives all adopted a course “unknown to law” and failed to ensure compliance with the 1996 Regulations. It also expressed stern disapproval of their conduct in selectively not placing crucial documents on record and in tendering an incomplete and inaccurate note of the relevant regulations during the hearing, including omission of the crucial provisos to Regulation 33(4).
Briefly, the appeals were filed by Kotak Mahindra Asset Management Company Limited, Kotak Mahindra Trustee Company Limited, and certain senior executives against a common SAT judgment dated 6 March 2026, which had substantially upheld SEBI’s action against them under the SEBI Act, 1992. The controversy arose out of six close-ended fixed maturity plan schemes of Kotak Mahindra Mutual Fund launched between 2013 and 2016, with maturity dates falling between April and May 2019. Under the regulatory framework, these schemes were required to be fully redeemed and wound up on their maturity dates unless they were validly rolled over in the manner permitted by law.
Out of about Rs. 1,625 crores mobilised under the six schemes, around Rs. 266 crore was invested in zero coupon non-convertible debentures issued by Konti Infrapower & Multiventures Pvt Ltd. and Edison Utility Works Pvt Ltd., both part of the Essel group. These investments were secured by a pledge over 22.8% shares of Zee Entertainment Enterprises Ltd., with a stipulated security cover of 1.5 times the exposure, and an obligation to top up security if the cover fell below that level. The debentures were to mature on 8 April 2019, coinciding with the maturity of one of the schemes and preceding the maturity of the remaining schemes.
The trouble began after ZEEL made a public disclosure on 13 November 2018 about divesting 50% of its promoter shareholding, which, along with invocation of pledges by other lenders, caused a drop in ZEEL’s share price. As a result, the security cover fell below 1.5 times. On 25 January 2019, the debenture trustee issued notices calling for additional security or cash top-up, but that was admittedly not done. At a meeting held on 26 January 2019, in which Kotak representatives participated, the promoters expressed unwillingness to provide further shares or money and instead sought a moratorium.
Kotak AMC claimed that it then had two options: either invoke and sell the pledged ZEEL shares, or restructure the redemption of the debentures with other lenders. It chose restructuring, asserting that this was done to prevent further collapse in ZEEL’s share price and to protect investors generally. Kotak Trustee was informed on 28 January 2019, concurred with the decision, and advised Kotak AMC to obtain a personal guarantee from the promoter. On 6 April 2019, Kotak AMC and other relevant parties executed several multilateral agreements and guarantee deeds to implement this course.
When the six schemes matured in April-May 2019, the full amounts due to unitholders were not paid on the scheduled maturity dates. Instead, portions invested in the Essel-linked debentures were withheld, and around Rs. 376 crores out of about Rs. 2,116 crores payable under the schemes was paid only after the maturity dates. SEBI wrote to Kotak AMC on 11 April 2019 asking how the first two schemes had been wound up, and Kotak AMC replied on 12 April 2019 denying any violation. Eventually, all monies were paid to unitholders by 25 September 2019.
SEBI thereafter initiated proceedings. The Whole Time Member, by order dated 27 August 2021, directed Kotak AMC to refund part of the investment management and advisory fees collected from unitholders, with 15% simple interest from the maturity dates till payment, imposed a monetary penalty of Rs. 50 lakhs, and restrained it from launching any new FMP scheme for six months. Separately, on 30 June 2022, the Adjudicating Officer imposed penalties on Kotak Trustee and senior executives, including Rs. 40 lakhs on the trustee and separate penalties on individual executives such as Nilesh Shah, Lakshmi Iyer, Deepak Agarwal, Jolly Bhatt, Abhishek Bisen and Gaurang Shah. SAT later set aside only the disgorgement direction but otherwise upheld the regulatory findings.
