Holding that gains made by investors cannot excuse violations of securities regulations, the Supreme Court on Monday upheld SEBI's action against Kotak Mahindra Asset Management Company (Kotak AMC), its trustee company and senior executives over their handling of six Fixed Maturity Plan (FMP) schemes, observing that "market integrity" takes precedence over the financial outcome of a regulatory breach.

Rejecting Kotak AMC's contention that its decision ultimately benefited investors by preventing larger losses, a Bench of Justice Dipankar Datta and Justice Satish Chandra Sharma said that profit or loss to investors is irrelevant in determining whether securities regulations have been violated.

"Market integrity being the paramount consideration, profit or loss to investors is immaterial to determine whether a regulatory infraction has occurred. A wrongdoer cannot be allowed to use the plea of the investors having gained, notwithstanding the violation, as a shield for evading penalty," the Court held.

The Court dismissed appeals filed by Kotak AMC, Kotak Mahindra Trustee Company and six senior executives against a Securities Appellate Tribunal (SAT) judgment that had largely upheld SEBI's findings. It also imposed costs of Rs.30 lakh on Kotak AMC and Rs.20 lakh on the trustee company.

Opening the judgment with the familiar statutory disclaimer, "Mutual Fund Investments Are Subject To Market Risks, Read All Scheme-Related Documents Carefully," Justice Datta observed that the case itself illustrated one such risky situation "ostensibly created by the appellants."

Background

The case arose from six close-ended Fixed Maturity Plan schemes launched by Kotak Mutual Fund between 2013 and 2016. The schemes had invested about Rs.266 crore in debt securities issued by two Essel Group companies, backed by pledged shares of Zee Entertainment Enterprises Ltd. After the value of the pledged shares declined in early 2019, Kotak AMC chose not to invoke the pledge and instead restructured the repayment by extending the maturity of the debentures beyond the maturity dates of the schemes.

As a result, portions of investors' money were withheld beyond the schemes' maturity dates and released only months later.

SEBI found that Kotak AMC had violated the SEBI (Mutual Funds) Regulations, 1996 by failing to redeem the close-ended schemes on their scheduled maturity dates, lacking due diligence while making the investments and failing to make adequate disclosures to investors and the regulator.

SEBI had imposed a monetary penalty of Rs.50 lakh on Kotak Mahindra Asset Management Company (Kotak AMC) under Sections 15D(b) and 15HB of the SEBI Act, besides directing it to refund a portion of the investment management and advisory fees collected from unitholders with 15% simple interest and restraining it from launching any new Fixed Maturity Plan (FMP) scheme for six months. Separately, the regulator imposed a Rs.40 lakh penalty on Kotak Mahindra Trustee Company. Individual penalties were also levied on six senior executives: Rs.30 lakh on Nilesh Shah, Rs.25 lakh on Lakshmi Iyer, Rs.20 lakh on Deepak Agarwal, Rs.10 lakh on Jolly Bhatt, Rs.15 lakh on Abhishek Bisen and Rs.20 lakh on Gaurang Shah. While the Securities Appellate Tribunal set aside the disgorgement direction, it upheld the penalties, and the Supreme Court has now affirmed that decision.

Supreme Court's view

Rejecting the defence that the restructuring had protected investors from greater losses, the Court said the regulatory framework is "consequence-neutral" and does not distinguish between violations that result in profit and those that result in loss.

"The 1996 Regulations make no distinction between a breach resulting in profit and a violation resulting in loss. Neither do we," the Bench observed, adding that excusing regulatory breaches because investors ultimately benefited would incentivise future violations.

The Court further held that compliance with securities regulations cannot be compromised even if strict adherence may have resulted in financial loss to investors.

"Those willing to invest in mutual funds despite such disclaimer do so at their own risk and peril. Committing a breach to save such investors is no justification for deviation from the regulatory mandate," the judgment said.

The Bench also upheld SEBI's finding that Kotak AMC had failed to exercise due diligence while investing in financially weak Essel Group companies and criticised the asset manager and trustee company for not informing SEBI before extending the maturity of the debentures.

It also refused to interfere with the penalties imposed on the senior executives, observing that as domain experts they were fully expected to know the consequences of violating the regulatory framework.

"They are supposed to be individuals who are domain experts, being well-versed in the field of securities law. It is unimaginable that they were not aware of the consequences of infraction of the regulatory framework. Future of the unitholders was put to immense risk by them. In matters such as this, where the margin for error is virtually non-existent, the conduct of the Senior Executives treads beyond condonable limits and, consequently, disentitles them even to any interference with the penalty imposed."

Besides affirming the penalties imposed by SEBI, the Court directed Kotak AMC and Kotak Trustee to deposit costs of Rs.30 lakh and Rs.20 lakh, respectively, with the Supreme Court Registry within two months. The amount will be distributed among ten accredited charitable organisations across the country.

Concluding the judgment with a message to the mutual fund industry, the Court coined what it described as a "Mirror Disclaimer":

"MANDATE FIRST, GAINS LATER;

SEBI COMPLIANCE, NEVER FALTER."

Appearances : Senior Advocate Mukul Rohatgi for Kotak AMC, Senior Advocate Shyam Divan for Kotak Trustee and its executives; Addl Solicitor General N Venkataraman for SEBI

Case : Mr Nilesh Shah and others v Securities and Exchange Board of India, Kotak Mahindra Asset Management Company v Securities and Exchange Board of India, Kotak Mahindra Trustee Company v Securities and Exchange Board of India

Citation : 2026 LiveLaw (SC) 662

Click here to read the judgment