2026 INSC 681 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6529 OF 2026

MR. NILESH SHAH & ORS. …APPELLANTS

VERSUS

SECURITIES AND EXCHANGE

BOARD OF INDIA & ANR. …RESPONDENT S

WITH

CIVIL APPEAL NO.4681 OF 2026

KOTAK MAHINDRA ASSET

MANAGEMENT COMPANY LIMITED …APPELLANT

VERSUS

SECURITIES AND EXCHANGE

BOARD OF INDIA …RESPONDENT

WITH

CIVIL APPEAL NO.6527 OF 2026

KOTAK MAHINDRA TRUSTEE

COMPANY LIMITED …APPELLANT

VERSUS

SECURITIES AND EXCHANGE

BOARD OF INDIA & ORS. …RESPONDENT S

2

J U D G M E N T

DIPANKAR DATTA, J.

“MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS , READ ALL

SCHEME-RELATED DOCUMENTS CAREFULLY.”

1. An average Indian is more than familiar with this unmistakable phrase.

Brandished at most noticeable places, it cautions potential investors of

the likely risks of investment in mutual funds. The present appeals deal

with one such risky scenario ostensibly created by the appellants.

THE APPEAL

2. The appeals, under Section 15Z of the Securities and Exchange Board

of India Act, 1992

1

, are directed against a common judgment and

order

2

of the Securities Appellate Tribunal

3

dated 6

th

March, 2026,

disposing of two appeals

4

. Appeal No. 654 of 2021 was the instance of

Kotak Mahindra Asset Management Company Limited

5

, assailing an

order dated 27

th

August 2021 of the Whole Time Member

6

of the

Securities and Exchange Board of India

7

whereas, the appellants in

Appeal No. 527 of 2022 were Kotak Mahindra Trustee Company

Limited

8

and its employees/officers/senior executives/fund managers

9

,

1

SEBI Act

2

impugned order

3

TRIBUNAL

4

Appeal No.654 of 2021 and Appeal No.527 of 2021

5

KOTAK AMC

6

WTM or Member, used interchangeably

7

SEBI

8

KOTAK TRUSTEE

9

Nilesh Shah; Lakshmi Iyer; Deepak Agarwal; Jolly Bhatt; Abhishek Bisen; Gaurang

Shah (collectively, Senior Executives)

3

collectively, wherein they assailed an order dated 30

th

June, 2022

passed by the Adjudicating Officer

10

, SEBI.

GENESIS OF THE LIS

3. The facts, shorn of unnecessary details, are:

a. A mutual fund by the name of Kotak Mahindra Mutual Fund

11

was

sponsored by Kotak Mahindra Bank Limited

12

. The funds thereof

were held by KOTAK TRUSTEE in a fiduciary capacity. KOTAK TRUSTEE

appointed KOTAK AMC (a wholly owned subsidiary of KOTAK BANK)

as the asset management company to manage the funds of

KOTAK MF.

b. KOTAK MF launched 6 close ended schemes

13

(a scheme having a

fixed maturity period) between 2013 and 2016 which were to

mature in or around April/May 2019

14

. Accordingly, KOTAK AMC

was to invest only in such securities which would mature on or

before the date of the maturity of the scheme

15

. The Schemes

were regulated by the SEBI (Mutual Funds) Regulations, 1996

16

.

As per the 1996 Regulations, the scheme must be wound up at

the end of the maturity period.

10

AO

11

KOTAK MF or KOTAK MUTUAL FUND, used interchangeably

12

KOTAK BANK

13

FMP series nos. 127, 183, 187, 189, 193 and 194; collectively referred as ‘Schemes’

14

FMP Series 127 had maturity date of 8

th

April, 2019, FMP Series 183 had maturity date

of 10

th

April, 2019; FMP Series 187 had maturity date of 15

th

April, 2019; FMP Series 189

had maturity date of 22

nd

April, 2019; FMP Series 193 had maturity date of 2

nd

May,

2019; FMP Series 194 had maturity date of 15

th

May, 2019.

15

see: Circular SEBI/IMD/CIR No. 12/147132/08 dated 11

th

December, 2008

16

1996 Regulations

4

c. An amount of Rs. 266 crore (out of Rs. 1625 crore) collected under

the said Schemes was invested in debt securities, i.e., Zero

Coupon Non-Convertible Debentures

17

issued by Konti Infrapower

& Multiventures Private Limited

18

and Edison Utility Works Private

Limited

19

(parts of the ESSEL group of companies

20

). These

investments were backed by a pledge over 22.8% shares of Zee

Entertainment Enterprises Limited

21

, which were owned by

Cyquator Media Services Private Limited

22

. Amount of the shares

pledged by CYQUATOR was to the extent of 1.5 times of the

exposure amount, which was to be topped up by CYQUATOR by

giving additional security (additional shares or otherwise) in case

of drop in share cover below 1.5 times.

d. The ZCNCDs were to mature on 8

th

April, 2019, which was on the

maturity date of one of the 6 Schemes and prior to maturity of the

remaining 5.

e. On 13

th

November, 2018, ZEEL made a public disclosure expressing

its intent to divest 50% of its shareholding. This, along with

invocation of pledge by other lenders of ZEEL, caused a drop in the

share value of ZEEL, resulting in the security cover to drop below

1.5 times the exposure. In view of this drop, notices were issued

17

ZCNCDs

18

KONTI

19

EDISON

20

ESSEL

21

ZEEL

22

CYQUATOR

5

by the debenture trustee (IDBI Trustee) to KONTI, EDISON and

CYQUATOR on 25

th

January, 2019, to create a security over more

shares, so that the cover can be increased back to 1.5 times or to

deposit additional money. This, admittedly, was not done.

f. On 26

th

January, 2019, a meeting was held by the promoters of

ZEEL and its lenders, of which representatives of KOTAK MF were

also a part. In this meeting, promoters of ZEEL expressed

unwillingness to provide further shares or deposit additional

money and requested for a moratorium.

g. At this juncture, KOTAK AMC claims to have had 2 options: first, to

sell the shares of ZEEL pledged against the ZCNCDs, or second, to

agree with other lenders of ZEEL for restructuring the redemption

of the ZCNDCs. It chose the latter. This decision, KOTAK AMC

claims, was to ensure that there was no further drop in the share

price of ZEEL, which would impact other lenders and mutual funds.

On 28

th

January, 2019, KOTAK TRUSTEE was informed of this

decision, to which it concurred. It advised KOTAK AMC to obtain a

personal guarantee from the promoter.

h. On 5

th

April, 2019, KOTAK AMC addressed emails to the unitholders

of the Schemes, making them aware of the developments that had

occurred. The emails are, however, not on record.

6

i. On the very next date, i.e. 6

th

April, 2019, Kotak AMC, KONTI,

EDISON, CYQUATOR, and a promoter of ZEEL entered into several

multilateral agreements and deeds of guarantee.

j. On 8

th

and 10

th

April, 2019, 2

23

of the 6 Schemes matured. Ideally,

the entire amount in those Schemes should have been paid to the

unitholders as per the scheme document. However, a part of the

amount (about 10-21%) which was invested in KONTI and EDISON

was withheld. Soon thereafter, the remaining 4 schemes

24

also

attained maturity. A portion of the amount due was withheld in

this case as well. In a chart tendered during the hearing before

us, it is shown that an amount of about Rs. 376 crore was paid

after the maturity dates of the Schemes out of the total payable

of about Rs. 2116 crore.

k. On 11

th

April, 2019, SEBI wrote to KOTAK AMC inquiring the manner

in which the first two schemes were wound up and whether the

same was in consonance with the 1996 Regulations. KOTAK AMC

promptly responded to this letter the very next day, i.e., on 12

th

April, 2019 denying violation of the 1996 R egulations.

Contemporaneously, KOTAK AMC wrote letters to the investors

explaining its action and assuring that the remaining monies would

be paid soon, in due course.

23

FMP Series 127 and 183

24

FMP Series 187, 189, 193, and 194

7

l. On 10

th

May, 2019, SEBI issued a SHOW CAUSE NOTICE

25

to KOTAK

AMC. It was required to show cause why directions under section

11(1) read with 11(B) of the SEBI Act should not be issued. A

supplementary SCN and a subsequent SCN was also issued. SCNs

were also issued to KOTAK TRUSTEE and its senior executives.

m. On 25

th

September, 2019, all the monies concerning the Schemes

were paid to the unitholders. An update thereof was also sent to

the unitholders.

n. Pursuant to the SCNs being issued to KOTAK AMC, KOTAK TRUSTEE

and its Senior Executives, replies, submissions, and personal

hearing followed. An order was passed by the WTM on 27

th

August,

2021 levying penalties on KOTAK AMC in the following terms:

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 15D(b) and 15 HB for the violations of the provisions

of SEBI Act, 1992, MF Regulations, 1996 as well as various

circulars discussed in the present order.

25

SCN

8

127.3. The Noticee is also restrained from launching any new

FMP scheme for a period of six months from the date of this

order.

o. Similarly, on 30

th

June, 2022 the Adjudicating Officer levied

penalties on KOTAK TRUSTEE and its senior executives in the

following terms:

Noticee Penal Provisions Penalty (Rs.)

Noticee 1

(Kotak Mahindra Trustee

Company Limited)

Section 15D(b) and

15HB of SEBI Act

Rs. 40,00,000/-

(Rupees Forty Lakh

Only)

Noticee 2

(Mr. Nilesh Shah)

Section 15HB of SEBI

Act

Rs. 30,00,000/-

(Rupees Thirty Lakh

Only)

Noticee 3

(Ms. Lakshmi Iyer)

Section 15HB of SEBI

Act

Rs. 25,00,000/-

(Rupees Twenty

Five Lakh Only)

Noticee 4

(Mr. Deepak Agarwal)

Section 15HB of SEBI

Act

Rs. 20,00,000/-

(Rupees Twenty

Five Lakh Only)

Noticee 5

(Ms. Jolly Bhatt)

Section 15HB of SEBI

Act

Rs. 10,00,000/-

(Rupees Ten Lakh

Only)

Noticee 6

(Mr. Abhishek Bisen)

Section 15HB of SEBI

Act

Rs. 15,00,000/-

(Rupees Fifteen

Lakh Only)

Noticee 7

(Mr. Gaurang Shah)

Section 15HB of SEBI

Act

Rs. 20,00,000/-

(Rupees Twenty

Lakh Only)

p. Both the orders, viz. the order passed by the WTM and the

Adjudicating Authority or AO were carried in appeal before the

TRIBUNAL as mentioned above. The TRIBUNAL, while partly allowing

the appeals vide the impugned order, held as under:

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.

(emphasis in original)

9

q. Appellants are now in appeal before us against the impugned

order.

ANALYSIS

4. Section 15Z of the SEBI Act permits an appeal to be carried to this

Court from any decision or order of the TRIBUNAL on any substantial

question of law arising out of such order.

5. We have heard Mr. Mukul Rohatgi, learned senior counsel appearing

for KOTAK AMC, Mr. Shyam Diwan, learned senior counsel appearing for

KOTAK TRUSTEE and its Senior Executives, and Mr. N. Venkatraman,

learned Additional Solicitor General appearing for SEBI. We have also

perused the submissions filed on behalf of the parties.

6. We begin by examining the substantial question(s) of law proposed by

the appellants in the appeal as well as during the hearing before us.

Amongst others, the appellants would beseech us to examine whether

the actions of KOTAK AMC taken in good faith could be held as violation

of statutory duties or liable to regulatory action/penalty, when such

action did not cause loss to the unitholders. All other question(s) flow

therefrom. The primary question so framed, reads as follows:

Whether, in the facts and circumstances, there could be any breach or

violation of SEBI (Mutual Funds) Regulations, 1996 where: (i) The

actions complained about did not result in any loss or harm to the

investing public; (ii) The actions of the Appellants resulted in gain to

the investors; (iii) All three sets of Appellants acted bona fide in the

interest of investors and did not make any monetary benefit or gain;

(iv) Had the Appellants taken steps as postulated by SEBI, there would

have been a substantial monetary loss and harm to investors in the

range of Rs. 376.05 crores.

10

7. We preface our consideration of the above question by observing that

though the Supreme Court is the highest court of the land as ordained

by the Constitution of India, this Court is neither expected to nor can

it pronounce on the economics of the securities market. Its role as an

appellate court under Section 15Z is limited to answering substantial

questions of law. The commercial wisdom behind a decision to take a

bona fide risk which unfortunately results in loss or a (conscious)

breach of the regulatory framework fortuitously resulting in gain to the

investors is beyond the pale of appellate scrutiny of this Court under

Section 15Z. It has to be borne in mind that the statutory scheme is

consequence-neutral and the regulatory regime has been designed to

enforce compliance, irrespective of the outcome. Needless to observe,

absent manifest absurdity in the findings, this Court ought not to and

would not interfere.

8. We draw guidance from the decision of this Court in Chairman, SEBI

v. Shriram Mutual Fund

26

in this regard. There, this Court in course

of deciding an appeal under Section 15Z, SEBI Act was called upon to

answer, inter alia, the question of law as to whether once it is

conclusively established that a mutual fund has violated the terms of

the certificate of registration and the statutory regulations, i.e., the

1996 Regulations, the imposition of penalty becomes a sine qua non

of the violation. The question was answered in the following terms:

26

(2006) 5 SCC 361

11

35. In our considered opinion, penalty is attracted as soon as the

contravention of the statutory obligation as contemplated by the Act and

the Regulations is established and hence the intention of the parties

committing such violation becomes wholly irreleva nt. A breach of civil

obligation which attracts penalty in the nature of fine under the provisions

of the Act and the Regulations would immediately attract the levy of penalty

irrespective of the fact whether contravention must be made by the

defaulter with guilty intention or not. We also further held that unless the

language of the statute indicates the need to establish the presence of mens

rea, it is wholly unnecessary to ascertain whether such a violation was

intentional or not. On a careful perusal of Section 15-D(b) and Section 15-

E of the Act, there is nothing which requires that mens rea must be proved

before penalty can be imposed under these provisions. Hence once the

contravention is established then the penalty is to follow.

9. Ergo, once a breach of the SEBI Act and the regulations framed

thereunder is established followed by regulatory action/imposition of

penalty, as in these appeals, the only defence available to the

appellants would be to demonstrate that no breach occurred at all and

the decision/order of the TRIBUNAL holding to the contrary is manifestly

perverse. Nothing else will suffice.

10. Turning to the crux of the appeals, we find that the primary allegations

of SEBI against KOTAK AMC, KOTAK TRUSTEE and its Senior Executives

were:

A. Lack of due diligence while investing in ESSEL Group Companies;

B. Extension of maturity dates of the ZCNCDs; and

C. Inadequate disclosures to the investors and to SEBI.

A. LACK OF DUE DILIGENCE WHILE INVESTING IN ESSEL GROUP OF COMPANIES

11. SEBI alleged that the investment made by KOTAK AMC in the ZCNCDs

issued by KONTI and EDISON was without due diligence and proper care,

and lacked a high standard of service. The WTM of SEBI observed, on

12

a perusal of the papers before it, that the rationale behind investment

in ZCNCDs issued by KONTI and EDISON was not the financial health of

those companies itself but the fact that the investment was backed by

shares of ZEEL to the extent of 1.5 times the exposure. Referring to

the financial statements of KONTI and EDISON placed by Kotak AMC

before it, the WTM noted that the consistent losses incurred by KONTI

and EDISON were ‘…quite alarming enough for any lender/investor to

avoid investing any funds into the debt securities of these

companies…’. Despite having knowledge of these facts, the Investment

Committee chose to invest in the ZCNCDs.

12. Apart from these facts, the WTM also made a reference to a circular

dated 1

st

October, 2019

27

which mandates that investment in debt

instruments, having credit enhancements backed by equity shares

directly or indirectly, shall have a minimum cover of 4 times

considering the market value of such shares. Admittedly, there was no

such compliance.

13. These are, among others, the reasons which led the WTM to hold that

KOTAK AMC failed to exercise due diligence and care.

14. KOTAK AMC defended by stating that the ZCNCDs were a structured

obligation, hence, it did not give due consideration to the cash flow

statement and made investment based on the reputation of ESSEL

Group, repayment history of the group, and strength of collateral of

27

SEBI/HO/IMD/DE2/CIR/P/2019/104

13

shares of ZEEL. It also contended that apart from KOTAK AMC, 22 other

persons including 8 other mutual funds invested in ESSEL Group. This

appears to be KOTAK AMC’s consistent stance across the documents,

viz. in the appeals and submissions filed before the TRIBUNAL as well as

before us.

15. What cannot be denied is the finding by the WTM which is: “Thus, the

internal approval note of the IC itself very strangely suggests that the

IC of the Noticee was not aware about the issuer entity even on the

date of approving the proposal to invest in the ZCNCDs of the Issuers.”

It also records: “…The due diligence documents presented before me

do not indicate that the Noticee has ever attempted to analyse various

risk parameters, viz: credit risk, liquidity risk and interest rate risk etc.

while evaluating the proposal to invest in the ZCNCDs of certain

insignificant and financially handicapped entities of Essel Group such

as Konti and Edison”.

16. There has been no challenge, far less serious challenge, to these

findings.

17. It is trite that in cases of financial and technical matters, the line of

thinking adopted by the expert regulator, if found reasonable, cogent,

and in consonance with the established principles of law, may not be

lightly departed from. Given that the WTM has duly considered all the

relevant factors, its reasoning deserves deference.

14

18. Additionally, regulation 25(16) read with the Fifth Schedule of the

1996 Regulations demands due diligence. The focus should, therefore,

have been on diligence, not dividends. Having faltered, the appellants

have to bear the consequences. We, therefore, see no reason to agree

with the contention that there was no lack of due diligence.

19. The WTM’s order, since affirmed by the TRIBUNAL, is cogent and

commends itself for acceptance. The contentions of KOTAK AMC, thus,

stand rejected.

B. EXTENSION OF MATURITY DATES OF THE ZCNCDS

20. This forms the core issue of the dispute—the trigger which caused SEBI

to issue the SCNs and subsequent action that ensued against the

appellants.

21. Undoubtedly, the Schemes were close-ended schemes. What does the

1996 Regulations provide in respect of close-ended schemes? We need

to read regulation 33 (to the extent relevant) and regulation 39 thereof

for a better understanding of the issue.

22. Regulation 33 and 39 are part of Chapter V of the 1996 Regulations

titled ‘Schemes of Mutual Fund’.

23. Regulation 33 of the 1996 Regulations provides for repurchase of

Mutual Funds, with sub-rule (4) thereof ordaining as follows:

(4). A close ended scheme shall be fully redeemed at the end of the maturity

period.

Provided that a close-ended scheme may be allowed to be rolled over if the

purpose, period and other terms of the roll over and all other material

details of the scheme including the likely composition of assets immediately

before the roll over, the net assets and net asset value of the scheme, are

15

disclosed to the unitholders and a copy of the same has been filed with the

Board:

Provided further that such roll over will be permitted only in the case of

those unitholders who express their consent in writing and the unit holders

who do not opt for the roll over or have not given written consent shall be

allowed to redeem their holdings in full at net asset value based price.

24. Regulation 39, dealing with winding up of a close-ended scheme,

provides in sub-regulation (1) that a close-ended scheme shall be

wound up on the expiry of duration fixed in the scheme on the

redemption of the units unless it is rolled over for a further period

under sub-regulation (4) of regulation 33.

25. The first scheme to mature was FMP Series 127 on 8

th

April, 2019.

Regulation 33(4) read with regulation 39 of the 1996 Regulations, in

its plain language, lays down what was required of the appellants. The

only exception provided by the regulations is, if the scheme is rolled

over. This, admittedly, was not done. Neither is that the contention of

the appellants.

26. In fact, the contentions, to put it mildly, are surprisingly puerile.

27. First, the contention is, KOTAK AMC was not the only fund which had

invested in ESSEL securities. Several mutual funds in the market had

also invested in ESSEL securities and without acting against the other

market participants, SEBI has singled KOTAK AMC out for action which

is wholly arbitrary and incorrect.

28. This contention must be and is rejected in its entirety, as has been

rightly done by the WTM and the TRIBUNAL. Apart from the established

principle that negative equality cannot be claimed, there is ex facie

16

violation of the 1996 Regulations. KOTAK AMC can neither seek shelter

under the alleged violations of others to justify its own breach nor

would existence of other violations, if at all, absolve KOTAK AMC of its

own liability. Illegality is not cured by numbers; a collective wrong

remains illegal, regardless of majority.

29. Secondly, the contention advanced on behalf of KOTAK AMC is that its

act of extending the maturity dates of ZCNCDS beyond the maturity

dates of the Schemes and consequential partial redemption of the

Schemes by winding them up much after the maturity dates did neither

cause any loss to the unitholders nor did anyone complain. On the

contrary, goes the contention further, it only resulted in profits to the

unitholders.

30. We have no hesitation to reject this contention as well.

31. The approach proceeds on a fundamentally flawed premise. Instead of

claiming that there had been no breach of the SEBI Act and the 1996

Regulations, the appellants are seeking to justify the breach on the

ground that no investor suffered and no investor complained.

32. The contention that no loss was caused to the investors/unitholders

and, on the contrary, they gained and, hence, action should not have

been taken is no defence at all. The 1996 Regulations make no

distinction between a breach resulting in profit and a violation resulting

in loss. Neither do we. Breaches of the regulatory framework,

fortuitously, could ultimately result in gain but excusing a breach which

17

led to profit is likely to incentivize the next breach. Progression from

profit to greed, from greed to regulatory breach and from breach to

systemic failure is not too unfamiliar. 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

1996 Regulations operate in a specific field: to ensure compliance.

Variable scenarios of violation is not contemplated.

33. The ordinary intent behind investments in mutual funds is stability and

security coupled with profits. KOTAK AMC having represented to the

unitholders, who invested in the Schemes, that their investment would

be for a fixed term and that the returns would be credited to them on

the maturity dates or soon thereafter, it is a roll over in the manner

ordained, as noticed, that could have saved it from breach. Since no

notification of a proposed roll over was made to the unitholders as well

as to SEBI, there was no roll over. The breach is brazen and

indefensible.

34. Also, the argument that taking of steps as postulated by the regulatory

mechanism would have resulted in loss to the investors and that was

sought to be averted, in our view, is wholly opposed to the very

scheme of the securities law. Those interested to invest in mutual

funds are put on guard from the very inception with regard to the

18

likely risks involved. The ‘Risk Disclosure Statement’ and the ‘Due

Diligence Advisory’, as has been noticed at the beginning of this

judgment, comprise the ‘Statutory Disclaimer’. 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 and does not absolve liability.

The course adopted by KOTAK AMC was wholly unknown to, and

irreconcilable with, the legislative scheme enacted under the SEBI Act.

It departed from the carefully calibrated framework established under

the SEBI Act by not winding up the Schemes on the respective dates

of maturity, thereby inviting penalty. Any breach committed to avert

loss in the given circumstances does not find favour in law. Compliance

with the regulatory mechanism being mandatory and non-negotiable,

it is no valid defence that compliance with law would have resulted in

loss.

35. In any event, in an appeal under Section 15Z, this Court is not to sit

in judgment over the expediency of the breach, the pecuniary

consequence of the breach and the absence of complaints. Commission

of breach having practically stood admitted and establis hed, any

justification by referring to investor satisfaction and/or absence of

complaint would not provide any immunity to the appellants.

19

36. Thirdly, in the submissions filed before us, KOTAK AMC contended that

a circular issued by SEBI dated 28

th

December, 2018

28

would enure to

its benefit. The 2018 Circular permits creation of a segregated

portfolio. It was contended that despite non-invocation of the 2018

circular, the action of partial redemption would be saved thereby.

Astonishingly, this is in stark contrast with the stance adopted by

KOTAK AMC before the WTM. It was the specific stand of KOTAK AMC,

before the WTM and in its replies to the SCNs, that the act of partial

winding up cannot amount to creation of a segregated portfolio. The

WTM held that the division of portfolios in part amounted to

segregation but the same being a technical violati on, it was not

proceeded further. However, in the submissions before us, KOTAK AMC

would contend that albeit without following the procedure under the

2018 Circular, it acted in accordance with it and thus, no violation of

regulation 33 of the 1996 Regulations can be attributed to it.

37. Once KOTAK AMC claimed that it in fact did not segregate the portfolio,

the question of claiming benefit thereof, by any stretch of imagination,

cannot arise. To claim segregation, KOTAK AMC would have had to

scrupulously follow the procedure under the 2018 Circular, clause 3 of

which mandates that a provision therefor must be made in the Scheme

Information Documents

29

. The WTM held that there was no provision

in the SID for KOTAK AMC to undertake such a course. That apart, the

28

SEBI/HO/IMD/DF2/CIR/P/2018/160 (referred as 2018 Circular)

29

SID

20

procedure under the 2018 Circular, such as issuance of press release,

trustee approval, intimation to unitholders, allotment of segregated

units, etc. was not followed. It is, admittedly, not KOTAK AMC’s case

that this was done. Thus, even on this ground, we hold against the

appellants.

C. INADEQUATE DISCLOSURES TO THE INVESTORS AND TO SEBI

38. Regulation 33(4) casts a statutory duty of information being provided

to the unitholders and SEBI.

39. To avoid prolixity, we prefer not to repeat what has been discussed

above with regard to the unitholders and SEBI being kept in the dark.

Statutory violation of this nature has to be strictly viewed.

40. During the course of hearing, we posed a question to learned senior

counsel for KOTAK AMC: when was SEBI, for the first time, informed of

the course of action adopted by KOTAK AMC? The answer was: on 12

th

April, 2019, that is, in reply to SEBI’s letter seeking information on the

manner of winding up. This was a few days after the maturity dates of

FMP Series 127 and 183. Thus, after the entire operation, right from

the decision to extend the ZCNCDs to the execution of agreements

inter alia with KONTI and EDISON, the decision not to invoke pledge, and

several others, — none of this was ever intimated to SEBI till SEBI

knocked on KOTAK AMC’s doors. It was imperative for KOTAK AMC, at

the very least, to apprise SEBI being the regulator, of the proposed

21

action when the action itself was not in consonance with the

regulations.

41. Insofar as the investors are concerned, we pity them. Did they have a

choice not to accept the course of action adopted by KOTAK AMC? The

conscious decision to extend the maturity dates of ZCNCDs beyond the

maturity dates of the Schemes was not a choice left for the unitholders

to elect. That was not a contingency, which they could foresee. In an

ideal scenario, the unitholders were assured that, even in the event of

a default on the debentures, their investments would be protected

through the realization of the pledged shares serving as collateral —

the very rationale underlying the creation of security in the first place.

KOTAK AMC departed completely from the proposed action. Trotting

behind it was KOTAK TRUSTEE who beelined the action instead of its

independent assessment. As the trustee company holding the funds of

unitholders in a fiduciary capacity, KOTAK TRUSTEE was bound to

independently assess whether the course was, first, in adherence with

the extant regulations, and secondly, whether the course was in the

interest of the unitholders.

42. As held by the AO and upheld by the TRIBUNAL, all three parties, viz.

KOTAK AMC, KOTAK TRUSTEE and the Senior Executives failed to ensure

compliance with the 1996 Regulations. They adopted a course

unknown to law. No case for interference is, thus, set up by any of the

appellants.

22

ON CONDUCT

43. Having observed as above, dismissal of the appeals is the only

available option for us. However, before we so order, there lies

something to be said beyond the facts of the matter itself.

44. Several crucial documents are not on the record, including the

Investment Committee notes for the Schemes in question. It is not

that placing these documents on record would have made any

difference to the outcome. However, these documents ought to have

been placed on record, particularly when the conduct of KOTAK AMC is

in question, to show a bona fide approach. Curiously, these documents

were part of the appeal filed before the TRIBUNAL by all the appellants.

We are not too impressed by the selective non-disclosure.

45. Additionally, we wish to observe that during the hearing, a sheet of

paper was tendered across the Bar by learned senior counsel on behalf

of KOTAK AMC. Such sheet purportedly contained extracts from the

relevant regulations, for the Court’s convenience and understanding.

The same document was also referred to and relied upon by learned

senior counsel on behalf of KOTAK TRUSTEE and its Senior Executives

during the course of arguments.

46. The one-pager tendered by learned senior counsel for KOTAK AMC

reveals incomplete and inaccurate reference to the provisions of the

1996 Regulations. For instance, reference was made to sub-regulation

(4) of regulation 33 in a truncated form without the two provisos. Both,

23

the proviso and the further proviso, are of significant relevance to the

present controversy; yet, both were omitted from the said one-pager

note. The omission could be deliberate; it could also be a mistake. We

say no more than is necessary. Such omission, at times, could be

viewed with suspicion by the Court. We caution the appellants to be

more vigilant in future and thereby avert reoccurrence of such

mistake.

47. Even otherwise, the manner in which the appellants have conducted

themselves throughout, while keeping the unitholders, SEBI and us in

the dark, meets our stern disapproval.

48. Thus, on merits, there is no scope for grant of any relief.

49. Penalty, imposed on KOTAK AMC and KOTAK TRUSTEE, also calls for no

interference.

50. However, what remains for consideration is the quantum of penalty

imposed upon the Senior Executives. Learned senior counsel on their

behalf made a fervent appeal to waive the penalty. According to him,

while a beneficial outcome cannot justify a regulatory infraction, the

absence of investor prejudice may be considered a mitigating factor

for waiving penalty.

51. To consider this aspect, the conduct of the Senior Executives becomes

material. 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

24

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.

ORDER

52. In view of the aforesaid, the appeals do not deserve to be entertained;

thus, we dismiss the appeals of KOTAK AMC, KOTAK TRUSTEE and the

Senior Executives.

53. KOTAK AMC and KOTAK TRUSTEE will, however, bear costs assessed at Rs.

30 lakh and 20 lakh, respectively.

54. The costs be deposited with the Secretary General of this Court within

two months.

55. Secretary General will identify ten accredited organisations, not

confined to Delhi but all over the country which are engaged in

activities for a substantial period, in caring, supporting and uplifting

the conditions of destitute children, children battling cancer, orphans,

women in distress and victims of crime, mental patients - both children

and adult, elderly people with no family , individuals requiring

prosthetics, and the like; and ensure that the amounts received as

costs are distributed equally among them.

56. Pending applications, if any, shall also stand disposed of.

25

MIRROR DISCLAIMER

57. We conclude by warning managers of AMCs/fund houses by coining

this phrase:

“MANDATE FIRST, GAINS LATER;

SEBI COMPLIANCE , NEVER FALTER.”

………..…………………J.

(DIPANKAR DATTA)

…………..…………..………………J.

(SATISH CHANDRA SHARMA )

NEW DELHI.

JULY 13, 2026.