Nov 16, 2006
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Orders :
Orders of SAT
IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.58/2003
Date of decision: November 16, 2006
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1. Kotak Mahindra Mutual Fund
2. Kotak Mahindra Asset Management Co.Ltd.
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Appellants
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Versus
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Securities and Exchange Board of India ……
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Respondent
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Shri Janak Dwarkadas, Sr. Advocate along with Mis. Darshika Kothari, Advocate for the appellants
Shri Dipan Merchant, Sr. Advocate along with Shri U. N. Das, Advocate for the respondent
CORAM
Justice N. K. Sodhi, Presiding Officer
C. Bhattacharya, Member
Per: Justice N. K. Sodhi, Presiding Officer (Oral)
This appeal under section 15 T of the Securities and Exchange Board of India Act, 1992 (for short the Act) is directed against the order dated February 26, 2003 passed by the adjudicating officer imposing a penalty of Rs.50,000/- under section 15D(b) of the Act on the appellants for their failure to comply with the terms and conditions of the grant of certificate of registration as a mutual fund and also for their failure to comply with clause 9 of the Fifth Schedule of the Code of Conduct and also for violating the circular dated 15.2.2001 issued by the Securities and Exchange Board of India (for short the Board). Facts giving rise to this appeal lie in a narrow compass and these may first be noticed.
Kotak Mahindra Finance Limited sponsored a fund called the Kotak Mahindra Mutual Fund. It is established in the form of a trust to raise monies through the sale of units to the public under different schemes for investing in securities. Kotak Mahindra Trustee Co. Ltd. (for short the trustee) is the trustee company which holds the properties of the Mutual Fund in trust for the benefit of the unit holders and Kotak Mahindra Asset Management Company Ltd. (for short the AMC) is the investment manager to the fund which is approved by the Board. The trustee launched a close ended debt scheme comprising of several investment plans for investment in debt, money market and Government securities. Under the scheme, four plans were proposed to be launched in each calendar month commencing from May, 2002 and it is not in dispute that the first plan was launched on May 29, 2002 the duration of which was for 370 days. The trustee to the fund prepared a draft of the offer document and submitted the same to the Board for its approval under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. It is common ground between the parties that the offer document was approved which contains the following clause:
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“At the time of launch of each Plan, a notice indicating the maturity date will be displayed at the ISCs. The Trustee may decide not to launch a Plan; alter, fully or in part, the above schedule of launch or increase or decrease the duration of any Plan. The Trustee also reserves the right to terminate a particular Plan from a notified date in the event of the number of Unitholders or the net assets of the Plan going below an economic size as determined by the Trustee. In such cases, notice indicating the change will be displayed at the ISCs. Launch of Plans beyond the above schedule will be done as per all applicable Regulations of SEBI in this regard.”
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As already observed, the first plan was launched on May 29, 2002 the duration of which was for 370 days. The second plan which was scheduled to be launched on June 8, 2002 was not launched at all by the trustee. The third plan which was scheduled to be launched on June 15, 2002 having a duration of 60 days was not launched on this date and instead the trustee altered the date of its launch and preponed the same. There is no dispute that it was launched on June 12, 2002 and the period of duration was increased to 370 days instead of 60 days. It was then that the appellants were served with a show cause notice alleging that they had violated the circular dated 15th February, 2001 issued by the Board which requires that the offer document detailing the features of the plan shall be submitted to the Board atleast 21 days’ prior to the opening of the first plan if there are more than one plan. It is alleged that the appellants while launching the second plan did not give the required 21 days’ prior notice to the Board and to the investors. Adjudication proceedings were initiated against the appellants. The adjudicating officer has found that the appellants violated the circular when they launched the second plan on June 12, 2002 in as much as they did not give 21 days’ notice to the Board and not even to the investors. He accordingly by his order dated February 26, 2003 imposed a penalty of Rs.50,000/- on each of the two appellants. Hence this appeal.
We have heard the learned senior counsel for the parties and are of the view that the appeal deserves to succeed. The learned senior counsel appearing for the appellant has drawn our attention to the circular dated February 15, 2001 issued by the Board regarding launch of additional plans under the existing schemes and has strenuously urged that the same applies only to open ended schemes whereas the scheme launched by the trustee was a close ended scheme and, therefore, the said circular was not applicable. We find merit in this contention. It appears that some mutual funds had launched additional plans of different maturity periods as a part of their existing schemes and this matter was discussed in the meeting of the advisory committee on mutual funds. The committee recommended that the additional plans that were launched under the existing schemes which had substantially different characteristics from the main scheme shall not be launched as part of the ongoing open ended schemes and should be launched as separate schemes. This recommendation was accepted by the Board and the circular dated 15th February, 2001 was issued requiring the trustees of mutual funds to give atleast 21 days’ prior notice before launching any plan as part of the ongoing open ended scheme. It is true that the appellants in the instant case did not give the requisite notice. The question that arises for our consideration is whether they violated this circular. As is clear from the contents of the circular which we have carefully perused, it applies only to the ongoing open ended schemes and the requirement of the circular is that if as a part of any such scheme a new/additional plan were to be launched, then 21 days’ prior notice was necessary to be given to the Board and the investors. It is the admitted case of the parties before us that the scheme launched by the appellants is a close ended debt scheme comprising of several investment plans. Since the scheme is not an open ended scheme, we are clearly of the view that the said circular does not apply to the same and, therefore, the question of the appellants violating the circular does not arise. The adjudicating officer was not justified in imposing a penalty on the appellants for violation of the circular. This apart, the clause contained in the offer document gives an option to the trustee that at the time of launch of each plan already announced, it may decide not to launch the same or alter it fully or in part the schedule of launch or increase or decrease the duration of any plan. The offer document containing this clause had been approved by the Board and it is in exercise of this discretion that the trustee altered the second plan and launched it on 12th June, instead of 15th as referred to in the offer document and increased its duration to 370 days. We find nothing wrong with the action of the trustee in this regard and it was in consonance with the offer document. In this view of the matter, it is not necessary for us to examine any other contention advanced by the learned senior counsel for the appellant.
In the result, the appeal is allowed and the impugned order dated February 26, 2003 set aside leaving the parties to bear their own costs. The amount deposited by the appellants in pursuance to the order of the Tribunal dated 21.2.2005 shall be refunded to the appellants within 4 weeks.
Sd/-
Justice N.K. Sodhi
Presiding Officer
Sd/-
C. Bhattacharya
Member