In the matter of:

Shriram Asset Management Co.Ltd,
(Investment Managers of Shriram Mutual Fund)      Appellant

Vs.

Securities & Exchange Board of India                        Respondent
 

APPEARANCE:

Mr. K.Prakash
Company Secretary, AMC

Mr. Reetesh Gupta
Fund Manager, AMC                                                    for Appellant

Mr.S.V.Krishna Mohan
Division Chief, SEBI

Ms Anitha Anoop
Legal Officer,
SEBI                                                                               for Respondent
 

(Appeal arising from the order No.49 dated 09.10.2000 made by the Adjudicating Officer, Securities & Exchange Board of India)

Shri P.Sri Sai Ram was appointed as Adjudicating Officer, by Chairman, Securities and Exchange Board of India, vide order dated 11.01.2000 to inquire into the alleged contravention of the provisions of the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996(the Regulations) as set out in the aforesaid order, by the Appellant, who is the asset management company of Shriram Mutual Fund. Alleged contraventions as per the order are extracted as under:

Shri Prakash, Company Secretary, appearing for the Appellant re-iterated the submissions made in the Memorandum of Appeal and prayed to waive the penalty imposed by the Adjudicating Officer. On the alleged violation of regulation 53 (b), the Appellant had submitted that sponsors of Shriram Mutual Fund (SMF) are Shriram Investment Ltd and Shriram Transport Company Ltd., of Shriram Group of Companies, Chennai. Both the said companies operate on an all India basis with a large network of branches spread over the country. The services of the branches of the sponsor companies, with no extra cost were availed for marketing the units issued by SMF. Although the unit holders are required to deal with the Registrars directly, they more often approached the nearest branch of the sponsor companies for services required by them, as it saved them from incurring postal charges, etc. However, submitting applications and certificates with the branches resulted in delay in processing the same as these applications, etc. are transmitted by the branches to their head offices in Chennai and they in turn forward the same to the concerned Registrar and the Appellant�s office comes to know about the repurchase application etc., only at a stage when Registrars send their reports relating thereto. Though the Appellant perceived the aforementioned procedure as being more investor friendly as it saved the unit holders from incurring postal charges, etc the process resulted in short delay in some cases. The Appellant itself had reported this aspect in its Compliance Test Report (CTR) submitted to the Respondent for the period ended 30.06.1999.There were delays in settling repurchase/redemption requests in respect of 473 cases. Though there was no provision for payment of interest for delayed payment at that point of time, the Appellant with the approval of the Respondent paid interest at the rate of 15% per annum to the concerned investor incurring an expenditure of Rs.2, 37, 026. According to the Appellant, the delay in dispatching cheques against repurchase was not at all intentional. The practice of receiving repurchase applications through the branches of group companies has since been discontinued and the investors have been advised to contact the respective Registrars directly.
 

Referring to the alleged violation of the investment limit provided in clause (2) of seventh schedule and consequential violation of regulation 44 (1) it has been stated that the aggregate investment in the shares of M/s. Aryan Pesticides Ltd., had exceeded the limit of 10% of the paid up capital of the said company at one stage. At the point of time the limit was found exceeded, though it was planned to liquidate the excess holding it took some time for fruition. The holding was brought down from 11.58% to be in tune with clause (2) of the Seventh Schedule at the earliest. This factual position was placed before the Adjudicating Officer. According to the Appellant, the Adjudicating Officer had accepted its submissions, particularly the efficacy of the practice followed by the investors in sending their repurchase requests through the branches of sponsor companies, payment of interest to the investors to cover the notional loss caused to them due to delayed repurchase of the units and the submission that the lapse on its part was unintentional and that it acted bonafide. However, the Adjudicating Officer though agreed to the submissions of the Appellant, without any justification imposed a monetary penalty. Yet another submission of the Appellant was that its corpus was only Rs.12 crores, income therefrom was not adequate even to meet the management fees and the usual overheads and as such any penalty, if at all be imposed, may adversely affect the fund, and hence the penalty be reduced to a nominal figure which the Appellant can afford to meet.
 

Shri S.V.Krishna Mohan, authorised Representative of the Respondent submitted that SEBI is entrusted with the duty of registering and regulating the working of mutual funds and several other capital market related entities. It had notified regulations for the purpose. The Regulation in position for the purpose is the one notified on 01.10.1996, amended from time to time. The Regulation inter alia provides for registration of mutual funds, asset management companies and also measures to regulate their activities, with a view to protect the interests of the investors. The Appellant is an asset management company registered with the Respondent. Eligibility criteria for registration as an asset management company are laid down in regulation 21, which amongst other things insists that the directors of asset management company should have adequate professional experience in the field of financial services. With a view to monitor compliance of the statutory provisions, the Respondent had introduced a reporting system requiring submission of quarterly Compliance Test Report (CTR) to it by asset management companies. From the CTR submitted for the quarter ended June, 1999, it was found that the Appellant had purchased shares in M/s.Aryan Pesticides Ltd, beyond the prescribed limit and also that redemption proceeds were not dispatched to the unit holders within the stipulated time. According to Mr.Krishna Mohan, it was not a suo moto disclosure of the lapses, as claimed by the Appellant. The omission was found out from the report filed as required in terms of the Respondent�s instructions. The Appellant had reported the lapse perforce.
 

Learned Representative submitted that as per regulation 44 (1) all investments shall be subject to the investment restrictions specified in the Seventh Schedule to the Regulations. One of the restrictions in the said schedule is that no Mutual Fund under all its schemes shall own more than 10% of any company�s paid up capital carrying voting rights. The Appellant had exceeded the said limit in the case of its investments in the equity shares of M/s.Aryan Pesticides with its purchases on 29.07.1998 and continued to hold the excess quantum upto 01.09.1999. The Appellant had exceeded the investment limits involving 11 transactions between 29.07.1998 and 01.09.1999, that at no point of time during this period had the Appellant had taken steps to rectify the irregularity. Only on receipt of the Respondent�s letter dated 18.08.1999 seeking the Appellant�s explanation in the matter, investment was brought within the limit, on 01.09.1999.
 

Shri Krishna Mohan submitted that as per regulation 53 (b) redemption proceeds have to be dispatched to the investors within a period of 10 days and in case of delay mutual fund has to pay interest at the prescribed rate. Learned Representative citing the information furnished by the Appellant in its letter dated 20.09.1999 submitted that as on 30.06.1999, 473 redemption requests were pending with the Appellant. Out of the said 473 cases, 60 cases were pending for less than one month, 172 cases for more than one month, 109 cases involved a delay of 2 to 3 months, and in 132 cases delay involved was more than 3 months.
 

Shri Krishna Mohan submitted that the Appellant is an asset management company, which is responsible for managing the assets of the mutual fund. It is a professional fund manager, supposed to be diligent and alert in managing the investment portfolio of the mutual fund. It is supposed to be fully conversant with the statutory regulations governing mutual funds and also that it is the duty of the asset management company to ensure that the scheme complies with those statutory requirements in letter and spirit. Despite such requirement, it had failed to discharge its duties as is evident from the admitted fact that the Appellant had invested in the shares of M/s. Aryan Pesticides beyond the prescribed limit and continued to hold the excess limit for over a period of one year, till the Respondent sought its explanation. It is also on record that the Appellant had denied prompt payment against redemption to investors at least in 473 cases and the delay involved was considerable. Shri Krishna Mohan submitted that the Appellant in total disregard to the regulatory provisions, devised its own procedures and policies as is evident from the manner in which repurchase applications were made to receive through the branches of group companies and investing in the shares of M/s.Aryan Pesticides beyond the prescribed limit. In this context he cited Supreme Court decision in Disciplinary Authority cum General Manager & Others Vs. Nikunja Bihari Patnaik (1996(9) SCC 69) therein the Court had observed that "the very act of acting beyond authority ��� is by itself a misconduct" which need be curbed, irrespective of the consequences of such misconduct. He submitted that the fact that the Appellant had paid interest to the investors and that the investment was brought down to the limits, does not absolve the Appellant from facing the penal consequences provided for failure to comply with the statutory requirement. He also submitted that the Appellant�s plea that its financial position is not that good and as such the quantum of penalty need be reduced does not merit consideration. According to him any leniency for such serious violations would send wrong signals to other intermediaries in the market. He pleaded to up hold the impugned order.
 

Appellant is the asset Management Company of SMF. Asset Management Company is a very important functionary in the scheme of mutual fund operation. It is the asset Management Company, which is responsible for the day to day management of investment portfolio functions of mutual funds. They are not to act complacently or indifferently in disregard to the regulatory requirements prescribed by SEBI.
 

There is no dispute about the factual position. The Appellant, in all fairness had admitted that its investment in the shares of M/s.Aryan Pesticides exceeded the prescribed limits and that despatch of redemption proceeds to the investors was delayed. However, the Appellant in both the cases had stated that the failure was unintentional.
 

Regulation 53 (b) mandates mutual funds/asset Management Company to dispatch redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase. According to regulation 44 (1) any investment to be made under regulation 43 shall be invested subject to the investment restriction specified in the Seventh Schedule to the Regulation. According to clause (2) of the said Schedule "no mutual fund under all its schemes should own more than ten percent of any company�s paid up capital carrying voting rights".
 

The Adjudicating Officer had in the course of inquiry, opportunity to examine the primary evidence and assess the same. Obviously his finding should be based on the appreciation of the facts before him vis-à-vis the statutory requirement. In this context it is considered necessary to look at the assessment and findings recorded by the Adjudicating Officer in the order. With reference to the alleged violation of rule 53 (b), taking cognizance of the submission of the Appellant that "with the best intention of providing door step services to the investors they had provided the facility of repurchase of units through the branches of mutual fund (not the branches of mutual fund but branches of group companies)�� that delay occurred due to infrastructure process and in the process of extending service to the investor. That procedure saved the investor approximately Rs.25/- towards postage cost for sending the units to the AMC, ��.., that "they had already advised the investors through newspaper advertisements to submit the certificate directly to the Registrar ����..", that "the delay was unintentional and they will ensure that the regulation will be adhered to in future", the Adjudicating Officer has recorded the following findings:

During the hearing held on 7.6.2000, the AMC was asked to submit the break up of reasons for delay in redemption of 473 cases. The AMC therefore vide their letter dated 30.6.2000 had enclosed returns received from some centres. However, from the returns, I am not able to find the various reasons for the delay. The return gives details only of the certificates received by different centres for redemption.
 
The AMC/Mutual Fund should have anticipated the practical problems resulting in delay in redemption and the consequential violation of SEBI regulations. The AMC/Mutual Fund did not anticipate those problems. However, considering the various remedial subsequent actions, which the fund and the AMC took, I accept their submission namely that the AMC/Mutual Fund have acted bonafide and the delay was (un) intentional. Be that it may, the fact remains and I find that the AMC failed to despatch the redemption or the repurchase proceeds (in respect of the cases mentioned in the Chairman�s order dated January 11, 2000) within ten working days from the date of redemption or repurchase that has resulted in violation of Regulation 53(b) of SEBI (Mutual Funds) Regulation, 1996 by the Fund/AMC.
 
The AMC has submitted that the aggregate purchase of shares of Aryan Pesticides beyond 10% limit at periodic intervals was necessitated on account of certain fundamental aspects of investment in that company. They have submitted that 10% limit was exceeded on 29.7.1998 and the limit was brought down to 10% on 1.9.1998 (correct date as per the information furnished by the Appellant is 1.9.1999) From the above submission, it is seen that the Mutual Fund has not explained as to what are those fundamental aspects of the investment in M/s. Aryan Pesticides which has necessitated them to exceed 10% limit. The submission of the AMC are not acceptable in the light of SEBI Regulations mentioned below and the circumstances of the case. The excess investments of more than the prescribed limits resulted in violation of clause 2 of Schedule VII which provides that no mutual fund under all the schemes should own more than ten percent of any company�s paid up capital carrying voting rights, and consequently that of Regulation 44(1) of SEBI (Mutual Fund) Regulations 1996, which provides interalia, that the investments should be subject to restriction specified in the Schedule VII to the Regulations.

ORDER

In the light of the aforesaid finding viz. that the AMC violated Regulation 53(b) of SEBI (Mutual Fund) Regulations, 1996 and Regulation 44(1), ibid, I levy a penalty of Rs.5,00,000/- against Shriram Asset Management Company in terms of section 15E of Securities and Exchange Board of India Act, 1992��������".

Section 15E of the Act provides penalty for failure to observe the provisions of the Act, rules and regulations by an asset management company. According to the said section an asset management company failing to observe the statutory requirements shall be liable to a penalty not exceeding five lakhs rupees for each such failure.
 

Section 15I vests in SEBI powers to adjudicate in certain matters. According to the said section 15I

While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections"

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c) the repetitive nature of the default."
 

In the light of the provisions of section 15I and the clear observation of the Supreme Court as to when penalty for failure to carry out statutory obligation could be imposed, it is to be seen as to whether the facts of the present case warranted penalty. What is to be considered is whether there is anything to show that the Appellant acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. In this context, finding of the Adjudicating Officer and his order thereon need be booked into. In the case of the alleged violation of regulations 53 (b) and 44 (1) by the Appellant the Adjudicating Officer�s conclusion confirming the violation is based on facts. The finding to that extent cannot be faulted. However, he is not on a sound footing on his decision to impose penalty for violation of regulation 53 (b). Taking into consideration the Appellant�s version that it had already paid interest @ 15% to all the "delayed investors", the Adjudicating Officer has stated that the "notional loss caused to the investors due to delay on the part of the Mutual Fund has been adequately covered by the Mutual Fund". He has categorically accepted the Appellant�s submission that it �acted bonafide� and the delay was �unintentional�. Having accepted the said version, the Adjudicating Officer was not justified in imposing penalty for the said default, as it goes against the guidelines provided by the Supreme Court in the case cited above.
 

Coming to the alleged violation of regulation 44 (1) relating to investment exceeding the prescribed limits, his finding is based on facts and cannot be faulted. He has made it clear that the Appellant had not explained the circumstances leading to such excess investments in the shares of M/s. Aryan Pesticides inspite of having given opportunity. As stated earlier, clause 2 of Seventh Schedule of the Regulation clearly provides that "no mutual fund under all its schemes should own more than ten percent of any company�s paid up capital carrying voting rights". It is not the Appellant�s case that investment beyond the prescribed limit was an inadvertent lapse on its part. On the contrary there is every reason t o believe that it was a conscious decision to invest more than 10% in the shares of the said company as could be seen from the Appellant�s letter dated 24.02.2000 addressed to the Respondent. In para 2 of the said letter it has been stated that "the purchase of shares of M/s.Aryan Pesticides Ltd., at periodical intervals was necessitated on account of certain fundamental aspects of investment in that company". It is also to be noted that the excess holding continued for a period exceeding more than a year i.e. 29.07.1998 to 01.09.1999 and that it could not have escaped the Appellant�s attention as the Appellant had furnished periodical reports and annual report reflecting the investment position to the authorities relating to the said period. It is difficult to believe that an asset management company primarily concerned with the management of the investment portfolio of a mutual fund did not know the legal provisions governing the investments. The argument that there was no takers for those shares and hence the delay in liquidating the same is also difficult to accept as it could be seen that the Appellant could dispose of the excess holding within 15 days of receipt of the Respondent�s letter dated 18.08.1999 seeking its explanation in the matter! In the light of the facts on record, it is clear that the excess investment in the shares of M/s.Aryan Pesticides Ltd. was of a conscious decision of the Appellant, disregarding the provisions of the Regulation and in that view of the matter imposition of penalty is perfectly justified. Incidentally, the Supreme Court decision in Disciplinary Authority cum Regional Manager, cited (supra) by the Respondent is of no help in the facts and circumstances peculiar to the instant case.
 

The Adjudicating Officer has quantified the penalty at Rs.5, 00, 000/- for violation of regulation 53 (b) and regulation 44 (1). In view of the above discussion and finding that imposition of penalty is not justified for the violation of regulation 53 (b), penalty imposed by the Adjudicating Officer for the said violation cannot survive. There are now two alternatives left with me in this regard � either to remand the matter to the Adjudicating Officer to refix the quantum of penalty or to decide it myself. I feel in all fairness, instead of further delaying the matter, it is proper to modify the quantum of penalty and put an end to the proceedings. Since the quantum of penalty provided in section 15E of the Act is the same for both the �failures� and the penalty of Rs.5 lakhs is imposed on the basis of the Appellant�s failure on two counts, and that now it is found that the Appellant�s failure on one count alone attracts penalty, it is felt that the penalty imposed by the Adjudicating Officer be reduced by 50% i.e. reduce it from Rs.5 lakhs to Rs.2.5 lakhs. It is accordingly ordered. To this extent the impugned order stands modified and the order as modified sustains.
 

The appeal is disposed of on the above lines.